The Societas Europaea (European Company) as a New Corporate Vehicle

The European Company Statute:
The Societas Europaea (European Company) as a New Corporate Vehicle
May 2001 Dr Maria Chetcuti Cauchi. All Rights Reserved.


1. The concept of a Societas Europaea

The proposed Societas Europaea is a company organized under a supra-national European law rather than the law of an individual Member State. Although the SE is meant to be an optional form of incorporation, its aim is to offer companies the facility of operating throughout Europe without the constraints and burdens presented by the present system whereby a number of domestic company laws can apply to a multinational group of companies.

The proposed European Company is an effort to mould a supranational company, a creature of Community law which is to a significant extent autonomous of MS laws. Under the new company law regime, existing EU companies would be able to combine or reorganize their business structure and set up a working structure which, in theory, would be able to take full advantage of the single market, together with the facility to transfer its seat from one MS to another with greater ease.

2. The statutory form of the European Company Statute

The ECS comes in a two pronged package.  The EU is on the threshold of implementing a Regulation which will establish the first pure European public limited liability company form: the Societas Europaea. SEs operating throughout Europe will only need to comply with one set of rules, namely the EU corporate law rules rather than cope with the dissimilar company law regimes applicable in fifteen different MSs.  A Directive on worker participation constitutes the second limb of the law regulating the SE.

The two instruments currently await imminent adoption, originally expected in May 2001.  The Regulation is scheduled to enter into force three years from adoption and thus, MSs are given a time limit of three years within which to enact national laws in compliance with the accompanying Directive. The first SEs are expected to be registered in the year 2004.

Benefits envisaged by the original draftsmen

The completion of the internal market and the improvement it brings about in the economic and social situation throughout the Community mean not only that barriers to trade must be removed, but also that the structures of production must be adapted to the Community dimension. For that purpose it is essential that companies, the business of which is not limited to satisfying purely local needs, should be able to plan and carry out the reorganisation of their business on a community scale.

1. A European company law governing all aspects of the Societas Europaea

The original intention behind the inception of the SE was the creation of a supranational company completely independent of MSs laws. This idea was highly regarded by the Commission as the most feasible way of increasing the quantity of European law, thus creating a European perspective for businesses. Obviously, this would break down the psychological barriers between MSs and prompt a European outlook. In this way, the idea that a company is tied to the State in which it is registered would be circumvented; activities outside that MS would no longer be regarded as foreign activity and companies would be able to take full advantage of the single market with the facility of transferring their seat from one MS to another, without having to confront the complications raised by various national laws in the case of limited liability companies.

2. Facilitation of operations on a transnational level

The idea of the SE as a new legal structure has been envisaged with a view to providing a framework for those enterprises which are established or which operate on a multinational level. It is a fact that the present stage of company law harmonisation overcomes some of the complications in restructuring companies from various MSs. However, it does not discharge companies regulated by diverse legal needs from the requisite of deciding on the particular national company law jurisdiction under which to incorporate.

The aim of the proposal for a European Company is not to substitute the national company laws already in force within MSs or to necessitate MSs to put into operation a homogeneous company law code. Rather, the SE would subsist in conjunction with companies belonging to and operating in MSs and permit them to come together at a European level without the related difficulties of seeking to function on the European plane while coping with fifteen dissimilar sets of company  law policies.

Its aim is to offer an optional arrangement whereby companies may opt to be governed by a regime which is separate from national systems, thus freeing them from the legal and practical restrictions arising out of diverse legal systems. In practice, this will mean that companies established in different MSs will have the opportunity to merge into an SE and operate throughout Europe under a single set of rules and a unified administration and reporting procedure.

By resorting to a European Company form, an enterprise can restructure expeditiously and without difficulty, thus taking the best possible benefit of the trading prospects offered by the Internal Market. In response to the changing  needs of the world of commerce, the SE will give European Companies with business concerns in more than one MS the opportunity of moving  across borders without problems.  This will highly benefit pan-European projects such as Trans-European Network projects in the transport or energy sectors. A single European Company could attract by far more private venture investment than any succession of national corporations could.

The SE is regarded as the solution to the problem of conflict of laws in case of cross-border mergers. Corporations set up by different laws, from different MSs could come together into a new company or create a joint holding company which is presided over, not by the law of a specific country but, by a homogeneous Community law. Operating through a standardized regime surmounts the conflict of laws hurdle.

3. The achievement of the common market

The Commission has always deemed the SE as a vital ingredient of the Common Market itself. The original draftsmen dreamt of a ECS that would, inter alia, eliminate the disadvantages arising from the choice of different juridical forms as well as remove differences in the powers of the boards of administration and in the drawing of accounts and annual reports in a form which is not homogeneous in all MSs. It was believed that business in the internal market could be conducted by supranational companies of the federal type [governed by] a truly community law , rather than by companies established under national law.

The view that the Common Market should primarily be carried by common companies has ideologically much to commend it, for a European Company of this type would surely be an instrument designed to merge national economies into a single European economy.

Whether this ambition has been reached or otherwise is a matter which is to be seen in the years following the adoption of the SE.  However, at the outset, it must be admitted that there exist serious prima facie grounds for doubting this, especially obstacles entrenched in cultural differences between different countries embracing different types of corporate law regimes.

4. Increased freedom of movement

The SE form is advantageous in that it would have the possibility of moving its seat from one Member State to another without the burdensome process of dissolution and winding up. It will no longer be necessary to wind up the company in the Member State where the headquarters were originally established and to re-register the company in the Member State where the headquarters are newly to be established. At present, if such a company decides to relocate its seat within the EC and chooses not to conduct business through branches in other member states, it would have to be dissolved and wound up in its home state and re-incorporated in the State where it chooses to have its new seat. If a uniform regime is applied by means of the ECS such problem of conflict of laws would be overcome, thus maximizing the freedom of movement of such public companies.

5. The introduction of worker participation rules

The issue of employee involvement is a subject which has been given high priority under the European Social Charter. Since the primary inception of the concept of a European Company, employee participation has been the subject of great controversy and discord. Agreement on worker-involvement is likely to pave the way to accord on the ECS, its adoption and its success as a feasible corporate vehicle.

6. Enhanced protection for shareholders and creditors

Another advantage brought about by the proposed European company law regime lies in the fact that this same law will afford the same protection to shareholders and creditors in all MSs, thus eliminating insecurity caused by a multitude of different laws which could potentially be invoked in protection of these groups.

7. The use of the European Company label

One of the motives behind the creation of the SE was to encourage the formation of multinational companies with superior economies of scale, thus enabling European enterprises to compete more efficiently with their American and Japanese counterparts.

The current economic situation prevailing in Europe necessitates a reform in the existing legal structures within which trade is presently carried out; this is founded almost entirely on domestic legislation and no longer tallies with the economic framework within which it needs to advance to meet the aims of the EC Treaty. As a result, considerable hurdles to the formation of groups of companies from different MSs remain. The single market is moving towards a greater integration of national markets and thus, legislation is required to sustain companies whose business transcends the mere need of satisfying local markets. It can do this only by facilitating the planning and restructuring of business on a Community scale.

In this way, the term SE included in the name of every such European Company will connote a corporate form different from that present in the different MSs – a corporate vehicle governed by a unique, homogeneous legal regime – a free floating entity, which is not attached to the legislative system of any particular MS but is only tied to the supranational jurisdiction thus created by the European Community.

8. Lower costs

Companies operating at Community level are presently required to sustain superfluous and expensive divisions in their structures and organisations to meet the conditions imposed under national corporate legislation. Thus, the need to establish a costly and organizationally lengthy, complex network of subsidiaries governed by different national laws should be done away with, bringing about a substantial decrease in administrative and legal costs. In terms of administrative costs, it is estimated that up to 30 billion per yearcould be saved. This would result in the ECS smoothening and expediting the restructuring progress of European businesses on a Community scale.

The Evolution of the Societas Europaea

1959: The inception of the concept

The concept of a European company has been in the Brussels machinery for many years. The idea was first put forward by Thibirge at the Fifty-seventh Congress of French Notaries in 1959. The concept was most particularly advocated by Professor Sanders in his inaugural speech at the Rotterdam School of Economics in 1959. The Commission supported the idea and on 29 April 1966 presented a Memorandum on the creation of a European Commercial Company. It also set up a group of experts, chaired by the same Professor Sanders, to analyse the feasibility of such corporate vehicle and to consider the potential advantages which a company governed by the same legal regime in all MSs would have. The latter group of experts finalised a proposal in 1967. The proposed Statute faced a number of obstacles and objections ever since its conception.

As a result, the ECS lay on the backburner until 1970 when finally, the Commission issued its proposal. The proposed Regulation was submitted to the Economic and Social Committee of the Community, which adopted the text in 1972. In 1974, the European Parliament rendered a favourable opinion thereon after introducing some amendments in the already frequently-mentioned field of worker participation. A revised proposal was produced in 1975 which endeavoured to produce a comprehensive scheme of company law; yet this produced a result  too complex and lengthy.

1982: Disagreement resulting in deadlock

Discussions were shelved in 1982; it was claimed that the ECS was dependant on theCommission proposals for harmonisation of MSs legislation on groups of companies. In reality, the problem faced by the ECS was that MSs could not reach consensus on a significant number of areas. Thus, with little progress made, the idea was put on hold.

1988: Revival of the Proposal

The impetus for the revival of the ECS proposal arrived in July 1988 when the Commission circulated a memorandum inviting comments on the proposal. The following year, the Commission submitted a proposal to the Council.  The Commission owes this revival to the 1992 deadline for the completion of the Internal Market. According to its memorandum of July 1988, the Commission was embarking on the exploration of a form of company founded on a legal system independent of national systems.

This memorandum stressed that the obstacles to cross-frontier co-operation emerge from the lack of a legal structure regulating cross-frontier mergers, which compels enterprises to resort to other methods of co-operation such as joint ventures and take-overs. Other hindrances to cross-border co-operation include the diversity of taxation systems applicable in the various MSs; the complexities of managing groups of companies as a single economic component rather than as a collection of the interests of the individual companies which make it up, as well as the administrative obscurity surrounding the establishment of companies in another MS.

Another problematic matter which was addressed by the Commission was WP. The Commission rightly pointed out that the WP issue could not be regarded just as a matter of social rights, but as an instrument for promoting the smooth running and success of the enterprise.

The majority of MSs decided that it was worth preparing a new draft proposal. This was, however, not backed up by the United Kingdom mainly due to its stand on WP. Ultimately, a proposal was submitted by the Commission to the Council on 25 August, 1989.

1989: Transfer of employee participation provisions
from the Regulation to a Directive

On reviving the proposal in 1989, the Commission decided to relocate the question of employee participation from the core of the proposed Regulation, and to lay down optional systems of WP in a complementary Directive.  This proposed Directive describes itself as an indissociable complement and an essential supplement to the regulation.

The facilitation of cross-border operations again lies at the very basis of the SE and this is reflected in the words of the 1989 proposal itself:

a regulation will permit the creation and management of companies with a European dimension, free from the obstacles arising from the disparity and the limited territorial application of national company laws.

After bearing in mind the opinions and other contributions of the various parties concerned, the Commission produced a new text on 16 May 1991. The outcome was the so-called Revised Proposal circulated in February 1992.

1992: The Revised Proposal stalemate in the worker participation debates

In 1991 the whole project got stuck somewhere in the pipeline mainly due to the project for a Directive on Workers Involvement in the SE. Unlike the initial proposals, this draft presented the MSs with two options as to the management structure to be adopted by the SE.  The German style provides for a two-tier board comprising a supervisory board which in turn selects the management board.  The second option is a one-tier board in which shareholders directly elect the management. This freedom in the selection of a board structure was somewhat tampered by the supremacy conferred on the MS in which the SE has its place of administration. Basically this means that the choice of a management structure was limited to that allowed by the State in question. Nonetheless, this proposal insistently continued to press for some element of WP to be included on the board and due to the resultant lack of agreement on the matter, the project seemed to be stuck and there was little hope that it would ever emerge again.

1996: Problematic areas left to national law

In April 1996 a draft Regulation was produced. In the light of the persistent disagreement on issues regarding cross-border mergers, registration and disclosure requirements, taxation, auditing and accounting treatment and insolvency, the text was considerably revised, with a large number of areas passed on to the realm of national law. The drafters of the ECS tried to circumvent the disagreements on these vital issues by referring them to the national laws of MSs, hoping that when an adequate number of SEs are formed, the ECJ will hastily build up a corpus of legislation which will pave the way to the regular harmonisation of such issues. Despite this new compromise, agreement on the package could still not be reached, particularly due to the problematic WP issue. Meanwhile, the need for the ECS was still being felt, the more so after an exercise conducted by the Commission revealed that the absence of an SE form was costing European businesses thirty billion ECU per year.

1997: The Davignon Group

Acknowledging that the inclusion of controversial compulsory WP provisions constituted the main factor preventing the development of the ECS, the Commission set up a group of experts to deliberate on a possible solution to this problem. The group proposed that the management and employees of the companies taking part in the formation of the SE should seek to reach an agreement by means of negotiations, failing which, default reference rules should be resorted to. The group also proposed that one-fifth of the supervisory board or the administrative board should be composed of employee representatives.

1998: Post Davignon blockage

For a whole year, deliberation in Council continued, evolving mainly around the issues of the default provisions, the legal basis for the Regulation, conversion of an existing public limited company into an SE and the condition that the registered office and the head office of the SE must be located in the same MS. General agreement was reached on the special negotiating board which was to be composed of employee representatives and management; employees had the rights of information and consultation, which had to reflect those found in the Works Council Directive.

Building on the Davignon Report, the Luxembourg Presidency put forward a new compromise to the Council and negotiations proceeded under the UK, Austrian and German Presidencies. The bulk of the package was agreed in the period between 1998 and 1999 under the Austrian and German Presidencies and in fact, fourteen MSs signed an agreement. Spain refused to join the agreement on the grounds that the draft was poised in favour of countries with participation traditions.

2000: Agreement reached at the Nice summit

Agreement on the Directive was considered impossible until the Nice Summit in December 2000. The agreement reached takes into account the diverse forms of employment relations existing in the MSs. It was concluded that it should be up to the MS whether or not to implement the Directive on WP in the case of SEs created by merger. Should the MS choose not to implement the Directive, an SE would only be registerable in that MS if an agreement was concluded which included provisions for participation of workers, or in the absence of such agreement, if none of the companies involved had been governed by participation rules prior to the registration of the European Company.

On the 20th December 2000, political agreement on the ECS was reached at the Nice summit and it has been described as a:

milestone agreement which marries the needs of business with the needs of workers and reflects the Lisbon Summit approach that good social policy is good economic policy.

Spain was ready to join in with the fourteen MSs on the agreement concluded three years before, thus giving the go-ahead for the adoption of the two instruments.

Presently, the Draft Regulation on the Statute for a European Company and the Draft Directive supplementing the Statute for a European Company with regard to the involvement of employees are pending before the European Parliament, which had to be consulted on the two amended texts.

Final adoption was due to take place in May 2001 and the  package should enter into force in 2004. Agreement on the ECS has been recognized as fundamental to the formation of a fully integrated market in financial services and it is hoped that the ECS does in fact reach such expectations.

This political accord represents a major breakthrough for companies seeking an efficient structure to operate on a pan-European basis. The European Company 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. It is therefore a step forward in our efforts to make the Internal Market a practical reality for business, to encourage more companies to exploit cross-border opportunities and so to boost Europe’s competitiveness in accordance with the objectives of the Lisbon Summit.

May 2001 Dr Maria Chetcuti Cauchi. All Rights Reserved.