After two public consultations, the European Commission in January proposed a directive to facilitate the cross-border exercise of shareholders' rights. The directive called for an end to the practice of "share blocking" and for companies to use instead a record date, which, the EC suggested, be set no earlier than 30 days before the meeting.

Companies in some continental European markets, such as France, Italy, and the Netherlands, require investors to prove ownership before voting by depositing shares with an institution designated by the company. While deposited, the shares are blocked from trading. The practice, dubbed share blocking, is a concern for foreign institutional investors and fund managers, many of whom will not vote shares, rather than risk the liquidity of their holdings.

The elimination of share blocking could spur greater voting participation, particularly by Anglo-American investors who traditionally have been the most vocal advocates of corporate governance reforms.

Individual markets also are getting into the act. In Germany, a 21-day record date voting system for companies with bearer shares, which constitutes about 90 percent of the German market, was introduced in November to replace the practice of having to block shares in advance of a shareholder meeting. And in Sweden, the record date is no longer 10 calendar days, but instead "not earlier than five business days prior to the meeting" following a Jan. 1 amendment to the Swedish company law.

The cross-border directive also calls for general meetings to be convened with at least 30 days' notice with all relevant information made available on a company's Web site. The directive must be ratified by both the European Parliament and the European Council and, if approved, must be incorporated by European Union member states into each of their corporate laws. (For more details, see the Jan. 13, 2006, issue of Governance Weekly.)

While the directive will not directly impact the 2006 proxy season, it may spur some institutional investors to seek governance changes contained within the recommendations.

Voting Rights Caps Targeted
A March 2005 study commissioned by the Association of British Insurers noted that roughly two-thirds of the top 300 European firms still do not follow the one-share, one vote principle. For example, voting rights caps at some continental European firms often limit the votes of shareholders to as low as 2 or 3 percent of voting equity, regardless of the size of their equity stake. And dual-class structures with unequal voting rights favoring certain shareholders still exist in several markets, including Sweden, where 75 percent of companies do not apply the one-share, one-vote principle, and the Netherlands, where 86 percent do not do so, the study found.

But for most investors tracking continental European governance issues, voting rights caps will feature more prominently than other types of defenses this proxy season. "The main issue on the Continent today is voting right caps, there is no question about it," Andre Baladi, co-founder of the International Corporate Governance Network, told Governance Weekly. "You do not have voting rights caps in Anglo-Saxon countries; this problem is typical of continental Europe and of Asia where it has been neglected for so long."

Baladi said that the issue has been and will continue to be a focal point for institutional investors at consumer goods giant Nestle, but it will also surface in other companies. "Nestle is the example, but other companies will follow, including in France where it came up at Danone."

Several major French companies, such as Vivendi Universal, Danone, Alcatel, Total, and Societe Generale, limit the voting rights of their shareholders with caps of 2 percent, 6 percent, 8 percent, 10 percent, and 15 percent, respectively. Shareholder proposals in 2005 to eliminate voting rights caps at Vivendi and a small number of other French blue-chip companies failed to carry despite efforts by both national and international investors to pool their clout behind the resolutions. Market observers suggest that efforts to dismantle these takeover defenses will continue in 2006.

France, Luxembourg Propose Takeover Defense Laws
While investors mount efforts to unravel many of Europe's long-standing takeover defenses, governments are moving in the other direction. The hostile takeover bid by Rotterdam-based Mittal Steel for steel producer Arcelor prompted the Luxembourg government, which holds a 5.6 percent stake in the target company, to seek to accelerate passage of the country's first takeover law that would explicitly allow companies to institute "poison pills," or to seek management-friendly buyers to fend off hostile bids.

Similarly, French Finance Minister Thierry Breton announced Feb. 17 that his government would introduce legislation to allow companies to adopt poison pills without shareholder approval. The move was seen by some investors as a response to Mittal's bid for Arcelor, and by others, as a continuation of recent efforts by French lawmakers and others to protect the country's corporate icons.

Germany, whose cross-border merger regulations were ruled incompatible with European laws by the European Court of Justice in December, announced in January it would also introduce new takeover legislation, according the German business daily Handelsblatt.

Germany, Sweden Improve Pay Disclosure
Executive pay will be spotlighted this proxy season as at least two markets push forward with plans to improve pay disclosure. Last year, German lawmakers approved legislation requiring companies disclose most elements of pay for executive directors. The information will be contained in all 2006 annual reports.

The German Corporate Governance Code recommends but does not require that companies disclose individual pay details for all directors. But because it lacks the force of law, many companies ignore the recommendation. As a result, of the 30 firms on Germany's main DAX index, only 20 have disclosed director pay data.

One concern for proponents of pay disclosure is a provision within the new German law that allows companies to forgo the disclosure requirement if 75 percent of shareholders agree with a management resolution limiting disclosure. Porsche, CTS Eventim, and car rental company Sixt, all of which have a controlling shareholder, have already taken steps to limit disclosure through such a vote.

Meanwhile, a revised comply-or-explain Swedish governance code that took effect July 1, 2005, is improving pay disclosure in that market. The number of companies putting their remuneration policies and other pay-related matters to a shareholder vote has risen and will continue to do so in 2006.

The code's recommendations now apply only to companies listed on the two major indices of the Stockholm Stock Exchange. According to the code, a remuneration policy should include:

• The relative importance of fixed and variable components of the remuneration and the linkage between performance and remuneration;


• The principal terms of bonus and incentive plans;


• The principal terms of non-monetary benefits, pension, notice of termination and severance pay; and


• The members of senior management covered by the terms.