Volume 9, Issue 3

The need to introduce principles concerning the governance of corporate groups at the European Community level is what underlies the Action Plan of the European Commission (Communication from the Commission to the Council and the European Parliament of 21 May 2003). At the same time, the report of the Reflection Group deals extensively with the issue of EU intervention regarding groups of companies. Beginning with some theoretical premises and the experience of a cross-border group (i.e. the Pirelli Group), the proposal presented below is both a continuation of the basic guidelines of the documents mentioned above and a first response to the “Consultation on the future of European Company Law”, launched by the European Commissions, with the objectives of extending the issue’s framework and to define new legislative paradigma and conceptual models. More specifically, what it is proposed is the introduction of a number of uniform general principles for “group corporate governance”, the essential purpose of which is to improve the “flexibility of the management of groups in their international business activities”.

The Directive on Markets in Financial Instruments (MiFID 2004), adopted in 2004, brought about substantial changes in the market. Competition between trading venues has increased and a substantial portion of trade in financial instruments has moved from regulated markets to other trading venues. This has created an unlevel playing field between regulated markets on the one hand and other trading venues on the other. At the same time, the fragmentation of trade has led to problems for ensuring investor protection and market surveillance. The Commission has recently proposed a reform of the MiFID regime (MiFID II) to address these two problems. In this article there is an analysis of how and to what extent the proposed MiFID II will solve these problems. It is concluded that MiFID II will solve the problem of the unlevel playing field between regulated markets and multilateral trading facilities (MTFs), but that the proposals may introduce new problems of unequal competition in relation to new kinds of regulated trading venue (organised trading facilities – OTFs), and in relation to unregulated activities which are not considered to involve genuine trade execution. Most of the problems created by fragmentation are addressed in the proposed reform, but it is concluded that the proposed solutions may not be sufficient in all respects.

The article provides a detailed analysis of the EU Short Selling Regulation (236/2012), which imposes significant changes to the European credit default swap (CDS) market. The Regulation consists of two principal elements: mandatory disclosures and short selling restrictions. The disclosure regime is found to be broadly reasonable, but it includes several inconsistencies, which exacerbate regulatory fragmentation and reduce the ability of regulators to identify abuses in the CDS market. The restrictions on uncovered sovereign CDS positions reflect an insurance-based view of credit default swaps; this is modestly supported by the empirical literature, but it is not developed consistently in the Regulation. The definition of hedging creates uncertainty, and the exclusion of corporate CDSs provides opportunities for regulatory arbitrage. There is an opting-out regime, which may go unused, because the conditions for invoking it are tight and possibly illogical. The Regulation also creates new powers of intervention in exceptional situation, potentially provoking turf battles between national regulators and the European Securities and Markets Authority (ESMA).

The UK represents the most detailed initiative to date to develop a code which puts new responsibilities on the investor and investee communities. The UK Stewardship Code is an important attempt to redress the balance in the corporate governance matrix and although similar efforts have taken place in other markets, such as France and the Netherlands, the Code is the first of its type in the world. Not only of relevance to the UK, this is an important development for other countries too. The Code is said to offer a groundbreaking way forward through a background of shareholder apathy and indifference toward matters of governance. By and large, it intends to advance shareholder surveillance of companies, viewed by some as the missing control that led to the financial crisis. However, modern investment management practices make it particularly difficult for a committed, long-term ownership mindset to exist. This article raises the question of whether a more systematic and continuous relationship between institutional shareholders and management is about to evolve through the Code and discusses the market failures and structural limitations that prevent investors from becoming effective stewards. Whilst the market failures and structural impediments of the Code can cause concern, there are possible remedies that can help to provide a more favourable setting for stewardship. Consequent to this analysis, the article argues that there are more logical alternatives to company democracy and investor engagement than the generalist duties of the UK Stewardship Code.

The question of whether and when expulsion and valuation clauses in partnership agreements or the articles of close corporations are valid has occupiedGermancourts as well as legal scholars formanydecades. While the courtsnowadaystake a rather restrictive stance on the validityand enforceability of such clauses, a growing body of literature criticises the case law of the Federal Supreme Court as overreaching with regard to the members’ freedom to arrange for the internal affairs of their own association. This article depicts the changeful caselaw of the German Federal Supreme Court on expulsion and valuation clauses as well as its echo in the scholarly debate. Subsequently, the analysis turns to the questionwhetherandhowthis restriction of the partners’ and shareholders’ freedom of contract can be justified. It comes to the conclusion that limiting themembers’privateautonomyonthe issues of expulsionandvaluationof theexitingmember’s share in the association can, in principle, be justified as a manifestation of so-called libertarian paternalism. Applying this regulatory concept that builds on the insights of psychological and behavioural economic research to the Federal Supreme Court’s case law shows, however, that the court’s grip on the arrangements of the members of partnerships and close corporations is unjustifiably tight and has to be loosened in deference to the members’ freedom of contract, thereby bringing it morein line with English and U.S. laws on closely held business associations.