1. The Second Company Law Directive and the protection of corporate creditors Diederik BRULOOT ECLE meeting Cologne - 27 September 2012

2. OVERVIEW Second Company Law Directive (2 nd CLD) ‧ Public companies ‧ Creditor protection Latest developments in the 2 nd CLD-debate ‧ Is there still a debate? Possible future approach ECLE meeting Cologne - 27 September 2012

3. 2 nd CLD: IS THERE STILL A DEBATE? 2005-2006 ‣ “Efficient creditor protection in European company law” ‣ Even the Lutter Group concluded: “legal capital does not prevent the insolvency of companies and hence does not afford ultimate protection to creditors” “The balance sheet sets the standard for distribution possibilities, but due to dangers an additional solvency test is required” September 2006 ‣ Directive 2006/68/EC (= Amending Directive) ECLE meeting Cologne - 27 September 2012

4. AMENDING DIRECTIVE Selected topics Baseline of individual amendments Optional character of amendments-- Actual design of amendments-- Contributions in kind ‣ Baseline: no expert report if no added value, BUT ‧ Only 3 specific cases ‧ Only audited accounts ‧ Some member states: expert = auditor only ‧ Re-use option = alternative road, but technical issues ECLE meeting Cologne - 27 September 2012

5. AMENDING DIRECTIVE Share buybacks ‣ Abolishing unnecessary limitations, BUT ‧ Reintroducing (10)%-threshold as an optional rule ‧ =DISHARMONISATION ‧ Art. 19, (v): “the acquisition shall not prejudice the satisfaction of creditors‘ claims” ECLE meeting Cologne - 27 September 2012 GermanyBelgiumNetherlandsUKLuxembourg 10 %20%50% OR 100%-1 100%-1

6. AMENDING DIRECTIVE Financial assistance ‣ Replacing absolute ban by conditional permission, BUT ‧ Detailed rules aimed at neutralising conflicts of interest –Fair market conditions, investigation of credit standing, disclosure (a.o. risk for liquidity & solvency). ‧ “Overruled” by rough net-assets limitation (art. 15 2 nd CLD) ECLE meeting Cologne - 27 September 2012 Implemented Partially Implemented Not Implemented BelgiumNetherlandsUK LuxembourgGermany France

7. 2 nd CLD: IS THERE STILL A DEBATE? 2006 Amending Directive as a 1 st step? Feasibility study (January 2008): ‣ Unclear results ‣ EC position: “the current capital maintenance regime […] does not seem to cause significant operational problems for companies. Therefore no follow-up measures or changes to the Second Company law Directive are foreseen in the immediate future.” ECLE meeting Cologne - 27 September 2012

8. 2 nd CLD: IS THERE STILL A DEBATE? European Private Company proposal (June 2008) ‣ Flexible rules on creditor protection ‣ Presidency compromise proposals: back to the 2 nd CLD Public consultation (2012) ‣ “In your opinion, should the Second Company Law Directive be reviewed?” ‧ YES: minimum capital requirement, introduction of a solvency test, use of IFRS for distribution purposes, clarifying regime of abstention vote ‧ NO: current rules are flexible and leave a significant margin for Member States, current rules have stood test of time, compliance costs for companies are not excessive ECLE meeting Cologne - 27 September 2012

9. 2 nd CLD: IS THERE STILL A DEBATE? Public consultation ‣ Results: July 2012 ‧ 496 responses –115 Spain – 86 Germany – 54 Austria – 41 France -30 UK –30% lawyer – 11 % university – 11% business federation ‧ Should the Second Company Law Directive be reviewed? ECLE meeting Cologne - 27 September 2012 75% Answered25% No answer ²/ 3 No Lawyers & business federations 1 / 3 Yes Universities, think tanks & trade unions

10. 2 nd CLD: IS THERE STILL A DEBATE? Public consultation ‧ New EC action plan before end 2012 European Parliament resolution (June 2012) ‧ “possible reforms of the Second Company Law Directive should focus on further simplification instead of introducing an alternative regime for capital formation and maintenance” Future approach? ECLE meeting Cologne - 27 September 2012

11. 2 nd CLD: F UTURE APPROACH ? Legal capital ‣ ≠ 1970’s German legal capital system ‧ = set of rules of conduct attached to capital concept 2 nd CLD as a directive on ‧ Shareholder & creditor protection ‧ Rather than legal capital as such Creditor protection ‧  Vicinity of insolvency ‧  Distributions to shareholders ‧ Company formation and considerations ‧ Others? ECLE meeting Cologne - 27 September 2012

12. 2 nd CLD: F UTURE APPROACH ? Vicinity of insolvency ‣ Gambling for resurrection ‣ Art. 17 2 nd CLD ‧ Call a general meeting: inappropriate action ‧ Loss of ½ capital: inappropriate criterion ‣ National law: rule implementing art. 17 2 nd CLD is necessarily completed by other rules, e.g. Belgium: ‧ Duty to motivate going concern accounting in case of consecutive losses ‧ Auditor warning is case of serious and corresponding facts endangering company’s going concern ‧ Directors liability for insolvent trading ECLE meeting Cologne - 27 September 2012

13. 2 nd CLD: F UTURE APPROACH ? Vicinity of insolvency ‣ Rule redirecting directors’ incentives in the interest of creditors = desirable ‣ Wrongful trading can serve as a model for a European rule ‧ But differs not fundamentally from functional equivalents ‣ No link to concept of legal capital necessary Distributions to shareholders ‣ Art. 15 2 nd CLD: net-assets test ‧ + bright line rule ‧ + long term obligations taken into account ECLE meeting Cologne - 27 September 2012

14. 2 nd CLD: F UTURE APPROACH ? Distributions to shareholders ‣ Art. 15 2 nd CLD: net-assets test ‧ -- results outdated ‧ -- liquidity aspect neglected ‧ -- IFRS: issue of distributable non-realised fair value profits ‣  combination of balance sheet test + liquidity orientated solvency test is preferable ‣ Introducing this combination on the level of 2 nd CLD: ‧ Increases level of creditor protection ‧ Resolves IFRS-issue on a European level ‧ Follows and confirms clear trend in member states’ company laws ‧ Can with or without reference to the concept of legal capital ECLE meeting Cologne - 27 September 2012