Luca Enriques University of Bologna & ECGI EC Reforms of Corporate Governance and Capital Markets Regulation: How Do They Affect Outside Investors? Luca Enriques University of Bologna & ECGI

Overview A lot is happening in Europe in terms of corporate governance and capital markets reforms, both at the state level and at the EC level. My focus: Recent and current EC corporate and securities law initiatives and their impact on corporate governance: The implementation of the Financial Services Action Plan Post-scandals reaction Modernization of EC and EU company laws Evaluation

But before I start, a disclaimer is required: Enriques (WP, 2005a): “EC company law directives and regulations are trivial for EU companies’ governance and management.” Enriques (WP, 2005b) and Enriques & Gatti (WP, 2006a): “The EC should have almost no role in corporate law making.” Can I provide an unbiased overview of recent EC attempts to centrally regulate company and securities laws? I’ll do my best.

The FSAP and its output The Financial Services Action Plan Integration of EU Capital Markets through uniform law Main provisions relating to corp. governance and capital markets: IAS/IFRS Regulation Market Abuse Directive Prospectus Directive Takeover Bid Directive Transparency Directive

Relevant innovations (1/2) IAS/IFRS Fair Value IAS 24 The Market Abuse Directive: More emphasis on enforcement (investigations, sanctions etc.). But enforcement remains local Very timid with trading disclosure obligations by blockholders How will the prohibition on tipping be construed?

Relevant innovations (2/2) The takeover bid directive Mandatory bid rule (no effective harmonization; already there almost everywhere) Board neutrality rule: optional for Member States Might well lead Member States already adopting it to reconsider it especially after Mittal Steel’s audacious bid for Arcelor

Post scandal initiatives Three “recommendations” on auditor independence on directors’ remuneration on the role of non-executive directors Two directives close to adoption on statutory auditors on corporate governance

The two directives Audits: Mandates PCAOBs Introduces independence requirements Adopts ISAs Mandates audit committees Corporate governance: Mandates corporate governance statement With mild SOA “Section 404” requirement Imposes collective board responsibility for annual accounts

Initiatives to modernize EC and EU company laws Reform of legal capital directive Over-ambitious project on dual-class shares and pyramids Proposal to facilitate exercise of voting rights Cross-border merger directive (facilitating restructurings)

Evaluation (1/2) These are busy times in Brussels for company law policy makers... IFRS (IAS 24) can be important to tackle self-dealing (“sunlight...”) MAD is requiring on managers and condescendant with large shareholders But, if the prohibition on tipping is strictly construed, it also may make life more difficult for dominant shareholders

Evaluation (2/2) Takeover bid directive: if Member States opt out of the board neutrality rule (in reaction to Mittal Steel’s bid), it may lead to more dispersed ownership But the poison pill technology is still missing Post-scandal reforms as “me too reforms” (Hertig)? Stricter regulation of audits: or over-regulation? Cost-benefit balance far from clear Nothing else on self-dealing (hence very little) Rightly so. Any lesson for India?