1st CECL Conference
Held on 23 September 2005 in Leiden, the Netherlands
Chaired by Professor Steef M. Bartman, Leiden University.
The title refers to the European Commission’s adoption in 2003 of an Action Plan aimed to modernize company law and to enhance corporate governance throughout the European Union. This Action Plan was drafted in the wake of the activities of the High Level Group of Company Law Experts, chaired by Professor Jaap Winter.
It already had and no doubt will continue to have a strong impact on the development of European company law for many years to come. Several experts from various European universities highlighted different aspects of this development. The discussion with the audience was introduced and initiated by Professor Jaap Winter.
Prof. Dr. Steef M. Bartman,
Leiden University: Opening Remarks
Prof. Dr. Kid Schwarz,
Maastricht University: European Partnerships
Prof. Dr. Luca Enriques,
University of Bologna: EU Company Law Harmonization
Prof. Dr. Loes Lennarts,
Utrecht University: Conflicts of Interest in EU Corporate Law
Prof. Dr. Erik Werlauff,
University of Aalborg: The Societas Europaea in the Scandinavian Banking Industry
University of Oslo: EU Takeover Directive
Dr. Christoph Teichmann,
University of Heidelberg: The European Private Company
Prof. Dr. John Birds,
University of Sheffield: UK Company Law Reform in a European Context
Opening Remarks by Steef M. Bartman
The conference was chaired by Steef Bartman, Professor of Company Law at the University of Leiden, who in his opening remarks explained the significance and reason behind the conference. The EU has a predictably optimistic view regarding the development of European corporate law. This is illustrated, for example, in the European Commission’s Action Plan on modernising company law and enhancing corporate governance in Europe, drafted in 2003 as the result of the recommendations of the High Level Group of Company Law Experts, chaired by Jaap Winter, also a participant at this conference. Both the recommendations and the Action Plan continue to have a strong impact on the progress of company law in Europe. For example, recent developments since 2003 have already been seen in the adoptionof the Takeover Directive (to be implemented into national legislation by May 2006), the Regulation on the European Cooperative Society (effective as of 18 August 2006) and the Directive on Cross- border Mergers (to be implemented ultimately by 15 December 2007). In addition, there has been progress on a company law Directive to enable cross-border transfers of the corporate seat, and the setting-up of an advisory group on corporate governance.
First lecture: Kid A. Schwarz
Kid A. Schwarz, Professor of Company Law at the University of Maastricht, and chairman of the board of the Ius Commune Research School, presented the first lecture on European partnerships, with a strong emphasis on the limited liability of capital suppliers, also known as “equity partners”. We have all come across equity partners before in partnerships. They are the “silent”, or “limited”, partners in a partnership, whose liability is usually limited to the amount of their capital contributions. Such partners are said to forfeit such a limited liability privilege under certain circumstances, thus facing full liability as if they were, in fact, general partners. This is usually the case if they participate in the management affairs of the partnership, if there is incomplete, incorrect, or non-registration of the limited partnership,
or under other circumstances, such as in the UK, when a limited partner can be made liable for the amount of capital withdrawn during the lifetime of the partnership. Schwarz sees a strong similarity between limited partners in a limited partnership and shareholders in companies. This is so even though a clear distinction exists between partnerships and companies in the various national legal systems in Europe. Nevertheless, he noted that partnerships and some companies can be similarly viewed as small-scale businesses and that generally speaking such businesses differ from large scale businesses because their investors are typically directly involved in management. Additionally, market equity is not attracted, they have a closed character and their shares are not freely tradable. The owners therefore fully control the business venture, thus making ownership and management not normally separate. However, such non-separation could pose a problem for limited partners, as “owners” who are supposed to refrain from participation in the management of the partnership business if they wish to retain their limited liability status. In order to explain things further, Schwarz referred to the various agency conflicts that arise in both companies and partnerships, in particular, that of “management-shareholder” type of agency conflict. The ability of capital partners to influence management decisions and policy plays a central role in determining active participation in management and the imposition of personal liability. Are company shareholders who exercise such influential powers considered to be “de facto” managers, resulting in an opportunity to pierce the corporate veil and, consequently, the imposition of personal liability upon them? The answer, in Schwarz’s opinion, is no. This is a basic notion of Dutch as well as English corporate law. There is no threat of personal liability for shareholders who are involved in and interfere with the management affairs of a company because of their active participation in management, save under extreme circumstances based on tort or bankruptcy rules. While shareholders are shielded from liability to a large extent, could the same be said for limited partners? True, there is a certain likeness between company shareholders and limited partners. For example, just like shareholders, limited partners contribute capital to the partnership, which is managed by the general partners. However, the distinction between management and ownership is less clearly defined in a partnership because there is no separate patrimony, and no firm distinction between the partnership’s and partner’s property. What, then, is the situation regarding personal liability for limited partners in a limited partnership? What kind of behaviour constitutes an act of management resulting in the loss of a limited partner’s limited liability position? Schwarz looked at initiating, ratifying and influencing management decisions, concluding that they, as a rule, are “internal” mechanisms. In continental European legal systems, such “internal” behaviour has no effect “externally” (i.e. to the outside world) and thus does not create any misunderstanding for the partnership’s creditors. The risk of a limited partner’s loss of limited liability status only occurs upon a partner’s external behaviour as if he were a “general” partner, resulting in misunderstanding among creditors with regard to their recourse actions. This clearly contrasts with the “Anglo-Saxon” position where unlimited liability occurs even if the limited partner’s influence is not visible to third parties. Limited partners should remain “dormant” and not be able to influence management decisions at all. This, Schwarz argued, deprives them of the most important tool to govern the principal-agent relationship existing between management and the equity partner in a partnership. It also explains the rare use of the limited partnership in the UK. A new bill has recently been introduced in the Netherlands which would make a limited partner fully liable, not only as a result of creditor confusion (as is now the case), but also if such a limited partner merely internally influences the policy of the partnership. Schwarz took a position against the adoption of this rule in Dutch law. The threat of full liability in a limited partnership would, in his opinion, have the effect of making it less attractive and may contribute to it no longer being used, as in the UK. This, he asserted, is not acceptable in an era in which the Dutch corporate law system should also strive to enhance its attractiveness.
Second lecture: Luca Enriques
In the conference’s second lecture, Luca Enriques, Professor of Business Law at the University of Bologna, Italy, took a considerably different approach than that of most writers on the issue of European company law. As also seen in recent writings, he is less optimistic than most regarding harmonisation and accordingly put his case forward against the harmonisation of European company law and against the EU playing a central role in company law making. In his lecture, he criticised the main rationales for harmonisation, among them the prevention of a “race to the bottom”, the correction of market failures and the facilitation of market integration, and then further analysed the drawbacks of company law harmonisation in Europe. Also questioned was whether the EU is better equipped to tackle market failures than national legislatures. Should the EU play such a central role, or any role at all, in this area? Enriques made the interesting point of harmonisation being akin to a “cartel”, with laws being made by a “monopolist” (and less accountable) law-making power, due to excessive interest-group-prone EU legislation. Can this be seen as an abuse of power? Does this take account of localised preferences and tolerances in national markets? Further, Enriques noted that while a rationale for harmonisation is that it may eventually lower transaction costs, European company law is by no means cheap. For starters, just think of all the lobbying required at EU level alone and all the “rent extraction” opportunities for lawmakers. Indeed, it must, albeit humorously, cross our minds to think of the economic benefit of harmonisation in its job-creation for lawmakers and the lawyers and consultants interpreting such laws. However, on a more serious note, these costs should probably be weighed against other advantages or benefits of EU lawmaking and harmonisation, such as the facilitation of cross-border transactions and cross-border shareholder voting rights, also referred to by Jaap Winter later as EU market failures that can possibly be resolved by harmonisation. Notably, although there is some progress, these are areas in which little has been done so far. Enriques ultimately desires that we take Gerard Hertig’s advice and somehow have the courage “of doing nothing”, instead of pursuing an “ambitious harmonisation agenda”. However, like Jaap Winter, one may also take the view that we simply cannot afford not to do anything on certain issues. Moreover, one must acknowledge that some matters, such as cross-border voting and the exercise of shareholder’s rights, cross-border mergers, and cross-border transfers of seat, can only be dealt with at EU level.
Third lecture: Marie-Louise Lennarts
Marie-Louise (Loes) Lennarts, Professor of Company Law at the University of Utrecht gave an interesting account on the EU approach to conflicts of interest in corporate law. According to her, the company is an inexhaustible source of conflicts of interest: between managers and shareholders, majority and minority shareholders, and shareholders and stakeholders (such as creditors and employees). For the purposes of her lecture, Lennarts concentrated on the issue of related party transactions and self-dealing. Although, like Luca Enriques, she wondered whether it really is the task of the EU to take care of related party transactions and self-dealing, she preferred to concentrate on what the EU does now. She concluded that the EU does not do much: only one of the eleven European Directives currently in force deals with related party transactions, not to mention that this was, in her opinion, an unimportant and avoidable rule (Art. 5 of the Twelfth Directive). Aside from this, she referred to an insider trading provision in the Market Abuse Directive and two recent European Commission recommendations related to remuneration agreements with executive directors. In addition, although never adopted, the Draft Ninth and Fifth Directives also contained provisions on such transactions and conflicts of interest. There are also provisions on derivative actions in the Fifth Directive, which are very much linked to related party transactions and quite important because they give minority shareholders an opportunity to sue for damages caused to the company by related party transactions. This, she asserted, could have benefited the Dutch system because Dutch law does not provide for such an instrument. Measures still to be implemented include the introduction of an annual corporate governance statement for listed companies and a measure aimed at disclosure of group structure and relations. But does European company law do enough to regulate related party transactions? Lennarts questioned whether it is enough to rely on enhanced disclosure methods or the introduction of a special investigation procedure. Moreover, she submitted that there is a need for more rules on certain issues in order to improve the protection of minority shareholders. It may indeed seem that Lennarts has a wide agenda, as Jaap Winter later noted. However, she nevertheless believes that a case can be made to introduce some rules on self-dealing, and not just restrict them to rules on disclosure. She also noted that the issue of remuneration is much more visible now, especially as a result of the recent US corporate scandals, because the persons involved also received equity payments. If we are strict about pay, she reasoned, it can and perhaps should lead to other self-dealing rules as well.
Fourth lecture: Erik Werlauff
Erik Werlauff, Professor of Company and Business Law at the University of Aalborg, Denmark, then gave an account on the use of the European Company (Societas Europaea or SE) in the Scandinavian banking industry, walking us through two examples of Scandinavian banking mergers, which for certain reasons did not utilise the SE as a tool to achieve the mergers. The first was an example of a Swedish-Danish merger where the SE could have been applied afterwards. It could not have been applied at the time because the SE legislation was not yet in force.Werlauff, however, nevertheless maintained that the parties could have waited until the SE legislation came into force and utilised the SE to merge. The second “prospective” SE was, according to Werlauff, a merger where the SE must be applied but is currently being hindered. This is the Nordea banking group’s cross-border merger which is currently facing unexpected complications coming from EU legislation itself regarding deposit guarantee systems. On a positive note, however, there is still a glimmer of hope for the “Nordea” SE as it is rumoured that the merger may still be completed in the near future.Werlauff wholeheartedly believes that the SE is a good legal form for financial companies, not just for typical mergers but also SEs formed otherwise, in particular by the formation of a common parent SE (for those not ready to take the traditional merger step), or by the formation of a common subsidiary SE (for those wishing to pool their activities). According to Werlauff, the advantages of an SE all remain valid too and a look at the Nordea–case illustrates these in his opinion: the status and image of being an “SE”; just one bank inspection, thereby cutting costs; one set of provisions for workers’ rights; simpler tax calculation; better allocation of customers – all going to the bank’s headquarters; and simpler treatment of personal data within the bank. Regardless of all the well-known shortcomings of the SE, Werlauff was ultimately still positive about this European corporate vehicle. As Jaap Winter observed: “Finally! Someone who believes in the SE!”Winter added, however, that the SE undoubtedly raises questions that were never thought of. Surely the idea of having 25 different SEs as a consequence of the national influences of company law upon the SE begs the question: does it really have added value? Werlauff optimistically maintained that it does.While the SE is far from perfect, in his view it was nevertheless the best.
Fifth lecture: Beate Sjafjell
Beate Sjafjell’s of the University of Oslo question was the Takeover Directive a golden mean or dead end? Sjafjell began her lecture by quoting EU Commissioner who said that the Takeover Directive is a failure. Whether it really is a failure or not, according to her, is really a matter of perspective. She concentrated on the shareholder vs. stakeholder perspective, and stated that hers is what she termed an “inclusive stakeholder approach”. Indeed in a company takeover, a number of parties are affected. Media attention and the threat of lay-offs often provoke a lot of discussion regarding the protection of stakeholders, especially employees or the local community. Undoubtedly, there is a fine line which must be drawn between the two camps. The Nordic perspective, according to her, provides this to some extent by taking some sort of middle stance, giving stakeholders the consideration due to them, whilst at the same time placing enough emphasis on shareholders in order to allow companies to function effectively. Her focus in analysing the Takeover Directive was on the protection of shareholders and other stakeholders. The Directive itself contains rules on disclosure, information, transparency and time, which are beneficial to all parties and interests. Sjafjell noted that, while the Directive seems to want to appease both the stakeholder and the shareholder camps alike, it nevertheless takes a de facto shareholder primacy stand. This follows from the fact that the Directive contains specific rules relating to shareholders, especially focusing on minority shareholders. However, as far as employee-stakeholders, in particular, are concerned, Article 14 of the Directive does lay out that any information and consultation rights of employees or their representatives shall not be prejudiced by the Takeover Directive. Moreover, Article 9 of the Directive provides that the board must disclose its opinion of the bid to the employee representatives and attach any separate opinion of the employee representatives on the bid to its own document, which is then made public. Since it was viewed by her to be a protectionist measure for shareholders, Sjafjell also focused on the mandatory bid rule. She noted that most Member States had already adopted such or a similar rule before the Takeover Directive became a reality. So what then is the Takeover Directive trying to do? Is it trying to give minority shareholders additional protection? Is it trying to protect the market, by enabling the facilitation of takeovers? Her statements in this respect ignited a discussion with Jaap Winter, who denied that there were different views within the High Level Group about the introduction of the mandatory bid. “The necessity of this introduction was not something we were asked to advise on”,Winter stated. All said and done, however, with regard to whether the Takeover Directive is indeed a golden mean or dead end, Sjafjell concluded that neither extreme is correct, rather that the Takeover Directive is “a bit of a flop”.
Sixth lecture: Christoph Teichmann
Christoph Teichmann, Lecturer at the University of Heidelberg, Germany, discussed the progress on the European Private Company (EPC). Despite the recommendation of the Winter Commission Report to give priority to other projects such as proposed cross-border directives, the European Statute for Small and Medium-sized Enterprises (SMEs) is currently at its “feasibility study” stage. According to EU officials, the results of this study are scheduled for presentation in Brussels in December 2005. The EPC is similar to the recently-enacted Societas Europaea (SE) in the sense that it will be an optional European structure with limited liability which will assist European businesses, this time adapted for SMEs. There is an apparent need by SMEs for such a vehicle. Currently, European SMEs wishing to set up subsidiaries within Europe face difficulties because of legal uncertainty, mainly due to the differences in national legal systems, as well as high transaction, legal and accounting costs. These difficulties could be alleviated by the introduction of such an optional vehicle at EU level, and there is, of course, the added “psychological” bonus of having the title of a “European” company. Teichmann optimistically highlighted some desired features of the EPC, such as limited liability, no gap-filling by national law and contractual freedom (concerning the internal affairs of the company). Whether all of these will indeed prove to be features of the hopefully future EPC remains to be seen, however, if we consider that the SE legislation, for example, did indeed contain provisions for gap-filling by national law and that the SE had a “painful history” and was brought about after considerable delay. Teichmann reminded us that this was due to the fact that there were specific problems with public companies concerning certain issues that were difficult to resolve, such as workers’ participation and group liability. Such problems, he argued, are non-existent in the private companies area and agreements should therefore be easier to reach this time around. He further took the view that the EPC may actually stimulate regulatory competition rather than, as some others believe, interfering with regulatory competition in Europe. This is particularly relevant since, as Teichmann maintained, the EPC is not just an academic proposal but also an initiative of the business world itself. It is European businesses which have demonstrated a demand for a vehicle such as the EPC. Indeed, there are those who oppose the EPC project progressing at this stage if there are other directives on Europe’s agenda which solve the same problems (such as cross-border issues) that the EPC hopes to solve. Teichmann, however, asserted that in a market where the regulators are the suppliers and the entrepreneurs are the customers, one cannot simply ignore the demand articulated for a vehicle such as the EPC.Why not give European businesses what they demand? While this may be true, a fundamental question still remains: can this really be done? After the introduction of the “imperfect” SE, one may doubt whether the “ideal” corporate vehicle for SMEs should be offered by the EU, or that it is better left to the national legislatures.
Seventh lecture: John Birds
The closing lecture on the issue of UK company law reform in a European context was given by John Birds, Professor of Commercial Law at the University of Sheffield, United Kingdom. The UK has been trying to reform its company law for some time now, and launched a recent review in 1998, titled “Modern Company Law for a Competitive Economy”. This was of particular interest to academics at the time because, even though company law was at the heart of the economy, it was nonetheless considered to be outdated. The purpose of modernisation was to maintain and increase the competitiveness of British companies, to provide an attractive regime for overseas companies, to promote consistency, predictability and transparency in company law, and to achieve a proper balance of interests for those concerned with companies by straightforward, cost-effective and fair regulation. Something that particularly interested attendees was the issue of the adoption by the UK government of “enlightened shareholder value”, rather than pluralism, as the underlying value and guideline for corporate conduct. This is basically where directors must ensure that the shareholders’ interests are pursued in an enlightened and inclusive way. A question put forward was who would enforce it, since shareholders seemed unlikely to do so. Birds was quick to clarify that this is not a means of someone suing directors but a defence for directors in order to justify their actions, judging per person objectively based on their actions. A representative from the British Department of Trade and Industry present at the conference added what he called the “official UK government response”. Enlightened shareholder value is a system to disqualify directors where there is a very blatant case to do so. In addition, it is also open to liquidators to enforce. If directors are so bad to workers that the company goes under then the liquidators can claim that it was brought on by bad management practice. Interestingly enough, the UK’s company law review paid greater attention to other common law jurisdictions such as the US and Australia, rather than other European jurisdictions. This is somewhat remarkable in view of EU harmonisation. Moreover, although he admitted that the UK was not solely responsible for it, Birds did see a certain parallel between the UK’s review and reform of company law and EU recommendations, proposals and changes made to EU company law legislation over the recent
years. However, whether there really is a convergence between the EU and British approaches is another matter because, as Birds further noted, differences still remain and the EU Commission’s policy objectives are nevertheless to strengthen shareholders’ rights and third party protection in order to foster efficiency and competitiveness of business. Those who are interested in the details of the draft law on the UK corporate law reform as recently presented to Parliament, are referred to the Country Report on the UK by John Birds in this issue of ECL.
Reports on this conference can be found in Ondernemingsrecht 2005-16, by W.N.J. van Casteren and in European Company Law 2006-01 by Odeaya Uziahu – Santcroos.