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E-MailProponents of the global shareholder activism movement have recently praised the EU for generously empowering shareholders through the so-called Shareholder Rights Directive (“SRD”) (Directive 2007/36/EC). A year after the deadline for the transposition of the SRD into national corporate laws an article in the current issue of European Company Law entitled Is the EU Taking Shareholder Rights Seriously? An Essay on the Impotence of Shareholdership in Corporate Europe checks what progress has really been made regarding the issue of shareholder involvement in European corporate governance.
The article attempts to show that the deficit in the European corporate governance model with regard to the status of the shareholders persists even in the post-SRD era and that there is still a long distance to be covered in order to truly empower shareholders in the EU. The deficiencies of the past in shareholder governance have not been cured by the SRD, while the latter does not interact satisfactorily with the existing EU and national legal framework in order to unfetter shareholders from the mechanisms that restricted their active engagement. European corporate law is still captive of an ideology that wants other corporate constituencies to be protagonists in corporate affairs.
First of all, the sterilization of the shareholder voting right in Europe is examined. The SRD is accused of introducing a dysfunctional “pull” system of dissemination of pre-meeting information that does not tackle the well-documented problem of shareholder passivity. In turn, the problem of tight record and “cut-off” dates is examined. It is concluded that sufficient time is not allowed for the voting entitlements and the voting instructions to travel up the chain of financial intermediaries that stand between the end investor and the corporation and as a result many shareholders are effectively disenfranchised.
The second broader issue examined in the article is the role of the proxy advisors in corporate governance. Proxy advisory firms without having a stake in the corporation are able to influence the outcome of the vote and tend to endorse director liability discharge proposals that serve to entrench management. It is suggested that the proxy advisory industry essentially functions in a regulatory vacuum that renders it accountable to no one, thus introducing an additional layer of agency costs in corporate governance. The role of creditors, who at the same time act as share custodians, in voting blank proxies in European firms is also analyzed. It is suggested that in the modern corporate world share ownership is effectively sterilized and cannot even begin to germinate if a serious effort is not made to regulate all those service providers, such as proxy advisors, credit-rating agencies, share custodians, and voting agents, who without having a stake in the firms affected by their activities, they effectively pull the strings of corporate governance.
Furthermore, the article examines the legal barriers to shareholder activism in Europe by explaining that despite the SRD provisions shareholders of European firms face a procedural deadlock in their effort to put items on the general meeting’s agenda due to a defective system of intra-shareholder communication that does not allow them to identify one another and coordinate in order to meet the threshold required to exercise this right. In addition to this, by having recourse to the Takeover Directive the legal risks that accompany the initiation of proxy solicitations –a powerful tool in a shareholder activist’s arsenal- are considered.
Finally, the article attempts a brief analysis of the blocked avenues of corporate litigation in Europe. Four European-specific reasons, for which corporate litigation is so under-developed in Europe are identified: (i) shareholders are required to hold a minimum amount of shares in order to be granted standing to file a suit; (ii) the rules regulating litigation costs are unfavorable to the shareholders; (iii) end investors are not provided with standing for filing a suit; and (iv) multiple derivative suits are not allowed to prevent abuses in corporate groups.
The full paper is available for download here.
One Comment
So good that Pavlos E. Masouros of Leiden University has revisited the EU Shareholder Rights Directive (“SRD”) a year later and how sad that his findings show that it is in name only. Considering the language of “effectively sterilized and cannot even begin to germinate if a serious effort is not made to regulate all those service providers” to understand the depth of this failure. It is true that when the strings of corporate governance are controlled by proxy advisors, credit-rating agencies, share custodians, and voting agents, then truly the rights of the shareholders invested in the companies have a ways to go. Of course with the SRD provisions and a defective system of intra-shareholder communication; it seems like the true rights won’t be restored any time soon.