European private companies seek to incorporate under EU law as EPCs
Three and a half years after adopting a statute allowing publicly listed companies to incorporate at the European level, the European Union is gearing up to do it again – this time for privately held small- and mid-sized enterprises (SMEs).
The European private company (EPC) — or società privata Europea (SPE) in the Latin variant used in Brussels — is expected to appear as a formal proposal before the European Commission in late June and before the European Parliament in July.
The statute would allow SMEs to reconstitute themselves as EPCs, incorporating under EU law rather than any particular national laws.
This means that an EPC and any subsidiaries it establishes in other EU states could use the same legal structure and administrative procedures for all its entities. According to advocates, this would save the average SME €15,000 to €30,000 ($24,000 to $47,000) per year on the legal, notarial and administrative costs of forming and operating cross-border subsidiaries.
A veritable chorus of business groups is backing this proposal, including BusinessEurope, the employers’ group; Union Européenne de l’Artisanat et des Petites et Moyennes Entreprises (UEAPME), the association of craft firms and SMEs; and Eurochambres, representing Europe’s national chambers of commerce.
These groups point out that, while no impediments to conducting business across borders within the European single market officially exist, differing legal and administrative rules act as hidden barriers that tend to keep SMEs focused on their home markets.
Because SMEs make up 90 percent of the business base in the EU, the business groups maintain that it’s high time they were given a tool they could use to ‘go international’ within Europe. ‘The EPC gives companies the option of acquiring an EU label, which offers them another dimension and a strength in the market,’ says Marta Alegrias, a legal adviser to BusinessEurope.
Strangely absent from the chorus are individual SMEs. Although the European Commission received 75 replies to a 2007 questionnaire on the need for this statute, only a handful came from individual companies, and of those, only one firm stepped forward to testify at a March hearing.
Schunk, a mid-sized German machine-tools manufacturer, was that firm. ‘We need a flexible European legal form of company that is tailored to our needs and that allows us to sail under a European flag,’ Kristina Schunk, a lawyer for the family-owned company, told the hearing.
Resounding silence
The legislative drive for the EPC comes against a backdrop of the relatively recent introduction of a European-level corporate statute for large listed companies. This legal form is known as the SE (for societas Europaea), or European company.
The EU adopted the SE statute in late 2004, after a 40-year legislative marathon. Policy-makers initially were encouraged when a few giants – including German insurer Allianz and Austrian road-builder Bauholding Strabag – morphed into SEs.
But corporate Europe has predominantly greeted the SE with a resounding silence. According to the European Trade Union Confederation (ETUC), only about 120 SEs have been formed, and 70 to 80 percent of those are shell companies with no employees.
‘There is some doubt about what the SE statute achieved, or whether it was necessary,’ says Reiner Hoffmann, deputy general secretary of the ETUC. ‘I have no doubt that it would be useful for some companies to reestablish themselves under European company law, but that has not been a priority in the past.’
A half measure
The basic problem of both the SE and the EPC is that they leave in place existing national laws governing labor relations, environmental protection, taxes and nearly everything else except a company’s legal form and governance structure. The EPC also will not eliminate that most difficult of cross-border barriers: the cultural and language differences that complicate communications within the single market.
This general complexity would remain, but that is not a substantial enough reason to hold the EPC back, its advocates say. ‘If the EPC project were first to tackle tax simplification, for example, it would never get off the ground,’ remarks Vincent Tilman, a Eurochambres policy director.
Nor should the diversity of national worker rights laws deter SMEs from becoming EPCs and operating EU-wide, EPC backers say. Various countries have rules requiring worker participation at the board level depending on the number of workers the company employs. These range from as few as 25 in Sweden up to 500 in Germany and 1,000 in Luxembourg. However, SME subsidiaries are likely to have only a few employees, falling short of even the low thresholds in labor-friendly regimes.
On the plus side for the EPC, advocates maintain, is the fact that more and more SMEs are operating across borders within the EU and finding that a cross-border legal presence would be useful. The addition of Eastern European member states, where administrative procedures are unfamiliar to Western Europeans, has added momentum.
‘Finland is more on the eastern side of the EU, and for our companies in particular there is sometimes interest in establishing a presence in Estonia and other Baltic states,’ says Leena Linnainmaa, director of legal affairs of the Central Chamber of Commerce of Finland. ‘A uniform legal structure would help.’
The corporate silence that greeted the SE in Europe is less likely to greet the EPC, she adds. ‘For a large company to change its form is a huge decision, with major tax implications and often employee participation issues as well. For a small privately owned company it is less complex. I won’t say that there will be 500,000 EPCs, but I would be surprised if the number of EPCs were as small as the number of SEs.’
In Finland alone, there are at least several hundred privately owned firms that operate internationally and have the resources to become EPCs, Linnainmaa says. If and when they do so depends on individual circumstances and strategies.
Identity shopping
An important implication of the proposed EPC statute is that firms adopting this form could move their domiciles across EU borders more easily, because by definition their legal structures would be uniform throughout the region. This change would make it simpler to migrate to a business-friendly regulatory environment.
Business groups hope to make this mobility a formal part of the statute. ‘Instruments that envisage a real degree of corporate mobility in the EU are of key importance,’ states BusinessEurope in a position paper.
Meanwhile, recent European Court of Justice rulings have facilitated cross-border transfers of domicile. The EU’s cross-border merger directive, which came into play last December, does the same. With their uniform EU-wide structures, EPCs would be especially well positioned to take advantage of these developments to move their domiciles across national borders, where they would have greater access to more beneficial legal or cultural regimes.
Individual firms, however, bristle at any suggestion that an EPC or an SE would be used as a tool for forum shopping. For example, Allianz stated emphatically when adopting the SE structure that it intends to keep its domicile in Germany, and it has done so.
Schunk, similarly, has no plans to move. ‘Our legal corporate presence in Germany is very important to us,’ says Schunk. ‘We have roots here. Mittelstand [small- and mid-sized, usually family-owned] companies in general are not inclined to look for such clever tricks; we are in it for the long term.’
