Lithuania: European company has become a reality in Lithuania

Starting from February 2005, incorporation of European companies (Societas Europea, hereinafter referred to as "SE") has been transposed into Lithuanian legal system. However, as a matter of practice, registration of SE with the Register of Legal Persons has become possible after full transportation of the Directive 2001/86/EC supplementing the Statute for a European company with regard to the involvement of employees into Lithuanian legal system by adopting appropriate law. On 12 May, 2005 the Parliament of the Republic of Lithuania implemented the said Directive by adopting the Law on the Involvement of Employees within the European company. The Law came into force as of 28 May, 2005.

According to the Council Regulation (EC) No 2157/2001 on the Statute for a European company (SE), as of 8 October 2001, SE is a public limited-liability company having its registered office in one of the EU member states and incorporated in one of the following specific ways:

1. by merger of two or more public limited-liability companies if at least two of the merging companies have their registered offices in different EU member states;
2. by formation of a holding SE company provided that at least two of the merging companies operate in different EU member states or have for at least two years had a subsidiary company or a branch in another EU member state;
3. by forming a subsidiary SE by subscribing for its shares provided that at least two of the subscribing companies operate in different EU member states or have for at least two years had a subsidiary company or a branch in another EU member state;
4. a public limited-liability company having its registered office in one of the EU member states may also be transformed into SE if the company has for at least two years had a subsidiary company in another EU member state;
5. SE may itself set up one or more subsidiaries in the form of SE.

In comparison with the operation through two or more companies acting separately in different EU member states, the formation of SE may expose its founder to the following new opportunities:

1. SE is to be treated in every EU member state as if it were a public limited-liability company formed in accordance with the law of the EU member state of its registration. Therefore, all legal requirements as to corporate governance, shareholders rights, competence and liability of managing bodies, requirements as to auditing and financial accounting, etc. will be governed by the SE statutes, Council Regulation (EC) No 2157/2001 on the Statute for a European company and the laws of EU member state, where SE is registered. As a consequence, SE incurs significantly less administrative and similar expenses than companies operating separately in different EU member states would incur. For instance, annual financial accounts of SE are prepared and its auditing is performed in the EU member state, where the SE has its registered office rather than in each EU member state separately. Therefore, costs related to preparation of annual accounts and auditing are less as all tasks can be tackled by one local enterprise;
2. SE ensures that single management and corporate governance structure and reporting system would be established for operations in different jurisdictions. SE therefore would avoid the need to set up a financially costly and administratively time-consuming complex network of subsidiaries governed by different national laws. Normally, the formation of a subsidiary involves various onerous procedures as to choosing and registering the firm name, formation of minimum share capital, election of managing bodies (or at least, appointment of the head of the company), registration of share emission with the national securities commission, etc. Therefore, SE could raise economy of scope opportunities in case SE operates in multiple jurisdictions;
3. SE ensures application of single and uniform employment policy, single employment incentives and reporting mechanism;
4. A reason for choosing the SE legal form could well be that it makes it easier to shop around EU for a friendlier company law (e.g., choosing a jurisdiction, which provides appropriate safeguards against the hostile take-overs or minority shareholders claims);
5. Taking into account accumulation by SE of financial resources, larger capital and other financial characteristics, SE would ensure new opportunities in relation to financing and fund-raising, as it would be approached by financing institutions as a single business and legal unit;
6. SE could avail of possible advantages from the state social insurance point of view; some EU member states shift the burden of social security reporting and payment of social security premiums to the employees in cases they are employed by a non-national company; in such countries SE would be treated as a non-national company, thus its employees, rather than SE itself, would be subject to security reporting and related obligations;
7. In the absence of choice of jurisdiction, the EU member state of SE registration would be the statutory jurisdiction for dispute settlement in the courts of law against SE as a defendant;
8. In cases both companies participating in the formation of SE have contractual relationships, which are subject to scrutiny of transfer-pricing rules, after the merger thereof such mutual contractual arrangements, as well as associated risks, would expire;
9. The registered office of SE may be, if it is necessary, transferred from one EU member state to another without winding-up the company. The possibility of such a transfer of the registered seat enables the SE to adjust to changes in the business, legal and tax environment in a more expedient and efficient manner. For example, liquidation of the already-operating company and incorporation of a new company in another EU member state would be required if the seat of an ordinary national company is changed; and
10. Incorporation of SE is currently the only way to perform cross-border mergers in Lithuania.

On the other hand, the formation of SE may result in the following major disadvantages:

1. Pursuant to Directive 2001/86/EC supplementing the Statute for a European company with regard to the involvement of employees, the involvement of employees in the management of SE must be ensured, for instance, through (a) informing representatives of employees about important issues concerning activities of the SE and conducting related consultations with the employees’ representatives; (b) providing employees with the possibility to influence the structure of the SE’s supervisory and managing bodies if such possibility existed in the companies participating in the formation of the SE. Thus, in comparison with a national Lithuanian company, SE must ensure a significantly higher level of employees’ participation in the decision-making and management process;
2. As far as taxation is concerned, SE is regarded as any other multinational company, i.e., it is taxed under different regulations of every state wherein SE engages in business activities. Having in mind that tax law of EU member states is far from being harmonised, the European company needs to hire taxation specialists in each EU country where it operates; an SE is also subject to the national tax laws of each EU member state where the SE has a branch or a permanent establishment.
3. If during SE formation two or more standalone companies are merged into one SE, the problem of separation of business and legal liability arises. Financial and business failure risks pertaining to separate activities in different jurisdictions are no more partitioned; i.e., failure of a unit of SE operating in EU member state other than Lithuania would have direct effect on the SE as a whole rather than indirect effect on the parent company in Lithuania, which would be the case of traditional structure of associated undertakings encompassing several jurisdictions. With regard to civil and / or administrative liability arising out of activities of formerly separate business units in different jurisdictions, the SE, being the only legal successor of former national companies, would be liable for outstanding obligations. Assuming that the assets of SE (i.e., necessary infrastructure, etc.) should be separated and respectively attributed to operations in two different countries alongside the lines of the former ownership structure, such consolidation of financial risks could detrimentally impact the overall financial risks management;
4. In any other EU member state SE would be regarded as a non-national company, therefore, it may face certain restrictions, which are applicable in other EU member states in respect of non-national companies (e.g., restrictions on acquisition or use of land plots, acquisition or exploitation of necessary infrastructure, restrictions on the use of rights of way, etc.); and
5. From the regulatory point of view, the obligations, as imposed by national regulatory authorities (e.g., competition authorities) on the company participating in the formation of SE, could entail uncertainties after the formation of SE, as it will be unclear as to the way the said obligations will be assumed and implemented by SE.

To sum up, SE is not: (a) a company governed by a specific uniform European legal regime; and (b) a company taxed as one entity at European level, which makes it less attractive as a choice for elimination of group structure and facilitation of the transfer of the company’s registered office according to Lithuanian laws.