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Corporate Governance and Company Law News

Topics: Opinion of the Advocate General in the Cartesio case, European Private Company (SPE), Corporate Governance Advisory Group, Corporate Governance Forum, Number of SEs, Books & Articles

Opinion of Advocate General in Cartesio case (C- 210/06)

On 22 May, Advocate General Maduro issued his Opinion in the Cartesio case. The main message is: ‘Articles 43 and 48 preclude national rules that make it impossible for a company constituted under national law to transfer its operational headquarters to another member state’. Following Advocate General Maduro, every member state has to allow companies constituted under their domestic law to transfer their de facto head office to another member state. If the ECJ followed the Advocate General this would have little effect on board-level participation rights because in the case of an outward transfer of the de facto head office the company will remain subject to the company law (and also worker participation provisions) under which it was constituted. The Opinion contains no statement regarding the transfer of a company’s registered office.

Generally, the opinion of the Advocate General is not binding. However, in 80% of decisions the ECJ follows these opinions. The ECJ decision in Cartesio can be expected this year.
The following considerations in the opinion (para 29) are particularly interesting: ‘On the one hand, despite what the rulings in Inspire Art and Centros suggest, it may not always be possible to rely successfully on the right of establishment in order to establish a company nominally in another Member State for the sole purpose of circumventing one’s own national company law. In its recent judgment in Cadbury Schweppes, the Court reiterated that “the fact that [a] company was established in a Member State for the purpose of benefiting from more favourable legislation does not in itself suffice to constitute abuse of [the freedom of establishment].” However, it also emphasised that Member States may take measures to prevent “wholly artificial arrangements, which do not reflect economic reality” and which are aimed at circumventing national legislation. In particular, the right of establishment does not preclude Member States from being wary of “letter box” or “front” companies. In my view, this represents a significant qualification of the rulings in Centros and Inspire Art, as well as a reaffirmation of established case law on the principle of abuse of Community law, even though the Court continues to use the notion of abuse with considerable restraint – and rightly so.’
As a consequence, the setting up of a ‘letter box’ company with the sole aim of circumventing national company law (and also worker participation provisions) might be considered an abuse of the freedom of establishment. In Germany there have been cases that tend in this direction. Anyway its is unlikely that the ECJ will deal with the abuse question in its Cartesio judgement, because an abuse problem is not at stake. But these considerations are important for future cases.

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European Private Company (SPE)

According to informed sources the Commission is planning to launch the SPE draft-statute at the beginning of July, initiating the legislative process at the European level. Since the SPE statute is based on Art. 308 EC unanimity voting in the Council will be necessary.

As far as we know, the SPE draft-statute, the offspring of the business community, will borrow its main features from the UK limited company. For example, the minimum capital required will be only €1. Moreover, the shareholders of the SPE are likely to enjoy a large degree of freedom in determining company organisation. In addition, there will be – in contrast to the SE – no restrictions on how an SPE may be created. It will therefore be possible to set up an SPE ‘ex nihilo’. Furthermore, the SPE may be set up with its registered office and central administration or principal place of business in different Member States. From the point of the subsidiarity principle it is quite problematic that the SPE does not foresee a cross-border (European) element. This might give rise to a breach of primary EC law.

The general principle for board-level participation will be that the SPE is subject to the rules of the Member State where it has its registered office. This feature invites board-level participation circumvention strategies. Particularly problematic is the fact that the SPE could be set up with its registered office and central administration in different Member States. One solution to prevent such strategies – at least to some extent – would be to include a provision that the registered office and central administration have to be in the same member state, as is the case in Art. 7 SE Regulation. Another problem is that the SPE statute does not contain a provision to oblige SPE founders to set up a company organ for the exercise of board-level participation rights.

For cross-border mergers and the transfer of the registered office the SPE statute contains special provisions to safeguard board-level participation rights. As a result, cross-border mergers are to be governed by the Directive on cross-border mergers. As just mentioned, the regulation also provides for a special regime for the transfer of the registered office. In this case negotiations must take place regarding the board-level participation regime of the SPE, if certain conditions are met. The negotiation procedure is quite similar to that of the SE directive (2001/86EC) and the Directive on cross-border mergers (2005/56/EC). However, the draft-statute also contains unacceptable restrictions on the negotiation procedure (one third threshold).

The provisions of the SPE statute regarding the cross-border transfer of the registered office could become an example for the 14th company law directive, as it shows that the Commission is aware of the problems that arise with the transfer of the registered office. Since the Cartesio decision will not provide a solution to this question, it would be logical to table a draft for a 14th company law directive as well.

From the trade unions’ point of view the SPE statute should envisage participation rights for workers. Such a statute should not lead to a situation in which existing European standards on information, consultation and board-level participation are undermined. In addition, the SPE statute should not have a negative impact on SE legislation. Finally an SPE statute has to reflect the special role of employee stakeholders as a general view and not only as a technical question (Stakeholder approach).

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Corporate Governance Advisory Group

On 25 February 2008 the Corporate Governance Advisory Group held its 9th Meeting. Commission Services announced that, in order to ensure continuity of the Group's expert advice in relation to the Commission’s ongoing initiatives on the European Private Company and simplification of company law, its mandate will be prolonged until June 2009.

The main issue at the meeting was discussion of the different features of the SPE statue. In the context of employee board-level participation rules Commission Services stated that political acceptance of the SPE statute would depend to a great extent on how the employees’ participation issue is solved. Generally, the members of the group agreed that for this reason the SPE should take its inspiration from the existing rules.

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Meeting of the Corporate Governance Forum

On 28 May 2008 the Corporate Governance Forum held its last meeting. The main topics of discussion were the recent sub-prime crisis and the preparation of a study on national corporate governance practices, which might also include employee participation issues in corporate governance. Commission Services also provided some information on the SPE statute.

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Number of European Companies (SE)

As of the end of May 2008, the SEEurope factsheets provided information on a total of 182 registered SEs. For more information on existing SEs, please visit the SE section of the worker participation website. The SE factsheets are currently transformed into a database. This service will be available soon (end of June 2008) on our site.

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Books & Articles

The spring issue of Transfer 2008 contributes to the recent corporate governance debate. In the main section of this issue several authors set out proposals for a truly sustainable and socially responsible company. Moreover, in the News and Background section the issue presents some of the outcomes of the SEEurope expert network coordinated by the research department of ETUI-REHS.

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