9.5.
Guest lecture on the Harmonization of Company Law
Legal basis
- freedom of establishment: TFEU articles 49, 50, 54
- as a historical context there was an important shift from predominant german
influence to predominant UK influence
- freedom to conduct business
- completion of the internal market, art. 114 TFEU
- free movement of capital and payments
- subsidiary principle: EU organs can only do changes that are necessary
→ important principle and important role in institutions of the EU
Legal instruments: directives, regulations , commission action plans, commission
recommendations, ep resolutions (important in the M&A field), ECJ case law
Harmonization world in 2 ways
- top down: institutions adopt instruments and impose requirements upon MS
- bottom up: MS take initiatives that leads to harmonization of company law
Adopted directives
1) 1968 first company law directive: protection of members and third parties, validity of
obligations (deals with representation of a company, single or multiple signature
clause, more protection when entering a contract with foreign entity), nullity of
company
2) 1976 directive: formation of public LLC, maintenance and alteration of capital - capital
is a threshold above(or below?) which equity shouldn’t go
3) 1978 directive: annual accounts - safeguarding that true view is given on the financial
situation
4) 1978 directive: mergers of public LLC
5) 1982 directive: division of public LLC - 2 or more distinctive companies or new
companies… Solution without liquidation
6) 1983 directive: consolidated accounts - 2 or more parent companies
7) 1984: statutory audit - function of supervising and controlling the accounts - making
sure there is correct, information, true and fair
→ expectation gap: the public expects that when there is this supervision that at the
end of the day the accounts will be correct. however, the statutory audit will make its
best to discover what is going on, but it cannot be guaranteed that that is all and that
there is nothing underneath the surface
8) 1989: disclosure requirements
→ subsidiary: different legal entity controlled by the parent company
→ branch: part of the company there is not a new legal entity - number of disclosure
requirements based on this directive
9) 1989: single-member private LLC
Gap of 15 years - crisis in the company law: daily mail decision by the ECJ: deals with
freedom of establishment - put to halt the developments in this field
- however many other developments: maastricht treaty, creation of eu, euro,
amsterdam treaty in 1997
10) 2004 directive: on take-over bids - company that is listed and other entities trying to
take over that company: meaning to invest a lot of money to inquire shares as much
as possible to take over control of the company - can be friendly or hostile
→ should these companies be protected and where the decision power should be put: board of
directors or shareholders? UK approach: shareholders: they are the owners of the company to
a certain extent. Opposing view: board of directors are in place to develop the company, they
have a plan, project. they should be able to protect this approach, the employment, the
position of this company in society and business. - this would mean that board of directors
would be able to block
→ passivity rule: board of directors shouldn’t intervene and shareholders should have the
decision power
→ EP had to vote on the project (another directive): they blocked the directive
to be adopted
11) 2005: cross-border mergers of LLC - registered office in 2 different MS. Many cross-
border transactions, when companies want to get rid of subsidiaries but have rather
branches
12) 2007: exercise of certain rights of shareholders in listed companies - protection of
minority of shareholders
13) 2012: interconnection of central, commercial and companies’ registers: there should
be information found and the registers should have a connection - creditors should
be able to find information through one channel
→ not as complete in every MS: not fully available everywhere
14) 2013: swift from only disclosing financial information to disclosing also other
information and diversity information by certain large undertakings and groups
→ environmental matter for instance
→ push came from european commission from action plan 2012: push was given to move
more towards modern approach, more sustainable companies
15) 2017: codification directive that regroups and brings together previously mentioned
directives
→ company law package: 2012 digital tools and processes (to what extent can be
communicated by digital means…), cross-borders mergers and convergers (company is being
converted into other legal entity - on national level there could be public liability company
converted to private liability company, or in international level also possible) and divisions
(company split up, assets and liabilities to one company and other part to other company)
Fifth directive was proposed but never adopted, dealt with the structure of the public LLC
and the powers and obligations of their organs
Ninth directive wasn't adopted, too much opposition: dealt with group of companies, another
one dealt with liquidation of companies
Fourteenth directive wasn’t adopted also: dealt with transfer of seat
Adopted Regulations
- EEIG 1985: not-for-profit partnership allowing the organization of ancillary cross-
border service - allowing for creation for partnership not for profit: whenever you want
to create cooperation or supporting ancillary service within the group of companies
- SE 2001: European public LLC (stock corporation): more highly regarded to have
european company weather than created only in one MS
→ successful? depends on a country: most successful in germany and austria - allowed them
to reduce the amount of employee representation
- SCE 2003: European Cooperative Company/Society - to certain extent not-for-profit
or for lesser profit institutions
- 2002: international accounting standards - for statutory audits
- SPE 2008: European private company LLC - close corporation (withdrawn 2015)
- SUP 2014
- European mutual society 1993, withdrawn 2006
- 1999 Working Group SLIM: Simpler legislation for the internal market: simplification
of first and second directive
- 2003 action plan: new initiative to modernize company law and enhancing corporate
governance
- 2012 action plan: european commission focus more on long term engagement
ECJ case law
- freedom of establishment: extended to companies: art. 54 TFEU/48 EC
- in MS 2 theories applicable to determine what nationality company is
1) incorporation theory: you need to look at place of incorporation - place of office
2) green seat theory: you need to look at the real office of the company - where the
actual administration takes place
Freedom of establishment case law
Daily mail (DM) case 1988
Relocation of seat: government approval is required
- DM this falls into freedom of establishment - ECJ ruled in favor
Centros case 1999
- mailbox company - no business in UK, but in Denmark
- wanted to make a branch - restricted by danish government
- ECJ said this restrictment is not justified
- Danish government - this is harmful for the creditors
Important shift in ECJ
Uberseering case 2002
- activity in netherlands and in germany
- conflict with contract party - german court said that as a consequence of transfer of
shares to/from germany - the seat is transferred
- ECJ: any company that is established under the laws of MS must be allowed legal
standing even though actual activity is elsewhere
Inspire Art (2003)
- Netherlands recognized legal entity but as a foreign and imposed some restrictions
- ECJ said this is not justified
Sevic Systems 2005
- merger between luxembourg and germany
- germany refused to recognize the merger
- ECJ: mergers is essential instrument for the creation of internal market thus needs to
be possible even in cross-border and is protected by freedom of establishment
Cartesio 2008
- Hungarian LLC tried to move seat to italy
- hungarian authorities refused to register transaction
- ECJ: freedom of establishment does not include transfer of seat to a foreign country.
MS under which company is incorporated, is able to impose some
conditions/restrictions
Vale 2012
- cross-border conversion
- Italian company wanted to convert to hungarian
- ECJ: conversion important to realization of the internal market. there shouldn’t be
discrimination, if hungarian law permits conversion then it needs to be allowed also in
cross-border instance
Polbud 2017
- Polish court required to first liquidate Polich company before convert to luxembourg
company
- ECJ: restriction is not justified
Free movement of capital and payments
Recent developments
- Regulatory Arbitrage and Regulatory Competition
- Light vehicles - entity type with less restrictions, more flexibility to organize however
you want: UK limited, Flex BV, GmbH
- “Delaware” effect - more companies want to incorporate there: quality of legislation,
complexity or flexibility of regulation
→ race to the bottom: easier to incorporate - perhaps doesn’t lead to good legislation, but to
simplification rather than good quality
- importance of company law
Company law and insolvency law
- gray area: protecting creditors may be governed by one or the other (or both)
- free movement → free choice of governing company law
- Insolvency Regulation: COMI
- CJEU Kornhaas v. Dithmar: german rules on directors’ liability applied to wrongful
trading by directors of UK limited
Adoption of new directive: Corporate sustainability reporting
- requires companies (listed companies) to report on a regular basis non-financial
information - sustainability reporting, anti corruption, environmental matters…
- gap between the information needed and provided - aim to make this smaller and to
be more transparent
- reporting needs to be audited: auditor needs to be educated and trained to do this
→ there needs to be certain standards - needs to be set by EU
- threshold 1.1.2024, after will be applicable
Proposal on directive on sustainable corporate governance
- to mitigate adverse effects in operations in value chain
- would have significant impact in large companies
- companies need to go through the production, the value chain steps to see that
everything is compatible with human rights, environmental rules, safety regulations
etc.
- considerable impact also in third country companies having activities in terms of EU:
they need to comply with these rules also
- due diligence supply chain
- liability important: they have to avoid and/or end the adverse impact
More future developments
- recognition of the concept “Group interest” - regulation on this?
- board structure and employee cor-determination
- impact of brexit
- alternative regime to capital protection and maintenance
