Financial Sustainability of the Company and the Principle of Share Capital Maintenance

This Report is an output of the European Law Institute – ELI Project on “ELI Guidance on company capital and financial accounting for corporate sustainability” (2019–2023). After brief introduction to the Project and research methodology, it provides a comprehensive review of legal-economic academic literature on corporate sustainability and capital maintenance. Following the literature review, the Report provides a legal analysis of EU primary and secondary sources of law tackling sustainability issues, including some sustainability standards, alongside relevant cases of the Court of Justice of the European Union (CJEU). This legal analysis does also include a comparative overview of national capital maintenance regimes in German, British and French company law and regulation. Although academic literature and evidence from corporate practice suggest that the stakeholder model of corporate governance has been challenged by and somewhat relegated in favour of the shareholder primacy orientation, findings presented herein show that the idea of sustainable company is deeply entrenched in EU primary and secondary legislation. The stakeholder model prevails in national company laws. The idea of corporate sustainability and longer-termism is underpinned by the mandatory rules on share capital maintenance, as stipulated in the Directive on certain aspects of company law. In fact, EU case law appears to adhere to the minimum capital maintenance regime adopted at the EU level, submitting stricter Member States regimes to the proportionality test. The concept and need of capital maintenance is further challenged by a fierce academic debate, where some scholars have suggested alternative or complementary forms of creditor protection within and outside the scope of company law. The EU fosters long-term corporate financial robustness through introducing and maintaining stakeholder model of EU company law, as explicitly provided under constitutional provisions of the TFEU; mandatory share capital rule, accompanied by remedial schemes and possibility of introducing alternative or complementary regimes (including civil law arrangements such as insurance schemes); non-financial disclosures of corporate social responsibility (CSR) and environmental, social and governance (ESG) matters, with reference to international standards (most notably UN and OECD), supported by pensalisation schemes; forward-looking remuneration policy, accompanied by the remuneration ‘capping’ scheme, deferral periods and shareholders’ binding say on remuneration proposals; and prudential requirements such as special capital and solvency requirements for financial and insurance institutions. Concerning financial accounting and reporting, corporate sustainability is not covered in EU accounting law and regulation, where fair value accounting, including accounting for IFRS 9 on financial instruments in conjunction with IFRS 13 on fair value measurements, remains a significant problem for longer-term financial sustainability, requiring alternative or complementary solutions.