Report of the EU Reflection Group on the Future of EU Company Law

On 16 and 17 May 2011, the future of European Company law was discussed at a conference organised by the European Commission in Brussels. A Reflection Group, set up by the Commission in 2010 and comprised of company law experts from various member states, presented its report on the future of EU Company Law at the conference. Professor Harm-Jan de Kluiver, partner at De Brauw in Amsterdam and noted specialist in corporate law, corporate litigation and corporate governance, is a member of the Reflection Group in a personal capacity.

After thorough analysis of EU Company Law, the Reflection Group has made several recommendations for further harmonisation of European Company Law. These recommendations include, amongst others, measures on improvement of:

  • cross-border mobility of companies within the EU
  • contribution of corporate governance and investors to the long-term viability of companies
  • interests of groups of companies.

The main conclusions and recommendations of the RG report are briefly set out below.

Cross-border mobility

  • EU harmonisation is called for to provide a right for national companies to transfer their registered office from one Member State to another, effectively changing the applicable company law regime from that of the former to that of the latter. Such a change would entail a cross-border conversion from a company form recognised by the former into a company form recognised by the latter.
  • National companies should be provided with a right to engage in cross-border divisions.
  • A legal regime for cross-border conversions and cross-border divisions should be introduced, either via separate directives or by amending the Directive on cross-border mergers into a joint Directive on cross-border mobility.
  • The Reflection Group believes that a right to transfer the registered office of national companies would not require major harmonisation of national law in respect of international private law and conflict of laws provisions.
  • The question of taxation should be addressed as part of the harmonisation of mobility envisaged here, where it is important to strike a balance between the Member States’ right to ensure proper taxation and the companies’ right to avail themselves of the freedom to move within the Union.
  • The creation of EU company forms to supplement the existing forms in the national laws of the Member States should be carefully based on practical evidence of a need by business and industry in the Union. Furthermore, new company forms should be carefully vetted against existing national law so that on the one hand the new forms are as flexible as national companies, and on the other hand the new forms should not intrude on national arrangement. Finally, it will be necessary to adjust national tax regimes to cater for any cross-border activities by these new forms.  

The contribution of corporate governance and investors to long term viability of companies

  • First, current EU legislation (and corporate governance codes) should be reviewed and amended against the background of whether the rules promote or at least facilitate a long term perspective. Second, on an optional basis, and upon the approval of shareholders, it should be possible to create the conditions for a longer term strategy to be implemented by management. This would imply that:
  1. Transparency and reporting rules should be reconsidered and reviewed to see whether and where those rules focus too much on a short term perspective.
  2. The conditions under which some disclosures have to be made on the basis of the Market Abuse Directive should be clarified to better define what items are price sensitive and/or should be disclosed, especially in the relationship to stable shareholders, that are more interested in the longer terms policies and developments of the company.
  3. An EU Directive or Recommendation could be considered with the aim to require (or recommend) that national legislators allow companies in the EU to amend their Articles to reflect that the overall goal of the company is the long term viability and continuity of the enterprise.
  4. The Board should indicate in its corporate governance report what its long term objectives are and how it plans to realise such goals while taking account of the short term imperatives.
  • The increased awareness of risks should imply that Boards and management are expected to explain, avoiding boilerplate approach, risk management functions, risk management policies, structures and procedures, in the corporate governance report. This should be done by way of an amendment to the Accounting Directive.
  • In order to favour long term share ownership and shareholder commitment:
  1. Companies’ Articles should be allowed to provide for long term shareholders preferential treatment. These benefits might consist of:

  1. enhanced voting rights;

  2. higher dividends.

  1. Coordination between the company and its long term shareholders to further its long term objectives should be possible without triggering rules on sharing of inside information and concerted action.

  • In respect of institutional investors it is suggested that:
  1. Institutional shareholders should explain their voting policies indicating whether or not they will adopt a long term engagement with the investee companies.
  2. The role and actions of institutional investors should be analysed and a report on actions and trends should be published regularly (for example every three years). On the basis thereof it can be considered whether additional actions would be appropriate including rules that could foster a long term rather than a short term perspective.
  3. An analysis should be made of the risks involved in long-term equity investing by insurance companies and pension funds (in correspondence to their long term liabilities) and allowing them to exempt part of their portfolio from the redemption obligation.
  • Instruments for activating absentee shareholders should include:
  1. Simplifying the mechanisms whereby shareholders exercise their voting rights, especially in a multi-tier holding system.
  2. Requiring issuers to organise an efficient voting platform system, allowing all shareholders to vote electronically, subject to an opt-out by smaller listed companies.
  3. Allowing companies to identify their shareholders and communicate with them.
  • In respect of the position of management and boards the Reflection Group advises that:
  1. Options available to listed companies should be increased by issuing an EU Directive enabling listed companies under their national law to amend their Articles of association to define different directors’ term length, to adopt staggered boards, and to limit directors’ dismissal at will ("ad nutum").
  2. The Commission will initiate an evaluation of the institution of the independent director and its functioning in practice.
  • As regards worker participation on the board level, the Commission should be neutral vis-á-vis Member States’ systems which have such a regime and those which do not provide for such a system on the condition that this does not contradict principles and freedoms of the internal market.
  • As regards the shaping of the governance structure of national forms of company the Reflection Group supports the trend of giving more choice for companies to decide the governance structure. The EU should encourage the Member States to provide more options. It is noted that this could also have a positive impact on cross-border activities. This may be an area where actions by the EU may be called for if no progress would otherwise be made in this field.
  • In respect of small and medium sized enterprises ("SMEs") in Europe:  
  1. There is a need for a simplification strategy for SMEs and intensified simplification efforts should be initiated by the Commission;
  2. In addition it should be considered to make available a private company template in national jurisdictions for a single shareholder company with a simple structure.

Groups of companies

  • The EU Commission should consider, subject to evidence that it would be a benefit to take action at the EU level, to adopt a recommendation recognising the interest of the group.
  • In respect of small and medium sized enterprises ("SMEs") which are part of a group in Europe:
  1. It is proposed that a new EU Directive or an amended Company Law Directive on single-member private limited liability companies require EU Member States to provide for a simplified company template, which would allow single-member companies, both individual entrepreneurs and holding companies, to save on transaction costs and unnecessary formalities.
  2.  In as far as the single-member company is part of a group of companies appropriate rules should be developed to safeguard the interests of the subsidiary and its stakeholders, specifically its creditors.
  • The existing European and national rules seem already to provide an adequate disclosure and information on the formation, organisational structure and management of groups of companies. Of course, this legal regime may always be improved and some new rules for a certain specific problem could be thought of (e.g., interlocking directorships).
  • If it is established that investors benefit from easily accessible information on group structure given in corporate governance statements, and that the benefits outweigh the cost to companies of providing such information, the Commission should act through an amendment to the Accounting Directive. The obligations created should in any case be limited to listed companies.

More information can be found by following these links:

Conference on European Company Law: The way forward

Report of the Reflection Group