EC Reforms of Corporate Governance and Capital Markets Regulation: How Do They Affect Outside Investors?

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EC Reforms of Corporate Governance and Capital
Markets Regulation How Do They Affect Outside
Investors?

• Luca Enriques
• University of Bologna ECGI

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Overview

• A lot is happening in Europe in terms of
  corporate governance and capital markets reforms,
  both at the state level and at the EC level.
• My focus
• Recent and current EC corporate and securities
  law initiatives and their impact on corporate
  governance
• The implementation of the Financial Services
  Action Plan
• Post-scandals reaction
• Modernization of EC and EU company laws
• Evaluation

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But before I start,

• a disclaimer is required
• Enriques (WP, 2005a)
• EC company law directives and regulations are
  trivial for EU companies governance and
  management.
• Enriques (WP, 2005b) and Enriques Gatti (WP,
  2006a)
• The EC should have almost no role in corporate
  law making.
• Can I provide an unbiased overview of recent EC
  attempts to centrally regulate company and
  securities laws?
• Ill do my best.

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The FSAP and its output

• The Financial Services Action Plan
• Integration of EU Capital Markets through
  uniform law
• Main provisions relating to corp. governance and
  capital markets
• IAS/IFRS Regulation
• Market Abuse Directive
• Prospectus Directive
• Takeover Bid Directive
• Transparency Directive

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Relevant innovations (1/2)

• IAS/IFRS
• Fair Value
• IAS 24
• The Market Abuse Directive
• More emphasis on enforcement (investigations,
  sanctions etc.). But enforcement remains local
• Very timid with trading disclosure obligations
  by blockholders
• How will the prohibition on tipping be
  construed?

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Relevant innovations (2/2)

• The takeover bid directive
• Mandatory bid rule (no effective harmonization
  already there almost everywhere)
• Board neutrality rule optional for Member
  States
• Might well lead Member States already adopting
  it to reconsider it
• especially after Mittal Steels audacious bid
  for Arcelor

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Post scandal initiatives

• Three recommendations
• on auditor independence
• on directors remuneration
• on the role of non-executive directors
• Two directives close to adoption
• on statutory auditors
• on corporate governance

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The two directives

• Audits
• Mandates PCAOBs
• Introduces independence requirements
• Adopts ISAs
• Mandates audit committees
• Corporate governance
• Mandates corporate governance statement
• With mild SOA Section 404 requirement
• Imposes collective board responsibility for
  annual accounts

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Initiatives to modernize EC and EU company laws

1. Reform of legal capital directive
2. Over-ambitious project on dual-class shares and
   pyramids
3. Proposal to facilitate exercise of voting rights
4. Cross-border merger directive (facilitating
   restructurings)

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Evaluation (1/2)

• These are busy times in Brussels for company law
  policy makers...
• IFRS (IAS 24) can be important to tackle
  self-dealing (sunlight...)
• MAD is requiring on managers and condescendant
  with large shareholders
• But, if the prohibition on tipping is strictly
  construed, it also may make life more difficult
  for dominant shareholders

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Evaluation (2/2)

• Takeover bid directive if Member States opt out
  of the board neutrality rule (in reaction to
  Mittal Steels bid), it may lead to more
  dispersed ownership
• But the poison pill technology is still missing
• Post-scandal reforms as me too reforms
  (Hertig)?
• Stricter regulation of audits or
  over-regulation?
• Cost-benefit balance far from clear
• Nothing else on self-dealing (hence very little)
• Rightly so.
• Any lesson for India?