What's the value of being European ?

4 May 2002



The concept of a European company now looks like it will finally become a reality. Robin Johnson and Laurence Robinson ask whether this first attempt at European corporate harmonisation will be the world of opportunity that was promised


Ever since the creation of the European Community, the harmonisation of company law within Europe has been on the agenda. It was as far back as 1970 that the specific concept of a supranational European company began its life in a proposed law from the Commission. Thirty-two years on, no real progress has been made but perhaps that is about to change. If it does, there could be a big shake up of company law throughout Europe. The most ardent Europhile probably realises that a complete overhaul of European corporate law is utopia. But remember that there are eurocrats beavering away at it as you read this.

The official underlying reasoning from the Commission for harmonisation has been the encouragement of economic growth in the Single Market together with less bureaucracy. Such harmonisation has taken the form of the single currency and completion of the "internal market". However, the difference between the proposed European Company and these events is the requirement for national governments to unravel the framework of businesses existence.

Economies of scale.

There is a belief that larger European corporations will benefit from greater economies of scale. However, in practice, there has been much caution shown by corporations and some have explicitly said they do not need it. Much of this caution stems from the issue of worker participation - a thorny question looked at later in this article.

The European Company Statute (ECS) was formally adopted by the Council of Ministers on October 8 2001 and is due to enter into force in 2004. The ECS gives companies the option of forming a European Company - known formally by its Latin name of "Societas Europeae" (SE). The statute comprises a Regulation (directly applicable in Member States) establishing the company law rules and a Directive (which will have to be implemented in national law in all Member States) on worker involvement. The basic idea is that companies established in more than one Member State will be able to merge and operate throughout the EU on the basis of a single set of rules and a unified management and reporting system.

Operating history

Only pre-existing companies with a two-year operating history in different Member States will be able to incorporate an SE. An SE can be established by the merger of two or more existing public limited companies from at least two different Member States; by the formation of a holding company promoted by public or private limited companies from at least two different Member States; by the formation of a subsidiary of companies from at least two different Member States; or by the conversion of a public limited company which has, for at least two years, had a subsidiary in another Member State.

Upon its adoption, Frits Bolkestein, internal market commissioner, said of the ECS: "Adoption of the [ECS] will give companies the option of using this efficient structure for their pan-European operations. The [SE] will enable companies to expand and restructure their cross-border operations without the costly and time-consuming red tape of having to set up a network of subsidiaries. This is a practical step to encourage more companies to exploit cross-border opportunities and so to boost Europe's competitiveness…"

One set of rules

The Commission puts forward the ability to operate throughout the EU with one set of rules and a unified management and reporting system as the main advantage. Hence it sees cost and time efficiency. The potential savings in terms of administrative costs for companies operating across the internal market were estimated to be up to a30billion per year by the Competitiveness Advisory Group of industrialists.

Likewise, the ability to expand and restructure without having to set up a network of subsidiaries (hence speed and flexibility) and the ability to move a registered office to another Member State without having to re-register in the second Member State.

Therefore, the Commission would argue that companies which regularly engage in transactions across borders, for example joint ventures with foreign parties and investments in foreign countries, are likely to see value in the ECS. The Commission would also suggest that there are potentially useful roles for SE's in cross border mergers where there are sensitivities between the nationalities. Hence the psychological problem of one nationality dominating another nationality can be avoided.

The reality

However, the reality is different. Real substantive matters are not governed by the ECS but left to the national laws of the Member State where the SE is registered. Such excluded matters include tax, maintenance and changes to capital, intellectual property, insolvency, accounting, directors' liabilities, employment contracts and pensions. Therefore, despite promising efficiency and a reduction in red-tape, the statute has created different layers of regulation for an SE.

First, there is the ECS itself and the constitution of the company. Secondly, for matters that are not covered by the regulation, there are the national laws of Member States implementing the statute. As such, the laws for every SE will be different, depending on where it is located. As a result, far from there being one supranational form for an SE, there will be 15 or more.

Until tax and accounting harmonisation is achieved, an SE is worthless. In effect, companies will set up SEs by reference to the most affordable tax and accounting requirements and companies will choose between nation states' fiscal policies.

As regards reduced administrative costs, it is going to be interesting to see how they will materialise. The argument that there will be reduced administrative costs is based on the SE being one legal entity with branches throughout the EU rather than subsidiaries. But an SE would not take away the need to have people on the ground in countries where the company is trading so the same corporate structures will need to be put in place.

Furthermore, in many instances, the structure of branches rather than subsidiaries may not be beneficial. There can be many reasons for using a subsidiary structure, such as limitation of liabilities.

Another advantage championed by the Commission is that the head office of the SE can be changed from one country to another without the corporate structure being affected. However, there are doubts as to whether even this will lead to a saving in costs. Changing the head office and registered office from one Member State to another would entail change in the national corporate law. There may be SE "nation hopping" as national laws change.

Employee participation was one of the most controversial aspects of the legislation and has been subject to some passionate debate. Countries whose national laws provide for a high level of employee participation, such as Germany and The Netherlands, did not want to see those rights watered down and argued that the SE could be used as a vehicle for companies seeking to evade employee participation. Other countries, for example, Spain, argued that there should be far less employee participation in an SE. A compromise was finally reached in December 2000 at the Inter-Governmental Conference in Nice.

The Directive now provides for employee participation in both the supervision and strategic development of an SE and aims to ensure that existing employee involvement in companies becoming an SE or participating in an SE will not be reduced or eliminated. Therefore, arrangements for the involvement of employees must be established in every SE. The level of worker participation will, in some respects, be determined by the formation particulars of an SE.

Where an existing company is transformed into an SE, existing rules for worker participation will continue to apply.

In the case of an SE formed by merger, or as a holding company or as a subsidiary company, the level of worker participation will be determined in accordance with the specific negotiation procedures in the Directive. Negotiations must begin with representatives of the employees as soon as plans for the formation of an SE are agreed (Article 3 of the Directive). The negotiations must be held with a special negotiating body representative of the companies' employees and may continue for six months, unless extended to a total of one year (Article 5). In the event negotiations fail, the standard rules in the Directive will apply (Article 7). These rules oblige SE managers to provide regular reports to, and regularly consult with, a committee representing the employees.

Are we therefore going to see nationalist/ethnic issues being raised and national politics/politicians fighting their corner. There could well be tension in the process and resentment from national employees and local politicians who feel they have lost out.

Design by committee

The current statute is in reality a diluted version of the original. As such, what has resulted is a national company with a European mask. UNICE, the body which represents European businesses, sees weaknesses in the Regulation and Directive. In particular the complexity of legislation, the fact that the Regulation only harmonises limited aspects of company law, the lack of a suitable tax regime and the imposition of standard rules on employee participation.

Overall, a company should carefully consider the real value of the SE before embarking on a costly restructuring of its European operations. The SE is a tool for corporations fully committed to adapting to the possible advantages of the internal market. It remains to be seen whether the promised cost reductions will filter through and it is the first few committed corporations that will provide the test of this.

It is true that the possibilities for effective co-operations and rationalisations of untidy groups will be of value to many undertakings. Yet it is also agreed that the current ECS is far from perfect, with many key areas left to national rules. As ever in Europe, national politics have played their part in the forming of this legislation. However, now that a foundation has been laid it perhaps should be appreciated that there is a new corporate body on the block. Whether it will provide the real value promised by the Commission - only time will tell.




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