The programme for the harmonisation of Company Law in the European Union - Essay Example

The programme for the harmonisation of Company Law in the European Union: A Critical Evaluation The European Community is empowered such that, among other things, it can study, and suggest changes on the body of laws in Europe. The idea of the harmonisation of laws in the European Community is concerned not with the creation of a single European Law in contrast to the Member States, rather it has its focus primarily on the harmonisation of the national legal system only to an extent, which is required for the functioning of the common market. The harmonisation of Company Law was considered to be a part integral to this process. As such, Company Law has developed into one of the most harmonised legal areas in the European Community. Starting with a brief introduction about the development of EC programme for the harmonisation of Company Law, this essay shall consider issues as to explain why this programme was seen as an essential component of the economic development process of the European Community. Also, it will deal with diverging opinions regarding the usefulness of this harmonisation. Lastly, it shall have its focus on the successes the Company Law harmonisation programme has achieved and the obstacles it encountered. The Company Law Harmonisation Programme: An Introduction The development of the EC Company Law harmonisation programme can best be considered as the sequential issuance of a number of directives and their implementation within EC member states. This was mainly aimed at dividing the subject into numerous fields, each being regulated by a separate directive. Before delving into these directives, which constitute the basis development of EC Company Law harmonization, it would be pertinent to consider the legitimate basis of these directives. The company law of Europe has its legitimate bases in the authorising treaty provisions. The Treaty basis for this programme is, in particular, Article 44(2) (g) (previously 54(3) (g)) and, more generally, Articles 94, 95, 293 and 308 (previously 100, 102, 220 and 235) of the Treaty of Rome. Nonetheless, Article 44(2) (g) is substantially important and plays the elementary roles among others, for a majority of the legal bases on the area of Company Law have been based on this Article. According to provisions in Article 44 (2) (g) set in Chapter 2, “Right of Establishment”, in Title III, “Free movement of persons, services and capital”, “The Council and the Commission shall carry out the duties devolving upon them under the preceding provisions, in particular: …by coordinating to the necessary extent the safeguards which, for the protection of the interests of members and other, are required by Member States of companies or firms within the meaning of the second paragraph of Article 48 with a view to making such safeguards equivalent throughout the Community;”1 Article 94, placed in the chapter on the approximation of laws, require that the Council, acting unanimously, should issue directives “for the approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the common market.” Thus, as per the Article 44 TEC, the Council shall act, by way of directives, in the areas, which the Article covers. But, as it happens often, in the early stages of the Company Law Harmonisation Programme progress was sluggish and demanded great effort. The first Commission Proposal for a Publicity Directive can be traced back to the year 1964, and the beginning of the EC harmonisation in Company Law is marked by the issuance of this First Directive in the year 1968. The first directive aimed at harmonising publicity prerequisites applying to companies, the conditions under which company transactions will be considered valid and the rules relating of the nullity of companies. The Second Directive, issued eight years later, deals with the establishment of public limited liability companies and the maintenance and adjustment of their capital. Also, it had an approach different from the first directive— many of the provisions lay down elaborate procedures rather than simply directing the Member States to make legislations to a certain end. Thus, for this reason, it has been the object of criticism in some circles. However, undeniably, this directive is of immense importance, represents a significant step towards company law harmonization in the European Community. Soon after the Second Directive, the Third and Fourth directives were issued. The Third company law directive presented a new framework for conducting cross-border commercial activities. It had provisions for co-ordination of the procedures applying to internal mergers within Member States. The Fourth directive was concerned with disclosure of financial information and the contents of a company’s annual accounts. It acts complementarily with the First Directive and is supplemented by the Seventh Directive, which deals with group accounts. After this there was a gap of six years until the Sixth, Seven and Eighth Directives came into existence. The Sixth Directive (1982) has its focus on the division of an existing public company into entities. The allotment of assets and liabilities among the various beneficiaries require specific provisions to protect creditors. Member countries are not bound by any obligation to introduce this type of reconstruction, however, if it is used, the process must conform to the Directive. The Seventh Directive delineates how and under what circumstances coalesced accounts be prepared and published by companies with subsidiaries. The Eighth Directive deals with the subject of qualifications and independence of auditors of both public and private companies. On account of this, Member States are obliged to ensure that auditors are independent and properly carry out their task of auditing company accounts. Initially, only six Member States with six legal systems and traditions were considered in the harmonisation process, with their legal system based mainly on common continental European legal principles. Later on, with the expansion of the European Community, the legal systems of new Member States had to be considered. As such, the process became more complex and thus slower. In 1985 the Commission made a new beginning, and company law developments were given a fresh momentum. This is surprising, in some ways, for “the White Book decided upon a new approach to harmonization, i.e. abandoning the idea of uniformity and attributing equal value and mutual recognition to national legal provisions instead.”2 It is a paradox that while the Commission wrote “less harmonization” upon its banner, it achieved more progress with general, and particularly company law harmonisation than anyone had previously considered possible. This was a turning point for the harmonisation process. As a result, the eleventh and the twelfth directives were passed in 1989. The Eleventh Directive is primarily concerned with disclosure requirements with respect to branches opened in a Member State by certain types of companies governed by the law of another state. The Twelfth Directive allows the operation of single-member private companies. Although both directives had significant implications on German Corporate Law, they were of less general and fundamental approach than the earlier Directives. There are five more directives in the pipeline, which have not yet been passed by the European legislators. The Draft Ninth Directive delineates certain facets of groups of companies and the relationship between the participating corporations. The Proposed Tenth Directive deals with cross-border mergers and has not yet been passed, for concerns have been expressed that a cross-border merger could be a way of escaping from worker participation provisions. The proposed Thirteenth Directive with issues relating to takeovers and is influenced by the City of London takeover code. Lastly, the Fourteenth Directive, as proposed, deals with the relocation of registered offices. Apart from these, there are some other directives that played key roles in the EC Company Law harmonisation process. For instance, The Major Shareholdings Directive deals with the disclosure of interests in shares. The Insider Dealing Directive lays out provisions to tackle share market abuse in general and to improve enforcement. This virtually placed the investors on an equal footing. An analysis of these directives in EC Company Law Harmonization Programme reveals that a lot have been achieved— nullity, minimum capital, disclosure and publicity requirements, mergers of public companies and accounts. Nonetheless, it cannot be assumed yet that this programme is successful. Issues like management structure, employee participation, groups and international mergers are still on hold. The Appropriateness of Directives as the Instrument of Harmonisation The use of the directive as an instrument has both advantages and fallbacks. The traditional view is that directives are mostly advantageous— it gives flexibility and greater freedom of movement for member states, which renders it easier to introduce Community rules into their national laws. This flexibility of directive allows that in a multicultural, multilingual economic area, agreements on common principles of Company Law can be arrived at without conforming to the exact wording in the actually applicable provision. It provides for bridging the gap in the legislative traditions of the Member States. Since the directive is concerned only with results, it permits the participating states to use their own wording and language. As such, it inspires a greater readiness on part of the members. But the Directives have their drawbacks as well. Difficulties emerge on matters that require comprehensive regulations. Even though the directive leave a certain amount of discretion at the hands of the Member States for its transformation, many of them set only the minimal standards to achieve the intended result of those directives. Some of them, such as the Fourth, Seventh and Twelfth Directives, are in the manner of a framework for the regulation of a specific matter, as Member States may introduce supplementary provisions to create differences between national laws. This will necessarily raise the issue of “blocking effect” from Company Law directives. This implies that those directives must be laid down in detail so as to cover multiple aspects of specific matters. However, the detailed provisions may lead to a “block effect”. Adoption of Regulations The common market fosters the growth of Europe-wide companies. Thus there must be provisions such that these companies can operate throughout the Community in the same vein as in their own country. This demands the availability of new forms of association and co-operation. As such, with the progamme for harmonization, there has always been a process for initiating supranational regulations has always. There are significant advantages inherent in the use of regulation for harmonization. Firstly, the process of adoption by the member states is not too long. This is mainly because there is no need for any further implementation at national level. Next, since it is applicable directly and equally throughout the Community, the regulation ensures a standardisation of features throughout Europe. In addition, many of the disputes relating to the interpretation of the regulation ultimately have to be submitted to the European court, thereby ensuring a uniform interpretation. The Regulation on the European Economic Interest Grouping (EEIG) in 1985 has been interpreted as a new paradigm for an international corporation. In order to speed up the implementation of the EEIG the European legislators gave primary focus to the provisions with European background and hence the national Corporate Laws of the Member States still apply. However, it is often argued that because of the application of national law alongside the provisions of the regulation, the EEIG proved inadequate in providing the requisite flexibility and legal certitude that was expected. Finally, at the conference of Nice (December 2000), the Member States came to an agreement on the introduction of the European Company or Societas Europaea (the “SE”). On October 8, 2001 the Council adopted the Regulation on the Statue for a European Company. By virtue of this regulation, companies, which want to proliferate their operations in other Member States were provided with the option of being subject to a single set of legislation. The establishment of the SE is a step forward for European integration because entities of different European countries will be able to cooperate more easily with each other3. In addition to these two significant regulations, there are other regulations such as Insolvency Proceedings Regulation and International Accounting Standards Regulation, which contribute considerably to the EC Company Law Harmonization Programme. Aims of the Programme As a point of departure for all harmonization measures, the EC Treaty calls for “the abolition, as between Member States, of obstacles to freedom of movement for persons, services and capital and “the approximation of the laws of member states to the extent required for the proper functioning of the common market”4. Article 54 (3) (g) of the EC Treaty makes clear that the prime advantage to be expected for companies or firms emerging from the treaty is their freedom of establishment throughout the Single Market. In practice, this means that companies are recognised in all Member States5 and companies of one Member State, which establish themselves in other Member States, cannot be required to comply with formalities other than those laid down for domestic companies. To enable the exercise of this right of establishment, the regulatory burden on business throughout the Community is to be reduced and Market distortions are to be removed. In addition, the gradual process of national law converging into common rules and standards is meant to limit the risks inherent in the wide discrepancies between Member States’ rules regarding protection of shareholders, creditors, and third parties. A use of freedom of establishment in a way that Member States, which have a well developed company law are put into a disadvantageous position. The European Company itself is envisaged to be method of facilitating cross-border mergers and cooperation. In addition, it is a vehicle for economic integration6. The prime motive behind such a venture was that “the new company should be subject to national law and the second was that it could enable large European enterprises to form units capable of competing with Japanese and US multinationals7. The harmonization programme is also intended to bring down transaction costs of companies. Persistent differences in national company laws supposedly imply higher transaction costs, because private parties from other Member States have to learn the relevant company law rules applying to a company before contracting with it or investing in its securities8.This may hinder cross-border trading and investment9. Importance of the Harmonization Programme to the Economic Dvelopment of EC The establishment of a common market has already been indicated in Article 2 of the Treaty of Rome. To this end, the activities of the European Community necessarily include the abolition of obstacles to the free movement of goods, persons, services and capital among the Member States. It also focused on the approximation of laws of Member States to the extent required for a proper functioning of the common market. The differences in national laws among Member States naturally tend to create problems and can spoil the functioning of the internal market. This is mainly because competition can be distorted. The proliferation of companies or other enterprises will eventually lead to a flurry of relevant economic effectiveness, such as tax revenues, expansion of employment, market development and innovation, shareholder and investor interest, etc. If national company laws governing key areas of creditor and shareholder protection and company management are fundamentally different, this may spur on the establishment of new companies in the states providing the most favourable laws and policy. Eventually, it will act against the interests of economic efficiency, primarily because corporate decisions of cross-border operations should be based solely on the economic grounds. It cannot afford to be cowed down by the relative burden of domestic regulation. A non-uniform legal environment will certainly impose administrative and legal encumbrances on companies holding subsidiaries in several Member States. Once companies are free to relocate their registered office to another Member State, it should be guaranteed that shareholders and creditors are not faced with any discrimination owing to the transfer. A necessary outcome of the programme for harmonization of Company Law in European Community is equal protection for creditors and shareholders. This should boost cross-border credit, corporation and investment, thereby encouraging a quick, efficient and rational economic development of the European Community as a whole. It must be noted that regulations, indirectly, play a significant role in the economic development of European Community. For instance, The Regulation on the European Economic Interest Grouping (EEIG) has encouraged a new form of co-operation, which capacitates companies in one Member State to co-operate in a joint venture with companies or legal persons in other Member States. The European Company Statue Regulation (the SE) enables companies to act throughout the Community in a manner identical to that of their own country. The regulation, in a sense, insures that all the Member Countries in EC would avail the same basic structure for a company’s establishment and business, without any specific state prevailing over others. This allows the EC Member States to pursue their interests of economic development in a fair and healthy environment. It can essentially be seen as one of the major achievements of this more than three decades old programme for harmonisation. The Successes and Impediments It is clear that the aim and virtue of the EC Company Law Harmonization is the establishment of a common market. Since it’s very inception, the Programme has emphasized “the prevention of the so-called Delaware-effect in the European Community”10. Apparently, the performance of the Programme has been quite impressive. Realizing their usefulness, the Member States have implemented a majority of the directives—the directives concerning nullity, minimum capital, disclosure and publicity requirements, mergers of public companies and accounts. Most of them have been adopted within the existing level of national legislation in the Member States. The programme for harmonisation is also intended to serve as a process to bring down the legislative barriers among the Member States. As such, the harmonisation programme, to a great extent, facilitates the free movement of goods, persons, services and capital among the Member states, which will ultimately benefits the creation of a common market. On account of the absence of a dominant European regulation and its prime importance for the freedom of establishment of firms in the EU, the European Court of Justice (ECJ) has been faced with this issue on a number of occasions. “In its first decision (Daily Mail) of 1989, the ECJ held that the right of establishment does not include the right of a company incorporated under the legislation of a Member State to transfer its central management and control to another Member State.”11 Afterwards, with the ECJ judgments in Centros and Uberseering cases, the conditions of a legislative competition have cardinally changed. This is mainly because the Court exhibited a better discernment of the right of establishment. It makes it possible for companies to relocate their central management and control from one Member State without the need for further proceedings. Thus, a company can have its presence in a Member State without requiring having any further relations to it, which has previously been a major obstacle to legislative competition. However, the Programme for harmonization, over the past three decades, has been the object of questions and controversies as well. The need to adopt a directive so as to make it more effective in national law sometimes gives rise to issues of inefficiency. The European Court of Justice does recognize the impact of directives against Member States, but the task of is still a weakness, for the directives are devoid of any horizontal direct effect, i.e. in relations between individuals. In addition, since directives are addressed to Member States and not to the companies, they do not have provisions for directly enforceable rights to the companies, to investors or other stakeholders. Another problem emerging in this process of harmonisation is the difficulty in fitting together the legal concepts. A directive may concentrate on an area in which particular concepts are acquainted with one state’s understanding of the law; but it might be exotic and incomprehensible to another state, given it’s different legal, economic and cultural background. For instance, the idea of the company organ incorporated into Community company law, which was borrowed from German Law, is familiar to the states whose legislation has its origin in the Napoleonic code. However, chances are rife that this would be difficult for a country like the United Kingdom to analyse the company transactions within the structure of agency. Similar problems may emerge from the use of terms, which may not be close enough in the multi-lingual versions of a directive and its implementation in the Member States. Criticism has also been aimed at the Commission’s priorities for the subject of implemented directives or the undertakings, which are subject to them. The different patterns of incorporation as public and private companies in the different Member States well exemplify this fact. The Second Directive, concerned only with public companies, can impede the harmonising effect of measures applicable only to a specific category of companies. The UK and Germany, in question, have a small numbers of public compared to private companies. There are critics who seem to attack the very concept of harmonisation. They argue that the harmonisation of company law in the Community has been misconceived, and that, in a single market, the harmonisation of company law has nothing to do with the removing of barriers to the free movement of capital, goods and labour within the EU. Examples have been cited from the US. In the 50 states of the US, company law differs from state to state, but the US remains undoubtedly a single market. It is argued that harmonisation of company law has placed constraints on the development of company law in member states. They maintain that company law deserves to be flexible, to respond to changes in attitudes and techniques. However, this view doesn’t seem to consider the “Delaware effect”12 in the US. Markets essentially condition a company’s decision to choose a region most beneficial to stakeholders. As such, legal systems with relatively lesser amount of protection for the stakeholders will naturally discourage investors. This in turn tends to have a negative impact on stock prices, thereby resulting As asserted by Professor Romano, the process of concentration can also reduce the costs of transactions.13 In practice, Delaware has a great deal of legal precedents creating a panoptic set of case law, an expert judiciary in corporate law and administrative experience in the expeditious processing of corporate filings. As such, Legislative competition can result in a maximum level of legal certitude, which in turn can bring down a firms transaction costs. In addition, the high proportion of franchise taxes in relation to the total revenue has made Delaware totally dependent on this income. Hence, it cannot afford the relocation of firms to other states. Thus, Delawares law and policy makers are under constant pressure when it comes to its corporate law rules. As a result, while Delaware is bound to focus on the level of susceptibility of its laws for market innovation, other states are pressured to imitate Delaware in this respect.14 However, harmonization leads to a monopolist for twenty-five competitors, i.e. it substitutes a single lawmaker for twenty-five different ones. This tends to encourage excessive regulation and innovation and a reduction of experimentation in the sphere of company law. A uniform legal system also disqualifies the chances of considering the divergent expectations and preferences at the national level. Furthermore, it tends to make the national company laws more complex and uncertain. In addition, concerns have been aired that since the EC company law rules are quite rigid, they are little adaptable to new economic or technological developments. Many critics of harmonisation view it as a “cartel among national legislators”15. Viewed from the perspective of these critics, there exist at least two problems with it— one, it runs a risk of excessive regulation and that it will change quite often. Next, experimentation of innovative solutions becomes more difficult. There prevails a risk that, like any monopolist, the EC lawmaker may abuse its market power by engaging in excessive regulation or in excessive, wasteful innovation. With reference particular to company law harmonization, it is well-known that the Second Company Law Directive is commonly viewed as a measure that has chilled innovation in various areas of corporate law such as creditor protection16 and takeover defences17. An important argument against harmonisation is that a uniform set of rules will necessarily be less able to satisfy people’s preferences or to prove adequate to divergent economic features than a decentralized system in which laws are made at the State or local level18. National preferences with regard to company law issues are found to be different. For example, in Italy private benefits of controls are tolerated much more than, say, in the UK,19 thus facilitating a lenient regime for self-dealing transactions in the former while rendering it inconceivable in the latter. In continental Europe, specifically in Germany, stakeholders play a more important role in corporate governance than in the UK. Likewise, while in continental Europe there is a wide consensus on the protection of stakeholders through company law rules, this is far less strong elsewhere. Investor education levels are different across the EU,20 and therefore the need for rules protecting investors is also different. Conclusion It would be safe to infer that in spite of the all impediments and diverging criticisms, the EC programme for the harmonisation of Company Law has been impressive. However, it is somewhat early to assert that the programme is a certain success. The Commission admits that much is left to be achieved on the legal framework for company law, mainly because of the persisting problems like complete freedom of establishment of companies, and adequate protection of stakeholders. Furthermore, the rules concerning takeovers and the board are key elements of company law, and the programme cannot be taken any further without resolving these conflicts. References EC Commission, The Completion of the Internal Market, White Book, Luxemburg, 1995, nos. 67 et seq, 77 et seq. Romano, Roberta (1987), The State Competition Debate in Corporate Law, Cardozo Law Review 8, 709 (719). Romano, Roberta International Regulatory Competition and Coordination, (Explaining American Exceptionalism in Corporate Law) 127 (129). Burnside, A, The European Company Re-proposed, Comp. Law. 1991 Brucker, J, EC Company Law Edwards, V (2003), The European Company— Essential or Eviscerated Dream? See K. J. Hopt, ‘Company Law in the European Union: Harmonisation and/or Subsidiarity?’ (1999) L. Enriques, ‘EC Company Law Directives and Regulations: How Trivial Are They? ’, (also available as ECGI Law Working Paper n. 39/2005 at ) Tunc, A., ‘Corporate Law. A. Report’ in R. M. Buxbaum, G. Hertig, A. Hirsch and Klaus J. Hopt (eds), European Business Law (de Gruyter, Berlin-New York, 1991) Gordon, J. N., ‘An American Perspective on Anti-Takeover Laws in the EU: The German Example’ in G. Ferrarini et al. (eds), Reforming Company and Takeover Law in Europe (2004) R. Van den Bergh, ‘Subsidiarity as an Economic Demarcation Principle and the Emergence of European Private Law’ (1999) Maastricht J Eur & Comp L 129 L. Enriques, ‘Bad Apples, Bad Oranges: A Comment from Old Europe on Post-Enron Corporate Governance Reforms’ (2003) 38 Wake Forest L Rev (2003) L. Guiso, M. Haliassos and T. Jappelli, ‘Household Stockholding in Europe: Where Do We Stand and Where Do We Go?’ (2003) EC on Pol’y 123 Draft Treaty Establishing a Constitution for Europe (CIG 86/04), http://gandalf.aksis.uib.no/~brit/EXPORT-EU-Constitution/Draft-EU-Constitution-June-2004/Article_III-x23.html, accessed 03/15/06 Mock, Sebastian, Harmonization, Regulation and Legislative Competition in European Corporate Law, , accessed on 03/15/06 Read More