Report on session of the Corporate and M&A Law Committee at the IBA Annual Conference in Rome
Friday 12 October 2018

Session Co-Chairs
Dovile Burgiene Ellex Valiunas, Vilnius
Takashi Toichi TMI Associates, Tokyo

Umberto Baldi Fincantieri, Trieste
Ellisa Habbart The Delaware Counsel Group, Wilmington
Mark Seah SC Dentons, Singapore
Ralf Morshäuser Gleiss Lutz, Munich

Takashi Toichi
TMI Associates, Tokyo

The session analysed the global trend that is converting the traditional corporate governance soft-law system into a full hard-law system, which involves a completely different approach to corporate governance matters, and is certainly transforming legal advice and practice.

After the introduction of the session and the panellists, the session started by explaining the recent examples of this trend.

Firstly, from Europe, Ralf Morshäuser explained trends in both the European Union and Germany, by referring to the updated EU Shareholder Rights Directive, which aims to boost responsible, long-term shareholder engagement, curb short-term excessive risk-taking and give shareholders more rights, such as the ‘say on pay’ of directors and approval of related-party transactions, and implementation of developments of national legislation in Germany which were affected by European legislation, including ‘say on pay’ (the Shareholder Rights Directive) or non-financial reporting (the Common Standard Reporting (CSR) Directive); the German Corporate Governance Code (DCGK) as prime examples of the interrelation between hard law and soft law. Thereafter, Umberto Baldi provided examples of transitions from soft law to hard law in the Italian legal system and the interplay between the two which included an instance where hard law (ie, the Italian Financial Code) sets forth a ‘comply or explain’ provision (typical of soft law) on the adoption of diversity policies. Further, from other European countries, Dovile Burgiene explained about amendments to the law on Companies in Lithuania requiring separation of the Chief Executive Officer, supervisory council and board member roles and for one-third of all board/supervisory council members of public listed companies to be independent.

Next, from Asia, Mark Seah explained that in Singapore, in 2018, the Corporate Governance Council made important recommendations which have been accepted and acted upon by the Singapore Monetary Authority and Stock Exchange respectively, including moving certain soft-law requirements of training for directors into mandatory hard-law. From another Asian country, Japan, Takashi Toichi added the enactment of the Corporate Governance Code in 2015, and the amendment to the Companies Act to enhance the corporate governance to require an increased number of independent/outside directors and to increase diversity of the board.

Lastly, from the United States, Ellisa Habbart explained about the US law framework, particularly from Delaware law perspectives, and explained that Delaware law does not have ‘hard’ rules that apply in all circumstances. Habbart added that directors’ actions are reviewed against common law fiduciary principles of duty of care and duty of loyalty; the review takes into account the facts surrounding the actions, and if directors are conflicted, their actions will be subject to greater scrutiny and the otherwise applicable business judgement rule will not apply. She added that US federal law may establish and impose ‘hard’ rules, non-government sources may also impose ‘hard’ rules, and other states may establish and impose ‘hard’ rules.

Thereafter, the panel discussed the key drivers of the trend to rely increasingly on hard-law regulation in corporate governance. Morshäuser started by explaining that the key drivers of this trend would be to attract investors by increasing: (1) transparency through (financial and non-financial) information; and (2) comparability between different jurisdictions and markets. Baldi added that a typical driver is the desire for an enforcement framework that self-regulatory, soft-law systems lack, and reputational risk may be politically perceived as an insufficient safeguard but, on the contrary, in developed and organised markets, institutional investors may police the space more effectively than public authorities.

The panel also discussed whether the benefits of good corporate governance warrant a hard-law approach or not, and whether a ‘one-size-fits-all’ approach is appropriate. During the discussion, Morshäuser emphasised that the latest changes in legislation already distinguished between certain companies (‘say on pay’ only for listed stock corporations; CSR reporting only for companies with more than 500 employees) in order to avoid a ‘one-size-fits-all’ approach. The disadvantages of excessive regulation are: (1) the costs incurred on the companies for reporting, legal advice, etc; and (2) a decrease of transparency by providing too much information to the market, which makes it difficult for investors to focus on the essential pieces of information (‘information overload’). Also, an increasing density of regulation is to be expected within the EU; for the European market the harmonisation of rules and the creation of common standards might be advantageous; it can be noticed that companies have already reacted by hiring additional specialists for their in-house law departments (such as compliance officers etc). Baldi added that, as always with corporate governance matters, companies should prepare with the appropriate tone from the top, and corporate governance trends may be experienced as yet another cost of doing business, to be avoided or minimised, or an opportunity to improve the company culture and ultimately its performance. Also, he added that personally he is not sure what the future holds for corporate governance, and the risk is that, in a stable or growing financial and business environment, complacency kicks in and merely cosmetic reforms take place, following whatever the trend of the day may be. On the other hand, in the event of a systemic crisis, such as the 2008 financial meltdown, we can expect significant regulatory activity on corporate governance matters, and although everybody knows that it is usually not advisable to act in a hurry, this is what may very well happen.

The panel session ended after receiving a few questions from the audience.