HomeChapter 5: The Convergence of Boards5.3 The Draft Fifth Directive on Company Law

5.3 The Draft Fifth Directive on Company Law

The Draft Fifth Directive on Company Law exemplifies legislation that may lead to the transformation of the formal structure and composition of corporate boards in public corporations in Member States of the European Union (EU). According to Du Plessis and Dine (1997:23-24), the European Economic Community was founded on the “ . . . ideal that through harmonisation and co-ordination the states of Europe could be brought together into a political union as well as a single market. An important objective in achieving this goal was the harmonisation and co-ordination of the divergent company laws of the Member States, with priority given to the 'public company' because these companies, much more than others, carry on cross-frontier activities.” It was against this background that the first Draft Fifth Directive on Company Law was issued by the European Commission in 1972. The main goal of the Draft Fifth Directive was - and still is - to co-ordinate the laws of the Member States in the EU that relate to the structure of public companies (www.europe.eu.int, Jan. 1999). At this moment, the Draft Fifth Directive provides the following rules:

Member States must ensure that public companies are organized according to either a two-tier board structure (management body and supervisory body) or a one-tier system (administrative body in which the actions of the executive members are supervised by the non-executive members).

The authorization of the supervisory body or non-executive members will be required by the management body or executive members for decisions relating to:

  • the closure or transfer of all or part of the company;
  • substantial extension or reduction in the activities of the company;
  • important organizational changes; and
  • the establishment or ending of long-term co-operation with other firms.

 

In companies with fewer than 1,000 employees, the members of the supervisory body will be appointed by the general meeting. If a company has more than 1,000 employees, Member States must provide employee participation in the appointment of:

  • members of supervisory bodies in the two-tier system;
  • non-executive members of boards in the one-tier system.

A maximum of two-thirds of the supervisory body or non-executive members will be appointed by the general meeting. A minimum of one-third (maximum of one-half) will be appointed by the employees. Alternatively, members of the supervisory body may be appointed by co-optation by the board itself. However, the general meeting of shareholders or the employees' representatives may object to such an appointment on certain specified grounds. Another alternative is for Member States to provide employee participation through a works council or through a collective agreement system. No person may be a member of the management body and the supervisory body at the same time. To ensure a wide measure of participation in the company's activities, it will be necessary to:

  • strengthen the position of shareholders regarding the exercise of their voting rights, which should be proportionate to the shareholder's stake in the company capital;
  • impose limits on the issue of preference shares without voting rights.

 

There must be an annual general meeting and other general meetings can be convened by either the management body, the executive members of the administrative body or shareholders (providing the latter represent a certain minimum proportion of the share capital). The annual accounts, annual report and the auditors' report must be made available to every shareholder. Except in special circumstances, resolutions of general meetings can be passed only by absolute majority. Minutes have to be prepared of every general meeting. The memorandum or articles of association may not confer on the holders of a particular category of shares an exclusive right to put forward nominations for a majority of those members of the supervisory organ whose appointment is a matter for the general meeting.

The annual accounts are subject to several requirements. For example, 5 percent of any profit for the year has to be put in a legal reserve until it reaches a certain minimum. The audit has to be undertaken by persons truly independent of the company, appointed by the general meeting. The auditors have to produce a detailed report of their work.

The memorandum or articles of association may not confer on the holders of a particular category of shares an exclusive right to put forward nominations for a majority of those members of the administrative organ whose appointment is a matter for the general meeting.

Certain derogations from the Directive are allowed, e.g. for companies with political, religious, charitable or educational objectives.

Source: www.europe.eu.int (Jan. 1999).

 

The implementation of the Draft Fifth Directive on Company Law may lead to a more harmonized and unified body of corporation laws and to changes in the formal independence of corporate boards incorporated in the European Union. Another development relates to the “Statute for a European Company.” This statute makes it possible for corporations to form a holding company or joint subsidiary in the European Union while they can avoid the legal and practical constraints arising from the existence of many different legal systems. The Statute provides four ways to form a European company (Latin: “Societas Europaea”, “SE”). The SE can be established through a merger, through the formation of a holding company, through the formation of a joint subsidiary or through the conversion of a public limited company previously incorporated under national law of one of the Member States (www.europe.eu.int, Jan. 1999). The statutes of a SE must provide the following governing bodies: the general meeting of shareholders and either a board of directors with a management board and a supervisory board or an administrative board based on a single-tier system.


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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.