THE EUROPEAN CONSOLIDATION BOARD


                                      European Consolidation Board for Foreign Industry (ECBFI)

LEGAL SUPPORT POST MERGER & ON GOING ADVICE

ACTION PLAN AND LEGAL MAP FOR COMPANY LAW

 The European Consolidation Board has adopted the European Commission Action Plan outlining future initiatives in the areas of company law and corporate governance.


What type of initiative does the ECBFI EC Action Plan include?

The Action Plan announces 16 different actions to be taken by the Commission. Some of these will be proposals for new legislation; others could require soft law (recommendations and corporate governance codes) or an information campaign, but all are priority actions.

What is the scope of the Action Plan – what kind of companies will be covered?


The different measures in the Action Plan will not all have the same scope. A number of initiatives concern corporate governance. EU corporate governance rules only apply to companies listed on a stock exchange.

The EU company law applies in principle to most EU limited liability companies. The precise scope of the different actions will be further assessed at a later stage.

ECBFI CORPORATE GOVERNANCE


What is corporate governance?

Corporate governance is about how companies are managed and controlled. It defines relationships between a company's management, its board, its shareholders and other stakeholders.

What is the difference between the corporate governance initiatives put forward in the Action Plan and proposals regarding corporate governance in banks?

The EU corporate governance rules apply in principle to all EU companies listed on a stock exchange. Since most banks are listed on a stock exchange they will also be covered by the actions announced in the Action Plan in the area of corporate governance.

However, in view of the specific nature of the activities of financial institutions, the Commission had already proposed measures to help avoid excessive risk-taking by individual banks and ultimately the accumulation of excessive risk in the financial system in July 2011 on revision of the Capital Requirements Directive). These specific measures will apply only to banks and will be complemented by the measures foreseen in the Action Plan.

 

QUESTIONS AROUND THE FUTURE OF THE ACTION PLAN

Why should institutional investors be obliged to provide information about their voting and engagement policies?

The objective is to promote shareholder engagement and ensure that institutional investors (pension funds, insurers, etc.) and their asset managers act in the best long-term interest of their beneficiaries and clients respectively. Transparency about voting and engagement policies would raise awareness on the importance of engagement, it would shed light on whether institutional investors and their asset managers take engagement seriously and how they fulfil their duties to act in the best long-term interest of their beneficiaries, including what the results of their engagement activities are.

This transparency would benefit all investors who would be able to invest on the basis of information on the voting and engagement policies of asset managers and institutional investors.

What is the Commission planning to propose as regards executive remuneration?


The Commission considers that companies should benefit from remuneration policies which stimulate longer-term value creation and that pay should be linked to performance. Poor remuneration policies and/or incentive structures lead to unjustified transfers of value from companies, and their shareholders and other stakeholders to executives. Given the insufficient progress across Member States following the previous recommendations on executive remuneration, the Commission it considers important to move forward and ensure that that shareholders hold the board accountable. This could be achieved by enhancing transparency on remuneration policies and individual remuneration of directors, as well as by granting shareholders the mandatory right to vote on remuneration policy and the remuneration report.

What are 'related party transactions' and why do the current rules need to be improved?


In case of related party transactions, companies contract directly with their directors or controlling shareholders. Such transactions may cause prejudice to the company and its minority shareholders, as they give the related party the opportunity to appropriate value belonging to the company. For this reason, adequate safeguards for the protection of shareholders' interests are of great importance.

The current EU rules (1) require companies to include in their annual accounts a note on transactions entered into with related parties, stating the amount and the nature of the transaction and other necessary information. However, this requirement tends to be regarded as insufficient and in their reply to the 2011 Green Paper, a considerable proportion of stakeholders called for stronger safeguards. Therefore, the Commission will propose in 2013 an initiative aimed at improving shareholders' control of related party transactions.

How does the initiative on board diversity fit with the Commission's proposal introducing gender targets?

The two initiatives are complementary. The Commission's proposal on gender targets sets an objective of a 40% presence of the under-represented sex amongst non-executive directors of companies listed on stock exchanges.

The initiative announced in the Action Plan aims to increase transparency and to have a broader diversity perspective, covering aspects such as age, nationality, professional and educational background and others. Moreover, the initiative will, in line with general corporate governance rules, be based on the "comply or explain" approach. Finally, it will cover all administrative, management and supervisory bodies in a company.