The European Company Statute Regulation will come into force on 8 October 2004, enabling businesses operating in more than one EU Member State to incorporate a pan-European company, the Societas Europaea.
On 8 October 2001, the Council of Ministers in the EU adopted the European Company Statute Regulation (2001/2157/EC) (the "Regulation") setting out a legal framework for a new form of company, the European Company or Societas Europaea ("SE"). The Regulation is supplemented by a Directive concerning employee involvement in the SE (2001/86/EC) (the "Directive"). Both the Regulation and the Directive are to be implemented in the UK by the European Public Limited-Liability Company Regulations 2004 and will come into force on 8 October 2004.
An SE may be created either through a merger of public companies, formation of a holding company or a subsidiary, or conversion of an existing public company. It will be a European public limited-liability company with a minimum share capital of 120,000 Euros and must be registered in the Member State where it has its administrative head office. The Regulation does not provide a comprehensive code of company law rules for the SE and, where the SE is registered in the UK, it will be subject in large measure to existing legislation and the common law applying to UK public companies. In accordance with the Directive, all SEs will be obliged to inform and consult employees and, in certain circumstances, provide for employee participation on the board.
The legal regime governing the SE will be a very complex amalgam of EC and Member State law, and the prospect of long and expensive negotiations with employee representatives may also deter companies from forming an SE. On the credit side, the corporate structure may afford greater flexibility to companies working on a pan-European basis, and relieve the administrative and financial burden of running a network of subsidiaries. It may also facilitate cross-border mergers and offer an alternative corporate vehicle for joint ventures with a European dimension.
The European Company – background
The European Commission first floated the idea of the European Company (the Societas Europaea or SE) in 1970: a corporate vehicle governed by EC law that, by being able to maintain a direct presence throughout the EU, would promote the free movement of goods, persons, services and capital and be a key component of the single market.
After a delay of over 30 years (mainly due to disagreements about employee participation), on 8 October 2001 the Council of Ministers adopted:
- the European Company Statute Regulation (2001/2157/EC) (the Regulation), which sets out the core company law framework, and
- a supplementary Directive (2001/86/EC) (the Directive), which concerns employee involvement.
The Regulation will be directly applicable in all Member States on 8 October 2004. The European Public Limited-Liability Company Regulations 2004 (the UK Regulations), which come into force at the same time, will apply the Regulation to UK law and provide for sanctions and penalties for contraventions, and also implement the Directive.
There are four ways to set up an SE:
- By merging two or more existing public limited companies from at least two different Member States.
- By forming an SE as a holding company for public or private limited companies from at least two different Member States.
- By forming an SE as a subsidiary of companies from at least two different Member States.
- By transforming a public limited company that has had a subsidiary in another Member State for at least two years.
Characteristics of the SE
An SE registered under the Regulation will be a European public limited liability company with a share capital of at least EUR 120,000. It must be registered in the Member State where it has its administrative head office, but will (at least in principle) be able to operate throughout the EU with one set of rules, and a unified management and reporting system.
The Regulation does not provide a comprehensive code of company law rules for the SE. There are detailed requirements in relation to the SE's formation, its board structure, the transfer of its registered office and employee involvement, but otherwise the SE is to be governed by the laws applicable to public companies in the Member State in which it is registered. An SE registered in the UK will be subject to UK rules on tax, intellectual property, maintenance of capital, insolvency, accounting, directors' liabilities and pensions. It will look rather different from SEs registered in other Member States.
Potential advantages of the SE
- There are currently no harmonisation rules governing cross-border mergers in the EU. The SE may facilitate cross-border mergers of public companies or be a suitable joint venture vehicle for pan-European projects (for example, road or rail networks).
- An SE can transfer its registered office to another Member State. A UK plc cannot do this: to migrate would mean winding up its operations in the UK and re-registering in the other Member State.
- An SE is a single company established under EC law and operating with one set of rules across the EU. By using an SE, multi-nationals can avoid having to comply with different rules according to the different Member States in which their subsidiaries and branches are located. An SE also can also expand and restructure its business without the trouble and expense of setting up subsidiaries.
- The SE offers a choice between a one- and two-tier board structure (discussed below).
- There may be presentational advantages in having a designation that denotes a uniform approach in an international context.
- All SEs are obliged to inform and consult employees and, in certain circumstances, provide for employee participation on the board. Some economists argue that this is a good thing, as it aligns the interests of the company and its workers, and improves the company's performance through lower employee turnover and higher productivity – but directors and shareholders might have a different view.
Potential disadvantages of the SE
- The SE is subject to a mixed legal regime. Companies and their legal advisers may have difficulty in knowing whether the Regulation or Member State law governs a particular issue.
- Negotiating employee-involvement arrangements will be time-consuming and expensive, and may well dissuade companies from establishing an SE (see "Employee involvement" below).
- The Regulation does not provide for any preferential tax treatment of SEs. SEs will be subject to the tax law of the Member State in which they are resident. (See "Taxation" below for details of proposed changes to UK tax law).
- Although a network of subsidiaries entails an administrative cost, it does enable liabilities to be ring-fenced.
- While an SE can transfer its registered office to another Member State, the procedure is complex and subject to various safeguards protecting the interests of the SE's creditors. Also, the transfer will make the SE subject to the corporate law regime of another Member State, so it will need to amend its constitution. The legal costs may be substantial.
The promoters of the SE may choose between a one-tier board (an administrative organ) or a two-tier board (consisting of a management organ and a supervisory organ).
The administrative organ is responsible for managing the SE. The UK Regulations stipulate a minimum of two members, all of whom are to be appointed by the shareholders in general meeting. Where employee participation on the administrative organ is agreed in accordance with the Directive, there must be at least three members. The members must meet at least once every three months at intervals laid down in the SE's constitution to discuss the progress and development of the SE's business. Subject to the constitution, members may be appointed for a term of up to six years and are eligible for re-appointment.
The management organ will manage the day-to-day business of the SE and has to report to the supervisory organ on the status and development of the SE at least once every three months. The supervisory organ has to supervise the work of the management organ, but has no power to manage the SE. The members of the supervisory organ appoint the members of the management organ, and are themselves appointed by the shareholders in general meeting. The UK Regulations stipulate a minimum of two members for the management and supervisory organs, and that no person may be a member of both organs at the same time.
Viability of a two-tier board for an SE registered in the UK
Public companies registered in the UK have a one-tier board structure. In practice, there is often a distinction between executive and non-executive directors, especially where the public company is listed: the executives run the day-to-day business and the non-executives monitor their conduct and performance. Both types owe the same legal duties, although the non-executives' more limited involvement in the company's affairs may reduce their exposure.
In continental jurisdictions where public companies have a two-tier board structure, there is a clear division between the role and function of the management and supervisory boards. In Germany, for example, the companies legislation regulates the relationship very tightly and prescribes corporate actions which the management board may not undertake without the supervisory board's approval.
The UK Government has not attempted to institute measures regulating the two-tier board system in the same way as continental jurisdictions have. The UK Regulations merely provide that any reference in the Companies Act 1985 and other UK legislation to "directors" that apply to an SE registered in the UK are deemed to be references to members of both the management and supervisory organs of a two-tier SE. As the supervisory organ cannot manage the SE, some provisions of UK law do not apply to its members. The DTI cites as an example section 342 of the Companies Act, which penalizes a director who knowingly permits a company to make a loan to any of its directors in breach of section 330. The DTI says that only the members of the management and administrative organs of an SE could face criminal sanctions for a breach of section 330, as the members of the supervisory organ have no authority to enter into a loan on behalf of the SE. Deciding whether other provisions of UK legislation (for example, the Health and Safety at Work Act 1974) apply may not be quite as straightforward as this.
The UK approach places a heavy onus on the SE's constitution to define the differing duties and responsibilities of the management and the supervisory organs – with no assurance that this will invariably safeguard the supervisory members. This may make it more likely that SEs formed in the UK will adopt a one-tier board.
Where the participating companies draw up a plan for the establishment of an SE, they are required as soon as possible after the publication of the draft terms to take the necessary steps to enter negotiations with the representatives of the companies' employees and agree the employee involvement arrangements. These must cover consulting and providing information to employees, and may extend to participation on the board of the SE.
The employees' representatives must be elected by ballot and will form a Special Negotiating Body (SNB). The SNB must try to reach a "voluntary" agreement with the management of the participating companies. Negotiations must start as soon as the SNB has been formed and may continue for six months (and for a further six months if the parties agree). Although the Directive imposes some minimum requirements as to the content of the voluntary agreement, these are "without prejudice to the autonomy of the parties". The agreement must either provide for the establishment of a "representative body", similar to a European Works Council, or specify the information and consultation procedures to be followed where no representative body is established.
If no voluntary agreement on employee involvement arrangements is reached at the end of the negotiation period, or the SNB decides not to open negotiations or terminates them early, the SNB may decide by a two-thirds majority vote to rely on the national information and consultation rules in the Member State(s) where the SE has employees. All Member States will operate such rules with effect from March 2005, when the Information & Consultation (I&C) Directive (2002/14/EC) has been transposed into UK law.
If no voluntary agreement is reached and the SNB decides not to rely on national I&C rules - and assuming the participating companies still wish to form the SE - the "standard rules" of the Member State in which the SE wishes to register will apply. The UK's are contained in Schedule 4 to the UK Regulations. Essentially, they provide for information and consultation via a representative body, and employee participation on the administrative or supervisory organ of the SE in specified circumstances (for example, where there is already employee participation in one of the participating companies).
Where an SE is to be registered in the UK and the employees have the right to participate on the administrative or supervisory organ, the employees will be able to exercise far greater influence than they would over a UK plc. It is highly unlikely that the SNB will agree to any dilution of rights already enjoyed by employees in one or more of the companies forming the SE. On the other hand, the potentially heavy liabilities attaching to directorships of large companies may discourage employees and/or trade union officials – at least those familiar with the UK system – from accepting a position on the administrative or supervisory organ.
An SE resident in the UK will be subject to UK tax laws and treated like any other UK resident company. There are no specific tax measures in the Regulation. UK tax law will have to be modified to cater for the implementation of the Regulation into UK law and to provide that an SE controlled in the UK is subject to UK tax. Some further modification is probably required to enable SEs to be formed in the UK without giving rise to a significant tax cost.
The Government intends to include the necessary tax changes in the Finance Bill 2005. In the meantime, SEs will be able to operate within the UK for most purposes on the basis of existing UK tax law. The Government will consult on the specific tax changes required to allow for the formation of SEs in the UK later in the year, as and when the amendments to the Tax Mergers Directive (90/434/EEC) have been confirmed.
The legal regime governing the SE will be a very complex amalgam of EC and Member State law; there are no tax incentives under the Regulation; there may be long and expensive negotiations with SNBs: these factors may deter companies from establishing an SE.
But the SE's future may be brighter than its detractors claim: the corporate structure will afford greater flexibility to companies working on a pan-European basis, and it will relieve the administrative and financial burden of running a network of subsidiaries. Perhaps it will be as a vehicle for cross-border joint ventures that the SE will realise its true potential.
Share your views
We would like to invite you to take part in our short online survey on the arrival of the European Company. Click here to access the survey.
The survey consists of seven questions and all respondents will receive a copy of the survey results. The deadline for the survey is 24th September 2004.
For further information, please contact Martin Mendelssohn (Corporate partner) by telephone on +44 (0)20 73672872 or by email at [email protected] or Richard Oliphant (Corporate assistant) by telephone on +44 (0)20 7367 3098 or by email at [email protected] .