Company law has been increasingly subject to legislation on the EU level in recent years. A recent piece of harmonization efforts in the field of company law is the Shareholders’ Rights Directive II (the Directive). Among others, it provides rules for the conduct of institutional investors and asset managers as shareholders in European listed companies as well as for proxy advisors. Importantly, it also regulates related party transactions (RPTs) entered into by European listed companies.
Regulating RPTs in particular and minority shareholder protection in general have been an important policy area for European lawmakers on both the national and European level given the prevalence of controlled companies and corporate groups in the EU. But rules governing RPTs on the European level had previously concerned only disclosure obligations, leaving it largely to the Member States to regulate RPTs. In this regard, the Directive is an important milestone. However, what the European Commission (Commission) set out to propose and implement in the EU as the RPT regime and the end-product of the legislative process are very different, the latter containing a watered-down version of the Commission’s Proposal (the Proposal). In my new article in the Yearbook of European Law, I track the legislative process of the Directive as regards the regulation of RPTs and identify the important factors that led to the current RPT regime in the EU, providing ultimately a political economy account.
The Commission’s Proposal was ambitious and stringent. It proposed subjecting material RPTs to disinterested shareholder approval (also known as the majority of minority shareholders’ approval (MOM approval)). Furthermore, material RPTs were required to be promptly disclosed and accompanied by a fairness opinion from an independent third party. Materiality thresholds were defined quantitively (and differently for disclosure and approval requirement) and exceptions from the requirements were very limited (only exempting RPTs with wholly owned subsidiaries).
What is striking from this Proposal is not only its ambition but also how little the Commission had actually justified its Proposal in such an important area. That is, the Commission provided too little analysis of the policy option it chose (mainly MOM approval), mainly ignoring important factors and other policy options as well as arguably offering conflicting arguments. A closer look reveals what was actually behind the Commission’s Proposal. I argue that the Commission was in a bid to facilitate/attract cross-border/foreign investment in EU companies to create strong equity markets across Europe and possibly a pan-European capital market, which would in turn contribute to the growth and competitiveness of European companies. As reflected in legislative documents and other evidence, MOM approval and other accompanying (disclosure and fairness) requirements were what the investment community demanded, considering the RPT regimes in place within the EU to be inadequate and divergent (which made it costly to invest cross-border).
Yet, the Commission’s Proposal drew a significant backlash from the business community. It is common knowledge that businesses, their associations, and controlling families have demonstrated generally significant resistance against the attempts from Brussels to harmonize EU law (Enriques (2006), pp. 61-2). It appears that the experience with the RPT regulation in the Directive adds a new chapter to this story. The European and national interest groups that represent companies and their controllers took to the stage and laboured and lobbied to keep the intervention by the Commission minimal. Their efforts to convey their concerns to the Member States and members of the European Parliament (MEPs) were successful. Both the European Council and the European Parliament significantly amended the Commission’s Proposal, giving Member States a great room of discretion to devise their own RPT regime (in terms of approval and disclosure requirements) and excepting many important RPTs from the scope of the Directive (or giving the Member States the chance to do so). In the legislative process, Member States also seemed to be mostly concerned with keeping their national regimes intact.
In the article, I attempt to dissect what was behind the hostility of the relevant interest groups against the proposed RPT regime. I provide different possible explanations, ranging from being genuinely concerned about the Commission’s Proposal (which had been met with criticism by academics) to aiming at keeping an important channel of private benefit extraction open for corporate insiders and at curbing competition by raising the cost of capital for the new companies (start-ups) in the equity markets due to weak investor protection. The reasons for the Member States’ and MEPs’ willingness to assuage the concerns of the relevant interest groups can also be various: for example, (i) their concern with the Proposal being unnecessarily stringent, based on the view that functional substitutes on the national level existed that made the EU proposal superfluous (and would only create switching costs); (ii) their belief that little value would be lost by a choice between the Commission’s Proposal and the ultimate RPT rules, which may have made it easier to heed the demands of the business community; or (iii) simply the negligible political consequences of the issue at hand.
Overall, the narrative provided in the article confirms the accounts of how corporate (legal) rules generally develop, namely responding to the market-based incentives (behind the Commission’s Proposal) but yet possibly being affected by political pressures and the divergence in core corporate law solutions across different legal families (as reflected mainly in the fact that during the legislative process civil law jurisdictions viewed MOM approval, which is commonly adopted in the common law world to address conflicts of interest (OECD (2012), p. 33) as incompatible with the well-established allocation of powers within the corporation and with the principle of equal treatment of shareholders (as MOM approval appears to be contrary to it by giving ‘control’ rights to minority shareholders in the case of RPTs (Gutiérrez & Sáez (2017), p. 30))). It also shows that not always will a thorough analysis and lawmakers’ sensitivity towards what is right and appropriate prevail in a legislative process. One cannot help but confirm the view of Otto von Bismarck, the Chancellor of Imperial Germany, who once reputedly said: ‘Laws are like sausages, it is better not to see them being made.’
Alperen Afşin Gözlügöl is a Ph.D. Candidate at the University of Hamburg; firstname.lastname@example.org.