Master Programme in European and International Law (LL.M.) 2 nd semester Summer term 2013 Module Module Module Module E: E: E: E: Company Company Company Company Law Law Law Law Module Coordinator: Central European University, Budapest, Hungary Course Course Course Course title: title: title: title: Corporate Corporate Corporate Corporate Governance Governance Governance Governance Scholar: Stefan Messmann, Central European University, Budapest, Hungary This document has been produced with the financial assistance of the European Union. The contents of this document are the sole responsibility of Stefan Messmann and can under no circumstances be regarded as reflecting the position of the European Union.
Transcript
Master Programme in European andInternational Law (LL.M.)
2nd semesterSummer term 2013
ModuleModuleModuleModule E:E:E:E: CompanyCompanyCompanyCompany LawLawLawLawModule Coordinator: Central European University, Budapest, Hungary
CourseCourseCourseCourse title:title:title:title: CorporateCorporateCorporateCorporate GovernanceGovernanceGovernanceGovernanceScholar: Stefan Messmann, Central European University,
Budapest, Hungary
This document has been produced with the financial assistance of the European Union. The contents of thisdocument are the sole responsibility of Stefan Messmann and can under no circumstances be regarded as reflectingthe position of the European Union.
This course on corporations will be devoted to an overview over the most important legal forms ofbusiness organizations in Germany, France and England. The basic legal structure (formation,governance structure, liability regime and financing) of companies and groups of companies will becompared within the framework of the three dominant legal traditions in Europe, namely German,French and English. The EU legislation harmonizing the important aspects of Member States’company laws, and to the development of supranational forms of business associations will also betaught. The objective of the course is to put students in a position to understand the common structuralfeatures of the law of business organizations in Europe. Students will be provided with a detailedsyllabus and will comprehensive legislative materials.
This course will provide a comparative survey of the law on the two main avenues wherebybusinesses are financed in market economies: 1/ based on credits and 2/ by tapping the capitalmarkets. InInInIn thethethethe firstfirstfirstfirst partpartpartpart of the course, thus, the main building blocks and distinguishing features ofleading credit-securing laws will be analyzed. This branch of law is known under various names (e.g.,‘secured transactions law’ in the United States, personal property security law in England, or the ‘lawof credit-securities’ in Germany), yet it is undoubtedly one of those emerging areas of commercial lawthat has been in the center of developments both, on the international and regional levels (e.g., themany reforms in Eastern Europe) since the European Bank for Reconstruction and Developmentlaunched its secured transactions reform project in 1992. TheTheTheThe secondsecondsecondsecond halfhalfhalfhalf of the course will bedevoted to raising finances on the capital markets and the main corollary regulatory challenges. Inaddition to a look at the most important types of securities (common v. preferential stocks, convertiblebonds and derivatives), the main building blocks of modern capital and securities regulatory systemswill be analyzed.
Inspired by the seminal work of Berle and Means (1932), the corporate governance has time andagain been the subject of extensive scrutiny and controversy, especially in the 1960’s and 1970’s.These debates focused on the managerial corporations in the USA and UK, triggered by spectacularbusiness failures, the built-up of huge excess capacities, and unscrupulous managers expropriatingshareholders. The ENRON and similar cases have definitely shown the loopholes of company laws.This course will therefore focus on corporate control and accountability of US, European and AsianCorporations beyond the respective company laws examining, i.a., the voting power concentration inlisted companies, owner-controls versus manager controls, board and ownership structures as well asmaking international comparison of identities of owners. Lastly, the course will examine theemployees’ co-determination in the member states of EU and the workers’ role in Japan as well as thecorporate governance codes in main industrialized countries.
Courses:Courses:Courses:Courses:
1. Legal Business Forms (1 cp)2. Groups of Companies (1 cp)3. Corporate Finance (2 cp)4. Corporate Governance (2 cp)
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Corporate Governance II
by Professor Stefan Messmann Central European University
Budapest
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I N T R O D U C T I O N
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Notion of Corporate Governance
– Reasonable managing of corporation taking into consideration
the process by which corporations are made responsible to the rights and wishes of stakeholders“…describes all the influences affecting the institutional processes, incl. those for appointing the controllers and/or regulators, involved in organizing the production and sale of goods and services…”
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Definitions II
“… the various participants relationship among in determining the direction and performance of corporations. The primary participants are the shareholders, the management and the board of directors…”“… the structure whereby managers at the organizational apex are controlled through the board of directors..”
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Modern definitions
Any individual or group on which the activities of the company have an impactIt encompasses employees, suppliers, customers and other creditors, the government, various ”pressure groups”
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Legal Insufficiencies
Case studies– Enron– Woldcom– Vodafone/Mannesmann– VWAG– Siemens– Kelon
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ENRON
Founded in the 1980s in Houston as gas pipeline company and owned power companies in India, China and the Philippines
- Water companies in UK- Pulp mils in CDN- Gas pipelines across USA
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ENRON II
Market value: $ 48bTurnover: $100b p.a.Estimated debts $ 40b within one year due to bad luck, poor investment decisions, negligent government oversight, arrogance
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Sarbanes-Oxley Act, 2002
- Sets up a
Public Company AccountingOversight Board
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Public Company Accounting Oversight Board
Shall adopt:
“auditing, quality control, ethics, independence, and standards relating to the preparation of audit reports for issuers”
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In essence, SOX
SOX requires:- Personal certification by CEO and CFO of accuracy
of published information - Shortened reporting period for “insider” transaction- Strengthened requirements on financial reporting - to report “all critical accounting policies”
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SOX further regulates
Rotation of lead auditors every 5 yearsBanning auditors from consulting work
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WorldCom
- Collapsed in 2002 due to wrong bookkeeping practices
- Top manager Bernie Ebbers and other 5 top managers have been suit for= conspiracy= securities fraud= false testimony
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WorldCom…(2)
- Settlement for $ 6.2b- Reasons for settlement:
= faire & reasonable= relative limited financial capabilities of defendants
- Historic settlement: outside directors have been suit
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Vodafone/Mannesmann
- No performance for money received- Defalcation (crime of damaging where the
amount of the damage is irrelevant)- GBH: payment beyond the contractual
stipulation admissible in case of economic advantage for the company AND if proportional to such advantage
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Vodafone/Mannesmann…(2)
- Distribution of money to managers at will- New proceeding: settlement- NZZ: nationalization of the industry- Liberals: those who create additional values
are at mercy of authorities- Leftists: Ackermann & co are profiteers
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VWAG
- Goedevert- Members of the Workers’ Council
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Siemens
Workers council members bribed
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Kelon case
The rise of Kelon (1984-1996): a model of public-private partnership (PPP)Kelon: PPP between Wang & Rongqitownship (Shunde county, Guandongprovince)
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Kelon…(2)
Producing cheap transistors for a HK firmLater: household white good sectorRefrigerator leaderShareholder company: 80% RongqiTownship Economic Development Company
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Kelon III
Success due to synergy achievement of PPPSudden collapse in 2000:
- Abuse by management by transfer pricing- Abuse by government by “other receivables”,
i.e., cash appropriated by the dominant shareholder
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Content of the course
1. Shareholder Claim2. The Role of Auditors3. Pros and Cons of Workers Codetermination
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Part I
S h a r e h o l d e r C l a i m s
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Reasons for shareholders’ claims
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Traditional shareholder
20-30 years agoDe facto neutralOnly controlling shareholders importantLegal or factual control
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Shareholder Claim
Emergence of a new breed of shareholders:- Investment funds (hedge funds or private
equity funds)- Their agressive interventions resulted in
major changes:
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Appropriation
Majority controlControl through legal devicesMinority controlManagement control
Link between shareholders & companyDecent amount of attention to business
(reasonable business prudence)Fidelity to the corporationMain problem: honesty
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Standard of conduct…(2)
Director has fiduciary obligations to the corporation only (NOT to the shareholders)Liable for gross negligenceDirector in 2 different companies:
- best business sense- disclosure of adverse interest- resignation
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Decision rights of shareholders
- USA: may ratify fundamental corporate decisions, like
= mergers= charter amendments
G: shareholder voting rights limited to a small number of fundamental transactions
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Shareholders’ rights…(2)
like= merger= charter amendment
B U Tmanagement prepares resolution
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USA: no initiatives by shareholdersG, F, UK:
- approval of appointment of auditors- approval of distribution or reinvestment of
earnings
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Shareholder/manager conflicts
F & UK: shareholders have the upper hand- F: concentrated ownership- UK: cooperation among investors
J: cross-holding: managerial dominanceG: ownership concentrated, but labor co-determinationi.e. F, UK, J, & G: little or NO conflicts
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Conflicts…(2)
USA: active conflicts, but
- costly proxy- collective action costly
against shareholders’ collective action
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Sales of assets
Comparable to acquisition of a target companySignificant transactionUSA (Del.), G: shareholder ratificationUK, F: only boardUSA, J: appraisal right
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Regulations
EU: any reduction of capital must be ratified by qualified majority
2nd Company Law Directive: shareholder meeting for dissolution USA: capital reduction without shareholder consent
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Regulations…(2)
EU: capital reduction: shareholder approval F, G: pre-approval for individual issues of sharesG: limits new authorized capital to 50% of issued capital
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Regulations…(3)
J, G: mandate pre-emptive rightsUK: grants it as statutory defaults F, USA: only if in the charterEU 2nd Company Law Directive: waiver of pre-emptive rights possibleUSA: duty of loyalty to thwart opportunistic issues of sharesUK: unfair prejudice
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The legal position of “control”
- In principle: clear definition of corporate management
- Praxis: individuals or groups are in control (“dominant shareholder”)
- Starting point of the problem: voting trust= voting trust agreements: deposited, mostly,
however, informal (except: for banks)= absolute power to elect & reelect directors
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Voting trust
= undue influence: directors dummies= not illegal per se, BUT good faith of directors
required, otherwise liable= illegal: agreement with directors to resign or
selling offices
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Voting trust…(2)
- Control may act= influence the directors, but then liable= under its own right:+ voting for directors + amend the charter+ ratify past acts of directors= sale of control
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Voting trust…(3)
- Proxy: agent for shareholders: = duty of fidelity= factually: dummy for the management
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Parasitic shares
A entitled to receive 2/3 of net earnings, and B 1/3At capital increase for A, B automatically absorbs 1/3 of earnings power as “parasite”At liquidation: possible preferential treatment for B (or for A), sharing thereafter the remaining amount
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Shifting of participations- mergers -
Methods of dilution (forbidden in some countries)
+ acquisition of large stocks of smaller companies and caused them to lease their assets for a fixed rent
+ later merger with them against preferred stocks which are less safe than the rent
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Removal of shareholders’safeguards
Deletion of pre-emptive rightsPre-emptive right: safeguard of voting right and relative participation
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Voting caps
= against hostile takeovers= to reduce dependence on proxy voting power= target: limitation of votes (BAFS, Linde)
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Other restrictions
- Transfer restriction:= registered shares with transfer restriction
- Multiple voting rights (until 1996)- Non-voting shares- VWAG: special case
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EU Transparency Directive
- Wertpapierhandelsgesetz 1995(Law on Securities Trade)
= notification of direct shareholding:5%, 10%, 25%, 50%, 75%
= multi-layer control of voting shares:specifies the cases in which indirectly controlled votes are “attributed” to a shareholder
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Repurchase of shares
J: open market or by tenderEU: capping share repurchase at 10% of subscribed capitalUSA: no approval required
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Related party transactions
1) Conflict transactions by managersUSA: most stringent disclosure requirements
- Securities law: publication= compensation to managers= managerial transactions within 1 days
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Remedies for inadequateboard approval
UK: void, damagesUSA: damagesF, J: damages
Damages: costs & benefit relationship
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Shareholder voting
in case of interested shareholders:F: shareholder approval for transactions outside ordinary course of businessG, USA: permitted unless such votes decide the outcomeUK: shareholder approval; ex post admittedF: conflicted manager shall not voteJ: vote permitted
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Managerial liability
In general: liability in case of insolvency, but liability insuranceOutside insolvency no liability (except G, J)G: gross negligenceUSA: elimination of directorial liability for negligence by charterOthers: directors harming the creditors are directly and individually liable
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Managerial liability…(2)
F, G: liable per se by failing to observe capital maintenance rules
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S h a r e h o l d e r s’ a c t i o n s
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Protection of minority shareholders in EU
Power of the parent company to give entrepreneurial instructionsGermany: Leitungsmacht
- Beherrschungsvertrag- Gewinnabführungsvertrag
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Corporate financing
Germany:- Eigenkapitalersetzende Darlehen
(loans replacing shareholders’ equity)- Triggers subordinated claim, i.e., this prevents
a controlling shareholder who has granted a loan from demanding repayment before the company’s crisis has been conclusively resolved
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Italy
I d e mBut majority shareholder directly liable for actions which prejudice company profitLiability vis-à-vis the creditor
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Italy…(2)
Joint liability for the management, if
- Controlling shareholders was “ acting in own interest’
- “principle of good management” violated
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Italy…(3)
Exclusion from liability, if
- Damage caused is offset by advantages in the structure of the group
- “theory of compensatory advantages”
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Italy…(4)
Recent court decision on compensatory advantages;
- An individual company is able to benefit from the advantages as a member of a larger group
- Such advantages could neutralize any apparent damages
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Italy…(5)
Doctrine of “compensatory advantages”requires:
the advantage to be effective & tangible
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Transparency disclosure
Executive directors of the controlling company have to inform the BoD & statutory auditors (or the SB) at least every 6 months about most significant transactions which group companies have entered into.
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Other instruments
All directors of the controlling company influencing controlled companies must justified their decisions in detail.Shareholders may ask for a special investigation against any director suspected to have breached their management duties.
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Withdrawal rights
Minority shareholder may - Withdraw from the corporation when the
parent company transforms its legal type or changes the corporate objects,
- Or when the parent company was held liable for mismanagement of the subsidiary
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France
Rozenblum case:
- Cour de cassation: accepted that the interest of the group (temporarily) outweights the interest of the company it manages.
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France…(2)
Liability, except that- the group is stable- business policy is coherent- the group’s costs & revenues are distributed
equitably among the members of the group
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Derivative actions
General rule:
Minority shareholders may bring suit against subsidiary’s directors
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Essence of the rule
The court will not ordinarily intervene if the matter is one that a company can ratify by its own internal procedure, andThe right to vindicate a wrong done to the company is vested in the company & prima facie the only proper plaintiff is the company itself.
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Raison d’être
To prevent a wrong going by the management without redress,In case of minority shareholders, it is appropriate to allow them to assert it even individually on behalf of the company.
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Remedy
Italy: shareholders of a company may bring a derivate action against the company’s directors having negatively affected the shares’ value by illicit conduct,Idem: Portugal & Germany
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Squeezing & selling-out
European Takeover Directive, 2004/2005 by EC & European ParliamentSqueeze out right:
right of a majority shareholder to force the minority to surrender their financial instruments to the majority shareholder(s), who as a result acquire(s) 100% ownership
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Sell out right
The right of a minority (sharwholder) to compell the majority shareholder to purchase the shares from the minority.
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Rationale
Allowed in EU in several countries100% ownership is considered of higher value than majority ownershipExpropriationGermanyCzech Republic
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Belgium
“simplified squeeze-out procedure”: by a bidder who controlled the company before IPP bid,With 95% voting right: other than public bid,Sell-out right doesn’t exist.
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France
2006 Loi relative aux offres publiquesd’acquisition implement the Takeover Directive,
- squeeze-out & sell-out right applicable without having to make a public buyout offer first,
- Price from independent evaluator.
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The Netherlands
Squeeze-out right introduced in 1988
No sell-out right to minority shareholders
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Threshold
Takeover Directive:- Not less than 90% 0f the capital carrying
voting rights and 90% of the voting rights in the offeree company,
- Higher threshold in EU Member States, but max. 95%.
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Part II
R O L E O F T H E A U D I T O R S
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Audit committee from a European perspective
Raisons:
- Solid reputation built up over many years dissolved overnight,
- creative accounting,- poor internal control,- inadequate oversight of business strategies,- excessive pay unmatched to performance
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EU Commission’s Action Plan 2003
“Modernizing Company Law & Enhancing Corporate Governance in the EU – A Plan to Move Forward”Main objectives:
- Strengthen shareholders’ rights & protection for
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Action Plan…(2)
Employees,creditors, andother parties, whileadapting company law& corporate governancefoster the efficiency & competitiveness of the business
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EU Parliament
2004 welcomed the Action Plan
Strong support
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EU Commission
2005: Recommendation on the role of non-executive or supervisory directors of listed companies & on the committees of the (s) board,Non enforced. MS invited to take steps necessary to introduce at national level a set of provisions of the Recommendations“comply or explain”
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Results
L, Sp, NL: enforcedOthers: partially enforced, e.g., GMany CGC adopted in MS tend to rely on disclosure to encourage compliance based on “comply or explain”Flexible solution: reflects enterprise specific requirements
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EU Statutory Audit Directive 2006
Addition to the EU Recommendation:
obligation for Public Interest Companies, incl. listed companies, to establish an audit committee
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Audit Committees
AC & effective internal control system helps to minimize financial, operational & compliance risks
Guidance: how AC should be established & function
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AC…(2)
MS may determine that the functions of AC may be performed by the (S)B as a whole,Independent statutory auditor, or audit firm, should in no way be subordinated to the committee.
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Role & Responsibility of AC
Not substitute to the (S)B,Makes recommendations aimed at preparing the decisions of the (S)BHowever, (S) may delegate part of its decision-making power to AC, if permissible(S)B remains fully responsible
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Internal control system
Define the guidelines of internal control systemIdentify an executive director for supervising the functionality of internal control systemEvaluate the adequacy, effectiveness & actual functioning of internal control system
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Describe & evaluate the essential elements of the internal control systemBoard of auditors is involved in the selection & appointment of independent auditors by the shareholders
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B, Sp, NL, UK
Advocate the oversight of the company’s “whistleblower procedure” as a task of the ACNL: additionally
- oversight of the company’s code of ethics- tax planning
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Code of Corporate Governance: F, Sp
(S)B should establish ACAC must have a formal written charter with a list of responsibilitiesAC should monitor the integrity of the financial information, esp. accounting methodsManagement should inform AC about methods use to account for significant & unusual transactions
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CGC…(2)
AC should review internal control & risk managementAC should review provisions regarding the possibility to commit irregularity by employees“whistleblower procedure”AC responsible for oversight of the company’s code of ethics, code of conduct and/or conflict of interest
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CGS…(3)
AC decides whether CEO shall attend its meetingAC may ask for help from lawyers, accounting & other advisorsAC should make self-assessment AC should report to the (S)B on its activity regularlyReview & approve related party transactions
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Members of the AC
EU Recommendations “sufficient number of committed non-executive or supervisory directors”At least a majority of independent members requiredEU Statutory Audit Directive: one independent member
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Member of the AC…(2)
Codes of L, Sp: chaired by independent directorB, G, L, NL: AC chairman & board chairman separate rolesG, I, L, NL, UK: at least one member of the (S)B qualifies as a “financial expert”
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Independence
EU Recommendation:
Free of any business, family or other relationship with the company, its controlling shareholder or the management
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EU Parliament’s Resolution, 2004
AC makes recommendations to the (S)B in relation to the
Sw, I: CGC- AC doesn’t make recommendations in the above
matters, but= evaluates the audit work & informs the company’s
nomination committee of result of evaluation= assists the company’s nomination committee in
preparing the nominations= recommends auditor’s fees
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Relevant principles
Audit committee- Makes recommendations to the (S)B in
relation to the = election= appointment= reappointment=removal
of independent auditors
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Principles…(2)
Monitors and keeps under review the auditors independence & objectivitykeeps the nature & extent of non-audit services Sets & applies formal policy on non-audit servicesReviews the effectiveness of the audit processHas free access to the (S)BIs informed of the auditor’s work progress
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AC & external auditors
EU Recommendations:AC assists the (S)B to ensure the effectiveness of the internal audit function & making recommendations on the election, appointment, reappointment and removal of the head of the internal audit department & its budget
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Principles
Establishment of internal audit department encouragedAnnual review of the function of the internal audit departmentReview of effectiveness, scope, and/or budget of the internal audit departmentPeriodical meeting with the directorsFree access to the (S)B
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Auditors’ liability in EU
Finding of the consultancy firm London Economics (LE), 2006:
- Analyzes the structure of the auditing market in EU
- Describes limitations of liability- Examines economic needs for limiting
auditors’ liability- Compares several possible methods for
limiting their liability
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Liability
Impact of liability is influenced by the audit quality & possible actions of capital market participantsThese participants are more willing to sue when
- Quality of financial statement is poor- Auditors’ reputation is on the stake
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Liability…(2)
Contractual relationship between company and auditorStatutory audit in interest of 3rd party3rd party relies on it: auditors’ non-contractual liabilityDuty of careEU MS majority: liability exist in case of breach of auditors’ duty of care
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Liability regimes
Strict liability: case of error
Negligence-based liability:- Error is imputable to a lack of due care- Priority over strict liability
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UK
8th Company Law Directive:
“statutory auditors & audit firms are responsible for carrying out their work with due care & thus should be liable for the financial damage caused by a lack of the care owed”
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Allocation of liability
Between company & auditors
- Proportional or- Joint & several liability
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Vie d’Or case
Supreme court of NL:- Auditors only proportionally liable for
wrongfully issuing an auditor’s report of approval concerning annual accounts of 1989, 1990, 1991 and 1992 & of inadequate provision of information
- Vie d’Or declared bankrupt in 1995- Shareholders claimed for damages
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Limitation of liability
Increasing or extending auditors’ liability?Motivations for raising auditors’ efforts
- increase of quality, but also- increase damage payments & audit fees
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EC staff working paper, 2007
Fix monetary cap,based on the size of the audited company,based on a multiple of the audit feeprinciple of proportionate liability.
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Liability system in EU
Ireland: Only MS where only practitioners (individuals) or partnerships may be appointed as statutory auditors & can be held liableOther MS: both individuals and audit firms are liable
- individuals signing the auditor’s report are jointly & severally liable with the audit firm
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Liability…(2)
UK: only firms are liable,Most MS: liability most frequently based on agreement and results from breach of contractual dutiesSome MS: liable based on tortP & Sp: derivative action of shareholders
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Liability…(3)
F: specific liability rules;- 3rd party may claim, provided they can prove
the damage, fault (or negligence) & accountability of the auditor & causal link
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Caparo v. Dickman case
UK, House of LordsFor successful 3rd party claim:
- causing of damage reasonably foreseeable,- relationship of proximity existed, and- in all circumstances of the case it was fair,
just & reasonable to impose a duty of care on the auditor.
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Germany (Austria)
3rd party can claim liability based on contract or tort
- In case of essential influence of the information to a 3rd party:“implied” contract between auditor & the 3rd
party
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Portugal & Spain
Shareholders can combine their claims & prosecute the auditors as a group
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Limitation of liability
In time or sum of money; caps
A: cap per audit €2-4mB: €3m for unlisted & €12m for listed companiesG: cap per audit €1-4m
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Limitation…(2)
Gr: cap per audit is 5x the total of the annual emolument of the President of the Supreme Court or the total of the fees in previous years
End of 19th centuryWorks Council Act, 1920for more than 5 peopleaccess to labor court
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Spokesperson Committee Act, 1989
Gesetz über SprecherausschűsseIndependent from Works Councilsfor more than 10 leading personnelconsultative
empowered to sign agreements on the content of individual employment contract for “leading personnel”
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Supervisory Codetermination
Introduced 1922 as an amendment to Works Council Act 1920in SB of more than 3 members, 2 for works council memberin all other corporation: 1 seatBreakthrough with regard to penetration of the SBAbolished 1934
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After WW II
Codetermination in the Mining (incl. coal), iron & steel Industry: full parity codetermination, Act 1951In companies with = stated capital up to Euro10 m: 11 members
5:5:1(neutral chairperson)= between Euro10-25m: 11 member
15 members possible, if so in AoA7:7:1
= more than Euro 25m: 11 members21, if so in AoA10:10:1
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Employees’ Representatives
Today: 40 companiesToday: 200 employees’ representativesComplicated electoral procedure providing that the majority are to be elected by their principals, others are independent ones
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Codetermination in other fields
Codetermination Act, 1976AG, GmbH, KG (1 or more partners limited by shares, KGaA), coopMore than 2000 employeesWidest general application across German industry & commerceHalf : halfChairman: shareholders, casting voteVice-chairman: employees’ delegateQuasi-parity codeterminationBGH: not unconstitutionalEnd of 2003: 767 German companies, 5410 seats for employees’delegates
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1/3 Codetermination I
Works Council Constitution Act, 1952AG, GmbH with more than 500 employees
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1/3 Codetermination II
In 2004 Works Council Constitution Act replaced by 1/3 Participation Act with similar but simplified rules
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Preliminary Assessment
3 different forms of supervisory codetermination= parity= quasi-parity= 1/3The form of supervisory codetermination depends on = legal form of enterprises= stated share capital= number of employees
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Two-Tier Board System & Supervisory Codetermination
1986 General German Commercial Code1870: compulsory for AG & GmbH1922: supervisory codetermination1951: parity representation at SB
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Function of SB
Appointing & removing the members of the BMRepresenting the company in & out of court in its relations with the members of BMSupervising & overseeing the managementHaving insights into the company’s books & cashApproving the company’s financial statementsReporting to the share-holders’ meeting
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Today’s Interpretation
CGC: “all members of the SB are bound by the enterprise’s best interests; i.e.,To take into consideration the interests not only of the shareholders, but also of the employees
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Perception on Codetermination I
1951: skepticism, rejection, distrust“Labor representatives would come blundering into management affairs like a herd of bulls into a china shop.”1976: Bayer AG, Daimler-Benz AG, Hoechst AG, Robert Bosch AG: violation of certain fundamental human rights guaranteed by the constitutionToday: viewed positively“source of pride”Valuable contribution of labor
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Perception on Codetermination II
BVerfG: = Act to promote the common weal or common good of larger German companies= therefore: not only in conformity with the constitution but also necessary for the promotion of the common weal & common goodBGH: went even further in 1982 in the Siemens case= By-laws of Siemens: within the committee in the SB in charge of the relation with BM, the chairperson of the SB shall also bethe chairperson of this committee with casting vote.= violation of the Act by the company’s by-laws is susceptible to constituting a ground to declare them mull & void.
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Current Perspectives I
Star of codetermination wanesShortcomings:= main discussion in SB: labor & social matters= SB: too large body= representatives of shareholders will not, in presence of employees’ delegates, ask critical questions= BM is informing SB very late= costly compromise= embezzlement (Untreue, Mannesmann, VW)= workers abroad cannot participate in the elections for SB
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Current Perspectives II
= serious internal conflict, e.g., Frank Bsirke, member of SB of i.a., LH, called for a strike against LH
= evasion strategy: going abroad= investor avoid Germany= foreign companies often refrain from take-overs
Take-over Act 2001, repealed in 2006, authorizes the MB to take measures against foreign ‘courts”with approval by the SB; danger of alliance between MB & workers’ representatives in SB
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Suspicious “coziness”
Piëch: keep the management on a long leashMany taboos in the SBTherefore: codetermination = “dinosaur model”
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Some Recent Scandals
MannesmannVWPiëch & CGC
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Remuneration
same rights for all member in the SBemployees’ representatives are asked to pass onto a foundation all remuneration received as members of the SB
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Recent Attempt to Modify the System of Determination
2005: Schröder initiativeCommission headed by Kurt Biedenkopf2006: commission was unable to fulfill its task
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German Lawyers’ Forum
8000 registered members (judges, public prosecutors, attorneys, in-house counsels, law officers, law teachers)Conclusion: codetermination= lack of flexibility= open up rigid rules for conventional solutions= new model: EU directive 2002/86/EC supplementing the Statute of the European Company and Directive 2005/56/EC on cross-border mergers
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Personnel Director
full-fledged member of MBspecial appointment: not against the will of the employees’ representatives in SB
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The Impact of European Development on German Codetermination
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Development since 2001
Several leading decisions by the European Court of Justice (ECJ)European Council Regulation, 2001 for the establishment of the European company (EC) by a Council Directive on employee codeterminationDirective on Cross-Border Mergers of LLCEC’s Action Plan, 2003
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Germany
In anticipation of development in the EU:= discussion on two-tier board system= standing corporate governance commission= several amendments in AkaG in 1998, 2002, 2005= German CGS, 2002
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Recent Decisions of ECJ
Common law theory v. seat theoryCentros decisionÜberseering decisionInspire Act decisionLasteyrie du Saillant decision
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Common Law v. Seat Theory
= UK: common law theory => theories of incorporation
= G, F, B, L, A, P, Sp, Gr.: seat theory= Art. 43 of the European Common Market
Treaty: freedom of settlement for all EU companies
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Legal Impact of the Seat Theory
A company is governed not by the law under which it has been incorporated, but by the law in effect at the place where its main (factual) administration headquarter is seated.In case of transfer of the seat from G abroad:= dissolution in G= hidden reserves become subject to taxation in G
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Centros Decision, 1999
Danish couple had incorporated & obtained registration in London of Centros, Ltd. and then registered a branch in DenmarkAdvantage: no minimum share capital of Euro20,000 (in UK: £100)ECJ: justified under EU law
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Überseering Decision, 2007
Dutch shareholders of Überseering carrying on business in Germany, had sold the shares of their company to German nationals. They continued to carry on Überseering’s business from DüsseldorfBGH: Regulated the ECJ to give preliminary ruling ECJ: Überseering kept legal personality when it started to be managed from Germany
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The Inspire Art Decision, 2003
Inspire Art had been incorporated & registered in UK, without deploying there any business activitiesBusiness activities in the Netherlands via branchNL: business name’s addition “foreign in form” with minimum registered capital as regulated in NLInspire Act: these regulations violate freedom of establishment under EU lawsECJ: held in favor of Inspire Act
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The Lasteyrie du Saillant Decision
Plaintiff, Hueghes de Lasteyrie du Saillant A Frenchman residing in France, had moved to Belgium. Upon his move, the French tax authorities imposed a capital gain tax on him calculated on the difference between the price for which the plaintiff bought the shares & the market value of the shares at the time of his move to BelgiumECJ: such taxation was violating Art. 43 of the Treaty
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Impact of these Decisions
The member state in which the company conducts its main business cannot enforce its own lawConclusions of German courts
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Basic Conclusion of German Courts
BGH, 2005: = adapted the theory of incorporation instead of the seat doctrine= but in case of abusive utilization of the freedom of establishment may be restricted
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Consequences
30,000 English limited companies are incorporated by German craft people and business people in order to avoid = codetermination= minimum capitalGerman Council for Conflicts of Laws: Regulation of International Company Law= company shall be subject to the law of the country in which they have incorporated and where they were entered into the public registerproposal for a Regulation of the European Parliament and the council on the law applicable to companies:= identical proposal
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European Company (SE)
EU Council Regulation of 2001 for the establishment of SECouncil Directive on Codetermination of Employees, 2001Directive on Cross-border Mergers, 2005EU Commission’s Action Plan, 2003
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Specific Arrangement
EU regulations leave the MS the choice between “either a supervisory organ and a management organ (two-tier system) or an administrative organ (one-tier system)”Consequences: wide diversity in EU = basic organization of the SB, = codetermination rules
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SE Employees’ Directive
Freedom of SE to choose the individual shapes of their codetermination systemsManagement obliged to start negotiations with representatives of the company’s employees on arrangements for the involvement of employees in the SE,Mandatory content of the agreementExpenses by the companyIf no agreement: Annex to the Directive shall apply on = composition = standard rules on information & consultation
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Transformation into SE
All aspects of employees’ participation shall continue to apply to the SE
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Assessment
Some form of employee participation for all SE is assuredSE not (yet) a great legislative successBut: Fresenius AG (medicare services)= STRABAG AG (holding construction company)= Porsche holding= ABM Amro (bank)= Schering Plugh Clinical Trials, UK (pharmaceutical company)= MPIT Structure Financial Services, NL= Elocteq Network Corp. Finland
