A RENEWED “DELAWARE EFFECT” FOR COMPANY REGULATION IN EU? THE CASE OF EUROPEAN COMPANY (SE)
Domenico Siclari*
I. Introduction
On 23 March 2010, the European Commission launched a public consultation on how the European Company Statute (SE) works.[1] This consultation aims to test the findings of an external study conducted by the Commission on this subject with the participation of all interested stakeholders,[2] and to provide input on issues relevant to the assessment of the SE.
The European Company, known formally by its Latin name, “Societas Europeae” (SE), is a second level company that may be formed through the merger of two or more existing public limited companies from at least two different EU Member States, either through (i) the formation of a holding company promoted by public or private limited companies from at least two different Member States, or (ii) the formation of a subsidiary of companies from at least two different Member States, or (iii) the transformation of a public limited company which has had a subsidiary in another Member State for at least two years. Created in 2001, the European Company is regulated by both a Regulation, directly applicable in Member States, which establishes the company law rules,[3] and by a Directive, implemented in national law in all Member States, on worker involvement.[4]
The purpose of the SE’s legislative set up is to harmonize the legal framework within which business must be conducted in the Community. As it is currently based on national law—which no longer corresponds to the economic framework of the EU—the current legal framework forms a considerable obstacle to the creation of groups of companies from different Member States.[5]
To ensure as much as possible that the economic unit and the legal unit of business in the European Community coincide, it was necessary that along with the companies governed by a particular national law, companies could be formed and could operate under the law created by a Community Regulation, which is directly applicable to all Member States.[6] This provision permits the creation and the management of companies in a European dimension, free from the obstacles arising out of the disparity and the limited territorial application of national company law.[7]
II. The risk of a renewed “Delaware effect” among the EU Member States
Article 9 of Council Regulation 2001/2157/EC provides legal guidance in the case of matters not regulated by that Regulation or, where matters are partially regulated by it, of the aspects not covered by it. It holds that an SE shall be governed:
(i) by the provisions of laws adopted by Member States in implementation of Community measures relating specifically to SEs;
(ii) by the provisions of Member States’ laws which would apply to a public limited-liability company formed in accordance with the law of the Member State in which the SE has its registered office;
(iii) by the provisions of its statutes, in the same way as for a public limited liability company formed in accordance with the law of the Member State in which the SE has its registered office.
This complex regulation leads to a renewed “Delaware effect”[8] among the EU Member States,[9] as every State would aim to provide the most favorable legislation to induce SEs to establish their registered office in its own territory.[10] In fact, according to the European Commission, of the 431 SEs registered as of 10 September 2009, the vast majority (around 65%) have been registered in the Czech Republic (170 SEs) and Germany (109 SEs).[11]
The most important negative impetus in the establishment of an SE is the lack of employee involvement in Member States without an employee participation system.[12] It seems that new SEs prefer to establish their registered offices in States with an employee participation system, such as Germany, with its traditional Mitbestimmung,[13] while States with troublesome, unclear or no employee participation systems are avoided.
Italy, for example, currently lacks a working employee involvement system, because European Directive 2001/86/CE was only implemented to a limited extent.[14] As such, the only thing that is guaranteed is that the development of the SE will not lead to the reduction or disappearance of existing common practices which enable the involvement of existing employees of participating partners/enterprises..
The risk is that EU States would engage in a “race to the bottom” in establishing company regulations, allowing more room for corporate autonomy.[15] Corporations might opt for the law that governs their most fundamental acts of self-governance, in a context to which the States that determine the legal framework within which the competition belong.[16]
The risk of a Delaware effect might also concern national securities legislation in the event that the SE becomes publicly listed; in fact, if an SE’s shares are listed, it must be treated in the same manner as public companies established under national law.[17]
III. Conclusion
In the process of achieving European harmonization through the Company Law Directives, and in hoping to ensure the free movement and establishment of companies, it is necessary to avoid competition in corporate law among Member States that will carry out only an undesirable “race to the bottom.”
It is certainly not easy to move towards internal market harmonization, particularly when faced with the vastly different politico-economic traditions of the various Member States.
We must not forget that the major problem with which we are confronted has its roots in the differences between the domestic constitutions of the Member States. For example, it is well known that in Germany, the evolution of the relationships between labour and capital assets has resulted in a specific employee participation model that has thus far not been achieved in Italy. The economic value related to the creation of a European internal market will not always prevail, but for the time being, the varying economic policy relationships between enterprises and employees of the Member States must converge into a single European constitutional order.
To move forward in the right direction, we must hope that the continuous and progressive application of the principle of constitutional homogeneity[18] will produce positive effects even in the corporate and security regulation sectors; that they will be homogenized within the specific framework of the cross fertilization process, which would not only include the constitutional principle, but also the real asset: the enterprises’ economic relationships.
Endnotes.
* Ph.D. Public Economic Law, University of Rome La Sapienza; Adjunct Professor, University of Rome Luiss Guido Carli. siclari_d@camera.it.
[1] See The European Company “Societas Europaea” (SE), European Commission (Mar. 23, 2010), available at http://ec.europa.eu/internal_market/company/se/index_en.htm.
[2] Ernst & Young, Study on the operation and the impacts of the Statute for a European Company (SE), 2008/S 144–192482, Final report, 9 December 2009.
[3] Council Regulation 2001/2157/EC, On the Statute for a European company (SE), 2001 O,J. (L294) 1 (EC).
[4] Parliament and Council Directive 2001/86/CE, Supplementing the Statute for a European Company with regard to the Involvement of Employees, 2001 O.J. (L294) 22.
[5] Council Regulation 2001/2157/EC, supra note 3.
[6] Council Regulation 2001/2157/EC, supra note 5.
[7] Id.
[8] On the “Delaware effect” in company law see, e.g., L.W. Cary, Federal and Corporate Law: Reflections upon Delaware, 83 Yale L. J. 663 (1974); M. Kahan & K. Kamar, The Myth of Competition in Corporate Law, 55 Stan. L. Rev. 679 (2002); W.J. Carney & G.B. Shepherd, The Mystery of Delaware Law’s Continuing Success, Emory Law and Economics Research Paper No. 07-17 (December 2008).
[9] In fact, in the European Union, companies have made use of the freedom of establishment to seek more favourable legislation from Member States. A negative consequence of the “Delaware effect” is, for example, the lowering of the minimum prepaid capital for limited liability. For more on the debate among European States and legal scholars in the field of corporate law regarding the possible emergence of a “Delaware of Europe,” see P.S. Ryan, Will There Ever Be a Delaware of Europe?, 11 Colum. J. Eur. L. 187 (2004); and R. Drury, The “Delaware Syndrome”: European Fears and Reactions, J. Bus. L. 709 (2005). According to J. Abramsson & R. Sandberg, Is a Delaware effect developing within the European Community?, Jönköping International Business School (2008), available at http://www.essays.se/essay/4c6d51542b/, however, the continued development of the freedom of establishment along with the companies increased understanding of its benefits might create incentives to seek more favourable legislations, but it is highly unlikely that a Member State will emerge to be as successful as Delaware.
[10] About the possibility of transferring the SE’s seat from one Member State to another without having to shut down or to re-register, see W.G. Ringe, The European Company Statute in the Context of Freedom of Establishment, 7 J. Corp. L. Stud. 185 (2007). In the context of European company law, see generally E. Wymeersch, The Transfer of the Company’s Seat in European Company Law, ECGI Law Working Paper No. 08/2003 (March 2003), available at www.ecgi.org/wp.
[11] EC Official Memorandum, Review of European Company Statute—Frequently Asked Questions, 23 March 2010, MEMO/10/97.
[12] On employee participation, see M. Andenas & F. Wooldridge, European Comparative Company Law (Cambridge University Press 2009).
[13] See, e.g., P. von Pernthaler, Qualifizierte Mitbestimmung und Verfassungsrecht, (Duncker & Humblot, 1972); P.H. Naendrup, Mitbestimmung und Verfassung, (Darmstadt, Luchterhand, 1977); in connection with setting up an SE, see M. Bock, Mitbestimmung und Niederlassungsfreiheit: Folgen der Einführung der Societas Europaea für die Vereinbarkeit paritätischer Unternehmensmitbestimmung mit europäischem Recht (Duncker & Humblot 2008).
[14] By Legislative Decree of Italy, 19 August 2005, no. 188.
[15] For the debate among corporate law scholars on whether State competition for corporate charters in the United States is a “race to the bottom” or a “race to the top” and for an analysis of the dynamics and performance of State charter competition, see L.A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 Harv. L. Rev. 1443 (1992).
[16] Regarding the risk of company regulation competition among EU States after the Centros judgement, see M. Siems, Convergence, Competition, Centros and Conflicts of Law: European Company Law in the 21st Century, 27 Eur. L. Rev. 47 (2002). In the Centros judgement, Case C-21/297, Centros Ltd v. Erhvervs-og Selskabbstyrelsen, 1999 E.C.R. I-1459, the ECJ held:
“it is contrary to the articles 52 to 58 to refuse to register a branch of a company formed in accordance with the law of another member state in which it has its registered office, but carries on no business … this interpretation does not prevent the authorities of the (host state) to adopt appropriate measures for preventing or penalising fraud, either in relation to the company itself, or in relation to its members, where it has been established that they are in fact attempting by means of the formation of a company, to evade their obligations towards private or public creditors established in the territory of the Member States concerned.”
[17] See, generally, R. Romano, The Advantage of Competitive Federalism for Securities (American Enterprise Institute Press 2003).
[18] On constitutional homogeneity in the EU, see V. Vadapalas, Constitutional Homogeneity in the Accession Process, in I. Pernice & R. Miccù (eds.), The European Constitution in the Making, (Nomos 2003), at 101; M. Mahlmann, Constitutional Identity and the Politics of Homogeneity, German. L. J. 6 (2005), available at http://www.germanlawjournal.com/; R. Arnold, Homogeneity and Differences: the Concept of a Core Europe for the Future?, in J. Nergelius (ed.), Nordic and Other European Constitutional Traditions (Martinus Nijhoff Publishers 2006).