1 Russian-European Centre for Economic Policy WORKING PAPER SERIES « UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK » A. Radygin, R. Entov September 2002 Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK Unification of Corporate Legislation:
World Trends, EU Legislation And Russia’s Outlook1 Content Chapter 1 Reception and unification of corporate legislation: the world process and national restrictions 3 1.1. Reception, convergence and unification 3 1.2. Some problems with the traditional models 10 Chapter 2. Specific features of company law unification within the EU 12 2.1. General 12 2.2. Directives concerning company law 15 2.3. “The European Company” 21 2.4. Mergers and takeovers 24 2.4.1. Terms and models: some by-country differences 24 2.4.2. Regulation of mergers and takeover in the EU law 28 2.5. Bankruptcies 32 Chapter 3. Russia’s corporate legislation and perspectives of applying the EU experience 33 3.1. Reception and general tendencies in development of company legislation in the period of transition 33 3.2. Specific features of potential harmonization of company law in Russia 38 3.2.1. Formal criteria 38 3.2.2. Real criteria and recommendations for Russia 43 Bibligraphy 54 1 A short version of this report is publishd in the RECEP White Book on the “EU-Russia Common European Economic Space”, October 2002 Policy Paper • RECEP 2 Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK Chapter 1 Reception and unification of corporate legislation: the world process and national restrictions 1.1. Reception, convergence and unification First of all, it is necessary to take into consideration the natural process of reception and unification of law which may be going on at the national, regional and international levels.At the national level, development of the corporate legislation cannot be assessed adequately unless the influence of the rules of other countries is taken into account. Latest developments in the area of corporate law are quickly borrowed by legislation and practice of other countries, which means that “corporate law in every country is developed by the international effort” (Ripert, p. 678). However, unification is not the result of international agreements but mostly of unilateral reception of concepts, constructs and institutions of foreign corporate law. Most of the lawyers consider such an approximation of legal systems not as unification but as copying or imitation of foreign law (Matteucci, p. 338).
Historically, on the basis of the available evidence, most far-reaching effect on evolution of corporate legal regulation is produced by the laws of France, the USA and Germany. The general importance of the Civil (1804) and Commercial (1807) Codes by Napoleon and the Commercial Code (1897) by Bismarck do not require any comment. Reception of the German civil law by Japan in the second half of the XIX century was brought about by the necessity to regenerate the legal regulation of the economic activities in the situation where the country’s own legal material was missing. The 1951 Japanese Law on Corporations, for the most part, was a duplicate of the US corporate legislation. Convertible debentures – statutory instruments in most European countries – were initially introduced in the USA. The German Law dated 29 April 1892 was the first to introduce “public limited-liability partnerships” which later became a standard legal and organizational form of small and medium-sized businesses worldwide. In their turn, the law on public limited-liability partnerships adopted by many European countries produces their effect on the legal status of private companies in England and close corporations in the USA.
Reception is characteristic of the current period, in particular, of the 90s in the last century, when the economic legislation of transitional economies was undergoing a dramatic transformation (see below).
Under the present circumstances (at the turn of the century) it would be proper to discuss convergence – approximation of national models of corporate governance (Table 1) through mutually beneficial exchange of certain elements (within the framework of reception).
In the last quarter of the century, for all the countries across the world, contraction of the authority of the general meeting of shareholders and emergence of the Board of Directors (the Board) as an independent body is the most common and characteristic trend in the development of elements of the management structure. Now, to the contrary, a discussion about development of such a form as “virtual shareholders’ meeting” is gaining momentum, which has become possible due to the progress in new technologies. In particular, the issue is on the agenda of the EU High Level Group of Company Law Experts set up in 2001.
For more detail see: Kulagin, 1997, pp. 66-71, 213-219.
Policy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK Table 1. Comparative characteristics of the “English-American”, “Japanese” and “German” models of corporate governance English-American* Japanese German ** General - Large number of - High share of - Long-term interest of characteristic and non-affiliated affiliated companies banks in corporations;
specific features shareholders; among the - Long-term investment - Property dispersion; shareholders; of corporations in other - Preference for share - Cross-holdings non-affiliated financing “keiretsu” (groups of corporations;
companies united by - Formal ownership joint ownership and concentration (family management); control through - Informal ownership majority interest);
concentration - Preference for bank financing Important issues:
(1) Key players - Managers; - Main bank-creditor - Commercial banks - Directors; and the core of (shareholders and - Shareholders “keiretsu” (informal creditors);
control by managers); - Corporate Principle of - Affiliated company- shareholders relationship: “balance shareholder of the of forces ” corporation; Principle of - Managers; relationship - - Government “direct control ” (objectively) and Principle of “social partnership” relationship - (formally) “establishing ties” (2) Key shareholders Growing share of non- Growing share of Growing share of bank financial banks, insurance banks, pension funds institutions and companies and and corporations; Low corporations; High corporations share of individual share of individual shareholders; High shareholders; Low share of foreign share of foreign investors investors (3) Board Unitary board includes Board of executive Two-chamber membership independent directors directors comprises management structure:
(a trend to increase affiliated persons - executive body (board their numbers on the (executive directors, – corporation officials) board) department heads) as - supervisory board well as retired officials. (“independent affiliated “Outsiders” are rarely shareholders and represented. employees) (4) Legal and USA: laws of the states Ministries in charge of Federal level: laws on institutional – rights and the industrial policy; corporations, stock framework responsibilities of Securities Department exchanges, groups;
corporations, SEC - of the Ministry of commercial law, PLC “corporation - Finance and Stock management rules;
shareholder” and Exchange Committee “Lands”: stock “shareholder-to- (copying of the US exchange regulation shareholder” legal regulation in the relationship; UK – post-war period) Parliament and Policy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK Securities and Investment Board (5) Information Well-developed, rigid Less rigid Less rigid disclosure and detailed requirements; financial requirements; financial requirements legislation; information is provided information is supplied Financial information half-yearly; aggregate half-yearly; aggregate is provided quarterly; information on information on information on bonuses; information bonuses; information personal bonuses, data on 10 top shareholders on all shareholders on all shareholders having over 25% of the having over 5% of the shares; information on shares; stock exchange supervisory board plays an important role members and the number of shares they have is not provided (6) Mechanism of Overall: on the basis of Overall: weak Overall: division interaction between a division between influence of between control and the players ownership and independent (non- management (two management (control) affiliated) shareholders chamber board) Technically: a simple on corporation’s affairs Voting incapacity and apprehensible due to a specific mix of legally authorized mechanism, the shareholders, (number of votes can shareholders get problems with voting be less than the shares information about the by non-Japanese number). Procedures of shareholders’ meeting, shareholders and considering proposals the annual report and institutional investors by shareholders are ballot papers by post, Technically: a simple well-developed (to vote by proxy mechanism, all the satisfy small shareholders have shareholders).
access to annual Obstacles:
reports., materials of - most of the shares are the shareholders’ not registered (share to meetings, vote by bearer), that is why the proxy documents are sent first to the depository bank to be forwarded then to shareholders;
- it is necessary to be present at the shareholders’ meeting or to be represented by the depository (7) Corporation’s (Mandatory) – Election (Normally) –Payment (Normally) – Payment actions that require of directors and of dividends, funds of dividends, funds an approval by the appointment of distribution, election of distribution, election of shareholders auditors as well as board members and the supervisory board option plans, appointment of the members and reorganization, merger auditor; changes in the appointment of the and buying out a capital and the statutes, auditor, ratification of controlling block of severance pays to decisions by the stock. The right to directors and auditors. executive and introduce business The upper limit to supervisory boards proposals. In the UK – bonuses for directors over the financial year;
the dividend size. and auditors. From changes in the capital 1981 – the right to and the statutes, introduce business mergers, the upper Policy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK proposals (Commercial limit to bonuses. The Code), which is not right to introduce encouraged business proposals is widespread.
* In contrast to the purely American and purely English models, the English-American model is adopted by Australia, Canada and the Netherlands.
** The German model (certain elements) is applied in Austria, the Netherlands, in Scandinavia and in some French and Belgian corporations. Most of the European transitional economies also prefer this model.
Some researchers point to the emerging convergence of the models and some of the characteristics (apart from the decline and the potential revival of the role played by shareholders’ meetings).3 In the USA, for example, this is evidenced by the increasingly strong pressure on the part of the investor “vote” (alongside the growing share of institutional investors). In the 80s, in Japan, a certain loosening of ties within “keiretsu” between banks and strong corporations capable of obtaining finance on the international market. Opponents to the American model insist on the necessity to give more power to the “vote”. At the same time, opponents to the German and Japanese models advocate making them more open, flexible, easier “to go into” and “to go out”.
Thus, the situation justifies a discussion about the trends and unification of the main components of the securities market infrastructure.
The gradual change in understanding the outlook for and significance of various external mechanisms of corporate governance is also very important. Capital market and corporate governance market are important by definition. According to some estimates tomorrow is not with the institutional but with the market control. The experience of Germany, where capital markets are being quickly developed alongside intensification of processes of public takeovers is evidence to that. Moreover, the delay in adopting Thirteenth Directive on Takeover Bids by the EU Council made Germany to develop its own national act on takeovers irrespective of the outlook for adoption of the Directive.
Such mechanisms as audit and information disclosure (key elements in the English-American model) are viewed in Germany as the foundation of the future corporate governance (the 1998 Act), while the USA academe increasingly deny them any such role. Among the arguments for the rejection one might point to the hypothesis of effective capital markets, lack of confidence in regulation and regulation agencies (including the SEC), some elements of the terminology of the social choice theory, etc. (Hopt, 2000). The 2001 “Enron” scandal might become a strong argument for this position.
Nevertheless, in general, it is possible to identify some world-wide trends characteristic of further corporate law improvement:
- stronger demand for “transparency” (information disclosure) of PLCs activities;
- parallel process of widening the rights of PLCs management bodies and increasing shareholders’ control over them;
- tougher judicial control over PLCs activities;
- development of legislation on protection of the rights of small shareholders across the full range of issues (priority of buying newly issued shares, qualified majority, merger and takeover rules, cumulative vote, etc..);
For more detail see: Gray, Hanson, 1994.
Policy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK - development of legislation on protection of the rights of PLCs’ creditors;