European Union: European Company Statute

Last Updated: 1 October 2004
Article by Steven Turnbull

Originally published September 2004

Overview

The European Company Statute (the "Statute") creates a new form of company ("societas europaea" or "SE"), available to commercial organisations with operations in more than one member state. When the concept was first aired over 40 years ago, the objective was to develop a single form of company which would be subject to a European Community-wide company law code, rather than the laws of any single member state. This proved difficult to attain, due to disagreement between member states both as to the company laws which would apply to the SE, and the approach to employee participation. The final product of negotiations, which concluded in 2001, is therefore a "European" public company that will be registered in one member state, will be governed by the Statute in certain key areas (eg minimum capital, management structure, shareholder meetings) but otherwise subject to national laws for public companies.

Implementation of the Statute

The Statute comprises a regulation setting out the core company law framework (the "SE Regulation"), and a linked directive concerning employee involvement in SEs ("SE Employee Involvement Directive"). The SE Regulation, adopted on 8 October 2001, will have direct effect in all member states with effect from 8 October 2004. Member states will, however pass implementing legislation in order to exercise the options provided under the SE Regulation and to provide sanctions for non-compliance. The linked SE Employee Involvement Directive (to be adopted on the same date) requires implementation in each member state by national legislation. Most member states appear to be on schedule for the 8 October deadline, although some may miss it by a few months.

Formation

A SE can be formed in any of the following ways:

  • merger of two or more public companies into a SE, where at least two of the public companies are governed by the laws of different member states
  • formation of a SE holding company for two or more public or private companies, where at least two are (or have a subsidiary or branch) governed by the laws of different member states
  • formation of a "subsidiary SE"1 by two or more public or private companies, where at least two are (or have a subsidiary or branch) governed by the laws of different member states
  • transformation of a public company into a SE, if it has had a subsidiary in another member state for at least two years
  • formation of a SE as a subsidiary of another SE

Transfer of registered office

Whereas in many European jurisdictions, companies wishing to transfer their registered offices from one member state to another must undergo a costly and time-consuming liquidation process, SEs will be able to transfer their offices freely, in accordance with the principle of freedom of establishment derived from the EU Treaty. Upon transfer, the SE will become subject to the company law of the second member state, which will necessitate changes to its constitution and potentially cause uncertainty as to the rules under which it operates.

Some member states have tended to resist moves to permit the transfer of companies’ registered offices across borders, on grounds that the rights of third parties, particularly creditors, would be endangered. The SE Regulation grants member states an option to include enhanced creditor protections, such as the opportunity for creditors to demand guarantees or security, in their implementing legislation for the SE, but these protections are not included in the Statute itself.

The proposed 14th Company Law Directive will, however, extend the principle of free transferability to all public and private companies incorporated under national legislation of member states. A public consultation on the planned proposal commenced in February 2004, and a draft Directive is expected in September 2004.

Employee participation

Employee participation in a SE is likely to be the major obstacle to acceptance of the SE as a suitable legal form for a commercial organisation. Under the SE Employee Involvement Directive, the management of a company planning to establish a SE must set up a "Special Negotiating Body" ("SNB") composed of members of the management and employees, to negotiate with a view to agreeing either (i) a specific employee involvement plan prepared and approved by management and employee representatives or (ii) that national rules2 for information/consultation/participation of employees, which are applicable in the member states where the companies involved in formation of the SE have employees, will apply to the SE. The SNB has six months (extendable to twelve) to reach a voluntary agreement; in the absence of agreement as to (i) or (ii), the default rules for information/consultation/participation of employees as set out in the Annex to the Directive shall apply. The default rules seek to ensure that the SE adopts, as a minimum, the highest level of employee participation that existed in any of the companies from which the SE was created.

Taxation

There will be no EU-wide tax rules applicable to the SE. National tax rules will apply according to where the SE is tax resident and has permanent establishments. However, certain EU tax Directives are to be amended to accommodate the SE, the effect of which will be to mitigate certain national taxes:

  • The Tax Mergers Directive (90/434/EC) provides for the deferral of capital gains tax on cross-border restructurings involving any form of merger, contributions of assets, exchange of shares or division.

The Directive does not currently apply to the SE, but the Commission is working on plans to extend it to allow SEs to benefit from its provisions and to provide for the transfer of the SE’s registered office to another member state to be tax-neutral, and for a deferral of tax on the associated transfer of the SE’s permanent establishment.

  • The Interest and Royalties Directive (2003/49/EC), which provides relief from withholding tax on interest and royalty payments made between associated companies of different member states, is to be extended to the SE. In order for a company to qualify for this relief, there must be a direct 25% capital ownership relationship between the payer and payee of the royalty/interest, or the payer and payee must be directly owned as to 25% of their capital by another company resident in the EU.
  • The Parent/Subsidiary Directive (90/435/EEC) provides relief from withholding tax on cross-border dividends. It currently only applies to distributions by specific forms of corporation, but will be extended to the SE.

On the formation of a SE, other taxes not covered by the Tax Mergers Directive (following extension of the Directive to apply to SEs) will need to be considered (for example member state transfer duties or capital duty) and any related member state reliefs for reorganisations.

Without a clearly beneficial tax regime, the SE will hold less attraction for companies looking to restructure their operations. The European Commission has plans to grant the SE a proper EU tax regime of its own, and it has been suggested that the SE may be used to pilot the EU’s objective of providing a consolidated EU tax base, possibly derived from International Accounting Standards, but at present it looks unlikely that these proposals will be achieved.

Applicable law

Whereas under the original proposals for the SE, a single set of European rules would apply to all companies, the SE Regulation now leaves many of the rules governing SEs - for example, as to directors’ duties, capital and capital maintenance, and the preparation, audit and publication of accounts (individual and consolidated) - to be determined by the law of the member state in which it is incorporated. The insolvency law applicable in the relevant member state will also apply to SEs.

Under a special hierarchy of law and regulation, the provisions of the SE Regulation itself have precedence, followed by the provisions of the "statutes" of the SE (where expressly authorised by the SE Regulation, e.g. Article 44.1, which permits the "statutes" to regulate the intervals at which the SE’s administrative organs are to meet). Where the SE Regulation makes no provision, the priority is (a) national law relating to SEs in the member state in which the SE has its registered office ("home state"); (b) home state law applicable to public companies; and (c) the provisions of the SE’s statutes. As a result, a company’s choice of member state in which to register its SE will have a large impact on the way the SE is set up and run, both as a result of the options provided in the Statute which the relevant member state decides to adopt, and the law generally applicable in relation to companies in that jurisdiction.

Branches

The SE will enable companies operating in more than one member state to be established as a single company, operating under one set of rules and administrative requirements and hence potentially making savings on operational costs. But given that any part of the company operating in a "foreign" member state (i.e. other than the one in which the SE is registered) will be subject to the same rules as all other foreign corporations operating in the member state - in most cases, the entity will have to be registered as a branch - there are no clear administrative advantages to this, and operational costs savings are likely to be minimal.

Member state options

The SE Regulation provides member states with 31 options as to how a SE in their jurisdiction should operate. These include choices as to :

  • rules on board structure - both single-tier (i.e. administrative board only) and two-tier boards (i.e. supervisory and management boards) must be available in each member state, but the member state may choose whether or not to draw up new rules to govern the systems
  • rules on enhanced creditor and minority shareholder protection
  • whether the registered office and head office must be in the same place - although they are in any event required to be in the same member state
  • currency of capital - if the Euro has been adopted by the relevant member state, the currency must be the Euro, otherwise it may be either the Euro or the member state’s national currency
  • currency in which accounts are drawn up - this may be Euro, even if the Euro has not been adopted as national currency – but member states may also require accounts to be prepared in their national currency if public companies are subject to the same requirement.

Impact within the EU

The extensive requirements for employee participation, and the inherent uncertainties as to the application of EU or national law to specific areas, will limit the potential opportunities for the application of the SE structure. However, the European Commission (and member states in their promotion of this concept) are hopeful that the SE will have application where the involvement of a "national" entity based in, and identifiable with, a particular member state may be unacceptable to one or more of the participating companies - so that a more anonymous or neutral "European" entity would prove more suitable.

The proposal for a EU Directive on cross-border mergers3could provide an alternative to forming a SE for companies from different member states wishing to merge, where their existing national laws do not provide for this, but the Directive is unlikely to be implemented in the near future.

There has been some interest from companies in the concept of the SE as a possible legal form for carrying on business in the EU. It seems likely that it will take some time for this concept - which appears to be more of an aspirational concept for European harmonisation than a practical solution to pan-European conduct of business - to win acceptance as a common legal structure for businesses in the EU.

Footnotes

1 "Subsidiary" is not defined in the SE Regulation or in the UK draft implementing legislation. It is taken to mean an SE which is owned by the companies by which it is formed (although it will not strictly be a subsidiary of these).

2 All member states will have national rules on information/consultation (but not participation) by March 2005 as a result of implementation of the Information and Consultation Directive (2002/14/EC).

3 2003/0277 (COD), published on 18 November 2003. Responses to the UK Government’s consultation are due by 20 September 2004.

This article is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters.

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