Corporate Governance and Corporate Group Law: Difference between pages

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by ''[[Klaus J Hopt]]''
by ''[[Brigitte Haar]]''


== 1. The concept and the international development of corporate governance ==
== 1. Coverage and background ==


Corporate governance, its concept and its problems was first discussed and developed extensively in the United States and in Europe, primarily in the United Kingdom. From there, corporate governance has made its way victoriously through all modern industrialized countries. Contributions to and research projects on this topic can be found all over the world. A European Corporate Governance Network was founded in 1995 with its seat in Brussels (the name was later changed to the European Corporate Governance Institute, ECGI). Since 2009 it has had its seat in Luxembourg and counts numerous researchers among its global members, primarily from law and economics, as well as many practitioners and companies. In the meantime, corporate governance has also become a topic of paramount importance in the practice of stock exchanges, banks, industrial associations and even parliaments in various countries. In many countries, far-reaching reforms of the company, auditing, stock exchange and capital market laws have been enacted in the last decade or are about to be enacted. All are meant to improve national corporate governance either directly or indirectly.
Corporate group law covers issues of protection and organization, especially those of corporate law as they are relevant to all forms of company alliances. As a sub-discipline of company law, it touches on a broad range of economically important legal fields, such as tax law, group law referring to [[Accounting|accounting]] and auditing, competition law and the [[Takeover Law|takeover law]] as well as insolvency law ([[Insolvency (Corporate)|insolvency (corporate)]]). Its subject matter is affiliations of enterprises which are composed of several independent components that are integrated under the unitary control of a dominant enterprise. The determinants of a corporate group, in particular in the case of a vertical integration, are the notion of control and the dominant influence of one company over another subsidiary company. Economically speaking, the group organization is usually based on endeavours for improved organizational flexibility, rationalization, synergy effects and fiscal advantages. As soon as one company is subjected to the unitary control of another, the company policy as well as its business perspectives are left up to the dominant company. The resulting dangers for minority shareholders and the creditors of the subsidiary are addressed by corporate group law.


The problem has already been aptly described in 1776 by Adam Smith in his famous book entitled ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ as follows: “The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” In modern terminology, this is the principal-agent conflict between the shareholders and management.  
Notwithstanding these regulatory needs, there is little historical background in the field of corporate group law as a whole. With the exception of Germany and Portugal as well as partial codifications in Slovenia, the Czech Republic and Hungary, neither the other Member States nor the [[European Community]] have a codified, much less a harmonized corporate group law despite its decades long development in German case law and scholarship. Since the formation of cartels was generally allowed in Germany, corporate concentration was spreading and soon after World War II the opinion prevailed that regulatory reform was indeed necessary. After the German Corporation Act of 1937 had been limited to regulations on affiliation agreements, only the German Corporation Act of 1965 provided for group-specific, albeit fragmentary, regulations. Regardless of remarkable developments in German legislation and doctrine over the course of the decades, a codified or even harmonized group law is missing in the remaining European countries. On the European scale the initial target was maximum harmonization, but without success. The original constitution of the [[European Company (Societas Europaea)|European Company (''Societas Europaea'')]] provided for creditor and minority protection. In addition, the [[European Commission]] suggested a regulation of group law in two preliminary drafts of [[Directive|directives]] (Preliminary Draft of a Group Law Directive, part I of 1974, part II of 1975; Preliminary Draft of the Ninth Directive of 1984 (Group Law Directive)).


== 2. Internal and external corporate governance ==
== 2. Legal development ==


At first glance, it might seem that corporate governance is just a problem of the legal organization of the public company, and indeed, the original thrust of the corporate governance movement in the United States was directed towards the role, duties and liability of the directors of the corporation. The code of conduct movement, too, which essentially originated in the United Kingdom, had its focus on recommendations for the board of directors, its committees and its control by the auditors. This is also true in Germany for the German Corporate Governance Code (DCGK). Apart from some recommendations on the rights of the shareholders and the general meeting, it deals mainly with the management board and the supervisory board. Yet in the modern international corporate governance discussion, it is accepted that apart from internal corporate governance, there is also an important role to be played by external corporate governance, ie corporate governance forces exercised by pressures of the market, in particular, but not only, by the market for corporate control.
Even without a codified group law, the [[Conflicts of Interest|conflicts of interest]] occurring within a corporate group require legal regulation. In the UK in particular, group conflicts are continuously dealt with by means of conventional instruments of private and [[Company Law|company law]]. In the remaining Member States, group law is similarly restricted to narrowly defined company law cases. This touches upon the formation of a corporate group that is regulated by [[Takeover Law|takeover law]] and is thus the beneficiary of fundamentally important minority shareholder protections as well as on the general complex of group law problems that are predominantly resolved with the help of the basic instruments of private and company law. In Italy, rules specifically regulating questions of group law were implemented in Art 2497-2497-''sexies ''[[Codice Civile|''Codice civile'']] in the course of the reform of company law. Besides enhanced transparency, they provide for minority shareholder indemnification in cash (Art 2497-''quarter Codice civile'') as well as the liability of the parent company in case of a violation of the best interests of the group of companies (Art 2497 ''Codice civile'').


Internal corporate governance is mainly concerned with the rules for management and the control organ(s) of the company. In the modern Berle Means Corporation, ownership and control are separated. In the German stock corporation, the shareholders have placed the management into the hands of the management board and the control into the hands of the supervisory board. Yet on the international scene this is rather a path-dependent exception. In the countries of the Anglo-American legal family, but also in Switzerland and many other countries, there is only one board (monistic or one-tier board system), though there is a distinction in it between executive and non-executive, often independent, directors. This implies that a choice given to the shareholders between the two systems may be better than the legislature mandating one system or the other ([[board).
The pan-European approach towards implementing a European corporate group law on the basis of a twofold harmonization was ineffective. Thus, the regulations of the [[European Company (Societas Europaea)|European Company (''Societas Europaea'')]] specifically relating to corporate groups have not found their way into the regulation proposal of 1989. The Ninth Directive of 1984/85 (Group Law Directive), which had been geared towards the law of affiliated companies in a broader sense, also ended in failure. Instead, in their discussion in the ''Forum Europaeum ''Corporate Group Law, European legal scholars have devoted their attention to the regulation of single group-specific conflicts of interest working along a building block principle, without setting the German model as the standard. This universal approach becomes clear from the specific regulatory core underlying the discussion and determining its outcome. Some proposals are strongly characterized by capital market law such as the obligatory offer and appraisal rights. The latter are rooted in English law, which in turn is more closely centred on the capital market. In part, following the discussions of the High Level Group of Company Law Experts, these ideas have made their way into the Action Plan of 2003 and have become European Law. Despite this development, the importance of a pan-European group law and its harmonization could arguably face a period of future decline. This could be due to an increasing [[Competition between Legal Systems|competition between legal systems]] in light of the case law of the [[European Court of Justice (ECJ)]] ECJ Case C-221/97 – ''Centros Ltd v Erhvervs- og Selskabsstyrelsen ''[1999] ECR I-1459; ECJ Case C-208/00 – ''Überseering BV v Nordic Construction Co Baumanagement GmbH (NCC)'' [2002] ECR I-9919;'' ''ECJ Case C-167/01 – ''Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd'' [2003] ECR I-10155) as well as to the systematic differences and convergences of company law. Harmonization has lately been superseded by case law of the ECJ that has to some extent developed group law. In its decisions the court has more precisely stated important requirements for a level playing field in the internal market on the basis of the European [[Fundamental Freedoms (General Principles)|fundamental freedoms]]. These decisions deal with cross-border changes of the corporate form (ECJ Case C-411/03 – ''SEVIC Systems AG ''[2005] ECR I-10805), with ''golden shares'' as controlling interests in a corporate group often being held by a government organization (ECJ Case C-483/99 – ''Commission v France ''ECR I-4781; ECJ Case C-503/99 – ''Commission v Belgium ''[2002] ECR I-4809; ECJ Case C-463/00 – ''Commission v Spain ''[2003] ECR I-4581; ECJ Case C-98/01 – ''Commission v United Kingdom'' [2003] ECR I-4641; ECJ Case C-112/05 – ''Commission v Germany ''[2007] ECR I-8995; ECJ Case C-171/08 – ''Commission v Portugal ''[2010]; ECJ Case 543/08 – ''Commission v Portugal ''[2010]) as well as with the taxation of corporate groups (first guiding decision in ECJ Case C-446/03, ''Marks & Spencer v David Halsey (Her Majesty’s Inspector of Taxes) ''[2005] ECR I-10837). As has become clear in the subsequent decision of the ECJ in ''CARTESIO Oktató és Szolgáltató bt ''(ECJ Case C-210/06 [2008] ECR I-9641), an important part of necessary regulation is still missing for the achievement of the level playing field in respect of restructuring and mobility of companies: how to address business relocation. If the Commission’s plan for realizing the free relocation of companies’ places of management is to be implemented, the work on the Proposal for a 14th European Parliament and Council Directive on the transfer of the registered office of a company from one Member State to another with a change of applicable law of 20 April 1997 will have to be pursued further. Even so, the European Court of Justice has provided the essential parameters of a European corporate group law in its case law. It is characterized by harmonization in some core areas of law and for the rest by a [[Competition between Legal Systems|competition between legal systems]]. The latter particularly will increase in importance if the efforts of the European Commission to implement subsidiarity and deregulation as guiding principles of European company law subsist.


On the other hand, the different shareholder structures in the various countries play an important role. In the United States and the United Kingdom, public companies are without major shareholders (the outsider model) as a rule, while in continental European countries the norm is rather companies with blockholders, family companies or companies with a controlling shareholder either within or outside of a group of companies (the insider model). In the latter cases, the principal-agent conflict between the shareholders and the management is much less important than the conflict between the minority shareholders (in the group they are also called outside shareholders) and the controlling shareholder. In such cases, the corporate governance problems are fundamentally different, as reflected in the subject matter of the economic and international discussion today. Of course, there are also transition phenomena, and the question then is whether a transition from one system to the other is possible without destabilizing the system as a whole.
== 3. Conflicts of interest ==


In the United Kingdom, in Germany and internationally, disclosure and auditing are indispensible parts or building blocks of all corporate governance systems. Disclosure in its various legal forms is important, particularly if it is audited, for it provides the market participants with important information for their investment and disinvestment decisions. Disclosure, even mandatory, is a less far-reaching regulatory intervention than a substantive, mandatory legal rule. It conforms more to the play of the market and to a market economy. Disclosure and auditing belong closely to the modern company, but since auditors must be independent they cannot be considered organs of the company. Both disclosure and auditing stand somewhere in between internal and external corporate governance. The auditors belong to the category of ‘gatekeepers’ with a particularly important role.
=== a) Intra-group conflicts ===


The most important external corporate governance—apart from banks, stock exchanges, the capital market and labour co-determination in the board—is the market for corporate control. As a rule, takeovers are useful because they are a means of furthering the use of synergies as well as an instrument of control of the management of the (target) companies with dispersed ownership, particularly if they are listed. This is not to say that takeover bids are always advantageous for all (or even only one) of the parties involved. The stock price of the bidder goes down in most cases, and the shareholders of the target may face the insertion of their company into a group or sometimes even the danger of looting. The development of a level playing field for takeover bids is an aim for the internal market ([[European Internal Market|European internal market]]) within the [[European Union]]. But this must not lead to a reduction of competition, as many economists fear occurs when the quest for a level playing field is made. On the contrary, the conditions and framework rules for a well-functioning market for corporate control within the internal market should be furthered. In order to reach this aim, the obstacles to takeovers—even hostile takeovers—should be reduced within all Member States. Corporate governance rules to this effect are part of the [[Takeover Law|takeover law]].
The developments outlined above cast an important light on the essential point of departure for the regulatory structures in European corporate group law that have been conceived on the basis of the company laws of the Member States and that are therefore strongly characterized by them. Also in the absence of corporate group law, problems specific to group law are resolved with the help of company and corporate law rules in the Member States. This becomes immediately apparent with regard to the consolidation of a group, a process which, in all states other than Germany, is viewed in terms of the exercise of control. Thus, in these jurisdictions direct reference is made to the majority of shareholder votes. The alternative rule under German law, on the other hand, declares the dominating influence the determining factor. This influence has to be conveyed via organizational structures but can sometimes add up to a dominating influence thanks to further circumstances, such as a continuously low presence of other organizational stakeholders at the shareholder meeting. This structural difference continues with respect to the process of consolidation. In addition to the mere acquisition of the majority interest, German corporate group law requires a controlling agreement according to § 291 of the German Corporation Code that is unknown as such in the other Member States. It is marked by organizational legal structures which provide the adequate legal framework for corporate groups to act and to constitute themselves as groups in German law. For the management of the group it is important to note that such a controlling agreement justifies detrimental directions by the dominating company.


== 3. European law and convergence of the national corporate governance laws ==
If there is no dominating agreement, under the law of the other Member States as well as under the German law of the de facto group, the controlling company is restrained from initiating any violation of the interests of the subsidiary. Despite the obligations of management to safeguard interests of the subsidiary company, the necessity of an alignment of interests according to the group’s interests cannot be completely ignored. Even though a potential primacy of the group interest has long been rejected in German group law, the direction and supervision of subsidiaries in the group interest have meanwhile increased in importance in the European discussion with a view to the second step of the European Commission’s Action Plan of 21 May 2003. This is based on proposals of the ''Forum Europaeum'' in favour of a consideration of group interests that are rooted in the ''Rozenblum''-Doctrine in French law, derived from a decision of the French ''Cour de Cassation'' of the same name (Cass Crim 4 February 1985, Rev Soc 1985, 648). According to this doctrine, primacy of the group interest requires the consolidation of the corporate group, the pursuit of a coherent company policy, as well as an equilibrium between advantages and disadvantages within the group.


There is much controversy whether and, if so, to what degree corporate governance rules should be harmonized on the European level or whether they should be left to national legislation and regulation. This is not just a question of subsidiarity, as laid down in European Union law, but also a question as to the right level of law- and rule-making, both economically and politically. The latter question goes to the very root of regulation theory and European legal policy and ranks among its most controversial issues. Economists usually tend to prefer competition between legislatures and rulemakers ([[Competition between Legal Systems|competition between legal systems]]), while lawyers and law professors usually prefer harmonization. The European Union has followed different attitudes regarding this over the years (including maximum harmonization, full recognition, minimum harmonization, core regulation, deregulation, best regulation). We cannot go deeper into this here. Yet in any case, the burden of proof should be with those who plead for European harmonization, since harmonization is only justified if two conditions can be convincingly demonstrated as fulfilled: first, that regulatory intervention by the legislature into the corporate governance is legitimate—eg because of market failure or external effects or the necessity to implement the political decision in favour of creating and maintaining an internal market—and secondly, that, in order to be successful, the intervention must be on the European level since intervention on the Member State level is not sufficient. Even in the latter case, this usually does not lead to an either/or situation, but to a mutual complementation of European and national corporate governance rules in which the former constrains itself to framework rules, core problems or building blocks of regulation. Whether the scale leans towards one or the other side in the long run depends on many economic and political conditions and is hard to predict.
=== b) Liability issues ===


Even apart from European rules, there is a clear development towards more convergence of company law and corporate governance that is driven by market forces. In the United States some authors have even proclaimed the ‘end of the history of corporate law’. From a European perspective this appears to be utopian, but it is true that despite all the peculiarities and path-dependencies of the national corporate governance systems, there is a clear movement towards convergence, also as far as corporate governance is concerned.  
Liability issues are closely related to the question of compensation for harm resulting from directions of the management which further the group interest but are detrimental to the subsidiary. In this context, the concept of strict structural liability has to be distinguished from the idea of liability for conduct. In the first case liability is incurred without more by shareholder structure, whereas in the second case liability results from the parent company’s conduct. A universal structural liability which ultimately would come close to the concept of the corporate group as an organizational entity has not been able to prevail on the pan-European scale. Instead, group liability law in the Member States as well as in the European Union law features elements of liability for conduct. The liability of the parent company correlates with the violation of duties of conduct by the management. This second approach ascribing liability for conduct has already been reflected by Arts 9 and 10 of the Preliminary Draft of the Ninth Company Law Directive of 1984 (Group Law Directive). It has become particularly clear in the proposals on management duties during a crisis as forwarded by the ''Forum Europaeum'' and the High Level Group as well as those in the Action Plan. In this matter the discussion is also not leaning towards a structural corporate veil piercing approach, but has since the ''Forum Europaeum'' supported an analogy to the English rules of ''wrongful trading'' or, alternatively, to the French and Belgium ''action en comblement du passif'', all of which have elements similar to liability for unduly delaying insolvency proceedings. With regard to insolvency, the question of international jurisdiction is of special relevance as it predetermines the law applicable to cross-border insolvency (''lex fori concursus'' according to Art 4 of the Council Regulation on Insolvency Proceedings; [[Insolvency, Cross-Border|insolvency, cross-border]]).


== 4. European rules for internal corporate governance ==
Further instruments for the protection of minority shareholders in the process of group consolidation such as the parent company’s squeeze-out rights as well as the minority shareholders’ sell-out and appraisal rights in case of dissociation are by now common ground in the Member States because of the Takeover Directive ([[Takeover Law|takeover law]]).


European rules for internal corporate governance can be found in European [[Company Law|company law]]. It is true that this law does not reach as far as the European stock exchange law ([[Exchanges|exchanges]]) and [[Capital Markets Law|capital markets law]], as illustrated by the dire fate of the 5th Structure Directive and the plans for a 9th Directive on group law, both of which have been abandoned by the [[European Commission]]. Yet it must be recorded that European company law is important, for its extent as well as its content. The assertion that European company law is trivial is a misperception. As to the details and legal sources of the European company law directives, [[Company Law|company law]], [[Stock Corporation|stock corporation]] and [[Mandatory Disclosure (Securities Markets)|mandatory disclosure (securities markets)]].
== 4. Harmonization projects ==


In its Action Plan of 21 May 2003, the European Commission rightly placed corporate governance in the middle of its agenda. This is already shown by the title of the Action Plan, ‘Modernizing Company Law and Enhancing Corporate Governance in the European Union—a Plan to Move Forward’. The short-term measures envisaged therein have already been implemented by various directives and recommendations. For example, this is true for the enhanced corporate governance disclosure requirements and confirmation of collective responsibility of board members for financial and key non-financial statements in the annual report, as mandated by Dir 2006/46 of 14 June 2006. According to this directive, a company whose securities are admitted to trading on a regulated market shall include a corporate governance statement in its annual report (corporate governance report), and board members are liable if they do not draw up and publish this report. In Germany this has been transposed by the balance sheet reform of 2009 and has led to a marked strengthening of Art 161 of the Stock Corporation Act concerning the company’s declaration as to whether and how far it follows the German Corporate Governance Code (as to the latter, [[Private Rule-Making and Codes of Conduct|private rule-making and codes of conduct)]].
=== a) Approaches towards a fully-fledged harmonization ===


Directive 2007/36 of 11 July 2007 on the exercise of voting rights by shareholders of companies having their registered office in a Member State and whose shares are admitted to trading on a regulated market provides for better communication of the company with the shareholders and makes the taking of shareholder resolutions easier (including participation in the shareholder meeting by electronic means and the asking of questions). It facilitates the exercise of voting rights by proxy voting and other means of voting, including the exercise of voting rights across the borders.
The development of a European corporate group law is closely tied to the development of European corporate law. In this context, the European Commission made several attempts to harmonize corporate group law which continued through the 1980s. In the beginning the directive proposal for the [[European Company (Societas Europaea)|European Company (''Societas Europaea'')]] of 1970 provided for the constitution of a corporate group along organizational lines. It failed just as did the 1989 directive proposal for the European Company (''Societas Europaea'') without corporate group law provisions. The equally unsuccessful second preliminary draft of a Ninth Directive of 1984 (Group Law Directive) had already adopted the distinction between contractual groups, integration and de facto groups instead of the concept of an organizational constitution of the corporate group. In view of the failure of a fully-fledged harmonization, the following regulations are marked by their merely fragmentary, field- and sector-specific character. The law of the European Company (''Societas Europaea'') has remained incomplete with regard to corporate group law because the Council Regulation on the Statute for a European company of 8 October 2001 (SE-Council Regulation, Reg 2157/2001) did not include provisions of corporate group law that were tied to legal form – such as still had been the case in the directive proposals of 1970 and 1975. Nevertheless, the ''Societas Europaea'' still shapes some of the content of corporate group law. Its function of providing a legal form for Europe-wide operating companies to, namely, enter into cross-border affiliations, transfer their seats of business and establish international holdings has turned out to be very important for corporate group law in business practice.


Recommendation 2004/913 of 14 December 2004 concerning the remuneration of directors of listed companies deals with a topic that has lately become of particular concern to the public. According to this recommendation, the remuneration policy of the company must be disclosed and the general meeting of the shareholders should have a say, either mandatory or advisory, on the pay policy. To the great disappointment of the European Commission, Germany and most other Member States did not follow the pay recommendation. Therefore, and under the impression of the international critique of excessive manager remuneration, the Commission published a complementary recommendation on 30  April 2009 ([[Board|board]]).
=== b) Group- and industry-specific regulation ===


The role of independent non-executive directors is dealt with in Recommendation 2005/162 of 15 February 2005 on the role of non-executive directors of listed companies and on the committees of the board. According to this recommendation, the roles of the chairman and chief executive should be separate and the chief executive should not immediately become chairman of the board. This is particularly relevant for Germany where this is quite common and was even practised by the late chairman of the German Corporate Governance Code Commission himself in his company. If the company does not follow the recommendation, it must at least publish information on any safeguards put in place. Furthermore, the companies (with the exception of small and medium companies) must establish a nomination, remuneration and audit committee in which the majority of the members must be independent. The recommendation—and in particular its Annex II—contains far-reaching details on what independence means. While in the end it is up to the board to determine whether a particular board member should be considered independent, the full transposition of the recommendation would have grave consequences for Germany and other countries having a majority of companies in which there are controlling shareholders or which are subject to quasi-parity labour co-determination. For more information, [[Board|board]].
In addition to these rules tied to legal form, the field of [[Accounting|accounting]] and auditing law relating to corporate groups has to be mentioned. It has been harmonized in several directives. For the consolidated financial statements the Seventh Directive on consolidated accounts (Dir 83/349) applies. In addition, the IAS-Regulation (Reg 1606/2002) that prescribes the International Accounting Standards for consolidated group accounts of all listed corporate groups sets further essential specifications.


The formation of an audit committee is mandated for certain companies by Dir 2006/43 of 17 May 2006. Each public interest entity must have an audit committee. Public interest entities are entities governed by the law of a Member State whose transferable securities are admitted to trading on a regulated market of a Member State as well as credit institutions and insurance undertakings. At least one member of the audit committee must be independent and shall have competence in accounting and/or auditing.
Finally, as a third important field of harmonization in European corporate group law the sector-specific group law has to be noted. It provides for specific regulations for banks, insurance companies and investment firms to ensure a consolidated European supervision over financial services enterprises in the [[European Banking Market|European banking market]] and in the internal market in insurance ([[Internal Market (Insurance)|internal market (insurance)]]). To this end, in the field of banking the Banking Law Directive of 20 March 2000 (Dir 2000/12) and in the insurance sector the Directive on the supplementary supervision of insurance undertakings in an insurance group (Dir 98/78, Solvency II) apply. A comprehensive European one-stop financial services group law has finally been included in the regulations on the supervision of financial conglomerates in the Financial Conglomerates Directive of 2002 (Dir 2002/87).
 
The further measures envisaged in the Action Plan were halted by the European Commission under Commissioner McCreevy. They concern, inter alia, enhanced [[Disclosure|disclosure]] by institutional investors of their investment and voting policies; choice for all listed companies between two types (monistic/dualistic) of board structures; and enhancing the responsibilities of board members (special investigation rights, wrongful trading rule, director’s disqualification). Against the advice of experts, Commissioner McCreevy also pushed an approach of full shareholder democracy (one share/one vote), at least for listed companies. Yet he foundered miserably with this ill-prepared plan and fell to the other extreme by not taking any further corporate governance measures as envisaged in the Action Plan. This has been rightly criticized by European experts and the [[European Parliament]].
 
== 5. European rules for external corporate  governance ==
 
The 13th Directive of 21 April 2004 on takeovers (Dir 2004/25) belongs to the most important measures for external corporate governance. The adventurous story of this directive’s genesis, its content and its relevance are described in [[Takeover Law|takeover law]].
 
Further elements may have a positive effect on corporate governance from the outside of the company. This is particularly true for disclosure requirements that lead to more transparency regarding the company and its actual corporate governance and that give more information relevant for investors and possible bidders. In European [[Company Law|company law]] and [[Capital Markets Law|capital markets law]] there are many disclosure rules, quite apart from the periodic disclosure contained in the annual accounts and group accounts. For example, they concern the mandatory corporate governance statement, the obligations relating to the information to be published when a major holding in a listed company is acquired or disposed of, and the obligation of issuers of financial instruments to inform the public as soon as possible of inside information that directly concerns these issuers.


==Literature==
==Literature==
American Law Institute, ''Principles of Corporate Governance'':'' Analysis and Recommendations'' (1994); Klaus J Hopt and others (eds), ''Comparative Corporate Governance'':'' The State of the Art&nbsp;and Emerging Research'' (1998); Susanne Kalss, ''Anlegerinteressen'':'' Der Anleger im Handlungsdreieck von Vertrag'','' Verband und Markt'' (2001); Paul Frentrop, ''History of Corporate Governance 1602–2002'' (2002); High Level Group of Company Law Experts, Report on Issues Related to Takeover Bids (Report&nbsp;I) and A Modern Regulatory Framework for Company Law in Europe (Report&nbsp;II), Reports of the High Level Group of Company Law Experts, European Commission, Brussels, 10&nbsp;January 2002 and 4&nbsp;November 2002, also available in Guido Ferrarini, Klaus J Hopt, Jaap Winter and Eddy Wymeersch (eds), ''Reforming Company and Takeover Law in Europe'' (2004) Annex&nbsp;2, 825 and Annex&nbsp;3, 925; Klaus J Hopt, Eddy Wymeersch, Hideki Kanda and Harald Baum (eds), ''Corporate Governance in Context'':'' Corporations'','' States'','' and Markets in Europe'','' Japan'','' and the US'' (2005); Klaus J Hopt and Eddy Wymeersch (eds), ''European Company and Financial Law'','' Texts and Leading Cases'' (4th&nbsp;edn, 2007); Patrick C Leyens, ‘Corporate Governance: Grundsatzfragen und Forschungsperspektiven’'' ''(2007) JZ 1061; Henrik-Michael Ringleb, Thomas Kremer, Marcus Lutter and Axel von Werder, ''Deutscher Corporate Governance Kodex'' (3rd&nbsp;edn, 2008); Klaus J Hopt, ‘Gemeinsame Grundsätze der Corporate Governance in Europa?’ [2009] ZGR 779.</div>
Paola Balzarini, Giuseppe Carcano and Guido Mucciarelli&nbsp;(eds), ''I&nbsp;Gruppi di Società'','' Atti del Convegno internazionale di studi'','' Venezia'','' 16-17-18 novembre 1995'','' vol&nbsp;I'' (1996); Forum Europaeum Konzernrecht, ‘Corporate Group Law for Europe’ (2000) 1 EBOR 165; Josè Engrácia Antunes,'' Os Grupos de Sociedades'' (2nd&nbsp;edn, 2002); Klaus&nbsp;J Hopt, Christa Jessel-Holst and Katharina Pistor&nbsp;(eds), ''Unternehmensgruppen in mittel- und osteuropäischen Ländern'' (2003); José Miguel Embid Irujo,'' Introducciòn al Derecho de los Grupos de Sociedades'' (2003); Susanne Kalss and Friedrich Rüffler&nbsp;(eds), ''GmbH-Konzernrecht im österreichischen'','' slowenischen und italienischen Recht'' (2003); High Level Group of Company Law Experts, ‘A Modern Regulatory Framework for Company Law in Europe, Report for the Commission, 4&nbsp;November 2002 (Report&nbsp;II)’ in Guido Ferrarini, Klaus&nbsp;J Hopt, Jaap Winter and Eddy Wymeersch&nbsp;(eds), ''Reforming Company and Takeover Law in Europe'' (2004) Annex&nbsp;3, 925; Klaus&nbsp;J Hopt,'' ''‘Konzernrecht: Die europäische Perspektive’ (2007) 171 ZHR 199; Paola Fasciani,'' ''‘Groups of Companies: The Italian Approach’ (2007) 4 ECFR 195; Maggie Pariente,'' ''‘The Evolution of the Concept of “Corporate Group” in France’ (2007) 4 ECFR 317.</div>




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Latest revision as of 18:39, 5 June 2025

by Brigitte Haar

1. Coverage and background

Corporate group law covers issues of protection and organization, especially those of corporate law as they are relevant to all forms of company alliances. As a sub-discipline of company law, it touches on a broad range of economically important legal fields, such as tax law, group law referring to accounting and auditing, competition law and the takeover law as well as insolvency law (insolvency (corporate)). Its subject matter is affiliations of enterprises which are composed of several independent components that are integrated under the unitary control of a dominant enterprise. The determinants of a corporate group, in particular in the case of a vertical integration, are the notion of control and the dominant influence of one company over another subsidiary company. Economically speaking, the group organization is usually based on endeavours for improved organizational flexibility, rationalization, synergy effects and fiscal advantages. As soon as one company is subjected to the unitary control of another, the company policy as well as its business perspectives are left up to the dominant company. The resulting dangers for minority shareholders and the creditors of the subsidiary are addressed by corporate group law.

Notwithstanding these regulatory needs, there is little historical background in the field of corporate group law as a whole. With the exception of Germany and Portugal as well as partial codifications in Slovenia, the Czech Republic and Hungary, neither the other Member States nor the European Community have a codified, much less a harmonized corporate group law despite its decades long development in German case law and scholarship. Since the formation of cartels was generally allowed in Germany, corporate concentration was spreading and soon after World War II the opinion prevailed that regulatory reform was indeed necessary. After the German Corporation Act of 1937 had been limited to regulations on affiliation agreements, only the German Corporation Act of 1965 provided for group-specific, albeit fragmentary, regulations. Regardless of remarkable developments in German legislation and doctrine over the course of the decades, a codified or even harmonized group law is missing in the remaining European countries. On the European scale the initial target was maximum harmonization, but without success. The original constitution of the European Company (Societas Europaea) provided for creditor and minority protection. In addition, the European Commission suggested a regulation of group law in two preliminary drafts of directives (Preliminary Draft of a Group Law Directive, part I of 1974, part II of 1975; Preliminary Draft of the Ninth Directive of 1984 (Group Law Directive)).

2. Legal development

Even without a codified group law, the conflicts of interest occurring within a corporate group require legal regulation. In the UK in particular, group conflicts are continuously dealt with by means of conventional instruments of private and company law. In the remaining Member States, group law is similarly restricted to narrowly defined company law cases. This touches upon the formation of a corporate group that is regulated by takeover law and is thus the beneficiary of fundamentally important minority shareholder protections as well as on the general complex of group law problems that are predominantly resolved with the help of the basic instruments of private and company law. In Italy, rules specifically regulating questions of group law were implemented in Art 2497-2497-sexies Codice civile in the course of the reform of company law. Besides enhanced transparency, they provide for minority shareholder indemnification in cash (Art 2497-quarter Codice civile) as well as the liability of the parent company in case of a violation of the best interests of the group of companies (Art 2497 Codice civile).

The pan-European approach towards implementing a European corporate group law on the basis of a twofold harmonization was ineffective. Thus, the regulations of the European Company (Societas Europaea) specifically relating to corporate groups have not found their way into the regulation proposal of 1989. The Ninth Directive of 1984/85 (Group Law Directive), which had been geared towards the law of affiliated companies in a broader sense, also ended in failure. Instead, in their discussion in the Forum Europaeum Corporate Group Law, European legal scholars have devoted their attention to the regulation of single group-specific conflicts of interest working along a building block principle, without setting the German model as the standard. This universal approach becomes clear from the specific regulatory core underlying the discussion and determining its outcome. Some proposals are strongly characterized by capital market law such as the obligatory offer and appraisal rights. The latter are rooted in English law, which in turn is more closely centred on the capital market. In part, following the discussions of the High Level Group of Company Law Experts, these ideas have made their way into the Action Plan of 2003 and have become European Law. Despite this development, the importance of a pan-European group law and its harmonization could arguably face a period of future decline. This could be due to an increasing competition between legal systems in light of the case law of the European Court of Justice (ECJ) ECJ Case C-221/97 – Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECR I-1459; ECJ Case C-208/00 – Überseering BV v Nordic Construction Co Baumanagement GmbH (NCC) [2002] ECR I-9919; ECJ Case C-167/01 – Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECR I-10155) as well as to the systematic differences and convergences of company law. Harmonization has lately been superseded by case law of the ECJ that has to some extent developed group law. In its decisions the court has more precisely stated important requirements for a level playing field in the internal market on the basis of the European fundamental freedoms. These decisions deal with cross-border changes of the corporate form (ECJ Case C-411/03 – SEVIC Systems AG [2005] ECR I-10805), with golden shares as controlling interests in a corporate group often being held by a government organization (ECJ Case C-483/99 – Commission v France ECR I-4781; ECJ Case C-503/99 – Commission v Belgium [2002] ECR I-4809; ECJ Case C-463/00 – Commission v Spain [2003] ECR I-4581; ECJ Case C-98/01 – Commission v United Kingdom [2003] ECR I-4641; ECJ Case C-112/05 – Commission v Germany [2007] ECR I-8995; ECJ Case C-171/08 – Commission v Portugal [2010]; ECJ Case 543/08 – Commission v Portugal [2010]) as well as with the taxation of corporate groups (first guiding decision in ECJ Case C-446/03, Marks & Spencer v David Halsey (Her Majesty’s Inspector of Taxes) [2005] ECR I-10837). As has become clear in the subsequent decision of the ECJ in CARTESIO Oktató és Szolgáltató bt (ECJ Case C-210/06 [2008] ECR I-9641), an important part of necessary regulation is still missing for the achievement of the level playing field in respect of restructuring and mobility of companies: how to address business relocation. If the Commission’s plan for realizing the free relocation of companies’ places of management is to be implemented, the work on the Proposal for a 14th European Parliament and Council Directive on the transfer of the registered office of a company from one Member State to another with a change of applicable law of 20 April 1997 will have to be pursued further. Even so, the European Court of Justice has provided the essential parameters of a European corporate group law in its case law. It is characterized by harmonization in some core areas of law and for the rest by a competition between legal systems. The latter particularly will increase in importance if the efforts of the European Commission to implement subsidiarity and deregulation as guiding principles of European company law subsist.

3. Conflicts of interest

a) Intra-group conflicts

The developments outlined above cast an important light on the essential point of departure for the regulatory structures in European corporate group law that have been conceived on the basis of the company laws of the Member States and that are therefore strongly characterized by them. Also in the absence of corporate group law, problems specific to group law are resolved with the help of company and corporate law rules in the Member States. This becomes immediately apparent with regard to the consolidation of a group, a process which, in all states other than Germany, is viewed in terms of the exercise of control. Thus, in these jurisdictions direct reference is made to the majority of shareholder votes. The alternative rule under German law, on the other hand, declares the dominating influence the determining factor. This influence has to be conveyed via organizational structures but can sometimes add up to a dominating influence thanks to further circumstances, such as a continuously low presence of other organizational stakeholders at the shareholder meeting. This structural difference continues with respect to the process of consolidation. In addition to the mere acquisition of the majority interest, German corporate group law requires a controlling agreement according to § 291 of the German Corporation Code that is unknown as such in the other Member States. It is marked by organizational legal structures which provide the adequate legal framework for corporate groups to act and to constitute themselves as groups in German law. For the management of the group it is important to note that such a controlling agreement justifies detrimental directions by the dominating company.

If there is no dominating agreement, under the law of the other Member States as well as under the German law of the de facto group, the controlling company is restrained from initiating any violation of the interests of the subsidiary. Despite the obligations of management to safeguard interests of the subsidiary company, the necessity of an alignment of interests according to the group’s interests cannot be completely ignored. Even though a potential primacy of the group interest has long been rejected in German group law, the direction and supervision of subsidiaries in the group interest have meanwhile increased in importance in the European discussion with a view to the second step of the European Commission’s Action Plan of 21 May 2003. This is based on proposals of the Forum Europaeum in favour of a consideration of group interests that are rooted in the Rozenblum-Doctrine in French law, derived from a decision of the French Cour de Cassation of the same name (Cass Crim 4 February 1985, Rev Soc 1985, 648). According to this doctrine, primacy of the group interest requires the consolidation of the corporate group, the pursuit of a coherent company policy, as well as an equilibrium between advantages and disadvantages within the group.

b) Liability issues

Liability issues are closely related to the question of compensation for harm resulting from directions of the management which further the group interest but are detrimental to the subsidiary. In this context, the concept of strict structural liability has to be distinguished from the idea of liability for conduct. In the first case liability is incurred without more by shareholder structure, whereas in the second case liability results from the parent company’s conduct. A universal structural liability which ultimately would come close to the concept of the corporate group as an organizational entity has not been able to prevail on the pan-European scale. Instead, group liability law in the Member States as well as in the European Union law features elements of liability for conduct. The liability of the parent company correlates with the violation of duties of conduct by the management. This second approach ascribing liability for conduct has already been reflected by Arts 9 and 10 of the Preliminary Draft of the Ninth Company Law Directive of 1984 (Group Law Directive). It has become particularly clear in the proposals on management duties during a crisis as forwarded by the Forum Europaeum and the High Level Group as well as those in the Action Plan. In this matter the discussion is also not leaning towards a structural corporate veil piercing approach, but has since the Forum Europaeum supported an analogy to the English rules of wrongful trading or, alternatively, to the French and Belgium action en comblement du passif, all of which have elements similar to liability for unduly delaying insolvency proceedings. With regard to insolvency, the question of international jurisdiction is of special relevance as it predetermines the law applicable to cross-border insolvency (lex fori concursus according to Art 4 of the Council Regulation on Insolvency Proceedings; insolvency, cross-border).

Further instruments for the protection of minority shareholders in the process of group consolidation such as the parent company’s squeeze-out rights as well as the minority shareholders’ sell-out and appraisal rights in case of dissociation are by now common ground in the Member States because of the Takeover Directive (takeover law).

4. Harmonization projects

a) Approaches towards a fully-fledged harmonization

The development of a European corporate group law is closely tied to the development of European corporate law. In this context, the European Commission made several attempts to harmonize corporate group law which continued through the 1980s. In the beginning the directive proposal for the European Company (Societas Europaea) of 1970 provided for the constitution of a corporate group along organizational lines. It failed just as did the 1989 directive proposal for the European Company (Societas Europaea) without corporate group law provisions. The equally unsuccessful second preliminary draft of a Ninth Directive of 1984 (Group Law Directive) had already adopted the distinction between contractual groups, integration and de facto groups instead of the concept of an organizational constitution of the corporate group. In view of the failure of a fully-fledged harmonization, the following regulations are marked by their merely fragmentary, field- and sector-specific character. The law of the European Company (Societas Europaea) has remained incomplete with regard to corporate group law because the Council Regulation on the Statute for a European company of 8 October 2001 (SE-Council Regulation, Reg 2157/2001) did not include provisions of corporate group law that were tied to legal form – such as still had been the case in the directive proposals of 1970 and 1975. Nevertheless, the Societas Europaea still shapes some of the content of corporate group law. Its function of providing a legal form for Europe-wide operating companies to, namely, enter into cross-border affiliations, transfer their seats of business and establish international holdings has turned out to be very important for corporate group law in business practice.

b) Group- and industry-specific regulation

In addition to these rules tied to legal form, the field of accounting and auditing law relating to corporate groups has to be mentioned. It has been harmonized in several directives. For the consolidated financial statements the Seventh Directive on consolidated accounts (Dir 83/349) applies. In addition, the IAS-Regulation (Reg 1606/2002) that prescribes the International Accounting Standards for consolidated group accounts of all listed corporate groups sets further essential specifications.

Finally, as a third important field of harmonization in European corporate group law the sector-specific group law has to be noted. It provides for specific regulations for banks, insurance companies and investment firms to ensure a consolidated European supervision over financial services enterprises in the European banking market and in the internal market in insurance (internal market (insurance)). To this end, in the field of banking the Banking Law Directive of 20 March 2000 (Dir 2000/12) and in the insurance sector the Directive on the supplementary supervision of insurance undertakings in an insurance group (Dir 98/78, Solvency II) apply. A comprehensive European one-stop financial services group law has finally been included in the regulations on the supervision of financial conglomerates in the Financial Conglomerates Directive of 2002 (Dir 2002/87).

Literature

Paola Balzarini, Giuseppe Carcano and Guido Mucciarelli (eds), I Gruppi di Società, Atti del Convegno internazionale di studi, Venezia, 16-17-18 novembre 1995, vol I (1996); Forum Europaeum Konzernrecht, ‘Corporate Group Law for Europe’ (2000) 1 EBOR 165; Josè Engrácia Antunes, Os Grupos de Sociedades (2nd edn, 2002); Klaus J Hopt, Christa Jessel-Holst and Katharina Pistor (eds), Unternehmensgruppen in mittel- und osteuropäischen Ländern (2003); José Miguel Embid Irujo, Introducciòn al Derecho de los Grupos de Sociedades (2003); Susanne Kalss and Friedrich Rüffler (eds), GmbH-Konzernrecht im österreichischen, slowenischen und italienischen Recht (2003); High Level Group of Company Law Experts, ‘A Modern Regulatory Framework for Company Law in Europe, Report for the Commission, 4 November 2002 (Report II)’ in Guido Ferrarini, Klaus J Hopt, Jaap Winter and Eddy Wymeersch (eds), Reforming Company and Takeover Law in Europe (2004) Annex 3, 925; Klaus J Hopt, ‘Konzernrecht: Die europäische Perspektive’ (2007) 171 ZHR 199; Paola Fasciani, ‘Groups of Companies: The Italian Approach’ (2007) 4 ECFR 195; Maggie Pariente, ‘The Evolution of the Concept of “Corporate Group” in France’ (2007) 4 ECFR 317.

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