European Company Statute:
Corporate Governance under
the Proposed European Company Statute
May 2001 Dr Maria Chetcuti Cauchi. All Rights Reserved.
Corporate Governance is about the process of direction of
a company, the relationship between the board of directors and management.
It is ultimately about regimes of accountability.
The regulations governing the structure of the
and the implementation of power and control in a businessare generally referred to as corporate
governance. By and large this comprises the function, rights, and
duties of the shareholders, the directors, and the executive officers.
Although the members of the company have an economic interest in the
company, yet it is impracticable for them to manage the company on a day
to day basis too. Thus, management is usually delegated to other
individuals. In order to safeguard the rights of members and stakeholders,
the law devised a system of checks and balances so that abuse of power by
managers is prevented. Essentially, this is the essence of corporate
Traditionally the term corporate governance has
always referred to a system whereby the board of directors administers the
corporation and lays down business policy,
executive officers act as agents of the board and execute its decisions
and the owners of the corporation (shareholders) elect directors and vote
in GMs on key business issues ranging from amendments to the company’s
statutes, to mergers and major corporate sales.
Different national laws provide diverse methods of
dealing with these management and control functions of the corporation.
Essentially, there are two forms of corporate governance: the UK corporate
governance structure representing the Anglo-American corporate structure,
with a single-tier board of directors and the German company structure
presenting a two-tier system, with
a supervisory board to monitor the managing board and the latter to carry
out the day-to-day running of the business.
The Regulation on the Statute for a European Company
makes provision for a separation of powers between the GM of the
shareholders and the board. The former is to take decisions on major items
of business whilst the managing bodies (whether in a one-tier or a
two-tier board structure) are to manage and represent the SE.
The importance of the role of directors under company
law, has its inception in the 20th century era, when the
phenomenon of the managerial revolution took place. This phenomenon
has been described as the “separation of ownership and function of
or as the “separation of ownership and control of wealth”.
It has been argued that company boards have four principal functions,
namely: to provide guidance to the head executive officer; approve main
corporate strategies; provide a procedure for persons, who are not
executives, to be represented in the company decision making process; and
select, regularly evaluate, and, if necessary, replace the chief executive
officer and other senior executives.
The 1990s have witnessed a persisting discussion as
to the extent of shareholders’ rights under national company law
systems. These rights vary from public to private companies and listed and
non-listed companies. Indeed some jurisdictions embody shareholders’
rights through the supervisory board, as the latter is deemed to be the
body which acts in the shareholders’ interests, to check, supervise and
correct the active management.
Other systems resort to legislation such as the statutory right to call
for an extraordinary GM.
However, under all systems of governance, shareholders are excluded from
the performance of any managing or representative function.
The role of Courts in resolving shareholder disputes
is evidenced in several countries such as the UK and Germany. These
countries place heavy reliance on the protective role of the Courts.
However, one should address the
question as to whether the Courts are the best institution for enforcing
compliance. This is because the approach frequently adopted by the Courts
to company litigation is not very encouraging: judges do not show the same
awareness of commercial values and business priorities as the legislator
does; delays are not avoided and the costs rise high; there is no
willingness to intervene as little as possible and let the business go on
and a large number of procedural hurdles and filing and notification
requirements are necessary. Thus, one starts doubting whether the Courts
are, in actual fact, the bastion of the shareholder.
This has resulted in countries, which had previously relied heavily
on judicial discretion, such as Italy and Switzerland, introducing a wider
range of statutory entitlements available to shareholders.
of the Company: Conflicting Approaches
Undoubtedly, the debate on company law harmonisation
throughout the EU has experienced its most challenging instances when
facing the worker participation issue
and the application of the two-tier system of management.
In this debate, the British point of view has been in
direct conflict with the approach adopted by other MSs. Under British Law,
the company has a separate legal personality, it is a persona
juridica which exists autonomously and
it is controlled by its organs.
The role of shareholders is to exercise their power in the GM, whilst the
directors have a fiduciary position vis-à-vis the company and they must
act in the interest of the company.
When it comes to the interest of employees, creditors, investors and
customers, British corporate law recognises that these form part of the
commercial world, but they do not fall within the ambit of company law.
Under this system, the prevailing mentality is that
the management board is accountable to shareholders and not other groups.
In fact, S. 309 of the 1985 UK Companies Act provides that directors are
in the performance of their functions …
(to) the interests of the company’s employees in general, as well as the
interests of its members.
This surely differs from S. 70 of Germany’s Public
Limited Companies Act (1965) which authorises the managing directors to
pursue the public interest, the employees’ interests and the
shareholders’ interests without giving any of them priority. This
system goes completely against the British company law tradition and many
years of common law principles are suddenly challenged.
Thus, it is quite understandable that considerable tension is created
when, under the continental system, employees are recognised almost as
much as shareholders.
Under English, Belgian, Italian, and Scandinavian
law, shareholders periodically elect a board of directors, sometimes also
referred to as ‘administrative board’. This institution is
responsible for the control of the company, though there is no formal
distinction between supervisory and management functions. The members of
this board jointly handle the affairs of the corporation and arrive at
decisions by a majority vote and they are also entitled to assign any of
their powers, or even the complete administration of the company's
affairs, to one or more of their number.
The directeur general or direttore generale
is appointed with one or more assistant managing directors and the board
of directors authorizes them to enter into all dealings necessary for the
running of company's business. This authority is only conditional to the
general supervision of the board and to its sanction of major decisions,
for instance borrowing or the
giving out of shares or bonds.
The supervisory-managing board dichotomy in Germany
goes back to the second half of the nineteenth century, when German
industry was trying to catch up with its English counterpart. Due to its
under-developed stock market and lack of wealthy private investors, the
financing of industry was carried out by universal banks, which developed
a close relationship with their clients, and thus had to be represented on
the company’s board.
With its management codetermination, Works Councils
and institutional representation on the Supervisory Board, German company
law has been classified as the system which best offers protection to the
employee, a system which is “at the ultra-red end of the comparative
spectrum on industrial democracy”.
The argument in favour of the two-tier system claims that only
non-executive directors, who are separate and independent from the board,
can exert effective control on the management.
Critics of this system state that this procedure slows down the
decision–making process and the supervisory board remains too detached
from the work carried out by the management.
Complex management structures dominate the scene in
case of public companies. The two-tier
arrangement is also referred to as a dual system.
In this case, the upper tier is made up of a supervisory board (Aufsichtsrat)
whose members are chosen periodically by the shareholders and the
employees of the company.
This board is almost deemed to be an intermediate between the shareholders
and the management board as the shareholders can use the rights deriving
from their ownership through this upper-tier. However, this board is not
only the representative of shareholders but it also broadens control to
represent the interests of other stakeholders, particularly employees.
The lower tier is composed of a management board (Vorstand)
and it includes one or more individuals appointed by the supervisory
board. This member/s chosen by the supervisory board cannot also be a
member of the supervisory body. The business of the company is
administered by the management board, conditional to the supervision of
the supervisory board. The management board is obliged to report
periodically to the supervisory board and the latter may at any time call
for information or clarifications. The management of the company itself
may not be undertaken by the supervisory board itself, but its approval
may be required in the case of specific transactions.
Different countries have different conceptions of the
rationale behind a company. These dissimilar conceptions have an effect on
the shareholding and board structure, thus resulting in diverse corporate
Under the contractual theory, the wishes of
the shareholders are seen as the overriding consideration in the
management of the company. This emanates from the fact that at formation,
only the shareholders of the company, as owners of the company, were
involved. This theory has been extended by British Courts even into the
period when the company is in full operation, with the consequence that
the interests of the shareholders are equated with the interests of the
company. This results in the exclusion of other interests by the
management, thus resulting in employees and creditors being regarded as
Problems which have arisen in the application of this
theory mostly have to do with different interests which different
shareholders could have: the extent to which dissenting minority
shareholders are to be considered when the interests of the company are in
whether the interests of the company can be equated with the interests of
‘the single individual hypothetical shareholder’
and whether a hypothetical future shareholder could be used as the
benchmark for the general body of shareholders.
other hand, the separation of ownership and control theory provides
that since the ownership and control of a company are usually in separate
hands, then the identification of the shareholders with the company no
longer represents reality. This results in a situation where the company
is regarded as a creature on its own, separate from the interests of the
shareholders and of the professional managers.
constituency model presents a two pronged theory. The first variant of
the model regards the company as the exclusive property of the
shareholders and thus, it is run in their interests. However, it is in the
interests of the shareholders to consider other interest groups as
ignoring the latter would damage the shareholders’ position. The second
variant of the theory admits that there are other interests which are to
be considered and it is in the interest
of the company to take such groups into consideration.
enterprise model is the model adopted in Germany and Holland. Under
this model, the directors are to take into account the interests of the
shareholders as well as the interests of other parties. These are regarded
as forming part of the company and have a corporate function inside the
decision making process.
This model is one of the models adopted in the ECS in the two-tier option.
Systems available under the SE
Early proposals for an ECS imposed the two-tier
system on the SE. The present draft of the proposed Council Regulation on
the Statute for a European Company
presents two management structures and the choice, as to which model a
particular SE adopts, is to be made by the founder companies of the SE
itself. The articles of the European Company shall specify whether it is
opting for a two-tier or a one-tier structure. The former has a management
board and a supervisory board whilst the latter consists of a management
The separation between the management and the
supervisory board goes back to the nineteenth century, and the first
co-determination law was enacted in 1920. Under the ECS, the two-tier
structure consists of a management board with a supervisory board
monitoring its activities. The former board is appointed by the latter.
The management board, composed solely of insiders, is responsible for the
company's daily business activity. The supervisory board has general
oversight functions and is responsible for safeguarding a company's
overall welfare by reviewing management board activities. The two-tier
board presents a distinct
division in corporate responsibilities and also allows directors to
supervise and take action completely independently of the management.
It has frequently been argued that the two tier board
model is unique in the sense that it:
creates a clear institutional and personal separation of
monitoring and management organs and, accordingly, realizes a distinct
distribution of responsibilities and powers within the corporation.
Under the ECS, the GM, together with employees
have the power to appoint the supervisory board.
The role of the supervisory board is to check and monitor the management
board. This board may not engage in management tasks and may not represent
the company in transactions with third parties.
The supervisory board has the power to appoint and
remove members of the management board at any time.
The management board has the duty to provide the supervisory board with
information and respond to enquiries.
No member may serve on both the management board and the supervisory board
at the same time, except if a vacancy arises on the management board and
in such a case, the role of such member on the supervisory board is
Under the single-tier structure, an administrative
board is to manage the SE.
The SE’s Statutes shall lay down the number of members on the board.
The members are appointed or removed by the GM unless minority shareholder
rights under national law or model employee participation rules provide
The administrative organ is
to meet at least once every three months to discuss the progress and
possible development of the SE's business and each member of the
administrative board is entitled to examine all information submitted to
will be elected among the members but if half of the members are elected
by employees, only a member appointed by the GM may be chosen as chairman.
appointment of members of the company organs shall not exceed six years,
but generally re-appointment is possible, unless there any restrictions in
A company or
other legal entity may be permitted to be a member of one of its organs,
if permitted by its Statutes, provided that this does not go against the
law applicable to public limited‑liability companies in the MS in
which the SE is registered. The legal entity present on the company board
shall designate a natural person to exercise its functions on the board.
permitting a minority of shareholders or other persons or authorities, to
appoint representatives on the company organ will not be affected by the
Regulation governing the SE.
are disqualified, under the law of the MS in which the SE is registered or
who have been disqualified by a judicial or administrative decision
delivered in that same MS, may not be members of the SE organs.
Particular conditions of eligibility for members
representing the shareholders may be laid down in the SE's Statutes.
transactions which require authorisation of the supervisory organ in the
two‑tier arrangement or an express decision by the administrative
organ in the one‑tier system, shall be listed in the SE’s Statutes
of an SE's organs shall be obliged not to divulge any information
dealing with the SE, even after their office has ceased, except where such
revealence is required or
permitted under national public limited‑liability companies law or
required in the public interest.
half of the members of the board must be present or represented in order
to have a quorum and a majority is necessary for decision taking.
As a general
rule, the chairman of each organ shall have a casting vote, unless
the SE’s Statutes provide otherwise. Where half of the supervisory organ
consists of employees' representatives, there can be no provision to the
contrary in the Statutes.
employee participation is provided for a MS may provide that the
supervisory organ's quorum and decision‑making shall be subject to
the rules applicable to public limited‑liability companies in the MS
management, supervisory and administrative organs members shall be liable
for loss or damage sustained by the SE following any breach of the legal,
statutory or other obligations inherent in their duties on their part.
drafts of the ECS imposed the two tier system on the SE. The influence of
German corporate law was highly felt in the Regulation. One has to admit
that there are situations in which the two-tier model and a division
between various members of the management group is more advantageous. This
can be seen in the case of transfer of management to a particular person
whilst retaining supervisory
control in order to verify his
capacity in managing the company; division of power in companies where two
families have equal shares; upgrading professional managers to a
directorate level; finding roles on the boards for a large group of people
after a merger and solving the difficulty of distinctiveness between the
chairman and the chief executive.
attempts to create a less introspective and elitist management structure;
it introduces diversity and affords a more prudent approach vis-à-vis
different groups forming the corporate nexus.
With all its advantages, the two-tier system still
could still not be accepted by some MSs. The fundamental problem was the
imposition of a corporate structure, with all its provisions on employee
participation, on another system which was centralist in nature. A
country’s company law regime is an assembly of traditions which has
developed according to a society’s own way. This results in a
situation where diverse jurisdictions highly differ from one another, much
more than one would imagine:
because, the centre of gravity of legal development lies not in
legislation, nor in juristic science, nor in juridical decision, but in
British businessmen and politicians alike regard the
implementation of the two-tier board system, as a dangerous and costly
reform, which at the end only results in allowing greater power to the
Under English law, the position of employees vis-à-vis the company, which
employs them is deemed to fall under industrial or labour law and not
within the ambit of company law.
Under the present ECS, companies may choose which
board structure to adopt. This choice has been regarded by many as the
best solution towards greater integration. Satisfying all parties involved
would remove all the obstacles which have, for decades, challenged the
development of the ECS. However, one should not raise his hopes too high
as this solution could have its repercussions too.
The presentation of such a choice between the
one-tier and the two-tier board structure has already taken place in
France in 1966. French legislation openly permits public companies to
establish either a unitary board of management or else a supervisory board
(conseil de surveillance) and a management board (directoire).
This is highly similar to the German equivalent. French companies, which
had previously been rooted in centralist values were given the possibility
of adopting a two-tier board of management, where the directoire
holds the responsibility of the day to day running of the business whilst
the Conseil de Surveillance ensures that the management carries out
its duties proficiently.
By the 1990s, only 7.6% of the French public
companies chose the two-tier board structure.
The EEC Green Paper of 1975 admitted that:
Only a small proportion of companies have adopted this
structure and many of those who originally adopted it have reverted to the
old classical system.
Now, the same situation could take place under the
ECS. Let us assume that a company in Britain or any other MS which
embraces the ‘single-tier’ ideology decides to convert into an SE and
it decides that such SE is to be governed by a two-tier management board. The question, in this case, is whether the ex-English company
management board will be able to adapt to the new system. Will the
directors really carry out their duties properly under the two-tier
It is very likely that the end result would be that
friction and conflict between the two boards, will occur. Here, one should
refer to what occurred in France. The result was a drastic decrease in the
number of companies opting for the two tier system. One possible
difficulty could be that the supervisory board would find it very
difficult to confine itself merely to control, without trespassing on
and exercise of control by the supervisory board would explicitly go
against the ECS:
40 The supervisory organ shall
supervise the work of the management organ. It may not itself exercise the
power to manage the SE.
Will the management board report to the supervisory
organ as prescribed by the Statute
or will the members of the management board bypass the supervisory organ
as they would still be entrenched in the mentality that they owe
allegiance only to the shareholders? The factor causing all these problems
is the cultural entrenchment of various MSs, such has the UK, in a
centralist philosophy. Under UK legislation, shareholders’ interests are
granted primacy for the purposes of corporate governance protection as:
The fundamental model of UK company law – together with
most comparable systems – remains that of the shareholder’s ‘city
The failure to introduce a two-tier system in France
is evidence of a lack of desire for any reform in corporate structures and
traditions. Most companies still feel that the concentration of managerial
powers in one organ is the best system, resulting in more efficiency,
simplicity and secrecy
and the introduction of a structure imported from another legal system
cannot not be accepted:
it is imperative that that structure is employed efficiently and is in
keeping with the expectations of all parties in the company. Companies
must not be prescribed with structures culturally alien
to those expectations.
Management structure is the result of the commercial
history of a State. Such State is very likely to regard other methods as
alien to its traditions and costly in terms of restructuring of corporations that already run smoothly.
Exercised by Shareholders
All the countries, throughout Europe, have provisions
giving ‘residual’ control to the shareholders through the GM. This
power given to shareholders is ‘residual’ in that much of the daily
decisions regarding the running of the business are taken by the
managerial sector, whilst the remaining decisions on particular, listed
transactions are taken by the GM.
The GM decides on matters for which it has sole
responsibility, as provided by the Regulation and the law of the State of
These matters include, inter alia, the appointment and removal of
members of the supervisory board,
the transfer of the SE’s registered office from one MS to another,
amendment of the SE’s articles
and distribution of profits and treatment of losses in case of winding up
of the company. Any other matters which are not under the responsibility
of the Board of Directors, shall fall within the responsibility of the GM.
Therefore, in order to determine which matters fall
within the responsibility of the GM the ECS provides that reference to
national laws governing corporations in the State of registration is to be
made. Obviously, SEs registered in different MSs will have different
provisions governing them and thus, as regards SEs registered in France,
the GM will have particular matters falling under its control whilst
shareholders of an SE registered in Germany will have different issues.
This further weakens the ‘European’ character of the Statute.
The general rule is that decisions of the GM are
taken by majority of the votes cast, unless the Regulation requires
otherwise or the law applicable to public limited‑liability
companies in the place of registration requires a larger majority.
This is subject to the power given to MSs to establish that, where at
least one-half of the subscribed capital is represented, a simple majority
of the votes shall suffice.
Under the 1989 proposed Regulation, the voting rights of a shareholder
were proportionate to the fraction of subscribed share capital which such
Under the present Statute, it is no longer proposed that voting rights
should be proportionate to subscribed capital.
The ECS provides some protection to minority
shareholders. Under Articles 55 and 56 we find that a 10% minority of
an SE's subscribed capital may request a GM and put items on the
agenda. Since in larger companies this could be a sizeable number of votes
to collect, the SE's Statutes or national legislation may
provide for a smaller proportion under the same conditions as those
applicable to national public limited‑liability companies.
Furthermore, if such meeting, requested by these shareholders, is not
convened in due time, these minority shareholders may request the
competent judicial or administrative authority to order that such GM be
held within a stipulated period of time.
Originally it was provided that the management could
withhold information from the GM if such information could be incompatible
with the legal obligation of confidentiality. The problem was that there
was no clear way in which this managerial power could be checked and
controlled and decision-taking could be blocked due to allegations that
adequate consultation had not taken place. This could have resulted in
nullification of decisions. The new draft does not deal with this matter
and harmonisation in this area is now a moot issue.
case of an SE with two or more classes of shares, every decision by
the GM shall be subject to a separate vote by each class of shareholders
whose class rights are affected thereby. Moreover, if a decision requires
a majority of votes, that majority shall also be required for the separate
vote by each class of shareholders whose class rights are affected by the
over of matters to National Legislation
Previous drafts of the ECS often presented exact
provisions dealing with particular matters. It is a fact that the draft
Regulation as presently drafted has been diluted. Many problems which were
causing deadlock have been overcome by referring to national law or
leaving the matter to be decided by the promoters of the SE in the SE’s
Originally the make-up of the SE board was regulated
by the Statute, now it is left in the hands of those setting up the SE.
Also the manner in which the board could delegate its powers and the issue
of directors’ liability have been completely left to national
Originally, all directors were to have the same rights and duties,
irrespective of whether they were executive managers or non-executive
supervisors. Thus liability for the loss of the company weighed on
each and every one of them and the burden of proving that he was not in
breach was reversed on the director himself. All the above provisions have
been deleted and these matters are now left to the law of the MS of
Earlier proposals of the Regulation presented much
more lengthy and detailed provisions covering the role of shareholders in
the SE. Earlier drafts enclosed a great deal more comprehensive
stipulations concerning shares, including: pre-emption rights and
exclusion of shares carrying multiple voting rights; procedural matters
covering the manner in which the GM would have to be conducted; the right
of shareholders to demand more information regarding a particular matter
on the agenda and the shareholder’s voting rights were proportional to
the fraction of subscribed capital he/she held. In addition, other
essential matters such as the regulation of proxy voting, appointment of
such proxies, limitations to the power of voting of the proxy and
instructions to the proxy on how he should vote in the absence of
instructions, have also been excluded by the Regulation.
Even though many problems have been solved by
reference to national law, the problem is that under the present
Regulation, much discomfort, insecurity and uncertainty will afflict those
who endeavour to resort to the SE as a form of transnational public
company as only minimum harmonisation has been achieved. The exclusion or
the passing over of certain technical matters to national law does not
really make the ECS as attractive a medium for transnational business as
its original promoters had hoped it would be.
Model of Corporate Governance
One cannot conclude this subject matter without
making reference to the recent OECD initiative regarding Principles of
These may prove to be guidelines for corporate governance systems which
would solve various matters of contention which the ECS could not unravel.
These principles cover the wide areas of fair treatment of shareholders,
shareholders’ rights, responsibilities of the board, as well as issues
of disclosure and transparency. Shareholders’ rights, such as furnishing
shareholders with the opportunity of effective participation in and voting
at GMs as well as informing them of the rules governing shareholders’
meetings, and the guidelines covering the composition of directors’
boards, are but a few examples of the detailed provisions suggested by the
one cannot shun the fact that the present Regulation, with all its diluted
provisions and references to national legislation, is still a major step
towards harmonisation in this area. One should keep in mind the fact that
corporate governance is a framework within which companies should
function, it is a ‘means’ and not an ‘end’ in itself. Thus, there
is no universal, unique formula for good governance and
as long as some level of harmonisation, within which companies can
operate, is achieved, then the ECS will have fulfilled its ultimate goal.
Future years and experience will elucidate those grey areas of ambiguity.
May 2001 Dr Maria Chetcuti Cauchi. All Rights Reserved.