The Revised Shareholders’ Rights
Directive and the Future of Investors’ Voice:
Will Europe Finally Facilitate Cross-Border Voting?
Master Thesis (LL.M) Privaatrecht: Commerciële Rechtspraktijk Name Student: Can Yilmaz
UvAnetID: 10617337
Supervisor: Prof. dr. J.W. (Jaap) Winter Course: European Company Law II Date: December 2014
“If people are good only because they fear punishment, and hope for reward, then we are a sorry lot indeed..” ― A. Einstein
Table of Contents
1) INTRODUCTION ... 5
2) WHY DO SHAREHOLDERS VOTE? ... 6
2.1)THE ECONOMICS OF SHAREHOLDER VOTING ... 6
2.2)THE (ECONOMICALLY DRIVEN)RATIONAL APATHY OF SHAREHOLDERS ... 9
2.3)THE CASE FOR SHAREHOLDER EMPOWERMENT ... 10
2.4)CONCLUSION ... 11
3) A CALL FOR EUROPEAN LEGISLATION ...11
3.1)MODERNISING EUCOMPANY LAW AND ENHANCING CORPORATE GOVERNANCE ... 12
3.2)STRENGTHENING SHAREHOLDERS’RIGHTS ... 14
3.3)THE SHAREHOLDERS’RIGHTS DIRECTIVE:AN OVERVIEW ... 15
3.4)CONCLUSION ... 17
4) ANALYSIS: SHORTCOMINGS IN THE SHAREHOLDERS’ RIGHTS DIRECTIVE ...17
4.1)MODERN-DAY TRADING AND THE RISE OF INTERMEDIARIES ... 18
4.1.1) Cross-Border Chains of Intermediaries ... 21
4.1.2) Applicable law ... 22
4.1.3) Beneficial Ownership in a Cross-Border Context ... 25
4.1.4) Existing Provisions ... 26
4.2)CONCLUSION ... 27
5) FUTURE POLICY CONSIDERATIONS ...27
5.1)MAINTAINING THE PRESENT SITUATION ... 28
5.2)THE COMMISSION’S PROPOSAL... 30
5.3)ALTERNATIVE MINIMUM STANDARDS ... 32
5.4)CONCLUSION ... 36
6) CONCLUSION ...37
ANNEX A: RECOMMENDATION TO ENSURE ACTIVE SHAREHOLDER PARTICIPATION ...39
1) Introduction
It is an often-heard story that the European legislator sets out to intervene in an area of EU company law to establish or further ensure the functioning of the Internal Market, only to face heavy dilution in the course of the law-making process and to eventually come up with a watered-down and inadequate compromise that does not
solve the initial problem (e.g. in regards to the Societas Europaea statute, the 10th
directive on cross-border mergers and the 13th takeover directive). This paper
essentially investigates if the same can be said for the Commission’s efforts to strengthen shareholders’ rights. The analysis is divided into five additional chapters: Chapter 2 will briefly cover the economic rationale behind voting rights and its purpose in the company’s “checks and balances” system. Chapter 3 will focus on the necessity of regulating shareholders’ rights on a European level, which resulted in the adoption of the Shareholders’ Rights Directive. Chapter 4 will discuss the Directive’s present legal framework and its shortcomings, thereby strongly emphasising the need for additional legislation in order to facilitate cross-border voting and establish a Europe-wide involved shareholder base. Chapter 5 discusses policy considerations for the future. Finally, a conclusion in chapter 6 will reiterate the existing cross-border voting puzzle: Will Europe finally facilitate cross-border voting?
The scope of the analysis is restricted to participation issues related to listed companies with dispersed (international) share ownership, arising from the fact that these shares are traded and held through modern book-entry shareholding systems. Other firms are omitted not because they are unimportant, but because the issues discussed do not apply with the same force to closely held firms with concentrated ownership. ‘Institutional investor’ is understood in a broad sense, i.e., as any institution that professionally invests (also) on behalf of clients and beneficiaries (e.g. hedge funds, mutual funds, pension funds, insurance companies and endowments of non-profit institutions). A distinction with retail investors is warranted because institutional investors hold most of the capital in listed companies and can therefore play a more active role in the company (i.e., generate greater clout). Please note that this paper attempts to critically assess the existing legal barriers to shareholder participation and its proposed solutions. It, however, cannot provide a definitive analysis on governance issues. For more information, please consider my references.
2) Why do shareholders vote?
To be able to analyse any measure that (supposedly) facilitates cross-border voting, one must first understand why legislators and courts on both sides of the Atlantic have emphasised the importance of the right to vote. In this chapter the rationale behind voting rights will be explained from an economic perspective, which has strongly influenced today’s corporate governance frameworks. It will explain why shareholders have voting rights, why they often refrain from using these rights in practice and why national legislators have nonetheless adopted ‘empowering’ measures.
2.1) The Economics of Shareholder Voting
From a traditional economic point of view, a company is often defined as a ‘multitude of complex relationships (i.e., contracts) between the firm and the owners of factors
of production and the consumers of output’.1 Among these are internal relationships
between those who contribute capital (investors), those offering entrepreneurial skills (managers) and those providing labour (workers). The ensuing explicit or implicit contracts serve as the organisation’s internal “rules of the game”, specifying the rights of each actor, the performance criteria on which they are evaluated and the rewards
they may expect.2
It is, however, virtually impossible to fully stipulate by contract every single duty of and all limitations on each actor. Indeed, venturers are apt to miss something
and unforeseen complexities are bound to arise later on.3 Such an endeavour would
also be highly inefficient, as financial contracting is assumed to be costly.4 Therefore,
much will be left to discretion. It is primarily in this void that company law provides for a free set of useable “off-the-rack principles”, which reduces the number of items
that need to be negotiated and hence the cost of contracting.5 Very common examples
of these ‘default terms’ are rules on voting or establishing quorums.6
1 Citing M.C. JENSEN and W.H. MECKLING, ‘Theory of the firm: Managerial behaviour, agency costs and ownership
structure’, Journal of Financial Economics, Vol. 3, Issue 4, October 1976, at 9.
2
E.F. FAMA and M.C. JENSEN, ‘Separation of Ownership from Control’, Journal of Law and Economics, Vol. 26, No. 2, June 1983, at 302.
3 F. EASTERBROOK and D.R. FISCHEL, ‘The economic structure of corporate law’, Harvard University Press, 1996, at 34. 4 C.W. SMITH and J.B. WARNER, ‘On financial contracting: An analysis of Bond Covenants’, Journal of Financial Economics,
Volume 7, issue 2, 1979 at 121.
5
Again, this is from an economic perspective. Many believe that this economic approach is or should be the primary focus of company law, notwithstanding other purposes such as the protection of shareholders and creditors – see High Level Group of Company Law Experts, ’Report on a Modern Regulatory Framework for Company Law in Europe’, November 2002 at 29-30.
6 J. ARMOUR, H. HANSMANN and R. KRAAKMAN, ‘what is corporate law?’ in: R. KRAAKMAN et al., ‘The Anatomy of
Corporate Law: A comparative and Functional Approach’, Oxford University Press, 2009, at 21.
Be this as it may, providing default rules cannot supply the sole answer to incomplete contracts. The law can only function as a cost reducing mechanism if it reflects terms that the majority of well-informed parties would themselves most
commonly choose.7 In other words, to achieve actual cost reduction ‘the law may
only fill in blanks and oversights with terms that contracting parties would have bargained for if they had anticipated the problems and had been able to transact
costlessly in advance’.8 Therefore, the law generally only covers the outlines of the
relation among corporate actors; something must fill in the details.9
Voting serves that function, as is explained by EASTERBROOK & FISCHEL in
their renowned article Voting in Corporate Law (1983).10 They argue that ‘the right to
vote is the right to make all decisions not otherwise provided by contract – whether the contract is express or supplied by legal rule’. Such decision may inter alia be to delegate this (residual) power to others, which explains why voters may elect directors and give them discretionary powers over matters otherwise controlled by
voters themselves.11
So why is it that the residual power to act (or delegate) by way of voting is exclusively granted to the shareholders of the firm? The answer, according to economic theory, lies in the fact that the company’s shareholders are widely seen as
the primary bearers of the firm’s residual risk12 – the risk of the difference between
projected inflows of resources and promised payments to agents.13 As such, they
receive the surplus that remains after all fixed claims of other constituents are paid
(“residual claimants”) and therefore have the most clear-cut incentive14 to maximise
the company’s economic results;15 and by doing so maximising the aggregate welfare
7 Armour, Hansmann & Kraakman, supra note 6. 8 Easterbrook & Fischel, supra note 3 at 34. 9
Easterbrook & Fischel, infra note 10 at 402.
10 F. EASTERBROOK and D. FISCHEL, ‘Voting in Corporate Law ’-427. , 26 J.L. & E con. 395 1983, 395
11 Ibid., at 402.
12 Easterbrook & Fischel, supra note 10 at 403; See also E.F. FAMA and M.C. JENSEN, ’Organizational Forms and Investment
Decisions’, Journal of Financial Economics, vol. 14, 1985, at 102; See more recently S.M. BAINBRIDGE, ‘Director Primacy: The Means and Ends of Corporate Governance’, 97 Nw. U.L. REV. 547, 2003 at 23; R.C. NOLAN, ‘Shareholder rights in Britain’, European Business Organization Law Review, issue 2, June 2006 at 567; P.E. MASOUROS, ‘Is the EU taking shareholder rights seriously? An essay on the impotence of shareholdership in corporate Europe’, European Company Law vol 7, October 2010, at 195. This is not to say that shareholders are the only residual claimants, as was indicated by Easterbrook & Fischel ibid. at 404, see extensively L.A. STOUT, ‘Bad and Not-So-Bad Arguments for Shareholder Primacy’, Southern California Law Review, Vol. 75, 2002, at 1193 and M.M. BLAIR and L.A. STOUT, ‘A Team production theory of Corporate Law’, Virginia Law Review, Vol. 85, no. 2 at 314 (“because other corporate stakeholders make firm-specific investments and because these cannot always be protected through explicit contracting, shareholders are not, in fact, the only residual claimants to the firm’s earnings.”); Also, shareholders that hedge away their economic interest by using derivatives do not necessarily qualify as residual claimants, see S. MARTIN and F. PARTNOY, ‘Encumbered Shares, 2005 U. Ill. L. Rev. 775, 2005, at 5.
13
Fama & Jensen, supra note 2 at 302.
14 Easterbrook & Fischel, supra note 10 at 403-406; (“The firm should invest in new products, plants, etc., until the gains and
costs are identical at the margin.”).
15 M.C. SCHOUTEN, ‘The Mechanisms of Voting Efficiency’, Columbia Business Law Review, Forthcoming; Centre for
Business Research, University of Cambridge, Working Paper No. 411; Harvard/Stanford International Junior Faculty Forum
of all who are affected by the firm’s activities.16 To achieve this, shareholders are expected to encourage management to work hard and to keep them at bay (or oust them) if they act opportunistically and their interests become misaligned with the
interests of the shareholders.17
In sum, shareholders’ focus on wealth creation makes them well suited to act as “watchdog”, not only on their own behalf, but even on behalf of other
stakeholders.18 To act as such, they are predominantly dependent upon voting rights
because, unlike other stakeholders who are able to protect themselves contractually,19
shareholders can only rely on very incomplete contracts.20 Their dependence on
voting is exacerbated by the fact that shareholder wealth maximisation norms usually do not lend themselves to judicial enforcement, other than perhaps in exceptionally
dubious situations.21
This economic view on shareholder participation serves as the principal foundation for modern corporate governance theories, in which ‘shareholders fully participate in the decision-making process at General Meetings (henceforth also referred to as “GMs”) and exercise such influence on policies pursued by the board
that they can play a full role in the company’s “checks and balances” system’.22
2010; August 13, 2010, at 10-11; J.W. WINTER, ‘Shareholder Engagement and Stewardship: The Realities and Illusions of Institutional Share Ownership, 2011 working paper, at 2; P. SANTELLA et al., ‘A comparative analysis of the Legal Obstacles to Institutional investor activism in Europe and in the US, working paper July 2009, at 3.
16 Armour, Hansmann & Kraakman, supra note 6, at 28 (“including the firm’s shareholders, employees, suppliers, and customers,
as well as third parties such as local communities and beneficiaries of natural environment”); D.A. ZETZSCHE, ‘Shareholder Passivity, Cross-Border Voting and the Shareholder Rights Directive’, Journal of Corporate Law Studies, Vol. 8, No. 2, 2008 at 8 (“These monitoring efforts are presumed to enhance firm value and […] benefit all constituencies interested in the corporation, and eventually society at large”).
17 Zetzsche, supra note 16 at 8; Hirschman discussed these efforts within his heavily cited ‘exit’ or ‘voice’ framework, describing
voice as inter alia meetings, constructive dialogue and (formal) voting, in A.O. HIRSCHMAN, ‘Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations, and States’, Harvard University Press, 1970.
18 See High Level Group of Company Law Experts, supra note 5; Eur. Comm’n, Dir.-Gen. Internal Mkt. & Servs., ‘Fostering an
Appropriate Regime for Shareholders’ Rights’, first consultation, MARKT/ 16.09.2004 at 6; See also A.A. ALCHIAN and H. DEMSETZ, ‘Production, information costs, and economic organization’, The American Economic Review, Vol. 62, issue 5, 1972 at 782; U. NOACK and D.A. ZETZSCHE, ‘Corporate Governance Reform in Germany: The Second Decade’, European Business Law Review, Vol. 16, No. 5, 2004 at 1045; See, for an example in the United States Courts, MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118, 1126 (Del. 2003) (“The stockholder franchise has been characterized as the ‘ideological underpinning’ upon which the legitimacy of the directors’ managerial power rests.” - quoting Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 659 (Del. Ch. 1988)); See differently Bainbridge, supra note 12 at 27.
19
Lenders may lay down security clauses in their credit agreement, employees can protect themselves in their individual employment contracts or via collective bargaining agreements, suppliers or customers can enter into long-term agreements and even the community at large has its legislative power; see Velasco, infra note 20.
20 See extensively J. VELASCO, ‘Taking Shareholder Rights Seriously’, U.C. Davis Law Review, Vol. 41, No. 2, 2007 at 634;
For example, shareholders cannot put the company in bankruptcy or require company disbursements, see Eckbo et al., infra note 95 at 1.
21 S.M. BAINBRIDGE, ‘Shareholder activism and Institutional Investors’, UCLA School of Law, Law-Econ Research Paper No.
05-20. September 2005 at 9; Cf. Dutch Supreme Court cases NJ 1995, 288 (Poot/ABP) and AA 1997, 740 (Kip/Rabo).
22 Citing Winter, supra note 15 at 2; E. WYMEERSCH, ‘Shareholder after the Crisis’, December 16, 2009, Financial Law
Institute Working Paper 2009-12 at 2. The turbulent academic discussion on the legitimacy of shareholders influence, especially cf. other means of accountability, falls outside the scope of this paper, please see inter alia L.A. BEBCHUK, ‘The case for increasing shareholder power’, Harvard Law Review 118, p. 835-914, Bainbridge, supra note 12, p.1735-1758, W. BRATTON and M.L. WACHTER, ‘The case against shareholder empowerment’, UPenn Law Review, Vol. 158, 653, 2010; Corporate Governance, which can be defined in many ways, is usually understood as the system by which companies are directed and controlled.
2.2) The (Economically Driven) Rational Apathy of Shareholders
The current corporate governance framework is built on the assumption that
shareholders participate and exercise their voting rights in GMs.23 In reality, this
assumption is inaccurate at best and flawed at worst, as is summarised by
BAINBRIDGE (2003). He argues that shareholders are often not interested in voting
rights because each individual shareholder only has a small interest in the company. As a result, the incurred expenses to remaining informed about the company exceed the expected benefits, especially since any one shareholder’s vote is unlikely to affect
the outcome of any election (“collective action problems”).24 The shareholders’
hesitation to incur costs is amplified by the likelihood that a substantial number of
shareholders will attempt to free ride on his efforts.25 Shareholders therefore choose
to remain passive or they vote with their feet by selling their shares.26
This “rational apathy” is not only common for retail shareholders, but can also
be found in the investment strategies of many institutional investors.27 The passivity
of the latter group is compounded by regulatory constraints, automated and high-frequency trading as well as by portfolio diversification, which requires the use of analytic methodology that does not necessarily take into account firm-specific
characteristics and best practices of corporate governance.28 In their economic
consideration, large shareholders may also choose to outsource their voting privileges to professional institutions, who, as Chief Justice of the Delaware Supreme Court Strine pointed out, may have incentives that are bad for a particular operating
company in the long-run.29
Altogether, an active shareholder base is widely expected to be a pre-condition for good corporate governance, but in reality it cannot be assumed that
23
See ‘Commission Communication on Modernising Company Law and Enhancing Corporate Governance in the European Union—A Plan to Move Forward’, COM (2003) 284 final (May 21, 2003) at 10-14; See also Winter, supra note 15 at 2 referring, as an example, to principle IV.1 of the Dutch Corporate Governance Code.
24 see Velasco supra note 20 at 622-623; Easterbrook & Fischel, supra note 10 at 402, Zetzsche, supra note 16 at 14; The term
collective action problems derive from the world-renowned work of A.A. BERLE and G.C. MEANS, ‘The Modern Corporation and Private Property’, first publ. 1968, Transaction Publ., New Brunswick & London (2003), at 76.
25 Bainbridge, supra note 12 at 15.
26 M.C. SCHOUTEN, ‘The Political Economy of Cross-Border Voting in Europe’, Columbia Journal of European Law, Vol. 16,
October 2009 at 7; Easterbrook & Fischel, supra note 3 at 83; Hirschman, supra note 17 (exit is more likely in liquid markets).
27 See High Level Group of Company Law Experts, supra note 5 at 57; The OECD Steering Group on Corporate Governance,
‘The role of private pools of capital in corporate governance’, may 2007 at 3.
28 M. KAHAN and E.B. ROCK, ‘Hedge funds in corporate governance and corporate control’, University of Pennsylvania Law
Review, Vol. 155, No. 5 at 16-16; G. SCHAEKEN WILLEMAERS, ‘The European call for more shareholders’ engagement: state of play and way forward’, Revue Trimestrielle de Droit Financier, nr. 4, 2011 at 164 and 168; See extensively Winter,
supra note 15 at 3-5 (branding the modern market trend “extreme diversification”); See also Santella et al. supra note 15 at 22.
29
L.E. STRINE, ‘The Delaware Way: How We Do Corporate Law and Some of the New Challenges We (and Europe) Face’ Delaware Journal of Corporate Law, Vol. 30, No. 3, 2005 at 689 (at the time Vice-Chancellor of Delaware Court of Chancery); See also (empirically) S. CHOI, J.E. FISCH and M. KAHAN, ’The power of proxy advisors: myth or reality?’, Emory Law Journal, Vol. 59, p. 869, 2010 at 872; M.C. SCHOUTEN, ‘Do Institutional Investors Follow Proxy Advice Blindly?’, January 2, 2012; See further chapter 4.1 and infra note 109; see also Winter, infra note 52 at 8.
when shareholders have the possibility of participation they will actually participate.30 As rational as this apathy may be, it could (in the context of their “watchdog”
function) prove disadvantageous if adopted as a general attitude by shareholders.31
2.3) The Case for Shareholder Empowerment
Rational apathy is in fact a well-known phenomenon.32 Nonetheless, ‘in realising that
the market for corporate control does not always work or may lead to inefficient results, many national legislators have attached greater value to voting rights of
shareholders’.33 “Why?” one might ask. The answer, on first examination, may
simply be “why not?”. If shareholders truly are rationally apathetic, then little harm could come from more meaningful voting rights, as such rights would simply be
disregarded.34 However, ‘the fact that there is so much debate on the issue of
shareholder empowerment strongly suggests that neither side believes this to be the case: shareholder activists pursue enhanced voting rights because they believe shareholders would take advantage of them, and others oppose such changes because
they fear the same.’35
ZETZSCHE (2008) extensively studied the effects of law-making on efficient
voting by shareholders. His model distinguishes three categories of costs involved
when voting, namely information costs, decision-making costs and procedural costs.36
He argues that the propensity of institutional investors to vote depends primarily on
the procedural costs of voting, which can be influenced and reduced by law.37
30 M.M. SIEMS, ‘The Case Against Harmonisation of Shareholder Rights’, European Business Organization Law Review
(EBOR), Vol. 6, 2005 at 551; See also Schouten, supra note 26 at 8 who notes that some investors might nevertheless choose to vote because they enjoy participating in the decision-making process; Zetzsche, supra note 16 at 8 and 22; See further E. BOROS, ‘Virtual Shareholder Meetings’, Duke Law and Technology Review. 8, 21, 2004 at 3 as well as L. RENNEBOOG and P.G. SZILAGYI, ‘Shareholder Activism Through the Proxy Process’, CentER Discussion Paper Series No. 2009-65; ECGI - Finance Working Paper No. 275/2010; December 15, 2009 at 9 and 15, both indicating that institutional investors may well prefer visits by analysts and direct behind-the-scenes contact with management as a more effective way to influence the governance and business direction of the companies they invest in.
31
High Level Group of Company Law Experts, supra note 5 at 48.
32 Ibid., at 57.
33 Citing J.W. WINTER, ’Cross-Border Voting in Europe’, Soc. Sci. Res. Network 15, 2000 at 4; Cf. Zetzsche, supra note 16 at
14 (“relying entirely on market control leaves us with the uneasy feeling that in certain settings there is no control at all.”); For a study on measures taken by national legislators, see e.g. D.A. ZETZSCHE, ‘Virtual Shareholder Meetings and the European Shareholder Rights Directive - Challenges and Opportunities’, CBC-RPS No. 0029, June 26, 2007 (study on Canada, France, Germany, U.S., U.K. and Switzerland); International Corporate Governance Network (ICGN),’Cross Border Proxy voting – case studies from the 2002 proxy voting season’, Jan. 2003 (study on U.S., U.K., Germany, Japan and Italy); E. UNANYANTS-JACKSON, ‘Cross-border Voting in Europe: A Manifest Investigation into the Practical Problems of Informed Voting Across EU Borders’, Manifest Information Services, May 2007 (extensively covering 18 of the largest European markets). See further EC impact assessment, infra note 72 at 54-118 (annex 3).
34 Velasco, supra note 20 at 624.
35 Citing Velasco, ibid.; Also in line with this argument, Easterbrook & Fischel supra note 10 at 406 (“If it is not worth the costs
of running elections, firms that eliminated voting would have prospered relative to others. That has not happened, and one may infer that voting is beneficial.”). For debate on shareholder empowerment, see literature supra note 22.
36
Zetzsche, supra note 16 at 24.
37 Ibid. at 29; the other categories of costs are not to be taken into account by institutional investors, because disclosure laws and
fiduciary duties already require them to research and analyse information disclosed by the issuer (information costs; at 25-27), and because in current trends of significant economies of scale and scope costs for developing voting and disclosure strategies are negligible (decision-making costs; at 28); Cf. Winter, supra note 33 at 4-5 argues that institutional investors with large
Therefore, collective action and free-rider problems notwithstanding, empowering
shareholders can be expected to increase voting turnouts.38
Thus – not in the least place fuelled by corporate scandals such as Parmalat,
Ahold, Enron, WorldCom, Vivendi, Royal Dutch/Shell et cetera39 – shareholders
were granted more rights to participate in and monitor corporate decisions. The legislative measures that were over the last two decades adopted by states roughly entailed the rights of shareholders to propose, speak and vote during GMs as well as
duties by the board to inform investors.40 These rights will be discussed in more detail
in chapter 3.
2.4) Conclusion
Shareholders are the residual claimants of the firm, meaning that they only receive a return after all other constituents have been paid. They therefore have the most clear-cut incentive to maximise the firm’s economic results. Since shareholders have very limited possibilities of ensuring profit maximisation via contract or judicial enforcement, they depend on voting rights to keep management at bay or discipline them, or so the theory goes. In practice, shareholders have chosen to remain apathetic because of collective action and free-rider problems. Nonetheless, in believing that law can actually make a difference, Member States have adopted measures that should facilitate easier participation processes.
3) A Call for European Legislation
The previous chapter described why shareholders are well suited to fulfil a “watchdog” function within the firm. It also explains why voting is seen as the best instrument to do so. This chapter focuses on similar legislation adopted at the European level, mainly in response to developments of internationalisation (cross-border equity ownership) and digitalisation (web-based technology). In order to understand the formation of the Shareholders’ Rights Directive and comprehend its potential pitfalls, this chapter will first describe the broader developments of EU Company Law in general. It will then discuss the European goal of strengthening shareholders’ rights, followed by an overview of the provisions in the final directive.
number of shares prefer actively engaging over selling, as they would face downward market pressures when selling at once.
38 Schouten, supra note 15 at 7, further arguing that incentives alone do not suffice to “make the right choice”.
39 L. ENRIQUES, ‘Bad apples, bad oranges: a comment from old Europe on post-Enron corporate governance reforms’, Wake
Forest Law Review, Vol. 38, 2003 at 918-926; Noack, supra note 18 at 1040.
40 See literature cited supra note 33; Cf. OECD Principles of Corporate Governance 2004 (regarded as a governance benchmark).
3.1) Modernising EU Company Law and Enhancing Corporate Governance
Many years ago, ‘the European Community set out on an ambitious project to
harmonise key areas of the company laws of Member States’.41 Based on what is now
article 50 (2) (g) of the Treaty on the Functioning of the European Union (“TFEU”), the early European integration strategy aimed to prevent a “race to the bottom” that would supposedly result from Member States’ unchecked freedom to regulate (or
deregulate) companies as they see fit.42 Thus, in order to establish an optimally
functioning internal market,43 nine company law directives and one regulation were
adopted up until 1989.44
This successful initial period was followed by a period characterised as one of stagnation, with Member States fundamentally disagreeing on a common regulatory core for a variety of company law issues, such as inter alia the structure of the company, powers of the board and the general meeting as well as rules on takeover
bids.45 No significant EU company law was adopted between 1989 and 2001, which
left many to conclude that the core of company law was not harmonised at all.46 This
impasse between Member States was last displayed in July 2001, when the European
Parliament rejected the proposed 13th directive on takeover bids with a tied vote,
marking the end of the Commission’s early harmonisation approach.47
Yet since then, ‘European corporate law has enjoyed a renaissance’.48 A
combination of landmark decisions by the European Court of Justice regarding the
freedom of establishment and free movement of capital,49 the adoption of the
41 Citing J.W. WINTER, ‘EU Company Law on the Move’, LIEI 31, Kluwer 2004, at 97. 42
L. ENRIQUES and M. GATTI, ‘The Uneasy Case for Top-Down Corporate Law Harmonization in the European Union’, University of Pennsylvania Journal of International Economic Law, Vol. 27, 2006 at 947.
43 Article 26 TFEU (ex article 14 EC-Treaty).
44 A.R. PINTO, ’The European Union's Shareholder Voting Rights Directive from an American Perspective: Some Comparisons
and Observations’, September 15, 2008, Fordham International Law Journal, Vol. 32, 2008 at 604; J. ARMOUR and W.RINGE, ‘European Company Law 1999-2010: Renaissance and Crisis’, ECGI - Law Working Paper No. 175/2011; Oxford Legal Studies Research Paper No. 63/2010, December 14, 2010 at 3 (“The topics ranged from basic disclosure and publicity requirements in the first Company Law Directive, through legal capital rules, to rather more recondite topics such as single-member companies”).
45 Winter, supra note 41 at 97; Pinto, supra note 44 at 604, See extensively Armour & Ringe supra note 44 at 3-6 (adding
political roots and differences between national economies, such as industrial structure and financing of corporate activity, as two complementary reasons why harmonization at the EU level failed initially).
46 Winter, supra note 41 at 97 (“nine company law directives have come into force since, but the core of company law is still not
harmonized”); Some even went as far as describing the EU integration strategy as ‘trivial’, see L. ENRIQUES,’EU Company Law directives: How trivial are they?” 27 U. PA. J. INT'L ECON. L. 1, 9, 2006.
47
Winter, supra note 41 at 98 (“Many felt at that time that the development of EU company law, on the basis of the harmonisation approach taken in the EC Treaty, had come to a grinding halt. There was no sense of direction for the future”); A similar despair was reflected in the Commission’s subsequent press release, EC Press Release, ‘Commission regrets rejection of the Takeovers Directive by the European Parliament’, Brussels 4 July 2001, IP/01/943.
48 Citing Armour & Ringe, supra note 44 at 1 and 43. 49
For Freedom of Establishment see: Winter, supra note 41 at 101-104, naming explicitly ECJ 212/97 (Centros), ECJ C-208/00 (Uberseering), ECJ C167/01 (Inspire Art); See further e.g. ECJ C-411/03 (Sevic Systems), ECJ C-201/06 (Cartesio), ECJ C-378/10 (Vale). For Freedom of Capital see: Armour & Ringe, supra note 44 at 21 (“it shows the potential future direction of travel in this area.”); See differently J. BEKKUM, Van, J. KLOOSTERMAN and J.W. WINTER, ‘Golden Shares and European Company Law: The implications of Volkswagen’, European Company Law, 5 (2008), issue 1, at 6 (“The ECJ
European Company Statute, 50 the impact of regulating financial markets on company
law51 and a number of corporate scandals and crises52 have altogether lead to a
long-awaited reform activity.53
The Commission’s new approach to legislation started a couple of years earlier (in the late 1990s) with a strong EU push to improve capital markets,
embodied in its Financial Services Action Plan.54 Given that success, 55 the European
Commission set up the High Level Group of Company Law Experts (hereinafter “High Level Group”) ‘to provide recommendations for a modern regulatory European company law framework designed to be sufficiently flexible and up-to-date to meet
companies’ needs, taking into account fully the impact of modern technology’.56 In its
final report, the High Level Group noted that the European Community’s early integration strategy had mostly been driven by a desire to protect shareholders and
third parties (i.e., creditors) with a view to preventing a “race to the bottom”.57 The
Group then emphasised that company law’s primary purpose should instead be to facilitate the running of efficient and competitive business enterprises and that the
protection of shareholders and creditors adds to this efficiency by reducing costs.58
Overall, the report called for little, but significant legislative action at EU
level.59 The suggestions of the High Level Group formed the basis of the European
Commission’s 2003 Company Law Action Plan (“Action Plan”).60 The Action Plan
clearly resonated the suggested innovative approach to company law: ‘Future harmonisation measures could henceforth only be justified on a case-by-case basis
thereby denied the European Commission a potentially powerful tool to reshape European Company Law and bring down barriers (…) deriving from the normal application of Member States’ national company law.”).
50
See extensively W. RINGE, ‘The European Company Statute in the Context of Freedom of Establishment’, Journal of Corporate Law Studies, Vol. 7, no. 2 at 185-212.
51 See extensively L. ENRIQUES and M. GATTI, ‘EC Reforms of Corporate Governance and Capital Markets Law: Do they
tackle insiders’ opportunism?’ 28 Nw.J. INT'L L. & Bus. 1, 4 (2007).
52 See literature cited supra note 39; See also J.W. WINTER, ‘The financial crisis – does good corporate governance matter and
how to achieve it?’ DSF Policy Paper, No. 14, at 1-15.
53 Armour & Ringe, supra note 44 at 1; Winter, supra note 41 at 107-108.
54 Communication of the Commission, ‘Financial Services: Implementing the framework for financial markets: Action Plan’
COM(1999)232, 11 may 1999.
55 Noack & Zetzsche, supra note 18 at 1040 (stating that the FSAP “kickstarted” the EC’s Company Law Action Plan). 56
Citing High Level Group of Company Law Experts, ’Final Report on a Modern Regulatory Framework for Company Law in Europe’, November 2002, 1-161 at 29 (hereinafter also referred to as “Final Report” or “Report”).
57 Ibid., at 29.
58 Ibid., at 29-30; Cf. economic approach described supra note 5.
59 Whilst mainly encouraging the issuance of soft-law recommendations (thereby taking into account the large disparities in
national company laws and differences in corporate governance practices), the Group urged the adoption of hard-law EU directives on a number of governance topics, e.g. on requiring a detailed corporate governance statement in annual reports, on facilitating efficient exercise of voting rights in cross-border situations (see infra chapter 3.2 and further), on granting companies a choice between one-tier and two-tier board structures and on the board’s responsibility for financial and key non-financial data; See extensively Enriques, supra note 51 at 17; External corporate governance via the market for corporate control and better auditing were not included in the terms of reference of the High Level Group, see Hopt, infra note 61 at 5.
60 ‘Commission Communication on Modernising Company Law and Enhancing Corporate Governance in the European Union—
A Plan to Move Forward’, COM (2003) 284 final, May 21, 2003; See generally Schouten, supra note 26 at 11, 13-16; Some notable differences with the High Level Group’s Final Report are mentioned in Winter, supra note 41 at 110-111, viz. timeframe of priorities (short-medium-long term) as well as order of focus in the Commission’s legislation.
according to their positive net impact on business’ and fully taking into account
principles of subsidiarity and proportionality.61 It also favoured a certain degree of
‘regulatory competition’ between national rules, stating that such an approach could
actually be healthy for the efficiency of the single market.62 Based on this premise,
the Action Plan covered a broad range of issues,63 mainly focussing on those areas
directly connected with corporate governance: ‘legal capital, which can greatly affect corporate finance decisions, ownership structures, and enhancement of shareholders’
rights’.64 This eventually lead to the revision of a number of existing directives, such
as the 2nd Company Law Directive on legal capital and the 4th and 8th Company Law
Directives on (auditing of) annual accounts, as well as the adoption of a brand-new
Directive on shareholders’ rights.65
3.2) Strengthening Shareholders’ Rights
The High Level Group had highlighted that in a proper system of corporate governance, shareholders should have effective means to actively exercise influence
over the company.66 Following this recommendation, the Commission launched ‘a
specific project to build a regulatory framework for shareholder information, communication and decision-making that would facilitate participation of shareholders across the EU, and, where possible, outside the EU, in the governance of
European listed companies’.67
It quickly became apparent that the necessary framework would have to be developed within a Directive, as an effective exercise of such rights required a
number of ‘cross-border legal difficulties’ to be solved.68 Indeed, a significant and
increasing level of foreign ownership had, by then (and still), characterised the listed companies across the EU – the weighted average of non-resident investor’s proportion of the listed shares of European markets was already 29% by 2003 and 33% in
2005.69 As a result, all cost-inducing legal or practical barriers were expected to have
61 Citing Armour & Ringe, supra note 44 at 6 and 23; see art.5 TEU; cf. Final Report, supra note 56 at 29-31. 62 Action Plan 2003, supra note 60 at 9.
63 See K.J. HOPT, ‘European company law and corporate governance: Where does the Action Plan of the European Commission
lead?’, ECGI – Law working paper no. 52/2005, October 2005 at 3, dividing these issues in grosso modo six categories: (1) Corporate governance, (2) raising and maintenance of legal capital, (3) groups of companies, (4) restructuring, (5) new European company forms (e.g. Societas Privata Europaea) and (6) transparency of national legal forms.
64 Citing Enriques, supra note 51 at 23. 65 Winter, supra note 52 at 3-4.
66 Final Report, supra note 56 at 47; Cf. thereby underlining the importance of their “watchdog” function, see supra chapter 2.1. 67
Ibid., at 55.
68 Action plan 2003, supra note 60 at 14, see also first bullet at 9; EC impact assessment, infra note 72 at 23.
69 Most of which are institutional investors, Federation of European Securities Exchanges (“FESE”), ‘share ownership structure
in Europe (2004)’, November 2004, and ‘share ownership in structure in Europe (2007)’, December 2008; This increase of cross border equity investment has been notable since the 1980s, see ICGN report, supra note 33 (demonstrated by the increase
an undesired negative impact on the voting turnout of foreign shareholders at GMs.70 A recommendation at EU level would not ensure that measures required to tackle these barriers would be taken at a national level, nor would it safeguard that shareholders across the EU had equivalent opportunities and facilities to participate in
GMs.71 A directive would guarantee minimum common standards while respecting
national specificities72 and so, after a lengthy consultation process, the European
Commission proposed a directive on 5 January 2005, which was formally adopted in
June 2007.73
3.3) The Shareholders’ Rights Directive: An Overview
Shareholder meetings typically comprise of four steps, namely (i) shareholder identification and authorisation, (ii) information, (iii) communication and (iv) voting.
The Shareholders’ Rights Directive mandatorily affects all of these steps.74
Shareholder identification and authorisation: ‘In determining who is formally entitled to vote as shareholder, company law inevitably has to decide at what time one
has to be shareholder in order to have the voting right’.75 Firms that are not able to
identify their shareholders from a shareholders register or on the day of the general
meeting must make use of a so-called record date system.76 In such a system, the
company is required to determine who is eligible to exercise its rights as a shareholder
at a predefined point in time prior to the GM.77 Moreover, the Directive prohibits the
firm from demanding that trading in shares is blocked (by depositing, transferring or re-registering them to another person) or otherwise restricted during the period between the record date and the GM. Such practices are held to be overly restrictive and a disproportionate condition that constitutes a major impediment to effective cross-border voting, since a large majority of investors would choose the ability to of foreign ownership percentages in the UK, from 3,6% in 1981 to 31,9% in 2001); and is still on-going, see EC impact assessment, infra note 72 at 23; see extensively Santella et al. supra note 15; Increases in cross-border holdings were amplified by market trends of portfolio diversification (Winter, supra note 15 at 3-5), algorithmic, automated and high-frequency trading (Wymeersch, supra note 22 at 1; Schaeken Willemaers, supra note 28 at 164), the introduction of a single currency and the consequential consolidation of key sectors of EU industry (Winter, supra note 41 at 105; Santella et al. supra note 15 at 10).
70
Schouten, supra note 26 at 5; These barriers will be the covered in detail infra chapter 3.2 and chapter 4; see further EC impact assessment, infra note 72 at 227 and Zetzsche, supra note 16 at 3.
71 As was emphasized by the High Level Group, Final Report, supra note 56 at 48.
72 See ‘Annex to the proposal for a Directive of the European Parliament and of The Council on the exercise of voting rights by
shareholders of companies having their registered office in a member state and whose shares are admitted to trading on a regulated market and amending directive 2004/109/EC, impact assessment’, {com(2005) 685 final} at 4.
73 Directive 2007/36/EC of 11 July 2007 on the exercise of certain rights of shareholders in listed companies; hereinafter also
referred to as “Shareholders’ rights directive” and “the directive”; Latest transposition date was 3 August 2009 (see article 15).
74 See extensively Zetzsche, supra note 16 at 35.
75 Expert Group on Cross-Border Voting in Europe (“Expert Group”), ‘Cross-Border Voting in Europe’, WODC, 2002/6 at 4-5
(this report, which is inextricably linked to the Group’s Final Report, will be covered extensively in the next chapters).
76 Article 7 (2) of the Directive; the firm’s identification and authorization measures are subject to the principle of
proportionality, article 7 (4) of the Directive.
77 Article 7 (3) of the Directive states that this date must lie at least 8 days after the convocation, and it must not lie more than 30
days before the day of the general meeting; see extensively Zetzsche, supra note 16 at 35.
sell their shares at any given moment over the ability to vote at the GM.78 So, taking into account the fact that less dissuasive and cumbersome alternatives (such as the record date system) were operated efficiently, an overall ban on share blocking was
widely supported.79 Lastly, shareholders are granted the right to appoint any other
person as proxy holder, who in turn has the same speaking and asking rights as the shareholder. Proxies may only be subject to (proportional) formal requirements
necessary to ensure their identification and verify the content of voting instructions.80
Information: The Directive requires timely notice and complete information as to agenda items and as to necessary procedures for exercising shareholder rights, so that shareholders are able to cast informed votes at, or in advance of, the general
meeting, no matter where they reside.81 The company may provide such information
by two methods: the information is made accessible to shareholders at a pre-determined (virtual) place (“pull” method) or it is actively supplied to the recipient by
the issuer (“push” method).82 Voting results must be posted on the company’s website
within 15 days after the GM.83
Communication: Shareholders are granted the right to put items on the agenda, to table draft resolutions for items that are already on the agenda, and to ask questions
that are related to items on the agenda, which management is obliged to answer.84 The
right to put items on the agenda and table draft resolutions may be limited to those shareholders holding at least 5% of the share capital. Member States may set a lower
threshold in their national company laws.85 In all cases, the final version of the
agenda must be made available to all shareholders in sufficient time to prepare for the
discussion and voting.86
78 Article 7 (1) (a) and (b) of the Directive; It has been said that 30% of total EU cross-border votes are lost due to share-blocking
requirements across EU Member States, see EC impact assessment, supra note 72 at 12. Even a (false) assumption that a requirement blocks investors from trading may suffice to refrain shareholders from exercising their voting rights. Such was the case in e.g. Germany’s “hinterlegung” requirement, see Noack supra note 18 at 1043 or, more generally, the explanatory memorandum to the Directive).
79 Expert Group, supra note 75 at 35; EC impact assessment, supra note 72 at 11-12, 14 and 29-30; Manifest, supra note 33 at 20. 80
Article 10-11 of the Directive. The same applies to intermediaries, registered as nominees, acting on behalf of their client. Article 13 states that they can only be asked to disclose their client’s identity and the number of shares he has; Cf. Chapter 4.
81 See article 5 of the Directive and Recital 6, preamble; Cf. article 17 of the Transparency Directive (2013/50/EU).
82 These methods are explained in detail by Zetzsche, supra note 16 at 38: The information has to be supplied no later than 21
days previous to the GM, and must include (i) convocation with specifics of the time, place and agenda of the meeting as well as a clear description of the procedure necessary for exercising shareholders rights in the meeting, (ii) number of shares and voting rights (per class), (iii) documents, such as annual reports, to be submitted to the GM, (iv) draft resolutions and recommendations or comments by the company’s separate bodies, (v) proxy forms and forms for voting by correspondence.
83 Article 14 (2) of the Directive.
84 Zetzsche, supra note 16 at 42; The proposed right to ask questions ahead of the GM was later abandoned, see C. ROSE, ‘The
New European Shareholder Rights Directive: Removing Barriers and Creating Opportunities for More Shareholder Activism and Democracy ', Journal of Management & Governance, vol 16, no. 2, 2010 at 279.
85 Article 6 (2) of the Directive.
86 Zetzsche, supra note 16 at 42; if, as a result of exercising abovementioned rights, amendments to the agenda are made, the
revised agenda must be made available on the internet, article 5 (4) of the Directive.
Voting: Companies should face no legal obstacles in offering their shareholders any means of electronic participation in the general meeting. Voting without attending the general meeting in person, whether by correspondence or by electronic means, should not be subject to constraints other than those necessary for
verification of identity and the security of communications.87 Therefore, Member
States are required to abolish national legal measures that prevent companies from offering real-time transmission of, digital two-way communication in, or fully
virtualised GMs.88
3.4) Conclusion
Over the course of the last decade, the European Commission has changed the focus of its company law reform efforts. Triggered by the High Level Group of Company Law Experts, the Commission aimed primarily at meeting the needs of businesses, as opposed to treating harmonisation as an end in itself. Legislative measures were more closely targeted on cross-border issues, among which were barriers to cross-border participation by shareholders. The resulting Shareholders’ Rights Directive introduced minimum standards in regards to shareholder identification and authorisation, information, communication and voting.
4) Analysis: Shortcomings in the Shareholders’ Rights Directive
So far, this paper has analysed why shareholders cannot rely on contractual arrangements or national legislative action to facilitate their (assumed) desire to influence company policy by voting. It has also explained the manner in which the European Commission has set out to strengthen shareholders’ rights, embodied in the Shareholders’ Rights Directive. This chapter will examine the Commission’s efforts. As mentioned earlier, the European legislator favoured a certain degree of regulatory competition and aimed at introducing minimum standards. With this in mind, certain practical differences between Member States’ legislation (e.g. differences in languages, record-dates, thresholds to put items on the agenda and quorums for derivative suits) are not discussed. Nor are other, non-legislative instruments that are influential to corporate governance (e.g. standardised model documents and formats,
87
Recital 9, preamble of the Directive.
88 Article 8 of the Directive; for a full discussion of shareholder meeting technology see inter alia Zetzsche, supra note 33 (EU);
L.M. FAIRFAX, ‘Virtual Shareholder Meetings Reconsidered’, 2010, Seton Hall Law Review, Vol. 40, No. 1367, 2010; GWU Legal Studies Research Paper No. 539; GWU Law School Public Law Research Paper No. 539. (US); R.G.J. NOWAK, ‘Wet elektronische communicatiemiddelen aangenomen’, Ondernemingsrecht, 2006, 197 (NL).
corporate governance codes and listing rules issued by stock exchanges). Instead, this chapter will provide a deeper glance into the Directive’s legal framework, which will reveal flaws that are rather incoherent with its purported objectives: Viable rights have undoubtedly been granted, but to whom actually? The covered issues emanate primarily from developments in modern-day cross-border trading, which will be discussed first. The resulting conflict-of-law issues will be the focus of the second part, followed lastly by the Directive’s omission to empower who many believe to be the ‘actual shareholder’, i.e., the beneficial owner.
4.1) Modern-Day Trading and the Rise of Intermediaries
‘It is possible to look back with a certain nostalgia on the days in which all investors in public companies purchased paper shares evidencing their investment, which they
were able to store in dusty safes in their drawing rooms.’89 On the European
continent, such paper shares were traditionally held in the form of bearer certificates, allowing for transferal of legal ownership simply by placing the physical documents
in possession of the acquirer.90 As financial markets developed, they increasingly
encompassed high-volume trading and profits that were won or lost on the basis of intra-day securities positions, making the required mass movement of paper securities
highly inefficient and cumbersome.91 A safe alternative was increasingly needed.92
The first step in achieving this was the immobilisation of shares, which means that physical shares are placed in a central securities depository (“CSD”) by affiliated
professional custody businesses.93 The individual investor, in turn, holds a securities
account with the affiliated institution, or with a bank or brokerage firm that has a
securities account with an affiliated institution.94 This system allows for transactions
to be processed by book-entry in the relevant section of the administration of the affiliated institution (who administers the physical certificates), rather than through
89 Citing A. HAINSWORTH, ‘Shareholder Rights Directive and the Challenge of Re-Enfranchising Beneficial Shareholders’, 1
Law & Fin. Mkt. Rev. 11, 2007 at 11.
90 Winter, supra note 33 at 7. 91
Hainsworth, supra note 89 at 11; For a detailed examination of this “paper crunch” in the U.S., see D.C. DONALD, ‘The Rise and Effects of the Indirect Holding System - How Corporate America Ceded its Shareholders to Intermediaries’, September 26, 2007 at 10-14 (“During the last six months of 1968 (…), the volume of failed deliveries forced the NYSE to close one day per week and then hold abbreviated trading hours in order to give members time to catch up on their paperwork.”).
92 Winter, supra note 33 at 7 notes that bearer shares ran the risk of being stolen and resold, after which ownership could be
passed on to the third party, if he had bought the shares in good faith. Ownership protection was certainly desired.
93 ibid. at 8; examples of CSDs are Euroclear (int’l), Clearstream (int’l), Monte Titoli S.p.A. (ITA), DTCC (US).
94 See extensively M. KAHAN and E.B. ROCK, ‘The Hanging Chads of Corporate Voting’, Georgetown Law Journal, Vol. 96,
p. 1227, 2008; U of Penn, Inst for Law & Econ Research Paper No. 18; NYU Law and Economics Research Paper No. 07-29 at 1237-1240; See also Expert Group, supra note 75 at 11.
the physical movement of paper shares.95 Alternatively, there may be no physical
securities at all: 96 In accordance with preconditions set out in local laws, companies
may choose to issue ‘dematerialised’ shares, the existence of which is limited to the
records maintained by the CSD.97 Again, often times only a handful of large, highly
solvent financial institutions will have direct affiliated securities accounts at the
CSD.98 Those that do generally act both as custodians for their own investor-clients
and as sub-custodians for those financial institutions who do not have direct
membership (e.g. most broker-dealers).99
The systems described here for bearer shares in practice operate similarly for
registered shares.100 Both the custodian-driven demobilisation and the
legislature-driven dematerialisation of securities facilitate swift paperless trading, thereby
reducing settlement risks and increasing efficiency.101 In their most elementary form,
both systems result in at least one intermediary (CSD and/or affiliated institution)
interposing between the issuer and the (depository bank of a) shareholder.102
Where does this leave us in terms of shareholders’ rights? In commerce, there exists a general conception of who the shareholder is (the economic or beneficial owner) and what the shareholder has (a right to vote, a right to sue, a right to receive
dividends, a right to sell et cetera). 103 ‘Much of corporate law thinking and
scholarship in the academy, the courts, the legislatures, agencies, newspapers, and elsewhere, proceed from some version of this beneficial-owner-as-shareholder
paradigm.’104 However, when shares are registered or administered in the name of an
intermediary on behalf of someone else, discrepancies may arise between the
economic ownership of the shares and the legal status as shareholder.105 Take, for
example, a jurisdiction in which registered shares are most common: The person
listed in the shareholders register will customarily be deemed shareholder.106 If shares
95 Hainsworth, supra note 89 at 11; While all modern economies allow financial intermediaries to open CSD accounts
(“centralized registration system”), not all permit other shareholders to directly open such accounts (“decentralized registration system”), see B. ESPEN ECKBO, G. PAONE & R. URHEIM, ’Efficiency of Share-Voting Systems’, January 2011, Tuck School of Business Working Paper No. 2009-64; ECGI - Law Working Paper No. 174/2011 at 27; See further Donald, supra note 91 at 8-10; See also Winter, supra note 33 at 8, additionally covering so called “globals”, which are single comprehensive bearer certificate for all securities of the same class.
96 See Winter, supra note 33 at 8-9.
97 Hainsworth, supra note 89 at 11; Donald, supra note 91 at 3. 98
Hainsworth, ibid.; Expert Group, supra note 75 at 11.
99 Ibid.; see also Donald, supra note 91 at 5.
100 Expert Group, supra note 75 at 12; just as investors no longer hold bearer certificates (which are stored in a depository by
affiliated institutions), so are investors no longer included in the share register – see text accompanying infra notes 105-108.
101 Zetzsche supra note 16 at 37; Hainsworth, supra note 89 at 12. 102
Zetzsche, supra note 33 at 16-17.
103 Kahan & Rock, supra note 94 at 1240. 104 Ibid.
105 Donald supra note 91 at 24; Nolan supra note 12 at 570.
106 Example derived from Zetzsche, supra note 33 at 17; Cf. he who holds a bearer certificate is deemed owner entitled to vote.
in that jurisdiction have been immobilised or dematerialised to facilitate efficient trading, the registered person (i.e., formal shareholder) will most likely be one of the intermediaries close to the issuing company – absent of specific legislation this is
usually the CSD or affiliated institution.107 Consequently, this registered,
non-beneficial owner of the shares (the intermediary) will have all the powers and privileges attaching to those shares as against the issuing company, but little incentive
to use them.108 Indeed, depositaries usually do not generate income from facilitating
shareholders’ rights and nominees and custodians along the chain have no economic
stake in the shares.109 In contrast, any advantage of exercising shareholders’ rights
will accrue straight to the indirect investor in the shares.110 He therefore has great
economic incentive to see that the powers attached to the shares are exercised in order to secure his own well-being, but has no direct rights as against the company by virtue
of his investment.111 Accordingly, the power to act as a responsible shareholder and
the economic incentives to act as such become divided.112
This disparity also applies to voting rights in particular. There is a wide consensus on the principle that the entitlement to control the voting right should rest
with the person having the genuine economic interest in the shares.113 In other words,
the person who has made the investment decision and bears the risk related to the
shares should control the exercise of his voting rights.114 However, identical to the
example above, voting rights are traditionally granted to those who legally qualify as shareholder. Again, absent of any specific legislation this would usually be one of the
links close to the issuing company.115
To counter this issue many local laws now contain provisions that – at least to a certain extent – directly grant (joint) rights of ownership of the shares to ultimate
107 Expert Group, supra note 75 at 15; Donald, supra note 91 at 24; Cf. in the U.S. the vast majority of shares (>95%) are held by
‘Cede & Company’, the nominee of the national CSD ‘Depository Trust & Clearing Corporation’, see Winter, supra note 33 at 30; in jargon these shares are held “in street name”, see in detail Kahan & Rock, supra note 94 at 1237).
108 Nolan, supra note 12 at 570; The same argument is made by Hainsworth, supra note 89 at 13.
109 Zetzsche, supra note 33 at 23; See in detail Strine supra note 29 at 687-689 (dubbing it “separation of capital from capital”). 110 Nolan, supra note 12 at 570.
111 Ibid.; The (beneficial) owner’s incentive as residual claimant is discussed in detail supra chapter 2. 112
Nolan, supra note 12 at 570.
113 EC impact assessment, supra note 72 at 37; See also J.W. WINTER, ‘The Shareholder Rights’ Directive and Cross-Border
Voting’, Eur. Corp. Governance Forum on Cross-Border Voting, Annex 4, June 2006 at 3 (“Few will deny that in the end, the investor who has paid for the shares and runs the economic risk of the shares should be able to determine how the shares held on his behalf will be voted.”).
114
Citing ‘Opinion of the committee on economic and monetary affairs on the proposal for a directive of the European Parliament and of the Council on the exercise of voting rights by shareholders of companies having their registered office in a Member States and whose shares are admitted to trading on a regulated market and amending Directive 2004/109/EC’, COM(2005)0685 – C6-0003/2006 – 2005/0265(COD), 27 November 2006 at 4; see also Schouten, supra note 26 at 23.
115 See literature cited supra note 107.
investors,116 or alternatively entitle beneficial owners to exercise voting rights, e.g. by obliging intermediaries to let their clients exercise voting rights in the client’s own name (if they so request) and by disallowing intermediaries to vote themselves
without a special proxy or instruction.117
Unfortunately, the current legal constructs of Member States from which shareholders’ rights emanate are not always fully adapted to increasingly complex
modern forms of intermediated holdings.118 Adding to this complexity are inter alia
the use of cost-efficient computerised ‘omnibus accounts’ by nominees and custodians, the use of ‘pooled accounts’ and collective investment schemes by designated asset managers (and others) on behalf of their combined clientele as well
as more complicated forms of trading such as short-selling or stock lending.119 Whilst
national securities and company laws could potentially solve these issues, they are ill-suited for one particular crucial element of modern-day trading: foreign investments
and the inevitable cross-border expansion of the chain of intermediaries.120
4.1.1) Cross-Border Chains of Intermediaries
The developments in the immobilisation and dematerialisation of securities have incontrovertibly resulted in a reduction of settlement risks, increases in the efficiency
of the securities markets and, thereby, the facilitation of cross-border investments.121
In fact, cross-border share ownership of European public firms has increased greatly over recent years (as was discussed in chapter 3.2) and is further stimulated by the
drive towards creating integrated financial markets in Europe and beyond.122
In such situations where shares in a company are held by an investor with a securities account in a different country than the one where the issuing company
116 This is the case in most continental European States, see Wymeersch, supra note 22 at 2 (footnote 3); Winter, supra note 33 at
18 (and footnote 64).
117 For measures taken per EU Member State, see EC impact assessment, supra note 72 at 105-112 (Annex 3); See as an example
of these measures article 12, 15 (and 38) of the Dutch Giral Securities Trading Act, explained by Winter supra note 33 at 8; Cf. art. 8 of the American Uniform Commercial Code (U.C.C.), explained by Kahan & Rock, supra note 94 at 1240-1243 (“Under Article 8, the beneficial owner of the shares held in a custodial account with an intermediary (such as a broker) is considered to be the holder of a “securities entitlement” in a “financial asset” which is ultimately held by a depositary.”); The UK system differs, depending predominantly on contractual arrangements, as is explained in detail by Nolan, supra note 12 at 570-572 (see Section 360 of the Companies Act 1985: “Except as required by law, no person shall be recognised by the company as holding any share upon any trust and (except as otherwise provided by the articles or by law) the company shall not be bound by or recognise any interest in any share except an absolute right to the entirety thereof in the holder.”); details infra chapter 4.
118
As was stressed by the European Commission in its explanatory memorandum to ‘Proposal for a Directive on the Exercise of Voting Rights by Shareholders Having their Registered Office in a Member State and Whose Shares Are Admitted to Trading on a Regulated Market (2005)’ 2005/0265 (COD)’, at 2.
119 Making it extremely complicated for legislature to establish who the ultimate beneficiary is, see Winter supra note 33 at 6-11. 120 EC, ‘Fostering an Appropriate Regime for Shareholders’ Rights’, first consultation, supra note 18 at 4.
121
Hainsworth, supra note 89 at 12.
122 EC explanatory memorandum, supra note 118 at 2; for details on the increasing percentage of cross-border equity ownership,
see literature cited supra note 69; see more recently OEE, INSEAD OEE Data services, ‘Who owns the European economy? Evolution of the ownership of EU-listed companies between 1970 and 2012’, August 2012 at 20 and 33 (the percentage of foreign ownership in EU listed companies in 2011 was approximately 44%).
resides, the chain of intermediaries will surely become longer.123 For example, common intermediaries in between a foreign investor and ‘his’ Dutch listed company are: Euroclear Netherlands (the Dutch CSD, formerly known as “Necigef”), large institutions affiliated with Euroclear Netherlands, global custodians, clearing houses such as Clearstream and the foreign bank where the investor holds his securities
account.124 In reality, the shareholding chains between issuing companies and foreign
investors are often much longer, more complicated and even involve intermediaries (and others) in third countries (e.g. including a foreign CSD and its affiliated institutions, a global custodian and its proxy vendor, a sub-custodian who provides services in a specific European or other market, a large international depository bank,
a fund manager, a leading voting service provider, a proxy platform et cetera).125
This increased cross-border intermediation of shares has lead to a number of additional legal and practical barriers that hamper the effective cross-border exercise of voting rights, thereby essentially undermining the role of shareholders in the
corporate governance process.126 The remainder of this chapter will discuss these
barriers.
4.1.2) Applicable law
One of the first questions to arise when speaking of voting rights in a cross-border context is that of the applicable law: According to the law of which country should
the entitlement to vote be assessed?127 The applicable law as regards to the person
entitled to vote in the GM is the law that governs the legal status of the company and
its internal relationships, the so-called lex societatis.128 The right to vote typically
accrues to the ‘shareholder’, as is evidenced by national company law provisions of
practically all Member States.129
123 Winter, supra note 33 at 12.
124 Specific (simplified) example derived from M.C. SCHOUTEN, ‘Consultatie Commissie inzake uitoefenen aandeelhouders-
rechten’, Ondernemingsrecht 2004, 244 at 2; Cf. Schouten, supra note 26 at 6.
125 As explained by Winter, supra note 113 at 1; Zetzsche, supra note 33 at 16 (“In between the CSD and the [foreign bank],
there may be a direct link. However, more often than not, a multitude of other custodians link the CSD to the [foreign bank]. This is particularly true in a cross-border context, since only a few institutions are linked to CSDs across borders.”); see more detailed Winter, supra note 33 at 12-16; Manifest, supra note 33 at 64-77; EC impact assessment, supra note 72 at 9-10.
126
Hainsworth, supra note 89 at 12.
127 Winter, supra note 33 at 16; K. MEER, Van der, 'Grensoverschrijdend stemmen in Europa', V&O 2002 at 222; M.P. HOEK,
Van den, ‘Naar een oplossing voor grensoverschrijdend stemmen – het rapport Cross Border Voting in Europe’, Ondernemingsrecht 2003, at 477.
128 Expert Group, supra note 75 at 15; The lex societatis may be the country in which the company is incorporated (this
‘incorporation doctrine’ applies e.g. in the UK and the Netherlands), or the country in which the company has its principle business (called the ‘real seat doctrine’, which is utilized in e.g. Germany and France), see Winter supra note 33 at 16 (and footnote 56); Armour, Hansmann & Kraakman, supra note 6 at 25-27; Cf. article 60 of the Council Regulation (EC) No 44/2001 (“Brussels I regulation”).
129 Winter, supra note 33 at 16; Expert Group, supra note 75 at 15 and 19.
