5.3.3 Analysis

This section distinguishes and analyzes seven main stages of the legislative process surrounding the adoption of the Shareholders' Rights Directive: (1) the first consultation, (2) the second consultation, (3) the proposal for a directive, (4) the adoption of the Directive, (5) the third consultation, (6) the "long silence," and finally (7) the consultation on cross-border securities holding.

In 2003, the European Commission published its Company Law Action Plan, in which it announced a range of legislative initiatives aimed at (1) fostering efficiency and competitiveness of business, and (2) strengthening shareholders' rights and third party protection.1 With respect to cross-border voting, the Action Plan stated that

Thus, as a consequence, in 2004, the Commission published a consultation document that proposed a tule pursuant to which the ultimate investor would be entitled "to control the voting right."3 Notably, this Community tule would not interfere with Member States' national laws designating which person has the voting right (which, as Figure 1 has shown, in cross-border situations may be a financial intermediary). Instead, the Commission's pragmatic rule would merely entitle the ultimate investor to determine how the voting right is exercised by the person who actually has the voting right, i.e., by the intermediary. To ensure that the ultimate investor would not merely be entitled to determine how the voting right is exercised but truly be able to do so, the Commission proposed various options, including mandating that the intermediary issue a proxy to the ultimate investor, or accept voting instructions from the investor.

The proposed rule, pursuant to which the ultimate investor would be entitled to control the voting right, was based on an earlier report by an expert group (the Expert Group on Cross-Border Voting in Europe).4 The expert group had recommended that

In essence, the recommended system mirrored the U.S. system of corporate voting.6 At the core of this system is section 8-506 of the American Uniform Commercial Code, which stipulates that a securities intermediary "shall exercise rights with respect to a financial asset if directed to do so by an entitlement holder."7 The expert group consisted of six members who can be divided into three groups: law professors (3), issuers (1), and professional service providers (2).8 The noticeable point for our analysis is that there is no prima facie reason to assume that any of these groups had an interest in maintaining the status quo. In fact, the opposite may be true, at least for issuers and law professors.

Law professors, who historically have had an important role in European lawmaking, arguably also have an interest in keeping an active lawmaking process going.9 For one thing, it adds to their power and prestige.10 Further, European law has a consumption-good component for European law professors "because it provides a common ground for research in this area of law."11 From this perspective, all other things being equal, law professors may be expected to favor new European legislation (such as legislation aimed at facilitating cross-border voting) rather than being opposed to it.

Issuers, too, arguably have an interest in legislation aimed at facilitating cross-border voting. Europeanlssuers, which represents the interests of issuers at the European level, has emphasized that issuers need clarity on who gets to vote. This is seen as crucial to improving the dialogue between shareholders and issuers as well as to securing the integrity of the voting process.12 More generally, Europeanlssuers has called for measures to remove obstacles to cross-border voting, apparently with a view to increasing voting turnut by foreign investors.13 There are two ways to interpret this. An optimistic view would hold that issuers believe that, as a general matter, a high voting turnut benefits corporate governance. A more skeptical view would hold that issuers believe that a high voting turnut renders management less vulnerable to activist shareholders who hold a small stake but can nevertheless have a significant impact on shareholder decisionmaking if voting turnut is sufficiently low.14 Either way, issuers have a certain interest in legal reforms aimed at facilitating cross-border voting. Two tentative conclusions emerge from the analysis of this first stage of the legislative process. First, the Commission's position at this stage was based on a preceding report prepared by outside experts. Second, the conclusion that emerged from this report (i.e., that there was a need for legal reform) generally reflected the interests of the groups that were relatively strongly represented among the authors of the report, that is, law professors and issuers.

The following year, the Commission published a second consultation document. With this document, the Commission seemingly departed from its earlier position, noting that it was "not convinced that there is any urgent need to confer at the E.U. level a legal entitlement on the `ultimate investor' or accountholder to direct how votes are cast."15 The Commission offered three reasons for this:

Tracing this development back to the outcome of the previous stage, i.e., to the outcome of the first consultation, it becomes clear that the explanation offered by the Commission echoes some of the objection made by respondents to that consultation. While the Commission has not published the individual responses to the consultation, it has published a document containing a synthesis of the responses. This document stated that

The Commission's apparent sensitivity to these objections is remarkable because the synthesis of responses also reveals that a majority of the respondents actually took the view that some definition of a "person entitled to control the voting right" is needed at the E.U. level.18

Who were the respondents who raised the objections to the introduction of a tule entitling ultimate investors to control the voting right? Figure 2 divides the respondents to the first consultation (146 in total) into different groups:

Notice that fmancial intermediaries represent almost a quarter of all respondents, and that there is a prima facie reason to assume that they did have an interest in maintaining the status quo. As Dirk Zetzsche has noted:

In this light, financial intermediaries can be expected to oppose the introduction of a rule that would essentially require them to facilitate voting by the ultimate investor. Stated differently, financial intermediaries generally have an interest in preserving the status quo, because the status quo enables them to charge high fees for voting services; where they currently do not generate such fees, the status quo saves them from having to provide these services at all.

Unfortunately, since the responses to the first consultation have not been published, we can only speculate as to whether financial intermediaries were indeed the ones raising the objections that contributed to the Commission's implicit decision to maintain the status quo. Judging from their responses to subsequent consultations (which have been published and which are discussed below), they may very well have.21

Two tentative conclusions emerge from the analysis of this second stage of the legislative process. First, the Commission's position at this stage seems to have been based on objections raised by respondents to a preceding consultation. Second, while it cannot be inferred from publicly available information who exactly were the respondents raising these objections, two circumstances suggest that they may have been raised primarily by financial intermediaries, who represented nearly a quarter of all respondents to the consultation: (1) the fact that financial intermediaries generally have an interest in preserving the status quo, and (2) the fact that financial intermediaries responded to subsequent consultations by raising similar objections.

Following the second consultation, the Commission published a proposal for a directive.22 The proposal included a range of measures to facilitate cross-border voting, many of which made good sense and found their way into the final directive.23 For example, the proposal stipulated that every shareholder should have the right to appoint any other person as a proxy holder to attend and vote at a general meeting in his name.24 The positive impact of these measures, however, was inherently limited, because they would only facilitate cross-border voting by the person formally qualifying as shareholder, not necessarily by the ultimate investor. In other words, the proposal addressed the first type of banier to cross-border voting discussed earlier, i.e., practical barriers for shareholders to exercise their voting rights, but largely failed to address the second type, i.e., barriers that derive from the fact that due to the presence of financial intermediaries between the company and the ultimate investor, the investor may not be the one who is legally entitled to exercise the voting right.25

Why did the Commission no longer seem concerned with enabling ultimate investors to vote? The answer to this question can be found in an annex to the proposed directive. In the annex, the Commission acknowledged the benefits of a tule enabling ultimate investors to control the voting right.26 Nevertheless, the Commission chose not to include such a tule in the proposal, mainly for two reasons. One reason was that respondents to the consultations "could not agree on a specific definition of the person that should be entitled to control the voting right attached to shares."27 The second reason was an apparent reluctance by the Commission to impose limitations on financial intermediaries' contractual freedom to charge fees, which

Again, the reasons offered by the Commission echo some of the objections made by respondents to the preceding consultation. Seemingly in contrast to the outcome of the first consultation, where a majority of the respondents considered that some definition of a "person entitled to control the voting right" was needed at the E.U. level, a majority of the respondents to the second consultation considered that this "is not a pre-requisite to facilitating cross-border voting."29 According to some respondents, defining the ultimate investor would be "a near impossible task," while according to other respondents "giving the ultimate investor a forma! voting right would intrude unnecessarily in the contractual relationship between investors and intermediaries."30

Interestingly, these are the type of objections put forward by virtually all of the respondents that can be characterized as financial intermediaries.31 Of course, this should not come as a complete surprise given that, as noted earlier, financial intermediaries can be expected to oppose the introduction of a tule that would essentially require them to facilitate voting by the ultimate investor.32

How strongly were financial intermediaries represented among the respondents to the second consultation? Figure 3 breaks down the respondents to the consultation (138 in total) by category, and shows that they represented nearly a quarter of the respondents. This goes some way in explaining why so many respondents appeared to favor the status quo.

At the same time, a majority of institutional and private investors supported the proposed rule enabling ultimate investors to control the voting right.34 This is consistent with their interests, described earlier.35 Specifically, the proposed rille would benefit investors in two ways. First, the rille would facilitate cross-border voting by investors who are currently unable to vote due to a lack of cooperation by the various financial intermediaries in the chain. Second, the rille would benefit investors who, by virtue of their size, are currently only able to secure cooperation by contracting at a relatively high cost with the relevant financial intermediaries, because it would enable them to vote at a lower cost.

Similarly, a majority of the issuers who responded to the consultation supported the proposed rille enabling ultimate investors to control the voting right.36 Again, this is consistent with their interests, as described earlier.37

Two tentative conclusions emerge from the analysis of this third stage of the legislative process. First, the Commission's position at this stage seems to have been based on objections raised by respondents to a preceding consultation. Second, these objections appear to have been raised primarily by financial intermediaries, who represented nearly a quarter of all respondents to the consultation and who generally have an interest in preserving the status quo.

Following the consultation and proposal stage, the Council of the European Union and the European Parliament had to agree on a final version of the directive and sign it into law. The Parliament put the issue of cross-border voting by ultimate investors back on the table in two ways. First, the Parliament's Committee on Economie and Monetary Affairs stated that

The proposed article imposing such duties on fmancial intermediaries, however, did not make it into the final directive.39

Second, the Parliament's Committee on Legal Affairs proposed a recital that did make it into the final directive:

After the Parliament agreed on a definitive version of the Directive, the Council approved this version at the Council meeting of June 2007.41 As a result, Member States became obligated to implement the provisions of the directive in their national laws by August 2009.42

Contrary to previous stages of the legislative process, this fourth stage was not immediately preceded by a public consultation or a report prepared by an expert group for the relevant decisionmakers, i.e., the Council and the Parliament. This does not necessarily mean, however, that the Council and the Parliament reached their positions autonomously. As mentioned at the beginning of this section, interest groups may be able to influence the legislative process through other channels such as by making unsolicited contacts with lawmakers and pressuring elected officials.43 Moreover, around the same time that the Council and the Parliament reached their positions, the so-called European Corporate Governance Forum (the "Forum") published its position on the issue. Like the other expert groups discussed in this Chapter, this expert group partially consisted of market participants. While the Forum technically advises the Commission, the Council and the Parliament will undoubtedly have learned of the Forum's position. In this context, an investigation into the possible influence of interest groups at this stage of the legislative process remains quite relevant.

While it may be no secret that, as a general matter, interest groups exert pressure on members of the Council and the Parliament,44 it is difficult to derive from publicly available information whether and to what extent interest groups may have influenced the Council and the Parliament's position on the proposed Shareholders' Rights Directive. Nevertheless, it is interesting to conduct a general comparison between their positions and the positions taken by various interest groups at other stages of the legislative process.

First, consider the Committee on Economic and Monetary Affairs' decision not to propose a definition of the "ultimate investor" because of "differences between the national systems of share ownership."45 This argument had been made by several financial intermediaries, who generally have an interest in preserving the status quo and have responded to the second consultation by emphasizing the differences between national systems of share ownership (such as registered share ownership and bearer share ownership) and the varying consequences of investors' ability to vote across borders.46

Likewise, the fact that the proposed article imposing duties on fmancial intermediaries was not included in the Directive is consistent with the position taken by financial intermediaries that contractual relationships should not be interfered with.47 The European Banking Federation, for example, has responded to a later consultation by labeling such duties an "unacceptable intrusion in the free market" and arguing that a proposal, pursuant to which the fees charged by financial intermediaries to facilitate voting would need to be calculated on a cost basis, would constitute an "unjustified restriction of contractual freedom between the parties."48

Next, consider the fact that the Committee on Economie and Monetary Affairs proposed an article (ultimately not included in the Directive) imposing duties on financial intermediaries. Also, consider the fact that the Committee on Legal Affairs proposed a recital (that did make it into the Directive) effectively instructing the Commission to ensure that investors would be able to give voting instructions to financial intermediaries. These facts are consistent with the positions taken by issuers and investors who generally have an interest in legal reform and mostly have spoken out in favor of legal reform.49

The laffer two facts are also consistent with a position taken around the same time by the European Corporate Govemance Forum. The Forum is a high profile expert group established in 2004 to serve, among other things, as a body for reflection, debate, and advice to the Commission in the field of corporate governance.50 On the issue of cross-border voting, the Forum took the position that

Why did this expert group take a different position on the issue than fmancial intermediaries, who favored the status quo? Again, the composition of the expert group may go some way in explaining its position. Figure 4 divides the members of the Forum (15 in total) into different groups and shows that investors and issuers constituted nearly half of the members, while intermediaries only constituted a minority.

The Jack of publicly available information regarding the possible influence of interest groups on the Council and the Parliament prevents the drawing of any conclusions in this respect. However, if we compare the positions of the Council and, in particular, the Parliament to the positions taken by various interest groups at other stages of the legislative process, we do see some interesting parallels. Moreover, if we look at the composition of the Forum, which advocated legal reform, we see that issuers and investors, who generally have an interest in legal reform, were more strongly represented than financial intermediaries, who generally have an interest in preserving the status quo.

Following the adoption of the Shareholders' Rights Directive by the European Parliament and the European Council, the Commission published a third consultation document, which stated that:

To solve this problem, the Commission proposed a tule pursuant to which intermediaries would, among other things, need to (1) explain to clients whether, and if so how, they can give voting instructions; (2) cast votes in accordance with such instructions (or pass on the instructions to the next intermediary in the chain) where a client is entitled to give voting instructions; and (3) refrain from charging fees substantially exceeding the actual costs incurred by them in connection with these services.54

Note that the proposed duty of intermediaries to accept or pass on instructions would only arise "where a client is entitled to give voting instructions."55 Therefore, the proposal would be of limited use to those ultimate investors who are not entitled to give voting instructions. Again, the proposal seems to address the first type of barrier to cross-border voting, i.e., practical barriers for shareholders to exercise their voting rights, rather than the second type, i.e., barriers that derive from the fact that the investor may not be legally entitled to exercise the voting right due to the presence of intermediaries between the company and the ultimate investor.56 In essence, the proposal would preserve the status quo.

Again, this stage of the legislative process was not immediately preceded by a public consultation or a report prepared by an expert group. The Commission's proposal instead ensued directly from the Directive, which, as mentioned earlier, contained a recital instructing the Commission to ensure, by means of a Recommendation, that investors will be able to give voting instructions to financial intermediaries.57 The Directive nevertheless left the Commission considerable discretion in deciding how to ensure that investors can give voting instructions to financial intermediaries. At least in theory, this has created room for interest groups to influence the specific proposals to be made by the Commission, for example by making unsolicited contacts with Commission staff members. The fact that the Commission's proposals, as a practical matter, would be of limited use to those ultimate investors who are not already entitled to give voting instructions suggests that an investigation into the possible influence of interest groups at this stage of the legislative process may yield valuable insights.

Unfortunately, it is difficult to determine from publicly available information whether and to what extent interest groups may have influenced the Commission's specific proposals at this stage. At most, one can compare the Commission's position to the positions taken by various interest groups at other stages of the legislative process. On the one hand, the Commission's effort to facilitate cross-border voting by imposing duties on financial intermediaries is consistent with issuers' and investors' pleas for legal reform.58 On the other hand, the fact that the Commission's proposal falls short of granting ultimate investors a right to give voting instructions is consistent with financial intermediaries' objections against legal reforrn.59

The lack of publicly available information regarding the possible influence of interest groups on the Commission at this fifth stage of the legislative process prevents the drawing of any conclusions in this respect. A rough comparison between the position of the Commission and positions taken by various interest groups at other stages of the legislative process leads to a mixed impression, which also prevents the drawing of any meaningful conclusions.

The third consultation, which represented the fifth stage of the legislative process, was published by the Commission in April 2007. Since then, the Commission has not launched any further initiatives relating specifically to cross-border voting, in spite of the recital in the Shareholders' Rights Directive that instructs the Commission to address the role of financial intermediaries by means of a Recommendation.60 The main feature of the sixth stage of the legislative process is that there has been no development at all.

Why has the Commission not launched any further initiatives relating specifically to cross-border voting since 2007? The Commission's silence is remarkable in light of the fact that the outcome of the previous stage (i.e., the third consultation) was that a majority of the respondents agreed that the duties of intermediaries in the voting process should be addressed at the E.U. level, and supported the imposition of the proposed duties.61 Perhaps the Commission is sensitive to the dissenting minority of the respondents, who argued, among other things, that "voting is already catered for in existing custody agreements and . . . an EU recommendation will only add more read [sic] tape and administrative burdens," and that "voting is well addressed in their national legislation so that no further action is needed at EU level."62

Again, these objections seem to have come mostly from respondents who can be characterized as financial interrnediaries.63 Notably, the European Banking Federation responded to the third consultation by stating that it believes that "constraints and responsibilities on intermediaries in the voting process should be avoided as much as possible."64 Similarly, the main objection against the proposal on fees, i.e., that the issue should be lelt to market forces,65 seems to have come mostly from interrnediaries."66

Figure 5 breaks down the respondents to the third consultation (98 in total) by category, and shows that financial intermediaries were well represented among the respondents. This may go some way in explaining why a sizeable minority of the respondents essentially opposed legal reform in this area.

At the same time, in a pattere that by now should strike the reader as familiar, a majority of investors68 and issuers69 seem to have responded in favor of legal reform.

Two tentative conclusions emerge from the analysis of this sixth stage of the legislative process. First, the fact that the Commission has refrained from launching any further initiatives on the issue of cross-border voting since 2007 may be due, if only in part, to objections against legal reform raised by respondents to the preceding consultation. Second, these objections appear to have been raised primarily by financial intermediaries, who were well represented among the respondents to the consultation.

To be sure, we can only speculate as to why the Commission has refrained from launching any further initiatives on the issue of cross-border voting since 2007. Indeed, another possible explanation is that instead of continuing to consider the issue within the policy area of corporate governance, the Commission decided to consider the issue within the separate policy area of financial markets infrastructure.70 In 2009, the Commission launched a consultation in that area, which represents the final stage of the legislative process analyzed in this Chapter.

The Commission's policy initiatives in the area of financial markets infrastructure are geared towards achieving an efficient, integrated, and safe market for securities clearing and setdement—the "plumbing" of international securities transactions.71 In 2009, the Commission launched a public consultation with the aim to obtain information "on the necessity to improve the EU-wide legal framework for securities holding and disposition and on how future EU legislation in this field could address the issue."72

Among the issues addressed in the consultation document is the role of financial intermediaries in facilitating the exercise of certain rights by investors. The Commission notes that national laws governing the duties of fmancial intermediaries vary considerably, and suggests that future legislation might address the issue as follows:

Next, the Commission proposes measures for two distinct situations. The first is the situation where the investor is legally entitled to rights flowing from the securities but depends on financial intermediaries to be able to exercise those rights. Here, the Commission proposes that financial intermediaries be required to facilitate such exercise, for example by providing the investor, upon demand, with a certificate confirming his holdings.74

The second is the situation where not the investor but the intermediary is legally entitled to the rights flowing from the securities—the situation the present analysis focuses on, as explained in section 5.2.1.75 In this regard, the Commission proposes that financial intermediaries be required to exercise, on behalf of the investor, rights flowing from securities, such as the collection of dividends or the acceptance of takeover bids.76 Remarkably, though, the Commission does not explicitly propose that financial intermediaries be required to exercise voting rights on behalf of the investor by accepting voting instructions. This proposal, too, would therefore be of limited benefit to investors who do not formally qualify as shareholders and who are not otherwise entitled to give voting instructions.

The consultation document was based on an earlier report prepared by an expert group (the Legal Certainty Group), which stated that

Figure 6 divides the members of the Legal Certainty Group (37 in total) into different groups:

Note that issuers and institutional investors, who generally have an interest in legal reforms aimed at facilitating cross-border voting and who, as the analysis has shown, have mostly argued in favor of legal reform, are hardly represented in the expert group. By contrast, financial intermediaries, who generally have an interest in preserving the status quo and who have indeed opposed legal reform throughout the legislative process, are quite strongly represented in the expert group. This may go some way in explaining why this group opposes the imposition of a duty on financial intermediaries to facilitate voting by ultimate investors.

Two tentative conclusions emerge from the analysis of this final stage of the legislative process. First, the Commission's position at this stage was based on a preceding report prepared by outside experts. Second, the conclusion emerging from this report (i.e., that fmancial intermediaries should not be obliged to facilitate the exercise of voting rights by investors) generally reflected the interests of the group that was relatively strongly represented among the authors of the report, namely financial intermediaries.