a) Certain issues would be better dealt with in national law than at Community level:

R E P U B L I C O F H U N G A R Y MINISTRY OF JUSTICE DEPUTY SECRETARY OF STATE H-1055 Budapest, Kossuth tér 4. Tel: (+36-1) 441-3743, Fax: (+36-1) 441-3742 Reference: Response to the Consultation paper on Future Priorities for the Action Plan on Modernising Company Law and Enhancing Corporate Governance in the European Union Directorate General Internal Market F2 European Commission Rue de la Loi 200 1040 Brussels Budapest 27th of March 2006. Dear Sir, With reference to the Consultation initiated by the Directorate General for Internal Market and Services on Future priorities for the Action Plan on Modernising Company Law and Enhancing Corporate Governance in the European Union, the Ministry of Justice of the Republic of Hungary would like to respond the Commission s questions as follows. Question 1 By answering the questions raised in the Commission s consultation document, we came to the general conclusion that large number of legislative measures foreseen by the Action Plan does not correspond to the principles of subsidiarity and proportionality. In our view, future Community legislation in the field of company law should make a clear distinction between those measures that are necessary for the enhancement of competitiveness in the Internal Market, and those measures that are not justified. a) Certain issues would be better dealt with in national law than at Community level: Until present, for instance, the need for Community legislation on wrongful trading rules has not been proven. Such evidence would be difficult to be produced since several Member States have already introduced wrongful trading rules in their national legislation. Likewise, one can ask whether rules on the voting policies of institutional investors would not be better defined in national legislation than at Community level. Also, in our view, there is no reason to adopt an EC directive on the choice between monistic and dualistic board structures (one-tier or two-tier). (NB. The new Hungarian Companies Act, n IV. of 2006, ensures the free choice for shareholders between monistic and dualistic board structures.) b) Regarding certain measures foreseen in the Action Plan, both the need and the chance to reach an agreement for adoption of Community legislation are weak. Regarding these 1

measures, we would suggest adopting Commission recommendations rather than EC directives: For instance, we do not see the chance to adopt entirely binding (i.e. not optional) community rules on groups, because of the substantial differences between legislative concepts of Member States (even if the idea of adopting a text as detailed as it was seen in the proposal for the 9 th directive is already abandoned). In our view, most of the provisions of the proposal for a directive on shareholder s rights presented in January 2006 should be rather take the form of a Commission recommendation. We can agree with the proposal made by Commissioner McCreevy, according to which, in order to avoid adopting a binding text with several optional arrangements, the one share- one vote rule should take the form of a recommendation. c) Recognizing and respecting the axiom of Less is more! can not be avoided in the reform of EC Company Law. Dealing with Company law issues having cross-border relevance and an impact on the functioning of the Internal Market, future Community legislation should intervene only in specific cases where national law cannot bring adequate solution. We would stress the need for the revision of existing EC regulations and directives. If the Commission would like to bring into effect the principles of subsidiarity and proportionality, upcoming proposals should focus on the following issues: - The adoption of the 14 th directive on the transfer of registered office - The revision of the regulation on the SE statute - The adoption of the regulation on the EPC statute - The revision of the capital maintenance regime of the 2 nd Directive (Council Directive 77/91/EEC). The first, second and third points of the above-mentioned list will be elaborated in detail in Questions 7, 11 and 12. Regarding the forth point, we would like to stress that the complete revision and deregulation of the 2 nd Directive should be foreseen among the middle-term priorities of the Action Plan. The 2 nd Directive, as a first generation company law directive, should be aligned with the principle of subsidiarity and proportionality. The wrong starting point of the Action Plan was that the slight amendment of the 2 nd Directive would be sufficient to take it as a good basis for the elaboration of the alternative capital maintenance regime. However, experts, shareholders and managers of companies across the EU certainly would agree with our view, that Community legislation cannot prohibit national legislation to make a free choice between different creditors protection regimes. Likewise, Community legislation can not neglect the expectations of stakeholders; nor can exclude the application of the arrangements that the market has judged to be more efficient. Although, as a general rule, we do not encourage the subsequent amendment of the same directive in a short time scale, in the case of the 2 nd Directive this seems to be unavoidable. Question 2 We support the efforts of the Commission to emphasize the application of better regulation principles in the adoption of upcoming Community measures in the field of company law. We agree that during the EU decision-making process, it is important to carry out impact 2

assessment studies, ensuring sufficient time for consultations, and involving stakeholders, economic actors. However, we are not convinced that the codification of existing company law directives into one piece of legislation would bring an added value, or would have an impact on the competitiveness of EU companies. Firstly, EC Company law directives and regulations are already compiled in text books that fulfil the function of having one single text. Secondly, directives are always transposed into national legislation; therefore companies generally do not read the text itself of the directives, but the transposing national law. We share the view that first generation company law directives should be treated in the same way, should respect the same set of criteria as the new ones. The analysis of the Company law acquis in the light of Better regulation principles should bring to the abolition of a number of rules of the 2 nd directive, and regarding the other directives, the lifting of a number of binding rules, in order to widen the room for manoeuvre in national legislation. Question 3 We believe that most of the short-term measures of the Action Plan in the field of corporate governance have made important contribution to the transparency of the structure and the decision-making in listed companies. We agree with the Commission that deviations from the one share, one vote principle distort the equilibrium between control and risk-bearing in limited liability companies. However, for the time being, it is not likely that a single approach could prevail in all Member States. Moreover, we do not believe that this measure is necessary in order to improve the Internal Market. The exceptions to the one share, one vote principle, and their aims vary widely in Member States. There also seems to be a tendency towards the limitation of exceptions in certain countries. In some of them it is the efficient capital market that reduces the use of preference shares etc., in others it is the national legislation. As we pointed out earlier, we believe that the basic guidelines for the Community legislation should be the principles of subsidiarity and proportionality. In our opinion, addressing the substance of this issue at the EU level would not have much added value, firstly because it could not take the form of legislative constraint, secondly because ensuring the transparency of the capital structure is more important than regulating the capital structure itself. Nevertheless, in the latter field the EU could play an important role and ensure the appropriate transparency of the capital structure of listed companies. Article 10 of Directive 2004/25/EC on takeover bids may serve as an example for the proposed legislation. Question 4 The approximation of shareholders substantive rights (investigation rights, wrongful trading rule, etc.) must have some positive effect on the improvement of the single market, but we do not consider it as a priority. A legislative instrument would move some elements of the substantive national law to the Community level. Nevertheless, these elements only have marginal connection with cross-border issues. 3

We emphasise once again that Community legislation should focus on problems, market failures, etc. that cannot be solved on the national level. In the last decade the converging tendencies of the substantive corporate law of the Member States (and other countries) have been obvious, important corporate law reforms have been carried out. These changes have brought forth the appearance of new institutions in some national regimes, automatically harmonizing the Member States legislations. Several countries have already adopted the aforementioned shareholders rights in their legislation. For the shareholders of companies having their seats in the latter countries, the Community action would have no added value at all. For shareholders in other States the Community legislation may result in some progress, however, we do not believe that addressing these questions at EU level would make significant contribution to the improvement of the single market. Question 5 Institutional investors play an important role in determining the governance of listed companies. Therefore their investment and voting policies are of great importance to other market participants. We believe however that in this particular field it would be difficult to find proper justification for Community action. Primarily the market itself should encourage institutional investors action to disclose their investment and voting policies. And even if market pressures do not have enough influence on the behaviour of institutional investors, disclosure may easily be specified in national legislation. There is no reason to believe that this aim can be better achieved on the Community level. Question 6 Wrongful trading rules and the issue of directors disqualification are important substantial elements of corporate law. Broadening directors responsibility has been a general trend in Europe for years and these rules have emerged in a number of national legislations. But it is obvious that even if the principle is the same, the actual regulations vary widely in the Member States. They have to be adapted to the national legal systems. Therefore, we believe that it would be difficult to accept common rules in this field since it widely affects the substantial law. Question 7 The 14 th Directive on transfer of registered office is just as important as the 10 th Directive on cross-border merges. We believe that the adoption of the 14 th Directive is key priority, even if its elaboration and adoption will raise several questions, and the Community legislator will have to make a number of decisions on company law and private international law issues. At present, the legislation of Member States varies widely regarding the legal consequences of a transfer of registered office. However, it is obvious that in a well-functioning Internal Market, companies should be allowed to freely adapt themselves to the market conditions, 4

business environment, and transfer their registered office from one Member State to the other. Therefore, it has to be clarified whether the transfer of a companies head office or registered office requires the aligning of the company statute to the national legislation of the host Member State. Obviously, this cannot be answered without an in-depth analysis made by the Commission on the application of the principle of registered office, and that of the country of incorporation. A debate should also be launched between Member States applying the principle of registered office, and the principle of country of incorporation. The decisions of the European Court of Justice (for instance, more recently, on the 13 th of December 2005 in the case SEVIC Systems AG) would serve as good starting point for discussions. Question 8 Regulating the organisation of listed companies has been on the Community s agenda for decades. The Action Plan focuses on ensuring their organisational freedom, instead of trying to make the companies uniform all over Europe. Following the American and the European financial scandals, the lack of independent control over the management of listed companies was defined as one of the major factors leading to the violations of law. Since then many Member States have strengthened the control over the management and the independence of some members of the board or of the supervisory body has been guaranteed. The trends have been very similar in the Member States regardless of the dominant board structure in the respective country. The Commission s Recommendations on directors pay and on independent board members may also have positive impact. On one hand, the one-tier system and the two-tier system are even as far as the guarantees of independent control are concerned. On the other hand we can still see some need for Community legislation in this field. We believe that ensuring greater freedom of choice to companies concerning their board structure may help to improve the Internal Market. This freedom reduces the costs of cross-border movements, restructuring etc. by letting the companies keep their original form after moving their registered office to another Member State. However, the EU should refrain from detailed legislation because it would concern substantial law and for that reason it would compromise the success of the proposal. Question 9 Squeeze out and sell out rights bring up substantial legal questions because they influence the ownership structure of the companies. Their introduction also requires the examination of constitutional questions since they affect property rights. In our opinion, the case of listed companies has to be strictly separated from other companies whose shares are not traded on the regulated market. Concerning the latter ones, we believe that legal intervention into the ownership structure of the company can not be justified neither on the national nor on the Community level. This matter belongs to the autonomy of the founders/owners of the company. As far as listed companies are concerned, the Community should not go beyond the rules set out in the Takeover Directive. We do not believe that introducing squeeze out and sell out rights would contribute to the improvement of the single market but may force the investors by putting legal and financial burden on them. 5

Question 10 We agree with the Internal Market DG s opinion that there is no need for Community legislation dealing with group relations. These matters, if it is necessary, may be dealt with on the national level. Question 11 According to Article 69 of 2157/2001/EC Regulation on the Statute of the European Company, 5 years at the latest after its entry into force, the Commission will draw up a report on the application of the Regulation and will make proposals for amendments, and to present this report to the Council and the European Parliament. In its report, the Commission will have to examine, whether it would be appropriate to abolish the ban on placing the SE s head office and registered office in different Member States. In this report, it would also be important to examine if the rule excluding natural persons from the establishment of an SE, and other rules reducing the room for manoeuvre of the companies establishing the SE should be maintained or not. The experience of the application of Directive 2001/86/EC regarding the involvement of employees in an SE should also be revised. The one and a half years experience since the entry into force of the regulation on the statute of the SE does not show that the regulation would be a success story. In Hungary, for instance, the possibility of establishing an SE was almost unobserved by stakeholders. However, the revision of the regulation has great importance, not only from the point of view of an eventual amendment of the text, but this experience will also have an impact on the elaboration of both the regulation of the statute of the European private company and the 14 th directive. Question 12 In our view, priority should be given to the adoption of the regulation on the statute of the European private company. According to the Action Plan, the decision on the need for the EPC statute depends on the outcome of the feasibility study, which was due to be presented by the end of 2005. Also, the Winter Report gave first priority to the adoption of the 10 th Directive. Although a study has been published on the Commission s website, the lack of a clear conclusion did not advance the Commission to make a well-founded decision. However, there is no doubt, that the need for the EPC statute has still a strong justification. The 10 th Directive, even if it will certainly enhance the cross-border cooperation of companies, does not respond to the need for a new, entrepreneur-friendly sui generis company form. The advantage of the EPC statute is exactly the fact that it can have an activity all over the Internal Market, and since the same binding rules of the regulation apply in all Member States, the costs of complying with 25 different national legislations can be reduced. However, the EPC statute will only be successful, if the following conditions will be met: - Contrary to the SE statute, the EPC statute has to provide the possibility of establishing the EPC even without an existing predecessor company. A good example for this is the statute on the European cooperative society, where the ECS can also be established by natural persons (Regulation 1435/2003/EC). 6

- Under condition that the economic activity of the future EPC will cover several Member States, the EPC could also be established by members coming from only one Member State, as it was suggested in the Winter Report. - Making reference to national legislation in the regulation on the EPC statute should be the exception. The EPC statute will only be successful if its rules are clear and comprehensive, and give sufficient freedom for the members of the EPC. Therefore, as a general rule, we suggest that the members of the EPC should be free to decide on issues that are not covered by the regulation. National legislation could not restrict the right of decision of the members of the EPC, nor require to apply the company law of the Member State where the EPC was incorporated. - The EPC statute can have a positive impact on the company law in the 25 Member States only if the regulation is restricted to minimum rules. A good example for this is the model regulation drafted by the French Chamber of Commerce in 1998. We would suggest that the EPC statute does not provide as burdensome rules on protection of creditors as the 2 nd Directive. The added value of the regulation on the EPC statue would be exactly to encourage national legislator to give up obsolete rules. - Unlike the SE statute, the EPC statute should not contain any rules on the involvement of employees. (In our view, Directive 2001/86/EC regarding the involvement of employees in an SE is the main reason of the failure of the SE statute.) We understand, that in case of EPCs having large number of employees, Member States would not agree on a text containing no rules on the involvement of employeess. One solution to this problem could be the limitation of the number of employees of the EPC to 500. Question 13 We cannot see any reason to support the idea of the European Foundation Statute. We believe that it does not make any contribution to the improvement of the Internal Market. Our objection to the creation of this particular European legal form does not mean that a feasibility study would be without any value. But it should focus on helping the cross-border movement and other cross-border aspects (fund raising, etc.) of foundations based on Member State law by the elimination the legal, financial and administrative burdens. It would have greater added value if this could be achieved without harmonizing substantial law. Yours sincerely, Gábor GADÓ Dr. Deputy Secretary of State 7