Our point of view

Nordic Market Newsletter

9 September 2011

EU Corporate Governance

In the wake of the economic crisis, the EU Commission’s DG Internal Market and Services has worked extensively to expand the regulation of corporate governance within the EU. This has, since 2009, resulted in recommendations on remuneration within the financial sector and of directors of listed companies; changes to a number of EU Directives to further regulate remuneration in the financial sector; a green paper on corporate governance within the financial sector; and a green paper on company audits. In April 2011, a green paper on corporate governance of stock exchange listed companies (the “Green Paper”) was presented, adhering questions on the Board (composition including diversity, remuneration, evaluation, time commitment and risk management), on Shareholder engagement (short-termism, obstacles for using voting rights, proxy advisors, minority protection and employee ownership), and on the “comply or explain” framework. If pursued by the Commission, the initiatives introduced in the Green Paper could have a considerable impact on current corporate governance arrangements in member states, and increase the role of the EU in regulating what traditionally has been a field subject mainly to national regulatory frameworks. The Green Paper has sparked an intensive debate on corporate governance within the EU member states, and its proposals have received criticism, both from member countries as well as from different corporate stakeholders. In July, a new draft directive and a new draft regulation for banks and financial institutions (CRD IV) was published by the Commission, which included new corporate governance regulations for boards. The most discussed proposals are limitations on the number of board assignments and diversity requirements on corporate boards. This last set of rules will be discussed further by the work group of the EU Council on 29 September 2011.

The Green Paper was expected with some apprehension in Finland. Finnish corporate interest groups have for long been concerned over the ever increasing regulatory burden of listed companies. It has been emphasized that compliance obligations have become too cumbersome specially for smaller listed companies and divert the attention of boards and management from focusing on the business and strategy of Finnish companies. In this respect Finnish stakeholders have protested against the perceived increase in compliance costs that the Green Paper is deemed to trigger. Finnish commentators have also noted that many of the issue raised in the Green Paper have already been addressed in Finnish company law and disclosure rules. The Green Paper emphasizes, for example, the need for the board to explicitly review the risk profile of the company, which has been an established element of board duties in Finland.

Many commentators would prefer to see corporate governance issues to continue to be subject to mainly national regulatory systems. However, it is also acknowledged that some of the initiatives are based on legitimate concerns. The Green Paper discusses, for example, the possibility of regulating proxy advisers. The current status of the proxy adviser industry has raised objections from Finnish and other Nordic companies as there seems to be a lack of detailed analysis of company specific issues in the proxy recommendations, and a lack of understanding of national governance systems and practices. The Green Paper also emphasizes the need to facilitate shareholder participation in corporate decision making, This issue is currently topical in Finland as proposals are pending to reform the Finnish shareholder registration system to facilitate indirect shareholding. The Commission proposals may well support the pending initiatives that have become politically sensitive.

In Sweden, the Commission’s corporate governance initiatives were generally not welcomed. The green paper on corporate governance of stock exchange listed companies received massive criticism, mainly due to the lack of any convincing justification for the proposed detailed regulatory proposals. According to the Swedish Corporate Governance Board, the Green Paper demonstrated a lack of knowledge and understanding of the different corporate governance systems of the individual EU member countries and focuses, without apparent structure, on very detailed rules, mainly applicable in an Anglo-American style corporate governance system but with less relevance in other jurisdictions. The proposals were also seen as a threat to self regulatory systems such as the Swedish one, with little respect for ownership rights and with negative impact for listed companies that risks damaging the dynamism and competitiveness of listed companies to the detriment of growth and the creation of new jobs. Similar criticism has been directed against the other EU corporate governance initiatives.

In Denmark the corporate governance regulatory framework has generally been well received, as the proposal is seen as a contributing factor to enhance the stability of financial institutions and the financial system in general. It is recognized that the principle of diversity, which should include more women and individuals with diversified backgrounds amongst the members of the board of directors, could improve the overall efficiency of boards. The sentiment is however, that such matter should be an exclusive right of the shareholders to decide upon, and such regulation should therefore be optional rather than compulsory. In addition although, it is recognised that sufficient time devotion is crucial for the well functioning of a board and that the number of boards on which a director may sit there should be limited, such limit is best individually determined and hence no upper limit should not be imposed. The general opinion amongst practitioners in Denmark is that objectives of the framework could best be reached thought the heightening of the managements´ knowledge of their duties as management and not by increased supervision.

Danish Corporate Governance Recommendations
In August the Danish Corporate Governance Committee has issued new recommendations on corporate governance in Danish companies. The new recommendations are a call to have a renewed focus on diversity in the board rooms. The Committee recommends that the board each year discusses the company´s possibilities to ensure diversity and publishes the board’s specific objective in this respect, including a status on the fulfilment of such objective either on the company’s website or as part of the management report in the company’s annual report. The primary aim of the new recommendations is to enhance the number of women and persons with international experience on the board of directors in Danish companies. Presently, the composition of the Danish boards far from match the Norwegian requirement of 40 per cent women.


New Finnish Competition Act as of 1 November 2011
A new Competition Act was ratified by the President of the Republic of Finland on 12 August 2011. The Act will enter into force on 1 November 2011.

The Act will apply to competition law infringements and transactions, which have been made subsequent to the new Act coming into force. Excluding some procedural provisions of the new Act (related e.g. to leniency), the current Competition Act will continue to apply to infringements and transactions made prior to the new Act coming into force. The new Act will bring the legislation even more in line with that of the European Union.

Within the field of merger control, the new Act replaces the dominance test currently in place with the so-called SIEC test (significant impediment to effective competition) corresponding to that applied by the European Commission. Also, the Finnish merger control procedure has been further aligned with its EU equivalent, for instance, by abolishing the filing deadline and including the possibility to file on the basis of a good faith intention to enter into a transaction.

With regard to procedural rules, the Finnish Competition Authority (“FCA”) will be given the right to prioritise certain matters and correspondingly cease handling of cases, e.g. if overall competition is deemed to function in spite of the competition restriction under investigation. Further, the FCA will be given the right to carry out inspections at private premises with the permission of the Finnish Market Court.

The new Act also entails amendments to the provisions on sanctions for breach of competition rules. The leniency procedure will e.g. be streamlined with that of the European Commission. Furthermore, the new Act will enable, not only undertakings, but also e.g. consumers and public bodies to claim damages.


The Swedish Corporate Governance Board
The Swedish Corporate Governance Board (Sw. Kollegiet för svensk bolagsstyrning) has decided to overhaul the Swedish takeover rules, a similar process has been on-giong in relation to the UK’s City Code an Takeovers and Mergers, on which the Swedish rules are based. The British revision has lead to more rigorous rules in respect of transaction agreements, especially greater regulation on the use of break fees. The Swedish overhaul will consider the progress in UK, and also consider other issues, for example whether and in those circumstances a bidder may depart from two previously stated intention or if the bidder in certain cases may be obliged to extend the time granted for acceptance of an offer.

Act on Investment Funds
As a result of adjustments to Act (2004:46) on investment funds, the Swedish Financial Supervisory Authority has decided to amend the regulations (FFFS 2008:11) on investment funds and to abolish the regulations (FFFS 2004:3) on foreign managers and investment firms in Sweden, and has furthermore decided to amend the regulations and general advice (FFFS 2005:11) on insurance intermediaries. The amendments concern, for example, the requirements on organisation, conduct, the handling of risk and information giving generally.

Nasdaq OMX Stockholm’s Disciplinary Committee

  • Pre-notification to the Exchange
    According to the Disciplinary Committee, decision 2011:6, Luxonen S.A. has infringed the stock exchange’s regulation for issuers as regards rule 3.4.2 concerning the obligation to inform the stock exchange before information that is expected to be substantially price-sensitive is made public. The Disciplinary Committee established that Luxonen should have realized that information concerning the liquidation and dissolution of the company is considered highly important, and that the stock exchange therefore should have been informed before publishing such information through a press release.
  • Information leak on website
    In decision 2011:7, the Disciplinary Committee stated that Holmen AB had infringed the stock exchange’s regulation for issuers by providing the company’s interim report on their webpage before publishing the report in accordance with the regulation, according to which financial information shall be published in a quick and non-discriminatory matter in order to secure access to the information for the whole market at the same time. However, the infringement was considered minor and temporary when handling the information and, hence, the Disciplinary Committee considered a warning to be sufficient reprimand.


The rights of a terminated employee to retain stocks
In a recent ruling by the Danish Supreme Court the court decided on a terminated employee’s rights to retain stocks in the parent company of his former employer. The employee had participated in an incentive program, according to which he had bought the stocks. The stocks were bought from the holding company of the group. Under the agreement the employee did not become the direct owner of the stocks, which were placed with an agent in Luxemburg; however any financial upside would be in the favour of the employee.
According to the terms of the incentive program the employee was obliged to resell his stocks to the original owner (the holding company) in the event of a termination of the employment regardless of the reason for termination and regardless of the termination being made by the employee or the employer. A year after the employee entered the program his employment was terminated by the employer without just cause.
The Supreme Court found that the investment made by the employee was neither covered by the Danish Stock Options Act nor by the Salaried Employees Act, regarding share of profits, bonuses, etc. The Supreme Court found that the obligation to resell the stocks was to be disregarded by reference to the Contracts Act on unfair contract terms, when the employment was terminated by the employer without just cause. The Supreme Court referred to the fact that the investment was made as part of the employment and that the main purpose of the incentive program was to provide a retention scheme for the employees. Further, the Supreme Court stated that the terms were to be disregarded as unfair regardless of the fact that the stipulated resell price might be considered equal to the market value of the stocks. The employee was thus entitled to keep his rights in relation to the stocks bought as if he was still employed.
The decision from the Supreme Court may be relevant in relation to both existing and future incentive schemes and the principles of the ruling should be considered when drafting any clause on the obligation to resell stocks in relation to incentive schemes.


Amendments to the Corporate Act
The Norwegian government has proposed amendments to the Corporate Act. The suggested changes involve reduced share capital from the current NKR 100,000 to NKR 30,000. The proposed reduction, together with other adjustments such as removal of mandatory audit for minor companies, aims to make it easier to start and to conduct a business.