Response to the European Commission’s Green Paper “The EU Corporate Governance Framework” 22 July 2011 Paul L. Davies University of Oxford- Faculty of Law Guido A. Ferrarini University of Genoa - Law School ; European Corporate Governance Institute (ECGI) Klaus J. Hopt Max Planck Institute for Comparative and International Private Law ; European Corporate Governance Institute (ECGI) Alain Pietrancosta Sorbonne Law School Rolf R. Skog Company Law and Stock Exchange Regulation, University of Gothenburg Stanislaw Soltysinski Komisja Kodyfikacyjna Prawa Cywilnego ; Sołtysiski Kawecki & SzlVzak, Legal Advisors Jaap W. Winter Duisenberg School of Finance ; De Brauw Blackstone Westbroek Eddy Wymeersch Ghent University - Financial Law Institute ; ECGI European Company Law Experts Introductory statement We first set out briefly the rationale for having rules on corporate governance, whether those rules are determined at national or EU level and whether they are contained in hard or soft law. We then consider the rationale for taking action at EU level. Thirdly, we make a suggestion as to how the choice between hard and soft law should be made. Fourth, we consi- der the overall implications of the previous arguments for the division of rule-making between the EU and Member States. We suggest that the rationale for corporate governance rules is to address agency problems. Within corporate law, agency problems fall into three categories : those between the mana- gement (agent) and the shareholders as a class (principal) where shareholdings in a company are dispersed ; those between controlling (agent) and non-controlling (principal) shareholders where shareholdings are concentrated ; and those between the controllers of the company (agent) and non-shareholder stakeholders (which agency problems exist whether shareholders are concentrated or dispersed). Fol- lowing the Green Paper’s format, we concentrate predomi- nantly on the first two agency relationships. An issue to be noted at once is that a particular legal mechanism may ope- rate to mitigate an agency problem of one type, whilst reinfor- cing an agency problem of another type. Thus, a power for shareholders easily to remove members of the board may mitigate the agency problems of the shareholders as a class whilst reinforcing the agency costs of non-controlling share- holders. Corporate governance issues have traditionally been addressed at Member State level, with limited rule-making at Community level based on the harmonisation clause related to the freedom of establishment, article 50 par. 2 (g) TFEU- . This is in line with the principle of subsidiarity laid down in Article 5 TEU. Thus, there is a need to identify a rationale for rule-making at EU level in relation to corporate governance, if rules are to be made at this level. The obvious role for EU rules is where there is a need to address cross-border issues which national legal systems are, by definition, less well able to address. We suggest that this means that the EU corporate governance rules be confined to companies whose shares are publicly-traded. Although it is conceivable that the sharehol- ders of a publicly-traded company are all located in a single Member State, the evidence is that, at least in major publicly- traded companies, a substantial proportion of those sharehol- ders, especially in the case of institutional shareholders, come from outside the jurisdiction in which the company is incor- porated. Figures from the Federation of European Stock Exchanges show that, at the end of 2007, foreign investors owned 37 % of the value of listed shares on European exchanges. This has been slowly increasing in recent years. There is some varia- tion across countries, both in the current position and rate of change. For example, domestic investors hold 70 % or more of the market in Germany and Italy, whilst they hold less than 30 % in the Netherlands. Between 1999 and 2007, foreign ownership increased notably in Belgium, Germany and the UK, but fell in Italy. It also follows from this argument that there is a stronger rationale for EU intervention in relation to shareholder rights than in relation to board rules. This rationale, we suggest, already underlies the Shareholders’Rights Directive which the Community has adopted. We think that this is the right general principle and that therefore the Commission should not seek to bring non-publicly traded companies within any proposals it may make. We discuss below in our answer to Q 1 the definition of a ‘publicly-traded’company. However, it is not enough to justify EU rule-making that the population of companies should have a cross-border share- holder body. It must also be the case that the objectives of good corporate governance will be promoted by having a common rule across all the Member States. In some cases, we think this is the case, as the Shareholder Rights Directive demonstrates, but in the case of rules relating to the functio- RTDF N° 4 - 2011 u DOCTRINE / P. L. Davies, G. A. Ferrarini, K. J. Hopt, A. Pietrancosta, R.R. Skog, S. Soltysinski, J. W. Winter, E. Wymeersch 153 DOCTRINE