EC Reforms of Corporate Governance
and Capital Markets Regulation: How
Do They Affect Outside Investors?
Luca Enriques
University of Bologna & ECGI
ALMA MATER STUDIORUM – UNIVERSITY OFBOLOGNA
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
© Luca Enriques 2006
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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?
 I’ll do my best.
© Luca Enriques 2006
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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 Steel’s 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
a. Audits:
i. Mandates PCAOBs
ii. Introduces independence requirements
iii. Adopts ISAs
iv. Mandates audit committees
b. Corporate governance:
i. Mandates corporate governance statement
• With mild SOA “Section 404” requirement
ii. Imposes collective board responsibility for
annual accounts
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Initiatives to modernize EC and EU company
laws
a. Reform of legal capital directive
b. Over-ambitious project on dual-class shares
and pyramids
c. Proposal to facilitate exercise of voting rights
d. 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 selfdealing (“sunlight...”)
 MAD
is
requiring
on
managers
condescendant with large shareholders
and
 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 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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