The COVID-19 pandemic has spread worldwide like wildfire turning from a public health crisis into what appears to be the greatest economic crisis since the Great Depression. In addition to measures aimed at protecting individuals’ health and safety, states around the world have adopted extraordinary measures to mitigate the economic and social impact of the pandemic and support people and businesses. In the attempt to make companies immune to the COVID-19 crisis, special measures in the area of corporate law have also been introduced.
In our recent paper (published in the European Company and Financial Law Review) we identify and analyse corporate law rules adopted in some European states amidst the pandemic, in order to track the major reform trends and consider how corporate law in Europe has adjusted to the emergency. The discussion also sheds light on the potential of some emergency measures to call traditional corporate law rules into question and on what will be the new normal after the crisis.
The analysis focuses primarily on the UK, Germany, France, Italy and Spain; occasionally, depending also on the relevant rules actually introduced by the states, other jurisdictions are considered as well, including Austria, Belgium, the Netherlands, Luxembourg, Portugal, Denmark, Finland, Sweden and Greece. This selection allows to gain a fairly clear sense of the major areas of corporate law that have been affected by the pandemic reforms in Europe.
The paper groups the emergency measures into three main categories. First, rules aimed at facilitating electronic shareholders’ meetings and meetings of the board of directors: containment and social distancing restrictions to prevent gatherings and avoid contagion clearly impact on the ordinary functioning of the corporate bodies, and most European states have thus introduced special provisions in this area, also providing companies with the necessary flexibility to organize shareholder and board meetings and postponing the deadline for holding general meetings, at a time when financial statements are typically approved.
The second category includes rules designed to temporarily relax directors’ duties and liability. A number of states, in fact, gave some leeway to directors as companies operate in survival mode, also to prevent that otherwise viable firms might be forced into liquidation or bankruptcy. More generally, with companies facing an uncertain fate, directors are confronted with unprecedented challenges and uncertainties, and the question arises as to whether the standard of review for director conduct needs to be adapted amidst the pandemic.
Finally, the third category comprises rules aimed at supporting corporate liquidity. As companies have been experiencing deepening liquidity problems following the pandemic outbreak, in addition to state aid liquidity measures, some European states also introduced provisional rules in the area of corporate law to help companies overcome liquidity shortages, and these rules include both measures that limit liquidity outflows and measures aimed at facilitating liquidity inflows.
The analysis shows that, while some points of similarity exist among the emergency rules considered, there are nevertheless numerous differences in their nature, scope, technicalities, and also timing. These differences emphasize a lack of coordination at the European level.
Clearly not all European states introduced measures in all the three categories that we identified, and indeed only a few of the states that we considered enacted more comprehensive reforms: among these are Italy, Spain and Germany—some of the states in Europe most heavily hit by COVID-19.
The vast majority of European states introduced special rules for shareholders’ meetings and, in some cases, also meetings of the board of directors and supervisory board. This is clearly an area that has been impacted by the pandemic outbreak right from the beginning, as confinement and social distancing measures prevented the ordinary functioning of corporate bodies. The reforms aimed at facilitating electronic shareholders’ meetings and, in some cases where enabling rules were needed, also electronic meetings of the board of directors and supervisory board. Deadlines to approve the financial statements have also been postponed. The technicalities of the rules, however, generally differ among states, also as regards the digital tools to use, and this can have an effect on how shareholders can actually exercise their right to attend and participate in shareholders’ meetings. The reforms have had effects on notice requirements for shareholders’ meetings, shareholders’ right to attend the meeting and attendance by proxy, and also introduced limitations on the possibility to challenge resolutions adopted during the pandemic outbreak.
A number of states also introduced special rules to relax directors’ duties amidst the pandemic, as companies face unprecedented challenges and uncertainties. These rules complement the suspension of the duty to file for insolvency proceedings, and they are all intended to give some leeway to directors in continuing operating the business and prevent that otherwise viable firms might be forced into liquidation or bankruptcy. They vary, however, in their nature, ranging from the suspension of wrongful trading liability in the UK, to the exemption from liability for payments made in the ordinary course of business in Germany, the suspension of the ‘recapitalize or liquidate rule’ in Spain and Italy, and also the introduction of a going-concern presumption in Italy. These measures generally apply regardless of whether companies have actually been affected by the COVID-19 outbreak, except for Germany, where a COVID-19 qualifier was introduced, as discussed in our paper. No countries introduced reliefs from liability for negligence, nor does such a relief seem justified: despite the extraordinary circumstances and the fact that imperfect information prevails given the unprecedented uncertainties, the focus needs to remain on procedural due care when reviewing directors’ conduct.
When it comes to corporate law rules aimed at supporting companies’ liquidity by limiting liquidity outflows, it should be noted that virtually all European states introduced restrictions on distributions to shareholders in relation to companies that benefit from state aid liquidity schemes, but in at least one case a rule of general application has also been introduced, restricting shareholders’ withdrawal rights in Spain. Measures aimed at facilitating liquidity inflows, on the other hand, mainly consist in the suspension of the rule providing for the subordination of shareholders’ loans in systems such as Italy, Germany and Spain. No special measures, by contrast, have been enacted to ease recapitalizations by companies, with the exception of the recommendation made by the Pre-emption Group to relax pre-emptive rights in the UK, and a quite comprehensive reform introduced in Italy. The need for companies to raise equity capital, however, looms large and rules aimed at facilitating new equity injections can prove useful.
The differences in the emergency measures adopted in Europe substantially build on a lack of harmonization at the European level in the underlying areas of corporate law. As global emergencies require global responses, greater convergence, however, is imperative, also to ensure a level-playing field for companies that navigate through the crisis.
More generally, the pandemic appears to set the scene for a unique legal experiment, as it adds momentum to reconsidering some traditional corporate law rules such as the ‘recapitalize or liquidate’ rule but also rules regulating the functioning of shareholders’ meetings, subordination of shareholders’ loans and pre-emptive rights. The COVID-19 emergency has imposed exceptional measures. Some of these measures have already turned into permanent rules, such as for the exemption from liability for directors for payments made in the ordinary course of business in Germany, while other measures have been recently extended, as in the case of the suspension of the ‘recapitalize or liquidate rule’ in Italy, that can now be applied for five years to losses arisen in the 2020 financial year. Time will tell to what extent COVID-19 will be capable of reshaping traditional corporate law rules.
Angelo Borselli is a postdoctoral researcher in business and corporate law, Bocconi University, Milan, Italy.
Ignacio Farrando Miguel is a professor in business and company law at Pompeu Fabra University, Barcelona, Spain.