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

EC Reforms of Corporate Governance and Capital Markets Regulation: How Do They Affect Outside Investors?. Luca Enriques University of Bologna & ECGI. Overview.

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

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  1. EC Reforms of Corporate Governance and Capital Markets Regulation: How Do They Affect Outside Investors? Luca Enriques University of Bologna & ECGI

  2. 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

  3. 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? • I’ll do my best.

  4. 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

  5. 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?

  6. 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 Steel’s audacious bid for Arcelor

  7. 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

  8. 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

  9. Initiatives to modernize EC and EU company laws • Reform of legal capital directive • Over-ambitious project on dual-class shares and pyramids • Proposal to facilitate exercise of voting rights • Cross-border merger directive (facilitating restructurings)

  10. 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

  11. Evaluation (2/2) • Takeover bid directive: if Member States opt out of the board neutrality rule (in reaction to Mittal Steel’s 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?

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