The European Commission has recently adopted a recommendation and presented two new proposals to further harmonise European company law and improve corporate governance of European listed companies: a Commission Recommendation on the quality of corporate governance reporting, a Proposal for a Directive regarding the encouragement of long-term shareholder engagement, and a Proposal for a Directive on single-member private limited liability companies.
In its Action Plan on European Company Law and Corporate Governance dated 12 December 2012, the European Commission had identified inter alia the following corporate governance shortcomings:
- a lack of shareholder engagement,
- a lack of transparency on the identity of shareholders and the voting policies of institutional investors and proxy advisors,
- the complex framework for conducting cross-border operations, and
- insufficient quality of corporate governance reporting.
In order to address these shortcomings, on 9 April 2014 the European Commission launched the following legislative initiatives:
Commission Recommendation on the quality of corporate governance reporting ("comply or explain")
The Commission is of the opinion that the explanations provided by the companies under the "comply or explain" rule are often insufficient. Therefore it has prepared a recommendation providing guidance for Member States, bodies responsible for national corporate governance codes and listed companies, in order to improve the quality of corporate governance reporting. For instance, a company should describe in a sufficiently clear, accurate and comprehensive manner why it has departed from a recommendation and what other measures it has taken with a view to achieving the underlying objective of the recommendation departed from.
Proposal for an amending Directive as regards the encouragement of long-term shareholder engagement and certain elements of the corporate governance statement
Starting from the fact that more than 60% of the minority shareholders of listed companies (often institutional investors) do not take part in the decision-making process at general meetings, the Commission essentially proposes the following measures to increase long-term shareholder engagement:
- Say on pay
Listed companies should develop a remuneration policy and annually prepare a remuneration report, disclosing inter alia the individual remuneration of directors and the ratio between the average remuneration of directors and the average remuneration of full-time employees of the company. The remuneration policy (at least every three years) and the remuneration report (annually) must be submitted for approval by the shareholders. - Identification of shareholders
At the request of the company, any intermediary must communicate to the company the name and contact details of the shareholder calling on his services. The use of this right is strictly limited in order to facilitate the exercise of the rights of the shareholder. - Transparency of institutional investors, asset managers and proxy advisors
Institutional investors (i.e. life assurance undertakings and institutions for occupational retirement provision) must disclose to the public their voting behaviour (per company) and policy on shareholder engagement as well as certain aspects of their asset management arrangements. In addition, proxy advisors should guarantee that their voting recommendations are accurate and reliable and must publicly disclose on an annual basis certain information in relation to the preparation of their voting recommendations. - Right to vote on related party transactions
Transactions with related parties representing more than 5% of the company's assets or transactions which can have a significant impact on profits or turnover must be submitted to the general meeting for shareholder approval. Related party transactions representing less than 5% of the company's assets but more than 1% must be publicly announced together with a report by an independent third party on the terms of the transaction.
Proposal for a Directive on single-member private limited liability companies
In order to facilitate the establishment of cross border companies and to foster entrepreneurship, the Commission proposes a new national company form, the Societas Unius Personae ("SUP"), which would follow the same rules in all Member States. The main characteristic of the SUP would be that it can be easily established, without the need for any licence or authorisation, via a direct online registration procedure, and making use of a uniform template of articles of association. Furthermore, the SUP would have a share capital of at least EUR 1 and would only have one share. In order to offer protection to creditors, the proposal also introduces a balance sheet test and solvency statement which restrict the power of the SUP to make distributions to its shareholder.
Both proposals will be submitted to the European Council and the European Parliament for further consideration and discussion.