'The European Company Statute - How will it better protect minority shareholders?'

Abstract

This article examines the European Company Statute which came into force on 8th October 2004 with an analysis of minority shareholders rights under this new statute compared with the present company law in three major member states. There is a common perception that different legal systems have different levels of shareholder protection and different levels of risk against fraud. Analysis indicates that despite differences in the common law legal systems and civil law systems, member states' company law has been converging, largely due to outside forces . These forces are ongoing process of globalisation of financial regulation, the European Union's directives to harmonise member states, the OECD's internationally agreed code of corporate conduct, 'Principles of Corporate Governance', international accounting standards and electronic fraud, the International Accounting Standards being an important factor since a random sample of companies registered in UK, France and Germany show that 45 % of these have operations in the USA, 43% in Asia, 26% in South America, 19% in Africa and 12% in Australia and New Zealand.

KEYWORDS - shareholders, European, statute, converging, fraud, regulation.

Introduction

This article builds on the contributions of Coase(1960)1, Hayek (1973)2, North (1990)3 and Williamson (1988) 4 in the analysis of law from an economic perspective The study is part of a study of law and legal institutions and their contribution to economic growth through compliance which detects and prevents risks. It acknowledges the contributions of the descriptive and historical studies of European company law by Horn (1979) 5 and Coing(1982)6 The article shows that there is globalisation of law and regulation that is occurring even at a regional level, as Basel 11/CAD 3 Accord which seeks to regularise and put in place capital adequacy, supervisory review and market discipline across the EU member states, the ultimate goal being to mitigate risk7 through fraud, incompetence and inefficiency.

The new type of company formed by the European Company Statute 8(ECS) is now available to commercial organisations with operations in more than one business state and serves as an extra choice for businesses.

There will be options on rules on board structure, rules on enhanced creditor and minority shareholder protection, currency of capital and currency in which accounts are to be drawn up. One currency will be used but it can be the Euro or another, not both and there is no restriction on its profit-making capacity nor on the number of employees it may have.

Other costs to be saved will be administrative costs and taxation.9 Only the tax rules of the member state in which the SE is registered will apply, which will mitigate certain national taxes such as capital gains tax on cross-border re-structuring. Also, the Interest and Royalties Directive (2003/49/EC), which provides relief from withholding tax on interest, and royalty payments made between associated companies of different member states will be extended to the SE. There is one factor that commentators have not discussed with regard to tax and other operational considerations and that is that nearly all of companies in the UK, France and Germany have outlets in Asia, Africa, USA, South America, Australia and New Zealand. 10 This must have a significant impact on the way the companies are reported at least and the necessity for implementation of International Accounting Standards is obvious.

There is an Employee Involvement Directive attached to the SE which will require that each SE must have a negotiating body made up of managers and employees and which will enable all employees of the SE to adopt the highest standards of that SE's employees. So, for example, if the SE has an office in the UK and one in Latvia, the Latvian employees must have the same employment rights as the UK workers of the SE. A factor that managers will be worried about is the potential for demands for European-wide collective bargaining, not withstanding those employees in the United States of America, South America, Asia, Africa and Australia. How internal corporate structures in these other common law countries shape themselves may well be different to the formal corporate structure.

Shareholders' Rights In Uk Companies

The UK has a common law legal system and its company law vests control of the company primarily with company shareholders. Since 1844 the UK has had codified company law. Since 1862 the UK has also had the London Stock Exchange, which has played a role in regulating the financial market and ensuring shareholder primacy. Entry requirement is by the registration system. The law sets broad limits for the allocation of control rights and left it to shareholders to change them within these limits. 11 Shareholders rights are very important in achieving corporate transparency. There is common law protection for minority shareholders if fraud occurs and there is statutory protection 12 by company law.

A shareholder has an interest in the company and a right to uphold its constitution. Various classes of shareholders enjoy different rights, usually set out in the articles of association of the company and there are strict rules to be complied with when a company wishes to alter the rights of any of the classes of shareholders. Since the publication of the OECD's Codes of Corporate Governance in 1999, it has been agreed globally that all shareholders of major corporations must have the minimum rights of receiving the company's annual reports, market sensitive information from the company, to attend general meetings and question the executive team without giving prior notice, independent non-executive directors on the board, consultation on take-over bids, non blocking of bids by the Board, voting rights in each class of share, to vote on appointment of individual directors, on the adoption of the annual report and accounts, on changes to the articles of association and on major changes in the activities of the company.

Ordinary shareholders are entitled to receive dividends when they are declared and to be paid a proportion of the company's assets after payment of creditors, when the company is wound up, proportionate to the size of his shareholding. An ordinary shareholder will not normally have the right to exercise one vote for each share he holds at the general meetings of the company. For example, if a company alters its articles to insert a variation clause a shareholder can apply to the court to have the variation cancelled but only if the holder has more than 15% of the issued shares of the class of shares whose rights are being varied. The rules are strict and application to the court must be made within 21 days of the variation and by one of the shareholders who must be appointed in writing.13, although case law 14 has made it possible for holders of less than 15% of the shares to apply to the court if the variation was not made in good faith. There has always been litigation on company law issues and the UK has a fine body of case law, developed over many years.

Minimum corporate capital and mandatory pre-emptive rights only became law later in the 1985 Company Law Act in response to the EU directive.15. The EU First Directive in 1968 provided...