Communication from the Commission to the Council and the European Parliament - Modernising Company Law and Enhancing Corporate Governance in the European Union - A Plan to Move Forward
Date: 2003-05-21
Institutions: European Commission
Subjects: European company, access to information, action programme, board of directors, claim, company law, corporate governance, shareholder

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 21.5.2003
COM (2003) 284 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE
EUROPEAN PARLIAMENT

Modernising Company Law and Enhancing Corporate Governance in the European
Union - A Plan to Move Forward

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE
EUROPEAN PARLIAMENT

Modernising Company Law and Enhancing Corporate Governance in the European
Union - A Plan to Move Forward

TABLE OF CONTENTS

INTRODUCTION.................................................................................................................... 3

1.

MODERNISING COMPANY LAW AND ENHANCING CORPORATE
GOVERNANCE : THE EU ACQUIS AND THE NEED FOR NEW
INITIATIVES............................................................................................................. 6

1.1. The EU Company Law Acquis .................................................................................... 6

1.2. Reasons for new initiatives at EU level ....................................................................... 7

2.

KEY POLICY OBJECTIVES .................................................................................. 7

2.1. Strengthening shareholders rights and third parties protection.................................... 8

2.2. Fostering efficiency and competitiveness of business ................................................. 9

3.

AN EU ACTION PLAN .......................................................................................... 10

3.1. Corporate Governance ............................................................................................... 10

3.1.1. Enhancing Corporate Governance disclosure .............................................. 12

3.1.2. Strengthening shareholders’ rights ............................................................... 13

3.1.3. Modernising the board of directors............................................................... 15

3.1.4. Co-ordinating corporate governance efforts of Member States.................... 16

3.2. Capital Maintenance and Alteration .......................................................................... 17

3.3. Groups & Pyramids.................................................................................................... 18

3.4. Corporate Restructuring and Mobility ....................................................................... 20

3.5. The European Private Company ................................................................................ 20

3.6. The European Co-operative Society and other EU legal forms of enterprise............ 21

3.7. Enhancing the transparency of national legal forms of enterprise............................. 21

4.

CONCLUSION......................................................................................................... 22

ANNEX 1 : Modernising Company Law and enhancing Corporate Governance in the
European Union – A Plan to Move Forward …………………………………………………23

ANNEX 2 : List of Existing and Proposed European Company Law Instruments ................. 26

2

INTRODUCTION

A dynamic and flexible company law and corporate governance framework is essential for a
modern,  dynamic,  interconnected  industrialised  society.  Essential  for  millions  of  investors.
Essential  for  deepening  the  internal  market  and  building  an  integrated  European  capital
market. Essential for maximising the benefits of enlargement for all the Member States, new
and existing.

Good company law, good corporate governance practices throughout the EU will enhance the
real economy:

–  An effective approach will foster the global efficiency and competitiveness of businesses
in  the  EU.  Well  managed  companies,  with  strong  corporate  governance  records  and
sensitive  social  and  environmental  performance,  outperform  their  competitors.  Europe
needs more of them to generate employment and higher long term sustainable growth.

–  An  effective  approach  will  help  to  strengthen  shareholders  rights  and  third  parties
protection.  In  particular,  it  will  contribute  to  rebuilding  European  investor  confidence  in
the wake of a wave of recent corporate governance scandals. The livelihood of millions of
Europeans,  their  pensions,  their  investments  are  tied  up  in  the  proper,  responsible
performance and governance of listed companies in which they invest.

Scope

This Communication outlines the approach that the Commission intends to follow specifically
in the area of company law and corporate governance.

Achieving the  objectives  pursued (fostering  efficiency  and  competitiveness of business,  and
strengthening  shareholders  rights  and  third  parties  protection)  requires  a  fully  integrated
approach.

Related initiatives, forming part of this integrated approach but not part of this Action Plan,
include:

–  The  Financial  Services  Action  Plan1  of  1999,  which  confirmed  the  overall  objectives
which should guide the financial services policy at EU level and set out a framework for an
integrated capital market by 2005;

–  The Financial Reporting Strategy2 of 2000, which seeks to achieve high quality financial
reporting  through  the  adoption  of  a  common  set  of  accounting  standards  and  the
development  of  a  proper  enforcement  system,  which  led  to  the  adoption  in  2002  of  the
Regulation on the application of the international accounting standards;

–  The Communication on Corporate Social Responsibility3 of 2002, which addresses the
social and environmental dimension of business in a global economy and led to the setting

1 Financial Services: Implementing the Framework  for financial  markets  - Action Plan, Communication of the

Commission, COM (1999) 232, 11.05.99.

2  EU  Financial  Reporting  Strategy:  the  way  forward,  Communication  of  the  Commission,  COM  (2000)  359,

13.06.00.

3 Corporate Social Responsibility: A business contribution to Sustainable Development, Communication of the
Commission,  COM  (2002)  347,  02.07.02.  The  European  Multi-Stakeholder  Forum  on  CSR  brings

3

                                                
up of a European Multi-Stakeholder Forum with a view to promoting voluntary social and
environmental practices of business, linked to their core activities, which go beyond their
existing legal obligations;

–  The  Communication  on  Industrial  Policy  in  an  Enlarged  Europe4  of  2002,  which
addresses the need for EU industry to achieve a more sustainable production structure as a
driver of growth and productivity.

–  The  Communication  on  the  priorities  for  the  statutory  audit  in  the  EU,  which  is
published  together  with  the  present  Communication  and  which  covers  an  EU  policy
approach aimed at ensuring audit quality and public confidence in the audit profession. It
covers issues like the use of ISA’s (International Standards on Auditing), public oversight
of  auditors,  and  the  modernisation  of  the  Eighth  Company  Law  Directive  into  a
comprehensive principles-based approach.

Responding to the High Level Group's report

On  4  November  2002,  a  High  Level  Group  of  Company  Law  Experts  appointed  by
Commissioner Bolkestein in September 2001 and chaired by Jaap Winter presented its Final
Report on “A modern regulatory framework for company law in Europe”. This report focused
on corporate governance in the EU and the modernisation of European Company  Law.  The
Competitiveness  Council  (30  September  2002)  invited  the  Commission  to  organise  an  in-
depth discussion on the forthcoming  report  and  to  develop  –  in  co-ordination  with  Member
States  –  an  Action  Plan  for  Company  Law,  including  Corporate  Governance,  as  soon  as  is
feasible, declaring its intention to deal with the Action Plan as a matter of priority. The Ecofin
Council has also shown a major interest in this work.

This Communication is the Commission’s response. It explains why the European regulatory
framework for company law and corporate governance needs to be modernised. It defines the
key policy objectives which should inspire any future action to be taken at EU level in these
areas. It includes an action plan, prioritised, over the short, medium and long term. It indicates
which type of regulatory instrument should be used5, and by when.

Guiding political criteria

In developing this Action Plan, the Commission has paid particular attention to the need for
any regulatory response at European level to respect a number of guiding criteria:

–  It should fully respect the subsidiarity and proportionality principles of the Treaty  and
the  diversity  of  many  different  approaches  to  the  same  questions  in  the  Member  States,
while  at  the  same  time  pursuing  clear  ambitions  (strengthening  the  single  market  and
enhancing the rights of shareholders and third parties);

–  It should be flexible in application, but firm in the principles. It should concentrate on

priorities; be transparent; and subject to proper due process and consultation;

together representative organisations of business, trade-unions and civil society. It will present in 2004
a report about its works to the Commission, which should then make an evaluation of its results, decide
on its future and consider any other appropriate initiative.

4 Industrial Policy in an Enlarged Europe, Communication of the Commission, COM (2002) 714, 11.12.02.
5 When a legislative instrument is considered, this means that the action envisaged requires either the adoption of
a new legislative proposal or the modification of one or several existing legislative instruments.

4

                                                                                                                                                        
–  It should help shape international regulatory developments. The EU must define its own
European  corporate  governance  approach,  tailored  to  its  own  cultural  and  business
traditions.  Indeed,  this  is  an  opportunity  for  the  Union  to  strengthen  its  influence  in  the
world with good, sensible corporate governance rules. Corporate governance is indeed an
area where standards are increasingly being set at international level, as evidenced by the
recent developments observed in the United States. The Sarbanes-Oxley Act, adopted on
30  July  2002  in  the  wave  of  a  series  of  scandals,  delivered  a  rapid  response.  The  Act
unfortunately  creates  a  series  of  problems  due  to  its  outreach  effects  on  European
companies and auditors, and the Commission is engaged in an intense regulatory dialogue
with  a  view  to  negotiating  acceptable  solutions  with  the  US  authorities  (in  particular  the
Securities  and  Exchange  Commission).  In  many  areas,  the  EU  shares  the  same  broad
objectives and principles of the Sarbanes-Oxley Act and in some areas robust, equivalent
regulatory  approaches  already  exist  in  the  EU.  In  some  other  areas,  new  initiatives  are
necessary.  Earning  the  right  to  be  recognised  as  at  least  "equivalent"  alongside  other
national and international rules is a legitimate and useful end in itself.

5

1.  MODERNISING  COMPANY  LAW  AND  ENHANCING  CORPORATE  GOVERNANCE:  THE  EU
ACQUIS AND THE NEED FOR NEW INITIATIVES

1.1. The EU Company Law Acquis

Historically,  most  of  the  initiatives  taken  at  EU  level  in  the  area  of  company  law
have been based on Article 44 (2) g (ex 54) of the Treaty establishing the European
Community.  This  Article,  which  appears  in  the  Chapter  devoted  to  the  right  of
establishment, requires the European institutions to attain freedom of establishment,
“by co-ordinating to the necessary extent the safeguards which, for the protection of
the interests of members and others, are required by Member States of companies or
firms within the meaning of the second paragraph of Article 48 (ex 58), with a view
to making such safeguards equivalent throughout the Community”.

This Article has been interpreted to include two important grounds for the adoption
of EU initiatives in the area of company law:

a)  facilitating  freedom  of  establishment  of  companies:  the  harmonisation  of  a
number  of  minimum  requirements  makes  it  easier  for  companies  to  establish
themselves in other Member States where the regulatory framework is similar;

b)  guaranteeing  legal  certainty  in  intra-Community  operations,  where  the
presence of a number of common safeguards is key for the creation of trust in cross-
border economic relationships.

Over the years, the EU institutions have taken a number of initiatives in the area of
company law, many leading to impressive achievements6. Between 1968 (adoption
of the First Company  Law Directive)  and  1989  (adoption  of  the  Twelfth  Company
Law  Directive),  nine  Directives  and  one  Regulation  were  adopted.  Although  the
exact  situation  may  differ  from  one  Member  State  to  the  other,  these  European
measures have had an important impact on national company law. Moreover, their
influence  was  not  limited  to  the  types  of  companies  expressly  covered  in  the
Directives, because many Member States decided to extend their provisions to other
legal forms.

Over  the  last  ten  years,  the  EU  company  law  legislative  process  has  been
characterised,  in  the  wake  of  the  Maastricht  Treaty  of  1992,  by  more  political
deference to national law (with a higher number of references to national rules in the
legislative proposals). This more flexible approach to harmonisation made possible,
in particular, the adoption of the European Company Statute (Societas Europaea), in
October 2001.

1.2. Reasons for new initiatives at EU level

Now is the right time to give a fresh and ambitious impetus to the EU company law
harmonisation process. New initiatives, aiming either at modernising the existing EU
company law instruments or at completing the EU framework with a limited number
of new, tailored instruments, are needed for the following reasons:

6 See in Annex 2 the table of existing and proposed European legal instruments in the area of company law.

6

                                                
–  Making  the  most  of  the  Internal  Market:  the  growing  trend  of  European
companies  to  operate  cross-border  in  the  Internal  Market  calls  for  common
European  company  law  mechanisms,  inter  alia,  to  facilitate  freedom  of
establishment and cross-border restructuring.

–  Integration of capital markets: dynamic securities markets are vital to Europe's
economic future7. This requires giving both issuers and investors the opportunity
to be far more active on other EU capital markets and to have confidence that the
companies  they  invest  in  have  equivalent  corporate  governance  frameworks.
Listed  companies  want  a  more  coherent,  dynamic  and  responsive  European
legislative framework.

–  To  maximise  the  benefits  of  modern  technologies  :  the  rapid  development  of
new  information  and  communication  technology  (video  conferencing,  electronic
mail  and  above  all  the  Internet)  is  affecting  the  way  company  information  is
stored  and  disseminated8,  as  well  as  the  way  corporate  life  is  conducted  (e.g.
virtual  general  meetings,  video-link  board  meetings,  exercise  of  cross-border
voting rights).

–  Enlargement: the forthcoming enlargement of the EU to 10 new Member States
is  another  gilt-edged  reason  to  revisit  the  scope  of  EU  company  law.  The  new
member  countries  will  increase  the  diversity  of  the  national  regulatory
frameworks  in  the  EU,  underlying  further  the  importance  of  a  principles-based
approach  able  to  maintain  a  high  level  of  legal  certainty  in  intra-Community
operations. In addition to that, initiatives to modernise the EU Acquis will become
more  urgent  than  ever  to  ease  the  rapid  and  full  transition  of  these  countries  to
becoming fully competitive modern market economies.

–  Addressing  the  challenges  raised  by  recent  events:  Recent  financial  scandals
have prompted a new, active  debate on  corporate  governance,  and the necessary
restoration  of  confidence  is  one  more  reason  for  new  initiatives  at  EU  level.
Investors,  large  and  small,  are  demanding  more  transparency  and  better
information on companies, and are seeking to gain more influence on the way the
public  companies 
they  own  operate.  Shareholders  own  companies,  not
management - yet far too frequently their rights have been trampled on by shoddy,
greedy  and  occasionally  fraudulent  corporate  behaviour.  A  new  sense  of
proportion and fairness is necessary.

2.  KEY POLICY OBJECTIVES

The Commission considers that future actions at EU level in the area of company law should
seek as much as possible to meet the following two policy objectives.

7 See “Quantification of the Macro-Economic Impact of Integration of EU Financial Markets”, Final Report to
the  European  Commission  –  Directorate-General  for  the  Internal  Market  by  London  Economics  (in
association  with  PricewaterhouseCoopers  and  Oxford  Economic  Forecasting),  12  November  2002,
http://europa.eu.int/comm/internal_market/en/finances/mobil/overview.htm

8 See in this respect the Proposal of June 2002 for a Directive amending the First Company Law Directive, as
regards  disclosure  requirements  in  respect  of  certain  types  of  companies,  which  introduces  modern
technologies in trade registers. The proposed modifications would allow full advantage to be taken of
modern technologies: companies would be able to file their documents and particulars either by paper
means or by electronic means, and interested parties would be able to obtain copies by either means.

7

                                                
2.1. Strengthening shareholders rights and third parties protection

Ensuring  effective  and  proportionate  protection  of  shareholders  and  third  parties
must be at the core of any company law policy. A sound framework for protection
of members and third parties, which properly achieves a high degree of confidence
in  business  relationships,  is  a  fundamental  condition  for  business  efficiency  and
competitiveness. In particular, an effective regime for the protection of shareholders
and  their  rights,  protecting  the  savings  and  pensions  of  millions  of  people  and
strengthening  the  foundations  of  capital  markets  for  the  long  term  in  a  context  of
diversified shareholding within the EU, is essential if companies are to raise capital
at the lowest cost.

Maintaining  efficient  protection  of  members  and  third  parties  will  be  even  more
important in the future, in view of the increasing mobility of companies within the
EU.

To allow European companies to reap the benefits of the unified Internal Market and
of the integrating European capital market, ensuring adequate protection of members
and third parties should be organised along the following lines:

–  The  Commission  considers  firstly  that  some  new  tailored  initiatives  should  be
taken  with  a  view  to  enhancing  shareholder  rights  and  clarifying  management
responsibilities; and secondly the provisions related to the protection of creditors
should be modernised with a view to maintaining a high quality framework (e.g.
with respect to capital maintenance and alteration).

–  A proper distinction should be made between categories of companies. A more
stringent framework is desirable for listed companies9 and companies which have
publicly raised capital. They should be subject to a certain number of appropriate
detailed  rules,  in  particular  in  the  area  of  disclosure.  With  respect  to  other
companies, regulatory  initiatives should take  full account of both  their form and
size, allowing a more flexible framework for SME’s (in the same way as tailored
deregulation initiatives have been taken at national level).

–  Modern technologies can significantly help members and third parties to exercise
their rights effectively. At a minimum, company law should enable and encourage
as  much  as  possible  the  use  of  up-to-date  information  and  communication
technologies by companies in their various relationships with members and third
parties. The Commission furthermore considers that proper attention must be paid
to specific areas where the protection of shareholders and third parties may make
it necessary to compel companies to use modern technologies. However, the time
has  not  come  yet  where  the  use  of  modern  technologies  should  be  imposed  by

9 The words  “listed companies” used in the present Communication  cover  the  companies  whose  securities  are
admitted to trading on a regulated market within the meaning of Council Directive 93/22/EEC (OJ L 41,
11.06.1993,  p.  27,  as  last  amended  by  Directive  2000/64/EC  of  the  European  Parliament  and  of  the
Council  (OJ  L  290,  17.11.2000,  p.  27))  in  one  or  more  Member  States.  The  present  Action  Plan
provides  where necessary explicit information on the scope  of  the  various  actions  proposed. In  short,
the actions presented in the Corporate Governance Section in principle cover listed companies, although
some  of  them  are  considered  to  be  usefully  applicable  also  to  non  listed  companies.  The  actions
presented  in  the  other  sections  are  generally  applicable  to  all  companies,  except  for  the  section  on
pyramids which by nature covers listed companies only.

8

                                                
companies systematically on all members and third parties systematically without
the necessary safeguards

–  The development of a sound economy requires a high degree of confidence in the
relationships  between  the  various  actors  involved,  so  that  the  protection  of
members and third parties will be ensured by a limited number of measures aimed
at combating fraud and abuse of legal forms. Such measures should be carefully
designed,  with  a  view  to  avoiding  that  they  unduly  hinder  the  development  and
use  of  efficient  company  law  structures  and  systems,  which  the  promotion  of
efficient and competitive business requires.

2.2. Fostering efficiency and competitiveness of business

Business  efficiency  and  competitiveness,  which  are  crucial  components  of
economic growth and job creation, depend on many factors, one of which is a sound
framework of company law. Key to the achievement of this  objective is the setting
up  of  a  proper  balance  between  actions  at  EU  level  and  actions  at  national  level.
Some  company  law  rules  are  likely  to  be  best  dealt  with,  and  updated,  more
efficiently  at  national  level,  and  some  competition  between  national  rules  may
actually be healthy for the efficiency of the single market.

With  due  respect  of  the  subsidiarity  and  proportionality  principles,  business
efficiency and competitiveness should be promoted along the following lines:

–  EU  initiatives  in  the  area  of  company  law  should  certainly  address  a  number  of
specific  cross-border issues (e.g.  cross-border merger  or  transfer  of  seat,  cross-
border impediments to the exercise of shareholders rights…), where Community
action may be the only way to achieve the pursued objectives.

–  In addition to these specific cross-border issues, the necessary attention should be
paid  to  the  other  initiatives  which  the  promotion  of  business  efficiency  and
competitiveness  requires.  As  stated  above,  a  certain  degree  of  harmonisation  of
defined national issues reduces legal uncertainties and can thereby significantly
enhance business efficiency and competitiveness.

–  Flexibility should be available to companies as much as possible: where systems
are deemed to be equivalent, maximum room should be left open to the freedom
of the parties involved.

9

3.  AN EU ACTION PLAN

Achieving the above policy objectives requires a number of initiatives to be taken at EU level
in the coming years. The following approach is proposed:

–  Distinguishing the actions in three phases (short term, medium term, long term), based

on clear priorities.

–  Expert consultation should be an integral part of the preparation of initiatives at EU level
in  the  area  of  company  law  and  corporate  governance.  The  Commission  therefore  will
regularly seek advice from representatives of Member States, as is the case of the current
Group  of  Company  Law  National  Experts,  but  also  from  representatives  of  the  business
and the academic sectors, to provide the necessary external input.

–  This Communication will be open for public consultation until 31 August 2003. An open,
public  consultation  will  also  be  organised  where  appropriate  in  the  future  on  the  major
initiatives following from the Action Plan.

–  With  respect  specifically  to  corporate  governance,  a  European  Corporate  Governance
Forum will be convened once or twice a year to contribute to co-ordinating the corporate
governance efforts of Member States, as is explained in Section 3.1.4. below.

The  present  Action  Plan  identifies  the  nature  and  the  scope  of  the  actions  which  appear
necessary, proposes the type of regulatory instrument which should be used, and establishes
clear priorities for the short, medium and long term.

3.1. Corporate Governance

Corporate Governance, which can be defined in many ways, is usually understood
as the system by which companies are directed and controlled10. It is, in the light
of  the  recent  corporate  scandals,  now  a  major  issue  globally.  Poor  corporate
governance performance, by some companies, has greatly undermined confidence in
capital markets.

Within  the  EU,  Member  States  have  different  systems  of  corporate  governance,
which  reflect  their  different  cultures  and  the  various  views  about  the  roles  of
corporations  and  the  way  in  which  their  industry  should  be  financed.  Over  the  last
years, corporate  governance has  been  the  subject  of  an  increasingly  intense  debate.
Forty  or  so  corporate  governance  codes  relevant  to  the  European  Union  have
been adopted over the last decade, at national or international level, with the aim of
better protecting the interests of shareholders and/or stakeholders.

10 Cadbury Report, December 1992. For a more comprehensive definition, see for example the OECD Principles
of 1999: “Corporate governance involves a set of relationships between a company’s management, its
board,  its  shareholders  and  other  stakeholders.  Corporate  governance  also  provides  the  structure
through which the objectives of the company are set, and the means of attaining those objectives and
monitoring  performance  are  determined.”  Corporate  governance  essentially  focuses  on  the  problems
that result from the separation of ownership and control, and addresses in particular the principal-agent
relationship between shareholders and directors.

10

                                                
Differences  in  national  corporate  governance  arrangements  may  create  uncertainty
and costs for both issuers and investors, which need to be addressed  to  promote  an
efficient  integration  of  EU  capital  markets.  As  announced  in  its  1999  Financial
Services  Action  Plan,  the  Commission  launched  in  2001  a  review  of  the  main
corporate  governance  codes  relevant  to  the  EU.  The  full  comparative  study,
prepared  for  the  Commission  by  Weil,  Gotshal  &  Manges  LLP,  was  finalised  in
March 200211and concluded that the EU should not devote time and effort to the
development of a European corporate governance code: the study identified as a
more valuable area for the European Commission to focus its efforts on the reduction
of  legal  and  regulatory  barriers  to  shareholder  engagement  in  cross-border  voting
(“participation barriers”) as well as the reduction of barriers to shareholders ability to
evaluate the governance of companies (“information barriers”).

The need for a European code and for additional disclosure of corporate governance
practices,  as  well  as  a  series  of  additional  issues  raised  by  the  Oviedo  Council  in
April 2002 in the wake of the US scandals (the role of non-executive directors and of
supervisory  boards,  management  remuneration,  management  responsibility  for
financial statements, and auditing practices), were also considered by the High Level
Group of Company Law Experts. In its Final Report, it confirmed that there is no
need for an EU corporate governance code.

In this line  of  thinking,  the Commission  observes, firstly, that  the  main  differences
between  Member  States  are  found  in  differing  company  law  and  securities
regulation,  as  opposed  to  the  corporate  governance  codes  which,  according  to  the
March 2002 study, show a remarkable degree of convergence, and, secondly, that the
existence  of  many  codes  in  the  EU  is  not  generally  perceived  as  a  difficulty  by
issuers (many issuers continue to be active primarily on their domestic market; when
they  are  active  on  other  markets,  they  are  faced  with  codes  that  are  pretty  similar;
and  in  the  rare  instances  where  codes  provisions  are  divergent,  the  "comply  or
explain" principle offers a satisfactory solution).

Moreover the Commission considers that:

a) the adoption of a European code would not achieve full information for investors
about the key corporate governance rules applicable to companies across Europe, as
these rules would still be based on - and part of - national company laws that are in
certain respects widely divergent;

b) the adoption of such a code would not contribute significantly to the improvement
of corporate governance in the EU, as this code would have either to allow for many
different options or confine itself to abstract principles. Trying to harmonise all the
elements  of  a  European  code  would  take  years  and  would  not  be  achievable  in  a
reasonable timeframe.

There  is  nevertheless  an  active  role  for  the  EU  to  play  in  corporate  governance,
because  some  specific  rules  and  principles  need  to  be  agreed  at  EU  level  in
Directives or Recommendations and a certain co-ordination of corporate governance

11 Comparative Study of the Corporate Governance Codes relevant to the European Union and its Member States

:
rpt_en.htm

http://europa.eu.int/comm/internal_market/en/company/company/news/corp-gov-codes-

11

                                                
codes  in  the  EU  should  be  organised  to  encourage  further  convergence  and  the
exchange of best practice.

Therefore at this stage the Commission considers that:

-There is little indication that the development of a European corporate governance
code  as  an  additional  layer  between  principles  developed  at  the  international  level
and  codes  adopted  at  national  level  would  offer  significant  added  value.  In  that
respect, the Commission notes that corporate  governance is now  at the forefront of
the activities of the OECD, which recently decided to revise its corporate governance
principles of 1999 with the aim of adopting a modernised version of these principles
in 2004. The Commission is taking an active part in this exercise.

-A self-regulatory market approach, based solely on non-binding recommendations,
is  clearly  not  always  sufficient  to  guarantee  the  adoption  of  sound  corporate
governance practices. Only in the presence of a certain number of made-to-measure
rules, markets are able to play their disciplining role in an efficient way. In view of
the growing integration  of  European  capital  markets,  a  common  approach  should
be  adopted  at  EU  level  with  respect  to  a  few  essential  rules  and  adequate  co-
ordination of corporate governance codes should be ensured.

More  specifically,  the  Commission,  largely  in  line  with  the  High  Level  Group's
suggestions, intends to proceed along the following lines12.

3.1.1.  Enhancing Corporate Governance disclosure

Annual Corporate Governance Statement

Listed companies should be required to include in their annual report and accounts a
coherent  and  descriptive  statement  covering  the  key  elements  of  their  corporate
governance  structure  and  practices,  which  should  at  least  include  the  following
items:

a) the operation of the shareholder meeting and its key powers, and the description of
shareholder rights and how they can be exercised;

b) the composition and operation of the board and its committees13;

c)  the  shareholders  holding  major  holdings,  and  their  voting  and  control  rights  as
well as key agreements;

d)  the  other  direct  and  indirect  relationships  between  these  major  shareholders  and
the company;

e) any material transactions with other related parties;

12 In developing its approach, the Commission has paid particular attention to the following needs: considering
where possible a) the use of alternatives to legislation, and b) the preference to be given to disclosure
requirements  (because  they  are  less  intrusive  in  corporate  life,  and  they  can  prove  to  be  a  highly
effective market-led way of rapidly achieving results).

13  In  this  respect,  it  is  considered  essential  for  the  restoration  of  public  confidence  that  proper  information  is
given  on  the  way  in  which  the  company  has  organised  itself  at  the  highest  level  to  establish  and
maintain an effective internal control system.

12

                                                
f) the existence and nature of a risk management system;

g) and a reference to a code on corporate governance, designated for use at national
level,  with  which  the  company  complies  or  in  relation  to  which  it  explains
deviations.

A  proposal  for  a  Directive  containing  the  principles  applicable  to  such  an  annual
corporate  governance  statement,  which  should  appear  prominently  in  the  annual
documents  published  by  listed  companies,  is  regarded  by  the  Commission  as  a
priority  for  the  short  term,  so  as  to  rapidly  allow  market  pressures  to  be  better
exerted. The definition of these principles will properly take into account the related
requirements  present  in  existing  (e.g.  major  holdings14)  or  proposed  (e.g.  take-over
bids) instruments.

Information about the role played by institutional investors

Institutional investors should be obliged:

a) to disclose their investment policy and their policy with respect to the exercise of
voting rights in companies in which they invest;

b) to disclose to their beneficial holders at their request how these rights have been
used in a particular case.

Such  requirements  would  not  only  improve  the  internal  governance  of  institutional
investors themselves, but would also enhance participation by institutional investors
in the affairs of the companies in which they invest. A requirement for institutional
investors to systematically exercise their voting rights is not considered desirable, in
view  of  its  potential  counterproductive  effects  (due  to  a  lack  of  time  or  resources,
institutional  investors  might  simply  vote  in  favour  of  any  proposed  resolution  to
fulfil the requirement).

Institutional investors have an important role to play in the governance of companies
in  which  they  invest.  Fostering  this  role  will  require  amendments  to  a  series  of
existing legal texts (relating to insurance companies, pension funds, mutual and other
investment  funds,  …),  and  even  more  importantly  the  introduction  of  such  a
requirement  would  deliver  its  full  effects  only  once  the  problems  related  to  cross-
border voting will have been solved. The Commission therefore intends  to  take  the
necessary steps in the medium term.

3.1.2.  Strengthening shareholders’ rights

Access to information

Shareholders  of  listed  companies  should  be  provided  with  electronic  facilities  to
access  the  relevant  information  in  advance  of  General  Meetings.  This  issue  is
currently addressed by the Proposal for a Transparency Directive, which essentially

14 See Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission of
securities to official stock exchange listing and on information to be published on securities (Title IV –
Chapter  III  "Obligations  relating  to  the  information  to  be  published  when  a  major  holding  in  a  listed
company is acquired or disposed of").

13

                                                
enables listed companies to use electronic means to inform their shareholders15 and
contains  specific  provisions  guaranteeing  a  timely  access  to  regulated  information
when securities are listed  in another  Member  State  than  the  home  Member  State16.
The Commission considers this solution as a significant and proportionate first step,
which  does  not  preclude  the  adoption  of  further  measures  (which  would  generally
require listed companies to use electronic means to inform their shareholders) in the
medium  term,  if  this  looks  desirable  in  the  light  of  the  implementation  of  the
Transparency Directive (which itself contains a revision clause).

Other shareholders’ rights

There is a need for enhancing the exercise of a series of shareholders’ rights in listed
companies  (right  to  ask  questions,  to  table  resolutions,  to  vote  in  absentia,  to
participate  in  general  meetings  via  electronic  means).  These  facilities  should  be
offered to shareholders across the EU, and specific problems relating to cross-border
voting  should  be  solved  urgently.  The  Commission  considers  that  the  necessary
framework should be  developed  in  a  Directive,  since  an  effective  exercise  of  these
rights requires a number of legal difficulties to be  solved.  In view  of the  important
benefits  expected  from  such  a  framework,  the  Commission  regards  the  relevant
proposal as a priority for the short term.

Shareholder democracy

Strengthening shareholders’ rights should be based essentially on a) the provision of
comprehensive information on what the various existing rights are and how they can
be  exercised  and  b)  the  development  of  the  facilities  necessary  to  make  sure  that
these  existing  rights  can  be  effectively  exercised.  This  approach  is  fully  consistent
with the OECD Principles of Corporate Governance17.

The  Commission  considers  that  there  is  a  strong  medium  to  long  term  case  for
aiming to establish a real shareholder democracy in the EU. The Comparative Study
of  Corporate  Governance  Codes  relevant  to  the  EU  evidenced  that  corporate
governance codes tend to support the one share / one vote principle, although many
codes favour some flexibility in this respect. The hardest line is taken by the codes
issued by bodies affiliated with investors, which clearly do not support the issuance
of  shares  with  reduced  or  no  voting  rights.  The  Commission  nevertheless  observes
that any initiative in this direction, which would give further effect to the principle of
proportionality between capital and control advocated by the High Level Group in its
First  Report  on  issues  related  to  take-over  bids,  requires  prior  study.  The
Commission therefore intends to undertake a study, in the short to medium term, on
the consequences which such an approach would entail.

15  The  home  Member  State  shall  allow  issuers  the  use  of  electronic  means  for  the  purposes  of  conveying
information to shareholders, provided such a decision is taken in a general meeting and meets a series
of conditions, including the individual consent of the shareholder concerned (See Article 13).
16 A host Member State may require issuers: a) to publish regulated information on their Internet sites, and b) to
alert any interested person,  without delay and free of charge, to any new disclosure  or  any  change  to
regulated information which has already been published (See Article 17).

17  See  the  relevant  statements,  about  disclosure  (Capital  structures  and  arrangements  that  enable  certain
shareholders  to  obtain  a  degree  of  control  disproportionate  to  their  equity  ownership  should  be
disclosed)  and  about  exercise  of  rights  (shareholders  should  have  the  opportunity  to  participate
effectively and vote in general shareholder meetings).

14

                                                
3.1.3.  Modernising the board of directors

Board composition

In  key  areas  where  executive  directors  clearly  have  conflicts  of  interests  (i.e.
remuneration of directors, and supervision of the  audit of the company’s accounts),
decisions  in  listed  companies  should  be  made  exclusively  by  non-executive  or
supervisory  directors  who  are  in  the  majority  independent.  With  respect  to  the
nomination  of  directors  for  appointment  by  the  body  competent  under  national
company  law,  the  responsibility  for  identifying  candidates  to  fill  board  vacancies
should in principle be entrusted to a group composed mainly of executive directors,
since executive directors can usefully bring their deep knowledge  of the challenges
facing the company and of the skills and experience of the human resources grown
up  within  the  company.  Non-executive  directors  should,  nonetheless,  also  be
included  and  specific  safeguards  should  be  put  in  place  to  deal  with  conflicts  of
interests  when  they  arise,  for  example  when  a  decision  has  to  be  made  on  the
reappointment of a director.

These requirements should be enforced by Member States at  least on a  "comply or
explain"  basis.  Certain  minimum  standards  of  what  cannot  be  considered  to  be
independent should be established  at EU level. With a view to fostering  a concrete
and active role for non executive or supervisory directors, particular attention will be
paid  to  the  issue  of  the  number  of  mandates  that  may  be  held  concurrently.
Moreover, the impact of interlocking directorships on the independence of directors
should be properly addressed in the minimum standards to be established.

The  Commission  regards  these  measures  as  key  to  the  restoration  of  confidence  in
the markets,  and therefore intends to adopt  a  Commission  Recommendation  to  this
effect in the short term.

Such a Recommendation will define minimum  standards applicable  to  the creation,
composition and role of the  nomination, remuneration  and audit committees. In
view of the recent accounting scandals, special emphasis will be placed on the audit
committee (or equivalent body), with a view to fostering the key role it should play
in supervising the audit function, both in its external aspects (selecting the  external
auditor  for  appointment  by  shareholders,  monitoring  the  relationship  with  the
external  auditor including  non-audit  fees  if  any)  and  its  internal  aspects  (reviewing
the  accounting  policies,  and  monitoring  the  internal  audit  procedures  and  the
company’s risk management system)18.

The High Level Group further recommended that at least listed companies in the EU
should  generally  have  the  option  between  a  one-tier  board  structure  (with
executive  and  non-executive  directors)  and  a  two-tier  board  structure  (with
managing directors  and supervisory directors).  The Commission welcomes the  idea
to offer additional organisational freedom to listed companies, but recognises that the
implications of such a proposal should be carefully studied. Much has to be learned
in this respect from the adaptation of national law to the Regulation and the Directive

18 In developing the minimum standards applicable to the audit committee, appropriate attention will be paid to
a) the access it must have to the relevant information (there might be a scope for specific consideration
of the need for greater legal protection for whistleblowers) and b) the extent to which transparency on
its activities is desirable.

15

                                                
on  the  European  Company  Statute.  The  Commission  therefore  proposes  that  this
recommendation from the High Level  Group should be followed up in the medium
term.

Directors’ remuneration

Shareholders should be able to appreciate fully the relation between the performance
of the company and the level of remuneration of directors, both ex ante and ex post,
and they should be  able to make decisions on  the remuneration items  linked  to  the
share price. Agreeing with the High Level Group, the Commission considers that an
appropriate regulatory regime should be composed of four key items (disclosure of
remuneration policy in the annual accounts, disclosure of details of remuneration of
individual  directors  in  the  annual  accounts,  prior  approval  by  the  shareholder
meeting  of  share  and  share  option  schemes  in  which  directors  participate,  proper
recognition in the annual accounts of the costs of such schemes for the company).

In  order  to  promote  a  swift  application  of  such  a  regime,  a  Commission
Recommendation  should  be  adopted  to  this  effect.  The  Commission  regards  this
action  as  key  to  the  restoration  of  confidence,  and  intends  to  adopt  such  a
Recommendation in the short term and to closely monitor its application with a view
to  identifying  whether  any  further  additional  rulemaking  may  be  desirable  in  the
medium term.

Directors’ responsibilities

With a view to enhancing directors’ responsibilities, the collective responsibility of
all  board  members  for  financial  and  key  non  financial  statements  (including  the
annual corporate governance statement mentioned above in Section 3.1.1.) should be
confirmed  as  a  matter  of  EU  law.  The  Commission  considers  that  such  a
confirmation in framework provisions constitutes a first step which may be achieved
rapidly, and intends to take the necessary initiatives in the short term.

The  High  Level  Group  made  several  other  recommendations  designed  to  enhance
directors responsibilities : a) introduction of a special investigation right, whereby
shareholders holding a certain percentage of the share capital should have the right to
ask  a  court  or  administrative  authority  to  authorise  a  special  investigation  into  the
affairs  of  the  company;  b)  development  of  a  wrongful  trading  rule,  whereby
directors  would  be  held  personally  accountable  for  the  consequences  of  the
company’s  failure,  if  it  is  foreseeable  that  the  company  cannot  continue  to  pay  its
debts and they don’t decide either to rescue the company and ensure payment or to
put it into liquidation; c) imposition of directors’ disqualification across the EU as a
sanction  for  misleading  financial  and  non-financial  statements  and  other  forms  of
misconduct  by  directors.  The  Commission  supports 
ideas,  whose
implementation requires further analysis, and therefore intends to present the relevant
proposal for a Directive in the medium term.

these 

3.1.4.  Co-ordinating corporate governance efforts of Member States

The  Commission  shares  the  view  of  the  High  Level  Group  that  the  EU  should
actively co-ordinate the corporate governance efforts of Member States through
their company laws, securities laws, listing  rules, codes, or otherwise.  In particular,
each  Member  State  should  progress  towards  designating  a  code  of  corporate

16

governance,  designated  for  use  at  national  level,  as  the  code  with  which  listed
companies subject to their jurisdiction are to comply or in relation to which they are
to explain deviations. Co-ordination  should  not  only  extend  to  the  making  of  these
national  codes,  but  also  to  the  procedures  Member  States  have  in  place  to  monitor
and enforce compliance and disclosure. Member States should participate in the co-
ordination process set by the EU, but the process itself should be voluntary and non-
binding with a strong involvement of market participants.

The comparative study of codes relevant to the EU concluded one year ago that these
codes  show  a  remarkable  degree  of  convergence.  The  Commission  nevertheless
observes  that  such  a  situation  may  change  rapidly:  several  Member  States  are
currently engaged in important policy initiatives, and the EU will soon  be enlarged
by  10  new  Member  States.  In  addition,  standards  are  increasingly  set  at  the
international level and they should be implemented in Member States in a consistent
way.

For  these  reasons,  the  Commission  regards  it  important  to  encourage  the  co-
ordination and convergence of national codes through regular high level meetings of
the  European  Corporate  Governance  Forum.  Participants  to  such  a  Forum,  which
could meet once or twice a year, will comprise representatives from Member States,
European  regulators  (including  CESR),  issuers  and  investors,  other  market
participants  and  academics.  Interested  MEP's  will  also  be  invited  to  present  their
views. The Forum will be chaired by the Commission.

3.2. Capital Maintenance and Alteration

The  Second  Company  Law  Directive  adopted  by  the  Council  on  13  December
1976  in  respect  of  the  formation  of  public  limited  liability  companies  and  the
maintenance  and  alteration  of  their  capital  is  one  of  the  cornerstones  of  European
company  law.  It  imposes  a  minimum  legal  capital  to  public  limited  liability
companies,  and  contains  a  number  of  detailed  provisions  aiming  at  protecting
shareholders  and  creditors,  which  apply  inter  alia  to  the  formation  stage,  to
distributions  to  shareholders,  to  acquisitions  of  own  shares,  to  increases  in  capital
and to reductions in capital.

In 1999, a Report by the Company Law SLIM Group concluded that the capital
maintenance  regime  organised  by  the  Second  Directive  could  be  simplified  on  a
limited  number  of  points,  and  presented  several  proposals  to  this  end19.  From  the
discussions that followed the presentation of this SLIM Report, it appeared that the
implementation of many of these recommendations required further examination.

The High Level Group of Company Law Experts confirmed that most of the SLIM
Group  proposals  were  indeed  worth  implementing  and  gave  some  guidance  in  this
respect. In addition, the High  Level Group formulated a few additional suggestions
aiming  at  modernising  the  Second  Directive.  The  Commission  considers  that  a
simplification  of  the  Second  Directive  on  the  basis  of  these  proposals  and

19 The topics covered by the SLIM Report were as follows: removal of the requirement for an expert opinion on
contributions in kind in defined circumstances, introduction of no par value shares, simplification of the
rules  applicable  to  withdrawal  of  shares,  simplification  of  the  rules  applicable  to  acquisition  of  own
shares,  reduction  of  the  scope  of  the  prohibition  of  financial  assistance,  simplification  of  the  rules
applicable to pre-emptive rights.

17

                                                
recommendations  would  significantly  contribute  to  the  promotion  of  business
to
efficiency  and  competitiveness  without  reducing 
shareholders  and  creditors.  A  proposal  to  amend  the  Second  Directive  along  these
lines is therefore regarded as a priority for the short term.

the  protection  offered 

The High Level Group further suggested that adequate protection of shareholders and
creditors might be achieved, possibly even more effectively, with the introduction at
a later stage of an alternative regime which would not be based on the concept of
legal  capital.  This  alternative  regime,  whose  main  lines  are  briefly  outlined  by  the
Group20,  could  be  offered  as  an  option  to  Member  States  who  should  be  able  to
freely  decide  to  change  to  the  new  regime  or  to  retain  the  Second  Directive  rules
amended as suggested above.

The  Commission  considers  that,  before  deciding  to  introduce  an  alternative  regime
which  would  fundamentally  depart  from  the  capital  maintenance  regime  currently
organised  by  the  Second  Directive,  further  work  is  needed  as  to  both  the  exact
characteristics of a possible alternative regime and its ability to achieve an effective
protection  of  shareholders  and  third  parties.  A  study  into  the  feasibility  of  an
alternative to the capital maintenance regime will be launched by the Commission
in the medium term. The study will have to identify in particular the exact benefits
that an alternative regime would offer in comparison with the Second Directive rules
amended in the short term.

3.3. Groups & Pyramids

The  High  Level  Group  of  Company  Law  Experts  pointed  out  that  groups  of
companies,  which  today  are  frequent  in  most,  if  not  all,  Member  States,  are  to  be
seen as a legitimate way of doing business, but that they may present specific risks
for  shareholders  and  creditors  in  various  ways.  The  Commission,  following  the
Group's  recommendation,  takes  the  view  that  there  is  no  need  to  revive  the  draft
Ninth Directive on group relations21, since the enactment of an autonomous body of

20 Such an alternative regime would notably be based on the requirement for a solvency test before any payment

of dividend or other distribution can be made.

21 A draft “Ninth Company Law Directive on the Conduct of Groups containing a Public Limited Company as a
Subsidiary”  was  circulated  by  the  Commission  in  December  1984  for  consultation.  According  to  its
Explanatory Memorandum, the Directive was intended to provide a framework in which groups can be
managed  on  a  sound  basis  whilst  ensuring  that  interests  affected  by  group  operations  are  adequately
protected. Such a legal framework, adapted to the special circumstances of groups, was considered to be
lacking in the legal system of most Member States.
Apart from its provisions dealing with the notification and disclosure of shareholdings in PLCs, which
covered  all  PLCs,  the  Directive  otherwise  applied  only  when  a  PLC  was  the  subsidiary  of  another
undertaking (which could itself be a PLC, but could also be a natural person or a legal person).
The  main  features  of  the  proposal  were  :  a)  a  definition  of  a  “subsidiary  undertaking”  which  would
oblige Member States to provide for “control contracts”, b) rules about the disclosure of shareholdings
in  PLCs,  c)  detailed  rules  (Section  4)  as  to  the  conduct  of  a  “parent  undertaking”  towards  a  PLC
subsidiary (including the liability of the parent undertaking for damage to the PLC subsidiary and for its
debts),  d) detailed  rules  applicable  when  the  parent  undertaking  had  entered  into  a  “control  contract”
with  a  PLC  (Section  5),  or  when  it  had  made  a  “unilateral  declaration  instituting  a  vertical  group”
(Section 6), which would contain similar safeguards to those prescribed in Section 4 but with important
additions (including a rights for the employee representatives on the subsidiary PLC’s supervisory body
to veto instructions from the parent undertaking).
The  consultation  on  the  draft  Directive  showed  that  there  was  very  little  support  for  such  a
comprehensive  framework  on  group  law:  such  an  approach  was  largely  unfamiliar  to  most  Member

18

                                                
law  specifically  dealing  with  groups  does  not  appear  necessary,  but  that  particular
problems should be addressed through specific provisions in three areas.

Financial and non financial information

Complete information and disclosure with regard to the group’s structure and intra-
group  relations  are  a  crucial  pre-requisite  to  ensure  that  the  functioning  of  groups
remains  compatible  with  the  interests  of  shareholders  and  creditors  at  the  different
levels. The actual provisions of the Seventh Company Law Directive on consolidated
accounts  do  not  sufficiently  address  these  concerns,  in  that  consolidated  figures  do
not reflect the financial situation of the various parts of the group and the degree of
dependence of the subsidiaries on the parent company.

The  need  for  better  financial  and  non  financial  information  about  groups  of
companies is already addressed partly by a series of EU measures, whether adopted
(application of  IAS to  consolidated  accounts),  pending  (information  to  be  provided
under the proposed Thirteenth Directive), or envisaged (information to  be provided
in  the  annual  corporate  governance  statement).  The  Commission  nevertheless
observes  that  the  scope  of  these  measures  is  limited  to  listed  companies.  The
Commission therefore considers that additional initiatives aiming at improving to the
extent necessary the financial and non financial information disclosed by groups are
desirable  when  the  parent  company  is  not  listed.  Since  transparency  is  felt  as  the
most important area of intervention with regard to groups, whether they are listed or
not,  the  Commission  regards  these  additional  initiatives  as  priorities  for  the  short
term.

Implementation of a group policy

Member  States  should  be  required  to  provide  for  a  framework  rule  for  groups  that
allows those concerned with the management of a company belonging to a group to
adopt and implement a co-ordinated group policy, provided that the interests of that
company’s  creditors  are  effectively  protected  and  that  there  is  a  fair  balance  of
burdens and advantages over time for that company’s shareholders. The Commission
sees the introduction of such a rule as an important step towards improved business
efficiency  and  competitiveness,  but  stresses  that  appropriate  safeguards  have  to  be
carefully designed. A proposal for a framework Directive to this effect will therefore
be presented in the medium term.

Pyramids

Pyramids, defined by the High Level Group as chains of holding companies with the
ultimate  control  based  on  a  small  total  investment  thanks  to  the  extensive  use  of
minority  shareholders,  raise  a  number  of  problems  stemming  from  their  lack  of
transparency.  The  Commission  notes  that  the  introduction  of  a  requirement  to
publish  an  annual  corporate  governance  statement  (as  suggested  in  Section  3.1.1.
above)  would,  together  with  the  adoption  of  the  proposed  Thirteenth  Directive,
constitute a first significant improvement in this respect.

States, and the business sector viewed it as too cumbersome and too inflexible. As a consequence, the
decision was made not to issue an official proposal.

19

                                                                                                                                                        
The  Group  stressed  that  pyramidal  groups  that  include  listed  companies  raise
particular concerns. It recommended that national authorities should be required not
to  admit  to  listing  companies  belonging  to  abusive  pyramids.  The  Group  defined
them  as  holding  companies  whose  sole  or  main  assets  are  their  shareholding  in
another listed company, but made an exception for cases where the economic value
of such admission is clearly demonstrated, thereby recognising that the definition of
what constitutes an abusive pyramid required further consideration. It also suggested
that  operators  of  stock  indices  should  properly  take  into  account  the  free  float  in
determining the respective weight of each company.

The  Commission  considers  it  necessary  to  give  further  examination  to  the  risk
inherent in abusive pyramids. In so doing, the Commission will take account of the
need to  avoid  undue  restrictions  of  companies'  freedom  to  choose  their  appropriate
organisation.  The  Commission  therefore  intends  to  obtain  on  this  issue  the  expert
opinion of the Committee of European Securities Regulators (CESR).

3.4. Corporate restructuring and mobility

The  growing  integration  of  the  single  market  leads  companies  increasingly  to  do
business across national borders within the Union. In order to be able to align their
structure  on  their  activities,  European  companies  have  repeatedly  called  for  the
adoption  of  legal  instruments  capable  of  meeting  their  needs  for  mergers  between
companies  from  different  Member  States  and  for  transfer  of  their  seat  from  one
Member State to another.

The  Commission  intends  to  present  in  the  short  term  a  new  proposal  for  a  Tenth
Company  Law  Directive  on  cross-border-mergers22  as  well  as  a  proposal  for  a
Fourteenth Company Law Directive on the transfer of the seat from one Member
State  to  another23.  Both  proposals  are  faced  with  the  task  of  solving  difficulties
relating  to  board  structure  and  employee  participation.  In  this  respect,  the
Commission  welcomes  the  approval  in  October  2001  of  the  European  Company
Statute, which opens up promising prospects for the solution of comparable issues in
the Tenth and Fourteenth Directives. In addition to these company law implications
of  corporate  restructuring  and  mobility,  which  are  covered  by  the  present
Communication,  attention  is  paid  to  their  social  implications  in  other  Commission
initiatives  (these  social  implications  are  addressed  in  the  Multi-Annual  Work
Programme of the Social Partners 2003-2005).

22 Although the laws of some Member States do not prohibit a company from one of those States from absorbing
a  company  from  another  Member  State  or  from  taking  part  in  the  formation  of  a  new  company  by
merger with a company registered in another Member State, such an operation may be carried out only
with  companies  from  Member  States  where  it  is  likewise  not  prohibited  by  law.  The  adoption  of  the
European Company Statute offers one solution to these problems (a European Company may be created
inter alia by merger of two or more public limited liability companies from different Member States). A
proposal for a Tenth Company Law Directive is nevertheless desirable, since a) companies may wish to
enter  into  a  cross-border  merger  without  creating  a  European  Company,  and  b)  other  types  of
companies may wish to enter into a cross-border merger.

23  In  the  absence  of  legislation  governing  the  cross-border  transfer  of  seat,  such  an  operation  is  currently
impossible  or  at  least  contingent  on  complicated  legal  arrangements.  This  is  because  Member  States
laws do not provide the necessary means and, when a transfer is possible by virtue of  simultaneously
applying  national  laws,  there  are  frequent  conflicts  between  those  laws  because  of  the  different
connecting criteria applied in the Member States. A legislative effort is needed in this field in order to
implement the freedom of establishment in the manner intended by the Treaty.

20

                                                
The  High  Level  Group  made  other  recommendations  relating  to  restructuring
transactions,  along  the  following  lines  :  a)  some  of  the  requirements  currently
foreseen  by  the  Third  Company  Law  Directive  (mergers  of  public  limited  liability
companies) and by the Sixth Company Law Directive (division of such companies)
should be relaxed in specific cases which make them superfluous; b) Member States
should be required to create squeeze-out rights (for majority shareholders) and sell-
out rights (for minority shareholders), at least in listed companies, subject to certain
thresholds  being  reached.  The  introduction  of  such  rights  would  complement  the
comparable  provisions  already  contained  in  the  current  proposal  for  a  Thirteenth
Company Law Directive on take-over bids.

The  Commission  considers  that  the  simplification  of  restructuring  transactions
pursued  by  the  proposed  relaxation  of  some  of  the  requirements  currently  foreseen
by the Third Directive and the Sixth Directive is desirable in so far as the necessary
safeguards  are  ensured.  The  Commission  notes  that  this  simplification  is  not
perceived  by  the  Group  as  an  immediate  priority,  and  therefore  intends  to  take  the
necessary initiatives in the medium term.

With respect to the introduction of squeeze-out rights and sell-out rights, proposed
by the High Level Group in its Restructuring Chapter, the Commission observes that
the same objectives are pursued by one of the recommendations made by the SLIM
Group about the simplification of the Second Directive, which the High Level Group
has endorsed. The Commission therefore intends to consider such an introduction as
part of the modernisation of the Second Directive, which the Commission regards as
a priority for the short term.

3.5. The European Private Company

The  High  Level  Group  noted  that  the  Societas  Europaea  (SE),  adopted  in  October
2001, may not meet all expectations of the business community, in particular SMEs,
and  referred  to  the  development,  from  a  private  initiative,  of  a  "European  Private
Company" (EPC) which, as a new legal form at EU level, would primarily serve the
needs of SMEs which are active in more than one Member State.  This  concept has
received widespread interest and support not only from the private sector, but also
from the European Economic and Social Committee, and the introduction of such a
form is regarded by many as easier to achieve than the European Company Statute.

The Group nevertheless observed that the first priority should be to adopt the Tenth
Directive  on  cross-border  mergers,  which  is  expected  to  meet  one  of  the  purposes
advocated for the EPC. Therefore, and in view of a number of issues which need to
be solved (e.g. tax or co-determination issues), the Group recommended that before
deciding  to  submit  a  formal  proposal,  the  Commission  should  launch  a  feasibility
study in order to clearly identify the practical benefits of – and problems related to –
the introduction of an EPC statute.

The Group suggested that such a feasibility study should be launched in the medium
term, i.e. after the adoption of the Tenth Directive. The Commission considers that
the identification of most of the practical benefits of – and problems related to – the
introduction  of  an  EPC  statute  can  be  achieved  independently  from  the  progress
hoped  on  the  Tenth  Directive.  The  Commission  will  therefore  launch  a  feasibility
study in the short term, with a view to presenting a proposal for an EPC statute (if
the  feasibility  study  confirms  the  need  for  such  an  initiative)  in  the  medium  term.

21

The  aim  of  this  feasibility  study  is  to  evaluate  the  advantages  and  the  problems
generated by a possible European legal statute for small and medium enterprises in
order to facilitate their internationalisation. To this end, the study should conduct an
in-depth analysis of the legal, tax and social policy regimes relevant to SMEs in the
25 Member States of the enlarged Union.

3.6. The European Co-operative Society and other EU legal forms of enterprises

The European Council adopted last  year a general orientation on the proposal for a
Regulation on the Societas Cooperativa Europaea (SCE) and proposals of statutes
for a European Association and a European Mutual Society are now examined by
the European Parliament and the Council. The Commission observes that a majority
of  the  responses  received  in  the  consultation  organised  by  the  High  Level  Group
expressed positive views on the usefulness of these statutes.

The  Commission  intends  to  actively  support  the  ongoing  legislative  process
engaged  on  these  statutes,  in  response  to  the  explicit  desire  expressed  by  the
European  Parliament  for  giving  significant  attention  to  the  development  of  new
European legal forms of enterprises. Adoption by the Council of the Regulation on a
European Co-operative Society is hoped for in the near future, while the discussion
within the Council of the proposal for a European Association is actively going on.
As  soon  as  agreement  on  this  proposal  will  have  been  reached,  the  necessary
attention will be devoted to the proposal for a European Mutual Society.

With  respect  to  the  possible  development  of  a  proposal  for  a  Regulation  on  a
European  Foundation,  before  deciding  to  submit  a  proposal,  the  Commission
intends to launch a study aiming at assessing in depth the feasibility of such a statute.
Such  an  assessment  will  have  to  take  account  of  the  lessons  to  be  drawn  from  the
adoption and use of the other European statutes, so that it should best take place in
the medium term.

3.7. Enhancing the transparency of national legal forms of enterprises

Increased disclosure requirements for all legal entities with limited liability, are
a  need  which  stems  from  the  necessity  a)  to  preserve  fair  competition24  and  b)  to
prevent  company  law  from  being  abused  for  fraud,  terrorism  or  other  criminal
activity25. The Commission is committed to respond to this need, but the scope and
nature of this recommendation need to be further examined. In view of the numerous
other priorities, the necessary actions will be taken in the medium term.

24 The First Company  Law Directive,  which contains essential disclosure requirements (companies  must  file  a
series  of  documents  and  particulars  with  a  register,  and  interested  parties  can  obtain  a  copy  thereof),
applies only to  limited  liability  companies,  and  not  to  a  series  of  alternative  forms  of  enterprise.  The
creation of a framework for disclosure of basic data on certain other legal entities engaged in economic
activities is therefore perceived as a useful tool for trade and competition within the Internal Market.

25  See  in  this  respect  the  study  “Transparency  and  Money  Laundering:  A  study  of  the  regulation  and  its
implementation,  in  the  EU  Member  States,  that  obstruct  anti-money  laundering  international  co-
operation  (banking/financial  and  corporate/company  regulative  fields)”,  submitted  to  the  Commission
in  October  2001  by  the  Transcrime  Institute  (University  of  Trento,  Italy).  This  study,  commissioned
pursuant  to  conclusion  n°58  of  the  Tampere  Special  European  Council  of  1999  and  the  joint
ECOFIN/JAI  Council  of  October  2000,  presents  recommendations  to  increase  the  transparency  of
limited liability companies as well as other vehicles (as trusts).

22

                                                
4.  CONCLUSION

The  present  Communication  explains  why  the  European  regulatory  framework  for
company  law and  corporate  governance  needs  to  be modernised.  It  defines  the  key
policy  objectives which should inspire  any future action to be  taken at  EU  level  in
these areas. It includes an action plan, prioritised, to plan the various actions which
appear necessary over the short, medium and long term. It determines which type of
regulatory instrument should be used, and approximately by when.

Further to  the  conclusions adopted  by the  Brussels European Council of 20 and 21
March 2003, which requested the adoption of an Action Plan on Company Law and
Corporate  Governance,  the  Commission  addresses  this  Communication  to  the
European  Parliament  and  the  Council,  and  transmits  it  also  to  the  European
Economic and Social Committee and the Committee of the Regions.

Comments  from  all  interested  parties  are  invited  by  31  August  2003.  Comments
should be sent to DG MARKT G3, European Commission, B-1049 Brussels (e-mail
address: Markt-COMPLAW@cec.eu.int).

The Commission will publish a synthesis of the comments received, and they will be
given adequate consideration when implementing the present Action Plan.

23

ANNEX 1

Modernising Company Law and Enhancing Corporate Governance
in the European Union - A Plan to Move Forward

List of Actions

SHORT TERM (2003-2005)

Description of action

Corporate
Governance

Enhanced  corporate  governance  disclosure
requirements 
of
collective  responsibility  of  board  members  for
key non financial statements)

confirmation 

(including 

legal 

framework 

Integrated 
shareholder 
efficient 
decision-making  (participation 
exercise of voting rights, cross-border voting)

facilitate
and
to  meetings,

communication 

to 

Preferred  type  of
initiative26

Legislative
(Directive amending
existing legislation)

Legislative
(Directive)

Strengthening  the  role  of  independent  non-
executive and supervisory directors

Non legislative
(Recommendation)

Fostering  an  appropriate  regime  for  directors
remuneration

Non legislative
(Recommendation)

Confirming  at  EU 
the  collective
responsibility  of  board  members  for  financial
statements

level 

Legislative
(Directive amending
existing legislation)

Convening  a  European  Corporate  Governance
Forum  to  co-ordinate  corporate  governance
efforts of Member States

Non legislative
(Commission
initiative)

Capital
Maintenance

Simplification  of  the  Second  Directive,  on  the
basis  of 
recommendations  as
supplemented in the HLG Report (SLIM-Plus)

the  SLIM 

Legislative
(Directive amending
existing legislation)

26  This  column  gives  information  about  the  type  of  regulatory  instrument  which  should  be  used:
-  When  « Directive »  is  mentioned,  this  means  that  the  action  envisaged  requires  either  the
adoption of a new Directive or the modification of one or several existing Directives (in the areas
of  company  law,  securities  law,  financial  reporting  law…),  in  accordance  with  the  regulatory
powers of the various relevant bodies existing at EU level;
-  To  the  extent  possible,  the  necessary  initiatives  will  be  grouped  with  a  view  to  avoiding  a
multiplication of legislative initiatives.

24

                                                
Groups of
companies

Increased  disclosure  of  group  structure  and
relations, both financial and non financial

Restructuring Proposal for a Tenth Directive on cross-border

mergers

Legislative
(Directive amending
existing legislation)

Legislative
(Directive)

Proposal  for  a  Fourteenth  Directive  on  cross-
border transfer of the seat

Legislative
(Directive)

Feasibility study in order to assess the practical
needs  for  –  and  problems  of  –  a  European
Private Company

Non legislative
(Study)

Active progress on current proposals (European
Association, European Mutual Society)

Legislative (existing
proposals)

European
Private
Company

EU legal
forms

MEDIUM TERM (2006-2008)

Description of action

Preferred  type  of
initiative

Corporate
Governance

Enhanced  disclosure  by  institutional  investors
of their investment and voting policies

Legislative
(Directive)

Choice  for  all  listed  companies  between  the
two 
(monistic/dualistic)  of  board
structures

types 

Legislative
(Directive)

the 

Enhancing 
responsibilities  of  board
members  (special  investigation  right,  wrongful
trading rule, director’s disqualification)

Examination  of 
the  consequences  of  an
approach aiming at achieving a full shareholder
democracy  (one  share  /  one  vote),  at  least  for
listed companies

Legislative
(Directive or
Directive amending
existing legislation)

Non legislative
(Study)

Capital
Maintenance

Review of the feasibility of an alternative to the
capital maintenance regime

Non legislative
(Study)

Groups of
companies

Pyramids

Framework  rule  for  groups,  allowing 
the
adoption  at  subsidiary  level  of  a  co-ordinated
group policy

Legislative
(Directive)

Prohibition  of  stock  exchange 
listing  for
abusive  pyramids,  if  appropriate,  following
further examination and expert input

Legislative (possible
Directive amending
existing legislation)

25

Restructuring Simplification  of  the  Third  Directive  (legal

mergers) and Sixth Directive (legal divisions)

Legislative
(Directive amending
existing legislation)

European
Private
Company

EU legal
forms

Possible  proposal  for  a  Statute  for  a  European
Private  Company  (depending  on  the  outcome
of the feasibility study)

Legislative

Assess  the  need  for  the  creation  of  other  EU
legal forms (e.g. European Foundation)

Non legislative
(Study)

Transparency
of national
legal forms

Introduce  basic  disclosure  rules  for  all  legal
entities with limited liability, subject to further
examination

Legislative
(Directive or
Directive amending
existing legislation)

LONG TERM (2009 onwards)

Description of action

Capital
Maintenance

Possible  introduction  in  the  Second  Company
Law  Directive  of  an  alternative 
regime
(depending  on  the  outcome  of  the  feasibility
study)

Preferred type of
initiative

Legislative
(Directive amending
existing legislation)

26

ANNEX 2
LIST OF EXISTING AND PROPOSED EUROPEAN COMPANY LAW INSTRUMENTS

Existing European Company Law Instruments

REGULATIONS

Title of Act

Publication
Reference

Council  Regulation  (EEC)  2137/85  of  25  July  1985  on  the  European
Economic Interest Grouping (EEIG)

[1985]
OJ L 199/1

Council Regulation (2001/2157/EC) of 8 October 2001 on the Statute for
a  European  Company  SE  supplemented  by  Council  Directive
(2001/86/EC)  of  8  October  2001  supplementing  the  Statute  for  a
European Company with regard to the involvement of employees

[2001]
OJ L 294/1
[2001]
OJ L 294/22

Regulation  (EC)  No  1606/2002  of  the  European  Parliament  and  of  the
Council  of  19  July  2002  on  the  application  of  international  accounting
standards

[2002]
OJ L 243/1

DIRECTIVES

Title of Act

First Council Directive (EEC) 68/151 of 9 March 1968 on co-ordination
of  safeguards  which,  for  the  protection  of  the  interests  of  members  and
others, are required by Member States of companies  within the meaning
of  the  second  paragraph  of  Article  58  of  the  Treaty,  with  a  view  to
making such safeguards equivalent throughout the Community

Publication
Reference

[1968]
OJ L 65/8

Second  Council  Directive  (EEC)  77/91  of  13  December  1976  on  co-
ordination  of  safeguards,  which  for  the  protection  of  the  interests  of
members and others, are required by Member States of companies within
the  meaning  of  the  second  paragraph  of  Article  58  of  the  Treaty,  in
respect  of  the  formation  of  public  limited  liability  companies  and  the
maintenance  and  alteration  of  their  capital,  with  a  view  to  making  such
safeguards equivalent throughout the Community

[1977]
OJ L 26/1

Third  Council  Directive  (EEC)  78/855  of  9  October  1978  based  on
Article  54(3)(g)  of  the  Treaty  concerning  mergers  of  public  limited
liability companies

[1977]
OJ L 295/36

27

Fourth  Council  Directive  (EEC)  78/660  of  25  July  1978  based  on
Article 54(3)(g) of the Treaty on the annual accounts of certain types of
companies

[1978]
OJ L 222/11

Sixth  Council  Directive  (EEC)  82/891  of  17  December  1982  based  on
Article  54(3)(g)  of  the  Treaty  concerning  the  division  of  public  limited
liability companies

[1982]
OJ L 378/47

Seventh  Council  Directive  (EEC)  83/349  of  13  June  1983  based  on
Article 54(3)(g) of the Treaty on consolidated accounts

[1983]
OJ L 193/1

Eighth  Council  Directive  (EEC)  84/253  of  10  April  1984  based  on
Article 54(3)(g) of the Treaty on the approval of persons responsible for
carrying out the statutory audits of accounting documents

[1984]
OJ L 126/20

Eleventh  Council  Directive  (EEC)  89/666  of  21  December  1989
concerning  disclosure  requirements  in  respect  of  branches  opened  in  a
Member  State  by  certain  types  of  company  governed  by  the  law  of
another State

[1989]
OJ L 395/96

Twelfth  Council  Directive  (EEC)  89/667  of  21  December  1989  on
single-member private limited liability companies

[1989]
OJ L 395/40

RECOMMENDATIONS

Title of Act

Publication
Reference

Commission  Recommendation  (2001/256/EC)  of  15  November  2000  on
quality assurance for the statutory audit in the European Union: minimum
requirements

[2001]
OJ L 91/91

Commission  Recommendation  (2001/453/EC)  of  30  May  2001  on  the
recognition,  measurement  and  disclosure  of  environmental  issues  in  the
annual accounts and annual reports of companies

[2001]
OJ L 156/33

Commission  Recommendation  (2002/590/EC)  of  16  May  2002  on
“Statutory  Auditors’  Independence  in  the  EU  :  A  Set  of  Fundamental
Principles”

[2002]
OJ L 191/22

28

Proposed European Company Law Instruments

REGULATIONS

Title of Act

Publication
Reference

Amended  Proposal  for  a  Council  Regulation  (EEC)  on  a  statute  for  a
European Association

[1993]
OJ C 236/1

Amended  Proposal  for  a  Council  Regulation  (EEC)  on  a  statute  for  a
European Co-operative Society

[1993]
OJ C 236/17

Amended  Proposal  for  a  Council  Regulation  (EEC)  on  a  statute  for  a
European Mutual Society

[1993]
OJ C 236/40

DIRECTIVES

Title of Act

Publication
Reference

Proposal  for  a  Directive  of  the  European  Parliament  and  of  the  Council
amending  Council  Directive  68/151/EEC,  as 
regards  disclosure
requirements in respect of certain types of companies : COM (2002) 279

[2002]
OJ C 227/377

Proposal  for  a  Directive  of  the  European  Parliament  and  of  the  Council
on take-over bids : COM (2002) 534 final

[2003]
OJ C 45 E/1

29