The EU, corporate governance, and company directors who are fit for purpose

For the most part, EU company law is found within Directive 2017/1132, as recently amended by Directive 2019/1151 of 20 June, which should be transposed into local legislation by member states by August 2021.

In the wake of the success of member states sharing their commercial and companies’ registers, this new set of rules is intended to enable companies to use digital tools in procedures relating to companies, while providing safeguards against fraud, with the ultimate intention of protecting shareholders and other stakeholders in a company and the overarching aim of continuing to stabilise financial markets.

Directive 2019/1151 recognises the importance of competent authorities in member states being able to verify whether a person proposed to be appointed as a director of a company is fit and proper by proposing that member states should have access to a system of interconnected business registers, in order to have access to each other’s registers relevant for disqualification of directors.

Article 14 provides in unequivocal terms that member states should assist persons seeking to form a company or register a branch by providing information on the rules relating to the disqualification of directors and an outline of the powers and responsibilities of the administrative, management and supervisory bodies of companies.

Article 23, further provides that: “Member states should be able to prevent fraudulent or other abusive behaviour by refusing the appointment of a person as a director of a company, taking into account not only the former conduct of that person in their own territory, but, where so provided under national law, also information provided by other member states. Member states should, therefore, be allowed to request information from other member states. The reply could either consist of information on a disqualification in force or other information which is relevant for disqualification in the member state that received the request. Such requests for information should be possible by means of the system of interconnection of registers. In that regard, member states should be free to choose how to best collect this information, such as by gathering the relevant information from any registers or other places where it is stored in accordance with their national law or by creating dedicated registers or dedicated sections in business registers. Where further information, such as on the period and grounds of disqualification, is needed, member states should be allowed to provide it through all available systems of exchange of information, in accordance with national law. However, this Directive should not create an obligation to request such information in every case. Moreover, being allowed to take into account information on disqualification in another member state should not oblige member states to recognise disqualifications in force in other member states.

It would appear that this latest Directive will continue to strengthen and cement the trend for qualified, balanced boards, and it is no wonder, therefore, that the Malta Financial Services Authority (MFSA), the Malta Gaming Authority (MGA) and the Malta Stock Exchange (MSE) have all been very vocal about the need to raise the bar as regards the competency of directors serving on listed or regulated entities in Malta.

Earlier this year the MFSA issued a letter addressed to Malta’s largest banks with recommendations, among others, specific to its operations, and also on Corporate Governance. In its letter it advised that banks should aim at strengthening its executive senior leadership by engaging experienced and credible individuals holding significant international banking experience; appoint a mix of Maltese and foreign new non-executive directors and ensure that risk culture is at the heart of the organisation.

These principles are based on sound principles of Corporate Governance and could easily be applied across the boards of multiple companies, with a strong board of directors at the helm, creating a balanced team composed of “experienced and credible individuals”, as recommended by the MFSA.

On issues of Corporate Governance, the EU has always focused its attention on ensuring companies are managed by directors who are fit for purpose. This is most notable in the Shareholders Rights Directive 2007/36/EC as amended by Directive (EU) 2017/828, the Takeover Bids Directive 2004/25/EC and more recently, the 2018 Commission Implementing Regulation (EU) 2018/1212. Corporate Governance was also highlighted as an area of interest in the context of implementation of the Commission Action Plan on financing a sustainable growth dated 2012. Special provisions on corporate governance and remuneration in relation to banks and investment firms were also conceived through the Capital Requirements Directive IV (Directive 2013/36/EU or CRD IV), as amended by Capital Requirements Directive V (Directive 2019/878/EU or CRD V) and Regulation No. 575/2013 or CRR, as amended by Regulation No. 2019/876 or CRR II.

Anyone interested in the topic of Corporate Governance, the Regulator’s expectation and raising the bar in Malta and the EU can join the discussion during a full day, CPE Accredited (5.75 hours core competency), conference to be held on 19 November at the Salini Resort. To register, email info@csb-legal.com or visit: https://www.csblegal.com/events/upcoming/corporate-governance-conference-1 9th-november-2019/

About the Author

This article was authored by Dr Davinia Cutajar, managing partner, CSB Legal. Davinia was conferred a Doctorate of Laws from the University of Malta in 2005 and admitted to the Malta Bar in March 2006. She is a member of the Chamber of Advocates and the Institute of Financial Services Practitioners (IFSP). Her main areas of practice are Company Law, Trusts and Foundations, Compliance Law, Corporate Governance, Civil and Commercial Litigation, Contract Law and Real Estate Law.