Executive summary

Corporate ownership through company groups is a common and sometimes the preponderant pattern of shareholding in an important number of markets. Data on share ownership by corporations and affiliated individuals indicates that a significant portion of publicly-listed companies in many of the markets surveyed for this report are members of a company group.

Previous OECD reports identified important advantages and benefits to carrying out entrepreneurial activity through affiliated but legally separate companies, including scale economies, efficiencies in resource allocation, reduced dependence on external finance, fewer informational asymmetries, lower transaction costs and less reliance on contract enforcement. Protection of intellectual property rights and facilitation of cross-border activity are additional common rationales. These advantages and benefits, among others, continue to make company groups important contributors to economic development and employment generation in many markets.

From a corporate governance policy perspective, company groups present the same agency problems that face stand-alone companies with defined control. Notably, parent companies may attempt to appropriate undue private benefits of control. Since cooperation in pursuit of synergies is a key rationale for company groups, groups typically engage in frequent related-party transactions. The more complex the structure of a group, the greater the opportunity for such transactions to be carried out in a less transparent fashion, which may benefit some group companies at the expense of others. Like other majority shareholders, parent companies in groups may engage in transactions that do not benefit all shareholders equally, such as intra-group mergers and sales of control to third parties effected on questionable terms. Allocation of business opportunities is another area that can present conflicts of interest for boards, individual directors and managers of group companies.

Groups also present non-agency-related issues. Domination of an economy by groups, may slow the development of broader, deeper and more efficient national capital markets. The organisation of industry into networks of related companies may also reduce competition in product and service markets.

The challenge of regulation of company groups is to secure the benefits that company groups can confer while managing the potential risks of abuse and inequitable treatment of shareholders and other stakeholders. It is important in this process to view properly-crafted group company law and regulation as a means to foster legal certainty to enable the achievement of greater synergies and efficiencies. Clarity around the rules and expectations for how company groups should operate allows entrepreneurs, directors and employees to focus more on value creation and less on protecting against litigation or regulatory intervention.

Approaches to the challenges of company group structures for directors and boards

The threshold question for a discussion of the duties and responsibilities of boards in company groups is—To whom do directors of group companies owe their fiduciary duties? The responses to the survey questionnaire on this question fell into three general categories: (1) jurisdictions that follow the classic fiduciary approach that duties always and exclusively relate to the company (and its shareholders) on whose board the director sits; (2) jurisdictions with special frameworks that recognise exceptions to the classic fiduciary approach for certain group companies and explicitly regulate such exceptions; and (3) jurisdictions where there have been efforts to somehow reconcile the classic approach to the group context without explicitly creating a separate group company regime modifying directors’ duties and/or to whom they are owed.

More than three-fourths of jurisdictions surveyed fall into the first category. Ten responding jurisdictions may be split between the remaining two categories, reporting that their legal/regulatory frameworks provide some form of separate regime for the duties and responsibilities of directors and boards of group companies. Most of these share some elements of Germany’s Konzernrecht (“company groups law”) concept. Importantly, practically all questionnaire responses evidenced legal/regulatory provisions and self-regulatory efforts to at least partially address the risks of mistreatment of shareholders and other stakeholders that group structures present. These provisions can generally be grouped into the following categories:

1. a. guidance on when and how directors may take into account group interests

2. b. clarity of procedures for managing conflicts of interest

3. c. processes for compensating losses incurred by a group company for the benefit of the group

4. d. transparency around group purposes and allocation of business opportunities

5. e. allocation of responsibility for company policy and oversight between parent and subsidiary boards (group governance)1

Observations and policy issues

This report is a stocktaking of current issues, practices and policy approaches with respect to the duties and responsibilities of boards in company groups. It does not evaluate the relative advantages and disadvantages of the legal/regulatory and self-regulatory approaches reported by respondents. The survey results do, however, shed light on aspects of the framework for board duties and responsibilities in company groups that have been the subject of attention in a number of jurisdictions, or where the framework does not address or remains uncertain around policy issues of relevance to company groups:

• Mandatory public disclosure of items of importance in group situations is still not required by all jurisdictions. Companies in a number of reporting jurisdictions are not required to publicly disclose major shareholders, ultimate beneficial ownership, corporate group structures, special voting rights, shareholder agreements, cross shareholdings and shareholdings of directors.

• Black letter law in most jurisdictions does not seem to directly address a parent company’s and its board’s usually privileged access to information from a subsidiary.

• Soft law (codes and self-regulatory efforts) may help clarify expectations and best practices, but risks legal challenge if the legal/regulatory framework is not consistent.

• There appears to be greater confidence in the efficacy of legal/regulatory frameworks around board duties to review related-party transactions than there is with respect to allocation of business/corporate opportunities among group companies.

• Explicit requirements for parent company board oversight of key risks, including compliance and supply chain risks, diverge considerably across jurisdictions.

• While judicial “piercing of the corporate veil” is rare in all jurisdictions, parent company accountability for environmental impacts and human rights in some jurisdictions has increased.

Note

← 1. Treatment of related-party transactions has also been an almost universal focus of attention. An outline of the Committee’s considerable previous work on this topic, both within and outside the context of company groups, is provided later in this publication.