24 April 2006
Companies and solicitors have recently had to digest significant changes to both the law and the Listing Rules as a result of various directives. The prospect of further changes in the company law and corporate governance area may not be an attractive prospect. However, the good news is that the European Commission's recent consultation on the Action Plan on Modernising Company Law and Enhancing Corporate Governance suggests a significant change in the Commission's approach in this area.
The Action Plan was adopted three years ago. Since then most of the short-term measures have been delivered. These include establishing the European Corporate Governance Forum, recommendations on independent directors and directors' remuneration and various changes to accounting directives to improve financial reporting and transparency.
The Action Plan's main objectives are to foster business efficiency and competitiveness and strengthen shareholder rights and third-party protection. The Commission is now reviewing the remaining areas it had identified for action to see if they are still appropriate. However, since the Action Plan was adopted, there have been two significant developments: a renewed focus on promoting growth and employment in the EU (the Lisbon Strategy) and the adoption of an EU Better Regulation initiative.
The Better Regulation initiative is intended to improve the quality of legislation, cut unnecessary costs, remove obstacles to innovation and create the right incentives for business. New policy initiatives must be subject to consultation and a rigorous impact assessment, and existing legislation is to be simplified. The Commission says that legislating at EU level will only be justified when that is the best level at which to act and where legislation is the only way possible. An approach that puts the least burden on companies and leaves them as much flexibility as possible is preferred.
This change of approach is a welcome development and the Commission will probably drop many areas previously identified for action. One area likely to survive is that of 'one share, one vote'. Member states have many exceptions to the one share, one vote principle, including multiple voting rights and voting right ceilings. The Commission is commissioning a study of the consequences of establishing 'shareholder democracy' in the EU. It has asked whether there would be added value in addressing this issue at EU level and, if so, what form any action should take.
One of the difficulties is that there is no consensus as to what should be debated. A proposal that companies should only have voting shares with one vote per share would not address concerns that shareholders can exert control through pyramid structures or in other ways. Even in markets such as the UK, where one share, one vote is usual, there are good reasons for some exceptions. For example, preference shares receive a priority right to dividends in return for more limited voting rights. Given the Commission's desire to promote flexibility elsewhere, it would be surprising to move towards prescription in this area. Provided investors can make an informed view of whether or not to invest, there is a strong argument for contractual freedom.
The other areas likely to be important are: a proposed simplification and codification of the existing directives; simplification of the existing rules on capital maintenance; and the relationship between international accounting standards and the company law directives.
The Commission is holding a public hearing on the future of the Action Plan in Brussels on 3 May. This could well be the last chance to influence the Commission's thinking.