NOTE 11 May 2012 Non-Paper from the Danish Government on the future EU company law Introduction This non-paper has been drafted on the basis of the recommendations of the Reflection Group, the subsequent discussions of the recommendations at the Commission conference and at the high-level meeting of the Commission Company Law Expert Group (CLEG), and input from Danish stakeholders. Executive summary Evidence shows that a common framework is needed to facilitate crossborder activity and mobility in the EU thereby providing the necessary clarity and legal certainty for businesses whilst taking into account also the interest of relevant stakeholders. Therefore top priority should be given to a Directive on cross-border mobility in the EU encompassing common rules on cross-border transfers of the registered office, cross-border mergers and cross-border divisions. EU company forms seem only to add significant value to businesses if the rules applicable have a certain degree of uniformity and the references to national legislation are kept at a minimum. This requires that all Member States accept that an EU company form is per definition a competitor to comparable national company forms. Lacking such acknowledgement it does not seem worthwhile to make EU company forms an EU priority. Disagreement on the approach to employee participation has made the completion of a well functioning cross-border framework difficult. Workable solutions therefore need to be found. The solutions must balance important considerations such as protecting acquired rights to employee participation and taking into account the differences between member states. An amendment of the 2 nd Company Law Directive (CLD) to reduce administrative burdens could also be a priority. There seems to be no need for a comprehensive European group law. On a small number of specific issues such as transparency, cash pooling and loans within an international group there may be a need to have clearer and harmonised rules. However, the need to ensure that the one controlling a company with limited liability will not abuse the limited liability is not a
2/11 problem particular to groups of companies but applies to all limited liability companies. This issue should therefore be explored on its own taking into account the different corporate governance systems and rules on liability in the Member States. On long term viability of companies there are important considerations to acknowledge before deciding which actions to encourage or dissuade via legislation. In most aspects, viability is dependent on the relevant question of long term perspective. However, this should be distinguished from the less relevant issue of duration of any investment or management effort. It is also important to differentiate between the stakeholders. 1. General comments There are no one size fits all rules that are good for every company irrespective of its specific features. The starting point should therefore always be the subsidiarity and proportionality principles because adherence to these principles provides the best assurance that rules, if necessary, are made at the right level and applied to the right entities taking into account the need for flexibility and choice for companies, protection of relevant stakeholders and the aim of reducing unnecessary administrative burdens. A sound way forward for EU company law seems to be on the one hand for the EU-legislation to focus more specifically on cross-border problems, and on the other hand for everyone involved to acknowledge that European cross-border problems require common European solutions. Further, EU company law must consider the challenges ahead for businesses in the 21 st century. Without disregarding what has been agreed and accomplished at an EU level Europe should consider future needs of the business community 10-20 years from now and thereby gain a competitive advantage and give rise to growth and innovation for European economy. This general view translates into the following views on the current issues on the agenda in European Company Law. 2. Cross-border mobility Access to cross-border business activity, including cross-border corporate mobility, is at the core of the fundamental freedoms provided to companies by the Treaty. It is also a fact that it is important for the integration of the European markets and the competitiveness of European businesses to have such access in an efficient way. Numerous testimonies from the business sector and academics suggest that the framework could still be improved in some areas, notably the framework for cross-border establishment. 1 This 1 See e.g. the Report of the Reflection Group On the Future of EU Company Law and the comments made at the Conference on European Company Law: The way forward 16-17 May 2011. Also public consultations held by the European Commission http://ec.europa.eu/internal_market/company/seat-transfer/2004-consult_en.htm#market and a survey amongst Danish users high-light a need to complete the framework.
3/11 cross-border framework can not be completed sufficiently by contract, soft law or national legislation alone. A common EU-framework is needed to facilitate cross border activity and mobility, and to reduce costs and increase legal certainty when conducting business cross border. The interests of relevant stakeholders such as creditors, shareholders and employees must be taken into account when completing this framework. All Member States share an interest in providing adequate protection to stakeholders of companies but Member States differ in the way they provide it at the national level. Such differences are not a problem in a purely national context. They do not need to be a problem in a cross-border context either. However, it should be acknowledged that a cross-border context normally calls for a common cross-border solution and that this solution can be different from what applies to purely national settings. In a cross-border context the most important thing is to ensure that an appropriate degree of protection is found taking into account the cross-border element and taking into account already acquired rights. Less priority should be given to which national systems the common cross-border solution resembles the most. Referring matters to national legislation should be reserved to cases where there is no need for a common cross-border solution. It should also be acknowledged that company law is rarely the decisive factor for a company in its considerations in relation to cross-border corporate mobility. The stakeholder responses to the Commission consultation on the results of the study on the operation and the impacts of the statute for a European company (SE) showed that it is normally a combination of different factors that decide where a company chooses to locate and relocate. 2 It should also be acknowledged that corporate mobility is already possible, but the tools at hand are not as cost-efficient as they could be. Tax considerations are important to take into account when shaping the EU company law framework. We should not create cross-border vehicles that primarily serve to facilitate avoidance of tax payment. On the other hand taxation is not significantly linked to the registered office of a company, and tax law is a discipline of its own capable of solving its own problems with reasonable rules. Coordination and sharing of information rather than integration therefore seems to be the right approach between these two legal disciplines. 2 The most important factors seem to include: efficient tax rules, flexible employment law, legal certainty, transparency and simplicity in company law as well as low registration costs and efficient and reliable regulatory authorities. The importance of an economic approach to location decisions was also stressed and some went as far as suggesting that company law has little meaning, as compared to the market itself. These views generally correspond to the majority of the views expressed at the Conference on the future of EU company law and the views expressed in consultations with Danish users.
4/11 Thus, from a user perspective the most important contribution that company law can provide is a clear and cost-efficient framework to facilitate companies cross-border mobility and restructuring needs. An appropriate degree of protection of relevant stakeholders needs to be included in the framework, balancing the interests of businesses with the interests of stakeholders. 2.1. Cross-border mergers, divisions and transfers of seat These three types of tools are the main tools in a corporate mobility and cross-border restructuring perspective. The European Court of Justice (ECJ) has already made it clear that the Treaty allows such operations crossborder, subject to certain conditions. However, without Directives there is too much legal uncertainty deterring companies from benefitting from these rights ultimately resulting in less competitiveness and growth in the EU. Anecdotal evidence from users show that the cross-border merger Directive has been received very positively, although improvements could be made, and that Directives on cross-border transfer of registered office and divisions are amongst the most wanted future EU-initiatives. A Directive on cross-border transfer of the registered office seems to have top priority amongst users. Testimonies from companies, legal advisors and academics show that the 10 th Company Law Directive (CLD) is not a perfect substitute for a Directive on transfer of registered office as envisaged by the Commission in its impact assessment on a possible 14 th CLD. The 10 th CLD is a more complicated and costly procedure as it involves a mingling of assets, a combination of liabilities and an exchange of ownership rights that requires certain kinds of valuations to be conducted and information to be disclosed. Moreover, a company does not fully preserve its legal identity if it transfers its registered office by way of a crossborder merger. This could have negative consequences for a company s corporate identity and its contractual relations. Harmonisation of national law is only required to the extent necessary to introduce a right to transfer the registered office from one Member State to another, including rules protecting the interests of stakeholders in these situations, and should not interfere with the national company law regimes beyond that. For example, Member States should remain at liberty to decide which company forms are available under national law and what constitutes the connecting factors to that Member State, e.g. a possible requirement that the real seat is present in that Member State. A transfer of registered office would thus practically correspond to a cross-border conversion from a company form of the original Home State to a company form in the new Home State, and the transfer would be dependent on the company s compliance with the requirements in the national company law of the new Home State on this company form. Harmonisation of national law in respect of international private law and conflict of law provisions does not seem necessary.
5/11 Such limited harmonization would allow Member States to maintain their specific national settings in the particular area to the furthest extent while facilitating the cross-border operation. Further, it would not interfere with potentially important linkages to related legal areas. There is also a business need to allow for cross-border divisions. This type of restructuring is widely used in the EU at the national level 3, and there are no convincing reasons why it should not be made more easily accessible cross-border. Divisions involve similar types of problems as mergers and could generally be dealt with in the same manner as cross-border mergers. Legal instrument It could seem appropriate to amend the present 10 th CLD to provide more generally for cross-border mobility thereby effectively changing it to a Directive on cross-border mobility in the EU. The types of cross-border mobility to be covered should be cross-border mergers, divisions and transfers of registered office. Such an approach would provide clarity and avoid unnecessary duplication of rules. Differences in the rules applicable to these three types of cross-border operations should only be made when differences in their specific natures call for it. For instance, the simpler operation of a cross-border transfer of the registered office could justify simpler rules compared to a cross-border merger. Scope It should apply to limited liability companies as this would cover the most widely used and known legal forms for commercial activity. Other legal forms covered by TFEU Article 54 might be covered at a later stage, but considering the wide variety of legal forms in use in the various Member States, and the difficulties covering all these forms would lead to, the Directive should at first concentrate on limited liability companies. An amendment of the 10 th CLD Directive to this end should at the same time build on the experience already made with cross-border mergers. For instance it could be considered to facilitate and clarify the cooperation between competent authorities better; to reduce the complexity of the rules in order to ensure an easier application and a more uniform interpretation; and to take into account that the rules are currently mostly used as transactions within groups of companies because the rules are often considered too burdensome to apply for others. Although an initiative on a Directive on cross-border mobility should be given high priority, it would thus be wise 3 According to the baseline measurement of administrative costs in EU company law conducted according to the Action programme for reducing administrative burdens in the EU there are annually approx. 4,327 incidents of disclosures of terms of division EU-wide pursuant to the 6 th Company Law Directive. This figure covers 24 Member States and does not include divisions conducted by private limited-liability companies.
6/11 to coordinate it with the timing of the review of the 10 th CLD envisaged in Article 18 of the Directive, i.e. at the end of 2012. 2.2 European Company forms Until now, there has been only limited market demand for the existing EU company forms. This is not necessarily because the idea of EU company forms is not in itself appealing to businesses. It could very well be the right approach for some businesses. However, the existing EU company forms have not been designed in a way that ensures the benefits of this approach for businesses on a wide scale. In particular, the complex mixture of an independent regulation and dependence on different national laws has been identified as a major obstacle for making EU company law forms attractive and successful. 4 The planned review of the existing EU company forms (SE and SCE) should therefore be conducted with a view to making them less dependent on the different national laws. The review should also ensure that the ideas in the recent simplification and modernisation of various company law directives are expanded to cover also the SE and SCE Regulations, where appropriate. It could also be relevant to see if the experience gained when negotiating the SPE could be used as inspiration for simpler, more flexible SE/SCE-Regulations with less administrative burdens whilst still respecting the differences between Regulations intended for private companies, public companies and cooperatives. As regards introducing new EU company forms such initiatives should always first stand a test which clearly identifies a problem that can be solved with the proposed new company form. Secondly, it is relevant to ask if the problem is of such importance and specificity that a new company form is necessary, or if the problems could not rather be addressed through measures targeting existing company forms, which would seem to be the preferred solution if possible. Thirdly, if it can be demonstrated that an EU company form can indeed be an appropriate solution to solving a specific problem of a cross border nature, it can only successfully do so if it is an attractive competitor to national company forms. However, negotiations on EU company forms have proven that Member States are generally reluctant to agree on new company forms if they are seen as competitive to the national systems. Therein lays the dilemma. Thus, it seems that only if EU Member States to some extent accept that an EU company form is per definition a competitor to national company forms a useful instrument can be created with limited references to national law. This acknowledgement should in theory not be difficult since the different company forms of a Member State already compete nationally and internationally with the company forms of the other Member States. However, if it is not possible to get such an acknowledgement from all Member States it does not seem worthwhile even trying to propose new EU company forms. 4 See for instance the Commission report on the application of the SE Statute (http://eurlex.europa.eu/lexuriserv/lexuriserv.do?uri=com:2010:0676:fin:en:pdf)
7/11 2.3 Employee participation Employee participation at board level has turned out to be a very sensitive area in several negotiations on EU legislation involving company mobility and European company forms. A majority of EU member states do not legislate in the area whereas other Member States have well functioning, long lasting experience with legislation on employee participation. 5 These differences are part of the differences in industrial relations and culture between the Member States. For these reasons and since no convincing case for harmonisation has been made, employee participation in a strictly national context is not regulated by EU law. However, in the areas of cross-border mobility and establishment of European company forms it has not been possible to leave the question of employee participation entirely to the national legislator since the traditions in the Member States can clash in these situations for instance when conducting a cross-border merger or when the seat of a company is transferred across borders without a change of the working place for the employees. Solutions have been found for the SE company and for the cross-border merger Directive. The Commission Report on the application of the Statute for a European Company (SE) and anecdotal evidence from users of the 10 th CLD suggests that the rules on employee participation have a very big influence on the use of these instruments. The complicated nature of the employee participation rules seem to deter many companies from making use of the instruments or have the effect that the instruments are used mostly by companies without employees. This is not because companies oppose the idea of employee participation but due to rigid and lengthy procedures. That situation does not seem optimal. No agreement on employee participation has yet been found for the SPE, and negotiations can be foreseen to encounter similar difficulties should proposals for company law directives on the transfer of the registered office and cross-border division be launched, or should the solutions in the SE Directive and 10 th CLD be reconsidered as part of the upcoming evaluations. It is important that disagreement on the approach to employee participation does not stand in the way of completing a well working framework to facilitate companies cross-border mobility and restructuring needs. It is however equally important that the acquired rights of employees are taken into account. Workable solutions therefore need to be found for these situations. An effort should be made to encourage models of employee participation throughout the EU to facilitate cross-border activities. 5 See volume 1 and 2 of the catalogue: Employee representatives in Europe published on the website of the EU Commission Directorate General for Employment, Social Affairs and Inclusion.
8/11 Relevant objectives for the solutions include avoiding making procedures administratively burdensome; avoiding having different rules for the same type of companies and, at the same time; preserving already acquired rights for employees. The solutions must balance the relevant objectives as they are not all perfectly compatible. It could be helpful to consider to what extent the principles appropriate for cross-border mobility of national companies must be identical, and if they should be different from the principles appropriate for European company forms. E.g. in the case of cross-border mobility of national companies the objective of avoiding having different rules for the same type of companies is more relevant than in the case of European company forms. In addition, flexible systems allowing for employers and employees to agree freely on individual solutions could be developed further. The key in solving the issue could lie in the possibility for employees to be involved when they so desire while then at the same time providing companies with less rigid procedures. It could be considered to introduce certain options for the Member States as regards employee participation. The aim would be not to prevent all Member States from the benefits of increased mobility due to the differences in this area between some Member States. An optional system could provide Member States the opportunity to allow domestic companies the particular type of cross-border mobility only if the result in terms of protection of acquired rights is satisfactory for the particular Member State. This could have the consequence that companies from Member States with similar systems on employee participation would have full cross-border mobility within their combined territories, whereas companies cross-border mobility towards Member States with different systems on employee participation could be restricted. Such a solution would not be perfect but it would seem to be an improvement compared to no common rules on cross-border mobility at all. 3. Capital requirements It could also be a priority for the future EU Company Law to amend the 2 nd CLD to reduce administrative burdens. E.g. it is often criticised that Member States apply different mandatory methods for determining the value of companies. Another relevant question is whether the scope of application of the 2 nd Company Law Directive (CLD) should be amended. One of the effects of the 2 nd CLD is that it has encouraged Member States to introduce private company forms that are not covered by the requirements of the Directive. However, in real life, the dichotomy public / private limited liability company often makes little sense as public companies can have only one or a
9/11 few shareholders, whereas private companies can be large companies with several shareholders. Therefore it should be analysed if it would make more sense to apply the Directive to all limited-liability companies or alternatively only to listed companies, and re-design the rules in the Directive accordingly. Having said this, the political reality should also be taken into account. It might be more feasible to focus attention on reducing administrative burdens in the current Directive rather than trying to change its scope. 4. Groups of companies Even though groups of companies often operate cross-border there does not seem to be a need for a comprehensive European group law. However, practitioners have identified a need to have clearer and harmonised rules on a small number of specific issues such as cash pooling and loans within an international group. In addition, it would seem appropriate to align the definition of groups in EU company law to the EU accounting legislation to ensure coherence and legal certainty. One particular issue appears to be of special relevance to the various regimes on group law in the different Member States. This issue is the need to ensure that control of a company enjoying limited liability will not cause abuse of the limited liability. However, this is not a problem particular to groups of companies but applies to all limited liability companies. This issue should therefore be explored on its own taking into account the different corporate governance systems and rules on liability in the Member States. In this respect, it should be irrelevant who enjoys the access to control according to the national regime of corporate governance, be that the management (wrongful trading), a shareholder (piercing the veil) or a parent company (group law) as long as an effective regime of pairing flexibility of control with corresponding liability is available that suits the individual regimes of the Member States. There could be a need for further EU legislation on the transparency of groups. If a need is identified, it should be made clear for what purpose it is needed, and the scope of the initiative should be set accordingly, e.g. if it aims at the interests of investors it should target listed companies, whereas if it aims at the interests of tax authorities it should target all groups. The idea of a simplified company template for single-member companies could be examined further. If it could remove unnecessary costs for groups and SME s it would be a step in the right direction. 5. Long term viability of companies A review of the current EU-legislation to see if it sufficiently promotes long term viability of companies seems to be required in the context of the present financial crisis, where short-term speculation in many cases has had
10/11 devastating consequences. For instance, it has been argued that the requirement for quarterly reporting encourages investors to focus only on short term results and thereby tempts management to boost short term earnings rather than long term sustainable development. However, there are important considerations to acknowledge before deciding which actions to encourage through legislation and which to dissuade. One important thing is not to confuse perspective with duration. What is important is to ensure that both investment in and management of companies are carried out with a long term and sustainable view, which is essentially a question of perspective, whereas the actual duration of any investment or management effort is less relevant as it is possible to act with beneficial long term consequences within a short time frame just as it is possible to harm the long term prospects of a company by continued mismanagement or by remaining passive over an extended period. It is also important to differentiate between the stakeholders. A long term perspective from management and board members is particularly important for the viability of companies. That is also why it is important that e.g. remuneration schemes encourage this. The focus in recent years on remuneration schemes has therefore been positive. On the other hand, it seems more difficult and less sensible to try to promote a long-term perspective from e.g. shareholders by simply focusing on the duration of their investment. The very act of selling their shares in a company may be a very potent warning to incumbent management that it is failing and may ultimately help takeovers that promote a more efficient use of the resources. To reward shareholders simply because they endure may be disservice to the company. Lock-in effects should therefore be avoided. Moreover, it seems appropriate to respect shareholders right to be passive investors and the right for shareholders to sell a share believed to be overpriced or believed not to match with the other parts of the investment portfolio. The benefits of e.g. encouraging loyalty shares based on the duration of the share ownership and requiring institutional investors always to adopt a long-term engagement with the investee company therefore seems questionable. On the other hand the increasing emphasis on the need for more active ownership, and in particular the role of institutional investors, seems warranted. How EU-regulation could best ensure long term viability and competitiveness is therefore very complex. It seems that before any decisions are made, there is a need to carry out a comprehensive study on all the implications of the different considerations involved. A path to promote long term viability could possibly be to encourage corporate social responsibility, transparency and active ownership, and to de-
11/11 velop tools to support a constructive dialogue between shareholders and companies. For that purpose, there is a need to reduce costs, remove legal obstacles and regulatory barriers that preclude shareholders from actively engaging in companies. As regards institutional investors the idea of a best practice code could be a sound way forward. Any EU requirements in this area should be based on the comply-or-explain principle and it should allow Member States to be able to adapt the code to its specific national settings. However, it should be recognised that even prudent long term planning cannot guarantee future success. Consequently it seems that the law should foremost focus on providing companies the necessary flexibility to ensure their long term viability under rapidly changing business conditions while taking into account the interest of stakeholders. It should not attempt to block the necessary failure of inefficient companies.