The mandated disclosure regime for publicly traded companies is
similar in the U.S. and Europe, and significant disclosure is
required. By contrast, the requirements for U.S. companies that are
not public companies required to register with the Securities and
Exchange Commission (the "SEC")1 are
significantly less than those for private companies in Europe
(including private European subsidiaries of U.S. public
companies).
Disclosure Requirements in the U.S.
The disclosure required of U.S. companies that are not public
companies is governed by the laws of the state in which each such
company is formed. State laws vary as to their specifics, but the
level of disclosure required is generally very similar.2
This is also the case in the European Union (the "EU"),
where the European Institutions3 have issued a series of
Directives on corporate law that apply to all countries within the
European Union, albeit with opt-outs, exceptions, and allowances
for variances in some cases.
U.S. companies are required to file their formation documents with
the Secretary of State of the state in which they choose to be
incorporated (domiciled), which is the U.S. equivalent of a central
register, commercial register, or companies register. The formation
documents consist of a "charter" (called a Certificate of
Incorporation or Articles of Incorporation) for a corporation or a
Certificate of Formation or Limited Partnership for other entities.
The formation documents will include basic information, such as the
company's name and an address for its agent for service of
process (a service that can be provided for a nominal fee by a
number of professional Registered Agents with offices throughout
the country). The charter is also required to contain the corporate
purpose, which can be as broad as "any lawful act or
activity," and the total number of shares that the entity will
be authorized to issue.4 Other provisions may be
included, such as those providing for director and officer
indemnification and certain corporate governance procedures, but
these are not mandatory. The charter is not in fact meant to
provide disclosure of business or financial information, but rather
is the contract between shareholders and the company that can be
amended only with shareholder approval. The bylaws of a U.S.
company, which are separate from the charter and contain more
detailed governance rules, are not required to be disclosed by a
private company.
After their formation, companies are not required to provide
additional information other than to reflect amendments to the
documents that have been filed. Furthermore, events that occur as a
matter of state law, such as mergers, consolidations, conversions
to a different form of entity, dissolutions, and winding-ups all
require a filing with the Secretary of State in order to make the
event effective under state law.
It should be noted, however, that the commencement of bankruptcy
proceedings or any other type of litigation against the company
would not be reflected in the records of the Secretary of State.
Instead, this type of information would have to be discovered by
means of a litigation search at the courts located in the state and
county of the company's incorporation and, for certain types of
litigation, would require a search of all state and federal
courts.5 Furthermore, although some states require a
private company to name its initial directors at the time of its
formation, there is no requirement to update this information, and
there is similarly no requirement to disclose the authorized
representatives for purposes of dealing with third parties. A
private company is under no obligation to make its accounts or
other financial information publicly available.6
Disclosure Requirements in Europe
In Europe, the Member States of the EU must implement EU law
adopted in the form of Directives. This allows for a uniform system
of minimum disclosure requirements across all EU countries,
although Member States are usually free to implement stricter rules
than required in the Directives and also have some leeway when
implementing the reduced disclosure requirements for small and
medium-sized businesses (discussed in more detail below).
The First Company Law Directive was promulgated in
1968,7 and since then every company with limited
liability8 in the EU has had to open a file in a central
register, commercial (or trade) register, or companies register in
the Member State of its incorporation. Such a file must contain
information similar to what is required in the U.S., namely:
- The constitutive documents and any amendments thereto; and
- Information on the authorized representatives of the company for purposes of dealing with third parties.
But it must also contain the following:
- The names of the persons who take part in the administration, supervision, or control of the company;
- An annual statement of the capital subscribed (if the constitutive documents state the authorized capital);
- Details of, including any change to, the registered office of the company (which cannot be the address of a nominal service provider, as it can in the U.S.);
- Events signaling the termination of the company's existence, such as its winding-up, a declaration by the courts of nullity of the company, the appointment of liquidators, and the striking off the company from the register; and
- The accounting statements and reports required by the Fourth Company Law Directive described below.
This disclosure must be published in the official journal or
national gazette designated for that purpose by the respective
Member State.
The Fourth Company Law Directive9 requires every
European company with limited liability,10 regardless of
whether it is public or private, to publish:
- Its annual accounts, comprising its balance sheet, profit-and-loss account, and notes;11
- An annual report; and
- The opinion of the person responsible for auditing the accounts, who must generally be a Statutory Auditor.
In addition to generally detailed rules regarding the content of
the required documents, the Fourth Company Law Directive contains
rigid valuation rules with respect to the annual accounts. The
Directive also provides that the annual report must, at the very
least, include a fair review of the development and performance of
the company's business and of its position, together with a
description of the principal risks and uncertainties that it
faces.
The Directive's requirements are more relaxed for so-called
Small or Medium-Sized Enterprises ("SMEs"). Small
Enterprises are those that fulfill at least two of the following
three criteria:
- A balance sheet total of less than €4.4 million;
- No more than €8.8 million net turnover per annum; and
- Employment (on average during the financial year) of less than 50 employees.
Medium-sized establishments are those that fulfill at least two of
the following three criteria:
- A balance sheet total of less than €17.5 million;
- No more than €35 million net turnover per annum; and
- Employment (on average during the financial year) of less than 250 employees.
Member States have the option of requiring Small Enterprises to
publish only abridged balance sheets with abridged notes to the
accounts, containing fewer disclosures than otherwise required.
Member States may also waive the obligation with respect to Small
Enterprises to prepare annual reports, provided that certain
information concerning an acquisition by a company of its own
shares is given in the notes to its accounts. Finally, Member
States may relieve Small Enterprises from the obligation of having
their annual accounts audited by a Statutory Auditor.
With respect to Medium-Sized Enterprises, Member States have the
option, within certain limits, of requiring a different layout than
the one set forth in the Fourth Company Law Directive. Member
States also have the option of requiring abridged balance sheets
showing only certain items of those otherwise required. Finally,
Member States are allowed to limit the level of detail otherwise
required in the notes of a Medium-Sized Enterprise's accounts
as well as in its annual report.
As of March 2012, Member States now also have the option of
exempting so-called Micro-Entities from complying with even more
requirements of the Fourth Company Law Directive.12 In
order to qualify as a Micro-Entity, a company must meet all of the
following criteria:
- Its balance sheet total must not exceed €350,000;
- Its net turnover must not exceed €700,000; and
- The average number of employees during the financial year must not exceed 10.
Such Micro-Entities may be permitted not to draw up notes to their
annual accounts13 or prepare an annual
report,14 and they may even be exempted from the
obligation to publish annual accounts,15but each of
these possible exemptions applies only if the otherwise-required
information is disclosed elsewhere. Therefore, some basic
substantive disclosure obligations will still always apply.
Public Policy Considerations
Despite the recent efforts to simplify the business environment
and reduce the administrative burden on SMEs and Micro-Entities
established in the EU, the notion that a certain amount of
disclosure is required, especially in order to protect the
interests of third parties, has been recognized as a core principle
in European law and regulation ever since the First Company Law
Directive was promulgated in 1968. The theory is that if third
parties are able to easily verify information, such as whether a
certain person is authorized to act on behalf of a company, or
whether a company is backed by an adequate amount of capital, there
will be fewer instances when the obligations entered into by such
an entity will not be valid or will be avoided.
The same public policy considerations exist in the United States,
but for companies that are not large enough to require registration
with the SEC, the disclosure requirements are significantly less
burdensome. The theory here is that potential shareholders,
creditors, and business partners of a private company will require
the information they need as a condition to their investment or
loan and that small enterprises, in order to thrive, should be free
of expensive mandated disclosure requirements. For potential
litigants against the company, the legal system provides for
information through discovery, although that requires initiation of
litigation. In addition, companies that seek to expand their access
to the debt and equity capital markets will have an incentive (and
in many instances will be required) to register with the SEC, and
upon doing so will become subject to a far more extensive set of
disclosure requirements.
The European system makes this information available for private
companies by a simple search of a country's central register.
This information is available not only to persons who have
negotiating clout with, or some sort of legal or contractual power
over or rights vis-à-vis, the company but also to those
constituents who do not have the same level of clout or other legal
rights (or, for that matter, have none at all). From that point of
view, the EU Directives have achieved their purpose of protecting
the interests of third parties when dealing with companies
established in the EU.
Footnotes
1 The U.S. securities laws require periodic
reporting generally only for companies that have sold securities in
a public sale, are listed on a stock exchange, or have more than
the 2,000 holders of record or 500 holders of record that are
nonaccredited investors, plus more than $10 million in assets.
These are referred to as "public companies." Other
regulatory regimes govern disclosure by financial institutions and
investment entities.
2 For simplification, this
Commentary assumes that Delaware law
applies.
3 The three main institutions involved in EU
legislation are the Council of the European Union, the European
Parliament, and the European Commission.
4 The authorized share capital of a U.S.
company is not a capitalization requirement. U.S. companies are
not, generally speaking, required to have any specific amount of
funds in their bank accounts, whether upon incorporation or
thereafter, at least not as a matter of corporate law. The number
of shares authorized is usually significantly higher than the
number of issued and outstanding shares, and that latter number is
not subject to a disclosure requirement for a private
company.
5 Some courts now have searchable web sites
that facilitate and reduce the cost of this process.
6 In specific industries, disclosure to a
regulator may be required and therefore become available to the
public, including by way of information request.
7 Dir. 68/151/EEC of Mar. 9, 1968, OJ L/65
of Mar. 14, 1968, at 8, restated by Dir. 2009/101/EC of Sept. 16,
2009, OJ L/258 of Oct. 1, 2009, at 11, with effect as of Oct. 21,
2009.
8 Art. 2 of Dir. 2009/101/EC,
supra note 1, lists the following
examples, among others: (i) in Germany: the
Aktiengesellschaft
(AG),
Kommanditgesellschaft auf Aktien
(KGaA), and
Gesellschaft mit beschränkter Haftung
(GmbH); (ii) in France and
Luxembourg: the société
anonyme (SA),
société en commandite par actions
(SCA), and
société à responsabilité
limitée
(Sàrl), and in France
alone, the société par actions
simplifiée; (iii) in The Netherlands:
the naamloze vennootschap
(NV) and
besloten vennootschap
(BV); and (iv) in the United
Kingdom, companies incorporated with limited liability (both
Plc and
Ltd.).
9 Art. 47 of Dir. 78/660/EEC of July 25,
1978, OJ L/222 of Aug. 14, 1978, as amended, at 11.
10 Article 1 of Directive 78/660/EEC,
supra note 8, lists the following
examples, among others: (a) in Germany: the
Aktiengesellschaft
(AG),
Kommanditgesellschaft auf Aktien
(KGaA), and
Gesellschaft mit beschränkter Haftung
(GmbH); (b) in France and
Luxembourg: the société
anonyme (SA),
société en commandite par actions
(SCA), and
société à responsabilité
limitée
(Sàrl); and (c) in The
Netherlands: the naamloze vennootschap
(NV) and
besloten vennootschap
(BV).
11 It should be noted that as only annual
accounts are required to be published, the publicly available
information would be less current than that available for U.S.
public companies submitting quarterly financials to the SEC. But,
again, this is required of private as well as public companies in
Europe; hence the trade-off. European public companies will also
file more regular financials, based on other sets of laws and stock
exchange rules.
12 Art. 2 of Dir. 2012/6/EU of Mar. 14,
2012, OJ L/2012/81 of Mar. 21, 2012, at 3.
13 Provided that certain information
required to be disclosed in the notes is disclosed at the foot of
the balance sheet. Id. at art.
2(c).
14 Provided that certain information
required to be disclosed in the annual report is disclosed in the
notes to the accounts or, in the absence of any notes, at the foot
of the balance sheet. Id. at art.
2(d).
15 Provided that the balance sheet
information contained therein is duly filed, in accordance with
national law, with at least one competent authority designated by
the Member State concerned. Id. at
art. 2(e).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.