European Company needs more flexibility to prosper - Ernst & Young - NW

European Company needs more flexibility to prosper

The European Company, or Societas Europaea (SE,) has become increasingly popular since its entry into force. The total number of SEs in the European Union, however, is still relatively low. To increase the SE’s attractiveness, more flexibility should be introduced into its rules.

The rules regarding negotiations with employees are a perfect example: small companies could be exempt; discrepancies regarding employee involvement between the SE Statute and the Cross-Border Merger Directive could be softened. Further harmonization in European company and tax law would also increase the attractiveness of the SE.

Since legislation governing the SE came into force in October 2004, the number of SEs formed each year has increased rapidly. Whereas in 2005, only 16 SEs were established, by 2009 this figure was 166. The economic crisis of 2008-09 only had a mild negative impact on the number of SEs created (currently around 600).

In a recent study requested by the European Commission and executed by Ernst & Young and various partners, mobility was mentioned by many surveyed SEs as the main advantage offered. An SE can change its registered corporate head office within the European Economic Area (EEA) beyond a national border, without having to wind up and engage in cumbersome changes to its corporate governance. If prepared well, such a migration may bring the company substantial economic advantages.
 
According to the SEs themselves, a European Company also profits from a modern European image, especially in the Member States where the national public limited liability company lacks international recognition, e.g., in the Eastern European Member States. Moreover, if the SE is the result of a merger, this enables the merging partners to present the merged company as a truly new entity: there are no “winners” and “losers” as a result of the merger.

In general, the business case for a company or group to adopt the SE legal form consists of a combination of factors. Whether a transfer of the registered office abroad is to rationalize the structure of the group itself; to benefit from a more attractive tax or legal regime; to optimize the corporate governance of a cross-border group; or to deal with specific regulatory provisions, particularly in the banking and insurance sectors, the SE may be an appropriate vehicle

Despite these advantages, after more than five years, the absolute number of European Companies is still relatively low compared with the total number of public companies in Europe. One explanation is the lack of public awareness of the SE. More importantly, behind the unified image of the SE, different national legislation in areas such as company law, taxation and insolvency is still applicable to SEs. This creates uncertainty and diminishes the attractiveness of the SE. Further harmonization of company and tax law in the EU would reduce this complexity and could therefore foster the utilization of SEs.

Another important factor impacting the formation of SEs is employee involvement. When incorporating as an SE, a company is obliged to enter into negotiations with employees to establish the degree of employee involvement in decision-making. On the one hand, this provides for tailor-made, flexible alternatives to more rigid mandatory legal rules in some European countries. This makes the SE relatively attractive in countries such as Germany, the Netherlands and Austria. On the other hand, in countries without a compulsory employee involvement regime, this lessens the attractiveness of the SE Statute, as it forces companies to enter into negotiations with employees to establish their involvement.

The entry into force of the EC Cross-Border Merger Directive has also influenced the appeal of the SE. This Directive has solved some of the issues of cross-border EU mergers for which the SE was, until December 2007 (the deadline for implementation of the Directive), the only solution. In addition, and contrary to the SE Statute, the Merger Directive does not establish a mandatory process to negotiate arrangements for the involvement of employees in the post-merger company. Thus, the Merger Directive provides the flexibility for the relevant organs of the merging companies to choose to apply standard rules on employee participation without first having to set up and start negotiations. The alignment of the provisions of the SE Statute and the Merger Directive on this matter could be considered.

To enhance the attractiveness of the European Company, it would be advisable to make the rules governing employee involvement more flexible. This could be achieved by simplifying the negotiation procedures, which are sometimes circumvented in practice through the creation of shelf SEs. These SEs, in the absence of employees, are not capable of opening negotiations. Thus, the requirement to conduct negotiations on employee involvement could be triggered by the “activation” of the SE. The concept of “activation” would need to be defined by the European legislator and could, for instance, be linked to the reaching of a certain number of employees.

Authors:
Luc Julien-Saint-Amand, Tax and Law Partner at Ernst & Young, France
Cornelius Grossmann, Corporate Law Leader for Europe, Ernst & Young, Germany