The EUs 14th Company Directive - Research Paper Example

The EU’s 14th Company Directive Background to the 14th Company Directive The EU’s 14th Company Law Directive proposes measures for the trans-border movement of limited companies’ registered offices within the EU member states.1 In 1997 and 2002, two public consultations drew attention to the necessity for EU legislative provisions that permit companies which are regulated by Article 48 of the EC Treaty to transfer mergers and registered officers from one EU member state to another without first having to be wound up in the state from which it seeks transfer2. Ultimately, the transferring company is required to simultaneously lose legal status in its home state and obtain legal personality in the host state so as to circumvent the difficulties that are associated with having dual legal personality in two member states.3 The EU’s 14th Company Law Directive Proposals As a result of these public consultation exercises, the High-Level Group of Company Law Experts issued a final report on November 2002 in which it recommended a proposal for Directives that would facilitate cross-border mergers and the cross-border transfer of company seats within the EU.4 In 2002, the European Commission responded by announcing an Action Plan essentially undertaking to formulate and indorse proposals for such Directives.5Ultimately, the EU’s 14th Company Law Directive was formulated to deal with the cross-border transfer of company’s registered offices and the Company Law 10th Directive was formulated to facilitate trans-border mergers.6 On 26 February, 2004 the EU coordinated an Internet consultation with respect to its recommended proposals for a Directive regulating the cross-border transfer of companies with limited liability within the EU. The proposal included 10 key recommendations for inclusion in Article 44 (1) and (2)(g) of the EC Treaty.7 The proposals are summarized as follows: 1. The primary goal of the proposed Directive would be to facilitate the cross-border transfer of a registered office of a limited liability company on the basis of “freedom of establishment.”8 This would be possible in all cases where a company is already formed under the relevant law of any EU member state and “special provisions” would be provided for companies that conduct “regulated activities.”9 2. Member states would be required to accept a company’s national law which permits the company to ratify in a general meeting a decision to transfer the company’s registered office from one member state to another for the purpose of obtaining a legal personality distinct from its initial legal personality. The company would not lose its legal personality in its home member state until such time as it acquires a new one in the host member state, despite measures taken to transfer the registered office. 3. When a decision is made and ratified in a general meeting to transfer the company’s registered office, that meeting together with the consequences would be required to be published in advance. The publication should also include any alterations and modifications to the company’s memorandum and articles of association that are required by the host member state’s “substantive and formal registration laws.10 In other words the company must alter its constitution so that it corresponds with the company law formalities and requirements in the host member state. For example, a host member state’s national company law may require that legal personality is only bestowed upon a company whose registered office and head office share the same nationality. To this end, the transfer of the registered office should in such circumstances also include the transfer of the head office to the host member state. In all events, the home member state will not be the applicable law for the purposes of determining the proper acquisition of legal personality under the law of the host member state. 4. In the event the company’s decision by virtue of general meeting and the required alteration of its memorandum and articles of association comply with the company law of the host member state, the host member state should not be at liberty to refuse registration of the company. Specifically, the host member state will not be permitted to require the transferring company to conduct “an act of incorporation” because the decision to transfer its registered office and modification of the company’s memorandum and articles of association would ultimately take the place of incorporation under the law.11 5. The Directive would coordinate the home member state’s supervision of the “validity of the decisions” ratified by virtue of the company’s general meeting with the host member state’s supervision of the “substantive, formal and national procedure requirements” for the acquisition by the company of legal personality and lawful registration.12 To this end the home member state should verify that the decision for effecting the transfer of the registered office together with the alteration of the memorandum and articles of association were validly executed. Likewise the host member state should be verify the alterations’ content insofar as they are expected to take the place of formal incorporation where applicable. 6. The effect of registration in the host member state should have the consequences of the company dropping legal personality and registration within its home member state. However the transfer would be required to be documented in both the home and host member states. 7. Winding up of the company should never be a prerequisite for the transfer of a company’s seat from its home member state to a host member state unless specifically provided for in the Directive. Ultimately, the transfer of the company’s seat should not have an impact on its legal relations with outside parties. 8. The home member state will be required to ensure the protection of “certain categories of person” namely “minority shareholders and creditors”13 9. Cross-border company transfers should be tax-neutral pursuant to the provisions contained in Directive 90/434/EEC currently applicable to cross-border mergers. 10. The laws of the host member state should be the applicable law with respect to “employee participation rights”.14 However, where those rights are more firmly established by the home member states, those rights should remain in place or at the very least “negotiated” and the home member state should govern the manner in which these negotiations should be conducted.15 Although a Commission Consultation with respect to the Action Plan in Company Law and Corporate Governance conducted in 2006 wielded promising support in favour of the EU’s 14th Company Law Directive, the Commission announced to the European Parliament’s legal committee on 3 October 2007 that it would discontinue its work on the Directive. Work would cease because the Commission felt that statutory provisions were disproportionate because the economic incentives were unpredictable and uncertain. Additionally, the Commission was of the opinion that the current law, specifically the Directive on cross-border mergers were broad enough to cover the transfer of registered company offices within the EU. Even so, the European Parliament indorsed a 14th Company Law Directive Report on 10th March 2009 and invited the Commission to: “…submit to Parliament by 31 March 2009, on the basis of Article 44 of the EC Treaty, a legislative proposal for directive laying down measures for coordinating Member States’ national legislation in order to facilitate the cross-border transfer within the Community of the registered office of a company formed in accordance with the legislation of Member State (‘14th Company Law Directive’), and requests that the proposal in question be drawn up within the framework of inter-institutional deliberations and following the detailed recommendations set out below.”16 The detailed recommendations reflect the 10 key proposals set out above as published on February 26, 2004. Should the EU Adopt the 14th Company Law Directive? Perhaps the greatest justification for adopting the 14th Company Law Directive is provided by the Commission of the European Communities in its Communication to the Council and the European Parliament on Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward.17 A recurring theme throughout the Commission’s communication is an emphasis on the purposes for the which the Treaty establishing the European Community was founded. To this end the European Community was established to create a free, fair and open market allowing for the free movement of goods, services, capital and people among the member states.18 These four freedoms are carried over to EU company law by virtue of the doctrine of freedom of establishment pursuant to Article 44(2) of the Treaty establishing the European Community. Article 44 (2) (g) provides that freedom of establishment is accomplished: “…by co-ordinating to the necessary extent the safeguards which, for the protection of the interest of members and others, are required by Member States of companies of firms within the meaning of the second paragraph of Article 48, with a view to making such safeguards equivalent throughout the Community.”19 Article 48 when read together with Article 44(2)(g) is construed to: 1. Ensure the free establishment of companies by virtue of harmonious minimum requirements that facilitates a relatively easy method by which companies can be established throughout the EU in member states that have vastly similar legal frameworks. 2. Ensuring that the laws regulating company formation and operations throughout the community are certain and predictable with respect to safeguards and confidence in trans-border business relations.20 Fortifying the argument in favour of the adoption of the 14th Company Law Directive, the Commission identified five convincing reasons for facilitating the transfer of registered offices of companies with limited liabilities from one member state to another. These five reasons are summarized below: 1. Adhering to the EU’s internal market initiatives: There has been an increasing proclivity on the part of European companies to conduct business across borders which by itself justifies the creation of “common European company law mechanisms, inter alia,” the facilitation of “freedom of establishment and cross-border restructuring.”21 2. Integrating capital markets: The commission emphasized that the securities markets in Europe were key to its economic development and progress. As a result, investors would be more productive if they were permitted to operate freely within the internal market and “to have confidence that the companies” in which they invest “have equivalent corporate governance frameworks.”22 3. The increase in number of member states increases the risk of diversity with respect to national company laws within the internal market which places a greater urgency on the concept of harmony of EU company laws. Harmony promotes fair competition. 4. Recent events: Corporate scandals of late have increased the urgency to promote good and improved corporate governance and to improve confidence in companies. To this end a “a new sense of proportion and fairness is necessary.”23 Cumulatively, the proposals set forth by the Commission on February 26, 2004 seek to enhance harmony, protection and good governance by requiring publication of the altered memorandum and articles of association, notification of transfer of registered office to all interested parties and securing the most favorable laws for the protection of workers. The Commission is formulating these proposals took into account important policy goals which are: 1. Strengthening the rights and protections of shareholders and third parties. The commission expressed the view that facilitating the transfer of limited companies’ registered office within the internal market would increase the growth of diverse shareholding and would allow for increased chances of raising capital at lower costs to the company, its shareholders and third parties such as creditors. Moreover, the ease with which companies can transfer across EU borders instills a degree of confidence in the relationship between actors. 2. Facilitating cross-border transfer of limited companies also fosters confidence because it has the propensity to improve economic relations by encouraging free, fair and open markets. It increases the growth and opportunities for employment which leads to greater economic prosperity and confidence in corporate governance. Cumulatively, the Commission stated that: “EU initiatives in the area of company law should certainly address a number of specific cross-border issues (e.g. cross-border merger or transfer of seat, cross-border impediments to the exercise of shareholders rights) where Community action may be the only way to achieve the pursued objectives.”24 By permitting and facilitating the transfer of limited companies’ registered office, it necessarily follows that the national legal regimes with respect to regulating companies are similar or will become similar. This can only improve “business efficiency and competitiveness.”25 Even if facilitating an easier approach to cross-border transfer of companies’ registered office does not result in greater harmony of national company laws, it is still a positive move for the EU and its corporate citizens and all those connected to the corporate world, particularly shareholders. Hertig and McCahery maintain, there are any number of explanations why providing companies with a choice is appealing to governments. It allows companies to opt out of one system and into a system which is “best tailored to meet their needs.”26 Moreover, companies are: “…also generally interested in the availability of specific legal options as their terms are binding only if and as long as they correspond to the firm’s needs.”27 Be that as it may, it is possible to argue that the doctrine of freedom of establishment already makes allowances for the transfer of registered companies across EU borders, as contained in Article 44.28 To this end, a company who is refused transfer by or to a host member state may invoke the doctrine of direct effect by virtue of Article 43 of the Treaty establishing the European Community.29 Article 48 is particularly relevant since it provides that: “Companies or firms formed in accordance with the law of a member state and having their registered office, central administration or principle place of business within the Community shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of member states.”30 This means that member states are required to treat legal persons in the same manner as they treat natural persons for the purpose of free movement within the EU.31 The doctrine of direct effect functions to allow parties to take a member state to the European Court for failing to meet its community obligations under EU law.32 Vossestein, explains however that: a directive within Article 44 of the Treaty establishing the European Community would be far more effective than reliance upon the doctrine of direct effect.33 It would eliminate the costs and time and the uncertainties involved in having to litigate for the right to transfer a company from one member state to another. As Vossestein maintains: “While in short, ‘direct effect’ and the infringement procedure concern individual cases resulting from specific circumstances and measures in a particular Member State, a directive under Article 44 EC may on the other hand, by the introduction into law of Member States of a set of similar provisions, be aimed at ensuring, in general and systematic fashion, that all national legal systems correspond to the requirements of a genuine internal market in which the freedom of establishment is guaranteed.”34 The minutes of the 6th meeting of the Advisory Group in March 2007 reflects a vastly similar train of thought. At this meeting the Advisory group pointed out that the expansion of Article 44 to permit the easier transfer of companies within the EU would have the effect of reinforcing “basic EU principles such as freedom of establishment” and would accomplish this more rapidly than it would through litigation.35 Reflecting the reasoning expressed by Hertig and McCahery, the Advisory Group also acknowledged that the idea of being able to change its “business life” with respect to their “Member State of establishment” is appealing to “EU subsidiaries of overseas companies.”36 Even so, what ultimately concerns and motivates companies is the fact that transfer from one jurisdiction to another allows for facilitating “easier access to finance and const savings.”37 Putting this argument into perspective the Advisory Group went on to explain: “This financial aspect is important: if the company is going to be listed or wishes to raise finance, for growth, changing the company law regime may help to attract investors and lenders. There are other potential elements for costs savings when comparing the impact of different national company law regimes on companies, including for example the cost of finance.”38 Just as natural persons are free to move from one jurisdiction to another to acquire financial benefits, the same consideration should be extended to legal persons. Since the courts are predisposed to distinguish between legal persons and natural persons, the adopting of the 14th Company Directive becomes more urgent. The ECJ explained in the Daily Mail Case that: “It should be borne in mind that, unlike natural persons, companies are creatures of the law, and, in the present state of Community law, creatures of national law. They exist only by virtue of the varying national legislation which determines their incorporation and functioning.”39 This doctrine of incorporation becomes problematic for the free movement of corporate citizens and by extension corporate capital under the current state of EU law. It underscores the significance of the EU adopting the 14th Company Law Directive. It will serve as a means of ensuring that corporate citizens have just as much of an automatic right to move freely within the EU for the purpose of improving its economic situation. Rammeloo argues however, that aligning the corporate citizen with the natural citizen is unrealistic because the corporate person touches and concerns several different aspects of law, taxes, employment among many others and can appear in several different locations all at once.40 Even so, the Treaty Establishing Rome has mandated that the company retain the same rights to citizenship with respect to freedom of mobility within the EU as the natural person does.41 Whether this approach to the corporate citizen is realistic or not, it is in fact the law and policy of the EU and member states are instructed to adhere to it. Given the diversity of national laws with respect to corporate structures and constitutions, Article 48 is not always adhered to, further necessitating the incorporation of the 14th Company Law Directive. Provisions for mobility of companies within the EU also exist in Article 293 of the European Economic Community Treaty 1957 which provides that: “Member States shall, so far as is necessary, enter into negotiations with each other with a view to securing for the benefit of their nationals: …The mutual recognition of companies or firms within the meaning of the second paragraph of Article 48, the retention of legal personality in the event of a transfer of their seat from one county to another, and the possibility of mergers between companies or firms governed by the laws of different countries.”42 However, it must be acknowledged that this provision failed as noted in the Daily Mail case.43 Conclusion If the EU has any hope of ensuring the quick and economic transfer of corporate citizens across borders among member states, a step by step guideline such as that provided for in the proposals for the 14th Company Law Directive is not only desirable, but entirely necessary. It leaves no mistake as to its intention to facilitate the free movement of companies across EU borders. The 14th Company Law Directive also provides guidelines that clarify how the transfer is to be executed. Moreover, the Directive leaves no room for judicial discretion as to when or how a company can be transferred from its home state to a host state. It therefore follows that uniformity and predictability is far more likely to occur in the event the 14th Company Law Directive is implemented. Providing for the quick and economic transfer of companies across EU borders is intended to advance the EU’s goals as contained in its four freedoms. These four freedoms have as their primary goal, establishing economic growth and trade in a free and open market. The free movement of persons, corporate and otherwise are important keys to accomplishing the goals enshrined in the four freedoms. Companies do not merely encompass gal personality. They also encompass capital and employment opportunities. It therefore follows that the free movement of companies among the EU also involves the free movement of capital and employment within the EU. For this reason, the EU ought to adopt the 14th Company Law Directive. Bibliography Advisory Group on Corporate Governance and Company Law, Minutes of the 6th Meeting of 8 March 2007, (4 April, 2007) Barnard, C. The Substantive Law of the EU: The Four Freedoms. Oxford University Press, 2007 Case 81/87 R v HM Treasury Ex p. Daily Mail [1988]ECR 4583. Commission Communication to the Council and the European Parliament on Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward. Com (2003) 284 Final. Davies, K. Understanding European Union Law. Routledge Cavendish, 2001 EC Directive 2005/56/EC European Commission: The EU Single Market. (n.d.) ‘Public Consultation.’ http://ec.europa.eu/internal_market/company/seat-transfer/2004-consult_en.htm#context Retrieved 18 April, 2009. European Parliament Resolution of 10 March 2009 with Recommendations to the Commission on the Cross-border Transfer of the Registered Office of a Company. http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+20090310+ITEMS+DOC+XML+V0//EN&language=EN#sdocta5 Retrieved 18 April, 2009. Hertig and J. McCahery. ‘Optional Rather than Mandatory Company Law: Framework and Specific Proposals.” (Jan 2007) EGGI Working Paper Series in Law Working Paper No. 78/2007, 1-21. Hicks, A and Goo, S. Cases and Materials on Company Law. Oxford University Press, 2008 Johnson, M. ‘Does Europe Still Need a Fourteenth Company Law Directive?’ (2005) 3(2) Hertfordshire Law Journal, 18-44. Rammeloo, S.. Corporations in Private International Law – A European Perspective. Oxford University Press, 2004 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe. Brussels, 4 Nov. 2002. Treaty Establishing the European Economic Community, 1957 Treaty Establishing The European Community van Greven, D. and Storm, P. The European Company. Cambridge University Press, 2006 Vossestein, G. ‘Transfer of the Registered Office: The European Commission’s Decision not to Submit a Proposal for a Directive.’ (2008)4(1) Utecht Law Review, 53-65. Read More