by Florian Hauswiesner*
First published July 17, 2003

I. Introduction

After fifty years of first proposals and thirty years of difficult negotiations, the European Council of Ministers adopted the legal framework for establishing the Societas Europaea (SE), the first European company form ever, on October 8, 2001. This constitutes a big step into a common corporate law system that will facilitate cross-national mergers and doing business throughout the European Union. The merger of the German Hoechst AG and the French Rhone-Poulenc S.A. in 1999 to Aventis S.A., was one example, among many others, that illustrated the difficulties and the complicated legal procedure of a cross-border merger. Although the European common market is in effect since 1993 and the Euro is the official currency in most Member States, many European corporations still hesitate to merge or to set up affiliated companies in other Member States preventing them of becoming real European players.

This all will change with the possibility of creating Societas Europaeas from the year 2004 on. The need to set up a financially costly, administratively time-consuming and complex network of affiliated companies governed by different national laws will be avoided. In particular, there will be advantages in terms of significant reductions in administrative and legal costs, a single legal structure and unified management and reporting systems. The potential savings in terms of administrative costs were estimated to be as much as €30 billion per year by the Competitiveness Advisory Group of industrialists convened in 1995 by the heads of state and government. The establishment of the Societas Europaea will lead to an easier formation of trans- European corporations enabling them to equal the size and flexibility of American corporations and making the European economy, as its whole, more competitive and market driven.

II. Details

1) Statutes of the Societas Europaea (SE)

The SE will be regulated by a hierarchical and complex scheme of regulations:

1.1) European provisions

The legal framework of the SE consists of two statutes on an European level:

Council Regulation (EC) No. 2157/2001 (actual statute for the SE; called ECS) of October 8, 2001 and its counterpart, Council Directive 2001/86/EC of October 8, 2001.

EC Council Regulation No. 2157/2001, sets forth the requirements for the formation, share capital, registration, structure and general meetings of the SE and shall be effective October 8, 2004. EC Directive No. 2001/86/EC sets forth the provisions on employee involvement in the SE and constitutes an indispensable complement to the regulation.

1.2) National provisions

Many rules within Council Regulation (EC) No.2157/2001 refer to the national legislation to determine specific details (around 20 provisions contain: "a Member State may"). For matters not covered in the ECS, the law of the particular Member State where the SE is registered will prevail (Article 9 ECS). Within the national law, the SE will be regulated first by any acts promulgated by the Member State that relate specifically to the SE and second, by the rules relating to corporations that have their registered offices in the particular Member State. In Germany, the Department of Justice has presented a first draft for a SE-act (Diskussionsentwurf eines SE-Ausführungsgesetz-) which often refers to rules of the German corporation act (Aktiengesetz).

2) Definition

Pursuant to Article 1 of the European Company Statute/ECS, an Societas Europaea (SE) may be set up within the European Union and constitutes legally an European public limited-liability company which capital shall be divided into shares (in Germany: Aktiengesellschaft; in France: sociètè anonyme; in United Kingdom: public company limited by shares;). The shareholder shall be liable for not more than the amount he or she has subscribed.

3) Formation of an Societas Europaea

According to Article 2 of the ECS, an Societas Europaea can be set up in four ways:

a) By the merger of two or more existing public limited companies from at least two different Member States with registered offices and head offices within the European Union (article 17 et seq. ECS)

b) By the formation of a holding company promoted by public or private limited companies (latter in Germany: Gesellschaft mit beschränkter Haftung; in France: sociètè á responsabilitè limitèe; in United Kingdom: private company limited by shares) from at least two different Member States (article 32 et seq. ECS)

c) By the formation of a subsidiary of companies from at least two different Member States (article 35 et seq. ECS)

d) By the transformation of a limited company that, for at least two years, has had a subsidiary in another Member State (article 37 et seq. ECS)

4) Subscribed capital

The subscribed capital has to be at least €120,000 and the laws of a Member State requiring a greater subscribed capital, for companies carrying on certain types of activity, shall apply to SEs with registered offices in that Member State (Article 4 Council regulation No. 2157/2001). This amount is significantly higher than for most national corporations. For example the subscribed capital (Grundkapital) of a German Aktiengesellschaft (AG) has to be (at least) only €50,000. The high amount of subscribed capital is one reason, among others, why an SE is not meant for startup corporations which want to be present throughout Europe.

5) Registration on a national and European level

Pursuant to Article 12 of the ECS each Societas Europaea will be registered in a Member State on the same register as companies established under national law (in Germany this will be the "Handelsregister"). The SE must be registered in the Member State where it has its administrative head office. The registration of each SE will also be published in the Official Journal of the European Communities, a publication that is equivalent to the Federal Register. In the case that a registered office is transferred to another Member State, it must also be noticed in the Official Journal.

6) Structure of the Societas Europaea: choice between two systems

Pursuant to Articles 38, 52 et seq. ECS an SE shall consists of a general meeting of the shareholders. Depending on the form adopted in the statutes of the SE, an SE comprises further either a supervisory organ and an administrative organ (so called two-tier system,) or only an administrative organ (one-tier system;). While the two-tier system corresponds to the structure of the German Aktiengesellschaft (AG) with its managing Vorstand and its supervising Aufsichtsrat, the one-tier system is based on the Anglo-Saxon model of a board-governed corporation respectively public limited company (PLC).

6.1) Two-tier system (ECS Articles 39 et seq.)

The management organ shall be appointed and removed by the supervisory organ. A Member State may, however, require or permit the statutes to provide that the members of the management organ shall be appointed and removed by the general meeting under the same condition as for public limited-liability companies that have registered offices within its territory. It shall report to the supervisory organ at least once every three months on the progress and foreseeable development of the SE´s business. In addition, the management is obligated to promptly inform the supervisory organ about any events likely to have an appreciable effect on the SE.

The members of the supervisory organ shall be appointed by the general meeting. The members of the first supervisory organ, however, may be appointed by the statutes. They shall elect a chairman from among its members. If half of the members are appointed by the employees, only a member appointed by the general meeting of shareholders may be elected chairman.

6.2) One-tier system (ECS Articles 43 et seq.)

The administrative organ shall manage the SE. The members of the administrative organ are appointed by the general meeting although the members of the first administrative organ may, however, be appointed by the statutes. They shall elect a chairman from among its members. If half of the members are appointed by employees, only a member appointed by the general meeting of shareholders may be elected chairman.

6.3) Difficulties

The freedom to adopt either a one-tier or two-tier board structure, when forming an SE, could be problematic as most member states will be confronted with a form of corporate governance which is completely foreign from the one employed in their domestic companies. For example, currently, all domestic corporations in the UK are required to adopt the one-tier structure, while all German corporations must adopt a two-tier structure. The adoption of the ECS will require Member States to undergo a legislative overhaul in order to allow an SE to properly function within their jurisdiction, as it is up to each corporation which form they opt to choose in each Member State. This can be seen especially in Member States with a strong employee involvement in the supervisory organ (like in Germany; e.g. the proposed SEAG names the board in the one-tier system "Verwaltungsrat", a legal term never been used in German corporate law before).

7) Election of organ members and liability

For both systems, the members of the company organs shall not be appointed for a period exceeding six years. The members of the SE´s management, supervisory and administrative organs shall be liable, according to the provisions of the Member State in which the SE has its registered office, for loss or damage sustained by the SE following any breach of the their legal, statutory, or other obligations.

8) Rights of the shareholders

One or more shareholders who together hold at least 10% of the subscribed capital may request the SE to convene a general meeting and draw up the agenda therefore. The SE´s statutes or national legislation may provide for a smaller proportion. If a such meeting is not held in due time (within two months), the competent judicial or administrative authority, within the particular jurisdiction, may order that a general meeting takes place within a given period or authorize the shareholders to convene a general meeting.

One or more shareholders who together hold at least 10% (the statute or the legislation of the Member State may reduce this proportion) of the subscribed capital may request that one or more additional items be put on the agenda of any general meeting.

The ECS does not include any provisions on employee contracts and pensions. Therefore the national law of the member state where the headquarters and the branches of the SE are located at, regulate this issue.

9) Employee participation in an Societas Europaea

One reason, the adoption of the ECS took so long, was due to the struggle about employee participation ("Arbeitnehmermitbestimmung" in Germany). While some governments, like Germany and Holland, feared that the ECS would jeopardize a long tradition of employee participation, others, such as the United Kingdom, were concerned that bureaucratic and new employee rights could lead to a re-regulation endangering the dynamic of their economy.

Hence, the ECS constitutes a compromise with the adoption of Council Directive 2001/86/EC dealing with the participation of employees.

The creation of an SE requires negotiations on the involvement of employees with a body representing all employees of the companies concerned (so called special negotiating body, Article 3, Council Directive 2001/86/EC). If it is proved impossible to negotiate a mutually satisfactory arrangement, within six months, a set of standard principles laid down in an Annex to the Directive would apply. (article 7.1). These standard rules oblige SE managers to provide regular reports on the basis of which there must be regular consultation and information to a body representing the companies´ employees. This automatic default rule may provide employees with an incentive not to negotiate in good faith. While management may still withdraw proposals following failed negotiations rather than allow the default rule to apply, the sheer existence of the default rules may cause employees to holdout in the negotiations in an attempt to force management to make additional concessions.

In the event, that managers and employee representatives were unable to negotiate a mutually satisfactory agreement and where the companies involved in the creation of an SE were previously covered by participation rules, an SE would be obliged to apply standard principles on participation of its workers (Part 3 of the Annex). This would be the case of an SE created as a holding company or joint venture when a majority of its employees had the right, prior to its creation, to participate in company decisions.

The provisions concerning employee participation are especially flawed in the case of a merger. In this case, the standard principles of employees involvement would have to been applied when at least 25% of employees had the right to participate before the merger pursuant Article 7.2. This provision was the main reason why the Member States could not reach an agreement before the Nice Summit in December 2000. The compromise reached by the governments involved, was to authorize a Member State not to implement Part 3 of the Annex regarding the standard rules for employee participation in the case of SEs created by merger (Article 7.3).

The default rules on employee participation may disadvantage companies from Member States with a long tradition of employee participation as it prevents companies from Member States without a tradition of employee participation to merge with a company with an high degree of employee participation. The higher the potential share of employees from a company with employee participation in a merged company, the less attractive such a company is as a potential merger partner. Instead of allowing more competition between different systems, the compromise that was found in this point is neither convincing nor an advantage for countries as Germany and Holland, as contrary to the intentions of their governments to preserve their models, this compromise might lead to a loss of headquarters and thus tax money to countries without or few employee participation rights.

In the case of a transformation of a national company into an SE, the arrangements for employee participation applied by this national company, prior to its transformation as an SE, would continue to apply.

9) The Societas Europaea and tax law

Under the current ECS, the SE will be taxed in the same way as a multinational corporation. Like a multinational corporation, an SE created by merger, and operating through branches in different Member States, will be taxed on its worldwide income by the Member State where the SE has its registered office. Taxing the SE on its worldwide income will enable it to offset the profits from some its branches with the losses from others, something that is impossible through the use of subsidiaries.

While the ECS does allow SE's to be taxed like multinational corporations, it still leaves many questions on taxation matters unanswered. Any company considering the formation of an SE or an SE deliberating a cross-border migration would first need to fully understand the tax implications of such action. In the upcoming years, policy makers will need to focus on the taxation of the SE in relation to cross border transfers, mergers and legal mergers. Currently, the Merger Directive does not account for all the ways in which an SE can be formed. Therefore, prior to the formation of the first SE in 2004, the Merger Directive will need to be broadened to ensure that the formation or relocation of an SE does not create undesirable tax consequences.

Anna Diamantopoulou, Commissioner for Employment and Social Affairs, stressed that "the European Company Statute is not yet perfect and much work remains to be done on taxation matters." For the time being, the ECS does not provide a significantly beneficial tax scheme that would entice corporations to opt for the SE form.

10) The Societas Europaea and employment agreements and pensions

Employment agreements and pensions are not covered by the regulation. They will still be subject to national law in the Member States where the headquarters and branches operate.

Regarding company pension schemes, SEs could benefit from the provisions of the proposal for a Directive on occupational retirement provision presented by the European Commission in October 2000, notably as regards the possibility for a company to set up a single pension fund for all employees throughout the EU.

III. The Societas Europaea- the European corporation?

While the intention of the original proposals was to create a truly European corporate form, that is completely autonomous of Member State law, the ECS does not accomplish this task. This can be illustrated by the fact that the first proposals for the ECS contained 400 articles, while the now adopted ECS contains only 70 articles with many regards to the legislation of the Member States. As a result, the specific SE-Acts of the Member States will become complex (e.g. the proposed German SE-Act (SEEG) alone comprises 49 sections). Although the ECS is a Regulation which is usually applicable directly in the Member States it regards to national SE-Acts for many important issues not covered by it, which constitutes a legally awkward situation and demonstrates the heavy compromise character of the ECS.

More principally seen, the ECS's heavy reliance on Member State law even falls short of the harmonization goals for European company law set forth in Article 44(2)(g) of the EC Treaty. The EU's harmonization program has three objectives: (1) the harmonization of company law systems, (2) the promotion of uniform national conflict of law rules and (3) the creation of supranational European entities. The EU perceives the supranational form as beneficial because it would help to "ease cross-border economic operations and free companies (…) from national legal regulation." The SE was intended to provide these advantages. However, with all of its referrals to Member State law, the ECS fails to achieve the harmonization objective of creating a purely "European" corporate vehicle. In particular, the ECS completely neglects a number of important, but problematic, areas such as e.g. taxation, bankruptcy, intellectual property rights, directors' liabilities, pension fund systems and employment agreements. These exclusions not only fail to achieve the harmonization goals originally intended, but also create the possibility of the development of 15 and after the enlargement 25 more or less distinct SE forms.

Another flaw of the ECS constitutes the fact that it is not legally possible to create a company in the form of an SE from the start without setting up a national corporation first. This is an disadvantage particularly for start-up companies which do not have the possibility to opt for a corporate vehicle that can easily do business in and can easily be transferred to another Member State. Hopefully such a corporate vehicle and eventually a European limited company form will be created after the first positive experiences with SEs.

Fourth, article 8 of the ECS raises questions about the protection of creditors, shareholders and employees of an SE. (Once again) The Member State is entitled to determine the extent to which these rights will be protected. Article 8 stresses that the interests of the creditors have to be adequately protected, however it is nowhere defined what this means. Pursuant to Article 8 each Member States is entitled to adopt provisions to protect the interests of minority shareholders. This means that a Member State is authorized to adopt legislation that provides a minority shareholder with the option of a fair price buyout prior to the transfer. However, it raises the question of whether Article 8(5) or 8(14) would also allow member states to adopt legislation that blocks a transfer when a minority shareholder contests the fair price of this buyout.

IV. Conclusion and Outlook

Nevertheless, the creation of the first SEs in late 2004 and 2005 constitutes a huge step into a real integrated market. It will enable companies to use the benefits of a common market that will contain after the enlargement of the European Union on May 1, 2005 around 455 million consumers in 25 Member States. Never before in Europe´s history was it that easy for European corporations to do business throughout Europe and to transfer their headquarters from one Member State to another. Although there will be some uncertainties in the beginning, important juridical decisions will follow which will set new rules and eventually lead to a more unified legislation in the field of European corporate and business law. The fact, that the negotiations took so long, demonstrates that the governments involved were aware of the impact this legislation will have for each particular Member State and its legal and economic traditions.

The fact that there will be differences concerning employee participation and the structure of SEs can be regarded in a positive matter: the effect of a jurisdictional competition within the European Union might lead to the success of one particular corporation form that will be the one that is the most favorable and thus accepted by both the market and the business community. The example of the US shows that jurisdictional competition does not necessarily lead to "a race to the bottom" as critics in Europe fear. Although there are tax incentives here in the US that do not (yet) exist in the EU, it is quite remarkable that Delaware is the legal home of 300,000 corporations and 50% of all publicly traded companies in the United States including 58% of the Fortune 500 (in spite of a population of only 750,000). This example demonstrates that Member States have the possibility to become home of major SEs if they adopt rapidly their national SE statutes that fit the needs of the market. Therefore, in the long run, there might be one SE corporation model for the rest of Europe that sooner or later most jurisdictions will copy in order to attract as many SE headquarters as possible.

As a result, the national legislation could become more harmonized in the mid- and long-term, leading to the creation of an truly European corporation through the backdoor of national legislation and juridical competition.

* Mr. Hauswiesner studied law in Germany and France and received his law degree in 2000. He worked afterwards in the European Parliament. After a law clerkship at the Frankfurt district court and for the district attorney of Frankfurt, he interned with Berliner, Corcoran & Rowe LLP in Washington, DC. He works as an attorney at law in Frankfurt/Washington DC. He can be contacted at [email protected].

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