1. ALMA MATER STUDIORUM – UNIVERSITY OFBOLOGNA EC Reforms of Corporate Governance and Capital Markets Regulation: How Do They Affect Outside Investors? Luca Enriques University of Bologna & ECGI

2. © Luca Enriques 2006 2 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

3. © Luca Enriques 2006 3 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.

4. © Luca Enriques 2006 4 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

5. © Luca Enriques 2006 5 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?

6. © Luca Enriques 2006 6 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

7. © Luca Enriques 2006 7 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

8. © Luca Enriques 2006 8 The two directives a.Audits: i.Mandates PCAOBs ii.Introduces independence requirements iii.Adopts ISAs iv.Mandates audit committees b.Corporate governance: i.Mandates corporate governance statement With mild SOA “Section 404” requirement ii.Imposes collective board responsibility for annual accounts

9. © Luca Enriques 2006 9 Initiatives to modernize EC and EU company laws a.Reform of legal capital directive b.Over-ambitious project on dual-class shares and pyramids c.Proposal to facilitate exercise of voting rights d.Cross-border merger directive (facilitating restructurings)

10. © Luca Enriques 2006 10 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

11. © Luca Enriques 2006 11 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?