Further, the guidance for equal treatment has been extended to the rights attached to shares in general, not just the voting rights (A.1.).

Transcription

1 III.The Equitable Treatment of Shareholders 1. The Main Principle The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. The main principle is supported by three sub-principles defining that (A.) all shareholders of the same series of a class should be treated equally, (B.) insider trading and abusive self-dealing should be prohibited and (C.) members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation. 2. Changes since the 1999 OECD Principles of Corporate Governance The two major amendments to section III of the 1999 principles are directly concerned with the rights of the shareholders. They now state expressly that there should be protection from abusive actions of controlling shareholders (A.2.) and that cross border voting should be facilitated (A.4.). Further, the guidance for equal treatment has been extended to the rights attached to shares in general, not just the voting rights (A.1.). Finally, the new principles outline disclosure duties of board members and key executives in a more detailed manner (C.). They now emphasize that direct and indirect material interests fall within the scope of the revised principles. 3. Other Corporate Governance Regimes The approach of the corporate governance regimes in the major industrial countries to this topic differ. Many frameworks do not deal with the equal treatment of shareholders as a

2 key feature. They are confined to the role and responsibilities of the board, matters of internal and external control, the role of institutional shareholders and disclosure issues. 1 Notwithstanding they all have several related provisions in their guidelines. For example, the goal of facilitating the shareholders' possibility to exercise their voting rights and the protection of minority shareholders from abusive behaviour of controlling shareholders can be found in every major regime. Some go even further on certain points than the guidelines provided by the OECD Steering Group. 2 Finally, several corporate governance frameworks have elaborated the equal treatment of shareholders as an independent principle, even though they have set up their priorities partly differently. 3 The above mentioned differences result in particular from the varying legal circumstances in the countries which have set up corporate governance regimes. 4 For this reason, it would go too far at this point to undertake further examinations. 4. Evaluation a. All shareholders of the same series of a class should be treated equally One of the major goals of corporate governance is to enhance shareholders' confidence. 5 For this reason, the equal treatment of shareholders is an important issue when setting up a regulatory framework. The OECD Steering Group translated this idea into policy by formulating it as a key feature of its principles. The changes made during the 2004 revision have been outlined above. In this context it is interesting to note that the OECD in its annotations still does not take a position on the concept of "one share one vote". 6 In fact, by repeatedly describing several of the existing 1 See e.g. UK: The Combined Code on Corporate Governance (July 2003); Australia: Principles of the ASX Corporate Governance Council (March 2003); France: Principes de gouvernement d'entreprise (October 2003); Germany: Deutscher Corporate Governance Kodex (May 2003); Italy: Codice di Autodisciplina (July 2002). 2 E.g. the German framework which states the one vote one share principle expressly. 3 Japan: Principles of Corporate Governance for Listed Companies (March 2004); Russia: Corporate Governance Code (April 2002). 4 E.g. German statute law already provides equal treatment of shareholders. 5 OECD Principles of Corporate Governance (2004), p Ibid., p.41.

3 classes of shares, the Steering Group ultimately approves the need for dual share structures. 7 They have received very much criticism for this approach. 8 It has been said, that in many cases the effect of these structures "is simply to benefit one set of shareholders at the expense of others and to act as a deterrent to takeovers by entrenching management" 9. Others consider "one share one vote" to be an essential requirement for "a system of checks and balances to work properly" 10. On the other hand, there has also been a small number of supporters for the OECD's opinion. 11 One argument is that equal treatment of shareholders provides "equality of opportunity" 12. That not only voting rights but also access to information and participation in dividends and assets on a winding up should be the same for all shareowners. Following this, "all shares are presumed to be of equal status" 13 and there would exist a "level playing field" 14 for all kinds of investors. Otherwise, the door would be opened for investors with considerable means or influence to acquire rights in the company which are conversely proportional to the risk they bear. Another argument supports this view by asserting that looking at the fact that shareholders elect their "representatives", the board members, corporate structures can be compared with democratic political structures and therefore equality is deemed to be a key value. 15 Despite these plausible arguments, the most important issue to support the critics of the OECD's point of view is the simple fact that the existence of different classes of shares, especially of multiple or non-voting shares, leads to the situation that those who own the company are not the ones who control its appearance on the markets or in other words control of a firm would not be proportionate to investment. This, of course, is consistent with the risk-bearing issue above. For the reasons outlined, the OECD Steering Group unfortunately finishes halfway on its effort to improve the rights of shareholders by refusing to accept the "one share one vote" principle. The OECD's opinion on this is even more remarkable taking account of the fact that the OECD itself considers the voting right to be the "basic shareholder right" 16. "One 7 On dual share structures see e.g.: Kristian Rydqvist "Dual-class shares: a review" (1992) 8 Oxford Review of Economic Policy, p.45; on the question whether voting structure can influence the value of a company see Piet Sercu, Tom Vinaimont "One Share, One Vote?" (September 2002) working paper. 8 E.g. PIRC in Comments received from Web consultations, p.54; SCGOP ibid., p.107; IIF ibid., p PIRC ibid. 10 SCGOP ibid. 11 Shann Turnbull ibid., p.64; WOCCU ibid., p Brian R. Cheffins "Company Law: Theory, Structure and Operation" (1997, Oxford University Press), p Ronan Keane "Company Law" (3 rd Ed., 2000, Butterworths), p Brian R. Cheffins ibid. 15 Peter N. Flocos "Toward a Liability Rule Approach to the 'One Share, One Vote' Controversy: An Epitaph for the SEC's Rule 19c-4?" (1990) 138 University of Pennsylvania Law Review, p.1761, See principle II.A.

4 share one vote" increases transparency and certainty both for investors, institutional and minor, and the company itself and thus strengthens investors' confidence. This is necessary since investors are by far more concerned about the companies in which they have shares today because of the recent international corporate scandals. Apart from that, if one accepts the position adopted by the OECD, it is only consistent to claim the disclosure duties drawn up at principle A.1. To improve investors' confidence the OECD Steering Group introduced the new subprinciple A.2. It expresses that minority shareholders should be protected from abusive actions by or in the interest of controlling shareholders. This recommendation can be considered as being the most important in countries with concentrated ownership structures 17, a system well known in Europe. 18 There is a danger that controlling shareholders "exercise a level of control which does not correspond to the level of risk that they assume" 19. They actually control the whole business behaviour of the company although they own just a certain amount of the company's capital. Others might also use their power to benefit certain people on the expense of the company. To achieve the protection of minority shareholders the OECD recommends several means. Disclosure and loyality duties by board members to the company and to all shareholders, pre-emptive rights, qualified majorities for certain decisions, independent appraisal for share prices at buy-outs and derivative and class action law suits. Although the Steering Group is right in its position that "the choice and ultimate design of different provisions [...] depends on the overall regulatory framework and the national legal system" 20 it would have been advisible to emphasize the superiority of pre-emptive, internal and other ex-ante rights over ex-post rights like subsequent legal proceedings. Excessive litigation, a point which in fact was recognised by the OECD 21, and legal uncertainty for the decision-makers while courts are seized with law suits against corporate decisions are great impediments to a dynamic evolution of the company's value 17 The OECD Principles of Corporate Governance An Evaluation of the 2004 Review by the TUAC Secretariat, p Salacuse "Corporate governance in the new century" (2004) 25 Company Lawyer, p.80; on the situation in Germany see: Ekkehard Boehmer "Who Controls German Corporations? in Corporate Governance Regimes (2002, Oxford University Press) p ; on the weakening of this model in Europe in general see: John C. Coffee, Jr. "Convergence and its Crisis: What are the Preconditions to the Separation of Ownership and Control?" in ibid. p OECD Principles of Corporate Governance (2004), p Ibid., p Ibid., p.41, 42.

5 and independent decision making of the management. For this reason, ex-ante rights are preferable to secure the rights of minority shareholders. In additon, while supporting the regulation of buy-out rights in several countries the OECD should also have mentioned the sell-out right of minority shareholders. The sell-out right has to be seen as the counterpart for the buy-out right of majority shareholders. Since the majority shareholder is tempted to abuse his dominant position and because of the company's shareholder structure the market for its shares might have become illiquid, the sell-out right gives the shareholders the possibility to obtain an adequate compensation for the loss of their rights. 22 Sub-principle A.3., that votes should be cast by custodians or nominees in a manner agreed upon with the beneficial owner of the shares, has not changed since the 1999 principles. Only the annotations now recommend to treat holders of depository rights like the holders of the underlying shares. As a result of its broad nature there is not much room for criticism on this principle. It has been said that instead of the mere disclosure to the shareholder that the custodian will vote in the way he thinks the shareholder would benefit from if no instructions otherwise are received, the shareholder should be clearly informed in advance how the custodian intends to vote on each resolution. 23 This would certainly strengthen the position of the shareholders but cannot be deemed necessary. It might rather be quite impractical to ask for prior disclosure of every proposed voting action because of the unforeseeable progress of a shareholders' meeting. In this context, it is unfortunate that the OECD Steering Group once again did not take a clear position on the need for proxy voting and that companies should be encouraged to entitle their shareholders to appoint a proxy to vote on their behalf. 24 This is a common practice for public companies' articles 25 and a need in today's company-shareholder relationship. 26 Not every shareholder is able to vote personally and investment funds very 22 See Report of the High Level Group of Company Law Experts on Issues Related to Takeover Bids (2002), p.62; a summary of this report can be found at (2002) 23 Company Lawyer, p ; Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe (2002), p.52, ASX in Comments received from Web consultations, p.49; see also Principles of the ASX Corporate Governance Council (March 2003) Attachment A: Guidelines for notices of meeting IIF in Comments received from Web consultations, p See also Companies Act (Ireland) 1963, s Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe (2002), p.52.

6 often consider the appearance at a general meeting a waste of time. 27 They simply sell the stock they hold in the company if they lose confidence in its performance. 28 Since voting is the basic shareholder right and the means by which the bearers safeguard their ownership rights, it is strongly recommended to support proxy voting to facilitate the exercise of these rights. 29 The last two sub-principles are concerned with impediments to cross border voting and procedures for general shareholder meetings. They deal with very important issues of shareholder participation. Many shareholders are restrained from voting by regulations and market practices, short notice periods, incomplete notices and agendas or even voting fees set up by the companies. The OECD's guidelines suggest legal and regulatory measures to the responsible legislators to remove such artificial barriers. The approach by the Steering Group is reasoned and therefore to be welcomed but unfortunately once again fails to set up more precise recommendations. While other Corporate Governance frameworks for example state specific notice periods 30 the OECD Principles are silent on this point. Uncertainty prevails also on the meaning of "unduly difficult or expensive to cast votes". A framework considered to be a guidance on implementation should be more outspoken at this point. b. Insider trading and abusive self-dealing should be prohibited While the prohibition of insider dealing is controversial among authors, 31 legislators in every major industrial country with securities markets have implemented laws on insider trading. 32 Legislation regulating insider trading is widely considered to be necessary to ensure the integrity of and to enhance investors' confidence in the financial markets Brian R. Cheffins "Company Law: Theory, Structure and Operation" (1997, Oxford University Press), p.64; Ben Pettet "Company Law" (2001, Longman Law Series), p.170; Coral Ingley, Nick van der Walt "Corporate Governance, Institutional Investors and Conflicts of Interest" (2004) 12 Corporate Governance, p.534, 535; on the low level of voting by institutional investors in the UK see e.g. Geof P. Stapledon, Jonathan J. Bates "Reducing the Costs of Proxy Voting" in Corporate Governance Regimes (2002, Oxford University Press), p See Salacuse "Corporate governance in the new century" (2004) 25 Company Lawyer, p For further reading on "Shareholder Activism" see e.g. Coral Ingley, Nick van der Walt ibid., p The Combined Code on Corporate Governance (July 2003): "at least 20 working days"; Principles of the ASX Corporate Governance Council (March 2003): "at least 28 days". 31 See e.g. Henry G. Manne "In defense of insider trading" (1966) 44 Harvard Business Review, p.113; Dennis W. Carlton, Daniel R. Fischel "The Regulation of Insider Trading" (1983) 35 Stanford Law Review, p.857; Harry McVae "What's wrong with insider dealing?" (1995) 15 Legal Studies, p E.g. Ireland: Companies Act, 1990 Part V; US: Insider Trading Securities Fraud Enforcement Act, 1988; on the EU-level see Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse). 33 Directive 2003/6/EC rec 12; see also Council Directive 1989/592/EEC.

7 By formulating this recommendation as sub-principle to the "Equitable Treatment of Shareholders" principle the OECD Steering Group states that it considers prohibition of insider dealing as a matter of equality and fairness. 34 This approach has to be welcomed despite the fact that this argument is, of course, primarily of moral than legal nature. But by including the aim of ensuring investors' confidence in a regulatory framework, equality has become a sort of legal value. Interestingly and in contrast to their practice on several points outlined above, the OECD Principles are demanding in the annotations to the prohibition of insider trading concerning the implementation of provisions by governments which failed to do so up to now. On the other hand, it would have been of great benefit on the way to harmonization of corporate governance frameworks to give a statement on the need for criminal law sanctions in case of the abuse of insider power. c. Disclosure of material interest of board members and key executives in transactions The last sub-principle of chapter III of the 2004 OECD Principles states that members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation. This includes situations in which this certain interest results from a special relationship to a controlling shareholder and thus ensures that decision-making will not take place on the expense of minority shareholders. By extending this recommendation to indirect interests of the concerned managers the Principles take an important step further on the way to safeguard the interests of all shareholders. Unfortunately, cruical remarks have to be made, too. First, the restriction to transactions or matters directly affecting the corporation creates new difficulties in assessing what kind of transactions are to be disclosed. The wording of the 1999 Principles, "transactions or matters affecting the corporation", was broader but well reasoned and clearer and therefore should have been retained. There should be disclosure of any relationship outside the company that might influence any decision of the management in order to ensure confidence in the executives who are in charge. 34 An argumentation not without criticism, see e.g. Henry G. Manne ibid.; Frank H. Easterbrook "Insider Trading, Secret Agents, Evidentiary Privileges, and the Production of Information" (1981) Supreme Court Review, p.309,

8 Furthermore, a principle requiring controlling shareholders to disclose their material interests in certain transactions of the corporation should have been considered, too. 35 As the term indicates controlling shareholders have similar opportunities to control the companies' business behaviour as the key management and therefore should be forced to disclose such material interests in order to protect the interests and assets of the minority. Otherwise the result would be the one already discussed: the exercise of a level of control which does not correspond to the level of risk borne. For this reason, the last sub-principle offered a possibility to clearly state one of the measures merely risen under Principle A.2. as a mandatory duty. In this context it has also been said that such interests should be disclosed generally, not only to the board. 36 This criticism is correct. The personal involvement of key executives is of interest for the shareholders and the markets in general. This provision would have no remarkable effect on the protection and equality of the shareholders if disclosure only happened to the board. Interestingly, the 2003 draft of the OECD Principles included such an approach. But a possible conflict of interests of that kind of importance that the involvement of the management should be disclosed to the board and, as the Principles suggest, "it is good practice for that person not to be involved in any decision" concerning the transaction or matter, is of major interest to the public in general and in particular to the shareholders. Shareholders' confidence, the major aim of the OECD's regulatory framework, is essentially influenced by the behaviour of the board and the key executives. 5. Conclusion The OECD Steering Group has revised its principles on the equitable treatment of shareholders and set up an important guideline on this topic. Unfortunately, it failed to go one step further on certain important points. Since the framework is intended to be dynamic and to be revised in the future it can be expected that the mentioned issues will be considered at a later stage. A guideline for national legislators needs to be more forthcoming to really assist in setting up national provisions. 35 In the same way: Richard Frederick in Comments received from Web consultations, p ICGN in Comments received from Web consultations, p.26; Christian Strenger ibid., p.57; Shann Turnbull ibid., p.64; Richard Frederick ibid., 87; IIF ibid., p.151.