European Company: prospects for large business
European Company: prospects for large business
28.03.2022 Valery Reingold, Prof. Dr.iur., Baltic International Academy, Vladimir Dolotov, Master of Law, Baltic International Academy

Abstract
The Regulation on the Statute of the European company provided business with the new legal instrument that can offer it most suitable form of management of companies’ activities, which also addresses internal market needs. The European company, as a form of supranational legal entities, has legal capacity which is of European origin and is of highest interest to large business. This article deals with organizational and legal preconditions for the creation of European companies. It consequently examines the sources of legal regulation and ways of foundation of European companies. The advantages and drawbacks of the European companies, which define their current effectiveness in entrepreneurial activity, as well as their future perspectives are analysed in details. Conclusions and suggestions are also presented in the article.

Statement of the problem, its relevance.
The formation of the corporate law of the European Union is inseparably linked with the process of harmonization of legislation on legal persons of the EU Member States and the creation of new organizational legal forms of entities that allow companies from different Member States to carry out commercial activities on the territory of the EU.

In modern conditions of European integration supranational legal entities are considered to be one of the promising organizational legal forms of business in the territory of the EU. There are three supranational legal entities created – the European Economic Interest Grouping, the European Company and the European Cooperative Society. Among them the European company have received the most attention from business and suitable development.

The provisions of the Regulation on the Statute of the European company are created in order to ensure competitive advantages for large business. But when comparing the benefits of European company with its drawbacks, it should be recognized that at this moment, the drawbacks are more meaningful for business community, which is proven by the low number of European companies.

The creation of supranational legal entities contributed to solving the problem of the mobility of companies across the EU, thus, opening new opportunities for businesses. At the same time, the problem of establishing compliance of legal persons to the status of supranational companies was formed, as well as the effectiveness of the application of these organizational legal forms for commercial activity by entrepreneurs.

The dynamics of the usage of European companies fell short of expectations. At the present stage of activity of the European company it became clear that for the development, further formation and use of this organizational legal form it is necessary to improve its attractiveness.
The prospects of the European company development as a competitive legal form depend on the variety of factors: starting on changes in current European company legislation in order to make it more convenient for entrepreneurs till formation of new forms of supranational legal entities.

Whereas large business is interested in profit and in increase of market share, one of the most important factors, which might prejudice the perspectives of the development of European companies as well as other legal entities set in the EU law are the reduction of founding costs and administrative burden, and improvement of awareness of these legal entities in the business environment and society.

The influence of external factors also plays an important role, especially for the large companies, which are the main drivers of economic development. At the moment, overall profitability of companies is at low levels, which negatively affects the possibilities of business development.

Analysis of research and publications.
Bearing in mind that the idea of creating a supranational legal form for legal entities was first introduced in France and later evolved thanks to the joint work of the Western European lawyers and responsible EU institutions, the largest part of studies and publications on this subject are papers by European authors Studies on the legal regulation of creation and operations of European companies were performed by Andenas M. and Wooldridge F. (Andenas M., Wooldridge F., 2009), Gold M., Nikolopulos A. and Kluge N. (Gold M., Nikolopoulos A., Kluge N., 2009), Eicke R. (Eicke R., 2009). One should highlight the complex work of authors Cremers J., Stollt M. and Vitols S. (Cremers J., Stollt M., Vitols S., 2013) from the latest studies on the establishment and activities of European companies. One should also highlight the studies on specific issues of this topic, for example, research conducted by the company Ernst & Young.

The aim of the research.
The aim of this article is to reflect the preconditions for creating a new legal form of a company, which has a European origin, the study of legal status of the European company, the identification of features of the legal regulation of its establishment and operating activities, as well as the analysis of the advantages and drawbacks of these legal entities, which define its effectiveness for large business and future prospects.

The adoption of the basic directives played an important role in the elimination of legal barriers to stable development of international trade with the participation of European States and the establishment of the EU Single Market. At the same time, the EU harmonization of the company law of the Member States did not fully solve the problem of the necessity to choose the form of the new company set under the national law of one of the national states.

This is due to the fact that national legislation largely remains the legal basis for business activities in the EU. Therefore, the EU institutions did not limit themselves to bridge the gap between the existing national legal regulations and directed their efforts to creating supranational legal entities, which could carry out their activities throughout the EU and obey common regulation rules.

The need for supranational legal entities was caused by the necessity to achieve the main objectives of legal persons’ regulation in the EU law, in particular – the freedom of establishment of legal entities on the territory of any Member State of the EU; the establishment of minimum common requirements for legal persons; the provision of the same protection to participants and creditors of legal persons throughout the EU, as well as facilitation of the companies’ business activities through the elimination of differences between national legal systems. One of the practical reasons for the creation of such organizational legal forms was the desire to solve the issue of changing the location of a company within the EU Member States without the need for passing the liquidation procedure of the company in the state of its original location.

As the drivers of economic development and growth of GDP are large companies, the main attention was focused on stimulating their activities across the EU Member States. For this reason the central place in the process of creation of supranational legal entities was given to the European company.

The first concepts of a European company were launched in the 1960s, however, only after more than 40 years of discussions, additional researches and numerous changes the European company legislation entered into force. Council Regulation EC 2157/2001 of 8 October 2001 on the Statute of the European company [1, 1-21] came into force on 8 October 2004, together with the complementary Directive 2001/86/EC on worker participation in the management of the European company [2, 22-32].

Among the first European companies were such famous market leaders as Alfred Berg SE (Sweden), Allianz SE (Germany) and Elcoteq SE (Finland). In last few years Airbus Group SE (Netherlands), Christian Dior SE (France), CompuGroup Medical SE (Germany) and LVMH Moët Hennessy Louis Vuitton SE (France) were registered as European companies [3]. At the moment, other large companies such as Busch-Holding AG and Deutsche Börse AG (Germany), Meridian N.V. (Netherlands), Synergie SA (France) are also in the process of registering as a European company [4]. According to European Trade Union Institute (ETUI) data there are 2647 European companies registered till 15 October 2016 [3].

A dominant field of activities for normal European companies (without shelf companies) is provision of services. More than half of them have been set up in the service sector, mostly within financial services and commercial services. A considerable number of companies represent metal and the chemical sectors. In contrast, in some sectors – such as the transport and textile industries – very few European companies have been registered so far [5, 6].

A European company has legal personality in each Member State of the EU. Besides other questions not regulated by the Regulation on the Statute of the European company, it is governed by the national provisions applicable, under the same conditions, to public limited-liability companies of that Member State of the EU, in which it has its registered office.

The subscribed capital of the European company shall be divided into shares and shall not be less than 120.000 euro. It should be noted, that shareholders are not liable for more than the amount of the subscribed capital [6, 395].

European company operations are governed firstly by the Regulation on the Statute of the European company and, where expressly authorized by this Regulation, by the provisions of its statutes. Secondly, in the case of matters not regulated by this Regulation or, where matters are partly regulated by it, of those aspects not covered by it, European company operations are governed by:

1) the provisions of laws adopted by Member States in implementation of the EU measures relating specifically to European companies;

2) 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 European company has its registered office;

3) 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 European company has its registered office [1].

A characteristic feature of the Regulation is the presence of multiple issues, which is the reference to the national laws of the EU Member States.

The Regulation on the Statute of the European company imposes a number of provisions, which define the conditions and methods of establishing of a European company. As opposed to another form of supranational legal entity – European Economic Interest Grouping, a European Company may be formed only by at least two legal entities from different Member States of the EU. Furthermore, these legal entities must be formed under the law of the EU Member State with registered office and head office within the EU [7, 50].

The Regulation imposes the following ways of European company set up:

1) the merger of two or more existing public limited companies from at least two different Member States of the EU;

2) the formation of a holding company promoted by public or private limited companies from at least two different Member States of the EU;

3) the formation of a subsidiary of companies from at least two different Member States of the EU;

4) the transformation of a public limited company which has had, for at least two years, a subsidiary in another Member State of the EU [1].

The fifth way of formation of European company consists of the foundation of a fully-owned subsidiary European company by a parent European company [8, 56].

The merger was initially seen as the most important way of European companies’ foundation for large European industrial companies. However, analysis of the form of foundation leaves no doubt about the preferred way of registering a European company. On March 2014 about 78% of European companies have been set up by subsidiary, but only 4% – by merger [5, 8]. It should be explained, that the reason for this is the adoption and implementation of the Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies [9], which provides for simpler rules in terms of employee involvement and is open to more forms of companies.

The problem of choosing the structure of managing bodies of a European company was one of the significant obstacles that were not allowed to adopt Regulation on the Statute of the European company, because of differences in the internal structure of the companies in the national legislations of the EU Member States. It should be noted, that several Member States do not have a two-tier system for their national public limited-liability companies (for example, Belgium, Sweden and the United Kingdom). At the same time, several Member States do not have a one-tier system for their national public limited-liability companies (for example, the Czech Republic, Germany and Latvia). As a result, the Regulation provides for a flexible system of a European company management by allowing to choose between a two-tier and a one-tier system. As known, a two-tier system determines a clear separation of the functions of the management body, which is responsible for managing the company, and the supervisory body, which has to supervise the work of the management body and may not itself exercise the power to manage the company. The administrative body manages the company in a one-tier system, thus, assumes the functions of management and control.

In accordance to ETUI data more than 80% of European companies comprise a general meeting of shareholders and a supervisory body with a management body [5, 7].

The question of the participation of employees in management of the European company was the most complex, because of the existence of serious differences in national legislations of the EU Member States. In most of the Member States in some form employees’ participation is allowed in management of companies, but in the United Kingdom it is considered unacceptable. In this regard, it was decided to create two legal acts: the Regulation that has to govern the organizational and legal activity of the European company and the Directive that has to govern the participation of employees in management of European company.

This Directive guarantees an adequate level of involvement of employees in the affairs of the newly created European company, which is achieved through negotiations between the management or administrative bodies of the participating companies and the representatives of the companies’ employees [10, 95-101].

It is interesting to note, that despite the fact that for many years one of the main reasons of disagreement between the EU Member States on the question of adoption of the Regulation and the corresponding Directive was the involvement of employees in the management of the European company, according to ETUI data only 105 companies, or less than 5% of the total number of registered European companies, had employees participation in its management on March 2014 [5, 11]. Thus, it appears that the involvement of employees in the management of the European company is more the exception than the rule.

Many Member States in the EU do not allow public limited-liability companies to transfer their registered office outside their jurisdiction and, as a consequence, such transfer results in the winding-up of the company in the departure Member State and new incorporation in the arrival Member State [8, 73]. Despite on the above mentioned, the possibility to transfer the registered office of the European company from one Member State of the EU to another is not so clear-cut advantage of the European company as initially intended.

The Regulation on the Statute of the European company imposes that the registered office of the European company should be located within the EU, in the same Member State as its head office. In addition a Member State may establish for European companies registered in its territory the obligation of locating their head office and their registered office in the same place. The purpose of such stringent requirements regarding the coincidence of the registered office and the head office location of the European companies is to avoid competition between the national legislations of the Member States of the EU on the subject of the most liberal and convenient legal regime for such companies. At the same time, the possibility of the transfer of the registered office of the European company to another Member State of the EU is an important advantage, because such transfer shall not result in the winding up of the European company or in the creation of a new legal entity.

It should be noted, that the transfer of the registered office or head office is time consuming and expense process. The Regulation establishes a detailed legal provisions of the transfer of the registered office and guarantees the legitimate rights and interests of creditors, state authorities and minority shareholders of the company. It sets out the mechanism for transfer implementation, includes the requirements for the publication of information on the transfer, provided the state control and the necessity of the notification of the registration authority in the former location of the European company. The complexity of the process of the transfer of the registered office or head office is confirmed by the statistics – less than 4% of the European companies transferred the registered office to another Member State of the EU [5, 10].

The statutory requirement of coincidence of the registered office or head office significantly restricts the mobility of European companies, because of inability to transfer head office without the transfer of its registered office. Moreover, when a European company no longer complies with this requirement, the EU Member State in which the European company’s registered office is situated shall take appropriate measures to oblige the European company to regularize its position within a specified period. In this case, the company shall either re-establish its head office in the Member State of the EU in which its registered office is situated or transfer the registered office. If the “illegal status” is not stopped, the EU Member State in which its registered office is situated has to ensure the liquidation of the company.

The provisions of the Regulation are created with the aim of developing competitive advantages for large business. First, Regulation on the Statute of the European company is directly applicable legal act and vest the supranational legal entity with legal capacity, which has a European origin, instead of other companies, founded based on national legislation. It means, that European companies from different Member States not only are governed by the same Regulation provisions, but also have possibility to change the location of a company within the EU Member States without the need for passing the liquidation procedure of the company in the state of the original location. It gives a significant cost reduction for the large companies, thus, increase of profitability, attraction of investments and further business development. Second, the requirement for minimum subscribed capital of a European company, established in the amount of 120.000 euro, is accessible mainly to large companies. It became a barrier to development and popularity of this legal form for small and medium-sized enterprises. Third, European companies have a possibility to use different structures of managing bodies, even to choose such management structure, which is not allowed for national public limited-liability companies by the national legislation.

The existing provisions of the Regulation gave to European companies certain advantages and drawbacks, as well as identified areas for further improvement of legislation in order to encourage their establishment and activities.

According to statistics, the increase in the number of European companies is registered annually. On the one hand, it is not deniable, that this fact is a positive. Indeed, only 96 European companies were registered on 8 September 2007 [7, 53], 2125 – on 21 March 2014 [5, 2], and 2647 – on 15 October 2016 [3].

On the other hand, the number of registered European companies over the past 12 years indicates a tepid interest in this legal form of business. In this regard, it is important to highlight a few main reasons.

First, European company is legal person under the EU law, which is not exactly “supranational”, but has “supranational” nature, because major importance in regulating their activities has the applicable national law of the EU Member States. This is why the European company gets its own national characteristics in each Member States of the EU, due to different legal regulation of the activities at the national level.

The European legislator made a serious deviation from the “supranational” nature of the European company, because of rejection of the idea of keeping the union-wide register of all European companies. European company should be registered in the EU Member State in which it has its registered office in a register designated by the law of that Member State.

Thus, the legal uncertainty of the process of forming European companies, mainly stemming from the lack of uniformity of such companies because of the references to national legislation, is one of the important obstacles in the establishment of European companies.

Second, there is the need to attract substantial funds in the formation of a European company. According to the data obtained as a result of ongoing research upon the request of the European Commission, the total expenditure on the formation of a European company, including the costs of legal advice, translation and registration, can reach from 100.000 euro up to 2-4 million euro [11].

Third, the lack of awareness of European companies among the business community is also a serious problem in the spread of this form of legal entity in the EU Member States. In announcing the adoption of a European company, companies often incur additional costs associated with the explanation of legal nature of European companies among its business partners and employees of the company.

Fourth, the procedure relating to the negotiation of employee involvement as provided by Directive on worker participation in the management of the European company is regarded as a complex procedure and is therefore often seen as a drawback for formation of European company. Especially this factor has negative influence in the EU Member States, in which the national legislation does not provide for a system of employee participation [8, 241].

Although there are certain difficulties and drawbacks, the European company offers some significant advantages.

First, the possibility of transfer of the registered office appears to be a major advantage of the European company and hence a strong incentive for choosing this legal form. The importance of this advantage is particularly high for European companies and companies incorporated in the EU Member States that do not allow companies to transfer their registered office outside their jurisdiction or in which such a transfer would result in the winding-up of the company in the departure Member State and new incorporation in the arrival Member State [8, 212].

Second, “European label” of the European companies is considered to be one of the most important advantages. This legal form gives the company a strong European image. It became attractive for companies that intend to highlight their European nature or focused on new market penetration in other Member States of the EU. However, it should be noted, that in some specific sectors national brand is more popular in some Member States of the EU.

Third, tax advantages is the determining factor of the activities of companies, because of huge influence on the overall financial results. Despite the Regulation does not contain special provisions on the taxation of European companies, these companies have two means to receive tax advantages. The corporate income tax calculation is defined as financial result of all operations of the European company in different Member States. Thus, the European company has opportunity to offset the profit gained on the territory of one Member State and losses from the activities in the territory of another Member State. Strong differences between the rates of corporate income tax in the different Member States also became a point of interest for companies. It should be noted, that analysis of possible tax advantages related to the transfer of registered office of a European company cannot, however, be limited to corporate income tax. By making a decision to transfer registered office to another Member State, it should take into account other significant taxes: capital gain tax and withholding tax.

Fourth, the opportunity to simplify the organizational structure is increasing, thus, the profitability of the company as well. It allows to set up a unified management and reporting system of the company and offers the prospect of reduced administrative costs.

At the moment, the European companies have not encountered the success initially expected. Therefore, it becomes obvious, that it is necessary to increase the attractiveness of the European companies. Their further development will not be effective without making changes to existing legislation. It is not only linked to the possible amendments of the Regulation and the Directive, the other regulations and directives dedicated to another forms of supranational legal entities are of high importance.

All last four initiatives on new supranational legal form formation were withdrawn. The Proposal for a Council Regulation on the Statute for a European Foundation joined the other three proposals (the Proposal on the Statute for a European association, the Proposal on the Statute for a European mutual society and Proposal on the Statute of a European Private Company), which were withdrawn by the Commission due to lack of progress in the legislative process and deficiency of progress to reach an agreement [12]. In addition, the Commission’s Work Programme 2015 [13] and Work Programme 2016 [14] did not contain any proposals for new European legal forms.

It should be noted, that negotiations between the EU and United States on the Transatlantic Trade and Investment Partnership (TTIP) have essentially failed also. TTIP is about reducing the regulatory barriers to trade for big business, things like food safety law, environmental legislation, banking regulations and the sovereign powers of individual nations. In fact, TTIP is an assault on European and US societies by transnational corporations. Some of them have European company’s form.

Taking into consideration the abovementioned conclusions, it is possible to assume, that the formation of European companies by large business to be continued in the EU Member States with highly developed economies, such as Germany, France, Netherlands, Luxembourg. In other Member States most of the national companies will tend to be small to medium sized enterprises and prefer not to engage in the process of constituting a European company.

The main results of the research and conclusions.
Summing up the above mentioned about the European company and its prospects for large business, it is important to note the following:

1) The Regulation on the Statute of the European company vest this European legal form with the prominent features of supranational legal entity. First, taking into account that the Regulation is directly applicable legal act, the European company has legal personality and full legal capacity in all Member States of the EU, which, therefore, has a European origin. Second, the European company has a cross-border dimension in terms of activities or a statutory objective of carrying out activities in at least two Member States of the EU, as well as there is an availability of cross-border component for the foundation of the European company. Third, the ability of the European company to transfer its registered office from one Member State of the EU to another without the need for winding up of the foundation or the creation of a new legal entity.

2) The Regulation allows the foundation of legal entity which has a “supranational” character. The first reason is the influence of the applicable national law of the EU Member States in the management of European companies’ activities. The second reason is the lack of unified rules for governing all aspects of the activities of European companies. The third reason is the need to identify a single register at EU level, in which European companies will be registered.

3) The Regulation initially was created in order to develop competitive advantages for large businesses. It should give a significant cost reduction for the large companies, thus, increase of profitability, attraction of investments and further business development. The majority of European companies operate in the services sectors, the banking and financial sector ranking first with other services coming second, the following sectors are metal and chemical industries.

4) The European company is a typical example of the interplay between law and economic interest. Every entrepreneur, when founding a company, has to make a choice which organizational form to choose. The European company offers some significant advantages. First, the possibility to transfer the registered office from one Member State of the EU to another without the need for passing the liquidation procedure of the company in the state of its original location. Second, the possibility to reduce costs because of simpler management structure and tax regulation. Third, “European label” gives the company a strong European image and became attractive for companies that focused on new market penetration.

5) When comparing the benefits of European company with its drawbacks, it should be recognized that at this stage, the drawbacks are more meaningful for business community, which is proven by the low number of European companies. Of course, the most significant disadvantage is the legal uncertainty of the foundation and formation of a European company. One should take into account the substantial costs of the foundation of a European company, as well as the subsequent costs of compliance with company rules set in the Regulation already in the process of functioning of the company.

6) The dynamics of European companies’ number increase is on relatively low level, because of other initiatives on new supranational legal form formation withdrawal, TTIP failure and the political and economic development of the EU. This is why the formation of European companies by large business is expected to continue in the EU Member States with highly developed economies.

7) In the modern environment one should not underestimate the influence of external factors. The European economy has not recovered from the crisis. Skepticism about the future of the United Europe is growing. These factors have a negative impact on the economic activity and on the choice of entrepreneurs, who favor more familiar forms of legal entities under the national law of the EU Member States.

References

    1. Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE). Official Journal of the European Union. No L 294, 10.11.2001.
    2. Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees. Official Journal of the European Union. No L 294, 10.11.2001.
    3. The ETUI’s European Company (SE) database. Established SEs. SEs which have already been registered. [Internet resource]. http://ecdb.worker-participation.eu/. Retrieved 16.10.2016.
    4. The ETUI’s European company (SE) database. Planned SEs. Companies in the process of registering as an SE. [Internet resource]. http://ecdb.worker-participation.eu/. Retrieved 16.10.2016.
    5. Carlson A., Kelemen M., Stollt M. Overview of current state of SE founding in Europe. Brussels: European Trade Union Institute, 2014.
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    9. Directive 2005/56/EC of 26 October 2005 of the European Parliament and of the Council on cross-border mergers of limited liability companies. Official Journal of the European Union. No L 310, 25.11.2005.
    10. Cremers J., Stollt M., Vitols S. A decade of experience with the European Company. Brussels: European Trade Union Institute, 2013.
    11. Report from the Commission to the European Parliament and the Council of 17 November 2010. The application of Council Regulation 2157/2001 of 8 October 2001 on the Statute for a European Company (SE). [Internet resource]. http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52010DC0676. Retrieved 16.10.2016.
    12. Withdrawal of Commission proposals. Official Journal of the European Union. No C 80, 07.03.2015.
    13. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Commission Work Programme 2015. A New Start. /* COM(2014) 910 final */. [Internet resource]. http://ec.europa.eu/atwork/pdf/cwp_2015_en.pdf. Retrieved 16.10.2016.
    14. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Commission Work Programme 2016. No time for business as usual. /* COM(2015) 610 final */. [Internet resource]. http://ec.europa.eu/atwork/pdf/cwp_2016_en.pdf. Retrieved 16.10.2016.
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