Yup, they've done it. Never accuse the European Commission of making law too quickly. Seven years after the initial proposal, the Commission have now adopted a new directive to change the rules on maintenance of capital by plcs. This furtive young directive, which becomes law on 15 October 2006, will amend the aging 2nd Company Law Directive of 1976, in relation to the formation, maintenance and alteration of a company’s capital. These modifications were first taken on board after a report by the SLIM group (Simpler Legislation for the Internal Market). Corporate Blawg infers that the Commission would have to trim down the SLIM group report to make the issues more palatable to Member States, as otherwise it would be a bit like asking CND for their views on nuclear weapons.
The Commission's mantra on this new directive is that:
Simplification and modernisation of the second directive would significantly contribute to the promotion of business efficiency and competitiveness without reducing the protection offered to shareholders and creditors.
Corporate Blawg's considers that the Commission should also adopt the mantra that "shorter sentences are easier to read".
This new directive is not prescriptive, with each Member State having a wide berth of discretion. It is likely to be adopted by most since it easies administrative burdens and gives businesses more scope for flexibility. However, the precise mechanisms of the provisions have been left quite open, and it will be the prerogative of each Member State whether to feast upon the European-style of principles-based regulation, or to clamp down with rules-based jaws of iron.
The directive provides that public limited companies (plcs) may allot shares for consideration other than cash without requiring a special expert valuation. This applies where there is a clear reference for the valuation of such consideration. This valuation reference must not be more than 6 months old, and must have been performed in accordance with "generally accepted valuation standards".
In light of the IFRS replacing the idiosyncratic GAAP, Corporate Blawg considers the introduction of such GAVS to be a bit on the VAGUE side (Very Annoying Gobbledygook by Union of Europe). The valuation may be contested by one or number of shareholders holding 5% or more of the shares in the company. Where the above is not applied by Member States, the EU has held that it will still be open to companies to use an expert’s report of the fair value of an asset which has been provided to the company within one month of the asset contribution. Accordingly the management of the company will have to declare that there have been no new qualifying circumstances since the valuation was made.
The second main provision of the directive is that plcs may now be authorised in a general meeting to acquire their own shares, for a period of up to five years. This applies to only fully paid shares and such purchase may not exceed the limit of the company's distributable reserves. The legislation provides that the acquisition shall not be allowed to prejudice creditors’ claims.
After the excitement in the Companies Law Reform bill, that limited companies could give financial assistance, the new directive permits financial assistance by plcs, to a limit. Proposals for transactions involving fair market conditions may be submitted to a general meeting for prior approval where the company has duly investigated its interests and securities for loans. The management must provide a written report to the meeting. This report must include a raft of information, including the risks involved for liquidation and solvency, and the price at which the third party will acquire the shares. Again a plc may only provide financial assistance up to the limit of the company's distributable reserves, and should not, under any circumstances, result in a reduction of the net assets of the company. Whatsmore, the company must include liabilities on the balance sheet and a reserve, unavailable for distribution, of the amount of aggregate financial assistance.
As an afterthought of its enthusiastic liberation of plcs from onerous capital maintenance provisions, the directive considers creditors. The last part of the legislation states that creditors should be able to resort to judicial or administrative proceedings where their claims are at sake as a consequence of a reduction in the capital. It is thought that this is to harmonise law across the EU, since it is already a factor in UK legislation.
Corporate Blawg welcomes these changes to plcs, but notes the trade off. Where company administration is de-regulated there is always going to be the moral hazard that such freedoms may be abused. The due date for this legislation to be implemented is 15 April 2008, but Corporate Blawg anticipates that it is likely to become UK law sooner than that since the UK likes to appear at the forefront of company law developments, and the benefits to plcs may be quite considerable. The Company Law Reform Act has not received assent yet, and Corporate Blawg would not be surprised to see it pushed back to incorporate this new directive - in fact, that would be a terrific use of time and effort by parliamentary draftspersons (not to be confused with parliamentary daftpersons - i.e. politicians).
This new directive is not prescriptive, with each Member State having a wide berth of discretion. It is likely to be adopted by most since it easies administrative burdens and gives businesses more scope for flexibility. However, the precise mechanisms of the provisions have been left quite open, and it will be the prerogative of each Member State whether to feast upon the European-style of principles-based regulation, or to clamp down with rules-based jaws of iron.
The directive provides that public limited companies (plcs) may allot shares for consideration other than cash without requiring a special expert valuation. This applies where there is a clear reference for the valuation of such consideration. This valuation reference must not be more than 6 months old, and must have been performed in accordance with "generally accepted valuation standards".
In light of the IFRS replacing the idiosyncratic GAAP, Corporate Blawg considers the introduction of such GAVS to be a bit on the VAGUE side (Very Annoying Gobbledygook by Union of Europe). The valuation may be contested by one or number of shareholders holding 5% or more of the shares in the company. Where the above is not applied by Member States, the EU has held that it will still be open to companies to use an expert’s report of the fair value of an asset which has been provided to the company within one month of the asset contribution. Accordingly the management of the company will have to declare that there have been no new qualifying circumstances since the valuation was made.
The second main provision of the directive is that plcs may now be authorised in a general meeting to acquire their own shares, for a period of up to five years. This applies to only fully paid shares and such purchase may not exceed the limit of the company's distributable reserves. The legislation provides that the acquisition shall not be allowed to prejudice creditors’ claims.
After the excitement in the Companies Law Reform bill, that limited companies could give financial assistance, the new directive permits financial assistance by plcs, to a limit. Proposals for transactions involving fair market conditions may be submitted to a general meeting for prior approval where the company has duly investigated its interests and securities for loans. The management must provide a written report to the meeting. This report must include a raft of information, including the risks involved for liquidation and solvency, and the price at which the third party will acquire the shares. Again a plc may only provide financial assistance up to the limit of the company's distributable reserves, and should not, under any circumstances, result in a reduction of the net assets of the company. Whatsmore, the company must include liabilities on the balance sheet and a reserve, unavailable for distribution, of the amount of aggregate financial assistance.
As an afterthought of its enthusiastic liberation of plcs from onerous capital maintenance provisions, the directive considers creditors. The last part of the legislation states that creditors should be able to resort to judicial or administrative proceedings where their claims are at sake as a consequence of a reduction in the capital. It is thought that this is to harmonise law across the EU, since it is already a factor in UK legislation.
Corporate Blawg welcomes these changes to plcs, but notes the trade off. Where company administration is de-regulated there is always going to be the moral hazard that such freedoms may be abused. The due date for this legislation to be implemented is 15 April 2008, but Corporate Blawg anticipates that it is likely to become UK law sooner than that since the UK likes to appear at the forefront of company law developments, and the benefits to plcs may be quite considerable. The Company Law Reform Act has not received assent yet, and Corporate Blawg would not be surprised to see it pushed back to incorporate this new directive - in fact, that would be a terrific use of time and effort by parliamentary draftspersons (not to be confused with parliamentary daftpersons - i.e. politicians).
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