Volume 15, Issue s1 - Special Issue: ELI Guidance for Corporate Sustainability

The critical role of companies in contributing to environmental, social and governance sustainability within the framework of the European Green Deal developed by the European Union is well known and does not need to be underlined. What is less known is the action that should be taken for facilitating sustainable business conduct. It is however manifest that only sustainable companies can be able and long-term responsible for providing a contribution for the benefit of the society at large. It is also manifest that only financially solid companies may reach and ensure corporate sustainability over a significantly long period of time. A joint consideration of the relationship between corporate sustainability, company law and financial accounting is therefore essential for a valuable clarification of one important aspect of the ongoing debate concerning sustainability. This Report, which is the result of a research project conducted within the European Law Institute by a qualified team under the direction of three highly valued experts as reporters – Yuri Biondi, Colin Haslam and Corrado Malberti, respectfully from France, the United Kingdom and Italy – examines the mentioned relationship between multiple elements, with a view to formulating recommendations on company capital and financial accounting for corporate sustainability.

This article summarises the conception, development and main findings of the ELI project which resulted in the ELI report entitled “ELI Guidance on Company Capital and Financial Accounting for Corporate Sustainability,” approved in September 2022. Special attention is given to the methodological approach of the project and its main implications for EU and national policy and legislation on corporate sustainability both from a company law and a financial accounting perspective.

The European Law Institute – ELI Guidance proposes a set of Recommendations on company capital and financial accounting for corporate sustainability aimed at: (i) providing a frame of reference and analysis to understand corporate sustainability in the context of business and law; (ii) pointing to specific issues which need to be addressed by European and national lawmakers and regulators; and (iii) establishing a set of company law instruments which set out possible solutions to cope with these issues. The Recommendations aim at restating and modernising well-established principles of European company law on: (i) distributions; (ii) equity capital maintenance; and (iii) non-distributable reserves. Specific attention was paid to the enhanced controlling of new kinds of distributions such as share buybacks, as well as to limiting distributions of non-realised gains. The Project Team developed a comprehensive set of Recommendations aimed at fostering and facilitating sustainable business conduct through responsible company capital management and financial accounting adjustments. Further Recommendations were provided on related policy and regulatory matters concerning the EU framework for corporate sustainability. As a whole, the Recommendations propose that companies commit to a prudent use of resources, by setting aside sufficient reserves to meet social and environmental commitments over long-term horizons, and establish a fair balance between these commitments and distributions to shareholding investors. Corporate sustainability may be enhanced by implementing controls over distributions while reinforcing reserve provisioning. This in turn will ensure company continuity and resilience, as well as financial stability and sustainable development for the benefit of business and society at large.

In the last two decades new forms of distributions to shareholders such as share buybacks have found their way in standard dividend distribution policies of companies. Also, accounting rules have evolved and refer nowadays more to fair value consideration (for example in IFRS) which leads to an increased recognition of unrealised profits in distributable profits. The European Law Institute (ELI) recommendations (Biondi, Yuri, Colin Haslam and Corrado Malberti. 2025. “ELI Guidance on Company Capital and Financial Accounting for Corporate Sustainability.” Accounting, Economics, and Law: A Convivium 15 (s1): s21–88.) propose to modernise European company law regarding distributions, equity capital maintenance, and non-distributable reserves. The aim of the ELI recommendations is to ensure that payments made to shareholders, primarily in the form of dividends but also share buybacks, do not worsen the financial situation of companies and, therefore, endanger their continuity and resilience through time and circumstances, undermining their long-term capacity to cope with social and environmental commitments. We provide illustrative examples for eight ELI recommendations: restricting the dividend distribution of share premiums, stricter legal reserve requirements, the setting up of non-distributable reserves for gains from certain accounting measurements, for current value measurement of provisions, for capitalized development costs, for equity method holding gains, for held own-shares, and for goodwill. Our numerical examples show how the application of the ELI recommendations limits distributable profits and, therefore, contributes to sustain a sound financial situation of companies.

This Report is an output of the European Law Institute – ELI Project on “ELI Guidance on company capital and financial accounting for corporate sustainability” (2019–2023). After brief introduction to the Project and research methodology, it provides a comprehensive review of legal-economic academic literature on corporate sustainability and capital maintenance. Following the literature review, the Report provides a legal analysis of EU primary and secondary sources of law tackling sustainability issues, including some sustainability standards, alongside relevant cases of the Court of Justice of the European Union (CJEU). This legal analysis does also include a comparative overview of national capital maintenance regimes in German, British and French company law and regulation. Although academic literature and evidence from corporate practice suggest that the stakeholder model of corporate governance has been challenged by and somewhat relegated in favour of the shareholder primacy orientation, findings presented herein show that the idea of sustainable company is deeply entrenched in EU primary and secondary legislation. The stakeholder model prevails in national company laws. The idea of corporate sustainability and longer-termism is underpinned by the mandatory rules on share capital maintenance, as stipulated in the Directive on certain aspects of company law. In fact, EU case law appears to adhere to the minimum capital maintenance regime adopted at the EU level, submitting stricter Member States regimes to the proportionality test. The concept and need of capital maintenance is further challenged by a fierce academic debate, where some scholars have suggested alternative or complementary forms of creditor protection within and outside the scope of company law. The EU fosters long-term corporate financial robustness through introducing and maintaining stakeholder model of EU company law, as explicitly provided under constitutional provisions of the TFEU; mandatory share capital rule, accompanied by remedial schemes and possibility of introducing alternative or complementary regimes (including civil law arrangements such as insurance schemes); non-financial disclosures of corporate social responsibility (CSR) and environmental, social and governance (ESG) matters, with reference to international standards (most notably UN and OECD), supported by pensalisation schemes; forward-looking remuneration policy, accompanied by the remuneration ‘capping’ scheme, deferral periods and shareholders’ binding say on remuneration proposals; and prudential requirements such as special capital and solvency requirements for financial and insurance institutions. Concerning financial accounting and reporting, corporate sustainability is not covered in EU accounting law and regulation, where fair value accounting, including accounting for IFRS 9 on financial instruments in conjunction with IFRS 13 on fair value measurements, remains a significant problem for longer-term financial sustainability, requiring alternative or complementary solutions.

The adoption of IFRS by the EU has raised issues about its economic consequences in terms of, among others, volatility of corporate profits, taxation of profit and distribution of dividends. Indeed, it has brought the interactions between legal rules for dividend distribution and accounting policies back into focus. The EU company and accounting regulations are based on capital maintenance rules that involve limitations on dividend distribution when certain accounting policies are implemented in individual financial statements under local GAAP. However, while a majority of member states permit IFRS for individual financial statements, the EU regulations are silent on this issue. In this article, we outline an in-depth analysis on legal dividend distribution rules interactions with accounting policies in European countries, whether local GAAP or IFRS are applied. We have selected nine cases of potential recognition of unrealised gains in individual financial statements under local GAAP and/or IFRS, some of which are already specified in the EU regulations. For each case, we have analysed the national accounting regulations and the corporate laws. Our analysis reveals that the limitations on dividend distributions recommended by the EU have been most largely implemented in the national regulations, but not in all countries. It also sheds light on potential loopholes in the current European regulation regarding unrealised gains that may be more systematically recognised under IFRS than under local GAAP: unrealised gains arising from the recognition of deferred tax assets and unrealised gains arising from benefit pensions plan. To fill these gaps in the national regulations and to harmonise the legal basis for dividend distribution better within the EU, we suggest including in the European regulation the concept of ‘realised profits’ and thus ‘distributable profits’ as a required basis for dividend distribution. It involves in the first place identifying relevant criteria that may enable disentangling realised and unrealised profits or losses.

German GAAP can be categorized as typical Continental European (Fülbier, R. U., C. Pelger, E. M. Kuntner, and M. Bravidor. 2017. “The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Austria and Germany.” Accounting in Europe 14 (1–2): 13–28; Nair, R. D., and W. G. Frank. 1980. “The Impact of Disclosure and Measurement Practices on International Accounting Classifications.” The Accounting Review 55 (3): 426–50) with a primary focus on creditor protection by means of a strong prudence (or conservatism) principle and the priority of the profit (dividend) determination function compared to the information function of financial statements. The increasing internationalization of German companies lead to a questioning of German GAAP and, ultimately, the introduction of IFRS. IFRS became not only mandatory for consolidated financial statements of listed companies but influenced German GAAP as such. Indeed, some elements in German GAAP were more aligned over time with some IFRS features to improve information quality of German GAAP financial statements. To adapt capital maintenance to these new elements and maintain a strong creditor protection, specific dividend distribution restrictions were introduced. The purpose of this paper is to provide a general presentation of the important features of capital maintenance in Germany with a particular focus on the accounting-induced specific dividend distribution restrictions.

The application of IAS/IFRS standards, implying the substantial downgrading of the realisation principle, makes financial reporting inconsistent with the determination of distributable profits. This article summarises the Italian approach to this problem. Generally speaking, the introduction of a harmonised European regulation on this matter seems desirable, since different rules in EU Member States are likely to create disparities regarding the level of creditor protection.

This paper aims to outline the current regulatory framework of accounting for dividend distributions in France, with a view over its evolution since 1957. After briefly presenting the accounting regulatory sources of dividend distribution in France, our case study focuses on the dividend distribution restrictions that originate from two main matters, as in most EU member states: – Recognition of unrealised gains in the financial statements. – Carrying out of capital transactions impacting company equity: increase in capital, share buy-back, merger and acquisitions. Two findings are especially noteworthy. First, French regulations require restrictions on dividend distribution for the optional accounting treatments mentioned by the 2013 EU Accounting Directive and for which this directive recommends Member States to require those restrictions. Furthermore, in line with EU regulations, French regulations are silent on the distribution of dividends from unrealised profits or reserves arising from the recognition of goodwill in the individual accounts, the recognition of a deferred tax asset and the recognition of a share premium.

A significant principle in evaluating a company’s sustainability is the going concern principle, which assesses its ability to continue with its operations for the foreseeable future. Thus, adequate financial position and profitable business operations are preconditions for fulfilling going concern requirements, which leads to a prudent company’s capital management. However, this is insufficient for capital sustainability, considering that aggressive dividend policies lead to decreased capital. National laws and regulations play a significant role in preserving paid-in and accumulating earned capital, especially those regulations related to companies’ legal systems and accounting practices. This article provides a comprehensive overview of the Croatian legal system regarding the main aspects of regulations on dividend distributions on the one side and accounting recognition and measuring policies related to paid-in and earned capital on the other side. The results are beneficiary for the objectives of the ELI project Guidance on Company Capital and Financial Accounting for Corporate Sustainability related to “restating and modernising well-established provisions of European company law on: (i) distributions; (ii) equity capital maintenance; and (iii) non-distributable reserves, with a view to fostering and facilitating sustainable business conduct through responsible company capital management and financial accounting adjustments”.

The concept of shareholders’ equity is fundamental in both company law and financial reporting standards. In continental European countries and Japan, these legislations have traditionally shared common principles by limiting the source of distribution to shareholders to the accumulated profits a company has earned. As the purposes of financial accounting have progressed towards decision usefulness for investors, however, the link between accounting and statutory distribution restriction has been undermined. Our research addresses the treatment of shareholders’ equity in Japan based on legal primary sources and related literature. Its purpose is to explain the divergence between financial reporting and dividend restrictions in light of their contrasting objectives. Our findings provide two main implications. First, reconciling financial reporting and dividend restriction requires a complex recalculation of distributable profits. The regulation has become too complex to ensure all the companies easily comply with dividend distribution restrictions. Second, the underlying definitions of equity items and their presentation in financial statements have remained consistent between the Companies Act provisions and the accounting standards even after converging with the IFRS. This has been achieved by splitting the concept of shareholders’ equity from net assets in financial accounting.