Oireachtas Joint and Select Committees
Tuesday, 8 July 2014
Joint Oireachtas Committee on Jobs, Enterprise and Innovation
Scrutiny of EU Legislative Proposals
Schedule B comprises COM(2014)110; COM(2014)304; COM(2014)305; COM(2014)308; COM(2014)317; COM(2014)318; COM(2014)321; COM(2014)322; COM(2014)323, COM(2014)343 and EWN(2014)C171-11. It is proposed that these items do not warrant further scrutiny. Is that agreed? Agreed.
We will scrutinise COM(2014)212, a proposal for a directive of the European Parliament and of the Council on single-member private limited liability companies and COM(2014)213, a proposal for a directive amending existing law as regards the encouragement of long-term shareholder engagement and certain elements of the corporate governance statement.
I welcome from the Department of Jobs, Enterprise and Innovation, Mr. Pat Houlihan, principal officer, Ms Sabha Green, assistant principal officer, and Mr. John Moynihan, professional accountant. Before we begin, I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give to this committee. If they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or persons or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.
I invite Mr. Houlihan to make his opening statement.
Mr. Pat Houlihan:
We thank the committee for inviting us to assist with its further scrutiny of single-member private limited liability companies and the long-term shareholder engagement and certain elements of the corporate governance statement.
The pivotal role which the Commission perceives for small and medium-sized enterprises, SMEs, in advancing the EU economy, the improvement of the operating environment for all companies, particularly SMEs, a priority of its ten-year growth strategy, Europe 2020, and the low rate of SME investment in member states other than that in which they are based, combine to provide the rationale for the present draft directive. The Commission's proposal in 2008 for a European private company statute, SPE, which was intended to facilitate cross-border activity by SMEs, fell because it failed to garner the unanimous support necessary for adoption. The present proposal is effectively a substitute for the SPE and has been brought forward by the Commission following deliberative and consultative processes including an impact assessment.
The so-called twelfth company law directive, (89/667/EEC), as given effect in Ireland by SI No. 275/1994, the European Communities (Single-Member Private Limited Companies) Regulations, provided for the incorporation of single-member private limited companies.
Changes made to the 1989 directive were codified in Directive 2009/102/EC. The intention is that the current directive, which captures the content of the codified directive of 2009, will repeal the latter. As of now, on a national basis, we have the scope for single members to incorporate.
I will now turn to the legal basis of the proposed measure-Commission justification. Article 50 of the Treaty of the Functioning of the European Union provides the legal basis for the draft directive. The Commission justifies its proposal on the grounds of subsidiarity by making the point that without action at the level of the EU, only non-harmonised approaches would be forthcoming and SMEs would still encounter obstacles to operating in another member state. It also justifies the proposal on the grounds of proportionality by stating that the harmonisation in question is confined to those aspects which are most important in a cross-border context and do not go beyond what is necessary and proportionate for the achievement of the regulatory objective.
The directive provides for the establishment of private single-member limited liability companies in accordance with the rules and procedures set out in the proposal. These companies are to be referred to as SUPs, an abbreviation of the Latin term "Societas Unius Personae". The directive provides for limited harmonisation of the relevant national laws by requiring that companies may have a single shareholder and regulating the powers of that single member in respect of the company. The proposed directive on single-member private limited liability companies is intended to make it easier for any potential company founder, and in particular for SMEs, to set-up companies abroad. This is designed to encourage and foster more entrepreneurship and lead to more economic growth, innovation and jobs in the EU.
I will now set out key features of the proposal. Member states would be obliged to allow for direct online registration of SUPs, eliminating the need for a founder to travel to the country of registration or to appoint an agent there for this purpose. The proposal would provide for a template of articles of association, which would be identical across the EU, available in all EU languages and contain the necessary elements to run a single-member private limited liability company. A minimum capital requirement of €1 for SUPs would be introduced. Protection for creditors is to be provided through a balance sheet test and a solvency statement.
The Department of Jobs, Enterprise and Innovation issued a consultation document on the proposal which elicited responses from four organisations, in addition to which the Companies Registration Office supplied some comments. Some of the points made do not appear to take due account of the existing scope to operate as a single-member private liability company. That scope already exists. Among the contributions received was a welcome for the proposal and its benefits in terms of administrative burden reduction and its perceived benefits for SMEs in accessing export markets. Another observation was the perceived benefit of the solvency statement provided for at Article 18 in the context of proposed distributions, which was considered prudential. Due to the role posited for registration and ancillary functions in the draft directive, the Companies Registration Office had a number of comments to offer in terms of new requirements proposed and implications vis-a-visthe Companies Bill 2012, which is likely to be enacted later this year. This is the rather large consolidated Bill about which I suspect people present know quite a bit.
The first meeting of the Council working group to consider the draft directive took place on 22 May 2014 and was introductory in nature setting out the scope of the directive and seeking preliminary views from member states. Two further meetings have taken place since then, the latest on 2 July. While there is no evidence of fundamental opposition on the part of member states to the principle of what is proposed here, the situation in general is that all member states continue to maintain scrutiny reservations. Much of the discussion is of a technical nature and delegations continue to seek clarification on the meaning and intent of aspects of the text. In many cases, the Commission has undertaken to revert at future meetings with the clarifications sought. To date, there has only been a partial reading of the measure. They have probably got about two thirds of the way through. One point being made by some member states is that the share capital requirement should be increased significantly from €1. The Commission responded by pointing out that the wording in the article in question, which is Article 16, "shall be at least €1" allows member states the flexibility to require a higher figure. The Italian Presidency at the most recent meeting invited member states to make written submissions with any proposals, questions or issues they wish to bring to attention. It is our intention to avail of the Presidency's offer.
It is understood that the Italian Presidency is seeking to achieve a general approach by the end of its term. A general approach is the term used for agreement at Council level. The European Parliament is obviously ploughing its own furrow in this regard. At the most recent Council working group meeting, the Council legal services gave a long oral presentation making the case for the appropriateness of Article 50 of the of the Treaty of the Functioning of the European Union as a legal basis for the draft measure. This is an indication of the relatively preliminary nature of consideration of the dossier. In the event, member states sought the Council legal services' views in writing, which suggests that they may have some issues around their consideration as to whether it is an appropriate basis.
The Department will be formulating its policy position on the directive over the coming time, which will take account of the consultation undertaken, with clarification on points raised there which could benefit from being amplified, and further discussions with the Companies Registration Office. Proposals or suggestions made in the present forum will also be taken account of in the discharge of this process.
I thank Mr. Houlihan for his presentation and overview on the directive. I am not sure if he has received the submission from the Irish Congress of Trade Unions, ICTU, but I met it regarding the issue. It has expressed some concerns in respect of this directive, some of which I share. The substance of ICTU's submission is that it could encourage bogus self-employment, informal insolvencies and tax avoidance. There is a distinction between being a sole trader and being a limited company. There are advantages to both but a sole trader is not a company. A sole trader does not pay corporate taxes. The person pays personal income taxes. If one sets up what is now a single-person limited liability company, one will have all the advantages of a corporation, which would include lower corporation taxes. There are also potential issues relating to insolvencies. We have seen workers left high and dry where a company essentially ceases trading but a liquidator or receiver is not appointed and the workers are unable to get any of their unpaid wages under the insolvency fund. This is a major issue and workers have been left high and dry. The case of the Paris Bakery is the most recent one but there have been many such cases.
If a person sets up a company at the moment, they must have two directors. Will this remain in place or will it be changed to one director? What will that mean? In respect of some of the key messages that I have been asked by ICTU to articulate to the Department, it is important that if ICTU makes submissions, we air them and get responses from the Department. ICTU is very much of the view that the directive should ensure the single-member limited liability company is not a vehicle for avoiding tax, for example, allowing companies to set up a number of subsidiaries and then register in a different country from the one in which they actually operate. This does happen, as we know, so there must be clear rules relating to the transfer of a registered office which must include the protection of worker involvement rights, require the registered office and headquarters to be in the same country and allow for a transfer only for genuine business reasons. I think that makes sense. It should also ensure the single-member limited liability company is not a vehicle for promoting self-employment over employment, which could create its own problems. ICTU is saying that single-member single-worker firms should be excluded and that regardless of what happens here, we must ensure workers' rights are protected. We have seen examples where companies are set up, their headquarters may be somewhere else and they are not bound by the same employment rights rules in this State. These are all legitimate concerns that have also been raised by the European Trade Union Confederation.
Perhaps the Mr. Houlihan might acknowledge whether he received a copy of the ICTU submission and, if so, whether he agrees with the any of the concerns it raised. If he does not agree with these concerns, can he set out the Government's position in regard to them?
I had only a brief chance to glance at it. However, I note it raises a number of serious concerns, some of which have been outlined by Senator Cullinane. It suggests that it would not be possible to guard against the facilitation of bogus activities, tax avoidance and other illegal practices. I would like the committee to invite congress to discuss its concerns. They are the experts and the points they raise appear to be substantial. I would like the direct benefit of their insights.
Mr. Pat Houlihan:
I can confirm to Senator Cullinane that we received a copy of the report. In fact I have it in front of me, with a lot of red ink underlining parts of it. As I noted in the course of my presentation, the possibility of incorporating as a single member private limited liability company already exists. This proposal would provide another member state dimension to the current process. I have listened carefully to the Senator's comments about the potential that the proposal could, in theory, give rise to scope for unfair play, but that is something we would monitor carefully. The committee in Brussels is going through the proposal with the proverbial fine toothcomb and people are offering their views on it, whether for better or worse. We hope that as a result of that process any scope for the kind of renegade conduct the Senator described will be minimised, if not eliminated.
The Department is beginning to focus on the comments we have received, although they are not overly voluminous, and they will guide us as we construct a coherent policy position for subsequent negotiations. The discussions at working group level have thus far been fairly tentative and focused more on questions and statements than on getting clarification or moving towards a common agreed text. Such agreement seems to be quite far away and even the Presidency's desire to progress the dossier within the confines of its own term of office, which expires at the end of the year, has been questioned by some member states. I do not perceive any indication of undue haste and, in regard to the kind of concerns that have been articulated and the issues that need to be examined, every effort is being taken to ensure the measure contains nothing untoward or unintended. Members can rest assured that Ireland will be in the vanguard of that process because we want to ensure the proposal is sanitised. It is normal when we encounter a proposal that we work our way through it to get clarification on what exactly lies behind it and, if we identify issues, we put a marker on them.
Given that the new dimension involves what happens outside of this State in terms of establishing companies, if a company is registered in, for example, Latvia or Lithuania, will the workers it employs here enjoy the same protection as those who work for a company registered and operating in Ireland? Is the company governed by the employment law of the state in which it is registered rather than the one in which it operates?
Mr. Pat Houlihan:
The requirement is that the registered office and one or other of the central administration or principal place of business have to be in the same member state. That affords a reasonable degree of comfort. It is not intended to facilitate fly by nights or people operating from remote jurisdictions, like drones, and manipulating operations remotely. There would have to be a substantial presence in the member state in which the business operates in order for it to be registered and be bona fide.
That is no problem. The clerk to the committee advised me that it will likely be September before we could arrange a meeting with congress. Given that Mr. Houlihan has indicated that the timeline is not predetermined and that the negotiations will last longer than expected, that would still be a suitable time for us to revisit the matter. Is it standard procedure that ICTU and others who have made submissions would receive a response from the Department?
Mr. Pat Houlihan:
No, that is not generally the procedure. We take full note and cognisance of submissions, and we incorporate good, useful, sensible and workable proposals that come our way and we obviously do not pursue those we do not regard as sound. We are very much guided by what people advise us, and I assure the committee that will be the way we proceed in this instance.
We will discuss it further in private session once we have heard all the presentations. We will then go back into public session to agree the outcome. It has been agreed by the committee that we will invite witnesses from ICTU to meet us on a date subsequent to the summer recess to discuss the issues raised in its submission on the proposal.
Given that ICTU has not had an opportunity to meet the committee for some time, perhaps we could broaden the subject matter of the meeting to allow its representatives to speak on other issues rather than drag them before us two or three times.
Perhaps we can discuss these suggestions in private session or in another meeting before the Dáil goes into recess in order that we have a clear idea of the agenda for our meeting with ICTU.
We will now proceed to COM (2014) 213. I invite Ms. Sabha Green to make her opening remarks.
Ms Sabha Green:
I am grateful for the opportunity to update the committee on the progress that has been made on this draft directive since we furnished the Oireachtas scrutiny notes several months ago. As the committee will be aware, the proposal was adopted by the Commission last April and it went straight away to the European Council and the European Parliament at the same time.
On the Council side, there have been three meetings of the working party, which is the technical level, and matters are still at an early stage, with member states looking for clarification. The plan from the Presidency's point of view is to get member states to agree their general approach by the Competitiveness Council, which takes place on 4 December. At the same time, the European Parliament has selected its Committee on Legal Affairs to take the lead on the file but, as far as I could tell from the Internet yesterday, the rapporteur has not yet been appointed, probably for obvious reasons. Three other committees will be asked to give their opinions as part of the preparation of the final report, namely, the Committees on Economic and Monetary Affairs, the Internal Market and Consumer Protection, and Civil Liberties, Justice and Home Affairs.
Meanwhile, back at home, our company law section in the Department held a public consultation during May and June. We received only nine submissions, which we intend to publish as they came in on the Department's website in the coming week or so. There was a slight delay, partly because I have been out of the office but also because, although I made it very clear that my intention was to publish them, I asked people to let me know if there was anything confidential in them and there is a certain amount of checking whether certain items can be published. As far as I am concerned, there is nothing confidential. The Department is assessing all those submissions with a view to refining our negotiating position to be settled with the Minister.
I will recall the main features of the proposed directive. The main aim is to encourage shareholders to engage more with the companies they own in order that they and those companies take a longer-term view of success and build sustainable businesses. The proposal does this in two ways in particular. First, it gives the shareholders new rights of oversight of company business. Second, it obliges others in the investment chain to provide new types of information to the shareholders. Once adopted, the directive will affect several groups of people, namely, asset managers; institutional investors, which are not, in this case, banks but life assurance companies and pension funds; investment intermediaries; companies that are listed on the main market, in our case Dublin; proxy advisers; and shareholders.
The proposal will introduce three new categories of provisions, namely, new rights for shareholders to oversee remuneration and related party transactions; provisions on disclosure that will oblige institutional investors, asset managers and proxy advisers to provide more information to companies, each other, shareholders and, in some cases, the public; and procedures to improve the identification of shareholders by the companies they own and to facilitate the exercise by those shareholders of their rights in the companies.
The new rights for shareholders relate to oversight of the remuneration policy and of related party transactions. On pay, the text provides that shareholders will have the right to vote on the company's remuneration policy for directors at least every three years. The directive lists the main elements that should be included in the policy, which include maximum levels of pay for directors and the main contractual terms. While the policy is binding on the company, there is provision for the company to exceed those maximums, for example if there is either prior or post approval from the shareholders. The company will also have to prepare an annual remuneration report for the shareholders, which will have to include information on the total remuneration paid over the past year to the directors, how those packages were made up and how they fit in with the overall three-year policy. The report is submitted to the AGM and shareholders vote on it. If they reject it, the company must explain in the remuneration report of the following year whether - and, if so, how - the rejecting vote was taken into account.
Alongside the so-called say on pay provisions, the directive will oblige companies to report to their shareholders on related party transactions that represent more than 1% of the company's assets. For larger transactions, where they represent more than 5% of the company's assets, the company must submit the transaction to the shareholders for a vote. In both cases, the company must also arrange for an independent third party to assess whether the transaction is on market terms and confirm that it is fair and reasonable from the perspective of the shareholders, including minority shareholders.
The draft directive will provide that institutional investors and asset managers must develop and publish shareholder engagement policies. They will then have to report annually on the implementation of the policies. It is open to institutional investors and asset managers to fulfil this provision on a so-called comply or explain basis. Institutional investors will have other new disclosure obligations. They will be required to make public how their equity investment strategy contributes to the medium to long-term performance of their assets and they will have to publish certain elements of their mandates to their asset managers. Asset managers will have to disclose certain information to the institutional investor. At the same time, proxy advisers will be required to take measures to ensure their voting recommendations are accurate and reliable; to disclose information on the preparation of those recommendations; and to identify and disclose to their clients and the company concerned any actual or potential conflict of interest.
Shareholder engagement is a two-way street between the shareholders and the companies. The Commission has proposed measures to help companies identify and better engage with their shareholders. There will be obligations on investment intermediaries to provide names and contact details of shareholders to a company following a request from the company. The investment intermediaries will also have a role in exchanging other information between the company and its shareholders and in facilitating shareholders in exercising their rights.
Negotiations within the Council in Brussels have begun and we have had public consultation here, and I will summarise some of the issues that have arisen. In Brussels, there is general overall support for the objective of this proposal, but there is disagreement on the means to achieve it. While most member states have supported the draft directive's provisions for binding measures, some would prefer to introduce so-called soft law, such as a non-binding recommendation. There have been calls for more flexibility in the proposal to allow companies and others more freedom to devise policies as they see fit.
Another argument has been the concern that some of the new provisions could introduce unnecessary administrative burdens. If so, it could put EU companies at a competitive disadvantage vis-à-vistheir non-EU competitors. It could also motivate companies to de-list from stock exchanges, which would mean we would have even less information on them. Another concern has been about how the provisions on shareholder identification and exchanges of information will work in practice. There is a possibility of having several intermediaries in a single investment chain, some of which may be based outside the EU and, therefore, not covered by the directive. What will happen in the event of such a gap in the chain is a concern.
The submissions to the Department reflected general support for the objectives of the proposed directive and most of the comments received related to the practical implementation of those objectives. Regarding the identification of shareholders and facilitation of their rights, it is probable that the directive here could reduce the current powers of companies under Irish law to identify their shareholders as, for example, it introduces intermediaries into the process and places time limits on the period for which the information may be retained by companies. This is a little different from current Irish law and we must examine it as we do not want a diminution of our protections. Another issue is that the requirement on companies to confirm to shareholders that they have received votes could impose significant costs on the issuers of the shares as it does not take into account the reality of the voting process. For example, one submission pointed out that given that shareholders are free to change their vote at any time up to the date of the relevant meeting, one might need to confirm to a shareholder several times that one had received his or her vote, which could be costly.
Regarding engagement policies for institutional investors and asset managers, there was a concern that, by encouraging and emphasising long-term investment, the legislation runs the risk of forgetting the importance of short-term strategy. Companies will have legitimate needs for funding in the short term. The requirements for disclosure on asset managers may be onerous and costly for smaller management firms. Asking asset managers to disclose how their strategy contributes to the medium to long-term performance of an investor's assets may not be achievable as that investor may have more than one asset manager, each of whom has only part of the picture.
On the transparency of proxy advisers, one submission suggested that it would be difficult for a proxy adviser to "guarantee" that its voting recommendation is accurate and reliable, which is a high standard to require. The shareholder oversight of remuneration provision was welcomed generally. There was a view that the text could be clearer on the fact that it is ultimately a role for the board and remuneration committee rather than shareholders to set and agree directors' remuneration. There was a call for more clarity on how a company can go beyond the remuneration policy and the consequences if the shareholders do not subsequently approve that particular pay package.
It was said that the directive was silent on that situation.
Third, some expressed a concern for the provision to explain a ratio. The directive speaks on remuneration policy of giving a ratio between the average employee salary and the pay packages of the directors. Some people consider that would be a meaningless figure. If a company has bases in many different EU member states, it will have different levels of pay and that does not give a proper feel for what is the average pay. There was also a concern that making this publicly available could engender a reputational risk. Finally, there was a concern on the remuneration that the status of existing contracts would not be recognised and there was a need to grandfather those arrangements.
The final group of submissions related to shareholder oversight of related party transactions. There was a worry that it would be impossible for an independent third party to make the type of assessment that the text requires here. As an alternative, therefore, it was suggested that the requirement should be just to disclose details of the transactions rather than to give any opinion on its reasonableness. Second, it was suggested that there may be a conflict with existing Irish law, which sets a lower threshold for transactions that need shareholder approval. Again, that is something that needs further assessment.
The Department is assessing all these submissions and we will more than likely have to go back to some of the organisations for further information or clarity. Some of the submissions threw out issues and did not give us a steer as to what might be a suitable solution or whether they were serious problems. All the views will be considered in the refining of the Irish position over the coming weeks. We will post them on our website and we can let the committee know immediately when that happens.
The Italian Presidency is looking towards getting a general approach at the Competitiveness Council in December. The Presidency is about to schedule another technical working group later this month - there is no date yet - and another in September.
Mr. Pat Houlihan:
Before the Vice-Chairman wraps up proceedings, can I utter an apologia and a corrigendum all at the one time? In answering Senator Cullinane, I unwittingly made a very important error and I would like to have the record changed to reflect that. He asked what presence in the member state one of these SUPs might have. The registered office might be in Ireland but the central administration or principal place of business would have to be within the EU, although possibly here. I intimated in Ireland and I am sorry because I read my notes incorrectly. That is an important clarification and I regret it.
That is no problem. I thank Ms Green, Mr. Houlihan and Mr. Moynihan for engaging with the committee. I propose that the committee goes into private session to discuss what to do next with these proposals.
With regard to COM (2014) 212, a proposal for a directive of the European Parliament and of the Council on single member private member limited liability companies, it is proposed to invite ICTU to a meeting of the committee at a future date to discuss the proposal and any concerns it may have. Is that agreed? Agreed.
With regard to COM (2014) 213, a proposal for a directive amending existing laws as regards the encouragement of long-term shareholder engagement in certain elements of the corporate governance statement, it is proposed to retain the proposal under scrutiny by writing to the Department of Jobs, Enterprise and Innovation and requesting it to update the committee when clarification from stakeholders is received. Is that agreed? Agreed.