The Societas Europea: the Evolving European Corporation Statute
The Societas Europea: the Evolving European Corporation Statute
Terence L. Blackburn 0
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Recommended Citation Terence L. Blackburn, Th e Societas Europea: the Evolving European Corporation Statute, 61 Fordham L. Rev. 695 (1993). Available at: http://ir.lawnet.fordham.edu/flr/vol61/iss4/1
THE SOCIETAS EUROPEA:
TERENCE L. BLACKBURN*
In this Article, ProfessorBlackburn examines and evaluates the Commission of
the European Community's 1991 proposed European corporationstatute which
representsthe Commission's latest endeavorinto creatinga new form of business
organization that possesses a European identity independent of the laws of the
member states that comprise the European Economic Community. Professor
Blackburn argues that this proposalfails because it places too much reliance on
member state lawfor mattersof basicstructureand management, and therefore
incorporates by reference the material variations in company law that exist
among the member states. ProfessorBlackburn moreover contends that
thisproposal would render a Europeancorporation'smovement from one member state
to anotherhighlyproblematicand would necessarilysubject the corporationto the
nationalcompany law of the member state where its place of
centraladministration is located. ProfessorBlackburn conclude. however, that the proposal has
been successful in stimulatingthe harmonization of member state law governing
nationalcompaniesandprovides a useful toolfor buildinga consensus in the EC
on importantsocial and economic issues.
I. Historical and Procedural Aspects .........................
II. The Need for a European Corporation Statute ..............
A. Enabling Goals of the Proposed Statute ................
1. Operational Goals .................................
A. Formation of the SE ..................................
a. Public Limited Liability Company Requirement . 713
b. Diversity Requirement .......................... 715
c. Procedures for Merger .......................... 716
a. Availability to both Public and Private Limited
Liability Companies ............................
Diversity Requirement ..........................
c. Procedures for Creation .........................
* Associate Professor of Law, Seton Hall University School of Law.
d. Rights of Minority Shareholders ................
3. Formation by Joint Subsidiary ......................
4. Formation by Conversion ..........................
5. Formation by an Existing SE .......................
6. State of Registration ...............................
B. Capital Structure ......................................
1. Minimum Capitalization and Initial Issuance of
2. Issuance of New Shares ............................
3. Shareholders' Preemptive Rights ....................
4. Repurchase of Shares ..............................
5. Types of Securities .................................
6. Declaration of Dividends ...........................
C. Management of the SE ................................
1. Rights and Powers of the Supervisory, Management
and Administrative Boards .........................
a. Choice between Two-tier and One-tier Systems ..
b. Operation of Management Systems ..............
c. Duties and Liabilities of Directors ...............
2. Rights and Powers of Shareholders .................
a. General Meeting of Shareholders ................
b. Representation by Proxy ........................
c. Protection of Shareholders ......................
d. Special Problems of Minority Shareholders ......
D. Worker Participation in the Management of the SE .....
1. General Principle of Worker Participation ..........
2. Models of Worker Participation ....................
a. Representation on the Supervisory or
Administrative Boards ..........................
b. Appointment of Representatives to a Separate
c. Other Models of Worker Participation ...........
3. Selection of Worker Participation Model ............
a. Limitations on Selection of Model ...............
b. Procedural Aspects of Selection .................
4. Evaluation of Worker Participation Directive .......
E. Taxation of the SE ....................................
1. Losses from Permanent Establishments .............
2. Losses from Foreign Subsidiaries ...................
F. Annual and Consolidated Accounts ....................
G. Winding Up. Insolvency, and Liquidation ..............
1. Winding Up .......................................
2. Insolvency and Suspension of Payments .............
3. Liquidation ........................................
IV. Evaluation of the 1991 Proposed Statute ....................
A. Goals of the Proposed Statute .........................
ROPOSALS permitting businesses to create European corporations
independent of the laws of individual member states of the European
Economic Community ("European Community" or 'EC")' predate the
formation of the EC itself.2 The first modem proposal for a European
corporation statute can be traced to 1959, shortly after the effective date
of the Treaty of Rome, which created the European Community.3
The initial proposals were intended to simplify the process of
conducting business in more than one member state of the EC. The goal of
the early proposals was not to achieve a harmonization of national
company laws, or even a unification of these laws, but rather to bypass them
entirely using a separate supra-national form of organization.'
1. The European Economic Community was created in 1958 pursuant to the terms
of the Treaty of Rome of 1957. See Treaty Establishing the European Economic
Community (Treaty of Rome). Another treaty adopted at the same time created the
European Atomic Energy Community (Euratom Treaty). These two communities joined the
European Coal and Steel Community, which had been formed in 1952 by the Treaty of
Paris of 1951. See Treaty Establishing the European Coal and Steel Community (ESCS
Treaty). The institutional governance of these communities was unified and simplified by
the Merger Treaty, adopted in 1965 and effective in 1967, which established one
Commission, one Council, one Court of Justice, and one Assembly (later named the Parliament)
for each of the three Communities. See Treaty Establishing a Single Council and a Single
Commission of the European Communities. As a result of the merger, and of the
recognition that the European Economic Community was engaged in far more than strictly
-economic union, the three communities have become referred to as the European
Community, or the EC. See The institutionsof the European Community, Eur. File
(Commission of the European Communities and European Parliament 1991).
2. One commentator traces the original idea of creating a European business statute
to proposals in 1910 for creating international non-profit associations. See Eric Stein,
Harmonization of European Company Laws 439 (1971).
3. The proposal was made at the 57th Annual Convention of the French Notaries
Public. This development, and the history of other early proposals for creating a
European corporation statute, are traced in 2 Hans Smit & Peter Herzog, The Law Of The
European Economic Community § 54.03APP-54.07APP (1984). The Commission
eventually requested Professor Pieter Sanders, a Dutch scholar, to prepare a preliminary draft
of a European corporation statute. That draft was the basis of the Commission's 1970
proposal. See Pieter Sanders, The European Company, 6 Ga. J. Int'l & Comp. L 367
4. Professor Pieter Sanders, who drew up the first preliminary draft of the proposed
statute, later described the motivation behind the proposed statute as follows:
Why should it not be possible to constitute a company that as such would be
recognized in all of the Member States and which could do business in those
In 1970, the Commission of the European Community
("Commission") submitted to the Council of Ministers ("Council") 5 the first formal
EC proposal for a European corporation statute.6 This proposal, as
suggested by Professor Pieter Sanders, envisioned the creation of
corporations under European law, rather than the law of particular member
states; such a corporation was to be known as a Societas Europea ("SE").
The adoption of the proposal has proven highly controversial, due in
large part to the disagreement within the EC concerning the role of
corporations in general, and the SE in particular, within European society.
Much of the disagreement has centered on the proper role that workers
should play in the supervisory and decision making processes of SEs.
Despite prolonged negotiations and the preparation of numerous drafts
since 1970, the EC has not yet been able to adopt a European
The EC is once again actively considering the creation of European
corporations. In 1991, the Commission drafted an amended proposal for
a Council regulation on a European corporation,7 together with an
amended proposal for a Council directive concerning worker
participation in European corporations.' Although these proposals draw heavily
on earlier proposals on this subject, they also make substantial changes
from the earlier drafts.
countries on an equal footing with domestic corporations: a company not
subject to the national company law of the country involved, but to a uniform
European company law, applicable directly in all the Member States alongside
the national company law?
See Sanders, supra note 3, at 368.
5. The Council of Ministers is made up of one minister representing each member
state. See Treaty of Rome, supra note 1, art. 146. The Commission is comprised of
seventeen persons and must include at least one and not more than two nationals from
each member state. Id. art. 157(
). These persons do not represent and do not take
direction from the governments of their respective member states. In general, the
Council performs a legislation function of adopting directives and regulations, while the
Commission performs an executive function of enforcing and administering the Treaty of
Rome and the directives and regulations. The Commission also proposes and drafts all
regulations and directives that are considered by the Council. For a more thorough
discussion of the institutions of the EC, see David Freestone & J. Scott Davidson, The
Institutional Framework of the European Communities 55-115; Trevor Clayton Hartley, The
Foundations of European Community Law 8-25 (1981).
6. Proposal for a Council Regulation embodying a Statute for European Companies,
3 Bull. Eur. Comm. Supp. 8/70 (1970) [hereinafter 1970 Proposed Regulation]. The
term European corporation statute is used to refer generally to the proposed legislation
governing the creation of SEs. More precisely, the current proposed legislation takes the
form of a Regulation and a related Directive. A regulation of the EC has general
application, is binding on member states, and is directly applicable in those states without the
necessity of additional member state legislation. A directive, although binding on the
members states, permits the member state governments to choose the form and methods
of implementation. See Treaty of Rome, supra note 1, art. 189.
7. Amended proposal for a Council Regulation on the Statute for a European
Company, 1991 O.J. (C 176) 1 [hereinafter 1991 Proposed Regulation].
8. Amended proposal for a Council Directive complementing the Statute for a
European company with regard to the involvement of employees in the European company,
1991 O.J. (C 138) 8 [hereinafter 1991 Proposed Directive].
The 1991 draft of the European corporation statute represents
significant success, as well as substantial failure, in the attempt to create a form
of business organization "subject... to a uniform European company
law, applicable directly in all the Member States... ."I Companies will
find it easier to create SEs under the 1991 proposal than under earlier
drafts of the proposed statute, but illogical and unnecessary restrictions
still remain. Companies will also find it easier to conduct business
across national borders if they organize as SEs, because they will be able
tdoerinmteegrrgaetres.t1h2e losses of their foreign branches, and arrange
On the other hand, under the 1991 proposed European corporation
statute, companies will still retain important indicia of member state
"citizenship." Even though they are European corporations, they will still
be subject to member state laws governing many matters. Furthermore,
they will be limited in their ability to move their headquarters from one
member state to another without making major changes in their capital
structures,' 3 and management structures.1 4
Although the proposed European corporation fails to achieve much of
its original objective, it is not a complete failure. It has solved some of
the difficulties facing companies doing business in more than one member
state of the EC. The fact that it has not yet solved all of those difficulties
simply indicates that there is more work to be done with respect to
establishing a social and political consensus within the EC concerning the role
of business in the society.
The proposed European corporation statute is not only the result of
the establishment of consensus; it is also one of the mediums through
which that consensus is being established. The various drafts of the
proposal have helped set the agenda for establishing a consensus on the
structure, operation and management of business enterprises. Where
consensus has been established, the proposed draft has provided the basis
for harmonization of national company law, 5 as well as the law
governing SEs. Much work remains, however, before the proposed statute
will truly enable businesses in the EC to operate "free from.., the
territorial application of national laws."' 6
This Article examines and evaluates the development of the current
proposals for a European corporation statute. Part I of this Article
briefly reviews the history of the proposals, and the procedural steps that
9. Sanders, supra note 3, at 368.
10. See infra part III.A.
11. See infra part III.E.
12. See infra part III.A.1.
13. See infra part III.B.
14. See infra part III.C-D.
15. See, eg., Second Council Directive of 13 December, 1976, art. 1, 1977 OJ. (L 26)
1, 2 [hereinafter Second Company Law Directive] (dealing with the formation of public
limited liability companies and the maintenance of their capital).
16. 1991 Proposed Regulation, supra note 7, at 2.
remain for their adoption. 7 Part II considers the need for a European
corporation statute and the goals of such a statute, as identified by the
various institutions of the EC.18 Part III examines the major substantive
provisions of the 1991 Proposed Regulation and the 1991 Proposed
Directive, and traces the development of these proposals from prior drafts,
thereby illustrating the various opposing views that have been reconciled,
compromised, or accommodated.' 9 It also compares the proposed
statutes to other EC laws and proposals governing corporations organized
under the laws of the member states. The final part of this Article
evaluates the proposed European corporation statute.20
HISTORICAL AND PROCEDURAL ASPECTS
In 1970, the Commission proposed that the Council adopt a regulation
permitting the creation of SEs. 2 ' The proposal was lengthy and
complicated, and attempted to prescribe rules for virtually every aspect of a
corporation's existence, including its formation, capital structure and
manegement structure, the rights of its shareholders, the participation of
its shareholders and employees in management decisions, mergers, the
preparation of its annual financial statements, its taxation, and
liquidation and insolvency issues.22 Some of the provisions of the proposal
introduced concepts that had never been dealt with in the laws of the
After receiving favorable comments from the Economic and Social
Committee, the European Parliament adopted a number of proposed
amendments, the most significant of which related to the participation of
employees in management of the SE.24 The Commission then issued an
amended proposal in 1975, which incorporated the Parliament's
proposed amendments almost verbatim.2 5
Between 1976 and 1982, the proposal was examined by an ad hoc
working party of the Council. This work was then suspended pending a
review of the Commission's proposals concerning the harmonization of
member state laws applicable to parent-subsidiary groups of
companies.2 6 Work was not resumed until 1988, after the Commission called
on Parliament, the Council, and industry to once again attempt the
creation of a European corporation statute."
In furtherance of this request, the Commission prepared a new draft of
the proposed statute. In the 1989 draft, the Commission divided the
proposal on the European corporation into two separate but coordinate
pieces of legislation. The first, the Commission's Proposal for a Council
Regulation on the Statute for a European Company,28 addressed all the
basic issues of creation, funding, financial structure, management,
accounting, tax, and dissolution as they relate to the SE.29 The second, the
Commission's Proposal for a Council Directive Complementing the
Statute for a European Company,3° separately addressed the issue of the
participation of workers in the management of the SE.31 The Commission
apparently believed that this division of the proposal was necessary in
order to give to the member states the freedom to enact their own
national laws governing worker participation in the management of SEs.
After receiving the Commission proposals, the Council requested the
opinion of the Economic and Social Committee. 2 The Committee
offered a number of suggestions; these included making the SE form of
organization more readily available, modifying the rules on financial
structure and management, and emphasizing the Commission's
commitment to employee participation in management.33
In 1991, pursuant to the cooperation procedure established by the
Single European Act,34 the Commission adopted an amended proposal
which incorporated some of the suggestions made by the Committee and
the Parliament.3 5 This amended proposal is the subject of this Article.
This proposal is now pending review by the Council to determine if a
common position on the proposal can be established through a qualified
majority vote.3 6 If a qualified majority vote can be obtained, the
common position will be communicated to the Parliament. The Parliament
would then have three months to act. If the Parliament failed to act, or if
it approved the common position, then the Council would be able to
adopt the proposal into law by a qualified majority vote. If the
Parliament rejected the Council's common position proposal, then a
unanimous vote of the Council would be required for the proposal to be
adopted. If the Parliament were to amend the proposal, the Commission
would then have one month to review the amendments and transmit its
own amended proposal (which need not include the amendments
proposed by Parliament) to the Council. The Council could then adopt this
final proposal into law by a qualified majority vote; alternatively, it could
choose to adopt the proposal containing its own amendments, but only if
a unanimous vote were obtained.3 7
THE NEED FOR A EUROPEAN CORPORATION STATUTE
Despite the enormous growth in inter-European commerce among the
member states of the EC that has occurred since the creation of the
European Economic Community in 1958,38 companies that conduct
business across borders through branches or subsidiaries, rather than
through purchases and sales or licensing agreements with unrelated
companies, continue to face substantial barriers. The varying and conflicting
laws that exist within the member states that comprise the EC make both
the creation and the operation of such international enterprises difficult,
and occasionally legally or practically impossible.39
The legal systems of the member states of the EC are based on
THE SOCIETAS EUROPE.A
three different traditions-the common law system,' the civil law
system,4 ' and the Scandinavian law system.4 2 Each of the twelve
member states has developed its own body of law within these traditions.
Great Britain actually has three different legal systems.4 3 Some of the
member states' laws differ substantially from each other with respect to
such matters as employee participation in management" and the
recognition of single shareholder limited liability corporations.4 5 Therefore, a
company seeking to conduct business in more than one member state of
the EC must consider the laws of up to fourteen different legal systems.46
Although these fourteen different legal systems have significantly
similar approaches to many basic business law issues, differences still remain.
For example, all of the member states of the EC recognize the concept
that a publicly owned enterprise provides limited liability to its owners
for enterprise debts.47 However, not all of the member states recognized
single shareholder limited liability enterprises48 until after 1989, when
the Council adopted a directive that required them to do so. 49 Corporate
laws on a variety of other subjects, such as whether subscribers' capital
must be fully paid in to the corporation, 0 or whether workers have
rights to be informed of or involved in major decisions concerning the
corporation, 5 also differ significantly from country to country.
The EC Commission 2 has recognized that the varying laws of the
member states create significant barriers both to the efficient conduct of
business and to the creation of an economically unified market within the
EC. The Commission, therefore, has identified various needs of
European companies that should be satisfied in order for them to perform
more efficiently on an inter-European basis.5 3 At the same time, the
Commission has recognized that the growth of European (as distinct
from national) companies makes it necessary to provide additional
protections to persons and groups that do business with those
Enabling Goals of the ProposedStatute
The Commission's general goal of enabling corporations to operate on
a fully integrated European basis can be broken down into two related
sub-categories: the improvement of companies' ability to make decisions
and conduct business operations without regard to national boundaries;
and the improvement of companies' ability to organize or reorganize
without regard to such boundaries.
In its 1970 proposal for a European corporation statute, the
Commission expressed concern about the barriers to Community-based company
planning and operations. In the preamble to this proposal, the
Commission stated that the creation of an economic union within the EC
presupposed "a reorganization of the factors of production and distribution on
a Community scale in order to ensure that the enlarged market will
operate similarly to a domestic market."5 5 The Commission sought to
improve companies' activities and competitiveness at the Community level,
noting that the development of businesses at the national level could
"fragment markets and so constitute an impediment to economic
integration" of the Community.5 6
50. See infra note 202.
51. See infra part III.D.
52. The 1991 Proposed Regulation was drafted by the Commission and will not
become effective until it is adopted by the Council. Accordingly, this Article regards the
proposal as being the work of the Commission.
53. See infra part II.A.
54. See 1991 Proposed Regulation, supra note 7, pmbl.; infra part II.B.
55. 1970 Proposed Regulation, supra note 6, at 5.
56. Id. Based on the Commission's stated goals, it is apparent that the Commission
believed that the use of companies organized under national laws would render it difficult
to operate efficiently on a European basis, partly because of conflicting national laws, and
partly because of lingering nationalistic prejudices against "foreign" European businesses.
The only other European form of business organization, the European Economic Interest
Similarly, in 1991, upon concluding that the completion of the internal
market of the EC required that "the structures of production ... be
adapted to the Community dimension,"5' 7 the Commission called for the
"management of companies with a European dimension, free from the
obstacles arising from the disparity and the limited territorial application
of national company laws.""8 The Commission, moreover, called for the
creation of Community-based company law, that would be applicable in
all member states, so that companies could operate legally, as well as
economically, on a Community-wide basis.5 9
In addition to the need for a general company law that encourages the
operation of SEs on a community-wide basis, the Commission has
continually recognized the need to allow European companies to coordinate
their tax and fiscal policies. In its 1970 proposal, the Commission stated
that SEs should be allowed to deduct from their profits any losses
incurred by branches or subsidiaries in the other member states. t ° This
goal of treating the SE as one entity for tax, as well as operational
purposes, has been incorporated into the 1991 proposal.61
These statements by the Commission demonstrate that the
encouragement of effective operations on a European basis, rather than on a
national basis, constitutes one of the major goals of the European
corporation statute. Under the fully integrated market sought by the
Commission, companies would be able to make operational decisions,
such as choosing sources of supply and locations of production and sale,
based solely on market considerations.62 Decisions would not be affected
by managers' unfamiliarity with the laws of other member states, or their
perceptions of the favorable or unfavorable nature of "competing"
national laws. Consequently, inconsistent national laws dealing with
corporate governance and control and with tax issues would be harmonized
or unified to a Community-wide standard.6 3 It is against this standard
that the 1991 proposals will be evaluated."
Grouping, does not provide an effective alternative to European businesses because of
significant limitations that are placed on its size, and because it must be operated as a
partnership, rather than an integrated business entity. See infra note 163.
57. 1991 Proposed Regulation, supra note 7, at 1.
58. Id at 2.
59. See id
60. See 1970 Proposed Regulation, supra note 6, at 7-8.
61. See 1991 Proposed Regulation, supra note 7, at 4.
62. See id. at 1-5.
63. It has been suggested that current levels of harmonization of Member State
corporate law are insufficient to minimize the "race to the bottom" tendencies that may
result from the growing unification of the EC market as governments compete for
companies to incorporate and establish their headquarters in their countries. See Clark D.
Smith, Note, Federalismand Company Law: A "Race to the Bottom" in the European
Community, 79 Geo. L.J. 1581, 1593-99 (1991).
64. See infra part IV.
Since the time of its first proposal for a European corporation statute,
the Commission has recognized that the goal of operational integration
of European companies could not be achieved solely by harmonizing the
laws of the member states. The Commission noted in 1970 that the
harmonization of laws could not eliminate the barriers to either the
movement of company headquarters from one member state to another, or the
combination of companies across national borders. It also noted that the
harmonization of laws would not eliminate the necessity of choosing a
single country of "citizenship" and identity for European companies.65
For this reason, the Commission believed that it was necessary to free
European companies from legal ties to any particular country. To
accomplish this, the Commission concluded that a "full set of standard
porpoevraistiioonns"anwdowulidndhianvge utpo boef tchreeaEteudrotopegaonvecronm"ptahneyf.ou6n6ding, structure,
In 1988, more than six years after the Council had last considered the
idea of a European corporation law, and more than eighteen years after it
first proposed the adoption of a European corporation statute, the
Commission issued yet another call to action.67 The Commission warned that
cross-frontier cooperation had become "imperative" not only for
achieving economic integration of the EC market, but also for maintaining the
EC's competitive position in relation to the United States and Japan,
especially in the high-technology and financial services industries. 68
In its Memorandum, the Commission pointed out that the absence of a
European company statute impeded the development of EC-based
companies. The Commission also criticized the resulting failure in the
development of legal methods for accomplishing the "obvious economic need
to restructure companies. '69 According to the Commission, the
reorganization of such companies was made frustrated by: (
) the impossibility
of accomplishing cross-frontier mergers and other business combinations
under existing laws; (
) inconsistent and conflicting national tax laws
resulting in double taxation and tax-oriented rather than market-oriented
decisions by managers; and (3) inconsistent national laws regarding the
establishment and recognition of groups of companies." ° The
Commission solicited comments from the Council, Parliament, workers, and
porate managers for their use in the formulation of a new European
company law proposal.
The resulting proposal, made in 1989 and amended in 1991, reasserts
the need to permit the organization of corporations on a European basis.
The preamble to this proposal states that European companies should be
able to "carry out the reorganization of their business on a Community
scale"7 1 without reference to the laws of individual member states, and
expresses concern over the obstacles to the creation of groups of
companies that was produced by the divergent national laws.7 2 The
Commission concludes that it is essential to create a European corporate form of
organization "as a means of enabling companies from different Member
States to merge or to create a holding company and.., to form a joint
subsidiary.""3 A significant addition to the 1989 Proposed Regulation
would enable certain companies to become European companies without
the need for mergers or other corporate reorganizations.74 Although the
Commission briefly addresses the tax implications of subjecting the
corporations to tax in the individual member states, the 1989 and 1991
proposals give much less emphasis to these problems than the 1988
Memorandum had provided.7 5 Moreover, because of the progress made
in harmonizing member state company law, the Commission, in the 1991
proposal, places much less emphasis on the need for adopting a full set of
European company laws covering all aspects of the annual financial
reporting requirements and the winding up of European companies.7 6
Protective Goals of the ProposedStatute
The Commission has consistently acknowledged that if companies
were allowed to operate and organize on an EC basis, rather than on a
national basis, various protective mechanisms commonly found in
member state company laws would need to be adopted. The Commission's
main concern has been the protection of the rights of workers in such
enterprises. In addition, the Commission has been concerned to a
somewhat lesser extent about protecting the rights of minority shareholders
1. Protection of Employees
The preamble to the 1970 Proposed Regulation, in an effort aimed at
achieving "uniformity in the system of management of the European
company," warned against the use of national laws in providing a model
of employee representation in European company decision-making."
The 1970 proposal, however, went far beyond this goal of uniformity,
and asserted that it was "necessary... to provide for the formation of a
European Works Council"7 " in all European companies, and "equally
necessary to allow representation of workers on the Supervisory
Board[s]." 79 The proposal would therefore allow workers to become
involved in matters of company management and the appointment of
executive officers of the companies.8 0 The preamble offered no justification
for these worker participation goals other than citing the need for
uniformity." In the explanatory notes to the proposal, the Commission
stated that European companies should encourage worker participation
in management as a means of improving efficiency through the increased
level of cooperation both between employees and management and
between employees of the same business entity who worked in different
In 1988, the Commission expressly acknowledged that its proposals on
the European company statute were designed to do more than simply
establish uniform laws. In its 1988 Memorandum, the Commission
mented that the necessary restructuring of European companies on an
international level would be more readily accepted by European workers
if they participated in that restructuring, and their interests were
safeguarded. 3 In the Commission's view, worker participation in the
management of the European company
was essential both as a means of
ensuring the smooth operation of such enterprises and as a matter of
"social rights."" Therefore, the Commission stated that in addition to
encouraging efficient European-wide operations, the European company
statute should "at the same time pioneerworker involvement in the
decision-making structures of European industry." 5
teed" to all workers. s7
The 1989 and amended 1991 draft directives on worker participation
in the European company moderated the Commission's language on the
social rights aspect of the proposals.
Although the Commission stated
that the participation of workers in the supervision of the European
company was necessary for achieving the economic and social goals of the
EC, the Commission placed greater emphasis on the need for
coordinating the diverse laws of member states on this issue.8 6 In addition, the
1991 draft expressed concern over preventing the competitive inequalities
that would arise if equal levels of worker participation were not
Protection of Creditors and Shareholders
In articulating the goals of the 1970 proposal, the Commission took
the position that protection was required for creditors and certain
shareholders of parent-subsidiary groups of companies that were SEs. 8
83. See 1988 Memorandum, supra note 24, at 2.
84. 1985 White Paper, supra note 67, at 16. It isinteresting to note that the
Commission took this position even though it recognized that, in some member states, worker
representative groups were reluctant to accept the idea of worker participation. See id.;
infra note 338 and accompanying text. The Commission acknowledged the continuing
support of the European Parliament for worker participation provisions in the European
85. 1988 Memorandum, supra note 24, at 3 (emphasis added).
86. See 1989 Proposed Regulation, supra note 28, art. 1,at 69; 1991 Proposed
Regulation, supranote 7, art. 7, at 9.
87. See 1991 Proposed Directive, supra note 8, pmbl., at 9. The Commission's
position on this point lacks a certain amount of internal logic. If it is true that European
companies operate more smoothly and effectively when workers participate in
management, then a competitive inequality would result from the statute's failure to require
worker participation. Under such circumstances, it would hardly seem necessary to
guarantee worker participation, because companies would be led by market pressures to
allow worker participation (except that such guarantees of worker participation might
avoid a damaging period of non-competitiveness until the companies restructured their
operations). Ifo,n the other hand, worker participation would have no effect, then no
competitive inequality would result from the adoption of this model of management. If,
conversely, worker participation would make European companies less efficient, then it
would again be necessary to guarantee worker participation, in order to prevent
companies without such participation from gaining a competitive advantage.
88. See 1970 Proposed Regulation, supra note 6,pmbl., at 173-74. The term
"creditor" was not defined in the proposal. Because the proposal simply makes parent
compaCommission believed that the growth of such groups of companies had
already caused problems for the creditors and minority shareholders of
the controlled companies.8 9 As European companies were created, and
more and larger groups of companies were formed, the Commission
foresaw increasing problems and the need for additional regulation. The
Commission also thought that its regulation would serve as a model for
the member states' revision of their national laws on the subject. 90
The Commission also recognized, in the 1970 Proposed Regulation,
that controlling companies and minority shareholders did not have
common interests. A controlling company might not act in the best interests
of minority shareholders of the controlled company because the
controlling company was not necessarily interested in improving the profitability
of the controlled company. It might instead use the controlled company
for the purpose of improving the controlling company's profitability. The
Commission therefore provided special protection for minority
shareholders by enabling them to redeem their shares in the controlled
company in exchange for either cash or shares in the controlling company. 9 '
With respect to creditors, the Commission was more vague about the
need for special protection in groups of companies. The Commission
only referred to the "threat ...for creditors who rely on the protection
provided for by law" when one company controlled and directed
panies liaNbelevefrotrhethleessd, etbhtes Coof mthmeiirsscioonn'tsroplrleodpocsoamlmpaandieesc.o93ntrolling
The Commission's views on the special protections needed in groups of
companies remained unchanged for several years. In its 1975 amended
proposal, the Commission noted Parliament's strong support for such
provisions, and retained the provisions of the 1970 proposal. 94
In 1988, the Commission acknowledged that it had changed its views
on the protection of minority shareholders and creditors in groups of
companies. Although the Commission still believed that the legal
principle of independence conflicted with the economic demands of groups of
companies, the Commission noted that it was "open to question . . .
whether the European Company Statute is the proper place to create a
nies liable for the "obligations" of their subsidiaries, it apparently protects bondholders as
well as trade creditors. See id.
89. The Commission had initially defined control to exist where one company had the
power to direct more than half the votes, or appoint more than half the members of the
board of management or supervisory board, or exercise a decisive influence on
management. See 1970 Proposed Regulation, supra note 6, art. 6(
), at 12-13. This definition of
control was later modified to remove the concept of decisive influence. See 1991
Proposed Regulation, supra note 7, art. 6, at 8.
90. Of the six member states of the EC in 1970, only Germany had passed laws
dealing with the protection of creditors and minority shareholders in groups of companies.
See 1970 Proposed Regulation, supra note 6, pmbl., at 173.
91. See id. arts. 228-238, at 179-87.
92. Id. at 173.
93. See id. art. 239, at 187-88.
94. See 1975 Proposed Regulation, supra note 25, art. 239, at 100-01.
body of rules governing groups."95
By 1989, the Commission had fully reversed its position on the need
for creating special rules for European companies that operated in
groups. The Commission acknowledged that under existing law, the
rights of shareholders and creditors in a group were governed by the law
of the controlled company. Consequently, specific rules were not
required for a European company that acted as part of a group of
companies.96 This approach was continued in the 1991 amended proposal.'
3. Protection of Others
Aside from its goal of protecting minority shareholders and creditors
in groups of companies, the Commission apparently did not see any
significant need for providing special protection to creditors and
shareholders of European companies that were not members of such groups. The
Commission did express a mild concern for proper capitalization of such
companies. The Commission wanted to "ensure that such undertakings
[would] operate on an acceptable scale," and consequently specified that
a minimum paid-in capital would be required.9" The 1970 proposal also
gave creditors the opportunity to oppose a merger in the European Court
of Justice if their rights would be affected by the merger.99
The provisions of the 1970 proposal that dealt with shareholders'
rights were more the product of normal corporate housekeeping concerns
(e.g., liability of the board of management for wrongful acts, and rights
of the shareholders to convene shareholder meetings, place items on the
agenda, and bring derivative suits) than concerns for the special
problems of European companies, and were not separately discussed by
the Commission in the preamble or the notes to the proposal. 1°
The Commission has not changed its view that such additional
protective measures are not required. The 1989 and 1991 proposals generally
followed the pattern of the 1970 proposal on these issues, with the
exception that the right of creditors to contest merger in the European Court
of Justice has been eliminated. 01
III. SUBSTANTrvE PROVISIONS OF THE 1991 PROPOSALS
This Part will examine the most important provisions of the 1991
Proposed Regulation and the 1991 Proposed Directive and will analyze the
changes that the Commission has made from the earlier proposals. In
95. 1988 Memorandum, supra note 24, at 20.
96. See 1989 Proposed Regulation, supra note 28, pmbl., at 42. The only unresolved
issue that the Commission has acknowledged in this area is the need for specifying the
law that applies if the SE itself is a controlled company. See id
97. See 1991 Proposed Regulation, supra note 7, pmbl., at 4.
98. 1970 Proposed Regulation, supra note 6, pmbl., at 6.
99. See id art. 27, at 29.
100. See eg., id arts. 71, 81, 85(
), 85(3), at 62-63, 69, 73.
101. See 1991 Proposed Regulation, supra note 7, arts. 4, 17-31, at 7, 12-20.
addition, this Part will examine the extent to which they coordinate or
conflict with EC rules governing national companies. Finally, this Part
will evaluate whether the Commission has been successful in meeting its
announced goals for the European corporation statute.
The 1991 Proposed Regulation allows an SE to be formed by business
entities that are organized under the laws of a member state. 2 Each SE
is required to be a public limited liability company. 103 There are no
limits on the types of business that may be engaged in by an SE. An SE may
be formed in four ways: by merger, by creation of a holding company, by
formation of a joint subsidiary, or by conversion of an existing company.
An SE is allowed to participate in the creation of other SEs according to
the same rules applicable to national companies.
limit the availability of each method.
The 1991 proposal fails to completely achieve its goal of enabling
companies to take advantage of the SE form of organization.
the availability of the SE has been significantly limited, without apparent
1. Formation by Merger
The 1991 Proposed Regulation
permits the formation of an SE
through the merger of two or more existing corporations.' °4 The
Regu102. See id. arts. 2(
), 2(l)(a), 2(
), 2(3), at 6.
103. See id. art. 1(
), at 5. The English texts of both the 1991 Proposed Regulation
and the 1989 Proposed Regulation use the term "public limited liability company" to
refer to the form of organization of the SE itself and also the companies that are entitled
to participate in the formation of an SE through a merger. See id. arts. 1(
), at 5-6;
1989 Proposed Regulation, supra note 28, arts. 1(
), at 42-43. The 1970 Proposed
Regulation referred to these entities as societes anonymes, which is the French form of
organization of public limited liability companies. See 1970 Proposed Regulation, supra
note 6, art. 15, at 21. The 1970 Proposed Regulation stated that it intended to include
similar forms of organization under the laws of other member states, such as the German
Aktiengesellschaft, the Italian societa per azioni, and the Dutch naamloze vennootschap.
See id. at 6 (translator's note). Although it is not made explicit in the 1991 Proposed
Regulation, it appears clear that the term "public limited liability company" isintended
to have the same meaning as the term "societe anonyme." See, e.g., Second Company
Law Directive, supra note 15, art. 1,at 2 (specifying its applicability to the formation of
public limited liability companies, and also its applicability to the societe anonyme, the
Aktiengesselischaft, and other similar forms of organization). This Article uses the
approach of the 1991 Proposed Regulation and refers to all such forms of corporate
organization as public limited liability companies.
The development of the concepts of public and private limited liability companies is
traced in Clive M. Schmitthoff, Social Responsibility in European Company Law, 30
Hastings L.J. 1419, 1422-25 (1979).
104. The merger would still be subject to other EC and member state laws and
regulations, including the 1989 Mergers Regulation, which establishes EC-level antitrust laws.
See Council Regulation 4064/89 of 21 December 1989 on the Control of Concentrations
Between Undertakings, 1989 O.J. (L 395) 36. Under the Mergers Regulation,
concentrations with a "Community dimension" (based on world-wide and Community-wide
turnolation, however, establishes two important limitations. First, formation
through merger is only available to companies that are organized as
public limited liability companies. Second, at least two of the merging
must have their places of central administration located in
different member states." 5
Public Limited Liability Company Requirement
desired to form an SE.'0
Since 1970, the proposed European corporation statute has required
all the participants in an SE formed through a merger to be public
limited liability companies.10 6 The Commission, in 1970, explained that it
allowed only public limited liability companies to create SEs by any
method because the extension of this privilege to other forms of
corporate organization (a) would add considerably to the difficulties of drafting
the statute, and (b) would make it more difficult for the European Court
of Justice to supervise the formation of SEs.1 °7 The Commission further
explained that other forms of corporate enterprises could first convert
into public limited liability companies, as a preliminary measure, if they
This requirement was carried forward into the 1989 proposal
concerning the creation of SEs by merger without further explanation. °9 The
European Parliament thereafter proposed to extend the right of creating
SEs by merger to private limited liability companies and other similar
companies.' 10 In support of this proposal, the Parliament pointed out
that private limited liability companies conducted a major portion of the
economic activity taking place in the EC.'11 Nevertheless, the 1991
Commission proposal did not change the limitation that only public
limver) may be blocked by the Commission if it concludes that they will significantly impede
competition. See 1i.
105. See 1991 Proposed Regulation, supra note 7, art. 2(
), at 6. There is no
requirement that the shareholders be nationals of or organized under the laws of a member state.
Consequently, a company that was organized under the laws of a member state, but
which was a subsidiary of a corporation organized outside of the EC would be able to
participate in the formation of an SE through a merger or by any other means. See id.
106. See 1970 Proposed Regulation, supra note 6, arts. 2-3 notes, art. 21, at 10-11, 26.
107. See id. arts. 2-3 note 1, at 10-11.
108. In particular, the Commission suggested that a business entity organized as a
societe a responsabilite limitee, a Gesellschaft mit beschrankter Haftung, or a societa a
responsabilitalimitatamight convert to a public limited liability company. See id. These
types of companies are generally referred to as private limited liability companies. See
Twelfth Directive, supra note 49, pmbl. & art. 1,at 40-41. According to Professor
Sanders, who drafted the precursor of the 1970 Proposed Regulation, the conversion ofprivate
limited liability companies into public limited liability companies is easily accomplished
in each of the member states. See Sanders, supra note 3, at 372.
109. See 1989 Proposed Regulation, supra note 28, art. 2(
), at 43.
110. See Proposal for a regulation on the Statute for a European company, amend. 7,
), 1991 O.L (C 48) 72, 74-75 [hereinafter 1991 Amendments by Parliament].
111. See Amended Proposal for a Council Regulation (EEC) on the Statute for a
European Company: Explanatory Memorandum, COM (91)174 final at 2 [hereinafter 1991
Of the three models, this model is the least intrusive on management's
control over the company and the existing relationship between
management and employees. It is also the least disruptive to existing member
state laws. If a company's management has already been able to work
out a method of accommodation with its employees, there is no reason to
suspect that such method of accommodation would be affected by the
conversion of the company into an SE. However, in those companies in
which no worker participation existed, or little or no informational rights
have been provided, this third model would still require significant
changes in attitudes and procedures. Because the model requires
agreement between management and employees, its greatest impact on these
companies would be its requirement that management enter into
collective bargaining with workers concerning the structure of management.
Selection of Worker Participation Model
a. Limitations on Selection of Model
The 1991 Proposed Directive gives each member state the power to
affect the choice of models of worker participation for SEs. A member
state may restrict the choice of models that are available to SEs
registered in that state, or require that all SEs adopt one of the models."4°
This provision may seriously damage the Commission's goals of
enabling companies to operate in the EC without regard to national
borders, and permitting them to freely transfer their places of central
administration. This provision does not even require the member state to
adopt the same mandatory form of worker participation for SEs that it
does for national companies. If a member state requires SEs to adopt a
form of worker participation that is different from the required or
permitted form for national companies, then national companies within a
given member state may be unwilling to utilize the SE form of
organization. Perhaps more importantly, national companies that are registered
in other member states will be unwilling either to register as an SE in a
member state or to transfer their places of central administration there if
they do not like the form of worker participation which is mandated by
that member state.
This provision also presents difficulties for employees of existing SEs
that wish to transfer their states of registration and central
administration. Generally, under the proposed statute, the previously agreed upon
model of participation may only be changed pursuant to an agreement
between the management and the employee representatives.3 51 This
means that workers' participation rights could not be altered simply
because an SE changed its state of central administration. If, however, the
349. See 1991 Proposed Directive, supra note 8, art. 6(8), at 14.
350. See id art. 4, at 11-12.
351. See id art. 3(
), at 11.
management of an SE wished to change or reduce the level of worker
participation, it could simply transfer the SE's state of central
administration to another member state that required a lower level of worker
participation, subject to the approval of the general meeting of
shareholders. The SE would now be required to comply with the new state's
laws regarding worker participation, thereby rendering the rights of
employees to negotiate over the new form of participation meaningless.
b. ProceduralAspects of Selection
The 1991 Proposed Directive requires that an SE's selection of a model
of worker participation from the models allowed by the member state be
made pursuant to a written agreement between the SE's management and
employee representatives. In reaching this agreement, the two sides are
charged with considering the "legal, economic and social consequences
of the formation of the SE."35 2 If an agreement can not be reached, the
dispute must be presented to the general meeting. A report by
management on its proposal and a statement by the employee representatives
detailing why the formation of the SE under the management plan is
contrary to the interests of the employees would also be presented. The
shareholders would then vote on both the model of worker participation
to be adopted by the SE and the question of whether an SE should be
formed in the first instance.35 3
Once a model of worker participation has been chosen, whether by
agreement or by vote of the general meeting, it can be changed only by
an agreement between the management or administrative board and the
employee representatives. If the registered office of the SE is transferred
to another member state, the model of participation may only be altered
pursuant to the procedure for selecting a model of participation that was
This procedure for breaking a deadlock between management and the
employee representatives through the vote of the shareholders at the
general meeting 355 was first proposed in the 1991 Proposed Directive. The
1989 proposal had allowed the management or the administrative board
to impose a choice of model if the board and the workers were unable to
reach an agreement. 3 6 The 1991 proposal increases the power of
employees in the negotiation process. Previously, if management was
reluctant to adopt one of the models of participation, it could simply ignore
the workers' position, and then impose the model that management
desired. Now, management must persuade the general meeting that its
position is reasonable and desirable. In most instances, however, it is likely
that the shareholders would vote to support the position of the
manage352. Id. art. 3(
), at 10.
353. See id. art. 3(
), at 10-11.
354. See id. art. 3(3), 3(7), at 11.
355. See supra note 353 and accompanying text.
356. See 1989 Proposed Directive, supra note 30, art. 3(
), at 69.
ment that they have elected, rather than the position of the worker
representatives. Consequently, this change may not have any significant
impact on the choice of model.
The vote of the general meeting for determining the basic model of
worker participation in the event of a deadlock between the SE's
management and workers should be distinguished from the selection of a form of
employment under the "other models" alternative. In the former
situation, the management and the employees would have to reach agreement
on a choice among (
) the representation of employees on the board,
selected either through election or nomination; (
) the establishment of a
separate consultative body; or (3) the "other models" system, with details
to be worked out later. If agreement on this issue could not be reached,
then the general meeting would make the selection. In the latter
situation where the "other models" system has been agreed to by an SE's
management and employees, or has been selected at the general meeting
of shareholders, then both management and the employees would enter
into another round of negotiations for establishing the details of the other
model of participation. If an agreement could not be reached, the
general meeting would not have any power to select the form of
participation; in the case of deadlock, the member state standard model of worker
participation would be imposed.35 7
These procedures, which may require two separate levels of choices in
some instances, present an ample opportunity for strategic
decision-making. For example, if an SE were registered in a member state with a
relatively weak standard model of worker participation, and the
management were reluctant to give significant participation rights to employees,
then management would probably refuse to agree with the employees on
either the board membership model or the separate body model of
participation. Instead, it would urge the general meeting to adopt the "other
model," take a very hard position in the collective bargaining process,
and then adopt the state standard model after having failed to reach an
agreement with the employee representatives. If the standard member
state model granted relatively strong participation rights to employees,
management would most likely be unwilling to present the general
meeting with an "other model" alternative, because the results of collective
bargaining or the standard model would give employees more
participation rights than they would receive under the separate body model.
Employee representatives would face similar choices in deciding whether
they could persuade the general meeting to side with them in adopting a
strong form of worker participation, or if it was better to opt for the
other model form of representation, and then use the standard state
model of participation as a floor upon which they would base their
357. See Donald, supra note 158, at 46.
Evaluation of Worker Participation Directive
The 1991 Proposed Directive concerning worker participation in
management ultimately fails to meet the goals set forth by the Commission.
Under the present circumstances, however, this failure is probably
In attempting to accommodate the objections of member states and the
representatives of management and employees, the Commission has
established a structure which on its face allows a broad range of choices
among models of employee representation. The Directive already
permits use of the German, Dutch, French-Italian, and
ScandinavianUnited Kingdom systems of worker participation in management.3 58 In
addition, there has been discussion at the EC about the possibility of
further broadening the range of alternatives, to encompass all of the
other national models of worker participation. 35 9 Therefore, SEs might
have the opportunity to select among at least a half-dozen or more
different models of worker participation. If the proposal did no more than
this, then the choice of model by the SE would be dictated by the nature
of management's relationship with its employees and the competitive
forces of the European marketplace.
The proposal's inclusion of the right of member states to restrict
certain models, or to mandate one particular model destroys the
Commission's goal of attaining uniformity in the laws that are applicable to SEs
organized in the various member states.3 ° Member states may not be
able to resist mandating the model of participation that is most common
within their individual states. Once one member state takes such an
action, management or labor representatives in other member states will
feel greater justification in urging their governments to take similar
measures. For example, Germany could mandate the use of the elected board
representation model to avoid a dilution of German law. This could
compel the United Kingdom or France to mandate their own systems of
worker participation in order to prevent the encroachment of the
German model or a dilution of their own models. Even if only a few of the
member states take such action, the Commission's hope for uniformity of
law would be vanquished.
Under these circumstances, member states will be pressured to prevent
the transfer of an SE's place of central administration out of their
countries because of the potential impact on employee representation that the
proposal would produce. In addition, SEs will find it difficult, if not
impossible, to change freely their places of central administration, because
358. See supra text accompanying note 336.
359. See 3 1992-The External Impact of European Unification (BNA) 6-7 (July 26,
360. The wide range of choice that is made available to member states is viewed by one
commentator as allowing enough discretion to the state to permit the creation of SEs
without upsetting the delicate balance between employees and management. See
Franceschelli, supra note 311, at 12.
of the necessity of also changing the model of employee representation
upon such transfer. Thus, instead of creating uniformity of law, the
Commission has created not only diversity, but in all probability, an
absolute conflict in member state law governing SEs.
This loss of uniformity cannot be effectively rationalized as the price of
achieving the social goal of improving employees' rights in SEs. The
multiplicity of systems permitted by the 1991 Proposed Directive
essentially ensures that any company or any member state that desires to
preserve the status quo with respect to worker participation in management
will be able to do so-either because of member state action to restrict or
mandate the available models, or because of management's ability to
resist employee requests and then turn the issue over to the general meeting
for decision. Thus, the proposal is unlikely to have any real impact upon
Despite these problems, the compromises reached by the Commission
on the issue of worker participation in management are probably
unavoidable at the present time. The resistance of member states to the
adoption of any system that would advance employee rights at the cost of
flexibility or the elimination of national models of participation has been
strong. It appears that the Commission may have to accept far less than
it desires on this issue in order to obtain passage of the whole statute.
Further harmonization of member state law on this issue may have to
await the development of a stronger European political consensus on the
underlying issue of the proper role of workers in the management of
Taxation of the SE
1. Losses from Permanent Establishments
The Commission has attempted to enable the SE to operate as a single
entity for most business purposes. In order to accomplish this goal, the
Commission has proposed to allow an SE that conducts its business
through "permanent establishments"3 6 located in more than one
jurisdiction to treat its aggregate operations as a single taxable entity for tax
Under the primary tax system outlined in the proposal, if the
aggregate of profits and losses from all foreign permanent establishments
re361. The term "permanent establishment" is not defined in the 1991 Proposed
Regulation. The 1970 Proposed Regulation defined the term to include "(a) a seat of
management; (b) a branch; (c)an office; (d) a factory; (e)a workshop; (f)a mine, quarry or any
other site for extraction of natural resources; (g)work of construction or assembly carried
on for more than twelve months." 1970 Proposed Regulation, supra note 6, art. 280(
at 221. The Commission's recent proposal concerning the integration of losses of
national companies defines this term as "any fixed place ofbusiness through which an
enterprise of a Member State carries on all or part of its activities." 1990 Proposal for a
Council Directive concerning arrangements for the taking into account by enterprises of
the losses of their permanent establishments and subsidiaries situated in other Member
States, art. 2, 1990 OJ. (C 53) 30, 30-31 [hereinafter 1990 Proposal Concerning Losses].
suits in a loss, the SE would be allowed to offset that loss against the
profits generated in the member state in which the SE is registered.
Subsequent profits earned by the SE from the foreign permanent
establishments would then be treated as taxable income in the state of
registration, up to the amount of the losses previously used as an
offset.362 Profits in excess of the amount of offset losses would be taxed only
in the state in which the foreign permanent establishment was located,
and not in the state of registration.36 3
Alternatively, a member state may elect not to utilize this tax loss
integration system for SEs, if it instead allows SEs a credit for any taxes paid
to foreign jurisdictions that are attributable to the profits derived from
permanent establishments located there.36 The credit would be applied
against the tax liability in the state of registration based on an SE's
combined foreign and domestic operations.3 65 Under this alternative system,
if an SE incurred losses in a foreign permanent establishment that
produced a tax loss carryover in the foreign jurisdiction in which the
permanent establishment were located, subsequent profits produced by such
foreign permanent establishment would not be taxed in the foreign
jurisdiction until the carried over losses attributable to that establishment had
Double taxation of foreign-source income can be avoided using either the
exemption method or the credit method. Under the exemption method, the
country of residence does not tax income that is taxed or taxable in another country.
By contrast, under the credit method, the country of residence computes its tax
on the basis of the taxpayer's total income, including foreign-source income,
and permits taxes paid abroad to be deducted from its own tax. In practice,
most Member States use a combination of both methods: the exemption
method for some types of foreign-source income, such as dividends from a
substantially owned subsidiary, or branch profits, and the credit method for some
other types of foreign-source income, such as interest and royalties.
See Comm'n Of The European Communities, Report Of The Committee Of Independent
Experts On Company Taxation 31 (1992) [hereinafter Ruding Report].
365. See 1991 Proposed Regulation, supra note 7, art. 133(4), at 67. This provision is
identical in substance to the Commission's proposal that required member states to allow
national companies to take either offsets or tax credits, based on their operations in
countries other than the country of registration. See 1990 Proposal Concerning Losses, supra
note 361, arts. 6-7, at 31-32. The usefulness to national companies of the 1990 Proposal
Concerning Losses is limited, however, by another provision that allows member states to
"reincorporate" the deducted losses into the enterprises' taxable results if the
reincorporation has not occurred (through the earning of subsequent profits) upon the
expiration of five years. See id. arts. 8, 10, at 32. The 1991 Proposed Regulation does not
contain a similar reincorporation provision. See 1991 Proposed Regulation, supra note 7,
art. 8, at 9.
been exhausted. Accordingly, in the state of registration, a foreign tax
credit would not be allowed (i.e., there would be current taxation) until
the foreign loss carryovers had been exhausted, because the foreign
income would not have resulted in a foreign tax liability until that time.3 1'
The concept of offsetting the losses of foreign branches against profits
in the state of registration has been part of the Commission's proposal on
the European corporation statute since 1970.367 Generally, the member
states allow their national companies to offset the losses that are incurred
by their foreign permanent establishments, although the methods and
rules of the offsets vary.36 8 The 1970 proposal only allowed SEs to offset
losses that resulted from operations conducted in other member states of
the EC, and did not give the member states the option of using a foreign
tax credit system.3 69 In contrast, the 1989 and 1991 proposals allow for
the offsetting of losses that are incurred through the operation of any
foreign permanent establishment, and allows the member states to adopt
the tax credit system as an alternative.37 0
The 1991 proposal's tax provisions will generally make it easier for
companies to operate internationally. The proposal allows for greater
flexibility in offsetting losses generated by an SE's foreign permanent
The portion of the proposal that allows SEs to offset their income by
losses incurred through operations outside the EC raises additional
policy questions. If the purpose of the proposed statute is to encourage the
development of all multinational enterprises, then the proposal makes
sense. It should be noted that the proposal requires member states using
the loss integration method to accept a deferral of tax revenues where an
SE incurs losses in the operation of a foreign permanent establishment
that is located outside the EC. It remains to be seen whether member
states will be willing to accept this deferral in order to stimulate
multinational operations by EC-based SEs. In any event, the Commission has
not formally proposed that national companies be allowed a similar offset
for non EC-based losses.37 ' If this situation is not changed, it could
provide a substantial incentive for utilizing the SE form of organization.
The optional tax credit portion of the 1991 Proposed Regulation,
which was first added by the Commission in 1989, is mirrored by the
Commission's proposals regarding the foreign losses of national
companies, presents an additional problem.372 Because this provision is elective
by the member states, it institutionalizes yet another variation in the laws
applicable to SEs and thereby prevents business enterprises from
operating on a truly European basis, without regard to national borders.37 3
Losses from Foreign Subsidiaries
The 1991 Proposal does not allow either an offset for losses incurred
by an SE's foreign subsidiary,3 74 or a credit for taxes that are paid by an
SE's foreign subsidiary to a foreign jurisdiction.37 5 Member states
generally have been unwilling to allow national companies to offset their
income by losses that are incurred through the operation of foreign
subsidiaries, 37 even though nine of the member states allow national
companies to offset their income by losses incurred through the operation
of domestic subsidiaries.377 Nevertheless, the 1990 Proposal Concerning
Losses would allow all national companies to offset their income by the
losses incurred by foreign subsidiaries.3 78 If this proposal is adopted, it
372. See id. arts. 5-12, at 12-17. The Commission proposed the 1990 Proposal
Concerning Losses because of the objections by companies that SEs would have an unfair tax
advantage if national companies were not given the same loss integration/tax credit
benefits that were given to SEs. See European Info. Serv., Company Taxation:
ProposedDirectives on Removal of Tax Barriersto Restructuring Tabled, 1634 European Report 5
373. SEs and other companies that conduct business in more than one state of the EC
may have to accept this difficulty for now. The member states are almost equally split on
the question of whether to use a tax credit method or a tax exemption method of
preventing double taxation on national companies' income from foreign establishments and
dividends from foreign subsidiaries. Moreover, the Independent Committee appointed by the
Commission believes that it is "unrealistic to expect the member states to relinquish" the
opportunity of choosing between the two methods. See Ruding Report, supra note 364,
at 204. It is equally unlikely that the member states would relinquish their choice of
alternatives with regard to the foreign losses of SEs.
374. Apparently, a subsidiary cannot be a permanent establishment. The 1990
Proposal Concerning Losses defines the term "subsidiary" as a company in which "an
enterprise of a Member State has a minimum of [a] 75% [equity interest], giving it a majority
of voting rights." 1990 Proposal Concerning Losses, supra note 361, art. 2, at 31.
Permanent establishments are treated separately from subsidiaries under the proposal.
Compare id., arts. 5-8, at 31-32 with id., arts. 9-12, at 32.
375. See 1991 Proposed Regulation, supra note 7. The 1970 Proposed Regulation,
supra note 6, art. 281(l), at 222 had allowed the offset of losses from more than 50%
owned subsidiaries in proportion to the percentage ownership by the SE in the subsidiary.
376. See Ruding Report, supra note 364, at 195.
377. See Thommes, supra note 366, at 161.
378. The proposal requires member states to permit the offset of losses from
subsidiaries in which the company owns 75% or more of the capital and a majority of the voting
rights. See 1990 Proposal Concerning Losses, supra note 361, arts. 2, 9, at 6, 10. As is
the case with losses from permanent establishments, the member states are permitted to
require the reincorporation of those losses. See id. art. 10, at 10. The provision is
would presumably apply to SEs as well, because under the 1991
Proposed Regulation, member state laws governing public limited liability
companies apply to SEs when the European corporation statute is
silent.379 If the 1990 Proposal Concerning Losses is not adopted, the SEs'
inability to offset their income by the losses of foreign subsidiaries would
prevent SEs from formulating a fully integrated business and tax
strategy. This result is unacceptable, in view of the Commission's position
that a national company's choice of whether to operate abroad through a
foreign permanent establishment or a subsidiary merely constitutes an
election between two different forms of organization that would conduct
the same business activities abroad.38 0 Even though SEs could avoid this
issue by operating through permanent establishments instead of
subsidiaries, overriding business reasons might dictate the use of subsidiaries.
Thus a further coordination is required between the tax regulations that
govern SEs and the tax regulations that govern national companies.38 I
F. Annual and ConsolidatedAccounts
The provisions of the proposed corporation statute that deal with the
annual accounts and consolidated accounts of SEs present no particular
problems. SEs are required to prepare annual financial statements in
accordance with the EC Fourth Company Law Directive concerning the
financial statements of national public and private limited liability
companies.3 82 They are also required by the Fourth Company Law Directive
to publish an annual report.38 3 In addition, SEs that are parent
companies must prepare and publish consolidated financial statements and
annual reports in accordance with the Seventh Company Law Directive
that governs similar reporting requirements for national companies."'
The auditing of the annual reports is also governed by the same rules that
are applicable to national companies.3 85
The Commission's virtually complete reliance on prior EC directives
in establishing an SE's financial reporting requirements avoids differences
designed to encourage the establishment of cross-border subsidiaries. See Thommes,
supra note 366, at 162.
379. See 1991 Proposed Regulation, supra note 7, art. 7(
)(b), at 9.
380. See Thommes, supra note 366, at 161.
381. See Wooldridge, supra note 163, at 130.
382. See 1991 Proposed Regulation, supra note 7, art. 101, at 54. The preparation of
financial statements of national companies is governed by the Fourth Company Law
Directive, supra note 76. The 1991 Proposed Regulation requires SEs to use specific options
that are among those available to national companies as prescribed in the Fourth
Company Law Directive, but none of them are material to the subject matter of this Article.
See 1991 Proposed Regulation, supra note 7, arts. 101(
), 105 at 54-56.
383. See 1991 Proposed Regulation, supra note 7, arts. 102-104, at 55-56.
384. See id arts. 106, 109-112. The preparation of consolidated accounts for parent
undertakings that are national companies is governed by the Seventh Company Law
Directive, supra note 76.
385. See 1991 Proposed Regulation, supra note 7, arts. 103, 111, at 56, 59. The
auditing of the accounts of national companies is discussed in the Eighth Company Law
Directive, supranote 76.
between the laws applicable to SEs and national companies. 3 86 In
addition, because the directives essentially harmonize national laws on the
subject, the proposed European corporation statute avoids national
differences as well. Consequently, the financial reporting provisions of the
1991 Proposed Regulation should not present any problems to businesses
that wish to use the SE form of organization.
Winding Up, Insolvency, and Liquidation
The Commission has chosen to rely primarily on the laws of the
member states in establishing the rules governing the insolvency, winding up
and liquidation of SEs. For the most part, this approach is successful,
but it does produce some degree of variation in the laws applicable to
SEs, because member state laws are not subject to uniform regulations or
comprehensive harmonizing directives on these subjects.
The 1991 Proposed Regulation establishes three different procedures
through which an SE may be wound up: (
) by a vote of the general
meeting without particular cause; (
) by a vote of the general meeting
following the occurrence of an event that requires the SE be to be wound
up under the instrument of incorporation or the statutes of the SE; or (3)
by a vote of the general meeting following the occurrence of an event that
requires the SE to be wound up under the laws of the state in which the
SE is registered. 3 7 This provision does not present any problems to most
SEs. Even though member state laws may differ with respect to the
grounds for winding up a company, the SE will be subject to only one set
of laws at a time. Managers of an SE may explore the laws of other
member states when the SE's registered office is moved from one member
state to another, although it seems unlikely that variations in national
laws on this subject would affect the choice of the member state in which
In addition to the situations described above, an SE may be required to
be dissolved under one other circumstance. Under the 1991 Proposed
Regulation, if the registered office of the SE is transferred to a location
outside of the EC, any concerned person or any competent authority may
apply to a court in the state in which the SE last had its registered office
to have the SE dissolved. The court is permitted (but not required) to
give the SE time to rectify the situation. 8
The provision describing this last circumstance, which was added for
the 1991 Proposed Regulation, may present significant difficulties in its
386. The Commission's regulation of the preparation of financial statements and
annual reports was made easier by the prior work on the subject. The 1970 draft proposal
dealt with these issues at great length, because at that time there was no consensus among
the member states. See 1970 Proposed Regulation, supra note 6, arts. 148-222, at 124-72.
387. See 1991 Proposed Regulation, supra note 7, arts. 115-116, at 60-61.
388. See id. art. 117a, at 62.
THE SOCIETAS EUR OPEA
application. The provision applies when the "registered office, as defined
in Article 5 [of the 1991 Proposed Regulation], has been transferred
outside the Community. ' 3 9 Article 5, however, is not entirely clear with
respect to the meaning of the term "registered office" in this context.
Article 5 states that the registered office of an SE shall be the place
specified in the SE's statutes. The provision also states that it "shall be
the same place as the place where the SE has its central
administration., 3 9 ' The term "central administration" is not defined in the
An SE's statutes could specify that its place of registration is in a
particular member state, even though a portion of its management
operations were located in another member state. Under these circumstances,
it is likely that the true location of the SE's place of central
administration could be resolved through a fact-finding proceeding.
Where the judicial dissolution of the SE is at issue, however, the
situation is much more serious. The 1991 Proposed Regulation may be read
to permit a concerned person or competent authority to argue in court
that an SE's place of central administration is located outside the EC
because a portion of the SE's management is located outside of the EC.
If this argument were to prevail, the court could then order the
dissolution of the SE.
If the Commission intended this interpretation, a problem would be
presented to SEs that conduct business outside of the EC. Because the
proposed regulation does not provide any standards for determining
where an SE's place of central administration is located, SEs would lack
guidance as to what operational and management functions were
required to be located inside the EC. A court, in making its determination,
might choose to consider such factors as the home or office locations of
the members of management or the supervisory or administrative boards.
Alternatively, the location of company records could be considered in
reaching this determination. On the other hand, if the Commission did
not intend this interpretation, then the proposal should be clarified to
expressly limit its application to circumstances where an SE transfers its
registered office outside of the EC.
2. Insolvency and Suspension of Payments
With respect to the determination and the ramifications of an SE's
insolvency, the 1991 Proposed Regulation simply provides that the SE
shall be subject to national laws.3 9 ' The Commission has explained that
it deliberately did not limit the laws concerning an SE's insolvency to the
laws of the state in which the SE is registered because it wished "to
390. IdL art. 5, at 7.
391. See idL art. 129, at 66.
guard any other laws that might be applicable. ' 392 The inability of the
Commission to reconcile these national laws, or to provide a single set of
laws applicable to the insolvency of an SE,3 93 exposes the SE to varying
or conflicting laws, and increases the level of uncertainty that is
presented by the SE form of organization. Thus, if managers of SEs
conduct business across national borders, they will be required to know and
take into account the insolvency laws of a multitude of jurisdictions.
The proposed European corporation statute presents similar
difficulties with respect to an SE's liquidation. The proposal specifies that the
liquidation of an SE shall be governed by national law, rather than the
law of the state of registration.394 The 1991 Proposed Regulation only
addresses the issue of an SE's liquidation in its requirement that creditors
be paid in full before shareholders may receive any liquidation
distributions.39 5 These provisions also state that an SE in liquidation continues
to have legal personality until its liquidation is complete.3 96
The Commission's approach of applying member state law to the
liquidation of SEs is identical to its approach with respect to the liquidation
of European Economic Interest Groupings (EEIGs). 97 It would
perhaps be more beneficial if EEIGs and SEs were not treated similarly in
this respect. Although EEIGs may conduct business in the member
states, they are essentially limited-purpose joint ventures among
companies, firms or persons. Indeed, each member state is given the power to
determine whether it will recognize an EEIG as having legal
personality.398 Given these circumstances, it is easy to understand why the
Commission neither provided one set of laws to govern the liquidation of an
EEIG, nor directed that the laws of a single jurisdiction would govern
such liquidations. SEs, on the other hand, have a clearly defined legal
personality that, for example, allows them to be registered in only one
state at a time. Therefore, SEs should be able to rely on a single set of
laws governing liquidation.
Under the existing draft of the European corporation statute,
managers of SEs will be subject to the same uncertainties concerning the
appli392. 1991 Explanatory Memorandum, supra note 111, arts. 129-130, at 24.
393. The Commission did not even attempt to establish a uniform law on the
insolvency of SEs in its first draft of the statute. See 1970 Proposed Regulation, supra note 6,
arts. 261-63, at 202-04 (stating that SEs would be subject to any conventions among
member states regarding insolvency and relations among creditors).
394. See 1991 Proposed Regulation, supra note 7, art. 120(
), at 62.
395. See id. arts. 126(
), 126(3), at 64-65.
396. See id. art. 120(
), at 62. The 1991 Proposed Regulation eliminated the extensive
provisions concerning an SE's liquidation that had been contained in the 1970 Proposed
Regulation. See 1970 Proposed Regulation, supra note 6, arts. 251-260, at 198-202.
397. See 1991 Explanatory Memorandum, supra note 111, arts. 120-128, at 23; see also
EEIG Regulation, supra note 163, art. 35(
), at 8.
398. See EEIG Regulation, supra note 163, art. 1(
), at 2. For additional description
of the EEIG, see supra note 163.
THE SOCIETAS EUROPF
cability of member state laws governing liquidation to which they are
subject with respect to insolvency issues. This absence of a uniformity of
law constitutes an additional risk that is inherent in the SE form of
EVALUATION OF THE 1991 PROPOSED STATUTE
Although the 1991 Proposed Regulation and the 1991 Proposed
Directive take significant steps toward accomplishing the goals and filling
the needs identified by the EC, they fall short in several respects. These
proposals should not be viewed as an expression of concepts that have
already been accepted by all of the participants in the EC. Many
provisions of the statute and a number of gaps in it are the result of hard won
compromises; others reflect the political realities of what can be
accomplished at this stage of the development of the EC itself. Nevertheless, it
is important to evaluate the proposed statute against the EC's own
statements concerning what the statute is designed to accomplish, in order to
determine the extent to which the proposals meet these goals and the
extent to which they fail.
Goals of the ProposedStatute
The basic purpose of the proposed statute, as identified by the
Commission, is to promote the fully integrated internal market of the EC.'3
The Commission has identified four principal means of accomplishing
this integration: (
) enabling companies to conduct their daily
operations on a true European basis, based solely on market considerations,
without regard to national laws pertaining to their operation, governance
or tax matters;4°° (
) enabling companies to operate free of any particular
national identity; (3) enabling companies to transfer their headquarters
within the EC without regard to national borders; and (4) enabling
companies to restructure and form new business combinations across
national borders." 1 The Commission has also sought to include the
employees in the process by giving them a voice in the operation of these
new companies and giving them a sense of loyalty to the European
nature of the companies." 2 Although the Commission initially attempted
to protect the interests of other participants in the European corporation,
it has essentially abandoned this goal (except for traditional shareholder
protection provisions) in the most recent draft of the proposal. °3
With these goals in mind, one can now proceed to a final evaluation of
whether the 1991 Proposed Regulation and the 1991 Proposed Directive
succeed or fail.
399. See 1991 Proposed Regulation, supra note 7, pmbl., at 2.
400. See supra parts III.C., III.E-G.
401. See 1991 Proposed Regulation, supra note 7, pmbl., at 1-4.
402. See 1991 Proposed Directive, supra note 8.
403. See supra part III.C.I.c.
B. Formation of the SE
The proposed European corporation statute is only fairly successful in
enabling companies to take advantage of the SE form of organization.
The proposal does, at least, succeed in making available many of the
common methods of structuring or restructuring companies, including
the merger, and the use of holding companies and joint subsidiaries.4 °4
The only major method of business combination that had been omitted
from the 1989 and earlier drafts was the straight acquisition of shares or
assets of another company. The addition in the 1991 draft of the
conversion method of forming an SE enables companies to become SEs when
they either already have operations in other states or simply wish to
acquire the shares or assets of companies in other states.4°5 Without this
provision, companies would have to either forgo a portion of their
independence or control over their operations (as a result of their use of a
merger, joint holding company or joint subsidiary) or combine with
various shell companies in order to fit within the proposed statute.40 6
Unfortunately, the Commission has allowed only public limited
liability companies to use the conversion and merger methods of forming
SEs."4 7 This decision has substantially limited the usefulness of the
For example, under the proposal, a company that wished to form an
SE through a merger would first have to become a public limited liability
company in the state in which it was organized; in order to do this, the
company might have to make a number of changes in its structure,
capitalization, and organization. 4°8 After the company merged with another
public company to form an SE, it would no longer be subject to the
national laws that had required it to make those changes, even if it were the
surviving company. The European corporation statute might not have
required some or all of the changes that were made. Consequently, the
company would have undertaken a series of changes, in order to be able
to form an SE through a merger, that were not required once it became
The proposed statute raises similar problems for companies that wish
to convert to SEs. A company might have to undertake a change in its
structure so that it could become eligible to convert into an SE.""°
The joint holding company and joint subsidiary methods of forming
SEs are the only forms that are directly available to private limited
liability companies without the intervening step of first becoming a public
lim404. See supra part III.A.1-3.
405. See supra part III.A.4.
406. See supra part III.A.4.
407. See supra parts III.A.l.a., III.A.4.
408. See supra part III.A.I.a.
409. See supra part III.A.1.a.
410. See supra part III.A.4.
ited liability company.4" These two methods of forming SEs are
designed to preserve the essential nature and independence of the
founding company, while leaving the SE separate and apart from the founding
company. This result is often not desirable for companies that wish to
create fully integrated, truly European companies.
Finally, the proposed statute is surprisingly inflexible in its
requirements of diversity in the operations of the founders of SEs, especially in
view of the Commission's announced goal of encouraging the creation of
truly European companies.4 12 The most flexible rule for the formation of
SEs (short of not requiring any diversity of operations at all) would have
been to require that the SE, immediately following its formation, have
operations in at least one member state besides the state of its central
administration, regardless of the method of formation that had been
used. This rule, which the 1991 Proposed Regulation included with
regard to the formation of SEs by conversion,4" 3 would have ensured that
companies wishing to take advantage of the benefits of the SE form of
organization possessed a truly European character.
Instead, the proposed statute sets up more restrictive rules.
Companies that wish to form an SE through a merger must have their central
administrations in different states, regardless of the diversity of their
other operations.4" 4 Companies that wish to create SEs by holding
companies or subsidiaries must either have their places of central
administrations located in different member states, or must each have foreign
operations before the time that the SE is formed.41 5 There is no valid
reason for requiring such extended levels of diversity for companies that
wish to form SEs through a merger, or the use of a holding company or
In summary, the restrictive nature of the proposed statute frustrates
the Commission's goal of enabling the greatest number of companies to
take advantage of the SE form of organization. The merger and
conversion methods of formation are limited by the requirement that each of
the founding companies must be publicly held, and the merger, holding
company and joint subsidiary methods of formation are limited by
excessive diversity requirements. The proposed statute could be simplified,
and the Commission's goals could be achieved if all public and private
companies were eligible to use each of the methods of forming SEs, and if
the diversity test that presently applies to the conversion method of
formation were applied to the other three methods of forming SEs.
The proposed statute is successful in providing companies with a
411. See supra parts III.A.2.a., III.A.3.
412. See 1991 Proposed Regulation, supra note 7, pmbl., at 1-4.
413. See supra part III.A.4.
414. See supra part III.A. .b.
415. See supra parts III.A.2.b., III.A.3.
method of combining businesses that are organized under the laws of
different member states. Under existing member state laws, there is no
procedure that allows companies to fully combine ongoing operations.
They can make share acquisitions, create parent-subsidiary relationships,
or arrange the purchase and sale of assets, but they cannot actually
merge.41 6 Such mergers could be accomplished under the proposal if the
surviving company were to become an SE. Consequently, this portion of
the proposed statute will be very helpful in achieving the Commission's
goal of enabling companies to restructure on a European basis.
The inflexibility of the SE's capital structure, as prescribed by the 1991
Proposed Regulation,4" 7 has the effect of discouraging companies from
using the SE form of organization. The proposed statute institutionalizes
some of this inflexibility; other problems arise from the Commission's
decision to allow the laws of the member states to govern these issues
even though no effective harmonization of such laws has taken place.
The minimum capitalization that is required for SEs, although greater
than the level that is required for national companies, is not so high as to
discourage the formation of SEs.41 8 The mandatory use of nominal value
shares, and the maintenance of stated capital before dividends can be
declared, although anachronisms to many Americans, remain familiar
cvoenntcetphtes ftoormmaotsitoEnuorofpSeEasn. s4.19 Therefore, these provisions should not
Other provisions of the proposal present greater difficulty. The statute
unnecessarily limits the capital formation process by allowing each
member state to place limitations on the initial issuance and new issuance of
shares and other equity and debt instruments by SEs that are registered
in that member state.420 Consequently, an SE may be at a competitive
disadvantage to an SE that is registered in another member state if a
disparity exists between the two member states' restrictions on the
issuance of financial instruments.
Under the proposed statute, the member state laws may also regulate
or prevent the general meeting's prior authorization of the issuance of
new shares and the repurchase of shares already issued.4 2' These rules
make the process of capital formation even more cumbersome for SEs.
Furthermore, the Regulation requires that all new issuances of shares
416. See 1988 Memorandum, supra note 24, at 7-8. The Commission has proposed the
adoption of a directive concerning the cross-border mergers of national companies, but
this proposal remains under discussion. See Proposal for a Tenth Council Directive
based on Article 54 (
)(g) of the Treaty Concerning Cross-border Mergers of Public
Limited Companies, 1985 O.J. (C 23) 11.
417. See supra part III.B.
418. See supra part III.B.1.
419. See supra parts III.B.2., III.B.6.
420. See supra parts III.B.2., III.B.5.
421. See supra parts III.B.2., III.B.4.
must be offered on a preemptive basis to the existing shareholders (first to
the shareholders of the same class of shares, followed by offerings to the
shareholders of other classes of shares) before a public offering can be
made. Regardless of the member states' laws governing national
companies, a waiver of these preemptive rights may only be obtained with
respect to the particular shares then being issued, rather than pursuant to
prior authorization. Because this rule is more restrictive than some of
the member states' laws that are applicable to national companies, SEs in
such states will be at a disadvantage compared to national companies
registered in the same states.4'
Managers or controlling shareholders may be unwilling to use the SE
form of organization if they can obtain greater flexibility by using
national forms of organization. Moreover, they may be hesitant to locate
their central administrations in those member states that do not allow the
issuance of a sufficiently wide range of financial instruments.
Furthermore, because the proposed statute allows for a disparity in the laws that
regulate an SE's capital structure insofar as some member states are more
restrictive in their regulation of national companies than others, it may
be impossible for SEs to transfer freely their places of central
administration. These results are not desirable in view of the Commission's goal of
creating European companies that can organize and operate without
reference to the laws of individual member states. 2 3
Management and Worker Representation
The proposed statute, on its face, appears to grant SEs a great deal of
freedom in creating management structures that fit their needs and
interests by presenting a choice between a two-tier and one-tier board, and
among various models of worker participation in management.
Unfortunately, in an attempt at preserving the various traditions that have
evolved in the different member states, the proposed statute allows each
member state to restrict the choices available to SEs, and further allows
member states to require SEs to adopt specific management structures
and models of employee representation. 424 The resulting ability of
member states to require that SEs adopt a particular management structure
and model of worker participation that may differ from the particular
forms mandated by another member state,425 deprives the SE form of
organization of much of its usefulness.
This reliance on mandatory member state law in establishing basic
matters relating to management destroys the hope of attaining
uniformity among SEs that are registered in different member states. Instead of
creating border-blind companies, that are truly Community
enter422. See supra part III.B.3.
423. See 1991 Proposed Regulation, supra note 7, pmbl., at 1-4.
424. See supra part III.C-D.
425. See supra part III.C-D.
prises,42 6 the Commission has institutionalized the creation of enterprises
that purport to be European, but which retain many of the essential
characteristics of the countries in which they are organized. In view of the
member states' determination to impose their own national characters on
SEs within their borders, it is possible that there will be German SEs,
French SEs, and even Northern Ireland SEs.42
Moreover, the Commission's attempt to accommodate the interests of
a number of member states affects the protection that is provided to an
SE's workers. Despite the Commission's assertions to the contrary,42 s
the various models of worker participation fail to provide employees with
uniform levels of participation and influence.4 29 The current proposal
thus institutionalizes national variations in worker participation models,
and accentuates the disparity in employee rights among the various
member states. The proposal also fails to accomplish the Commission's
goal of promoting employee loyalty to a truly European business entity,
instead of to a national business entity. Rather than minimizing the
importance to employees of the place of central administration of the SE in
which they work, the 1991 proposed statute emphasizes that issue.43 °
Because of the variations that will exist in the required management
structures and models of worker participation, the selection of an SE's
place of central administration will be of vital importance to both the SE
and its employees. An SE might not be able to transfer its place of
central administration without effecting wrenching changes in its
management structure, the composition of its supervisory or administrative
board, and the nature of the body that is designated for accomplishing
worker participation in accordance with the prescribed model. An SE's
transfer of its state of central administration may also become a political
issue; member states may vie to retain local SEs or to persuade foreign
SEs to transfer their central administrations there. Sadly, it appears that
the Commission's economic and philosophic goal of creating a new form
of business organization that truly reflects the unified character of the
EC, has been subordinated to the strong desires of the member states to
preserve their own local traditions with respect to the management of
business and employee rights.
The proposed European corporation statute also relies heavily on
member state law in providing rules that govern the general operation of
SEs. Among the events governed by member state law are the
proce426. 1970 Proposed Regulation, supra note 6, at 6-7.
427. The proposed statute accepts the laws of territorial units within member states as
binding on SEs. See 1991 Proposed Regulation, supra note 7, art. 7(
)(b), at 9.
428. See 1991 Proposed Directive, supra note 8, pmbl., at 9.
429. See Wooldridge, supra note 163, at 88 (discussing the similar provisions of the
Amended Proposed Fifth Council Directive governing national companies).
430. See supra part III.D.
dures to be followed by the general meeting of shareholders,4"3 ' the
determination of the actions that require prior board approval,4 3 2 the election
of employee representatives and their corresponding duties and status
within the SE,4 3 3 and the winding up of SEs. 4" Generally, the most
significant of these issues have already been harmonized by other Council
directives. Therefore, in contrast to the proposed statute's reliance on
member state laws governing capital structure, management structure
and employee rights, the reliance on member state law with respect to an
SE's operations and financial reporting requirements is unlikely to affect
an SE's choice of its place of central administration.
G. Insolvency and Liquidation
The application of member state law to SEs also presents a significant
potential for disparity in the laws that apply to an SE's insolvency and
liquidation. Here, the Commission has allowed the application of
"national law" without limiting the definition of the this term to the law of
the member state in which the SE has its central administration.4 35 This
approach could subject an SE to the varying or conflicting laws of
different member states, thereby raising the level of uncertainty faced by
managers and requiring managerial familiarity with the laws of other member
tsitoante.s TbehseidCeso mthme iosnsieonin hwahdicehx pthreessSeEd haasdeitssirpelatoceaovfoicdensturaclhaad mreisnuilstt,r4a3-6
and this particular portion of the proposed statute should be reexamined.
The provisions of the 1991 Proposed Regulation that deal with losses
from foreign establishments are helpful, but not vitally important. The
member states, under tax treaties, already allow for either the integration
of profits and losses or the taking of credits for taxes paid on profits of
foreign branches.4 3 Under the 1991 Proposed Regulation, the choice
between the two methods available to an SE is left to the member state in
which the SE has its central administration. The proposed statute
ensures that one of these methods will be applied to an SE's foreign
operations, but generally does not change the law that would have been
applicable if the SE had remained a national company. Furthermore,
because the Commission has proposed a harmonization of the rules that
apply to national companies, variations among the laws applicable to SEs
in different member states will be substantially reduced.4 38
431. See supra part III.C.2.a.
432. See supra part III.C.1.
433. See supra part III.D.3.
434. See supra part III.G. 1.
435. See supra part III.G.2-3.
436. See 1991 Proposed Regulation, supra note 7, pmbl., at 2.
437. See Ruding Report, supra note 364, at 31.
438. See supra part III.E.1.
Once the evolution of the European corporation statute has been
traced, and the various provisions of the current proposed statute have
been explored, it becomes necessary to step back from the statute and
view it as a whole. One must assess whether the Commission, in its 1991
draft, has accomplished its goals, or in the alternative, has set forth a
statutory formulation that will be useful to those conducting business in
the EC. With one vitally important caveat, it must be concluded that the
Commission has failed to achieve either of these objectives.
As is the case with any creative project, it is easy for commentators to
adopt a critical view of what the Commission has accomplished, finding
fault with what it has done, and regretting what it has not, while losing
sight of the substantial progress that the Commission has made.
Notwithstanding this tendency, an objective analysis of the statute
reveals that the 1991 Proposed Regulation has not accomplished its
As previously discussed, the proposed statute has relied heavily on
member state law not only for ministerial matters with respect to which
member state laws are substantially alike, but also for matters of basic
structure and management with respect to which member state laws
greatly differ.43 9 The Commission, unable to reconcile the divergent
views of the member states with respect to the nature, structure and
management of business enterprises, has attempted to accommodate all of
them. In so doing, it has stretched the concept of the societas europea to
such an extent that it has become virtually unrecognizable.
Instead of creating a form of business organization that has a
European identity, the Commission has allowed member states to ascribe
particularly national characteristics to SEs with respect to the essential
matters of management and worker participation. Instead of creating
entities that could move freely from one member state to another, the
Commission has allowed member states to prescribe the capital and
management structures of SEs with the result that an SE might require major
restructuring before it could transfer its place of central administration
from one state to another. Instead of granting employees uniform levels
of participation in the management of the enterprises for which they
work, the Commission, by deferring to member state laws, has accepted
widely varying levels of employee participation. Instead of guaranteeing
to employees their social right to be involved in the management of the
enterprises in which they work, the Commission has established only a
minimum requirement that a group of employee representatives, who
need not even be organized in a separate body, must be informed and
consulted before an SE makes major business decisions.
The proposal has achieved its stated goals only with respect to the
integration of daily operations and the facilitation of cross-border
combi439. See supra text accompanying notes 431-35.
nations. Notwithstanding, the integration of daily operations will not be
particularly useful unless companies have easy access to the SE form of
organization. Moreover, the facilitation of cross-border combinations
will be problematic as long as the resulting SEs continue to retain
essentially national characteristics. As a whole, viewing the results of the
Commission's efforts against the goals announced by the Commission
itself, the current proposed European corporation statute has failed.
Nevertheless, it is still necessary to determine whether the Commission
has accomplished something that, although not quite what it set out to
do, is nevertheless useful to European businesses and their employees.
Again, the answer to this question is that it has not, subject to certain
The proposal, if adopted, would permit the merger of companies
organized under the laws of different member states. This represents an
improvement over the existing laws. The Commission has also made
significant progress in reaching a consensus on what business enterprises
should be like in a borderless Europe. Ironically, however, the
Commission's success in harmonizing member state laws that govern national
companies has made this work on SEs less valuable. A national
company that must already maintain its accounts in accordance with the
Fourth and the Seventh Company Law Directives obtains no new benefit
from rules that require SEs to report its annual and consolidated
financial statements on the same basis. If a national company with foreign
branches is assured by the 1990 Proposal Concerning Losses that it can
either integrate losses or obtain a credit for taxes paid to other member
states, the company will not obtain any additional tax benefit by
becoming an SE.
The SE form of organization will only be advantageous to businesses
where the Commission's efforts in harmonizing member state laws that
govern national companies have been less successful than its efforts in
achieving uniformity in the laws that govern SEs. In most
circumstances, however, building a consensus among the member states with
regard to SEs requires the same effort as building a consensus concerning
the laws applicable to national companies. Consequently, it is unlikely
that the SE form of organization will provide significant benefits in
finance, structure and management that will not be available to national
companies. Even when the Commission encourages the SE form of
organization by giving such entities special benefits or protections,
complaints by national companies about the competitive inequalities that
would be produced have led the Commission to extend to national
companies the same benefits that have been granted to SEs."4
440. This tendency toward competitive equality is demonstrated by the 1990 Proposal
Concerning Losses, supra note 361, which proposes extending to national companies the
same right of loss integration that had been provided for SEs. The proposal was
introduced at the request of national companies that objected to the special treatment that had
been proposed for SEs. See supra note 372.
Viewed from this perspective, it appears that the attempt to create a
special European form of business enterprise that differs markedly from
national forms of business enterprise has not only failed to date, but will
also fail in the future. Nevertheless, this does not mean that the work of
the Commission has been useless. The Commission's 1970 proposal for
creating the societas europea represented its first attempt at regularizing
European business. As a result of the Commission's subsequent efforts,
substantial portions of member state laws governing national companies
have been made uniform or harmonized through the Council's
regulations and directives. This progress is continuing under the stimulus of
the Commission's current attempts at reaching an agreement on the
governance of the European corporation. The discussions in the
Commission and the Parliament have focussed attention on some of the
difficulties of conducting cross-border business operations and have
helped in developing an agenda for resolving these difficulties. Today,
national companies find it easier to conduct business across borders than
they formerly did. These cross-border operations will continue to be
facilitated as the Commission's work on the European corporation statute
continues. Consequently, the Commission's efforts have been at least
partially successful, even though the European corporation statute has
not yet been adopted.
One final consideration must be mentioned-and this forms the caveat
to the conclusion that the proposed European corporation statute has
failed. If the proposed statute were adopted by the Council today,
notwithstanding all of its faults and compromises, it still would
constitute a significant step toward the full harmonization of European
business laws and the full integration of European business operations.
The European Community today bears little resemblance to the
European Economic Community that was first created by the Treaty of Rome
in 1957. That first attempt at unification contained many reservations
and accepted many compromises. Even so, it was a beginning. Without
that first effort, the economic and social blending of the member states
that exists today could not have been achieved. It is probably true that
children and fools should not be allowed to see half-finished projects.
Perhaps the proposed European corporation statute should be judged not
only by what it is today, but also by what the EC hopes that it will be
2. Organizational Goals ...............................
1. Protection of Employees ...........................
2. Protection of Creditors and Shareholders ...........
3. Protection of Others ............................... III. Substantive Provisions of the 1991 Proposals ...............
1. Formation by Merger ..............................
2. Formation by Holding Company ...................
B. Formation of the SE ................................... 764 C. Cross-Border Combinations ............................ 765 D. Capital Structure ...................................... 766 E. Management and Worker Representation ............... 767 F. Operations and Accounts .............................. 768 G. Insolvency and Liquidation ............................ 769 H. Taxation .............................................. 769 Conclusion .................................................... 770
17. See infra text accompanying notes 21-37.
18. See infra text accompanying notes 38-101.
19. See infra text accompanying notes 102-398.
20. See infra text accompanying notes 399-440.
21. See 1970 Proposed Regulation , supra note 6.
22. See id.
23. Mr . Paul Storm, who assisted Professor Sanders in drafting the proposal that served as a basis for the 1970 Proposed Regulation, points out that laws mandating the representation of employees in the management of corporations had been introduced only in Germany, and that laws providing for the protection of minority shareholders and creditors of "groups of companies" (essentially a parent company and one or more wholly or partially owned subsidiaries) were new for every member state, although Germany had adopted such laws by 1970 . See Paul M. Storm, A New Impulse Towards a European Company, 26 Bus . Law. 1443 , 1446 , 1449 , 1452 ( 1971 ).
24. Internal Market and Industrial Cooperation - -Statute for the European Company-(Memorandum from the Commission to Parliament, the Council and the two sides of industry) , COM(88)320 final at 28-29 [hereinafter 1988 Memorandum].
25. See 1975 Proposed Regulation, 8 Bull . Eur. Comm. Supp . 4 /75 ( 1975 ) [hereinafter 1975 Proposed Regulation] .
26. See 1988 Memorandum, supra note 24, at 29.
27. See id. at 2.
28. See Proposal for a Council Regulation on the Statute for a European company, 1989 OJ. (C 263) 41 [hereinafter 1989 Proposed Regulation]. For the purpose of clarity and consistency, references in this Article to the current proposal will be made to the 1991 Proposed Regulation even where that proposal restates identical language contained in the 1989 Proposed Regulation; the 1989 Proposed Regulation will be referred to and cited only where it has been amended by the 1991 Proposed Regulation or when it is important to identify the origin of significant changes from earlier proposals .
29. See id
30. See Proposal for a Council Directive complementing the Statute for a European company with regard to the involvement of employees in the European company, 1989 O.J. (C 263 ) 69 [hereinafter 1989 Proposed Directive] .
31. See id
32. The Council is required to seek the opinion of the Economic and Social Committee before issuing directives that have as their object either the achievement of freedom of establishment or the establishment and functioning of the internal market . See Treaty of Rome, supra note 1 ,arts. 54 , 100A .
33. See Opinion on the proposal for a Council Regulation (EEC) on the statute for a European company, and on the proposal for a Council Directive complementing the statute for a European company with regard to the involvement of employees in the European company , 1990 O.J. (C 124) 34 , 35 - 37 [hereinafter Opinion of Committee].
34. 1987 OJ. (L 169) 1; see Treaty of Rome, supra note 1, art . 149 .
35. See1991 Proposed Regulation, supra note 7; 1991 Proposed Directive , supra note
36. See Treaty of Rome, supra note 1, art. 149 ( 2 ) (a). When a qualified majority vote is required, the votes of the member states are weighted based upon the number of votes that have been assigned to each member state. All of the votes of a member state must be cast as a bloc. For an act of the Council to be passed by a qualified majority vote, it must receive at least 54 out of a total of 76 weighted votes . In addition, the 54 votes must be comprised of the votes of at least eight member states if the matter being considered is not a proposal from the Commission . See Treaty of Rome, supra note 1 , art. 148 .
37. See id. art. 148 . For more extensive discussion of the legislative process in the EC, see George A . Bermann et al., Cases And Materials On European Community Law 79-90 ( 1993 ) [hereinafter European Community Law]; Hartley, supra note 5 , at 8-48.
38. Total exports from the 12 countries that now comprise the EC to the other member states rose from 12.9 billion ecus in 1958 to 688 billion ecus in 1991. Intra-EC trade represented 40.8% of the total international trade conducted by the member states in 1960 . By 1991, that figure had grown to 61.6%. See Eurostat, External Trade and Balance of Payments-Statistical Yearbook 4 ( 1992 ).
39. See Dominique Carreau & William L. Lee , Towards a European Company Law, 9 Nw . J. Int'l L . & Bus . 501 , 505 - 07 ( 1989 ).
40. The laws of the United Kingdom (except Scotland) and Ireland are based on the common law system. Scotland's legal system is a mixture of civil and common law principles. See I Doing Business In Europe (CCH) 45 - 030 [hereinafter CCH] (Ireland); 2 i. 1 89 - 040 (United Kingdom).
41. The laws of Belgium, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Spain, and Portugal are based on the civil law system . See Iid. 5-060 (Belgium); I id 1 24 - 080 (France); I id 31-070 (Germany); 1 id 41-060 (Greece); I id 50-020 (Italy); I id. 57-040 (Luxembourg); 1 id 1 64 - 040 (The Netherlands); 1 id 75 - 020 (Spain); 1 id 72 - 030 (Portugal).
42. Denmark 's laws are based on the Scandinavian legal system . See 1 id 17 - 060 .
43. England and Wales have a unified legal system, while Scotland and Northern Ireland have their own separate legal systems . The Companies Act of 1985 , which governs England and Wales, applies in Scotland, subject to certain variations that serve to accommodate the civil code base and other elements of Scottish law . In Northern Ireland, the Companies (Northern Ireland) Order 1986 applies, rather than the Companies Act of 1985. See 2 CCH, supra note 40 , 90 - 020 .
44. See infra part III.D.
45. See infra note 58 and accompanying text .
46. See Richard D. English, Company Law in the European Single Market , 1990 B.Y.U. L. Rev . 1413 , 1418 - 19 ( 1990 ).
47. The societe anonyme of France, Law No. 66-537 of 24 July 1966 , art. 72, citedin 1 CCH, supra note 40 , 7 24 - 920 , 24 - 960 ; the Aktiengesellschaft of Germany, Public Limited Company Act of 1965 , § 2, cited in I CCH , supra note 40, f1 32 - 070 , 32 - 090 ; the Societa per Azioni of Italy, cited in I CCH , supra note 40 , 1 50 - 570 , 50 - 600 ; and the public company of Great Britain, Companies Act of 1985, § 1, citedin 2 CCH, supra note 40 , 90 - 020 each provide limited liability for shareholders of publicly held corporations .
48. See . e.g., British Companies Act 1985 , § 24 ; Code Civil art. 2362 , translatedin Mario Beltramo et al., 2 The Italian Civil Code 88 ( 1991 ).
49. The directive requires the member states to adopt laws and regulations that allow a company to have "a sole member when it is formed and also when all of its shares come to be held by a single person." Twelfth Council Company Law Directive 89 /667 of 21 December 1989 on Single Member Private Limited-Liability Companies , art. 2 ( l ), at 41 , 1989 OJ. (L 395) 40 [hereinafter Twelfth Directive]. The member states were required to comply by January 1, 1992, with respect to the formation of new companies, and by January 1, 1993, with respect to existing companies . See id art. 8 ( 1 ), 8 ( 2 ), at 42.
65. See 1970 Proposed Regulation , supra note 6 , at 5-6.
66. Id . at 6-7.
67. See 1988 Memorandum, supra note 24, at 4, 29 . In 1985 , the Commission had previously urged the Council to adopt a European company statute. See Completing The Internal Market-White Paper From The Commission To The European Council , June 1985 , 1137 [hereinafter 1985 White Paper]. The White Paper was concerned primarily with the need for allowing companies to organize on a cross-border basis, and spent little time discussing the improvement of general cross-border operations . See id . 133 - 144 .
68. See 1988 Memorandum, supra note 24, at 5.
69. Id . at 3.
70. See id. at 9.
71. 1991 Proposed Regulation, supra note 7 , at 1.
72. See id at 3.
74. See id
75. Compare 1988 Memorandum, supra note 24, at 8-9, 10 , 21 (expressing concern about the taxation of capital gains resulting from mergers, the double taxation of dividends and cross-border transactions among related entities, and distortions caused by perceptions that tax systems are favorable or unfavorable) with 1991 Proposed Regulation, supranote 7, art . 133, at 67, and 1989 Proposed Regulation , supra note 28 , art. 133, at 67-68 ( allowing only the integration of losses from foreign permanent establishments) . See infra part II .E.
76. See infra parts III .F., III.G.I. The Fourth, Seventh, and Eighth Company Law Directives eliminate nearly all variations in member state laws on these topics . See Fourth Council Directive of 25 July 1978 , based on Article 54 ( 3)(g) of the Treaty on the annual accounts of certain types of companies, 1978 O.J. (L 222) 11 , 11 [hereinafter Fourth Company Law Directive]; Seventh Council Directive of 13 June 1983, based on the Article 54 ( 3)(g) of the Treaty on consolidated accounts , 1983 OJ. (L 193) 1 , 1 - 2 [hereinafter Seventh Company Law Directive]; Eighth Council Directive of 10 April 1984 , based on Article 54 ( 3)(g) of the Treaty on the approval of persons responsible for carrying out the statutory audits of accounting documents, 1984 O.J. (L 126) 20 , 20 [hereinafter Eighth Company Law Directive].
77. 1970 Proposed Regulation, supra note 6 , pmbl., at 7.
78. Id . The European Works Council, which is based on French and Italian systems of employee participation, is a committee of employees in EC scale businesses, that is charged with the responsibility of safeguarding the rights of employees. The committee must be informed and consulted on issues concerning (1) major changes in the business, and (2) conditions of employment. The creation of European Works Councils was finally formally proposed by the Commission in 1990. See Proposal for a Council Directive on the Establishment of a European Works Council in Community-scale Undertakings or Groups of Undertakings for the Purposes of Informing and Consulting Employees, 1991 O.J. (C 39 ) 10 .
79. 1970 Proposed Regulation, supra note 6 , pmbl., at 7.
80. See id.
81. See id. At the time, the 1970 proposal was made , only Belgium, France, Germany, Italy, Luxembourg, and The Netherlands were members of the EC . In addition, only the laws of Germany provided for worker participation in larger public companies . See generally Law on Works Organizations of 1952 & 1972, translated in Heinrich Beinhauer, German Works Council Act 1972 ( 1972 ) ; 1970 Regulation, supra note 6, pmbl ., at 173. Strong opposition to worker participation in the management of the European company has come from Great Britain and Ireland, which did not join the EC until 1973 . See CCH , supra note 40 , 1 40 - 424 , 40 - 663 , 40 - 664 .
82. See 1970 Proposed Regulation, supra note 6, pmbl ., at 87.
362. See 1991 Proposed Regulation , supra note 7 , art. 133 ( 1 ), 133 ( 2 ), at 67. This system already is used in The Netherlands and Germany . See Roger H.A. Muray , European Direct Tax Harmonization-Progressin 1990 , 31 Eur. Tax'n 74 , 84 ( 1991 ).
363. See Muray, supra note 362 , at 84. Although Muray discusses the 1990 Proposal Concerning Losses, supra note 361, rather than the 1991 Proposed Regulation, the basic concepts of the two proposals are the same with respect to the workings of the integration of losses system and the tax credit system as they apply to permanent establishments.
364. The Commission established a Committee, chaired by Onno Ruding, to assess the impact of different member state taxation policies on the functioning of the internal market in the EC . The Committee described the two systems as follows:
366. See Muray, supra note 362 , at 84. This system is currently used in the United Kingdom . See id. The relative merits from a tax and economic standpoint of the loss integration system (which is in essence a foreign profit exemption system), and the tax credit system, are discussed in detail in Fred C. deHosson , The Parent-SubsidiaryDirective, 10 Intertax 414 , 418 - 20 (Spec. ed. Oct. 1990 ). For a description of the actual workings of the loss integration and the tax credit systems, as they are established in the 1990 Proposal Concerning Losses, see Otmar Thommes, The New EC Commission'sproposals for directiveson cross-borderinvestments, 3 Intertax 158 ( 1991 ).
367. See 1970 Proposed Regulation , supra note 6 , arts. 278 - 281 , at 220- 23 ; 1975 Proposed Regulation, supra note 25 , arts. 278 - 281 , at 119-21.
368. Member states generally allow such offsets for losses from operations from foreign branches, but generally do not allow them for losses from foreign subsidiaries . See Ruding Report, supra note 364 , at 195.
369. See 1970 Proposed Regulation , supra note 6 , arts. 275 - 281 , at 215-23.
370. See 1991 Proposed Regulation , supra note 7 , art. 133 ( 1 ), 133 ( 4 ), at 67.
371. See 1990 Proposal Concerning Losses , supra note 361 , arts. 7 ( 1 ), 9 ( 1 ), at 15 , 16 . 2. 1 . 3.