Corporate Law - Enforcement and Reporting
The closing months of 2022 will see many companies gear up for sustainability reporting as political breakthroughs at EU level pave the way for the formal adoption of the Corporate Sustainability Reporting Directive next month.
Following in its path will be more substantive corporate sustainability obligations – beyond simply reporting – in the form of the Corporate Sustainability Due Diligence Directive. That measure, as yet, remains some way off but early engagement by companies is strongly advised.
Compliance and enforcement will also be a key theme in the corporate sphere. Publication of the draft Screening of Third Country Transactions Bill has, at last, given us a flavour of what the Irish investment screening regime is set to look like. The new Corporate Enforcement Authority, with its additional staff and an increased budget, has already issued a number of guidance statements and has carried out a number of high profile arrests for company law offences. The Companies Registration Office has signalled that the period of leniency in enforcement, resulting from the Covid-19 pandemic is over. In tandem with this, the expiry of flexibilities granted to companies under Covid-relief legislation is fast approaching. Corporate clients should continue to ensure that robust compliance and oversight policies are in place.
The coming months should bring some clarity on measures to allow companies change their legal form and relocate to another jurisdiction within the EU, as the deadline for transposition of the governing EU mobility directive approaches. The government's approach to discretionary elements under the EU directive will be key to unlocking the potential of this EU initiative and the resulting legal framework.
Key Themes in Corporate Law
Since our last Horizon Tracker, the European Parliament and Council reached provisional agreement on the Corporate Sustainability Reporting Directive ("CSRD"), marking, in the words of EU Commissioner Mairead McGuinness, "quite a dramatic moment…in relation to reporting by companies". CSRD is expected to be adopted by the European Parliament on 9 November 2022, with implementation on a staggered basis over the coming years. For the first time, sustainability reporting will be mainstreamed, put on an equal footing to traditional financial reporting, independently audited, and based on common EU standards.
The original Commission proposal has been advanced upon in a number of important respects, most notably by bringing non-EU companies with substantial activity in the EU market within scope.
The reporting standards setter, the European Financial Reporting Advisory Group ("EFRAG") has published exposure drafts and working papers, giving a clear indication of the detailed standards expected to emerge. Acknowledging the need to work towards international convergence on standards, the EU has been in discussions with the International Accounting Standards Board ("IASB") and other international agencies. The CSRD, however, is seen as more ambitious in scope, extending beyond the climate focused standards of the IASB and embracing the concept of double materiality. In that sense, the EU sees itself as leading the way globally on sustainability reporting.
"While the Commission claims that this agreement will provide clarity around standards for companies in the EU, we see the need for a great deal of further elaboration to allow our clients to engage meaningfully with both the challenges and opportunities presented by the new reporting era ahead. Despite this, planning for the new regime should remain a top priority for companies and their boards."
Susanne McMenamin, Corporate M&A Partner, Matheson LLP
Under existing rules, Irish limited companies can engage in cross-border mergers with companies in other EU Member States. Upcoming changes, under the Commission's Company Law Package, plan to build on current merger rules but also to introduce harmonised laws on cross-border conversions and divisions.
A cross-border division will involve asset transfers to newly formed recipients. A cross-border conversion will see a company relocate to another Member State by operation of law, without the need for a winding up or the loss of its legal personality. This reflects the CJEU's view that national laws mandating a winding up before a cross-border transfer of a company were unjustified and disproportionate. That said, the new measures aim to reconcile those principles with the need for stakeholder protection; balancing company mobility against employee, member and creditor rights.
Domestic laws must be in place by 31 January 2023 and Member States have some discretion on implementation options. Policy deliberations are currently underway in the Department of Enterprise, Trade and Employment and we expect to see the outcome of these soon, in the form of draft regulations.
Sitting alongside the tried and tested cross-border merger regime, these additional corporate re-structuring options will be welcomed by multinationals operating in the EU.
'The possibility to operate beyond national borders is a part of the natural life-cycle of the company…. However, cross-border company operations can have significant impacts for relevant stakeholders as well as society at large. Therefore, it is essential that the protection of those involved in and affected by the company affairs, namely employees, creditors and minority shareholders, keep pace with the growing trans-nationalization of companies and that Member State authorities are able to act against abuse.'
- Commission Impact Assessment: Proposal for a directive amending Directive (EU) 2017/1132
- Public Consultation on the transposition of Directive (EU) 2019/2121 amending Directive (EU) 2017/1132 as regards cross-border conversions, Public Consultation on the transposition of Directive (EU) 2019/2121 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions
- European Parliament, Directorate-General for Internal Policies of the Union, Angelici, C., Hoffmann, J., Medici, S., et al., The Polbud judgment and the freedom of establishment for companies in the European Union : problems and perspectives, European Parliament, 2018
Covid reliefs related to corporate governance granted under Companies (Miscellaneous Provisions) (Covid-19) Act 2020 look set to expire at year end. Companies, once again, are left wondering whether there will be a last minute extension of the reliefs. Government has signalled that there would be no further extensions but said that work is continuing to put virtual shareholder meetings, one of the accommodations, on a permanent statutory footing. There are some indications that recently announced draft companies legislation will address a number of these issues along with some other anomalies identified in the Companies Act 2014.
Directors should also be alert to recent changes concerning directors' duties. The European Union (Preventive Restructuring) Regulations 2022 amended the Companies Act 2014, codifying the common law directors' duty to have regard to the interests of creditors when the company is unable, or likely to be unable, to pay its debts. The duty is owed by the director to the company (and the company alone) and is enforceable in the same way as other fiduciary duties owed to a company by its directors. As we enter a potentially difficult trading environment, these duties take on an added significance.
Geopolitical realities continue to be felt at board level, reflected, among other things, in sanctions in operation against Russia in addition to the draft investment screening legislation presented, for the first time, to the Dáil in recent weeks.
"The key takeaways are that this new regime is suspensory (with criminal sanctions), involves very low thresholds, covers a wide variety of sectors and needs to be considered in parallel with merger control rules. It remains to be seen how it will be implemented in practice and when the Minister will publish guidance documents on aspects which remain open to interpretation."