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Comments from ACCA
March 2006

ACCA is pleased to comment on the consultation paper on the above. ACCA is a professional body which represents some 110,000 qualified accountants who are based in the UK, the rest of Europe and around the world and who work in a wide range of business sectors – in public practice, in the public sector and in business itself. We are recognised by law in the UK and other countries for the purposes of licensing auditors, investment advisers and insolvency practitioners and have a wide range of expertise and experience in company law and corporate governance matters.  

Our responses to the specific questions set out in the paper are set out in the following paragraphs.

Q1   Does the action plan address the relevant issues and identify the appropriate tools to enhance the competitiveness of European business?

We welcome the Commission’s change of emphasis, in its proposed statement of future priorities, away from regulation per se and in favour of an approach which more explicitly promotes entrepreneurship and wealth creation. Regulation of limited liability entities will always be necessary, in order to protect the legitimate interests those who have a direct stake in the activities of such entities, but above this essential level of protection the law should aim to facilitate economic activity.

The above notwithstanding, we suggest that the revised plan does not adequately identify the tools needed to enhance the competitiveness of business. Perhaps justifiably, it focuses on improving structural arrangements in order to promote accountability. But one notable opportunity missed concerns the proposal on the role of non-executive directors (NEDs) and supervisory board members. The plan appears to underplay the role of NEDs in contributing to corporate strategy and, as a result, over-emphasises the role of NEDs in monitoring and oversight functions at the expense of their contributions to strategy and entrepreneurship. More generally, the revised plan seems to see corporate governance too much in terms of accountability and oversight generally and ignores or underplays the fact that corporate governance is about how companies are directed and controlled, which will encompass such matters as strategy, internal controls and risk management. We suggest, therefore, that some additional attention to the ‘business-positive’ potential of corporate governance rules would be in order.

Q2   Do you have comments on the proposed application of better regulation principles in the area of corporate governance and company law?

We welcome the commitment to systematic, minimum-standard consultation procedures and the undertaking that legislation will only be considered when it is considered to be the only means of achieving ends which cannot be addressed by market solutions alone. These are clear statements of intent which we find very helpful.

Q3   What would be the added value of addressing the one share, one vote issue at EU level?

We note that the Commission is in the process of commissioning a study on this issue. We would encourage the Commission to pursue this matter. Action is already being taken to require companies to disclose details of their share structures, in the interests of transparency and shareholder education, and a separate new instrument on cross-border shareholder rights is also being planned. It would be consistent, in our view, with the steps being taken to encourage cross-border investment if a common position were arrived at as regards share voting rights. Whatever the results of the Commission’s study, what is essential is that companies are required to make full disclosure of their voting structures – this is where EU law has a role to play in bringing added value to the situation.

Q4   What would be the added value of addressing shareholder rights questions at EU level?

Shareholder rights are already being addressed in the initiative on that matter. We agree it is right that EU law lays down minimum standards in this area, provided that these standards are practical and proportionate. If investors are to be encouraged to invest in other member states as well as their own, it would help the process if those investors are assured that they will have reasonable rights to information and to participate in the decision-making process of the investee company. This objective calls for minimum standards to be set on a cross-border basis. 

Q5    Is there a need for the issue of disclosure of voting policy to be addressed at EU level?

We agree that it is good practice for institutional investors to disclose their policies and practices on voting matters. But given the steps being taken by many industry bodies and market regulators to encourage investors to make such disclosures at present, we suspect that this may not be an area where it would be necessary for the law to become involved, especially given the new commitment to seeking ‘soft law’ solutions where this would be more appropriate.

It is widely recognised that there is very weak accountability of institutional shareholders to those who supply them with funds. But rather than pursue the options of a Directive or Recommendation on this matter, we suggest it would be more useful at this stage to undertake an EU-wide study looking into the governance arrangements of institutional investors and how they are accountable to those with a beneficial interest in them. 

Q6 Do you consider that
- the question of wrongful trading rules and
- the issue of directors disqualification
should be addressed at EU level?

We consider that the concept of wrongful trading is a good one, at least in principle. It serves to remind a company’s directors that they have a responsibility to manage their company’s finances prudently. By attributing to them a degree of personal liability for their company’s debts, the rule also serves as a practical incentive to directors to ensure that they keep their company’s finances under regular review. Wrongful trading is also, in itself, an important feature of creditor protection, since it gives creditors of insolvent companies a legal means of recourse against directors who have acted without regard to their interests in circumstances where they should have done.

But it must be acknowledged that the statutory rule on this matter which is laid down in statute law in the UK and Ireland has emerged from evolving case law in those states which has identified that, where a company either is insolvent or is approaching insolvency, a company’s directors owe their legal responsibilities to their company’s creditors rather than, as is the norm, to their company’s shareholders alone. Whether or not it is appropriate to apply a wrongful trading-type rule to directors in all EU countries will depend on the prevailing legal environments and in particular whether there is currently the same sort of legal distinction as exists in the UK between duties to shareholders and duties to creditors and other stakeholders.

If it is decided to investigate further the feasibility of a standard wrongful-trading-type rule, the Commission should consider how to make such a rule more effective in terms of achieving actual recoveries from directors. In the UK, the procedure may only be resorted to by the company’s liquidator during the course of an insolvent winding up.  Accordingly, it is not available to shareholders acting collectively, nor is it available in insolvency procedures other than insolvent liquidation. A further complicating factor is that the circumstances of insolvent liquidation necessarily mean that there are usually few assets available to the liquidator with which to fund litigation against the directors. Without the approval of creditors to indemnify him against legal costs, liquidators will often conclude that a wrongful trading action will be too risky, even where he considers that there is a good case for the directors to answer. 

We suggest that there may be more scope in practice for the institution of EU-wide provisions regarding disqualified directors. There seems certainly to be a good single-market case for setting up procedures to ensure that a restriction on acting as a company director which is imposed by the authorities in one member state should have effect in other member states also: this would appear to be all the more desirable should companies in future be permitted to transfer their registered office from one state to another. Criminal penalties could be provided for those who breach or attempt to breach these restrictions. Separately, there is scope for the Commission to promote the idea among member state governments, possibly via a Recommendation, that all should establish disqualification procedures for those who are unfit to be involved in the governance of limited liability entities (or at least public benefit entities). Any such Recommendation should set down minimum standards for the criteria that should be included in disqualification procedures.

Q7   In the light of existing instruments, is there still a need for a Directive on the transfer of registered office?

Given the constraints which currently prevent companies re-locating to other member states, it is probably true to say that there is a ‘need’ for an instrument which will allow those companies which are outside the scope of the ECS and the 10th Directive to achieve this. The bigger question, though, is whether such an initiative should be a priority for the Commission in its action plan. Our view is that the sort of companies which are likely to be interested in re-locating are those which are now entitled to take advantage of the provisions of the ECS and the 10th Directive. In the absence of any evidence to the effect that smaller, private companies have a legitimate need to be able to transfer, we would recommend that no further action be taken.  

Q8  Should the question of board structure be addressed at EU level?

We believe that the unitary and two-tier board structures work well in their respective legal and social environments, where they are supported by long experience and established statutory and non-statutory guidance. Those companies which wish to experiment with alternative board structures now have the option of incorporating as European companies. We do not consider that affording any wider encouragement to EU companies to adopt alternative structures is necessary or desirable.

Q9  Do you think that a squeeze out and a sell out right should be introduced at EU-level?

We consider that these rights are desirable to have in national legal systems. They help make it possible for parent companies to complete take-overs of subsidiary companies and thereby turn them into wholly-owned subsidiaries, and provide an effective means by which minority shareholders can achieve an exit from their involvement in a company on their terms. That being said, we are not convinced that there is a case for there to be legal provision on these matters at EU level. We would not consider them to be absolutely essential either in terms of shareholder rights or of capital maintenance rules. The most we would suggest is that the issue could be dealt with at some stage via a Recommendation to member states.  

Q11 How useful do you judge the ECS to be in practice? Do you consider modifications are appropriate or desirable?

In the UK, just one company has been incorporated under the ECS. This does not suggest that there is significant interest in the model and casts doubt on whether an SME version of the model would be a worthwhile exercise. 

Q12  Do you see value in developing an EPC statute in addition to the existing European and national legal forms?

We note that the feasibility study published in December 2005 concluded that ‘a European statute for SMEs will undoubtedly stimulate the spirit of enterprise in Europe’ (although the authors added that beneficial effects only stand to be achieved with the addition of supporting measures and assistance). Given the current political commitment to promoting entrepreneurial activity, any initiative which promises an increase in economic activity and job creation will be attractive. We are not aware from our perspective, though, of any substantial interest in the proposed concept from SMEs in the UK – accordingly, we are not therefore as persuaded as are the authors of the feasibility study that this project will be worthwhile. If the SME statute can be developed in a way which does not discriminate in any way against the conduct of domestic business activity we would not oppose the Commission taking the idea forward. But we would not think that the evidence, including the study referred to, warrants giving it priority treatment at this stage. 

Q14   Do you agree there would be added value in modernising and simplifying company law?

There will always be a superficial attraction in any project to modernise and simplify existing legislation. We see nothing wrong in principle with a review of current instruments to see whether discrete provisions can be dispensed with as being excessive to the regulatory objective. There should also, certainly, be a premium on achieving clarity in the framing of new laws and soft law.

But in the specific case of EU legislation we consider that there are some serious problems which are likely to hinder the effectiveness of the exercise. Firstly, EU law is invariably the result of laborious deliberations and compromises at the political level. It would be difficult, as we understand the position, to set about revising the terms of current legislation on a strictly technical level, outside that essential political context. The potential consequences of simplifying text for its wider meaning, particularly when so many different languages are involved, should also not be under-estimated. Secondly, some at least of the problems with EU legislation which are experienced by businesses and consumers arise not so much from the original instruments themselves but from the ‘gold plating’ they receive when they are transposed into national laws. While EU laws are designed to be only minimum standard, and member states are free to go further on any specific issue if they wish, it would be helpful if there were a general commitment on the part of the member governments to avoid disproportionate elaboration on the minimum standards laid down in Directives.  

One additional issue which we would urge the Commission to continue to attend to is the proposed project on possible alternatives to the existing capital maintenance regime. As an accountancy body, we are concerned about the ramifications of IFRS for the capability of individual companies to pay dividends under the existing distributable profits test. This issue has the potential to have very wide implications for the EU economy. We would therefore urge the Commission to continue to give the project the highest priority.

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