ECGS Answers to Consob consultation on changes to issuers and market regulations

Posted on September 20, 2011

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We are writing on behalf of European Corporate Governance Service (ECGS) registered in London, to comment on the European Commission’s Green Paper on the EU Corporate Governance Framework for listed companies.

The ECGS is a partnership of independent local market experts which have come together to provide specialist governance research and proxy voting advice, offering institutions access to unrivalled experience on corporate governance and responsible investment issues. The Managing Partner of ECGS is Proxinvest based in Paris.

Other active ECGS Partners are DSW (Düsseldorf), Ethos Services (Geneva), Shareholder Support (Rotterdam). ECGS also employs local governance experts in Montréal and Melbourne. ECGS prepared the following answers with the help and explanation of Mr Sergio Carbonara, a seasoned Roman connoisseur of the Italian financial rules and practices who represents ECGS interests in Italy.

The ECGS acts solely in the interest of all shareholders and is free of conflicts of interests in the production and sale of its advisory services.

ECGS considers that, in view of the globalisation of the markets and of the frequent objection to national reforms in the name of equal footing competition, the EC has a high responsibility regarding fair financial markets rules and the efficient allocation of capital. We consider at ECGS that the fair treatment of shareholders resulting from a better corporate governance is the cornerstone of the financing of new investment and therefore of new employment.

ECGS hereby congratulates the CONSOB for this consultation, with the objective of increased market efficiency. As our conviction is that the fair information and equal treatment of shareholders are the prerequisite of a reduced cost of capital and of an efficient economy we fear that some ideas for reform inspired by the Sell Side might have negative effects on minority shareholders’ rights and therefore on the integrity of the Italian market .

The document contains comments to the following proposals:

 

SECTION I

“PROPOSED CHANGES TO CONSOB’S MARKET AND ISSUERS REGULATIONS”

3. INFORMATION ON EXTRAORDINARY OPERATIONS

5. INVESTMENT RECOMMENDATIONS AND ASSESSMENTS OF CREDITWORTHINESS ELIMINATING

11. LIMIT ON MULTIPLE OFFICE HOLDING FOR MEMBERS OF BOARDS OF AUDITORS

 

SECTION II

PROPOSED LEGISLATIVE CHANGES

1. LIMIT ON MULTIPLE OFFICE HOLDING FOR MEMBERS OF BOARDS OF AUDITORS

2. REQUIREMENTS OF INDEPENDENCE OF DIRECTORS

4. RULES ON SPECIAL SHARES

7. CAPITAL INCREASES

8. REGULAR FINANCIAL INFORMATION

 

SECTION I

“PROPOSED CHANGES TO CONSOB’S MARKET AND ISSUERS REGULATIONS”

 

3. INFORMATION ON EXTRAORDINARY OPERATIONS

Some changes to Consob’s regulation are proposed “with the objective of attributing to issuers the option of exemption with respect to the publication of disclosure documents for significant operations, introducing a differentiation among different sets of formalities.”

We consider that individual and institutional investor should be clearly informed about any potential reduction of their rights or share into the company capital. Proposed changes regard extraordinary operations implying a direct impact both on investment value and shareholder rights. Due to their nature, these resolutions have to be voted by shareholders at Extraordinary General Meetings. Considering the relevance of such resolutions for all shareholders, and considering the great impact of such operations, information transparency and details must be at their highest level.

ECGS therefore considers that the mandatory information currently provided should not be changed. ECGS is not favourable for any option left to the issuer on such matters.

 

5. INVESTMENT RECOMMENDATIONS AND ASSESSMENTS OF CREDITWORTHINESS ELIMINATING

The proposal aims to “eliminate the mandatory disclosure of researches provided by specialist, sponsor, lead-manager o co-lead-manager.” The disclosure has to be published within sixty days since the same document has been provided to the Issuer.

Notwithstanding the need to change current timings of the mandatory disclosure, it seems there are no reasons to eliminate the mandatory disclosure itself, also considering the high impact such disclosures might have on the investors decision and on the stock’s market price. Eliminating the mandatory disclosure of researches provided by specialists, sponsors, lead-managers and co-managers would increase market’s information asymmetry, for this reason the regulatory provision should not be eliminated. On the other hand, 60 days timing is not appropriate .

ECGS considers the disclosure obligation must be maintained while keeping the mandatory publication within a very short time after remittance of the research to the Issuer.

 

11. LIMIT ON MULTIPLE OFFICE HOLDING FOR MEMBERS OF THE AUDIT COMMITTEE

Many foreign markets already faced the need of limiting the number of directorship held by an individual, in some cases even through legislative provisions

ECGS considers that In order to align Italian regulation with international best practices, it would be appropriate to limit directorships held by an executive Director at maximum two executive directorships or, alternatively, five non executive directorships if these are all non executive positions. In the event more directorships are held within the same controlling group, these mandates should be considered as just one.

 

SECTION II

“PROPOSED LEGISLATIVE CHANGES”

 

1. LIMIT ON MULTIPLE OFFICE HOLDING FOR MEMBERS OF AUDIT COMMITTEES

As already commented at previous proposal n.11, Section I, ECGS considers that the limits on multiple offices should be provided also for listed companies’ directors.

 

2. REQUIREMENTS ON INDEPENDENCE OF DIRECTORS

Market regulation should arrange all necessary measures for counterbalancing this excess of power of persons holding the role of Chairman and/or Chief Executive Office in order to protect minority shareholders’ interests.

Current Italian legislation falls short of any requirement for a reasonable number of independent directors: “at least one director, or two in case the board is made of more than seven members”. Current practice absolutely needs to be changed. Considering the high ownership concentration level in Italy, and International best practices, at least 33% of board members should meet independence requisites. Moreover, ECGS considers that when the Chief Executive Officer or most of executive directors or the Chairman of the board of directors (when this last is an executive director) are directly or indirectly related to controlling shareholders (de jure or de facto), at least 50% of directors should be independent.

In order to guarantee a higher representativeness to the board of directors, the provision at art.147-ter, part 3, TUF (“at least one member of the board of directors is nominated from the minority list that obtained the majority of votes”), should be changed by introducing the obligation to a higher proportionality in election mechanisms, when more than one slate has been presented at the General Meeting.

ECGS supports the idea that Art.147-ter, part 3, TUF, should be changed with the provision that all board members are elected following the “voto di lista” mechanisms: each nominee is indicated with a progressive number within the slate; nominees will so obtain total votes obtained by their slate divided by their progressive number; all nominees, regardless in which slate they have been presented, will be sorted by the so calculated quotient and first ones in the list will be elected.

Alternatively, art.147-ter, part 3, TUF, might be changed by providing that at least 50% of directors plus one is elected from the slate of nominees that obtained majority of votes and the others are elected following the “voto di lista” mechanism as described above.

 

4. RULES ON SPECIAL SHARES

ECGS considers that the proposed provision to allow the issuance of classes of common shares with different voting power is not acceptable and to be considered against all recognized International best practices.

Voting power, and consequently the ability to influence corporate strategic choices and shareholder rights themselves, has absolutely to be strictly proportional to share ownership (provided all safeguards to minority shareholders). The negative effects on a bias favouring old shareholders buy an increased voting power is inappropriate: there are other ways to attach shareholders such as scrip dividend open to all shareholders, or even increased dividends.

No changes to art. 2351, part 4, of the Civil Code should be considered . Changes are needed, indeed, in order to eliminate special provisions for cooperative listed companies, by making mandatory the rule “one share – one vote” for them too.

 

7. CAPITAL INCREASES

ECGS opposes to the idea of eliminating the provision of a higher voting quorum needed to approve share capital increase without pre-emptive rights (a half of the share capital plus one share even at second and third meeting calls). There are no expressed reasons to that proposed changes but the fact the issuers might find it hard to approve such resolutions.

The issuance of rights with no pre-emptive right or at the very lease no pre-emptive priority for existing invested shareholders is barely acceptable as there should not be any reason to deprive investor from their fair share into the company in order to favour the newcomer;

Any share capital increase without pre-emptive rights, affects market share value and shareholders interests. Pre-emptive rights guarantee shareholders to avoid involuntary dilution of their share ownership or to defend their investment value in case they do not want to subscribe the new shares (or they are just not able do it), by selling the rights on the market. Furthermore, eliminating the higher deliberative quorum for share capital increases without pre-emptive rights would risk to allow activities that are not always aimed to save companies from failure.

In order to protect all shareholders from a more than potential investment loss and also from potential unfair behaviours, ECGS considers that the provision at art.2441, part 5, of the Civil Code should not be changed.

At least such an exemption should only be made lawful when without that capital increase the company itself come under the threat of beingliquidated. This should be subject to a strict criterion such as a net asset value inferior o the company’s capital or a subsequent series of three years ol losses for the company.

 

8. REGULAR FINANCIAL INFORMATION

Proposed changes aim to allow the faculty for listed companies (excluding banks) to not follow International accounting standards.

Stock markets are, by definition, international and open to foreign investors. The proposed changes would make harder understanding Italian financials, probably forcing big institutional investors to abstain or to oppose the approval of financial statements at general meetings, with potential serious consequences for the company.

Accordingly ECGS considers that The provision compelling listed companies to draft financial statements following International accounting standards should not be changed.

 

PARIS, September 20th, 2011

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