Modernisation of the EU Company Law

On 4 November 2002, a group of company law experts set up by the European Commission announced its recommendations for a modernisation of company law within the EU. The group of experts was set up in September 2001 in light of the wish to create an optimal and up-to-date regulatory framework for European companies. The mandate of the expert group was to study the practice in the Member States and then provide recommendations on, among others, the following topics:

  • The creation and functioning of companies, including corporate governance principles.

  • Capital formation and maintenance.

  • Groups and pyramids.

  • Shareholders' rights, including cross-border voting and virtual general meetings.

  • Corporate restructuring and mobility within the EU.

  • The European Private Company and other legal forms of European enterprises.

Following the Council of Ministers of Finance and Economic Affairs (ECOFIN) in April 2002, in light of the ENRON scandal, the mandate was extended to review, specifically relating to corporate governance, the role of independent directors, management remuneration, and the responsibility of management for financial statements and auditing practices.

On 4 November 2002, the group of experts delivered a large number of recommendations for short, medium and long-term company law measures to the European Commission. The recommendations in the short term are, among others:

  • A stronger role for independent non-executive or supervisory directors in listed companies.

  • Disclosure by listed companies of remuneration policy for directors and of individual directors' remuneration, incentive schemes, pension, severance pay and other benefits.

  • Prior shareholder approval of share and share option schemes in which directors participate (but not of the individual allotment).

  • Collective responsibility of directors for financial and key non-financial statements of the company.

  • Use of modern technology, e.g. use of the Internet for information and voting at general meetings in listed companies.

Other recommendations from the group of experts include the following:

  • Freedom of choice between a unitary and a two-tier board structure, at least in listed companies.

  • Institutional investors should be required to disclose their voting policies and, at request, their voting records in individual cases.

  • It should be reviewed whether directors' disqualification across the EU could be an appropriate sanction for misleading financial and non-financial statements and other forms of misconduct by directors.

Furthermore, the group of experts recommends that in the long run the European Commission consider setting up an alternative company law regime - optional for Member States - according to which, among other things, the concept of legal capital would be abolished. In that connection, it is suggested that distribution of a company's funds, including by loans, should be based on a solvency test (which would solve the shareholder loan problem in Denmark) rather than, in Denmark, on distributable reserves according to the approved annual accounts. Similarly, a company should be able to purchase or receive own shares as security within the limits of for distribution instead of within a legal maximum as the 10% applicable in Denmark.

The European Commission now has to consider the recommendations, and an action plan for the EU company law is expected to be presented in early 2003.

On January 29 2003, a bill that will implement some of the recommendations was introduced in Denmark (see the article New Bill to Modernise the Danish Companies Act on the News site).

By Gitte Lansner, attorney-at-law