House of Lords - European Union

Select Committee on European Union Fortieth Report

COMPANY LAW AND CORPORATE GOVERNANCE (10041/03)

Letter from Gerry Sutcliffe MP, Minister for Employment Relations and Consumer Affairs, Department of Trade and Industry to the Chairman

In May 2003, the European Commission launched an Action Plan on Company Law and Corporate Governance, entitled "Commission Communication: Modernising Company Law and Enhancing Corporate Governance in the European Union". On 26 June DTI submitted an Explanatory Memorandum (EM 10041/03). The Lords Select Committee on the European Union cleared this EM by a letter to the Minister dated 3 July 2003.[140]

The Action Plan, containing 24 legislative and non-legislative measures, completed its short-term phase at the end of December 2005. The Commission then launched a consultation on the future direction of the Action Plan (13 measures have yet to be considered) seeking responses by the end of March 2006.

I have formally responded to the Commission in their consultation exercise. A copy of my response (together with the Commission consultation document (not printed)) is attached for your information. In drawing up this response we have consulted a wide range of stakeholders, HM Treasury, Financial Services Authority and Financial Reporting Council. There is certainly no pressure amongst stakeholders for significant additional EU action and there was considerable consensus that the focus of EU action should now move to effective implementation and evaluation of existing measures, particularly in the light of the cumulative impact of recent regulation in the corporate, accounting and financial services sectors.

At the strategic level, our response highlights the following messages:

(a) EU Action should promote competitiveness and follow better regulation principles;

(b) focus of EU action should be to address cross-border problems; increase market stability across the EU; enhance investment opportunities; help companies set up across borders;

(d) we are questioning whether the case has been made for EU action in relation to the majority of measures which have yet to be brought forward by the Commission.

28 March 2006

Annex A

UK RESPONSE: CONSULTATION ON FUTURE PRIORITIES FOR THE ACTION PLAN ON MODERNISING COMPANY LAW AND ENHANCING CORPORATE GOVERNANCE IN THE EUROPEAN UNION

1. THE OVERALL AIM AND CONTEXT FOR FUTURE PRIORITIES

Question 1: Does the Action Plan address the relevant issues and identify the appropriate tools to enhance the competitiveness of European business? If not, please give your reasons and indicate which measures are not appropriate and/or would be desirable. What are your views on the balance of legislative/non-legislative measures proposed?

Are you facing particular obstacles in the conduct of cross-border activities to which, in your opinion, the Action Plan does not provide any satisfactory remedy? Please give your reasons.

The UK fully supports the view expressed in the consultation document that the impetus for action at EU level should be:

(a) improving the competitiveness of EU companies; and

(b) better regulation.

The UK no longer considers that the Action Plan of May 2003 generally, and particularly the majority of the medium and long term measures proposed, identifies the relevant issues to enhance the competitiveness of European business. It is important that, to justify regulatory action, any proposal should satisfy cross-border economic criteria and be capable of withstanding robust scrutiny under better regulation principles.

There are three types of cross-border action at EU level that can contribute to the objective of promoting the competitiveness of EU companies:

1. Action to enhance financial stability and market confidence. EU Finance Ministers confirmed in Oviedo in 2002 that all Member States have an interest in the stability of markets across the EU. Any further action should focus on clearly defined cross-border market failures that can be shown to reduce the competitiveness of EU companies.

2. Action to extend investment opportunities across EU borders and increase investment flows (and so improve access to capital for EU companies). In many Member States, investors can be deterred from providing capital across EU borders due to different forms of regulation and variations in disclosure requirements. Further action should focus on clearly defined cross-border market failures that can be shown to reduce the competitiveness of EU companies.

3. Action to make it easier for companies to set up cross-border operations. EU companies should be able to structure themselves across borders as their business demands dictate. Much progress has been made through the development of case law by the European Court of Justice. This has led to competition between the different corporate systems among the Member States, with benefits for companies. Such competition is desirable and makes many of the present Action Plan proposals (or aspects of those proposals) unnecessary. Legislation should be considered only (i) where Member States' legal requirements still restrict companies' flexibility to operate throughout the EU and (ii) where there are clear abuses of freedom leading to market failure that cannot first be dealt with effectively through non-legislative means.

All EU company law proposals should be tested against these criteria and should not be pursued if they do not contribute to one or more of them. The criteria are designed to reduce barriers to corporate activity for EU companies, improve access to capital, increase investment flows across borders, and allow higher returns for EU investors.

EU action must recognise the global nature of markets and the need for EU companies to be able to attract capital from third countries. The Action Plan should provide a framework to encourage inward investment and migration of companies into the EU from the rest of the world.

The form that each proposal takes should be carefully examined. The assumption should be that a proposal should take the least regulatory, lowest cost form that is necessary to achieve the desired objective. Non-legislative means should be considered as the first option as this provides the most flexible means of dealing with changing circumstances. In this context, the importance of the role played by shareholders in regulating the affairs of their own companies must be acknowledged; national codes recognise that shareholders, rather than legislators, are often the best custodians of their own interests. Where legislation is required, it should be flexible, coherent, accessible, cover only what is essential and establish high-level standards rather than impose detailed regulation. We consider that the Action Plan as it currently stands contains too many legislative proposals.

We consider, for example, that rather than EU legislative measures in relation to encouragement of disclosure of institutional investors' voting policies, shareholder democracy and board structures, greater consideration should be given to co-ordination and sharing of best practice. There are existing vehicles for this, such as the Corporate Governance Forum and Advisory Committee. Equally, comparative studies might usefully be initiated by the Commission in these areas. Additionally, as regards proposals in relation to wrongful trading, special investigation right, general squeeze-out and sell-out, groups and pyramids, further pan-European corporate vehicles and the enhanced transparency of other types of corporate vehicle, we do not think that the case for EU action of any kind has yet been demonstrated.

The specific measures under the Action Plan are discussed in response to the further questions in the consultation document.

In terms of specific action that might be taken to address obstacles to cross-border corporate activity not addressed in the current consultation document, the UK considers that there is a need for urgent consideration of the ongoing relevance of the Second Company Law Directive on capital maintenance. The provisions of this Directive inhibit investment opportunities and flows within EU. Additionally, there is scope for consideration of measures that might be taken to improve access to information about companies across the EU. For instance, steps might be taken to facilitate electronic linking of information held at company registries. These issues are further considered at question 14.

Question 2: Do you have any comments on the proposed application of better regulation principles in the area of corporate governance and company law? Are there other ways in which, in your view, the Commission should be seeking to improve its actions in this field?

The UK supports the Commission's work to ensure full and proper application of better regulation principles in the field of corporate governance and company law. We welcome the real strides forward the Commission has made on Better Regulation and impact assessment with the publication of new guidelines in June 2005. The two public consultation exercises carried out on the shareholders' rights Directive proposal were good examples of Better Regulation principles being applied in practice. However we believe that the Commission could do even better in this area, in the following three ways:

(a) The form that each proposal takes. This is further discussed at question 1 above.

(b) The process of taking EU action should be subject to clear disciplines. Where a market failure is identified, the most efficient way of dealing with it must be established, including through full consideration of alternatives. The essential tools have already been adopted by the Commission, and must be used in addition to consultation with national Governments (including through the Company Law Experts Group): public consultation; examination by the Advisory Group; the preparation of, and consultation upon, Roadmaps before a proposal is made; and the drawing-up of detailed Impact Assessments that examine costs and benefits thoroughly for discussion in Council Working Groups. Two additional steps would improve the process. First, Roadmaps are currently prepared only after the Commission has committed itself to a proposal in its annual work programme. It would be helpful if Roadmaps were prepared at an earlier stage to assess whether proposals in the Plan should be taken forward. Second, full Impact Assessments should meet the requirements of the Commission's better regulation guidance for economic criteria for action by using those set out in response to question 1 above.

(c) There should be ex-post evaluation of the effectiveness of individual measures once they have been implemented into national legislation so that measures which are not delivering intended benefits can be repealed or modified as necessary. In addition, the degree to which the Action Plan itself is delivering its stated objectives should be evaluated at regular intervals and adjustments made as necessary to priorities and overall strategic objectives. The current consultation exercise is welcomed in that context.

It is also important that any legislative proposals are sensitive to the different sizes of companies and the scale of their operations. Consideration should be given to criteria and potentially size thresholds rather than simply adopting the traditional distinction between listed and unlisted companies. This approach would help to target policy objectives more effectively and would remove unnecessary regulatory burden. For example, the increased costs, on purely domestic transactions, of a proposal to facilitate cross-border transactions should be weighed against the likely benefits of that proposal.

We consider, in particular, that the measures in the Action Plan and the current consultation exercise should not be taken forward in the absence of proper empirical evidence.

2. ESTABLISHING THE RIGHT PRIORITIES FOR THE ACTION PLAN: MEDIUM AND LONG TERM

Question 3: [Shareholder democracy—one share/one vote.] What would be the added value of addressing the issue at EU level?

What would be the appropriate form for any EU instrument? Please give your reasons.

Are there, in your view, specific elements which any such instrument should cover?

It is essential to be clear what problem this proposal is seeking to address. Surely the objective must be to target those corporate structures which entrench management or sustain poor corporate governance practices. It is essential, therefore, at the outset to define precisely what is meant by one share/one vote.

The issue of "shareholder democracy"—in the form of good corporate governance practices through the proper exercise of shareholder rights—is of critical importance in ensuring liquid and deep capital markets within the EU. Investors themselves, assisted by proper transparency, have a key role to play in driving policy on the matter: This must be recognised.

The added value of considering the issue at the EU level is that it could, in particular, expose different practices and highlight the benefits of increased shareholder democracy for encouraging greater investment. Where this leads to greater democratisation of shareholders' rights, it could extend investment opportunities across EU borders and increase investment flows. In many Member States, investors can be deterred from providing capital across EU borders where shareholder rights are unfamiliar or unsatisfactory.

The principle should be that EU action should be designed to lead to the progressive elimination of distorting or disproportionate voting structures, at least in companies traded on regulated markets. However, no decisions should be taken on the form of such action, or the possible need for legislative intervention, until a thorough study has been undertaken across the EU to include:

— The existing differential voting structures and their prevalence in companies across the EU (including matters such as non-voting shares, multiple voting shares, loyalty shares, pyramid ("Chinese box") arrangements).

— The possible market benefits of security instruments with differential voting rights (such as preference shares). It must be recognised that voting rights are only one element in an investor's decision to acquire shares (return on capital and dividends are also key factors).

— The possibility that any variation in voting rights is taken account of in the price which investors pay for non-voting shares.

— Possible public interest justifications for the retention of differential voting rights (for instance, through the holding by national Governments of Golden shares).

— The methodology for compensating the holders of differential shares in existing companies whose rights were overridden.

— Whether a one share/one vote rule (applied only to listed companies) might lead to adverse effects through companies seeking to de-list:

— The importance of the contractual relationship (voluntary and transparent) between investors and companies.

The study should also consider the extent to which market forces may be relied upon to promote the elimination of differential voting shares (or equally how markets may develop financial instruments to maintain differential governance structures). Is any regulatory or other intervention desirable? If such intervention is desirable, how might the market be further empowered through, for instance, codes of practice or increased transparency? Ultimately, there is a need to conduct a risk/reward balance—do the wider benefits that might be attained in terms of increased proportionality of shareholder risk to voting rights justify the loss in flexibilities that might result from strictly legislating to this effect?

Question 4: [Rights of shareholders: Nomination and dismissal of directors, shareholder communication, special investigations into the conduct of company affairs] What would be the added value of addressing these questions at EU level? Please give your reasons.

Which instrument would be best designed to deal with these matters? Please give your reasons.

Are there, in your view, specific elements which any such instrument should cover?

Aside from the matters currently contained in the draft Directive on shareholder rights, it is not considered that there is presently a need for substantive action at EU level in the field of shareholder rights. Matters such as the appointment of directors and the co-ordination of action by shareholders in nominating board members should be determined by Member States or by agreement between the relevant parties. Such an approach would properly respect the different traditions in Member States. It would also provide scope for market forces and best practice to play a full part in influencing behaviours and raising governance standards. It is appropriate to deal with this issue at national level because of the need to balance it with other particular aspects of the national company law regime.

In particular, the UK does not see value in developing an EU special investigation rule (as proposed in the Action Plan). We are not aware of any demand for such an instrument from investors or others.

Additionally, there are a variety of existing investigations rights available within the EU (some of which may be exercised by shareholders, others involving investigation by a public body, for instance on "public interest" grounds). Any proposal for an EU wide special investigation rule might undermine existing practices within Member States which already operate effectively to protect shareholders, creditors or the public more generally. Such a legislative instrument would add unnecessarily to the amount of company legislation without identified benefits. We do not think the EU should expend further resources on developing such an instrument.

Question 5: [Disclosure by investors of their voting policies.] Is there a need for this issue to be addressed at EU level? What would be the added value of addressing the issue at EU level? Please give reasons for your reply.

What would be the appropriate form for any EU instrument? Please give your reasons.

Are there, in your view, specific elements which any such instrument should cover?

The UK considers that these issues are best dealt with at a Member State level. The disclosure of voting policies by institutional investors is increasingly good practice in the UK as a result of initiatives by institutional investors with encouragement from Government and best practice is still developing. It improves transparency and accountability and supports better engagement by investors with companies. However, we consider that EU legislation would be immensely complex to introduce due to the different investment markets and ownership structures in Member States and consequent definitional problems. In these circumstances, such legislation would run the real risk of creating a bureaucratic (box-ticking) and costly reporting structure which would divert resources away from effective investor engagement. Nevertheless, in order to establish good practice at EU level and encourage better investor disclosure, it might be possible for the Commission, possibly through the Forum, to monitor developments in this area.

Question 6: [Directors' responsibilities/enhanced transparency of legal entities] Do you consider that:

the question of the wrongful trading rules; and

the issue of directors' disqualification

should be addressed at EU level? Please give your reasons.

Which instrument would, in your opinion, be most appropriate? Please give your reasons.

If so, are there, in your view, specific elements which any such instrument should cover?

Do you consider that any additional measures are needed to enhance transparency for legal entities and/or legal arrangements (eg trusts)?

(a) The UK does not see value in undertaking further legislative action at EU level in the field of wrongful trading or to enhance transparency of further forms of legal entities. We are not aware of any demand for such legislation from creditors, shareholders or elsewhere and we believe that it would be appropriate to first identify if there is evidence that these are problems that need to be addressed. Such legislation would add unnecessarily to the amount of company legislation without identified benefits and we do not believe the EU should expend further resources on developing such legislation.

(b) The UK considers that there is scope for EU action on the issue of directors' disqualification. Such action is justified on the grounds both that it may contribute to enhanced financial stability and market confidence. It would also make it easier for companies to set up cross-border operations by reducing the scope for abuse of Treaty freedoms. Such actions should cover the identification of those who have been disqualified from being a director in different EU jurisdictions. Such persons should not simply be able to entirely evade the consequences of disqualification by forming a company under the law of another Member State and being appointed as a director of that company. This could lead to an abuse of the right of legitimate companies and directors to fully exercise their freedom of establishment rights. We believe it would be useful if the Commission were to explore the available options to address this issue (particularly facilitating disclosure of disqualification orders made in any Member State) and bring forward proposals. Such records of disqualification orders could be made available through national company registries or credit rating agencies.

It is not, however, considered either necessary or feasible to move forward on the basis of substantive harmonisation of directors' disqualification legislation across the EU. Such disqualification regimes, where they exist, will inevitably be tailored to accommodate the national regimes on directors' duties and responsibilities, which will differ considerably according to different traditions in Member States. Consequently we believe that the recognition of disqualification regimes is a question for Member States to consider.

Question 7: [Corporate restructuring and mobility] In the light of existing instruments, is there still a need for a directive on the transfer of registered office? Please give your reasons.

Are there, in your view, specific elements which any such Directive should cover?

The UK Government publicly consulted in March 2005 on the possibility of a directive on the transfer of a company's registered office. The UK Government's response to that consultation and the summary of consultees' responses, published in September 2005, is available on the website of the Department of Trade and Industry at http://www.dti.gov.uk/cld/cldpublished.htm. The comments below reflect the outcome of that consultation.

The UK remains committed to promoting cross-border restructuring opportunities for companies as an important part of the integration of the EU Single Market. In that context, the proposed Directive for the transfer of the registered office of a company may be helpful to companies seeking to adapt themselves in response to changing market circumstances and the location of their customer and client base.

It remains unclear as to the likely take-up of the transfer procedure under the Directive. There will also be a number of technical concerns. The UK could, nevertheless, accept a directive proposal to facilitate the transfer of a company's registered office within the EU.

Should the Commission decide to make such a proposal, we consider that it should review any available evidence about the effectiveness of:

(a) the cross-border transfer provisions in the European Company Statute; and

(b) the migration provisions (both intra- and outside the Community) in the company law of any Member State that has such existing provisions.

Additionally, the proposal should contain the following elements:

— Scope of the proposal—It should apply to both public and private limited companies (such transfer procedures should be available to small and medium enterprises, as well as large public companies).

— Decision to transfer registered office—Should be made in accordance with the domestic company law of the Member State from which the company proposes to transfer in the same manner in which alterations to the company's articles are agreed. It must be clear when the company satisfies these requirements. There needs to be clear communication between registries otherwise there is a risk of a company ceasing to exist for a period of time or existing in two places. One potential idea being supported by the European Commercial Registries Forum is that all registries adhere to a standard certificate of transfer that would be issued by the old registry. They have already produced a draft which is available at http://www.ecrforum.org/previous/dublin2005/54203%20Certificate%20of% 20Continuance%20(7)1.pdf;

— Employee involvement issues—The proposal should not include provisions on information and consultation of employees which should remain a matter for existing rules (both at EU and domestic level) on this issue. As regards employee participation arrangements, an approach should be adopted which maximises the flexibilities for, and minimises the burdens on, companies. In particular, employee participation requirements should not be extended to companies in circumstances where such arrangements neither exist in the transferring company nor are required under the company law of the country to which the company is transferring.

Question 8: [The choice between the monistic and dualistic types of board structures.] Should the question of the choice of board structure be addressed at EU level? Please give your reasons.

Which instrument would be best designed to deal with this matter? Please give your reasons.

Are there, in your view, specific elements which any such instrument should cover?

The UK does not consider that the issue of board structures should be addressed by EU legislative instrument. This should remain a matter for national law and companies themselves. It is vital that corporate governance practice in relation to boards is able to develop unrestricted by prescriptive legislative rigidities. The principle of "comply or explain" should underpin boardroom practice. We are not aware of a demand from business for additional legislation to increase flexiblities or existing choices as regards board structures across the EU.

In order to examine practice in the boardroom of EU companies, there may be a case for comparative analysis to be undertaken on the operation of board structures across the EU (for instance, the respective roles of committees in the unitary board structure or the balance of responsibilities between the supervisory/administrative boards in a two tier system). Any such work should have as its objective the promotion of dialogue and exchange of ideas with a view to promoting best practice. The views of the European Corporate Governance Forum should be sought as to the possible benefits and scope of any such analysis.

Question 9: (Squeeze out and sell out.] Do you think that a squeeze out and a sell out right should be introduced at EU-level? Please give your reasons.

If so, should these rights be limited to companies which shares are traded on a regulated market ("listed companies")? Please give your reasons.

Which instrument would be best designed to deal with this matter? Please give your reasons.

No, the UK does not think that a general squeeze out and sell out right should be introduced at EU level.

An appropriate degree of harmonisation on the issue of squeeze out and sell out has already been achieved by the. Takeovers Directive which introduces such rights in respect of "listed companies" following a successful takeover,

A general sell out rule could potentially be very costly for companies which did not wish to acquire minority shareholdings. Equally, it would be unfair to provide solely for a squeeze out right without also providing a sell out right as this would leave minority shareholders exposed to being compulsorily bought out by the company with no corresponding right to require the purchase of their shares. Such a squeeze-out right in the absence of a right of sell-out may also raise concerns regarding its compatibility with the European Convention on Human Rights.

There are also considerable practical issues which would have to be resolved concerning a possible general squeeze out/sell out rule, including finding a satisfactory means by which a fair price may be determined in the absence of a takeover and in ensuring that any such rule did not conflict with or undermine the existing provisions in the Takeovers Directive.

We do not consider that any possible benefits of such an EU rule would outweigh the practical and technical problems associated with it. It would also add unnecessarily to EU company legislation and impose further burdens on companies. We do not consider the Commission should further pursue this idea.

Question 10: [Groups and pyramids] Should the issues of framework rules for groups and abusive pyramids, in your view, be addressed at EU-level? Please give your reasons.

Which instrument would be best designed to deal with this matter? Please give your reasons.

Are there, in your view, specific elements which any such instrument should cover?

No—the issue of a framework rule for groups, should not be addressed at the EU level. It is appropriate to deal with this issue at national level because of the need to balance it with other particular aspects of the national company law regime, for instance directors' duties.

We are not aware of demand for such a rule from companies or other interested parties. It is currently understood that such a group rule only exists in a small minority of Member States and there is, accordingly, extremely limited practical experience to draw upon in developing such a rule. We do not think that the Commission should expend further resource on developing such a rule.

The issue of "pyramids" is dealt with at question 3 (shareholder democracy above). This matter should be considered as an integral part of a study on the one share/one vote principle.

Question 11: [Legal forms of enterprises: the European Company] How useful do you judge the ECS to be in practice? Do you consider any modifications are appropriate and desirable? Please give your reasons.

The European Public Company has not proved to be a useful vehicle in practice for UK business.

Only one such corporate. vehicle has been registered in the UK since the European Company Statute came into effect on 8 October 2004. There are a number of issues related to the Regulation which may be the reason why more European Companies have not been incorporated:

— The uncertainty of the legislative regime (divided between European and Member States' law).

— The fact that the European Company is less flexible than other public limited company forms in relation to matters such as its minimum capital requirements, the location of its head office and arrangements in relation to employee involvement; and

— The complexity of formation methods (it is not possible for individuals to establish a European company directly);

— Differing views amongst Member States and practitioners as to the duty of European companies to register branches set up in other Member States.

Additionally, the provisions in the European Company Statute concerning disqualified directors would be difficult to enforce as there is no way of identifying if someone is disqualified elsewhere in the EU.

The UK does not, however, consider that it should be a priority to make modifications to the Regulation in the light of the limited interest in, or demand for, such a pan-European corporate vehicle from business,

Question 12: [The European Private Company] Do you see value in developing an EPC Statute in addition to the existing European (eg Societas Europaea, European Economic Interest Grouping) and national legal forms? Please give your reasons.

If so, are there, in your view, specific elements which any such statute should cover?

No—the UK does not see value in developing a European Private Company.

We are not aware of any demand for such a vehicle from business. A European Private Company would add unnecessarily to the amount of company legislation without identified benefits, We believe that the EU should not expend further resources on developing such a vehicle. In particular the EU should wait for the mandatory "5 year review" of the European Public Company to be completed before carrying out further work on the European Private Company.

Even though it may be intended that the European Private Company would be entirely optional as a corporate vehicle, its introduction would not be without additional costs to business. The European Private Company would lead to a further complication of the corporate regulatory landscape and costs would be incurred by companies in considering such vehicles and making reports and decisions concerning them. The same applies to other possible pan-European corporate vehicles, such as the European Foundation (see question 13).

Question 13: [The European foundation] Do you consider it useful to carry out an examination on the feasibility of a European Foundation Statute? Please give your reasons.

No—the UK does not see value in further investigating the possible need for a European Foundation.

We are not aware of any demand for such a vehicle from business or elsewhere. A European Foundation would add unnecessarily to the amount of company legislation without identified benefits. We believe that the EU should not expend further resources on considering such a vehicle. In particular the EU' should wait for the mandatory "5 year review" of the European Public Company to be completed before carrying out further work on the European Foundation.

3. SIMPLIFICATION AND MODERNISATION OF EUROPEAN COMPANY LAW

Question 14: Do you agree that there would be added value in modernising and simplifying European Company Law? Please give your reasons.

Are there, in your view, areas of actual or potential overlap between the Action Plan and other initiatives or measures in related sectors? What, if anything, should be done in order to ensure coherence between the various fields of action? Please give your reasons.

What should be the extent of simplification in the interests of improving the regulatory environment and rendering the text more user-friendly? Please give your reasons.

We recognise that there are potential benefits from modernisation and simplification of outdated and unnecessary elements of the EU company law acquis. However, we have significant concerns about the proposals for a formal codification and recasting exercise. This exercise would distract from the prioritisation of reform of those elements of EU law that impose unnecessary burdens. Furthermore, all legislative changes involve costs to business in assimilating the new legislation and seeking appropriate advice. Such costs would need to be justified in terms of demonstrable benefits arising.

It is right to make sure that EU company law instruments are drafted as clearly and simply as possible, and that they do not contain redundant or obsolete material. It is also desirable to ensure, as far as possible, that provisions on similar subjects are grouped together. But that does not mean that "recasting" or "codification" should be set as general objectives for EU company law. There are a number of reasons not to pursue such objectives:

(a) The EU company law acquis is, and is likely to remain, largely made up of Directives. That means that, most of the time, the vast majority of "users" of EU company law will have to refer to Member States' implementing legislation rather than the Directives themselves. Given the range of their subject matter and their complex relationships with domestic rules, the arrangement of the Directives will not necessarily have any impact on how Member State legislation is arranged.

(b) Consolidated texts of company law instruments, reflecting all amendments currently in force, are now freely available from a range of sources notably EUR-Lex. This diminishes the need for codification.

(c) Company law does not stand still. The more all encompassing any codification, the sooner it will itself be subject to amendment.

(d) Simplification of the principles underlying regulation is often a good idea, but redrafting substantive provisions just to make them easier to read is only to be undertaken with extreme caution. There is always a danger of inadvertently changing a meaning.

Instead, the simplification and modernisation programme should prioritise those elements of EU law that impose unnecessary burdens. The tests for any proposed reform of existing EU law should be the same as for new proposals; the existing directives should be subject to the economic and better regulation criteria set out in response to questions 1 and 2.

There should be in-depth discussion between the Commission and interested parties on the principles, objectives and methods of the simplification and modernisation programme for company law. The Commission's inclusion of this issue in the current consultation exercise is welcomed as a starting point for those discussions. This opportunity should be used to seek to achieve real deregulation, removing unnecessary burdens and costs where identified.

We have concerns arising in part from our experience with the negotiations on the October 2004 Commission proposal to "simplify" the Second Directive, The project lacked clear objectives around which there was consensus, failed to adhere to genuine simplification measures (by adding new rules where none had existed previously) and was not underpinned by proper cost and benefit impact analysis. Inevitably, without clearly understood objectives, the proposal also opened up discussion on a range of issues unconnected with the original simplification intent.

We have substantial experience of the simplification process in the UK from development of our own company law proposals, now contained in the Company Law Reform Bill which is currently before Parliament. This Bill will substantially change company law to make it easier to understand and more flexible. The reform process started in 1998 with a review of the law by an independent group of experts, practitioners and business people to identify how existing legislation could be brought up to date. The review took three years to complete and was followed by extensive consultation processes in relation to the proposals. The work required much dialogue and detailed work with the various interest groups and this process will need to be followed at EU level with an increased number of participants.

We think there is scope for consideration of simplification, with the aim of reducing burdens on business, in the following areas:

Fundamental reform of the Second Company Law Directive on capital maintenance

Additionally, the Second Directive does not reflect recent developments in the field of accounting (including the adoption of International Accounting Standards at the EU level) which causes considerable uncertainties and costs for business, especially in relation to allowable distributions to shareholders. This is frustrating the wider policy objective of facilitating the assimilation of International Financial Reporting Standards to ensure common accounting standards across the EU.

We consider distributable profits to be a major barrier to convergence to standards based on the principles of IFRS Taking forward consideration of the case for reform of the Second Directive should be an urgent priority for the Commission. It is important, however, that, as part of any such reform, the adverse impacts on investment from any dilution of pre-emption rights (expressly provided for in the current Directive) should be expressly recognised.

Simplification of the Third and Sixth Company Law Directives on mergers and divisions.

Review of the 11th Directive on branch registration.

Additionally, there is scope for consideration of simplification initiatives outside the formal legislative regime. With the increase of the single market and cross-border trade, investors may not know on which company registry to look to for information concerning particular companies. There may be ways of addressing this without legislation for example by use of a website where information on all EU companies can be found in one place akin to the European Business Register (although the EU may like to consider giving statutory backing to such an organisation). The EBR also provides basic information in one place on company types across the EU. Also, the Commission has given-funding to BRITE (Business Register Interoperability Throughout Europe) to look into ways that registries can operate together more effectively. These types of measures can make the EU a more attractive place to invest.

Finally, it is critical that, both in any exercise to reform existing law or any new legislative initiative, regulatory activity is properly co-ordinated within the Commission to ensure that duplicatory or conflicting burdens are not imposed on business (for instance, proper account must be taken of other provisions or initiatives such as in the field of financial services, environmental and social reporting, etc).

140 Correspondence with Ministers, 10th Report of Session 2003-04, HL Paper 71, p 245. Back