Does the European company contribute to freedom of movement of companies? Should it? Are other approaches better? How can they be brought about?

By Jérémie Duhamel (jeremie.duhamel@juridix.net)

Under the direction of Professor Jonathan Rickford

Table of content :

Introduction
1/ What is freedom of movement of companies ?
2/ Why the freedom of movement of companies ?
3/ Is the “Societas Europaea” a solution to freedom of movement of companies ?

Chapter 1 : Freedom of establishment of companies : the European background
Section 1: Rome Treaty and now the EC Treaty
Section 2 : The European Court of Justice Cases law

Chapter 2 : Freedom of movement of the SE
Section 1 : The freedom of movement of the SE, the article 8 of the ECS
Section 2 : The Article 7 of the regulation
Section 3 : The proceeding and the Guarantees offered of the transfer

Chapter 3 : The limits to freedom of movement raised by the ECS
Section 1 : The structural limits of freedom of movement
Section 2 : The article 7 of the regulation versus the risk of Delaware effect within the European Union

Chapter 4 : The future improvements and the alternatives
Section 1 : The implementation of the ECS and the impact on freedom of movement
Section 2 : The other approaches to develop the freedom of movement of companies

Conclusion
1/ The “Societas Europaea”, a new achievement of the European Internal Market
2/ An imperfect and unfinished solution for the freedom of movement of companies

Introduction

The original promoters of the European Company envisaged a corporate vehicle which would “.. guarantee the Freedom of Establishment laid down in the Treaty, eliminate the possibility of conflict of company rules between two member States of the Community and is ideal for a proper working of the European Capital Market.” By December 2001, the European Company Statute (ECS), completed by the Employees Involvement Directive, creates a new form of company – the Societas Europaea. This new European vehicle will be available in October 2004.

The Single Market Commissioner, Mr. Bolkestein considers that : “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. This is a practical step to encourage more companies to exploit cross-border opportunities and so to boost Europe's competitiveness.” Moreover, according to Professor Winter , the cross-border traffic is the most attractive feature of the Societas Europaea (SE) (it is currently impossible for and between public companies).

However, before examining how the European Company Law deals with the Freedom of movement principle and what the ECS brings, three preliminary questions are raised.

1/ What is freedom of movement of companies ?

By assimilation to natural persons and reference to the freedom of movement of capital (indirect), Article 48 of the EC treaty, interpreted by the Cases law of the European Court of Justice (ECJ) , considers the freedom of movement as the possibility for companies to change or establish their businesses from one State to another within the European Union, without a reduction of their rights. This definition will be developed later, as well as the definition of “Company”.

However, neither the EC treaty nor the ECJ jurisprudence give a clear orientation for the real seat theory or the incorporation theory. This will raise a lot of doubts about the interpretation of the ECS.

2/ Why the freedom of movement of companies ?

As it was set in the “Programme Général pour la suppression des restrictions à la liberté d’établissement”, the SE constitutes a new corporate vehicle for the integration of European businesses and a new stage to the achievement of the Single market. It is therefore a step forward to encourage companies to exploit cross-border opportunities and so boost Europe’s competitiveness (SE could contribute to the realisation of the Lisbon Summit goal that being to make Europe the most competitive area of the world).

On top of that, MS will use Article 10 to create an attractive regime for the SE in order to attract a bigger slice of the market for SEs. The freedom of movement, combined with the competition of jurisdiction could create a more efficient legal environment for undertakings.

3/ Is the “Societas Europaea” a solution to freedom of movement of companies ?

The concept of SE is a compromise between harmonisation and the principle of subsidiarity. The ECS creates a common single set of rules for the companies operating throughout the EU, with an adaptive structure . The SE will also facilitate Cross border operation (no costly and complex network of subsidiaries ).

The jurisprudence of the ECJ had already recognised a limited freedom of movement (Chapter 1). But the main contribution to establishment of freedom of movement of companies is Article 8 § 1 combined with the other articles of the Statute (Chapter 2). However, the ECS is not homogenous, it contains some structural constraints to freedom of movement (Chapter 3). That is why some alternatives could be developed and the manner of implementation of the ECS on domestic levels could facilitate it (Chapter 4).

Chapter 1 : Freedom of establishment of companies : the European background

The concept of freedom of movement for companies is an old question in the European Union (EU) law. It doesn’t start with the regulation of 2001. If we want to appreciate the impact of the ECS, we should first of all, analyse the treaties text (Section 1) and their interpretations in light of the jurisprudential background of the ECJ (Section 2).

Section 1 : Rome Treaty and now the EC Treaty

The articles 43 and mainly 48 of the EC Treaty recognise the mutual recognition and the freedom of movement by analogy with the natural persons. Although article 48 requires companies to be treated in the same way as nationals for the purpose of the Treaty provisions on freedom of establishment (Article 43), this is not strictly possible, given the differences between natural and legal persons. Moreover, despite the many directives adopted to harmonise the European company law, many differences remain : real seat theory/ incorporation theory, one tier board/ two tier board, employees participation, taxation, …

The beneficiary companies of the freedom of establishment are the profit making companies governed by public or private law. This commercial focus remains in the SE one of the criteria of being (Article 2, referring to Annex I makes a reference to commercial public companies).

Since the adoption of the ECS, the EC treaty had lost a part of its importance. However, it remains the main basis of interpretation of the Regulation and the Directive. The treaty is still a part of the European company law because it aims a goal of freedom of movement of the European Companies which has not totally been attained by both the jurisprudence of the ECJ and the ECS. Consequently, new developments in the future, by an extensive interpretation of the ECS for example, are so possible.

Section 2 : The European Court of Justice Cases law

The ECJ had made several decisions about the scope of the freedom of movement of the European companies defined by an interpretation of the provisions of the EC Treaty. Those decisions established progressively a European theory of freedom of movement of the companies.

The Centros case brings two main ideas. First, the ECJ rules that where a company had exercised its right of establishment under the Treaty, the member States are prohibited from discriminate this company on the ground the latter it was formed in accordance with the law of another member State where it has its registered office but does not carry on any business. Secondly, a State is not authorised to restrict the freedom of establishment on the ground of protecting creditors of preventing fraud if there are other ways of countering fraud or protecting creditors. Besides, the Court in § 28 points to the availability to member States of the option of adopting EC harmonising legislation in this area of company law. In practice, it is a pressure for the adoption of the 14th directive.

The ECJ goes further in Uberseering case. The Court recognises the freedom of establishment by admitting an absolute right of mutual recognition of foreign companies between the member States. However, the ECJ does not pass the stage of the incorporation theory. Consequently, “mutual recognition cannot be denied on the basis that the company has moved its headquarter to another member State, even if according to the national company law of the jurisdiction involved, this transfer would have result in disqualifying the company under the applicable law” .

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Even if the cases law of the ECJ set up a large right of mutual recognition within the European Union, the goal of the EC Treaty to organise a freedom of movement to companies on the same level of the freedom of movement of the citizens is not attained. Moreover, the mutual recognition does not allow the change of the applicable law neither organise a procedure of movement of the headquarter of the company. On this ground, the ECS brings a new vehicle and contribute so to the freedom of movement of the European companies.

Chapter 2 : Freedom of movement of the SE

If the jurisprudence of the ECJ has increased a lot the freedom of movement of the companies, the goal of the “Programme Général” has not been attained completely. The ECS realises a compromise between the actual trend of the integration of a Common Market and the respect of the real seat theory.

The Article 8 of the ECS establishes the freedom of movement of the SE by authorising the transfer of the registered office within the EU (Section 1). However this freedom is strictly defined, both by the article 7 recognising in appearance the real seat theory (Section 2) and, by the proceeding of transfer (Section 3).

Section 1 : The freedom of movement of the SE, the article 8 of the ECS

According to the article 8(1) : “The registered office on an SE may be transferred to another Member State in accordance with paragraphs 2 to 13 (about the proceeding of the transfer). Such a transfer shall not result in the winding up of the SE or in the creation of a new legal person”.

This article authorises so the cross-border establishment of the SE. Consequently, an SE could choose its applicable law by transfer of its registered office and by cross-border merger (the different ways of movement of the SE within the EU), even in a MS in which it does not have a domicile. But the change of the law applicable takes into account the interest of both the share-holders and the stake-holders (see Section 2). However, an SE could not use this freedom in the same time of its conversion from a public–limited company (Article 37(3)). This provision has probably been set up to avoid a Delaware effect. Nevertheless, as we will see, the ECS organise a bolting of the freedom of movement by the Article 7.

The freedom is guaranteed by the last sentence of the article 8(1) : “Not result in the winding up of the SE or in the creation of a new legal person”. The introduction of the SE will result in the creation of a flexible scope within which companies would be able to transfer their registered office from one MS to another without having undergo liquidation.

As mentioned above, the SE could so choose the applicable company law. Article 9 of the regulation organises the law applicable for the SE. However, this Article do not really establishes a hierarchy between the provisions of the statutes and the laws of MS in the implementation of the regulation, principles applicable to the public companies and the provisions of the articles of association deviating from such national law. Does that imply that the companies will have to introduce in their articles all the possibilities for the different States where they could be incorporated or will it result a relative autonomy of the statutes in front of national laws ? The regulation does not give a certain answer (the Article 10 of the Regulation could be seen more as a non-discrimination principle) but it seems that from paragraphs 6 and 7 of the preamble, a priority is given to the statutes (in conformity with the regulation) : “The provisions of such 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 law”.

Article 8(6) of the ECS considers that the decision of transfer must result in the modification of the SE’ statutes. The modification of the statutes is organised in Article 59. However, Article 12 organises indirectly the participation of the employees in the procedure of modification of the statutes. In practice, there is a risk that employees refuse systematically the change of the incorporation state or condition it with excess.

Nevertheless, the article 8(1) can be understand only if it is read in the light of Article 7.

Section 2 : The Article 7 of the regulation

Article 7 establishes that : “The registered office of an SE shall be located within the Community, in the same MS as its head office. A MS may in addition impose on SEs registered in its territory the obligation of locating their head office and their registered office in the same place”.

Clearly the Regulation admits the real seat theory. Doubts remain on the definition of head office (no definition is given in the regulation, should we consider the national cases law ?). Moreover, is the real seat the same of the French “siège réel”, or the German “sitz” ? On the same level, is the “registered office”, the “siège statutaire” ? But this problem is not the main issue raised by the Article 7.

The recognition of the real seat theory has two consequences. First, it defined the freedom of Article 8 very strictly. The SE is free to change its registered office, but the head office has to be on the same place. This implies material cost (for the transfer of the real seat) on top of the change of the registered seat. Secondly, this Article raises a contradiction with the Uberseering case.

According to Wymeersh, “it would seem that both approaches are not fully compatible, at least in case in which the Treaty rules on freedom of establishment would prevail over the company law rules” . Should we, on the other hand, take into account the conception of the States ? Probably not because of the supremacy of the EC legislation (Article 9 of the Regulation considers that national laws are applicable only in default of the European provisions). Considering that the ECJ had not invalidated the provisions of the EEIG recognising the real seat theory, it is doubtful that it will do it in the future.

It is however absurd that, according to the Uberseering case, national companies benefit of a larger freedom of movement by the adoption of an “apparent formation theory” (if a company has apparently been formed under the jurisdiction of one legal system, all other member States have to accept it on its territory). In fact, it is more an absolute mutual recognition than a freedom of movement. In the view of those dispositions we could wonder what is the interest of Article 66 about the re-conversion to domestic public company status in State of registration. It seems that the SE is not conceive to be a simple vehicle between the different public limited liability companies.

Article 64 organises the sanction of the Article 7. According to Article 64, an SE shall absolutely respect the provisions of Article 7. The enforcement of Article 7 goes from imposition to regularise the position of the SE (1) to the liquidation of the SE (2). This level of sanction shows how important the real seat theory is fundamental in the ECS. No possibility is given to the States, even the States recognising the incorporation theory, to avoid this.

Section 3 : The proceeding and the Guarantees offered of the transfer

The procedure to change head offices, and so of the registered office, is largely inspired by the procedure of the regulation regulating European Economic Interest Grouping. Moreover, the procedure of transfer establishes a wide range of guarantees for the share-holders and the stake-holders.

This procedure is set up precisely in Article 8 of the ECS. This procedure is a long, at least three months and complex. The opposability of the transfer is guaranteed after that the Creditors and Share-holders are informed.

First, Article 8 (7) guarantees the protection of the creditors with giving a quite a free hand to member States in creditor protection mechanisms. The creditors have the right to apply to the Court on the grounds that the transfer proposal does not offer them sufficient security. Additionally, Article 8 (16), provides that in case of claims arising before the transfer has taken place, the SE shall be considered as still having its registered office in the member State where it was registered prior to the transfer, even if the SE was sued after the transfer took place. The transfer of registered office of an SE is also barred by winding up, liquidation, insolvency or suspension of payments proceedings which have been brought against it. The Regulation does not define what “adequate” security means. It seems to give such creditors some sort of ranking over others, but what if the company, after moving to another MS, creates other new secure creditors? Will the ‘new’ creditors destroy the rights of the previous ones? The Regulation is silent on this matter.

Secondly, Article 8(5) organises the protection of the share-holders. The ECS provides that member States are free to adopt provisions to protect dissenting minority shareholders. It seems that shareholders are given the right to request the Court that they are bought out at a fair price, however, it is held that one cannot really envisage a case where shareholders are given the power to block the cross-border transfer of the SE. Upon drawing up a transfer proposal, the management/administrative organ of the SE shall include the rights which are provided for protection of both shareholders and creditors, and is obliged to draw up a report, whereby the implications of the transfer for shareholders, creditors and employees are delineated..

Thirdly, the Statute offers no rights to employees, in the case where an SE changes jurisdictions. Article 8 (4) does not even mention employees when it refers to the right which shareholders and creditors are given to examine the report issued by the management team. However, the Directive guarantees the maintaining of the information and participation rights, according to the principle “Before-After”. Consequently, it would be very difficult for an SE to avoid the employees rights gained. This protection is also taken into account in the project of 14th directive.

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After an analysis of Articles 7 and 8, one can easily deduces that the freedom of movement of the SE is not as large as it had been wished. From the adoption of the real seat theory in an European view, the ECS raises some practical limits to the freedom of movement.

Chapter 3 : The limits to freedom of movement raised by the ECS

If Article 8(1) establishes the freedom for all the SE to move from one jurisdiction to another one, then the statute also sets down some limits and restraints. After an analysis of the regulation, structural limits on freedom of movement could be defined (Section 1). However, the main restriction results from the adoption of the real seat theory in the SE (Section 2).

Section 1 : The structural limits of freedom of movement

There are substantive matters which are not covered by the Directive and the Regulation. This absence could create a lack of legal certainty. Moreover, there could be some doubts on the applicable law for the SEs in such matters.

Taxation problem is one of the most important issues of the SE : the ECS will allow single incorporation for firms in the EU, single governance and single reporting structures, but in the absence of a tax regulation, it may not change much for cross-border business in the EU. As underlined by Commissioner Bolkestein , “the lack of appropriate tax rules significantly reduces the practical attractiveness of the European Company Statute”. There is a risk that member States will grant special tax regimes to the SE, despite the provision of Article 10.

The ECS provides only in its preamble that “the provisions of the Member States’ law and of Community law are therefore applicable in the above areas [taxation, competition, intellectual property or insolvency]”. This lack of solution sets up the risk of disorganising the freedom of movement : why the Centros case law would not apply to the SE by limiting the freedom of establishment if it results in tax avoidance ? What is the tax treatment of cross-border movement ?

One solution could result from the adoption of the cross-frontier merger directive (containing some tax provisions). Another limited solution is in the jurisprudence of the ECJ. Without giving a detail account of the ECJ jurisprudence , in Compagnie Saint Gobain case, it had been decided that the national treatment obligation imposed on member States (of international conventions on double taxation) “to allow to the agencies of foreign companies, the same advantages of the national companies”. This solution could constitute the basis to the taxation treatment of an SE using its right of moving from a jurisdiction to another one. Moreover, this solution could apply even if the condition of Article 7 is forsaken. This could be a possibility to eliminate the “Centros risk”.

There are other issues which are not dealt with by the Regulation or the directive, such as the maintenance of, and changes to, capital, accounting matters, directors’ liability, insolvency, or employment contract and pensions. For those matters, we could find some indications in the Regulation or the Directive, some ways of thinking in the other EU texts, but their place in the Societas Europaea Law will be set up later by the ECJ.

Section 2 : The article 7 of the regulation versus the risk of Delaware effect within the European Union

Jurisdiction competition is narrowly linked to freedom of movement : without freedom of movement, the choice of the best jurisdiction remains theoretical. However, the freedom of movement of the SE is not prohibited, it is only limited. As it had been analysed, the real seat theory is a part of the identity of the SE. It is doubtful that the ECJ will reverse this principle (it had not been reversed for the European Economic Interest Grouping).

On the other hand, it would be certain that the jurisdiction competition (if there will be one) would increase the freedom of movement of the SEs. However, even if the idea of competition between the national company law is appealing (partly because of the increase of efficiency of the law resulting), it is doubtful that in 2004 there will be a race through the European Union for the most efficient law. Why is the jurisdiction competition limited ?
- The choice between the different national SEs is not so important : the regulation establishes some strict limits in the implementation. As Ms Blanquet recognises that the SE is “a vehicle subjected to common rules in a way to gather economic unity and legal unity of undertaking within the Community. This vehicle will allow the creation and the management of European scale companies without the restrictions resulting from the disparity and national geographical scope of company law” . The member States, in implementing the ECS, are strictly restricted (for example, the obligation to organise a single and two tier board systems for all the States). The regulation creates, ‘in fine’, a single kind of company, not some principles of organisation : this is not a directive .
- The economical environment is much more important in the choice of establishment. That’s why the race for the optimal taxation system is much more important. It should also be taken into account that most of the public European companies are implanted in only one country (not the biggest however).
- The freedom of movement is not so easy as it had been analysed (at least by article 7).
- The partial autonomy of the statutes from the national laws as it had been developed before .

So, in the short term, there will probably be a limited competition between the different jurisdictions for the biggest European companies but not a risk of a “Delaware effect” . If there is a race, it will be at a snail’s pace. However, the future will say if there is a race for the bottom. And if there is an important competition, this competition will without doubt profit only to the big companies, except if the freedom of establishment is total (suppression of article 7 mainly).

However, in the case that there is a race to the bottom, could some distortions be possible ? Would it be allowed to evade employees’ participation by a transfer of the incorporation State ? In some conditions it is possible to avoid the employees’ participation (by successive mergers where for each ones the employees participation is not compulsory in the new SE, for example). However, the principle “Before-After”, recognised in the Directive, seems to bring a good guarantee to the employees. Moreover, it would possible that the ECJ recognises the avoidance of employees’ participation as a fraud of the freedom of movement (as the Centros case establishes risk of fraud in the change of establishment).

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In conclusion of this chapter, we could say that there are many restrictions to the freedom of the SE. However those restrictions, one of the most important being the taxation issue (the adoption of the real seat theory had been analysed before), do not prohibit the change of the incorporation State for a SE. Things could be optimised by the way of implementation of the Regulation and the Directive by the member State, but also by the adoption of new directives.

Chapter 4 : The futures improvements and the alternatives

If the statute doesn’t establish a high level freedom of movement necessary for the establishment of a common market, some improvements could be made to facilitate and to create new basis to this freedom. The way of implementation of the regulation (and perhaps the directive on employees involvement) could be a manner to limit the restrictions (Section 1). Beside this possibility, other approaches could increase the freedom of movement (Section 2).

Section 1 : The implementation of the ECS and the impact on freedom of movement

The implementation of the Regulation has a ‘limited’ influence. The choice of the real seat theory paralyses a lot the freedom of movement of the SE. However, the member States should adopt a more flexible position to allow the freedom of movement.

First, Article 59 (2) gives the possibility to the State to facilitate the adoption of the amendment of the statutes by admitting the simple majority when at least half of an SE’s subscribed capital is represented. Secondly, Article 7 gives the opportunity to a State to impose the condition that the head office is located in the same place of the registered office. The adoption of a such provision would certainly limit the freedom of movement (inside the member State) , even if it does not have any consequence on the choice of the jurisdiction.

Thirdly, Article 8 gives some possibilities to adapt it in the national law. The add of specific national forms of publication (Article 8 (2)), and the opposition on the cross-border transfer of a competent authority on grounds of public interest (Article 8 (14)) have to be implemented with a lot of diligence. The definition of the public interest, for example, must be very strict. There is a risk that some stake-holders may use it on a discriminatory manner.

Employees involvement and board structure implementation are also indirectly influencing the criteria of the change of a jurisdiction. As the Share-holders are, in fine, deciding the change of jurisdiction, a limited possibility for the employees to participate and a flexible board structure could attract the SEs in a jurisdiction and so increase the movement of the SE.

Section 2 : The other approaches to develop the freedom of movement of companies

As we have seen, the ECS offers a very limited freedom of movement. The change of the State of incorporation is of course possible, but the goal of the “Programme Général” is not yet attained. That is why some other approaches should be analysed.

The best thing to improve the freedom of movement may be the adoption of the 14th Directive on transfer of the registered office. The adoption of this directive would so recognise the preference to the incorporation theory and consequently make pressure for the abandon of the provision of Article 7 of the ECS. It would be absurd that the national companies have a larger freedom of movement (moreover a contradiction with article 9 (2) could result). Moreover, the adoption of the 10th Directive on Cross-border Mergers would constitute a serious step forward in the improvement of freedom of movement. This directive would be a good complement to the ECS. It is probable that the adoption of the SE will accelerate the adoption of those directives.

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Another possibility may be the use of the provision of Article 293 of the EC Treaty by the promotion of bilateral convention on the freedom of establishment, or the adoption of the project of an European Group law of the 9th directive. However, this approaches seem to belong to past and do not guarantee an harmonised legal system as a good implementation of the Regulation and the Directive does.
Conclusion

1/ The “Societas Europaea”, a new achievement of the European Internal Market

From the Roma Treaty to the Uberseering case law, through the European Economic Interest Grouping Regulation, the Societas Europaea is for sure the best achievement in company law for the realisation of the European Internal Market. By setting up this new form of company, a business can restructure fast and easily, to take the best possible advantages of the trading opportunities offered by the Internal Market.

Clearly, the ECS adopts the real seat theory. However, this theory is conceived on a European level because a freedom of movement of the real seat is organised. From the French conception of the “siège réel” is substituted a new “European theory of the real seat”. It is certain that this provision of the ECS constituted one of the most attractive issues of the SE. But, it should not be forgot that this freedom is strictly defined.

2/ An imperfect and unfinished solution for the freedom of movement of companies

At this stage, the main question for the European leaders should be : is it better to improve the freedom of movement of the European companies by developing the European company law (mainly the adoption of the 14th directive) or, by making the transfer of the SE more flexible ? If the latter proposition is adopted, it should be doubled by the realisation of a European private company. Considering that the creation of rules on the European level is the best solution for the integration of the Internal Market, the improvement of the ECS is the best way to follow.