Legal framework
France
Law stated as at 01-Apr-2011
· The Commercial Code (Code de commerce).
· The company's bye-laws.
In
addition, specific regulations apply to listed companies:
· Certain provisions of the Monetary and Financial Code
(Code monétaire et financier).
· The regulations of the Financial Markets Authority (Autorité
des Marchés Financiers) (AMF).
· Binding corporate governance principles adopted by
certain companies and usually set out in the internal rules of the board.
· EU recommendations (2004/913/CE of 14 December
2004, 2005/162/CE of 15 February 2005 and 2009/385/CE of 30 April 2009).
Germany
Law stated as at 01-Apr-2011
The general regulatory framework for all companies in
Germany is contained in the following sets of rules:
· German Civil Code (Bürgerliches Gesetzbuch, BGB). The BGB contains the basic principles for both
partnerships and corporate entities on a very general basis.
· German Commercial Code (Handelsgesetzbuch, HGB). The HGB focuses on the specific requirements
regarding commercial law. It contains the main regulations for partnerships,
for example, in relation to foundation and representation. In addition, the HGB
provides rules concerning financial statements and reports which also apply in
relation to corporate entities.
· Constitutional documents. Each company must have articles of association.
They contain the main provisions relating to, among others, share capital,
principal office, members of the management and supervisory board. In addition,
companies should have bye-laws regulating the allocations of duties.
Additionally,
special regulations apply to corporate entities, as follows:
· The regulatory framework for GmbHs is mainly set out
in the German Limited Liability Company Act (Gesetz betreffend
Gesellschaften mit beschränkter Haftung, GmbHG).
· The regulatory framework for AGs is mainly set out in
the German Stock Corporation Act (Aktiengesetz, AktG). In recent years,
the AktG was subject to a constant flow of legal reform concerning
transparency, remuneration and leadership issues.
· Special rules apply to companies of the financial and
insurance sector.
For
AGs listed or traded on any stock market, the following rules and regulations
apply in addition:
· Capital markets regulations. Listed companies must comply with a large number
of capital markets regulations such as:
o the German Stock Exchange Act (Börsengesetz, BörsG);
o the German Securities Trading Act (Wertpapierhandelsgesetz,
WpHG) with insider trading rules and disclosure rules (for example,
concerning ad hoc announcements);
o the German Securities Acquisition and Takeover Act (Wertpapierübernahmegesetz, WpÜG).
· German Corporate Governance Code (Deutscher
Corporate Governance Kodex, DCGK). The DCGK is a non-binding set of rules summarising
essential statutory regulations for the management and supervision of listed
companies and includes recommendations for good and responsible corporate
governance (see Question 2).
· Case law. Another
important source of corporate governance rules and directors' duties is case
law, established particularly by the German Federal Court of Justice (Bundesgerichtshof,
BGH).
India
Law stated as at 01-Apr-2011
Corporate governance in India is still developing. The
first major corporate governance reform proposal was launched by the
Confederation of Indian Industry (CII) in 1996 and a corporate governance code
for Indian companies was developed and set out in Clause 49 of the Listing
Agreement in 2000.
The
Companies Act 1956 (Act) sets out the provisions relating to directors' duties
and typically these provisions apply to directors of all corporate entities.
Clause
49 of the Listing Agreement sets out the provisions relating to corporate
governance applicable to listed companies. The Securities Exchange Board of
India (SEBI) is the regulatory body responsible for the enforcement of
corporate governance in relation to listed companies.
In
addition to the above, the Ministry of Corporate Affairs (MCA) has released a
set of voluntary guidelines for corporate governance. The MCA Guidelines for
Corporate Governance address a myriad of corporate governance matters including
independence of the board of directors (board), responsibilities of the board,
the audit committee, auditors, secretarial audits, and mechanisms to facilitate
whistleblowing and protect the individuals concerned. Important provisions
include the following:
· Issuance of a formal appointment letter to directors.
· Separation of the office of chairman and chief
executive office (CEO).
· Formation of a nomination committee for the
appointment of directors.
· Limiting the number of companies in which an
individual can be a director.
· Tenure, remuneration, training and performance
evaluation of directors.
· Additional provisions for statutory auditors.
The Netherlands
Law stated as at 01-Dec-2012
· Private company with limited liability (besloten
vennootschap met beperkte aansprakelijkheid, BV) (private company).
· Public limited company (naamloze vennootschap, NV)
(public company).
Private
companies are subject to less strict capital restrictions resulting in more
freedom to make distributions, and its capital may be organised in flexible
types of shares.
Public
companies can issue shares in bearer form, which allows them to be freely
negotiable. Up until now this has been the main reason why only shares of a
public company were allowed to be listed on the stock exchange. Private
companies can only issue registered shares. However, following recent
legislative amendments, the articles of association (articles) of private
companies may provide for flexible transfer restrictions, complete restriction
on the transfer of shares or even lift transfer restrictions entirely (Flexible
Private Company, see Question 4).
European
legislation has introduced the possibility of a European company (Societas
Europea, SE), which is also registrable in The Netherlands.
In
certain industries or fiscal structures, a co-operation (coöperatie) is used
more frequently. A co-operation is a corporate entity based on an association,
which has members who conclude individual agreements with the co-operation and
whose liability may be partially or fully excluded. The characteristics of the
membership of a co-operation can be designed to operate similarly to company
shares, including the right to financial benefits, voting rights and
transferability.
UK (England and Wales)
Law stated as at 01-Apr-2011
All
UK companies are subject to the Companies Act 2006, which stipulates certain
rules for their governance and the way they should be run. Within that
framework, the internal management of each company and the rights of its
shareholders are regulated by its articles of association (articles). The
articles are seen as a contract between the company and its shareholders and so
any breach of the articles is a matter between those parties, rather than for
any outside regulator.
Legislation
sets out separate model form articles (Model Articles) which may be used for
private and public companies, although these will not be suitable for more
complex companies or those wishing to have particular provisions in their
constitution.
Public
companies with a premium listing are also subject to the UK Corporate
Governance Code (Code) (see Question 2).
The
directors of both public and private companies are subject to the same duties
contained in the Companies Act 2006 (see Question 15). There is no distinction between different types or
size of company.
United States
Law stated as at 01-Dec-2012
The vast majority of US public companies are formed as
corporations. While many of the principles discussed below apply to private
companies and to other forms of entities, the discussion below is limited to
corporate governance rules applicable to, and the practices and principles of,
US public corporations.
The
focus is on federal securities law and Delaware law, as Delaware is the most
common state of incorporation for major US corporations.
References
to the Top 100 US Companies refer to the companies surveyed in Shearman &
Sterling LLP's 2012 Trends in Corporate Governance of the Largest US Public
Companies (2012 S&S Corporate Governance Survey), the highlights of which
are available for download from the iTunes Store® and Google play®.
· What is the name of the code? What areas are covered
by it (for example, board composition and committees, remuneration, audit and
risk)?
· How is the code structured (for example, a set of
rules or principles and provisions)? What type of companies must comply with
the code?
· Is the code based on the comply or explain principle?
How are companies required to report their application and compliance with the
code (for example, in their annual report)?
· What are the consequences of non-compliance with the
code?
· What has been the general response of companies,
regulators and shareholder groups to the comply or explain approach? Has it
been popular or controversial? Are there plans to reform it?
France
Law stated as at 01-Apr-2011
· The corporate governance code for listed companies of
December 2008 established by professional associations (usually referred to as
the AFEP-MEDEF Code). It provides a set of recommendations for listed companies
relating to board composition, the role of independent directors, board
committees, and the remuneration of directors and of general managers.
· The Middlenext corporate governance code for small and
medium companies of December 2009 (usually referred to as the Middlenext Code).
It applies to listed companies with a market capitalisation of less than EUR1
billion. Its structure and scope are similar to that of the AFEP-MEDEF Code.
Both
codes are based on the comply or explain principle. For each company which
refers to either of the codes, the annual report relating to internal controls
and risk management presented by the chairman of the board to the shareholders
must state which recommendations from the code have not been applied and the
rationale for not applying them.
If
a listed company elects not to refer to either of the codes, the chairman's
report must state what rules have been applied by the company relating to
corporate governance and why it has elected not to apply either of the two
codes. Non-compliance with the codes bears no other consequences.
The
AMF issues an annual report relating to corporate governance. The 2010 report
(issued in July 2010) provides that, out of a panel of 60 large listed
companies, 100% refer to the AFEP-MEDEF Code. It may be considered therefore
that the corporate governance codes are widely accepted. There are no plans to
reform the corporate governance codes in France.
Germany
Law stated as at 01-Apr-2011
The DCGK is published by the German Corporate
Governance Code Commission and covers all areas of corporate governance, that
is:
· Shareholders.
· Management board.
· Supervisory board.
· Remuneration.
· Transparency.
· Audit.
· Risk.
The
DCGK aims to make Germany's corporate governance rules transparent for national
and international investors.
The
DCGK contains mainly recommendations and suggestions, as well as descriptions
of statutory regulations. It is directed at listed companies, but it may be
used as non-binding guidance for private companies as well.
The
DCGK is based on the comply or explain principle. Listed companies must declare
in their annual reports whether they comply with or diverge from the
recommendations of the DCGK. Disclosed non-compliance with recommendations is
permitted. However, due to some unconfirmed theory, capital markets react
negatively to such deviations. Non-disclosed deviations from the DCGK may also
result in the voidance of the resolutions of the shareholders' meeting and
personal liability of the directors.
The
DCGK is an integral part of the corporate governance environment in Germany and
listed companies generally comply with more than 90% of its recommendations.
The comply or explain approach allows the companies to handle corporate
governance issues in a flexible manner and according to the specific needs of
the company. Currently, there are no plans to reform this approach. The DCGK is
updated and amended annually (see Question 37).
India
Law stated as at 01-Apr-2011
India has not adopted a specific corporate governance
code for all companies. For listed companies, Clause 49 of the Listing
Agreement sets out provisions relating to board composition, committees and the
disclosures which must be made by a company.
Clause
49 of the Listing Agreement contains mandatory and non-mandatory provisions
relating to corporate governance. The mandatory requirements concern the
following, among others:
· The formation of audit committees.
· Disclosure requirements in relation to related party
transactions.
· Accounting treatment.
· Risk management.
· Remuneration of directors and CEO/chief financial
officer (CFO) certification.
In
addition to the above, companies must submit a quarterly compliance report
(signed by the compliance officer or the CEO) to the stock exchange on which
the company is listed within 15 days of the end of a quarter.
Listed
companies must comply with the mandatory provisions set out in Clause 49 of the
Listing Agreement. The annual report of a listed company must have a separate
section on corporate governance with a detailed report on corporate governance.
Non-compliance with the mandatory provisions and the extent to which the
non-mandatory requirements have been complied with by a company must be
highlighted in the annual report. Contravention of the provisions of the
Listing Agreement or of any rules or regulations made under it may attract a
fine or imprisonment for the persons responsible for the company's affairs (sections
23, 23A, 23C, 23E and 23H, Securities Contracts (Regulation Act) 1992).
Some
of the non-mandatory requirements set out in Clause 49 of the Listing Agreement
are as follows:
· Independent directors should serve on the board of a
company for a period not exceeding, in the aggregate, nine years.
· A remuneration committee may be set up by the board to
determine on their behalf and on behalf of the shareholders, with agreed terms
of reference, the company's policy on specific remuneration packages for
executive directors, including pension rights and any compensation payment.
· A half-yearly declaration of financial performance
including a summary of the significant events in last six months may be sent to
each shareholder at his home address.
· A company may move towards a regime of unqualified
financial statements.
· A company may train its board members in the business
model of the company as well as the risk profile of the business parameters of
the company, their responsibilities as directors, and the best ways to
discharge them.
· A company may establish a mechanism for employees to
report to the management concerns about unethical behaviour, actual or
suspected fraud or violation of the company's code of conduct or ethics policy
(see Question 36).
Clause
49 of the Listing Agreement was welcomed by companies, regulators and the
shareholders as it provided for more transparency in the affairs of a company.
The Netherlands
Law stated as at 01-Dec-2012
· Book 2 of the Dutch Civil Code (DCC), which imposes
various mandatory rules for all entities. DCC will further be amended as of 1
January 2013, introducing more flexibility regarding internal governance and
the one-tier board (seeQuestion 37).
· A company's articles. The articles of co-operations
are supplemented by individual agreements between the co-operation and each
member.
· The Works Council Act 1971 (Wet op de
ondernemingsraden), which applies to companies with a works council.
Companies that employ at least 50 people must set up a works council.
· A large company regime, set out in the DCC, which
contains various mandatory rules relating, for example, to subjecting board
resolutions to the approval of non-executive board members or the supervisory
board. The large company regime applies to public companies and private
companies that meet all of the following criteria (large companies):
o the issued share capital plus reserves is at least
EUR16 million;
o the company or any subsidiary has established a works
council under a statutory requirement;
o the company, together with its subsidiaries, has 100
or more employees in The Netherlands.
· The NYSE Euronext rules (harmonised and
non-harmonised) contained in the Euronext Rule Book (Market Rules), which apply
to listed companies.
· The Act on Financial Supervision (Wet op het
Financieel Toezicht) (Wft), secondary legislation and governmental decrees.
The Wft brings together practically all the rules and conditions applicable to
the financial markets and their supervision, such as the disclosure of
substantial shareholdings and licence obligations. Section 5 of the Wft on the
supervision of conduct on the financial markets provides the rules of conduct
that apply to all parties that are active on the financial markets. Section 5
of the Wft was amended, effective 1 January 2009, with the implementation of
Directive 2004/109/EC on transparency requirements for securities admitted to
trading on a regulated market and amending Directive 2001/34/EC (Transparency
Directive) and Directive 2007/14/EC implementing the Transparency Directive in
relation to information about issuers whose securities are admitted to trading
on a regulated market, introducing a common European system for the publication
of annual, bi-annual and interim financial information by issuers.
· Industry specific legislation also includes corporate
governance rules, for example various acts applicable to health care
institutions and academic hospitals.
· The Dutch Corporate Governance Code (CGC), which
contains a non-binding list of principles and best practices for listed
companies (see Question 3).
· Industry specific governance codes including the
Banking Code (Code Banken) 2009, containing non-binding principles for
banks with a banking permit issued under the Wft, and the Healthcare Governance
Code that applies to most hospitals, mental care institutions and affiliated
health care companies.
UK (England and Wales)
Law stated as at 01-Apr-2011
The UK regulates corporate governance through the
Code. The Code is divided into the following headings:
· Leadership.
· Effectiveness.
· Accountability.
· Remuneration.
· Relations with Shareholders.
However,
a more useful list of its contents could be:
· The Board.
· The Chairman.
· Non-executive Directors.
· Remuneration.
· Risk and Accountability.
· Shareholders.
The
Code comprises:
· Main Principles, which are general requirements for
good governance and are mostly uncontroversial.
· Supporting Principles, which add more detail to the
Main Principles.
· Code Provisions, which set out specific
recommendations as to how the Main Principles may be implemented.
All
companies with a premium listing in the UK, whether incorporated in the UK or
not, must apply the Code. The Code is overseen by the Financial Reporting
Council which periodically reviews company accounts for compliance with
relevant regulations.
The
Code is applied on a comply or explain basis. Companies must apply the Main
Principles and must state in their annual report how they have applied
them. They also must state whether they have complied with all relevant
Code Provisions throughout the year. If they have not complied with a Code
Provision during the year, they must explain why, state the period of
non-compliance and how they have nonetheless applied the relevant Main
Principle.
A
failure to explain how the Main Principles have been applied, or to comply or
explain in respect of relevant Code Provisions, amount to a breach of the Listing
Rules and may lead to disciplinary action by the regulator, the Financial
Services Authority (FSA). Shareholder pressure may also be brought to bear on
the board of directors if it is believed the Code is not being followed.
A
few of the Code Provisions apply only to FTSE 350 companies, that is, the 350
largest companies in the FTSE share index. Examples are the provisions
requiring an external facilitator to be used at least every three years for
directors' appraisals and the annual re-election of all board members.
Although
companies with a standard listing and those quoted on AIM are not subject to
the Code, it is a benchmark of best practice and many companies voluntarily
adopt some or all of its terms.
The
comply or explain approach has been part of the Corporate Governance Code since
1992 and enjoys a wide degree of support from companies, regulators and
shareholders in preference to any alternative. This approach has been
recently reaffirmed by the Financial Reporting Council and there are no published
plans for reform.
United States
Law stated as at 01-Dec-2012
· Statutory law of the state in which the corporation is
incorporated. Most US public companies are incorporated in the state of
Delaware. The majority of other states base their legislation on Delaware law,
or on the Model Business Corporations Act.
· Federal statutory law, including:
o the federal securities laws, including the Securities
Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Act);
o regulations, rules and other guidance promulgated by
the Securities and Exchange Commission (SEC).
· Listing standards published by registered stock
exchanges, most notably, the New York Stock Exchange Listed Company Manual
(NYSE Listing Manual) and the National Association of Securities Dealers
Automatic Quotation System Marketplace Rules (Nasdaq Marketplace Rules).
· Common law rules.
· The corporation’s certificate of incorporation and
bye-laws. Corporate governance guidelines and policies adopted by the board of
directors (board) and the charters of board committees also influence the
corporation's governance.
· Shareholder activism and litigation, which often
influences reform of corporate governance regulations and directors’ duties.
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