copy the linklink copied!1. Overview of the legal/regulatory framework with respect to the duties and responsibilities of boards in company groups
This chapter provides an overview of the legal/regulatory framework (including corporate governance codes) with respect to board duties and responsibilities in group companies. It identifies different approaches to the common phenomena of group structures in 45 jurisdictions, including many of the world’s largest economies in OECD, G20 and Financial Stability Board members. The introduction provides background on the global landscape of company groups, and summarises the economic benefits and rationale for their existence, as well as the principle challenges these economic combinations present for policy-makers. Part I provides a typology of approaches to the challenges presented by company group structures with respect to the duties and responsibilities of boards of directors. Part II elaborates on salient differences and commonalities across jurisdictions.
copy the linklink copied!Background
The Financial Stability Board (FSB) conducted a peer review on the implementation of the G20/OECD Principles of Corporate Governance for publicly listed regulated financial institutions. The Chair of the FSB’s review team presented the preliminary results of the review to the Corporate Governance Committee in November 2016. The final recommendations from the FSB review were published in April 2017 and included a proposal to the OECD for a follow-up review on the practices with respect to the effectiveness of rules regarding the duties, responsibilities and composition of boards within group structures.
Against this background, the Committee agreed, at its meeting in April 2018, that a background report on the Duties and Responsibilities of Boards in Company Group Structures should be developed for an exploratory roundtable discussion in the October 2018 meeting. The background report, developed by Professor, Dr. jur. Karsten Engsig Sørensen, was submitted to the Committee for discussion at the October 2018 roundtable meeting. A scoping paper setting out the framework for a review of the duties of boards in company groups together with a proposed roadmap and options for conducting the work was also submitted to the Committee for discussion at that meeting. Finally, the report Corporate Governance of Company Groups in Latin America, which was developed by the Latin American Corporate Governance Roundtable’s Task Force on Company Groups was also submitted to the Committee as background for the roundtable discussion. These reports provide an overview of the different benefits of and rationales for the establishment of company groups and some of the most relevant issues with respect to corporate governance and board duties that announce themselves in group structures.
At its meeting in October 2018, the Committee agreed to conduct a peer review on the Duties and Responsibilities of Boards in Company Group Structures and to collect information from all jurisdictions via a questionnaire sent to delegates. The draft questionnaire was submitted to the Committee for discussion and feedback at its April 2019 meeting before being finalised and sent to delegates in June 2019. In all, 45 jurisdictions responded to the questionnaire (See Annex A. “ Questionnaire” for the full questionnaire).
copy the linklink copied!Structure and content of the questionnaire; responses; structure of this report
The principal elements of legal/regulatory frameworks with respect to the duties and responsibilities of boards in company group structures addressed in the questionnaire included:
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a. definition
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b. disclosure and transparency
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c. group structures
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d. composition, structure and function of group company boards
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e. duties and responsibilities of group company directors
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f. powers of parent companies over subsidiaries
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g. coordinated activities and intra-group transactions
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h. responsibility for parent companies and other group members for the acts of a group member
The Committee received responses from 45 jurisdictions. The Introduction to this chapter provides background on the global landscape of company groups. It summarises the economic benefits of and rationale for their existence and describes the principle challenges these economic combinations present for policy makers. Part I follows with a typology of approaches to the challenges presented by company group structures with respect to the duties and responsibilities of boards and directors, drawing from the questionnaire responses, subsequent communications with several respondents, the case studies prepared by Colombia, India, Israel and Korea, earlier work of the Committee and other relevant work on this topic.
Part II elaborates on salient differences and commonalities across jurisdictions apparent from the responses in the following areas:
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a. definition of company groups and their members
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b. limitations on permissible group structures
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c. transparency of group structures and operations
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d. composition, structure and functioning of boards and committees
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e. parent company board responsibility for oversight and governance of the group
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f. information flows within the company group
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g. misuse of subsidiaries to avoid compliance with legal obligations of listed companies
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h. liability of parent companies for acts or omissions of subsidiaries
copy the linklink copied!Introduction
Prevalence of company groups
The legal/regulatory framework with respect to the duties and responsibilities of boards in company group structures is important for three principal reasons: (1) concentrated ownership, very often taking the form of company groups, is a common and sometimes the preponderant pattern of shareholding in an important number of markets; (2) well-managed company groups can contribute importantly to economic development and employment through achievement of economies of scale, synergies and other efficiencies; but (3) company group structures present the potential for inequitable treatment of shareholders and other stakeholders and other negative consequences for the efficiency and development of capital markets and economies more broadly.
The Committee’s regional roundtables in Asia, Middle East and North Africa and Latin America have all identified the important presence of company groups and holding companies in the corporate sectors of the respective regions. An OECD review of the distribution of ownership of publicly listed companies globally indicates a strong presence of company groups not only in emerging economies but also in many European countries. To provide a global overview, Table 1.1, below, shows the distribution of publicly listed companies among different categories of owners, including private corporations and holding companies.
Table 1.1 reveals that private corporations and holding companies is the largest category of owners in nine of the jurisdictions surveyed. In several Asian economies, including India, Indonesia and Singapore, and some other emerging markets such as Argentina, Brazil, Chile and Turkey, private corporations and holding companies hold more than 30% of the total equity capital in publicly listed companies. In other Asian economies, including Korea and Malaysia, and several European markets, including Austria, France, Greece and Poland, private corporations on average hold between 18 to 24% of the capital. The significant levels of ownership by private corporations and holding companies in publicly listed companies is probably one of the reasons for an increased interest in the characteristics of company groups and the responsibilities of board and directors in such groups.
In addition to the data in Table 1.1, there are two other aspects of ownership that warrant particular attention with respect to the importance of corporate groups. The first is the presence of strategic individual investors, representing controlling or blockholder individuals or families who in many cases may be linked to the corporate groups. For example, while corporations and holding companies hold on average 20% of the capital in listed Mexican companies, another 34% is owned by strategic individuals and families. The second is public sector ownership, which also plays an important role in several markets, including Hong Kong, China); Malaysia Norway; People’s Republic of China (hereafter ‘China’) and Russia, with an average ownership ratio above 30% of the outstanding capital. Many jurisdictions have also established holding companies for substantial portfolios of state-owned enterprises, including listed companies.
To broaden the perspective, Figure 1.1 focuses on companies where one private corporation or a holding company is the largest shareholder of a listed company. It shows both the share of companies where a corporation is the largest holder and the average size of its holding. The figure covers almost 8 000 large listed companies from 29 jurisdictions, of which 2 510 (33%) have another corporation as their largest shareholder. For example, 43% of companies in France have another corporation as the largest shareholder, holding on average 50% of the capital. Corporate ownership is quite strong also in Argentina, Chile, India, Indonesia, Israel, Korea, Malaysia and Turkey, where more than half of the companies have a corporation as the largest shareholder. These data seem to confirm the presence of private corporations and holding companies as an important category of owners in listed companies and in many cases also the presence of group structures that include one or several listed companies.
Source: De La Cruz, A., A. Medina and Y. Tang (2019), “Owners of the World’s Listed Companies”, OECD Capital Market Series, Paris.
It is important to note that while concentration of ownership of capital is a principal indicator of control at the company level, there are several arrangements available in corporate governance frameworks that allow control without holding a majority of the company's actual equity capital. These include multiple class share structures, shareholder agreements, special voting rules, cross-shareholdings and pyramid structures.1 And, of course, in companies with more dispersed shareholding and/or low turnout at shareholder meetings, a single shareholder may still have significant influence and sometimes effectively control the shareholder meeting with less than a majority of the company’s voting shares.
Advantages and benefits of company groups
Consistent with Principle II.F (“Related-party transactions should be approved and conducted in a manner that ensures proper management of conflict of interest and protects the interest of the company and its shareholders”), the Committee has directed considerable attention to studying and confronting the issues of related-party transactions, both within and outside the context of company groups. The OECD-Asian Roundtable on Corporate Governance’s Guide on Fighting Abusive Related Party Transactions in Asia was released in September 2009 and Related Party Transactions and Minority Shareholder Rights, presenting the results of the third thematic peer review based on the OECD Principles of Corporate Governance, was published in 2012.
While both documents focused on efforts in many jurisdictions to minimise the negative potential of self-dealing, the fact that virtually no jurisdiction bans all related-party transactions outright reflects, among other things, a broad recognition of the important benefits of intra-group coordination and transactions— “consensus accepts that related party transactions can be economically beneficial, especially in company groups where there are other developmental arguments that they substitute for under-developed markets and institutions.”2
Corporate Governance of Company Groups in Latin America, published by OECD in 2015, included a subchapter on the benefits of and economic rationale for corporate groups. Positive contributions of properly-managed company groups cited in that study include efficiencies in resource allocation, reduced need for external finance (internalised capital markets), fewer informational asymmetries, lower transaction costs and less reliance on (often unreliable) contract enforcement mechanisms.
More recently, the results of a 2018 survey conducted by Japan’s Ministry of Economy, Trade and Industry reported the following top four benefits/rationales cited by parent companies for owning a listed subsidiary: (1) maintaining and improving motivation of the employees of the subsidiary; (2) maintaining the higher-status and brand value of being a listed company; (3) hiring high-quality talents in the subsidiary; and (4) ensuring trust with the business partners of the subsidiary.3 An obvious complement to items (1) and (3) is the ability to directly link compensation of key employees to the value of the subsidiary’s own shares.
Protection of intellectual property rights and facilitation of cross-border investment and operation are additional commonly cited rationales for the existence of company groups. Finally, the ability to establish listed subsidiaries or unlisted joint ventures may encourage entrepreneurship, providing limited liability for the sponsor and the prospect for minority shareholders of exposure to “pure plays”.
Accordingly, while efforts to reform the legal/regulatory framework applicable to company groups often focus on preventing mistreatment of minority shareholders, creditors and other stakeholders of individual group companies, it is important in this process to see properly-crafted group company law and regulation as a means to provide the 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 greater effort on value creation and less on protecting against unexpected litigation or regulatory intervention. Formation of company groups also can foster greater integration of markets across borders, which has motivated much of the European Union’s attention to the topic. All these can contribute positively to economic growth and employment.
Governance challenges presented by company groups
The agency problem has historically dominated the corporate governance debate. And policy makers, practitioners and academics have focused most of their discussions around the governance of firms on an individual basis. So it should not surprise that when the topic shifts to issues around company groups, the agency focus remains.
There are, of course, good reasons for this. Company groups present all the potential agency problems that face stand-alone companies with defined control. Parent companies, like other majority or controlling shareholders, may attempt to appropriate undue private benefits of control at the expense of other shareholders and stakeholders. Since cooperation in pursuit of synergies is a key rationale for the existence of company groups, companies in such groups typically engage in frequent related-party transactions. Cash pooling is common in company groups, as are other intra-group arrangements, including joint borrowing, cross-guarantees, common branding, use of intellectual property (trademarks, patents and copyrights) and shared management services.4 In vertically-integrated groups, frequent business transactions between parent and subsidiary are an integral part of the business model. The more complex the structure of a company group, the greater the opportunity for such transactions and arrangements 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 an area where company groups present particular agency challenges. Companies in groups often engage in overlapping activities. A business opportunity presented to or developed by the group can frequently represent a potentially profitable activity that more than one of its member companies might be positioned to pursue. Deciding which company in the group takes up a new business idea can present conflicts of interest for boards, individual directors and managers of group companies.
Groups also present non-agency-related issues, some with potentially important macro-economic impacts. Domination of an economy by company groups, especially those that are diversified across industries and that internalise financing, may ultimately slow the development of broader, deeper and more efficient national capital markets. The organisation of industry into networks of related companies can reduce competition in product and service markets. This anti-competitive effect can be especially problematic in smaller economies. Indeed, one of the principle objectives of the reforms discussed in the Israel case study was an effort to promote greater competition.
The prominence of company groups has raised concerns in some jurisdictions that concentration of economic power in fewer hands can bring with it adverse effects. Instances of regulatory capture, rent-seeking and corruption of the political system have all been cited as associated with company groups. In the end, the challenge of regulation of company groups is to secure the recognised micro- and macroeconomic benefits that company groups can confer while managing the potential risk of abuse and inequitable treatment of shareholders and other stakeholders.
copy the linklink copied!Part I. A typology of approaches to the challenges of company group structures
The G20/OECD Principles of Corporate Governance recognise that “[a] particular issue arises in some jurisdictions where groups of companies are prevalent and where the duty of loyalty of a board member might be ambiguous and even interpreted as to the group.”5 It follows that the threshold question for a discussion of the duties and responsibilities of boards in company group structures is—To whom do directors of group companies owe their fiduciary duties of care and loyalty? The responses to the questionnaire on this key issue can be usefully divided into three categories: (1) jurisdictions that reported that they 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.
Classic fiduciary duties approach
More than three-fourths (35) of jurisdictions reported that the duties and responsibilities of directors and boards in group companies are generally identical to those in companies that are not part of a group, and that each director’s duties of loyalty and care relate exclusively to the company on whose board the director sits. This approach is reflected in the annotation to Principle VI.A: “It is also a key principle for board members who are working within the structure of a group of companies: even though a company might be controlled by another enterprise, the duty of loyalty for a board member relates to the company and all its shareholders and not to the controlling company of the group.”
It is well-established in common law jurisdictions, including respondents Hong Kong, China; Ireland; Israel; New Zealand; United Kingdom and the United States, that the fiduciary duties of directors and boards relate solely to the company itself and not to its parent or the larger group. This is complemented in the United States (Delaware corporate law) by fiduciary duties imposed on controlling shareholders to act in the best interests of the company and in the United Kingdom, where listing rules provide special governance requirements for premium-listed companies with a controlling shareholder. Ireland’s response to the questionnaire elaborates a bit on what can be described as this traditional approach: “Directors of a subsidiary are expected to run the subsidiary as an autonomous entity and directors must act in the interests of the company. The common law position would suggest that if they are nominated to the board of the subsidiary by the parent company, they may take into account the interests of the parent if there is no conflict of interest between the two companies. In the event of a conflict, however, they must, without exception, act in the interests of the company.”
Restatement of the classic approach was by no means limited to the responses from common law jurisdictions. For example, France, birthplace of the Rozenblum doctrine discussed below (See Box 1.2), stated that the French legal/regulatory framework does not contain any exceptions to a director’s fiduciary duties of loyalty and care to the company on whose board such director serves when the company is part of a group. China echoed the view of most other non-common law jurisdictions subscribing to the classic fiduciary duties approach, that subsidiary companies are autonomous entities and not to be regarded as subordinate to the interests of their parent companies or the group of companies with which they are associated.
Special frameworks for companies in groups
Ten responding jurisdictions reported that their legal/regulatory frameworks, recognising the special characteristics of certain company groups, provide some form of separate regime for the duties and responsibilities of directors and boards of group companies. Most of these share at least some of the elements of the Konzernrecht (“law on company groups”) concept, first introduced into German company law in 1965 (See Box 1.1).
Several jurisdictions within and outside the European Union have followed or have been influenced by Germany’s autonomous body of company group law (Konzernrecht—generally translated as “law on company groups”). This model contemplates two types of company groups: de facto and contractual. De facto groups exist when one company owns shares or voting rights in another company that grants it effective control. In such cases the negative impact of any influence of the former (parent) over the latter (subsidiary) must be disclosed, audited and compensated. Under the German law, compensation must be time-bound. In general, compensation should be effected in the same fiscal year in which the subsidiary’s losses are realised.
Shareholders of a company whose board declares that the negative impact caused by the parent was not sufficiently compensated can request a special investigation of the circumstances. The parent and its directors can be held liable to the subsidiary for uncompensated losses. They may also be held liable to the shareholders of the subsidiary for additional damages arising from impairment of the share price. The directors and members of the supervisory board of the subsidiary can also be held liable to the company’s shareholders if they did not act with due care or concealed the extent of the negative impact on the company caused by the parent.
Celebration of a Control Agreement between the parent company and its subsidiary creates a contractual group. The Control Agreement must be approved by the shareholders of both companies and must bind the parent company to compensate the subsidiary for losses on an annual basis (thereby preserving the latter’s capital for the protection of creditors and potentially other stakeholders). Control Agreements typically also provide for transfer of profits to the parent, fixed dividends and put (exit) rights for shareholders of the subsidiary.
In both cases, directors and boards of subsidiaries are protected from liability for violation of the duty of loyalty so long as they can show they exercised due care to ensure that adequate compensation was determined and paid in the case of de facto groups and that the terms of the Control Agreement were respected in the case of contractual groups.
Among the respondents to the questionnaire, Latvia, Portugal and Slovenia (with Austria, mostly through case law) have incorporated much of the German model into their national company law regimes. Others, including Brazil, Czech Republic and Poland, have incorporated certain elements of the contractual group concept.
Among the legislation cited in the responses, Latvia’s Group of Companies Law and Slovenia’s Companies Act appear to draw most heavily on the German model for inspiration.6 Each law posits dominant and dependent entities under the unified management of the dominant entity. Such groups (or “concerns”) benefit from explicit recognition that the dependent entities may be managed for the benefit of the controller and specify procedures for determining the compensation due the dependent entity for its sacrifices. For the protection of creditors and other stakeholders, the legislation also typically imposes certain liabilities on the parent company and sets limits on what the dominant entity can cause the dependent entity to do. To the extent that they operate within these frameworks, directors in group companies are effectively excused from their duty of loyalty to the specific group company on whose board they serve. Such directors are not, however, relieved of their duty of care. For example, directors of subsidiary companies can be held responsible for failure to adequately oversee compliance with the specified procedures for determining the compensation due the company.
Similarly, the Portuguese Companies Code provides that a parent company forms a group together with those companies it manages in accordance with a subordination agreement, along with all its wholly-owned subsidiaries. “Under article 503 of the [Companies Code], the parent company has the right to issue binding instructions to a subsidiary’s board. Such instructions may be disadvantageous to the subsidiary if they serve the parent company’s interests or other group company’s interests. Therefore … the subsidiary’s board members shall not be liable for any acts or omissions committed when executing the instructions received.”7 Portugal’s response noted that the requirements for compensation provided in its legislation are on balance more flexible and less time-bound than in German law and practice.8
Other jurisdictions highlighted in their responses the possibility of contractual arrangements within the legal/regulatory framework applicable to company groups. Poland’s Code of Commercial Companies provides for an agreement between a parent and a subsidiary allowing the parent company to manage the subsidiary and/or to transfer profit from the subsidiary. Such agreements should also determine the scope of liability of the parent company for damages for breach of the agreement and the scope of responsibility of the parent for liabilities of the subsidiary to creditors. The legality of these sorts of contractual arrangements is also supported by the Polish Civil Code’s general provisions permitting freedom of contract between private parties.
New Zealand and the Netherlands both reported legislation providing an option for amending the duties and responsibilities of directors and boards in group situations. New Zealand’s Companies Act specifically provides that the charter of a subsidiary may alter the duties of its directors to enable them to “act in a way which they believe is in the best interests of that company’s holding company, even though it may not be in the best interests of the [subsidiary]. Such a charter provision must be approved by agreement of the shareholders, excluding the holding company. (There is no corresponding ability to modify duty of care.)” However, in the case of listed companies, only independent directors may vote to take such action, and consent of the minority shareholders is required. So as a practical matter, listed companies very rarely, if ever, avail themselves of this exception to the directors’ duty of loyalty. The Civil Code of the Netherlands provides that a company’s articles of association may provide that its directors must act in accordance with instructions from its (controlling) shareholders “in regards general guidelines on areas set in the articles of association”. However, the Dutch Civil Code also provides that such directors should ignore such instructions if to follow them would be “contrary to the interests of the company and the enterprises connected with it”.
Squaring the circle? Rozenblum, other balancing approaches and self-regulation
The challenge for any legal framework’s treatment of directors’ duties in company groups, especially in those where the classic fiduciary duties approach is regarded as “black letter law”, is squaring itself with the legitimate purposes for which company groups exist and the actual behaviour of directors and boards. Companies in groups observably act differently from their stand-alone company peers, with the strong implication that their boards work in importantly different ways. The challenge for both boards and policy makers is working through the practical difficulties, both informational and analytical, of identifying and measuring how the interests of the group and its member overlap and diverge, and promoting outcomes that are equitable and economically efficient.
While it was not mentioned in the responses to the questionnaire, the Rozenblum doctrine has proven a durable, albeit only partial, solution in those European countries that have adopted it. Rozenblum softens the general classic approach by allowing some room for directors, in the exercise of their fiduciary duties to the companies they serve, to balance the current cost of supporting other group companies with the perhaps longer-term potential benefits of group membership (as distinguished from acting at the explicit instruction of other group companies). Case law and actual practices clearly differ among jurisdictions when it comes to assessment of the possibility of future benefits deriving from group membership as adequate compensation for a subsidiary’s sacrifice.
The Rozenblum doctrine originated from a 1985 case in the French Cour de Cassation, Rozenblum et Allouche. Although the case concerned a criminal prosecution for abuse of assets, the reasoning of the court is applied in civil claims in other jurisdictions for violation of the duty of loyalty of subsidiary company directors who take into account the interests of the parent company in making decisions.9 Application of the doctrine protects the directors from liability for violation of the duty of loyalty where: (i) the businesses of the companies are carried out within a coherent group policy; (ii) the directors believe their actions will advance the interests of the group; (iii) the compensation is not grossly inadequate; and (iv) the actions will not bring about the effective insolvency of the subsidiary.
It should be kept in mind that the Rozenblum doctrine has important limits. First, it does not address and has not been applied in cases where the parent actually formally instructs the subsidiary to take or refrain from some action. Second, it does not absolve directors from fulfilling their duty of care. Finally, while the requirement that compensation not be grossly inadequate is notably looser than the compensation requirement under the German Konzernrecht regime, there has to be some sort of defensible, if general and not-time-bound, quid pro quo.
The Rozenblum doctrine has been influential in case law in several responding jurisdictions, including Belgium, Estonia, Netherlands and Spain.
To a greater or lesser extent, the questionnaire responses of practically all jurisdictions following the classic fiduciary duties approach (and also those that have absorbed some of the German model) evidence provisions of the legal/regulatory framework that in effect at least partially address the risks of mistreatment of shareholders and other stakeholders that group structures present. These provisions can be loosely grouped into the following categories:
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a. articulation of under what circumstances, and to what extent, directors may take into account group interests (balance the costs with the benefits of group membership) without compromising their duty of loyalty to the company they serve
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b. clarity of procedures for identifying and managing inherent conflicts of interest that commonly arise in company groups
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c. reasonable processes for determining and compensating losses incurred by a group company for the benefit of the group
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d. transparency around group purposes and encouragement of contractual and quasi-contractual arrangements that reduce conflicts of interest and shape expectations around allocation of business opportunities
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e. realistic and transparent allocation of responsibility for company policy and oversight between parent and subsidiary boards (group governance)
Although Italian company law does not provide a definition of company group, the Italian Civil Code sets out rules for subsidiaries that are “directed and coordinated” by their parent company. To protect minority shareholders (and creditors) of a “directed and coordinated” subsidiary when such entity is not operated consistently with “principles of correct company and business management”, the Italian Civil Code allows shareholders and creditors to sue the parent company for damages suffered. However, this right is tempered by Italian case law acknowledging an overall economic “group concept”, with courts permitting parent companies to assert an affirmative defence that any damages suffered by the subsidiary were offset by other transactions or the totality of benefits resulting from the direction and coordination of the parent company.
This framework also allows listed subsidiaries to pursue the interests of all the companies involved in this sort of group relationship, and permits such overall (group) interests to be taken into account by the subsidiary’s directors, subject to certain disclosure and procedural requirements. Accordingly, Italian securities law provides for additional requirements to be met for the listing of a subsidiary subject to direction and coordination by its parent company.
Actions taken in pursuit of the benefit of the companies under the direction and coordination of the parent are subject to the following transparency requirements:
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a. detailed disclosure of the justification for the transactions entered into at the behest of the parent
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b. annual report disclosure of the company’s relationships with other group companies and illustration of their impact on the company’s management and results
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c. disclosure (in any corporate document issued by the subsidiary) that it was subject to the direction and coordination by the parent company
In the case of listed subsidiaries, additional requirements have implications for board structure and composition at the subsidiary level. A company that wishes to take advantage of this framework must declare that it is subject to direction and coordination by another entity at the time it applies for listing, and in its annual financial statements and the annual Corporate Governance Report submitted to shareholders. Additionally, Italian securities regulations require a listed subsidiary that is subject to direction and coordination by its parent company to have a risk and control committee (which oversees the audit process and internal control system) made up entirely of independent directors. Other voluntary committees of the board of the subsidiary must also be made up entirely of independent directors. If the parent company is also listed, a majority of the board of the subsidiary must be independent.
Not all Italian listed companies with a dominant shareholder come under this regime. According to the Italian securities regulator’s 2018 Report on the Corporate Governance of Italian Listed Companies, of the 120 listed companies that have a majority shareholder and the 57 whose largest shareholder can exercise predominant voting rights (“weakly controlled” companies), 39 were subject to direction and coordination by another entity. Those Italian listed companies with a dominant shareholder that do not consider themselves subject to direction and control by another entity must declare the grounds for their determination in their annual management report (Italy’s securities regulations provide for a transitional regime for a company that become subject to direction and control by another entity subsequent to its listing).
Self-regulation: Group protocols and group governance guidelines
The challenges for directors and the potential for conflicts among shareholders are intensified when the activities of individual companies in a group overlap, or have the potential to overlap. As noted earlier in this report, potentially profitable business opportunities may arise that the shareholders of more than one group company may reasonably expect their company is positioned and entitled to exploit. Minority shareholders of companies acquired by a group not infrequently complain that the acquisition was accomplished precisely so the parent could appropriate the subsidiary’s future business opportunities. This is one rationale for equitable tender offer rules that ensure that the control premium is shared with minority shareholders.
The Spanish national code of corporate governance attempts to reduce the potential for disputes over misappropriation of business opportunities by promoting greater transparency about the expected future activities of companies within a group. Spain’s code recommends that to safeguard the interests of the stakeholders in all group companies, the group should draw up and publish a protocol that: (1) clearly demarcates the areas of activity of each company in the group; and (2) creates a framework of rules to prevent possible conflicts. Making expectations of the division of business opportunities among group companies explicit can provide directors and managers greater confidence to go about their value-creating activities without undue concern that their allocation of risks and rewards will be later second-guessed.
Colombia was one of only three respondents to the survey whose national code of corporate governance includes a definition of a company group.10 Principal among the changes included in the code’s most recent amendments in 2014 was the inclusion of recommendations aimed at reducing the potential for conflicts among stakeholders of different group companies. While affirming the legal autonomy of each corporate entity, Colombia’s code recognises the potential conflicts implicit in such groups and states that the functions of the board of the parent company should be carried out through policies implemented with respect for the balance between the interests of the group and its members. This balancing approach is complemented by a set of special recommendations for group companies regarding organisational structure, audit and controls, and disclosure.
“Group governance” initiatives in India and Japan appear to be in a similar vein. India’s questionnaire response noted that under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, listed parent companies with a large number of unlisted subsidiaries may monitor the group’s governance through a dedicated group governance unit or a governance committee of the parent’s board. Such monitoring is envisioned to be around compliance with the form and goals of an explicit group governance policy approved by the listed company’s board. The 2nd-Term Corporate Governance Study Group of Japan’s Ministry of Economy, Trade and Industry (METI) published its Group Guidelines in June 2019. The Guidelines reflect the results of interviews and surveys conducted by METI with company groups in Japan and elsewhere. They encourage companies in groups to articulate how the group structure “optimize[s] the business portfolio in order to improve value for the entire corporate group”. Among its practical recommendations to ensure fair treatment of minority shareholders of group companies is to increase the percentage of independent directors on the boards of listed subsidiaries and to tighten the definition of an independent director on subsidiary boards so as to exclude anyone associated with the parent company in the previous ten years.11
The self-regulatory efforts just described are undoubtedly promising. However, some may be exposed to challenge as incompatible with the current legal framework applicable to boards, directors and shareholder rights in jurisdictions that otherwise follow the classic fiduciary duties approach. Colombia’s chapter in Corporate Governance of Company Groups in Latin America noted that in the absence of any specific reference to the duties of directors of parents or subsidiaries in the country’s Commercial Code, there is disagreement within the Colombian legal community about whether following the recommendations of the national code of corporate governance with respect to group companies provides directors effective legal protection. This points to the need for jurisdictions considering provisions applicable to company groups in national codes or other voluntary best practice guidance to take into account the compatibility of such provisions with the existing legal framework.
copy the linklink copied!Part II. Differences and commonalities in legal/regulatory treatment of company group issues revealed by the questionnaire responses
Definition of company groups and their members
A definition of a company group can be explicitly provided in law or regulation, or the concept may be defined implicitly, by separately identifying the typical elements of a group, such as parent, subsidiary, affiliate or associate company. Five jurisdictions reported that an explicit, specific definition of a “company group” is absent from their company law/regulation, securities law/regulation, listing rules, national corporate governance code or other laws. However, taking into account the comments provided by the respondents from such jurisdictions, it is fair to say that for practical effects, some form of explicit or implicit company group definition (and in many cases more than one), is provided under the current legal/regulatory regime of all reporting jurisdictions.
Table 1.2 sets out where in the legal/regulatory frameworks of the responding jurisdiction an explicit or implicit definition of company group is laid out. A solid majority of respondents (30) reported company legislation/regulations that includes criteria for when a set of companies are regarded as constituting a group. Securities laws/regulation of an important number of respondents (21) also provided a specific definition. The listing rules of only nine jurisdictions included specific reference to company groups. Surprisingly, only three jurisdictions (Colombia, Finland and Saudi Arabia) reported that their national corporate governance code includes a definition of a company group, although, as noted below, the codes of Peru and Spain include provisions specifically applicable to group companies. Other areas of legislation cited by respondents as including a definition of company group included: tax law, banking regulations, bankruptcy law, labour legislation and competition law.
Virtually all explicit and implicit definitions of a company group rely heavily on the notion of “control”, usually expressed in terms of majority shareholding, ability to appoint a majority of the board and contractual arrangements that give one company effective control of another. Some jurisdictions include within the group definition for some purposes “affiliated” or “associate” companies that might fall outside the strict definition of control. For example, Argentina distinguishes between subsidiaries (companies with a shareholder that has a sufficient number of votes to obtain the corporate will in shareholder meetings or dominant influence) and affiliated companies (companies with a single shareholder with more than 10% ownership). In India, associate companies are those over which another company exercises significant influence (defined as control of at least 20% of total voting power, or control of or participation in business decisions under an agreement). The New Zealand Exchange’s listing rules include a subjective element in its definition of a (listed) company so as to include “all members of any group of companies or other entities of which the issuer is the holding company or has a controlling interest to the extent necessary to prevent the object of the rules being frustrated or avoided by the use of a separate entity”.
The legal/regulatory frameworks of several jurisdictions separately identify groups that exhibit an enhanced level of integration. Colombia’s national code of corporate governance’s recommendations with special application to groups are intended for those groups whose members share “common purpose and strategy”, not simply ultimate control. And, as discussed above, both Konzernrecht and the Rozenblum doctrine are intended to apply only in the case of groups that coordinate company activities to accomplish group objectives. Similarly, Italy’s listing rules impose enhanced transparency and procedural safeguards on companies subject to “direction and coordination” by another entity.
Limitations on permissible group structures (e.g., cross- and circular shareholding, limits on layering)
Historical, economic, political, institutional, socio-cultural, legal/regulatory and other factors combine to influence the nature, prevalence and ownership and control patterns of company groups in a given jurisdiction. And while a number of reporting jurisdictions, including Israel and Korea, described important changes to group structures following legal/regulatory interventions, even these cases evidence marked path dependence. For example, in contrast to its neighbour the United States, Mexico’s tax laws have historically incentivised the creation of company groups by generally minimizing taxation of the same income at both the subsidiary and parent levels. But while changes in the tax regime earlier in the 2010s removed much of the tax benefits for groups, Mexico’s corporate structure remains overwhelmingly dominated by company groups.
Practically all legal/regulatory regimes effectively ban circular shareholding (where a subsidiary is the ultimate owner of shares of its parent), at least in listed companies. Cross-ownership, where companies have important interests in each other without rising to the level of parent/subsidiary, remain common in some markets and have been the subject of increasing scrutiny. As described in the Korean case study, policy makers in that jurisdiction have waged a long battle against circular and cross-share ownership, greatly reducing what had been a formerly ubiquitous practice. However, Colombia’s largest economic group, Grupo Empresarial Antioqueño (GEA), remains stitched together through cross-ownership among three listed holding companies, with numerous listed subsidiaries.
Several jurisdictions volunteered information on prohibitions against common control of financial institutions and non-financial companies (mixed conglomerates). However, special legal/regulatory regimes applicable to groups of financial institutions and the treatment of cross-ownership between the financial and real sectors are outside the mandate of this report.
In their responses to the questionnaire and in the case studies that accompany this report, India and Israel highlight important recent legislation to restrict the use of pyramid structures in listed companies. As discussed in the Israel case study, that country’s Law for the Promotion of Competition and Reduction of Concentration in 2013 introduced limitations on the pyramiding of listed companies that by 2020 will limit all company groups to two layers (i.e., parent and one layer of subsidiaries). In somewhat similar fashion, India’s Companies Act 2013, limits company groups to two layers of subsidiaries, excluding no more than one layer of wholly-owned subsidiaries.
Transparency of group structures and operations
Together, the requirements for listed companies: (1) to prepare financial statements on a consolidated basis under IFRS; and (2) to disclose in their annual reports their major shareholders and the company’s material shareholdings in other entities, serve as the core transparency provisions around company group structure and intra-group activities in virtually all jurisdictions. However, the degree of specificity required from issuers and other group companies in their disclosures around ownership, relationships among key shareholders, group structures, the role of individual companies in the group, governance policies and transparency of subsidiaries varies considerably across jurisdictions.
Principle V.A.1 recognises the inadequacy of mere technical compliance with minimum standards for disclosure of financial and operating results: “Disclosure should include, but not be limited to information on: The financial and operating results of the company.” The annotation to this Principle elaborates that “[a]rguably, failures of governance can often be linked to the failure to disclose the ‘whole picture’” of relations and activities within a company group.
Ownership, voting rights, shareholder agreements and director shareholdings
Principle V.A.3 recognises the fundamental importance of transparency around share ownership and corporate control: “Disclosure should include, but not be limited to, material information on: Major share ownership, including beneficial owners, and voting rights.” Without a full understanding of what parties have interests in and influence over the company, and how such parties may bring their influence to bear, shareholders and markets cannot effectively predict corporate behaviour and place a value on the company’s shares and other obligations.
The questionnaire responses tabulated in Table 1.3 evidence strong consensus around the importance of mandatory disclosure of major share ownership, special voting rights, corporate group structures and directors’ shareholdings. However, there are still significant outlier jurisdictions. Czech Republic and South Africa report that listed companies in their jurisdiction are not required to publicly disclose the identity of major share owners. Corporate group structures need not be publicly disclosed in nine reporting jurisdictions, and cross shareholdings need not be disclosed in 22 (See Table 1.4). Directors’ shareholdings are not required to be publicly disclosed in nine jurisdictions. There is clearly scope remaining to enhance public disclosure requirements in these areas in a significant number of responding jurisdictions.
It is difficult or impossible to fully understand what motivates a company’s direction and control without the ability to identify who stands behind the owners of record of its shares. Notwithstanding, 14 jurisdictions reported that public disclosure of beneficial ownership of listed companies is not mandatory. In their responses, Ireland and Norway reported that transparency of beneficial ownership in those jurisdictions will soon be enhanced through the establishment of a central registry of beneficial owners.12 Of course, policing of the accuracy of beneficial ownership can be exceedingly difficult, especially in the case of cross-border shareholding. Chilean rules provide that if a foreign shareholder cannot be identified with specificity, it will be presumed to be acting together with the largest shareholder.
Requirements to publicly disclose shareholder agreements and cross-shareholdings are similarly less-than-universal. Transparency around shareholder agreements is not mandatory in 14 responding jurisdictions. Agreements among large shareholders in listed companies impact incentives and thereby the behaviour of their signatories and the directors they elect to the board. Mandatory public disclosure of such agreements therefore is essential in the case of listed companies. Providing for such agreements to be null and void in the absence of public disclosure has proven an effective means of enforcement in several jurisdictions.
Group structures, governance policies and transparency of subsidiaries
Group structures typically involve the tiering of companies under an apex parent or holding company (which itself is very often controlled by an individual, family, the state or other identifiable controller). However, such structures can be complicated by pyramiding, cross-shareholding, block holding and multi-class shares. A chart laying out the shareholding relationships between group companies can be a useful way to convey the basic structure of the group, but no mere graphic representation can capture the texture and totality of the relationships among group companies. Recognising the limitations of bare-bones descriptions of group structures, the Winter Report13 recommended that a parent company be required in its public disclosures to tell a detailed and coherent story of the group’s structure and the relations among group companies.
Figure 1.2 shows that most responding jurisdictions reported that their legal/regulatory framework contains mandatory or voluntary disclosure provisions for parent companies about governance structures (32), governance policies (32) and transparency of subsidiaries (37). However, most respondents seem to be referring to the general requirements for listed companies to disclose material information on their own governance and the rules for consolidated financial reporting (e.g., Argentina: “CNV Rules enumerate[s] among others, certain elements and data be informed to CNV as relevant facts…. Among these can be included shareholding … and group structure resulting”).
Source: OECD Survey.
The laws/regulations of some jurisdictions make more specific references to the obligation of a company that is part of a group to include in its disclosure the structure and membership in the group, the ownership relationships and (sometimes) the jurisdiction of incorporation. For example, Switzerland’s Directive on Information relating to Corporate Governance requires issuers to describe their operational group structure, including the identity of listed and unlisted members of the group.
Requirements under the securities rules in most Canadian provinces for disclosing board diversity of listed companies also apply to their subsidiaries. Currently, all major subsidiaries of non-venture issuers must disclose statistics and policies relating to female participation on the board and in management. For listed companies subject to federal corporate legislation, disclosure requirements also include “visible minorities, disabled persons and Indigenous Canadians”.
Relationship reporting; special group reporting
Five jurisdictions (Colombia, Czech Republic, Latvia, Slovenia and Turkey) reported that a company that is a member of a group may be required to publish in a special report the key aspects of its relationship with other group companies. Boards of companies that belong to a group in Colombia are explicitly required to annually prepare and present to their respective shareholders a detailed report laying out transactions between the parent and subsidiary, transactions undertaken by the parent with third parties that impact the subsidiary, and decisions that the parent or the subsidiary have taken in the interest of the other. Companies operating under one of the special regimes for companies in groups described in Part I of this chapter typically must comply with this sort of requirement.
Several other jurisdictions indicated that significant aspects of group relations would be expected to be explained in annual reports and/or required reporting on compliance with national codes of corporate governance. For example, the disclosure provisions of the section of the Italian Civil Code that permit group companies to pursue the interests of the group as a whole require disclosure (which can be in any corporate document issued by the subsidiary) of how the company was subject to the direction and coordination with the parent company. The Spanish Corporate Governance Code provides that in cases where both the parent and subsidiary are listed, the companies provide detailed disclosure on the activities they engage in and any dealings between them or between the listed subsidiary and other group companies and the mechanisms in place for resolving possible conflicts of interest.
No jurisdiction reported any legal or regulatory requirement to provide detailed information on the governance structure or governance model of subsidiaries of listed companies, or of other unlisted companies in a group to which they belong. Russia seems to have gone the farthest (though not very far) in the direction of unlisted subsidiary governance transparency. Under the Bank of Russia’s regulations, an issuer must provide for each significant controlled entity: the composition of the board of directors and its members’ shareholding in the controlling company; the composition of the management board and its share in the controlling company; and the identity of the CEO and his/her share in the controlling company.
The greater responsibility of parent company directors for group governance under the self-regulatory approaches of Colombia, India, Japan and Spain described at the end of Part I probably carries with it an implied obligation (or at least an expectation) of greater transparency with respect to the governance structures of unlisted companies within the group. These four jurisdictions, and others that may take a similar approach, need to ensure consistency and complementarity between the rules and expectations around parent company board responsibility for the governance of subsidiaries, on the one hand, and the disclosure regime, on the other. This may require extending reporting requirements to non-listed group members with respect to not just transactions impacting the group or its listed members, but also their own governance structures.
Composition, structure and functioning of boards and committees (and management)
Twenty-one respondents reported special requirements related to board structure and composition for company group members. However, most of these relate to the special duties of independent directors to review, report and/or decide on related-party transactions.
Substantive differences cited in the questionnaire responses between the rules around the structure and composition of boards and the requirements for directors applicable to group companies, on the one hand, and stand-alone firms, on the other, included:
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a. exemption from the limitations on how many boards a director can serve on in the case of boards of companies in the same group (France; Turkey).
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b. exemption from the prohibition on serving as managing director of more than one public company in the case of a parent and subsidiary (France).
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c. exemption from the requirement to constitute an audit committee when the parent company’s board already has one (France; Latvia; Norway, in the case of wholly-owned subsidiaries).
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d. prohibition on a member of an audit committee of a listed company serving on the board of another company in the group (Israel).
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e. requirements for the establishment of group-wide audit and risk committees (discussed below).
Jurisdictions with two-tiered board systems reported special treatment for company groups around composition of supervisory boards. Latvia, Lithuania and Poland impose limitations on members of the supervisory board of a parent serving on the management board of a subsidiary and the reverse. Norway’s Public Limited Liability Companies Act provides that in the case of companies subject to co-determination, “it may be agreed that the employees of the whole group shall be regarded as employees of the [holding] company”. This can be achieved either by agreement of the company with labour representatives or upon the order of the Ministry of Labour and Social Affairs upon request of the company or employees.
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Table 1.5. Special requirements / limitations / implications for company groups with respect to certain features surveyed
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Source: OECD Survey. |
Independent directors
Principles V.A.5 and VI.E do not take a position on whether an independent director on the board of a subsidiary must have no affiliation (including as an independent director) on the board of a parent or other group company. However, directors who serve concurrently on multiple boards in a company group inevitably face potential conflicts. Fifteen jurisdictions reported that a director can be classified as independent even if he or she serves as an independent director on another group company’s board. Seventeen reported that an independent director on a parent company’s board cannot qualify as independent on the board of a subsidiary. The remaining jurisdictions generally indicated that, while qualifying as independent on more than one group company board was not clearly prohibited, the extra scrutiny required to assess such director’s independence would likely disqualify any director who serves on a parent company’s board from being classified as an independent director on the board of a subsidiary.
As noted above, India affirmatively requires that an independent director of a listed company serve on the Board of an unlisted material subsidiary (20% of consolidated income or net worth).
Parent company board responsibility for oversight and governance of the group
All but nine responding jurisdictions reported the existence of special provisions related to duties of boards of companies that are members of a company group. As presented in Table 1.6, company laws and regulations are the most common source of such special provisions (29), followed by national codes of corporate governance (11), securities laws and regulations (10) and listing rules (6). Accounting laws (Czech Republic, Latvia, Poland), competition laws (Israel, Korea) and commercial codes (Spain) were the other sources of special rules cited in the responses.
Many of the jurisdictions that reported special provisions related to the duties of directors in company groups referred in their responses to the general rules around conflicts of interest, including recusal of directors from decisions in which they, or the (parent) company that appointed them, have an interest, and the special procedures and reports required for approval of such related-party transactions.
A few jurisdictions reported specific legal/regulatory requirements with respect to parent company responsibility for certain aspects of the governance of subsidiaries. India’s Listing Obligations and Disclosure Requirements imposes an affirmative obligation on the audit committee of a listed parent company to review the financial statements and investments made by unlisted subsidiaries, and on the Board of the listed parent company to review the significant transactions and arrangements entered into by unlisted subsidiaries. Italy’s Securities Law includes a requirement that all listed companies issue an annual Corporate Governance Report, detailing the extent of the company’s adoption of the national code of corporate governance. The provision makes reference to specific code recommendations that the board of the parent evaluate the adequacy of the organisational, administrative and accounting structure of the issuer and its strategically significant subsidiaries. Its references to the board’s oversight of internal controls and risk management extend to subsidiaries as well.
Several responding jurisdictions reported that their national codes of corporate governance implicitly or explicitly lay responsibility for oversight of certain group-wide activities at the feet of the parent company board. The approach taken by Colombia’s code has already been noted. Ireland’s national code of corporate governance (the UK Code together with the Irish Annex) provides that the board of a listed parent company “should ensure that there is adequate co-operation within the group to enable it to discharge its governance responsibilities under the Code effectively. This includes the communication of the parent company’s purpose, value and strategy”. It would be a reasonable interpretation that governance policies and practices of all the companies in the group would fall within this recommendation.
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Table 1.6. Special provisions that address the duties of parent/holding company and subsidiary boards in company groups
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Source: OECD Survey. |
The Russian Corporate Governance Code explicitly tasks the parent company and its board with responsibility for group-wide (parent company and controlled legal entities) policy and operations in several areas including:
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a. strategy and performance evaluation
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b. organisation of business processes and responsibilities
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c. powers of the parent company’s board to select the directors of subsidiary board
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d. board member share ownership
Russia’s code recommends a separate structural unit for risk management and internal controls whose ambit would extend to companies under its control.
As governance risk becomes a greater focus of attention of market participants, regulators, standard setters and companies, more jurisdictions can be expected to debate whether to assign greater responsibility to parent company boards for understanding and driving the governance systems of subsidiaries.
Audit and control environment
Source: OECD Survey.
Several responding jurisdictions referred to the imperative of preparing consolidated financial statements as an important driver for the implicit responsibility of parent company boards for the adequacy of the group-wide audit and control environment. However, expectations around the level of coordination and oversight required by the parent company board and management appear to vary. Colombia’s national code of corporate governance seems to go the furthest by explicitly assigning the board of the parent company responsibility for the group’s control architecture and approach to risk management, and the parent’s CRO with responsibility for execution of group-wide risk management.
Responses to the questionnaire also evidenced diversity around the approach to auditor selections. Peru’s national code of corporate governance recommends that the external auditors of the parent company in a company group should also serve as the auditors of all group companies, including those organised or operating abroad. Costa Rican regulations require that all domestic members of a financial conglomerate share the same audit firm.
Other respondents appear to be less forceful in their expectations around group-wide auditing and controls, with the auditors of the parent company (and by extension the audit committee and board of the parent company that oversee the audit process) required only to take responsibility for the audit of the consolidated statements and to reasonably ensure that the auditors of the subsidiaries, if different, have conducted their audits appropriately. The auditors of an Indian listed company are likewise required to undertake a limited review of the audits of consolidated entities. Notably, the separate audited financial statements of each subsidiary of an Indian listed company must be disclosed on the listed company’s website.
Risk management and oversight
The discussions in the responses indicate that, in most reporting jurisdictions, the general duties of directors to oversee risk management probably encompass at least some measure of oversight of risks to which material subsidiaries and other group companies may be exposed. Some respondents made reference to the board’s duty to provide in the annual report a faithful picture of the company and the risks it faces. However, over 40% (19) of all respondents reported that they do not have any explicit requirement for the board of a parent company to oversee, monitor and/or evaluate systems and policies related to risk management within the group distinct from the general requirements of oversight for the company itself (See Table 1.7.).
Some statutory descriptions of the obligation of the board to oversee risk specifically refer to subsidiary companies. Japan’s Company Act assigns the board responsibility for the adequacy of “systems to ensure the propriety of business activities in a group of enterprises comprised of the relevant stock company and any Parent Company and Subsidiary Companies thereof”. Korea’s listing rules specify that an issuer’s obligation to disclose financial and operational risks extend to the financial condition and key business operation of subsidiaries. Chile’s response to the questionnaire notes that the general “comply or explain” framework of rules on corporate governance issued by its securities regulator explicitly include “sustainability, economic, social and environment risks” as within the ambit of the board’s duty and the general materiality standards under Chilean law would extend the duty to oversight of such risks across the group.
The EU’s Non-Financial Disclosure Directive (2014/95/EU) is explicit in applying on a group-wide basis its requirements for disclosure of information on the way “large undertakings and groups” operate and manage social and environmental risk. Its provisions are intended to require “[p]ublic-interest entities which are parent undertakings of a large group exceeding on its balance sheet dates, on a consolidated basis, the criterion of the average number of 500 employees during the financial year” to publish “a consolidated non-financial statement containing information to the extent necessary for an understanding of the group's development, performance, position and impact of its activity, relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters”. The Directive itself is flexible with respect to what reporting framework / guidelines companies may employ to organise and present such information, with member states free to provide more detailed requirements or more specific reporting guidance. The Directive went into effect for financial reporting years beginning at or after 1 January 2017. All member states have completely or substantially transposed the Directive into national law.14 The questionnaire responses of Belgium, Ireland, Italy and Spain made specific reference to such companies’ national legislation implementing the Directive. Greece’s response noted that a listed company’s corporate governance statement must cover the governance structures of all entities in the consolidation. This includes disclosure on the key features of the internal control and risk management systems of all entities in the consolidation.
Information flows within the company group
As discussed in the introduction, reduction of informational asymmetries and sharing of knowledge and expertise are among the principal justifications for the existence of company groups. Access to information from subsidiaries is clearly important for the parent board’s ability to arrive at and implement common policies and pursue common group-wide objectives. Obstacles to access to key information on the activities of group companies can impede the ability of directors to fulfil their fiduciary duties to shareholders and carry out other responsibilities assigned to parent company boards. So it is perhaps surprising that the questionnaire responses indicate that the black letter law of most responding jurisdictions does not provide a parent company special rights to request and receive information from a subsidiary that is not available to other shareholders.
Perhaps one of the reasons few legal frameworks appear to accord special information rights within company groups is a reluctance to introduce exceptions to the general principle of equality of shareholder rights. Several respondents noted that like other shareholders, parent companies and their directors and officers have certain inspection rights that permit them to examine the books and records of the company under certain circumstances.
However, there are clearly exceptions to the general pattern of legal parity of parent companies and other shareholders when it comes to access to information. Chile presents a quite special case of privilege accorded parent company rights to information on subsidiaries. Chilean legislation explicitly empowers board members of a parent company to examine the books and records of its subsidiaries and “to attend any board meeting of a subsidiary with voice but no vote”. While not going as far as Chile’s, Norway’s company law explicitly provides that the board of a subsidiary is required to provide information requested by the board of the parent company, and that the board of the parent may receive information not available to other shareholders. Belgium reported case law suggesting that a director’s right to information reaches to the company’s subsidiary. Belgian courts derive this right from the director’s responsibility to effectively carry out his/her fiduciary duties to the company, including in particular, the responsibility of the board to ensure the accuracy of the annual report and financial statements.
As noted earlier, Colombia’s national code of corporate governance includes a recommendation that the parent company and important subsidiaries enter into and publish a framework for institutional relations that lay out, inter alia, the responsibilities of directors and officers for handling information among the entities in the group.
Several questionnaire respondents emphasised that rules regarding treatment of material non-public (privileged) information (MNPI) apply equally in the context of company groups. A subsidiary company’s directors and managers have a duty to restrict MNPI to those with legitimate need for it and directors and officers of a company with access to MNPI regarding another group company would ordinarily be classified as “insiders” for purposes of insider trading laws.
With the exceptions of Germany and Norway, no responding jurisdictions reported that a subsidiary may require its parent to share information about itself or another group company. Germany reported that within the non-Control Agreement Konzernrecht framework “the directors of the controlled company have the right and obligation to demand detailed information as to the solvency of the controlling company” in order to assess the controlling company’s ability to effect any compensation it will ultimately have to make to the subsidiary.15 Norway’s law includes a provision requiring the parent company to inform the board of a subsidiary prior to final adoption of matters and resolutions by the parent company that may be of importance to the subsidiary. This provision is consistent with the principle of Norwegian company law that it is ultimately the general assembly that governs the corporation, and hence the general assembly of a subsidiary must be equipped with all information material to the decisions it makes for the company.
Misuse of subsidiaries to avoid compliance with legal obligations of listed companies
The use of the corporate form (including subsidiary and affiliate companies and “letter box” companies) for the avoidance of compliance with the legal obligations of listed and unlisted entities has been the subject of a great deal of warranted attention and debate. In the context of the issues addressed in this report, instances of misuse of subsidiaries to carry out transactions, borrowings and other actions to the detriment of minority shareholders has been an issue of special concern in India.16 In response, the Securities and Exchanges Board of India (SEBI) imposed a requirement unique among the jurisdictions surveyed for this report: the board of directors of unlisted subsidiaries representing 20% of consolidated income or net worth of an Indian listed company must include at least one of the independent directors of the listed parent. As explained in the India case study, the purpose of this requirement is to provide the independent director/s of the listed parent direct access to the workings of the subsidiary to ensure that the latter is not used to avoid disclosure or board, or shareholder approval requirements that would be applicable at the listed parent company level. Estonia and the United States reported that executive compensation disclosure and/or approval requirements explicitly cover employees of subsidiary companies.
Liability of parent for obligations and actions of subsidiaries
“Piercing the corporate veil” refers to instances where a court or other authority disregards the legal separation of a corporation from its shareholders, and holds the latter directly liable for the debts and obligations of the former. The questionnaire responses about piercing the corporate veil generally stressed that the most extreme form of this doctrine is limited to very exceptional cases, generally instances of establishment or operation of a subsidiary company to carry out fraud or for another malicious purpose. Canada’s response cited a case affirming that the separation of entities would be ignored only when not to do so would yield a result “too flagrantly opposed to justice, convenience or the interests of Revenue”. Japan applies its version of the doctrine only “when the corporate entity completely lacks substance or if the corporate entity is abused to avoid application of laws”.
Of the responding jurisdictions, Colombia and China seem to be the least restrictive in the use of piercing the corporate veil as a remedy for improper acts by a subsidiary. Colombian law empowers the Superintendency of Companies (in addition to the courts) to ignore the limited liability of a parent company (as shareholder of its subsidiary) for fraudulent acts causing damage to third parties. China’s questionnaire response noted that “[s]hareholder[s] must not infringe on the company’s interests by abusing shareholders rights, or harm the interests of the company’s creditor by abusing the independent legal status or the shareholders limited liabilities. If a shareholder of a company has caused any losses to the company or to other shareholders by abusing shareholders rights, it shall be held liable for compensation.”
Another means whereby a parent company may find itself responsible for the obligations and actions of a subsidiary is the application of the de facto or “shadow director” concept. Applying this concept, a person or entity that in actual fact directs and controls the company (i.e., acting in the place of the company’s directors or board) may be regarded as a “shadow director” and thereby subject to the same duties of loyalty and care as a de jure director. Responses to the questionnaire reported that in Hong Kong, China, a parent company (and its officers and directors), and In Ireland, its officers and employees in certain circumstances, can be determined to be a shadow director of its subsidiary. The Israeli Companies Law prohibits interference with a director’s independent judgment and regards directors of parent companies who interfere in the management of a subsidiary as shadow directors who owe fiduciary duties to the subsidiaries. As a corollary, the Israeli Supreme Court recognised a right of shareholders to bring a derivative suit against the parent company as a shadow director of the subsidiary.
The shadow director concept is by no means alien to non-common law jurisdictions. Russia’s Civil Code imposes a duty to act in a reasonable and bona fide manner on any person who de facto can determine the actions of the board or management of a company. Korea’s Company Law specifically ascribes director liability on any “person who instructs a director to conduct business by using his/her influence over the company”, which would reach the officers and directors of a parent company.
Short of completely disregarding the legal separation of parent and subsidiary, the laws of a number of responding jurisdictions clearly do assign liability to parent companies for particular types of obligations and actions of subsidiaries under certain circumstances. The most commonly cited examples in the questionnaire responses revolved around insolvency of a subsidiary due to direct mismanagement by a parent company. Irish company law provides that a court can order a parent company to help pay off the debts of a subsidiary in bankruptcy if it is “just and equitable” to do so. But this provision is interpreted as applicable only when responsibility for the bankruptcy rests with the parent. Similarly, and more apposite for directors, Czech bankruptcy law provides for liability of controlling entities in the case of breaches of duty of care resulting in bankruptcy.17
The Italian Civil Code allows minority shareholders (and creditors) of a subsidiary to sue for damages suffered because the parent caused the subsidiary to be operated contrary to “principles of correct company and business management”. However, reflecting Italy’s recognition of the group concept discussed earlier, parent companies can exert an affirmative defence that any damages were offset by other transactions or taking into account the totality of the direction and coordination.
Other instances of liability of parent companies for the obligations or actions of subsidies cited in the questionnaire responses relate to areas of particular stakeholder concern and typically derive from legislation outside the national company and securities law framework:
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a. Labour and worker safety legislation: French labour law includes the concept of co-employment, which can extend responsibility to the parent company for the dismissal of employees of subsidiaries. New Zealand’s response noted “[t]here are numerous other provisions of New Zealand law, of general application, under which a holding company could be found liable for the actions of subsidiaries e.g. obligations in relation to health and safety at work”.
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b. Environmental degradation: Finland’s Law on Compensation for Environmental Damage may subject company groups and their controllers to liability for actions of subsidiaries.
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c. Corruption and bribery: Ireland’s response highlighted instances where Irish regulators and courts can impose liability on parent companies for a subsidiary’s breach of law related to environmental damage, health and safety and bribery.18
The examples provided above highlight the real potential for unlimited liability of parent companies for obligations and actions of subsidiaries, even in the absence of “piercing the corporate veil” or cases of abuse of the corporate form. Nonetheless, some parent company boards may be reluctant to take on greater responsibility for group company activities in these areas over concern that doing so would be viewed as acknowledgement of the parent company’s ultimate liability. Future research in this area might examine how company group practices and boards have adjusted to take into account the particular exposure of parent companies in cases of subsidiary violations of labour, environmental and anti-corruption legislation.
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OECD (2015a), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris, https://doi.org/10.1787/9789264236882-en.
OECD (2015b), Corporate Governance of Company Groups in Latin America, Paris.
OECD (2013), Supervision and Enforcement in Corporate Governance, Paris.
OECD (2012), Latin America Corporate Governance Roundtable Task Force Report on Related Party Transactions, Paris.
OECD (2012), Related Party Transactions and Minority Shareholder Rights, Paris.
OECD (2009), Guide to Fighting Abusive Related Party Transactions in Asia, Paris.
Sørenson, Karsten Engsig (2018), “The Duties and Responsibilities of Boards in Company Groups”. Report for OECD Corporate Governance Committee, DAF/CA/CG(2018)11.
Winner, Martin (2016), “Group Interest in European Company Law: an Overview”. Acta Univ. Sapientiae, Vol. 5:1, pp. 85-96.
CORPORATE GOVERNANCE THEMATIC REVIEW ON THE DUTIES AND RESPONSIBILITIES OF BOARDS IN COMPANY GROUP STRUCTURES
BACKGROUND AND GUIDE FOR FILLING IN THE QUESTIONAIRE
copy the linklink copied!Background and purpose
The Financial Stability Board (FSB) has conducted a peer review on the implementation of the G20/OECD Principles of Corporate Governance for publicly listed regulated financial institutions. The Chair of the FSB’s review team presented the preliminary results of the review to the Corporate Governance Committee in November 2016. The final recommendations from the FSB review were published in April 2017 and included a proposal to the OECD for a follow-up review on practices with respect to the effectiveness of rules regarding the duties, responsibilities and composition of boards within group structures.
Company groups, in which a parent/holding company controls one or more subsidiary entities, are common in both advanced and emerging markets. Company groups serve a variety of legitimate and economically beneficial purposes, including: leveraging of expertise, intellectual property and brands; achievement of business synergies; efficiency in capital structures; and compliance with national laws (especially in the case of cross-border company groups). However, company group structures may also present challenges for boards especially when beneficial ownership of the parent and subsidiary company is not identical (e.g., when the subsidiary is a listed company). And in making decisions, a director on the board of a company within the group may be expected to consider also the wider interests of the company group to which it belongs. How effectively the interests of the shareholders and other stakeholders of each company in the group are served, therefore depends on how these challenges are approached and resolved through the formulation of the duties and responsibilities of the board.
Against this background, the Corporate Governance Committee agreed, at its meeting in October 2018, to conduct a peer review on the Duties and Responsibilities of Boards in Company Group Structures and to collect information from all jurisdictions via a questionnaire sent to delegates. The results from this questionnaire will be used to present an overview of the legal/regulatory framework with respect to board duties and responsibilities and identify different approaches to tackle the common phenomena of group structures.
copy the linklink copied!Scope of your answers and definitions
The main focus of the G20/OECD Principles of Corporate Governance (“G20/OECD Principles”) is to provide guidance for regulation that is applicable to listed companies, regardless of whether the company is part of a group or not. At the same time, the G20/OECD Principles also contain several specific references to company groups that are relevant in the context of the duties of boards in company groups. This questionnaire addresses the company group-related issues that are addressed in the G20/OECD Principles. The exception is related party transactions, on which extensive information is already available in the OECD Corporate Governance Factbook 2019.
copy the linklink copied!What to include
In order to determine the scope of your answers, please consider that this questionnaire focuses on the corporate governance framework as it applies to all companies (listed or not) in a company group in which at least one company in the group is publicly listed. The relevant legal/regulatory areas to be considered in the responses (“the legal/regulatory framework”) typically include company law, securities law, listing rules and national corporate governance codes. Established case law may also be an important source of information.
General vs. specific laws/regulations: Questions 9 through 12 ask whether there exist relevant provisions: (1) under laws and regulations of general application to all companies; and/or (2) under laws and regulations specifically applicable to company groups and their member companies. The reason for inquiring about laws and regulations that do not specifically reference company groups is that the general framework of company law and regulation very well may include provisions that address the issues raised in this questionnaire, even where company groups are not legally defined or subject to a distinct legal/regulatory regime. Accordingly, we ask that in responding to each of these questions, you be particularly mindful of provisions of the general legal/regulatory framework that may de facto govern the behaviour of members of company groups and their boards in the circumstances described in the question.
Corporate governance codes: If you refer to a national corporate governance code, please indicate if the provisions of the code you refer to are mandatory or voluntary. Code recommendations that require “comply or explain” will for the purpose of this survey be considered voluntary (even if the code includes mandatory requirements for companies to disclose their practices). Please do not consider any other voluntary codes, such as self-regulatory arrangements, voluntary commitments and business practices.
Special sectors of activity and firms: This questionnaire does not seek to collect information about legal/regulatory provisions whose application is limited to special sectors of activity, for example the financial sector, state-owned enterprises and foreign companies listed in your jurisdiction. Please exclude any sector-specific regulation in your responses.
copy the linklink copied!Questionnaire
Question 1: Please indicate whether any of the following includes a specific definition of company groups:
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Company law/regulations
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Securities law/regulations
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Listing rules
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National corporate governance code
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Other laws, regulations, or case law – please specify
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None
(Response requested if your previous answer was different from “None”)
Please briefly describe the definition(s) of company groups in your jurisdiction, and where such definition(s) may be found.
Question 2: Does the legal/regulatory framework in general (i.e., for all listed companies, not just those in company groups) contain mandatory and/or voluntary disclosure provisions with respect to:
Please select one of the six options below for each field:
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a. Yes, mandatory to the regulator/authorities only
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b. Yes, mandatory to the regulator/authorities and voluntary to public
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c. Yes, voluntary to the regulator/authorities only
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d. Yes, mandatory to public
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e. Yes, voluntary to public
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f. None
Question 3: Does the legal/regulatory framework applicable to listed parent/ holding companies contain mandatory and/or voluntary disclosure provisions about governance structures, governance policies and transparency of their subsidiaries?
Question 4: Are companies that belong to a company group (parent/holding companies and subsidiaries) subject to any special requirements with respect to the board structure and/or board composition? [Note: Examples may include requirements related to the presence and special responsibilities of independent directors and board committees.]
Yes, please briefly describe
No
Question 5: Are there any limitations on, or special requirements for directors who serve on multiple boards or in management positions (including those of listed and unlisted companies) within the same company group?
Question 6: Does serving on multiple boards within the group have implications for whether a director is classified as “independent”?
Yes, please briefly describe
No
Question 7: Please indicate whether the legal/regulatory framework includes any specific provisions that address the duties of parent/holding company and subsidiary boards in company groups?
Please select all those elements of the framework that include or refer to such provisions.
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Company law/regulations
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Securities law/regulations
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Listing rules
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National corporate governance code
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Other laws, regulations or case law – please specify:__________________________________
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None
(Response requested if your previous answer was different from “None”)
Please provide a brief overview of such provisions – and where they may be found – as they apply to the duties of parent/holding company and subsidiary boards in company groups.
Question 8: Are listed companies that belong to a company group subject to any special requirements with respect to audit committees, statutory auditors, selection of external auditors and oversight of audit function at the subsidiary and parent/holding company levels?
Question 9: Does the legal/regulatory framework or case law contain any exceptions to a director’s fiduciary duties of loyalty and care to the company on whose board s/he serves, when the company is controlled by another enterprise? [Note: Examples may include provisions that permit parent/holding companies to require directors of subsidiaries to act in accordance with instructions, or to bypass the subsidiary board’s ordinary authority.]
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Yes, pursuant to the duties of directors under provisions of general application in company and securities law/regulation, case law and/or the national corporate governance code
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Yes, pursuant to provisions of special application to company groups and their member companies in company and securities law/regulation, case law and/or the national corporate governance code
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No
(Response requested if your previous answer was “Yes, …”)
Please provide a brief overview of such provisions – and where they may be found – as they apply to the duties of parent/holding company and subsidiary boards in company groups.
Question 10: Are there provisions of law or regulation for “piercing the corporate veil” to hold a parent/holding company (or its officers or directors) accountable when the parent/holding company causes decisions to be taken at the subsidiary level that are, in fact, not in the interest of the subsidiary but rather in the interest of the parent/holding company? [Note: One example would be when a parent/holding company (or its officers or directors) is judged to be a “shadow director” bound by the same fiduciary duties as a member of the Board of the company.]
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Yes, pursuant to the duties of directors under provisions of general application in company and securities law/regulation, case law and/or the national corporate governance code
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Yes, pursuant to provisions of special application to company groups and their member companies in company and securities law/regulation, case law and/or the national corporate governance code
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No
(Response requested if your previous answer was “Yes, …”)
Please provide a brief overview of such provisions – and where they may be found – as they apply to the duties of parent/holding company and subsidiary boards in company groups.
Question 11: Does the board or management of a parent/holding company or subsidiary in a company group have the right or the obligation to request and receive non-public information from other entities in the group, including the parent/holding company?
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Yes, pursuant to the duties of directors under provisions of general application in company and securities law/regulation, case law and/or the national corporate governance code
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Yes, pursuant to provisions of special application to company groups and their member companies in company and securities law/regulation, case law and/or the national corporate governance code
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No
(Response requested if your previous answer was “Yes, …”)
Please provide a brief overview of such provisions – and where they may be found – as they apply to the duties of parent/holding company and subsidiary boards in company groups.
Question 12: Are there any explicit requirements for the board of a parent/holding company to oversee, monitor and/or evaluate the implementation systems and policies within the group related to risk management of financial, operational, compliance, sustainability, supply chain due diligence and market risks? [Note: As mentioned in the Guide for Filling in the Questionnaire, above, please exclude any sector-specific laws/regulations in your responses.]
Please select one of the three options below for each field:
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a. Yes, pursuant to the duties of directors under provisions of general application in company and securities law/regulation, case law and/or the national corporate governance code
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b. Yes, pursuant to provisions of special application to company groups and their member companies in company and securities law/regulation, case law and/or the national corporate governance code
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c. No
(Response requested if any of your previous answers was “a” or “b”)
Please provide a brief overview of such provisions if you – and where they may be found – as they apply to the duties of parent/holding company and subsidiary boards in company groups?
Q13: Please provide any additional information that is relevant to this questionnaire.
Please identify your jurisdiction: ________________________
Please identify one contact person responsible for the responses to the questionnaire for your jurisdiction and her/his contact details, for the event that the OECD Secretariat has to get in touch with you for possible clarifications or follow up regarding your answers.
* End of the questionnaire *
Notes
← 1. Brett, Alan, Assessing control: Measuring the alignment between economic exposure and voting power at controlled companies, MSCI ESG Research, April 2019.
← 2. OECD (2012), Related Party Transactions and Minority Shareholder Rights, p.11.
← 3. Practical Guidelines for Group Governance System, provisional translation of a presentation prepared by the Corporate System Division, Economic and Industrial Policy Bureau, Ministry of Economy, Trade and Industry, Japan.
← 4. Sørenson (2018), The Duties and Responsibilities of Boards in Company Groups, p. 5.
← 5. Annotation to Principle II.G.
← 6. Czech Republic’s law regulating “koncerny” was also influenced by Konzernrecht, but the new Czech corporate law (2014) and subsequent case law indicate a movement away from this approach.
← 7. Of course, this provision protects subsidiary directors only so long as such instructions are lawful. They remain liable for carrying out any illicit instructions of the holding company.
← 8. Brazil’s company law provides a similar option for related companies to enter into a specific contract to govern the relationship among members of the group. However, the Brazilian chapter of Company Groups in Latin America, prepared by Brazil’s securities commission, noted that only two listed companies availed themselves of this option.
← 9. Procedural considerations motivate French plaintiffs to pursue claims against directors for these sorts of alleged violations in criminal rather than civil court. Accordingly, the Rozenblum Doctrine has rarely if ever been asserted in civil cases in France itself.
← 10. The term actually employed in the glossary to the Colombian code is “conglomerate”.
← 11. From a provisional translation of the presentation, Practical Guidelines for Group Governance System, provided by the Corporate System Division, Economic and Industrial Policy Bureau, METI, Japan. An English translation of the Group Guidelines is not yet available.
← 12. The EU Money Laundering Directive (2015/849/EU) requires certain minimum levels of transparency of beneficial ownership in EU member states.
← 13. Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe and the press release of the High Level Group of Company Law Experts (November 2002), both at www.europa. eu.int/comm/internal_market.
← 14. For details and comparisons of how member states have transposed the Directive into national legislation, see Enterprise 2020 CSR Europe, GRI and Accountancy Europe, Member State Implementation of Directive 2014/95/EU: A Comprehensive Overview of How Member States Are Implementing the EU Directive on Nonfinancial and Diversity Information, 2018. http://bit.ly/2K8muhC..
← 15. Germany’s questionnaire response notes that such right and obligation on the part of the subsidiary’s directors is established in case law rather than codified in statute.
← 16. Institutional Investor Advisory Services, “Unlisted Subsidiaries: The New Cloaking Device”, August 2014.
← 17. Debate is ongoing in many jurisdictions around the possibility that directors and controllers may owe fiduciary duties to creditors and other stakeholders when a firm is in or near insolvency. Article 19 (“Duties of directors where there is a likelihood of insolvency”) of the recent EU Directive on Preventive Restructuring Arrangements (2019/1023/EU) states that “Member States shall ensure that, where there is a likelihood of insolvency, directors, have due regard, as a minimum, to the following: (a) the interests of creditors, equity holders and other stakeholders…” [emphasis added]. The US case of North American Catholic Education Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007) established that “The directors of an insolvent firm do not owe any particular duties to creditors. They continue to owe fiduciary duties to the corporation for the benefit of all of its residual claimants, a category which now includes creditors” [emphasis added].
← 18. Several respondents noted that anti-competition law fines and penalties are frequently applied on a group-wide basis.
Metadata, Legal and Rights
https://doi.org/10.1787/859ec8fe-en
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