Select Committee on European Union Fortieth Report


SHAREHOLDERS VOTING RIGHTS (5217/06)

Letter from the Chairman to Gerry Sutcliffe MP, Parliamentary Under-Secretary of State for Employment Relations and Consumer Affairs, Department of Trade and Industry

  Thank you very much for your Explanatory Memorandum 5217/06 on voting rights for shareholders which Sub-Committee A considered at its meeting on 7 March. Whilst the Committee welcomes the general thrust of the Proposal to improve corporate governance in the Union, and notes the prominent role the UK should play in arguing for such measures, we have decided to hold the document under scrutiny pending clarification of a number of issues. We consider that such a proposal must focus only on what is necessary to create a working single market and not go further.

  We note the specific concerns you raise about the potential for the Proposal to obstruct overall rights enjoyed by shareholders. On the notice periods for meetings (Article 5 of the Proposal) we share your concerns and are pleased that you will be seeking to amend the Article. We consider that a mandatory 30 day notice period would be unworkable in many situations. Would you please provide details of the amendments you will be suggesting and whether these amendments are agreed.

  On the right of shareholders to ask questions, you write that you are seeking clarification of whether companies will be required to respond to all questions in writing. Please provide details of this clarification and, if there is to be a requirement for a written response, please indicate the likely costs to business and whether you will be opposing it.

  On the ability to impose more stringent national requirements you write that it is unclear what this would mean in all cases. Although you have helpfully provided some examples, we would appreciate a fuller analysis of the requirements you consider may be implemented by other Member States and any effects this would have on shareholders and business.

  Finally, we note your comments on the use of Article 95 as the legal basis for the Proposal. Please provide us with the results of your correspondence with the Commissionon on this, together with your analysis of the potential implications should Article 95 remain the legal basis.

9 March 2006

Letter from Gerry Sutcliffe MP to the Chairman

  Thank you for your letter of 9 March in response to the Explanatory Memorandum. We concur with your assessment that this proposal must focus only on what is necessary to create a working single market and not go further. This is the position we have been taking in the negotiations: it reflects the original guiding political criteria established in the EU Company Law and Corporate Governance Action Plan, that measure should be "firm in the principle, flexible in the application".

  Negotiations on this dossier are continuing in the Council and I should like to update you on progress and answer—in so far as is possible at this stage—the questions posed in your letter.

NOTICE PERIODS FOR MEETINGS (30 DAYS)

  I am pleased to report that the Commission has indicated that it is prepared to be flexible on this point, and that shorter notice periods should be permitted for Extraordinary General Meetings (EGMs). We would prefer that the Commission were to permit Member States and companies to decide in which circumstances EGMs should take place on shorter notice, and have suggested that following drafting for Article 5 of the Directive:

Article 5

  General meeting notice periods

  1.  Without prejudice to Article 9(4) of Directive 2004/25/EC of the European Parliament and of the Council, and subject to paragraph 2, general meetings may not be called on less than [XX] calendar days notice.

  2.  A general meeting may be called on at least [14] calendar days notice if:

    (a)  the laws of the issuer's home Member State and its statutes so permit; and

    (b)  the meeting is not an annual general meeting.

  It is more likely, however, that the Commission will seek to define more precisely the circumstances for EGMs (there is already a carve-out for 14 days in some takeover situations). We will need to study any Commission proposals in order to understand how workable they might be in practice.

Questions at meetings

  Many Member States have expressed their concerns about the potential for lengthy and costly meetings and other burdens on business if there is an unrestricted right to ask questions. At the most recent Council Working Group, a wide range of opinions was expressed as to whether, and when, the questions asked in writing should have to be answered. We have recommended that Member States should be permitted to allow companies to place constraints on the asking and answering of questions:

    (a)  which do not appear to have any reasonable connection with any resolution to be proposed at the general meeting at or in anticipation of which they are asked, or which appear otherwise to be unrelated to the business of that meeting;

    (b)  which appear to be frivolous or vexatious; or

    (c)  the asking of which would be likely to prejudice the legitimate interests of the company or other shareholders, or the efficient conduct of the business of the general meeting at or in anticipation of which they are asked.

  We are currently studying the Commission's Impact Assessment and will be consulting our stakeholders about the costs to business of an unrestricted right to ask—and have answered—oral and written questions in relation to company meetings.

More stringent national requirements (Article 3)

  The issue, and the precise meaning of "minimum harmonisation" as defined in paragraph 2.1.3 of the Commission's Explanatory Memorandum, was acknowledged by the Commission early in the negotiations as one which required more clarity throughout the directive. The Commission's Explanatory Memorandum says that the implication of minimum harmonisation is that "Member States are left free to maintain or introduce provisions which are more favourable to shareholders."

  In order to test this, we asked the Commission, specifically in relation to the restriction in Article 10 (which states that shareholders may appoint one proxy only—as opposed to one proxy per share in the UK), whether this meant that Member States could allow shareholders to appoint more than one proxy. This would seem to us to be an extension of shareholders rights and "more favourable to shareholders". The Commission were clear that Article 3 prevented this. This led to considerable discussion amongst Member States about the exact meaning of Article 3 in relation to the other articles in the directive.

  The Commission have said that whilst Article 3 will remain in the directive, the Commission will make clear what Article 3 means in respect of each other article. When we have sight of what it proposes, we will be in a better position to make an informed assessment of what other Member States reactions might be, what requirements they might implement as a result, and what the effects of this would be on shareholders and business.

Legal Base

  We are currently consulting the Commission on this issue. Our initial conclusion is that Article 95(1) would seem to be the correct treaty base.

  In ECJ case C217/04 United Kingdom v Parliament and Council, the Advocate General delivered his opinion in favour of the United Kingdom, saying, at paragraph 18:

    "18. Measures on the basis of Article 95(1) EC are intended to improve the conditions for the establishment and functioning of the internal market, but that provision does not confer on the Community legislature any general power to regulate the internal market. The Court has also stated that measures under Article 95(1) EC `must genuinely have that object, actually contributing to the elimination of obstacles to . . . free movement'."

  In the case of this directive, the conditions set out by the Advocate General seem to be satisfied. Nevertheless, we are also taking advice from Cabinet Office Legal Advisors on this point.

Update

  Following three Council Working Groups, the Presidency has said that it will be shortly in a position to issue a compromise text, which will be discussed at a meeting on 18 and 19 May. We do not, however, expect Member States to reach an agreed position before the Summer, and expect that negotiations will continue in the Council well into the next (Finnish) Presidency.

  I have attempted to answer your questions as fully as possible given the current stage of the negotiations. If there are any matters which you feel require clarification I am, of course, happy to provide further explanation.

19 April 2006

Letter from the Chairman to Gerry Sutcliffe MP

  Thank you very much for your letter dated 19 April regarding EM 5217/06 which Sub-Committee A considered at their meeting on 25 April. The Committee have decided to continue to hold the document under scrutiny.

  The Committee remains in favour of the proposed Directive and welcomes the general thrust of the Proposal to improve corporate governance in the Union.

  On notice periods for general meetings, the Committee were pleased to see that the Commission has indicated its willingness to be flexible. We consider that the agreed Directive should be sufficiently flexible to allow EGMs to be called at short notice as is currently the case in the UK. Please provide details of the Commission's future proposals in this area.

  On the right to ask and have answered all questions at company meetings we are glad to see that concerns over the possible burden to business are widely shared by Member States. We support the general thrust of your proposed amendment to this Article and would like to be kept updated on negotiations.

  On the ability of Member States to impose more stringent requirements than the Proposal itself does, whilst we are sympathetic to this in principle, we are unable to judge effectively what this might mean in practice. We would therefore like to have details of the Commission's promised clarification when this becomes available.

  We assume the stakeholder consultation exercise to which you refer in your original Explanatory Memorandum elicited a positive response and would appreciate details of it as well as of the proposed public consultation.

  Finally, on the question of the legal base, we note that you are consulting Cabinet Office legal advisors and we would be interested to learn the outcome of that exercise.

26 April 2006

Letter from Jim Fitzpatrick MP, Parliamentary Under-Secretary of State, Department of Trade and Industry to the Chairman

  Thank you for your letter of 26 April to Gerry Sutcliffe, about the above. The matter you have raised now falls within Margaret Hodge's portfolio and I am replying on her behalf as Duty Minister.

  We should like to update you on the progress of negotiations on this directive. You last wrote to the DTI about this on 26 April. I am sorry for the delay, but we have been pursuing certain negotiating objectives and have awaited developments before reporting back to you. DTI officials have been in touch with the Clerks in the intervening period.

NOTICE PERIODS FOR MEETINGS

  The Commission's first compromise proposal in response to requests for differentiating between notice periods for AGMs and EGMs, was to propose a period of 21 days for both. Nevertheless, there remains a good deal of support for differentiation, and both the rapporteurs for the European Parliament Committees (ECON and JURI) which are considering the directive have proposed amendments in favour of differentiation and the UK has supported these. We hope that the Commission will take this into account in future proposals.

QUESTIONS AT MEETINGS

  In our previous letter, we included a proposed amendment the purpose of which was to allow companies to place certain constraints on the asking and answering of questions and so reduce administrative and cost burdens. We now consider that we have reached an appropriate compromise text which achieves this—as follows:

    The right to ask questions and the obligation to answer are subject to the measures which the Member State may take, or allow companies to take, to ensure the identification of the shareholder, the orderly preparation of the general meeting and the protection of confidentiality and business interests of the company. The Member State may provide that the company shall not be obliged to respond individually to a question if the requested information has already been available in a question and answer format on the Internet site of the company.

MORE STRINGENT NATIONAL REQUIREMENTS

  Here, again, we believe that we have reached an appropriate compromise text as follows:

    This Directive does not prevent Member States from imposing further obligations on companies or from otherwise taking further measures to facilitate the exercise by shareholders of the rights referred to in this Directive.

The important difference with this wording is the omission of "more stringent national requirements" and the positive reference to "measures to facilitate the exercise by shareholders of the rights referred to". The inclusion of a description of what "more stringent" means for each article has been rejected as impractical by all parties.

LEGAL BASE

  We are pleased to report that the Commission has accepted that Article 44 EC is a relevant treaty base, given that it has been used to adopt other company law measures. The Commission has recommended that Article 44 EC is used jointly as a treaty base, along with Article 95 EC. We are inclined to accept this compromise.

PUBLIC CONSULTATION

  The clearance process is now underway and we intend to issue the consultation document in mid-October. In addition, we will be holding a public meeting.

PROGRESS OF NEGOTIATIONS

  We are still waiting to hear from the Presidency whether there will be further negotiations in the Council. Political agreement is still scheduled for the Competitiveness Council in December, but discussions in the European Parliament Committees have now been postponed twice, so there is some doubt over whether this timetable can be achieved.

21 September 2006



 
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