On behalf of European Corporate Governance Services Ltd. (ECGS), a company registered in London, we hereby submit our observations on the Consob consultation document concerning “Amendments to Regulation No. 11971 concerning Issuers and Regulation No. 16191 concerning Markets”.
ECGS is a partnership of local, independent experts who have joined forces to provide highly specialised research on governance and shareholder voting recommendations.Proxy voting guidance), offering institutional investors access to unparalleled expertise in corporate governance and responsible investment. The Managing Partner ECGS is represented by Proxinvest, a company based in Paris. Other ECGS members include DSW (Germany), Ethos Services (Switzerland), and Shareholder Support (Netherlands). ECGS can also rely on the partnership of other local governance experts in Montreal and Melbourne. ECGS has compiled the following responses with the advice of Dr. Sergio Carbonara, a Rome-based professional with expert knowledge of Italian market rules and practices, who represents ECGS's interests in Italy.
ECGS acts solely in the interest of all shareholders and is free from any conflict of interest in the production and sale of its consultancy services. ECGS considers the fair treatment of shareholders, resulting from proper corporate governance, to be the cornerstone for financing new investments and, consequently, new employment.
ECGS takes this opportunity to congratulate Consob on this consultation, which has the primary objective of improving market efficiency. Believing that correct information and fair treatment of all shareholders are prerequisites for containing the cost of capital and for an efficient economy, we fear that some reform proposals, inspired by the intermediary system, may cause negative effects on the rights of minority shareholders and, consequently, on the integrity of the Italian market itself.
This document sets out comments relating to the following proposed amendments:
SECTION I
“PROPOSALS FOR AMENDMENTS TO REGULATION NO. 11971 CONCERNING EMISSIONS AND TO REGULATION NO. 16191 CONCERNING MARKETS”
3. INFORMATION ON EXTRAORDINARY OPERATIONS
5. INVESTMENT RECOMMENDATIONS AND CREDITWORTHINESS ASSESSMENTS
11. LIMITS ON THE ACCUMULATION OF POSTS FOR MEMBERS OF THE SUPERVISORY BODY
SECTION II
“PROPOSALS FOR LEGISLATIVE INTERVENTIONS”
LIMITS ON THE ACCUMULATION OF POSTS FOR MEMBERS OF THE SUPERVISORY BODY
2. ADMINISTRATOR INDEPENDENCE REQUIREMENTS
4. REGULATION OF SPECIAL ACTIONS
7. CAPITAL INCREASES
8. REGULAR FINANCIAL INFORMATION
SECTION I
“PROPOSALS FOR AMENDMENTS TO REGULATION NO. 11971 CONCERNING EMISSIONS AND TO REGULATION NO. 16191 CONCERNING MARKETS”
3. INFORMATION ON EXTRAORDINARY OPERATIONS
“A regime of opt-out is envisaged for listed issuers concerning the information documents to be prepared on the occasion of significant extraordinary transactions according to schemes prepared by Consob.”
We consider that both individual and institutional investors must be clearly informed regarding any transaction that may reduce their rights or the value of their investment in share capital. The scenarios to which the information document refers (significant merger, demerger or share capital increase through contributions in kind, as provided for in Article 70, and significant acquisition or disposal operations, as provided for in Article 71) have an immediate impact both on the value of investments and on the shareholders' own rights. Due to their nature, such resolutions must be submitted to an extraordinary general meeting vote. Considering the importance of these operations for all shareholders, and the extent of their impact, the detail and transparency of the information provided to the public must be of the highest level.
The ECGS therefore considers that the mandatory nature of the information currently provided should be maintained.
The ESMA does not favour any option offering issuers choices on information transparency.
5. INVESTMENT RECOMMENDATIONS AND CREDITWORTHINESS ASSESSMENTS
The proposal aims to “to eliminate the obligation contained in the Consob Regulation relating to the publication of research produced by specialists, sponsors, lead-managers or co-lead-managers.”Research must currently be published within sixty days of the date on which its distribution begins.
Despite the sixty-day timeframe currently provided making the publication of the aforementioned research absolutely irrelevant, there do not seem to be any other reasons for the summary elimination of this obligation, especially when considering the great impact such research can have on investors' choices and the market value of the stock. The elimination of the mandatory publication of research produced by specialist, sponsor, Lead manager o co-lead manager would have the effect of increasing information asymmetry in the markets, therefore the obligation to publish research by such entities should not be amended. On the other hand, the 60-day timeframe from the date of its distribution, referred to in Article 69, paragraph 3,novices, is decidedly not in line with the objectives of transparency of information.
ECGS considers that the mandatory nature of the publications in question should be maintained, while it is stipulated that the publication should take place by the day on which their distribution begins (consequently amending Article 69).novices, paragraph 3 of the RE).
11. LIMITS ON THE ACCUMULATION OF POSTS FOR MEMBERS OF THE SUPERVISORY BODY
A simplification of the current system for calculating the assignments undertaken by members of the supervisory body is absolutely necessary, and appreciation is expressed for the proposed amendments. Furthermore, the need to broaden the provisions of Article 148 is highlighted.Bis from the TUF and to Chapter II (“Limits on the accumulation of appointments for members of the supervisory body”) also with reference to management bodies.
The need to set a limit on the number of roles a single director can hold has long been felt in most international markets, with some imposing limits through legislative provisions.
In order to align Italian regulation with the Best practices Recognised internationally, ECGS considers it appropriate to limit the accumulation of appointments for members of the management body to: a maximum of two executive directorships or, alternatively, five non-executive directorships if they are all non-executive. In the event that multiple appointments are held in companies belonging to the same controlling group, these should be considered, as a whole, as a single appointment.
SECTION II
“PROPOSALS FOR LEGISLATIVE INTERVENTIONS”
LIMITS ON THE ACCUMULATION OF POSTS FOR MEMBERS OF THE SUPERVISORY BODY
As already noted in point 11 of the previous Section I, while the need for regulatory simplification remains, the limit on the accumulation of roles should be established not only for members of the supervisory body of listed companies, but also for management bodies.
2. ADMINISTRATOR INDEPENDENCE REQUIREMENTS
Appreciation is expressed for the proposed regulatory intervention aimed at adapting the independence requirements set out in Article 148, paragraph 3, of the TUF also for those issuers who declare that they do not adhere to the Corporate Governance Code. Furthermore, aligning the requirements for directors with those provided in the same article for statutory auditors contributes to greater clarity and transparency in valuation methodologies.
Market regulation should establish all necessary measures to counterbalance the excessive power of directors holding the role of Chairman of the Board of Directors and/or Chief Executive Officer, in order to protect the interests of minority shareholders.
The current regulations provide for a decidedly insignificant presence of independent directors to balance powers within the management body: “at least one member of the board of directors, or two if the board of directors is composed of more than seven members” (art.147-Ground, comma 4, of the TUF). This practice must necessarily be modified. Considering the level of shareholding concentration and the Best practices At international level, at least 33% (rounded up to the nearest whole number) of the directors should meet the independence requirements (as set out in Article 148, paragraph 3, of the TUF). Furthermore, ECGS considers that in cases where the Chief Executive Officer or the majority of executive directors or the Chairman of the Board of Directors (where the latter holds management powers) are, directly or indirectly, representatives of the controlling shareholder (de jure o de factoat least half of the directors should be independent within the meaning of Article 148, paragraph 3, of the TUF.
In order to ensure greater representativeness on the board of directors, paragraph 3 of Article 147-Ground the TUF (“at least one of the board members is appointed from the list of the minority that obtained the most votes”) should be amended by introducing the obligation of greater proportionality in the appointment of directors when there are multiple candidate lists at the time of election.
ECGS therefore proposes to amend Art.147-Ground, paragraph 3, of the TUF, with the provision that all directors are elected according to the list voting mechanism: each candidate is assigned a percentage of votes equal to the percentage obtained by the reference list divided by the sequential number with which the candidate is indicated on the same list; all candidates, regardless of the reference list, are then ordered in descending order according to the quotient obtained. The directors to be elected are chosen from the single list thus formed.
Alternatively, it is proposed to amend Article 147-Ground, 3 of the TUF, providing that from the list that obtained the highest number of votes, half plus one of the directors to be elected shall be drawn, while the remaining ones shall be drawn from all lists according to the “party-list vote” mechanisms described above.
4. REGULATION OF SPECIAL ACTIONS
ECGS considers that the proposal to introduce the possibility of foreseeing special categories of shares is not acceptable and should be considered contrary to all Best practices internationally recognised.
The right to vote in general meetings, and consequently the ability to influence the strategic choices of the issuer and the rights of shareholders themselves, must be absolutely linked to share ownership (while maintaining all possible protections for minority shareholders). The negative effects arising from differentiated voting power, to favour existing shareholders, are not appropriate: other measures can be used for this purpose, such as the option to receive new shares in lieu of dividends (so-called. scrip dividend), or also through the forecast of increased dividends.
No changes should be made to Article 2351, paragraph 4, of the Civil Code. Instead, changes would be necessary to eliminate the provision for per capita voting for cooperative societies listed on regulated markets, making the rule mandatory for these latter entities as well. one share – one vote.
7. CAPITAL INCREASES
ECGS opposes the proposal to remove the deliberative quorum provided for by Art. 2441, paragraph 5 of the Civil Code (more than half of the capital, even in a subsequent meeting after the first) for the approval of a capital increase with exclusion or limitation of the pre-emption right. No further reasons are specified in the proposed amendment, other than the difficulty of the approval itself.
The issuance of rights without pre-emption rights or any preferential treatment for investors who are already shareholders of the company is barely acceptable, as there should be no reasons to deprive an investor of their rightful stake in the company in favour of a new entrant.
Any capital increase that excludes pre-emption rights is inherently detrimental to the shareholders of the company approving it. The pre-emption right protects shareholders from involuntary dilution of their shareholding and allows those shareholders who, for whatever reason, are not in a position to subscribe to new shares to defend the value of their investment by selling the right on the market. Furthermore, the elimination of higher decision-making quorums for capital increases with the exclusion of pre-emption rights could lend itself to activities not always aimed at ensuring the survival of a company in crisis.
In order to protect all shareholders from a more than probable loss of the value of their investment and also from the possibility of misconduct by the management bodies, ECGS believes that the rule referred to in Article 2441, paragraph 5, of the Civil Code should not be amended.
The exemption from the requirement set out in paragraph 5 could at most be provided only for those companies for which it is demonstrated that, in the absence of such a capital increase, the company would go into liquidation. Such a provision should, however, be subject to strict evaluation criteria, such as, for example, that the net asset value is less than the share capital or that for three consecutive financial years the net result has been a loss.
8. REGULAR FINANCIAL INFORMATION
The proposed amendment aims to introduce, within the current provisions of Legislative Decree 38/2005 concerning the use of international accounting standards, an optional regime of opt-out with reference to the preparation of financial statements for companies, other than banks, that are valid for listed issuers and issuers of widely distributed securities.
Stock markets are, by their very nature, international and open to investment from entities resident in jurisdictions other than Italy. The proposed amendment could cause greater difficulty in reading Italian financial statements for large foreign institutional investors, which could therefore be forced to abstain or vote against the approval of the financial statements themselves, with potentially very negative consequences for the issuer.
Consequently, ECGS considers that the rule providing for the obligation to prepare financial statements in accordance with International Accounting Standards should not be amended.
Paris, 20 September 2011