Better Regulation in EU Company Law, Process and Substance

Auditorium of the National Museum, Mannerheimintie 34, Helsinki


Conference report

The Conference Better Regulation in EU Company Law, Process and Substance was held on 5 October 2006 at the National Museum in Helsinki. The event was organised by Finland’s EU Presidency in cooperation with the European Commission and the European Corporate Governance Forum, sponsored by Fortum, Kesko, Nokia, Nordea, OMX, Sampo, Stora Enso and Varma.

About 200 delegates attended the conference. Delegates from the EU member states and candidate member countries were represented. There was also a strong representation from the financial, corporate, regulatory and academic arenas.

1.Welcome

Christoffer Taxell. President, Confederation of Finnish Industries, EK

The Conference was opened by Mr Christoffer Taxell. He emphasised that company law of good quality is of outmost importance for companies. There is a need for concrete results and real action in the field of Better Regulation. In his opening address, minister Taxell presented the basic principles, which have also been discussed at UNICE, to be taken into account when drafting company law. These eight principles include subsidiarity, a principle-based approach, a market-oriented approach instead of over-regulation, the “comply or explain” -rule for companies, transparency, global orientation of EU policies, competition between national systems which stimulates legal innovation, and impact assessments and consultation as important tools for Better Regulation.

2. Morning session - Better Regulation and Challenges of Drafting EU Company Law

Existing Directives need to be reviewed over time. However, many Member States and stakeholders oppose such review when they have no way knowing in advance concretely enough e.g. what amendments and in what order might be proposed by Commission or by other Member States.

The theme of the morning session of the Conference was Better Regulation in the field of company law. This session was chaired by Pierre Delsaux from the European Commission.

Pierre Delsaux, Director (acting), European Commission, Internal Market and Services DG, Free movement of capital, company law and corporate governance

Mr Delsaux explained the Commission’s central principles of Better Regulation and noted that Better Regulation is a process to achieve something that is effective for the markets. In this process, the involvement of all parties, including companies and other stakeholders, is crucial. The Commission’s Better Regulation action focuses especially on two areas: new policy initiatives on the Commission’s work programme are subject to a regulatory impact assessment, and key existing legislation is subject to simplification. Impact assessments examine possible policy alternatives and their costs and benefits and, thus, provide an aid to political decision-making. The Commission’s impact assessments are published together with new proposals. To simplify the regulatory environment of companies, the Commission’s overall intention is to reduce the administrative burden of companies by 25 %. Simplification in the area of company law leads, for example, to the questions of the possible revision of the 2nd Directive and the possible repeal of the 12th Directive.

The Commission organises consultation for all its initiatives in the field of company law. It has also established consultative groups, the European Corporate Governance Forum and the Advisory Group on Company Law and Corporate Governance. On future priorities for the Action Plan on modernising company law a wide consultation was organised, and in July 2006 the Commission published a consultation document which overviews the 266 responses received. According to Delsaux, in the consultation, there was general support for the Action Plan, and overwhelming support for the application of better regulation principles. However, the consultation showed that there is also “regulatory fatigue”, and some respondents call for enabling legislation for companies. In principle, there is also support for simplification, but “the devil is in the details”: how to ensure that concrete results will be achieved as a result of the simplification process.

Geoffrey Dart, Director, DTI (UK), Corporate Law and Governance and Better Regulation

Mr Dart addressed the theme “Better regulation – How to give company law back to stakeholders and the Member States”. Geoff Dart presented five key elements of Better Regulation: competitiveness, simplification, administrative burdens, impact assessments and consultation.

As to competitiveness, which can be considered to be the key objective of company law, it is essential that EU action addresses only cross-border problems where action will improve access to capital, increase investment flows and facilitate company mobility. To achieve this in practice, competitiveness testing must be an element of all impact assessments by the Commission, allowing stakeholders to judge whether the Commission is meeting this objective. One should focus on clear abuses and market failures that create cross-border barriers, while respecting national cultures.

As an example of a simplification exercise, Dart mentioned the recasting of UK company law. The process has been a time-consuming one but it has succeeded, on national level. On the EU level, the simplification efforts should be more focused, and stakeholders and Member States are needed to tell the Commission which parts of the acquis need reform.

When reducing the administrative burden of businesses the aim is streamlining, not repealing. The Commission’s intention to reduce administrative burdens is welcome. The UK Government has recently carried out an extensive exercise, using the Standard Cost Model, to measure the administrative costs caused by legislation. The results have revealed, inter alia, that company law is one of the most burdensome areas in this respect. In the UK, the measurement of administrative costs is also a part of the assessment of impacts of new legislation.

Systematic use of impact assessments, including competitiveness testing and estimates of administrative burdens, can contribute to the simplification programme. Impact assessments should also form a part of the consultation with stakeholders. In addition to the Commission, also the Council and Parliament must make use of impact assessments, and the institutions should assess the costs and benefits of their substantial amendments to the Commission’s proposals.

Consultation with the stakeholders by the Commission has a key role both in competitiveness testing, simplification of existing regulations, reduction of administrative burden and impact assessments. In addition to policy proposals, also full texts of draft directives should be subject to consultation. Possible consultation methods include discussions in the Advisory Committee, web-based consultations and Commission working groups of Member State governments.

Ralf Fischer zu Cramburg, Secretary of the Board, UNIQUE

Mr Fischer zu Cramburg noted that capital markets do need a certain degree of regulation but, at a certain point, the costs of regulation start to exceed the real benefits. As an example, Fischer zu Cramburg presented the results of a study (Deutsche Aktieninstitut DAI 2006) on the average costs of the Sarbanes-Oxley Act to German issuers listed in the USA: the total average costs were estimated to be more than 7 million euros. As to the cost-benefit ratio, 60 % of the German issuers estimated that the costs of SOX significantly outweigh its benefits.

Fischer zu Cramburg noted that this might be a lesson for Europe, and presented the “10 commandments” for drafting EU company law. The commandments include a degree of trust in company directors; educating consumers and investors; developing a balance around “caveat emptor”; accepting that a certain degree of risk relates to progress; stressing better, not more, regulation; considering regulation as a last resort, and evidence based; looking for consistent application of what is in existence (Lamfalussy level 3), taking action against Member States that do not comply (Lamfalussy level 4), having sunset clauses as standard; and undertaking impact assessments both ex ante and ex post.

Anne Outin-Adam, Director for legal Development, Deputy Directorate-General for Research, Prospective and Innovation, The Paris Chamber of Commerce & Industry

Ms Outin-Adam presented her opinion on the participation of civil society in the European lawmaking process, especially regarding company law. A “win-win” relationship can only be developed if the different interests represented in the society are taken into account. Company law serves the interests of businesses but also consumers, employees and shareholders. Civil society participates in the law-making process but it might also initiate it, as has been the case with the European Company Statute.

The participation of civil society in the EU legislative process is essential upstream of, during and downstream of the process. The consultations organised by the Commission on the Action Plan form a perfect “upstream” example, with the civil society closely associated. In general, to ensure that all relevant parties are properly consulted, the CCIP proposes minimum rules for consultation, including a minimum consultation period of 12 weeks and the publication of an evaluated summary of the results. Consultation is also essential when drafting soft law 5 instruments - of which examples are the recommendations on directors’ remuneration and independent directors - because in that case consultation is the only way to hear the voice of the civil society. During the process, more transparency of the work of the committees of the EP and more information of the work of the Council would be needed. Downstream, the comitology procedure has developed considerably, but a well-defined legal framework for the comitology committees should be established.

Outin-Adam also covered the issue how to foster competitiveness of EU businesses through legislative action. The Commission’s action regarding cross-border issues is needed, and Community intervention is also justified to simplify existing mechanisms. When creating a level playing field and planning harmonisation on EU level, the intervention should be justified regarding the issue of competitiveness. And, when aiming at increasing confidence among investors in order to ensure the functioning of the European capital market, new obligations on companies should be examined with regard to their impact on the costs of businesses and competitiveness. Outin-Adam concluded by stating that primary legislation has to guarantee the principles of democracy and transparency. The more flexible soft law instruments must be used to complement legislation.

Peter Montagnon, Head of Investment Affairs, Association of British Insurers

Mr Montagnon presented the investors’ views on Better Regulation and company law. Investors prefer fit-for-purpose, efficient and proportional regulations, and investors also need the right to influence in areas like corporate governance. Naturally, it is also important for investors that companies create value, and investors tend to be risk-adverse, not however to the same extent as regulators.

From the viewpoint of investors, there is scepticism for new regulatory proposals, and all new proposals should be fully reasoned and justified. Often, the “do nothing” option may be the best alternative. Furthermore, if existing legislation is not workable, there should be the possibility to repeal it. As an example of necessary EU action to regulate cross-border activities of companies, Peter Montagnon mentioned the directive on shareholders’ rights.

The quality of the Commission’s consultations, both formal and informal, has increased substantially, and this helps to deliver better EU proposals. Montagnon endorsed the efforts of the EU institutions to communicate better. There are, however, certain factors that complicate the law-making process on the EU level, like the interplay between the Commission, Council and Parliament, and the differences between Member States’ national systems and the implementation of EU legislation.

Marco Becht, Professor of finance and economics, Université Libre de Bruxelles

Professor Becht discussed the issue “Where do firms incorporate?” He presented the scene referring to the ECJ’s Centros, Uberseering and Inspire Art decisions which have opened up the European Union to cross-border mobility in incorporation. In practice, incorporation mobility has largely been confined to small limited companies and, especially, there has been a large post- Centros increase of incorporations in the UK from other EU countries, especially of companies that operate in Germany. The main motivating factor for this development has been the low 6 setup costs, in particular the low minimum capital requirement, of an Ltd in the UK. Thus, cross border incorporation tends to increase regulatory competition between Member States to provide low-cost corporate law.

Becht posed the question “is less regulation in company formation and branching more?”, and presented an example of a Plc corporation which listed on the official market of the Frankfurt stock exchange but was subject to UK company law and FSA regulation. He described how this case gives a good example of a functioning European capital market but how it also raises some questions related to the responsibilities and the regulation and supervision of companies.

In the general discussion, several issues were highlighted, including the Commission’s impact assessment and consultation practices, the possible revision of the 2nd Directive, companies’ opportunities to avoid supervision and corporate governance on the European-wide market and possible solutions for this, the need for coherence between financial market law and company law, and the importance of the confidence of citizens.

3. Afternoon session – Different Classes of Shares and other Voting Right Arrangements

Different Classes of Shares and other Voting Right Arrangements in Listed European Companies; What types of shares and other financial instruments companies and investors will need, what kind of changes are there going to be in financing instruments, are regulations or recommendations at EU level necessary?

A disparity of control regimes exists in the European Member States: the principle of proportionality between risk-bearing capital and control is the rule in some Member States, while it is the exception in others. Different share classes and voting right arrangements enable shareholders to control companies without holding a corresponding proportion of the share capital. In its 2003 Action Plan, the Commission considered that there was a medium to long term case for aiming to establish shareholder democracy in the EU, but that a study should first be undertaken on the consequences which such an approach would entail. The study commissioned by the European Commission will pro-vide for an overview of the range of restrictions on voting rights which currently exist in Member States.

The purpose of the conference was to extend and deepen the European discussion on different classes of shares and other arrangements relating to the exercise of voting rights in listed companies. The session was chaired by Professor Jaap Winter, who emphasized the need for an open debate at the European level to raise all relevant arguments with regard to the desirability of European regulatory initiatives in this field. The keynote speaker for the session was Professor Ronald Gilson of the law schools at Stanford University and Columbia University.

Ronald Gilson, Professor, Stanford Law School and Columbia University, ECGI Fellow: Equity Proportionality in Corporate Voting: Linking Problems and responses

Professor Gilson highlighted the need to identify the issues and potential problems under-lying the debate on disproportionate voting rights (“DVR”), and to seek focused solutions to these 7 issues. His presentation is summarized below.

As background for considering appropriate responses to the use of DVR Gilson pointed out that the economics related to DVR are partially conflicted. DVR reflects freedom of contract and diversity in financial instruments, and can provide an efficient mechanism for shareholders to monitor management. However, at the same time DVR lowers the cost of extracting private benefits, as controlling shareholders need smaller equity stakes to extricate private benefit (“private benefits of control” or “PBC”). DVR also provides a shield from capital market discipline.

The first problem related to DVR identified in the presentation is that it increases the profit from self-dealing as a controlling shareholder can extract private benefits of control with lower investments. Mandated proportionality (i.e. obligatory one-share-one-vote structures, or “1S1V”) could solve this issue, but may be overreaching and also have negative implications, as DVR can provide benefits for shareholders through efficient monitoring of management.

A possible more focused solution to the issue is to prohibit private benefits instead of mandating proportionality. Evidence does not seem to support that controlling shareholders would require a minimum level of PBC, and prohibiting PBC may then not have the same negative implications as mandated proportionality. The prohibition is mainly a question of improved enforcement. Gilson called for focused enforcement applied for situations, where PBC is an evident problem and reflected, for example, in higher control block premiums. One regulatory strategy for these situations would be to allow companies to commit to mechanisms that would target PBC, for example through the application of specialized legal procedures in this regard (EU level commercial court or enforce-able arbitration type process in corporate charter). In discussions after the presentation it was added that similar control mechanisms could also be included in listing rules. Markets could then value revenues from these companies free of PBC. In discussions after the presentation it was pointed out, however, that in addition to an efficient legal procedure, the substance of the applicable rules could be problematic, as there would be a need to interfere with substantive company law provisions, both mandatory and optional.

Another suggested solution to PBC is to prohibit control premiums in a sale of control blocks. A sale of control with a premium is usually easier to observe making enforcement easier. However, the prohibition only applies to the sale of controlling blocks and does not prevent a controlling shareholder from taking advantage of his existing block in jurisdictions with insufficient procedures to prevent this.

A third solution to the PBC problem would be to challenge PBC through a break through rule, which in practice would distinguish between jurisdictions with large and small levels of private benefit extraction. In situations, where a controlling shareholder has high private benefits, a breakthrough rule allows shareholders to share in gains from eliminating private benefits through the premium paid to secure the equity position necessary for breakthrough.

The second problem related to DVR identified in the presentation is that DVR restricts capital market imposed monitoring of management. Even if a controlling shareholder ex-tracts no private benefits, the monitoring function may fail for reasons related to the shareholder and result in protecting inefficient management from market pressure. Also, while DVR can support stability and long term strategies, it can also prevent fast adaptation to industry change.

Restricting private benefits of control is not a controversial goal as such. However, the conclusion of Professor Gilson was that the problems associated with DVR can be ad-dressed by more focused techniques than mandated proportionality, for example by an opt-in/opt-out regime or by introducing a breakthrough rule. Professor Gilson’s final remark was that the difficulties related to the regulatory process and implementation of any rules should also be taken into account when considering the appropriate response.

During the discussions at the conference another factor that was raised was the emphasis on transparency in corporate governance arrangements. It was deemed important that markets are able to value companies that have incorporated the 1S1V principle – particularly in jurisdictions with higher control block premiums. It was deemed just as important that any control devices must be clearly established and transparent to investors. In this regard it was pointed out that such devices are part of the financing arrangements between the investor and the company, and can be taken into consideration in pricing the financial instrument in question. However, it was pointed out that transparency must ex-tend to all substantive aspects of the control devices, and not only to formal structures.

Briefings

The keynote address was followed by briefings from representatives of different corporate stakeholders for whom the 1S1V issue is relevant. Different aspects of the 1S1V is-sue were addressed by representatives of the market place, management, institutional investors, and other investor representatives.

Mats Beckman, Chief Legal Counsel, OMX Nordic Exchange

Statistics from the Nordic Exchange (i.e. Stockholm Stock Exchange, Helsinki Stock Ex-change and Copenhagen Stock Exchange)) demonstrated that the number of companies with two classes of shares listed on the exchanges is quite limited, and mainly relate to “older” listed companies. For example, only five of the latest 32 companies introduced on the Stockholm stock exchange since 2005 had a second non-listed share class. Also, the vast majority of companies with two classes of shares listed had an unchanged price relation between the two share classes during the last 12 months. Price Spreads between the two listed share classes seems to be consistent over time, and there are also cases where the spreads are positive (i.e. A-shares has a higher price than B-share) and negative (B-shares has a higher price than A-shares).

From the perspective of the stock exchange, the phenomenon of dual class shares is not substantial or problematic. Investor preferences seem to drive companies subject to an IPO to only have one class of shares, unless there are structural reasons for doing so (Husqvarna spin off). The number of dual class listed companies is expected to further decrease over time. No evidence of market failure was found, and no need for regulatory intervention was identified.

Peter Montagnon, Head of Investment Affairs, Association of British Insurers

Mr Montagnon emphasized that corporate management must be fully accountable to all shareholders. Different control devises, such as DVR, are aimed at preventing the use of control, and result in management entrenchment. He also pointed out that it is a clear risk for other shareholders, if a controlling shareholder can take private benefits not available to other shareholders. Where management entrenchment cannot be efficiently controlled by other means, regulatory intervention is necessary.

Montagnon saw that the issue had been addressed in the United States, while practice in Europe varied. He noted that only in Estonia, Latvia and Lithuania, for example, had the break through rules of the Takeover Directive been nationally implemented. The opt-out possibility in the directive provided a worrying opportunity for the member states to protect national champions and industries.

Mr Montagnon criticised the debate regarding the alleged decrease of contractual freedom as a result of regulatory intervention in the 1S1V issue. It has been argued that it should be possible to offer different kinds of shares providing a choice for investors whether to invest in shares with a control element (i.e. voting shares) or whether to invest in shares providing cash flow only. Montagnon saw that the argument would be reasonable, if a choice was actually available. Often, however, only disproportionate cash-flow instruments are available and there is no alternative but to accept the instrument or not to invest at all. The markets cannot price the instruments appropriately in this situation according to Montagnon.

Institutional investors, as the force behind a single capital market, should be allowed an increasingly proportionate share of corporate control. This may also lead to a cultural change in European practice based on a common set of European values, and a progressive reduction and limitation of structures that entrench management and controlling shareholders. More research and debate in the 1S1V issue was called for. The speaker expressly warned against rash judgments in this matter, and supported the study under-taken by the European Commission.

Timo Löyttyniemi, Managing director, State Pension Fund (Finland)

Mr Löyttyniemi provided a shareholder perspective to the 1S1V debate. Löyttyniemi acknowledged that conflicts of interest between different corporate stakeholders may often arise, but the real impact of these conflicts should be carefully analysed, and can often be managed by market mechanisms.

In the presentation, Löyttyniemi analysed the effects of dual class share structures based on price differences between share classes with different voting rights. Where the price difference between the share classes is inconsiderable, the economic interests related to the share classes are largely aligned and the potential for conflicts of interest de-crease. Where there is a significant price difference, potential problems were identified in connection with a major change in ownership coinciding with a change in strategy. In these situations, the nature of the investment changes without the shareholders having a say proportionate to their holding. Problems were also identified in connection with bid situations, formal mergers and decisions on capital structure. In most cases, minority protection mechanisms were deemed sufficient to address the potential problems, including, for example, a redemption obligation in connection with mergers (Finland) and squeeze-out.

Löyttyniemi emphasized that the position of different shareholders should be analysed as a whole. He particularly noted that DVR is only one factor in this respect and, moreover, is not as significant in practice as the debate would suggest. DVR should not be over-emphasized or treated in isolation when considering intervention in corporate governance arrangements. The alignment of economic interests of the different constituents should also be paid attention to. In a comparison with private equity arrangements, Mr Löyttyniemi saw this factor as predominant.

Hannu Ryöppönen, Chief Financial Officer and Senior Executive Vice President, finance and strategy, Stora Enso Oyj

Stora Enso Oyj has significant controlling shareholders and two listed classes of shares. Mr Ryöppönen addressed the corporate governance debate from the perspective of corporate management and discussed expectations on the shareholders’ role in corporations. In public companies shareholders can participate in corporate governance mainly through the general meeting of shareholders. However, one of the key means of voting in practice is for shareholders to either buy or sell their shares. Investments in public companies can be seen as financial portfolio investments as much as they are means to affect corporate decision making.

The decisions taken by different corporate governance bodies should reflect the role and expertise of those bodies. For example, should the shareholders’ meeting in fact actively guide or direct the board of directors or management, or should the shareholders’ meeting instead focus on electing the best possible members of the board of directors. Managerial issues related to executing the corporate strategy require specific expertise and detailed background knowledge of the company and its business. Shareholder input and democracy should be seen in this light.

Ryöppönen emphasized the practical aspects of running a public company. Minority protection should be set at truly relevant levels so that management does not spend its time addressing governance concerns, but on running the company. This sets the frame-work for expectations on corporate governance rules. Management needs clear rules on corporate governance, the success of the company requires that shareholder decisions can be taken and executed quickly and efficiently, with a minimum of administrative interference. Once the shareholders have taken a decision, it is the board and management that shall take concrete action in the best interest of the company.

Jesper Brandgaard, Executive Vice President and Chief Financial Officer, Novo Nordisk A/S

Mr Brandgaard described the corporate structure of Novo Nordisk A/S, where control of the company effectively remains in the hands of a foundation with the purpose to provide a stable basis for the business of Novo Nordisk and to support medical research and other health and humanitarian initiatives. The control structure supports long term investment strategies that are vital in the pharmaceutical industry.

Of the two share classes of Novo Nordisk, the foundation holds shares with multiple voting rights, and the other share class with lesser voting rights is listed. This structure is transparent and was in place already when the company was initially listed. It has been made clear for shareholders that control of the company remains with the foundation, and that shareholders have effectively invested in “cash flow” only. This has been the basic arrangement that investors have accepted at the time they made their investment. How-ever, the arrangement has proved very successful over the years, and shareholders remain satisfied with the company and its performance.

In discussions after the presentation it was argued that DVR is not necessary for long term investments, and that there is evidence that institutional investors can successfully invest in projects with a very long maturity and high risk. It was also argued that if shareholders are satisfied with the running of the company, DVR should not be necessary. The very idea of DVR is that management or a controlling minority stake is en-trenched from intervention by an unhappy majority.

Jean-Nicolas Caprasse, Managing Director UK/Europe, Institutional Shareholder Services Europe

Mr Caprasse briefly described the study that the European Commission has requested ISS together with the European Corporate Governance Institute (“ECGI”) and Shearman & Sterling to undertake. The study will be concluded during the spring of 2007.

The study will consist of a review of the regulatory framework in 16 Member States with regard to both legal regulation and company specific statutes. ISS will review the situation for 450 companies, including companies with the largest market capitalization in each state, as well as samples of smaller more recently listed companies. The study will further address the economic impact of deviations from 1S1V. Institutional investors investing in European equities will be approached to find out their view on the importance of 1S1V. The target group will include investors from both inside and outside Europe. A review of academic research and literature on DVR will also be carried by ECGI to identify arguments in favour and against 1S1V. Finally, an international comparison of corporate governance structures related to 1S1V will also be carried out. The study will not seek to draw conclusion in the matter, but will be limited to a review of facts related to the matter.

Panel

The session was concluded by comments from the panel consisting of professors Ronald Gilson, Klaus Hopt, Jose Garrido, Jonathan Rickford, Rolf Skog and Antonio Borges. The panel was moderated by Professor Jaap Winter.

Antonio Borges, Vice Chairman, Goldman Sachs International

Mr Borges emphasized the need for flexibility and full freedom of contract in the financial markets. He warned against regulatory intervention. Mr Borges focused on the practical aspects of DVR. He underlined that controlling block shares are not ordinary financial instruments. The shares are held tightly by controlling shareholders, which is some-times reflected in very low or even negative premiums. The very idea of controlling stakes is that they are not traded and so there is no market for them.

DVR as such are not necessarily detrimental to shareholder interests. Controlling share-holders provide a monitoring function that serves the other shareholders as well. It is when PBC becomes significant that problems arise. Borges suggested that any response to DVR should be focused on addressing the actual PBC problems. Borges called for a pragmatic approach to DVR and suggested that the focus should be on how to allow freedom of contract and yet prevent entrenchment and bad corporate governance

Mr. Borges suggested that regulatory intervention would not be desirable. His view was that through market preference 1S1V would become the norm.

Jose Garrido, Professor of Commercial and Corporate Law, University of Castilla-La Mancha

Professor Garrido supported the 1S1V principle in public companies – directors should be accountable to shareholders and investors should have a saying in corporate affairs proportionate to their equity stake. Also, certain elements of EU company law regulation are based, at least implicitly, on the 1S1V principle. Garrido mentioned also that the idea of a shareholder rights directive would be pointless if the voting rights of shareholders are meaningless. If 1S1V was to be introduced, regulatory intervention would be required. Increased transparency is not a solution to the 1S1V issue, as most of the relevant structures are already reflected in the articles of association of companies. Most devices related to diverse voting rights are already highly transparent and easy to identify. The market does not seem to react in a very energetic way. Also, change in European practice in this regard based on market pressure alone would be very slow. It was pointed out, however, that generally successful regulatory intervention on EU level requires that the regulatory goals should be shared by all or most Member States. Garrido believes we are far from this today, and noted that previous attempts to introduce 1S1V through regulation have not been successful. Protectionist elements remain a reality in the EU. Political decision makers in the Member States have demonstrated their support for national champions.

Professor Garrido believes that a recommendation issued on the EU level on 1S1V would be realistic response. Other speakers and panelists agreed that a recommendation would be the correct response. Market development could then be followed to establish how the phenomenon develops in the EU.

Klaus J. Hopt, Director, Max Planck Institute of Foreign Private and Private International Law, Hamburg, Germany

Professor Hopt highlighted that the introduction of the one share–one vote principle would imply challenging compensation problems, and discussed the experiences in Germany with compensation for elimination of multiple voting rights.

In Germany it was initially argued that as the rules on minority protection were introduced in the public interest they should not be considered to give rise to compensation claims for lost benefits. However, it was possible that the German Constitutional Court would have held this to be a violation of the constitutional right of protection of property and legislators decided to make compensation obligatory.

Under the relevant German statutes, compensation is due regardless of the particular circumstances under which the multiple voting right was created. During the legislative process, it was discussed whether compensation could be limited to cases where the voting rights were based on an earlier contractual give-and-take scheme between the share-holder and the corporation (or at least as a de facto quid pro quo). Whether such restrictions would have been upheld by the courts was highly controversial, and in the end legislators decided against applying such restrictions.

With regard to the level of compensation, legislators encouraged shareholders to agree on the matter. If there is no such agreement, it is commonly accepted that the compensation must be adequate. According to a recent ruling, compensation is due only if a real value of the multiple voting right can be established. This must be proven by the claimant. It should be noted that in Germany is not enough to show that there is a difference between the stock exchange price of the ordinary shares and the multiple voting share. According to the prevailing opinion, the discounted future earnings and dividend streams are the main test, though the stock price may not be neglected and must be used at least as a base line for the compensation. A particularly controversial issue is whether all private benefits must be compensated, especially if they are at the expense of the other shareholders. Examples are group synergies, extraction of payments, takeover premiums, etc. Compensation can be effected in cash or even through a capital increase in which the normal shareholders are denied their pre-emptive rights. In some cases, adequate compensation may even be zero.

Jonathan Rickford, Director, Company Law Centre at the British Institute of International and Comparative Law

Professor Rickford supported the 1S1V principle but emphasized that regulatory intervention is misdirected, and that the possible private benefit concerns could be addressed through more focused measures. Mr Rickford examined two separate focused approaches building on provisions which are already part of Community law.

1. The mandatory bid rule

The acquisition of securities conferring control must now result in a mandatory bid for all the outstanding securities, and the controlling shareholder problem will disappear as acquirers of controlling blocks will have to bid for the whole company. This internalises across the shareholder base the undesirable effects of a limited bid conferring special private benefits on particular bidders. However, the requirements in article 5 of the takeover directive alone do not solve the problem as the article has a limited scope of application. For example, the provision only applies to acquisition of voting securities and even, arguably, only to the class of securities by the acquisition of which control has been acquired. The mandatory bid need only be made for voting securities, which favours structures using non-voting securities (such as British non-voting shares and German participating bonds). Nevertheless, the existence of the rule will reflect on the value of control blocks, as the transfer of these blocks becomes subject to the rule. Going forward, article 5 may erode disproportionate models in time based on market development. However, the Commission should closely monitor the implementation of article 5 and take enforcement action and/or propose amendments if necessary.

2. Free Movement of Capital and the liberalization of the Capital Markets

Professor Rickford discussed the role of the Member States as shareholders and their use of private law measures in light of two recent cases. Commission v Netherlands C-282/04 (the KPN/TPG case) concerns a special share with entrenched strategic and structural control powers. Another still pending case Federconsumatori et al v Comune di Milano C-463/04 involves provisions in the articles which confer on the Comune enhanced rights to appoint and remove directors such that it controls a majority of the board with only one third of the shares. The Advocate General suggested that these powers when exercised by a state entity were contrary to the Capital chapter but also that even private citizens exercising such powers would be in conflict with the treaty since they would tend to favour national incumbents. However, the commercial uncertainty and insecurity of transactions would be immense if private parties’ powers were fettered by the Treaty in this way. Moreover it cannot be right to impose on private parties the obligation to abstain from or justify any restrictions they may erect on the freedom. That is a matter for states and public bodies - including private law bodies controlled by states. The ruling in KPN tends to confirm this result. On the other hand, it also clearly establishes that Member states exercising powers under purely private law rights are bound by the free movement of capital. Rickford argues further that the rationale of the case extends to any other form of private law right such as a property or contractual rights, and applies whether the power is acquired on an initial flotation or subsequently (or indeed before). The Court can be expected to require states to exercise private law powers to “ensure fulfillment of the obligations arising out of the Treaty” and to “facilitate the achievement of the Community’s tasks” by avoiding restrictions on free movement of capital.

There is scope for the Commission to pursue appropriate test cases and to follow up with enquiries from member states as to the private law powers they have in the corporate sector with a view to the removal of those which infringe the freedom. There is a case for a special transparency regime for states and public authorities and bodies controlled or influenced by them to enable these obligations to be properly enforced. There is scope for immediate Commission action which will have a real practical effect on some of the worst manifestations of disproportionate corporate power.

Rolf Skog, Professor, Stockholm Centre for Commercial Law, Sweden

Professor Skog made the following three points in his presentation:

1. There is an indefinite number of financial instruments in the modern financial markets

The basic purpose of the limited liability company is to offer businesses a practical structure to procure risk capital. A multitude of financial instruments have been developed over the years to facilitate this. The difference between debt and equity instruments has become less clear through the introduction of hybrid instruments combining elements of both. In the same way, the importance of an instrument’s control rights has changed over time. Companies and investors have learned to create and price instruments that differ not only financially but also in terms of control rights.

Dual class common stock is just one of many such instruments. In principle, there is no difference between dual class stock and other hybrid instruments. Financial instruments are priced based on the combination of risk and return they offer. There is essentially no difference between different types of instruments in this respect either.

2. The need for transparency

For the financial market to be able to correctly price shares and other instruments transparency is of utmost importance. On the EU level, there are provisions on transparency in the Company Law Directive, the prospectus directives and the takeover directive. How-ever, further development of transparency regulation may still be needed.

3. Contravening powers

Professor Skog pointed out that the study launched by the Commission only addresses one element affecting shareholder democracy in isolation from contravening powers in legal provisions in company law, in listing rules and in other codes applicable to listed companies. While the full impact of the system with multiple classes of shares is applied in decision making of the general meeting in relation to the composition of the board and certain other issues. However, when it comes to changing the contract between the shareholders, i.e. the articles of association, or other fundamental issues for the company, other mandatory minority protection provisions are applied. To understand the situation in Sweden and the other Nordic countries, for example, this must be taken into account.

As an example, Skog mentioned that while the rules in the Swedish Companies Act do not contain rules on minority representation for shareholders on the board, the Stockholm Stock Exchange Listing requirements and the Swedish Corporate Code on Corporate Governance provide that the board must have at least two directors who are in-dependent of any shareholder who holds more than ten per cent of the shares or votes in the company. Furthermore, qualified majority requirements apply to many key decisions of a general meeting, such as amending the articles of association, or deciding on a new share issue that deviates from current shareholders’ pre-emptive rights or involve reductions in share capital, share repurchases or mergers. A qualified majority is generally required not only with regard to the number of votes, but also the number of shares. It was pointed out during discussion that in Finland, for example, a qualified majority of both the number of votes and the number of shares is further required in each share class in connection with mergers providing effectively minority protection without regard to multiple voting rights attached to a class of shares. Finally, certain decisions require the sup-port of all shareholders present or represented at the general meeting, who together must represent at least nine tenths of all shares in the company. In this instance, any differences in the voting power of the shares are irrelevant. Last but not least, the Act states that neither the general meeting, board of directors nor managing director may take a decision that may give an undue advantage to one shareholder or other party to the detriment of the company or another shareholder.

Jaap Winter, Professor, Partner, De Brauw Blackstone Westbroek, Member of the Corporate Governance Forum and chairman of the EU High Level Group of Company Law Experts

Professor Winter concluded the session and stated that the discussion and analysis of the 1S1V issue will continue in the EU. It is too early to draw final conclusions in favour or against regulatory intervention. However, during the conference it was clearly established that it is important to identify the actual problems related to DVR and that responses could be focused on those problems specifically rather than imposing 1S1V. The introduction of broad EU level regulation in this area was generally not seen as a primary response.