WERLAUFF. EU Company Law. DJØF Publishing. Common business law of 28 states. 2nd edition

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1 WERLAUFF EU Company Law Common business law of 28 states 2nd edition DJØF Publishing

2 EU Company Law Common business law of 28 states EU Company Law provides an account of a wide range of subjects of extreme importance to European businesses. Among the subjects treated are: The company's right to operate in other countries on an equal footing with domestic enterprises. Federal company organisational forms: The economic interesting grouping and the SE company. Tax-free structural changes across borders. Formation and capital injection. Dividend and other capital outflows. General meetings, board of directors and management, including the issue of single-tier or two-tier company management. Subscription and representation rules. Liability in damages. Group relationships, including across borders. Employees and their position in regard to outsourcing. The annual report. Merger between companies of the same or different nationalities. Merger control. Division and business transfer. Voluntary and compulsory dissolution. Reconstruction. The topics are treated in the book on a common European basis. It will make history when, in future, the company law of 28 European states will be modelled on the same basic rules: 15 old EU states, three EEAstates, and up to 10 new EU states. The author, professor Erik Werlauff, LLD, (born in 1952), was trained at the Department of Justice and as a practising lawyer with licence to appear before the Danish Supreme Court. He undertakes research and lectures in commercial law at the Aalborg University and has published a wide range of articles and books on company law, EU law, stock exchange and capital market law, financing law, and procedural law. ISBN

3 Erik Werlauff EU-Company Law Common business law of 28 states 2nd edition Translated by Hanne Grøn DJØF Publishing 2003

4 EU-Company Law 2nd edition 2003 by DJØF Publishing Copenhagen DJØF Publishing is a company of the Association of Danish Lawyers and Economists All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system, or transmitted in any form og by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher. Cover Design: Morten Højmark Print: Narayana Press, Gylling Printed in Denmark 2003 ISBN E-bog Published and translated with support from Konsul George Jorck and Hustru Emma Jorck Aalborg University Departement of Business Studies DJØF Publishing 17, Lyngbyvej P.O.Box 2702 DK-2100 Copenhagen Denmark Phone: Fax: fl@djoef.dk Homepage:

5 Content Introductions... XIV Abbreviations... XVII Chapter 1. Legal Personality And Cross-border Mobility of Companies Determining the concept of legal person A community law definition of legal personality Company nationality determination and -change; international choice of law Company law consequences of the EU requirement of equal treatment irrespective of nationality Companies Shareholders and other company participants Board and management members Capital movements, e.g. in-group Summary: The EU law objective of company law organisational freedom of choice v the states pursuit of control, security against evasion etc Liability and lifting the veil of incorporation Loyalty duty towards the interests of the legal person Chapter 2. The Legal Development Treaty law basis Secondary legislation as an instrument of legal development Overview of provisions and proposals Main features of the substance of the rules and drafts The Disclosure Directive V

6 The Capital Directive The Merger Directive The Annual Accounts Directive The Draft Structural Directive The Directive on Division of companies The Directive on consolidated accounts The Auditor Directive The Draft Group Directive The Draft Directive on International Merger The Branch Directive The Single-Member Company Directive The Draft Take-Over Directive Draft Directive on international transfer of registered office The Draft Liquidation Directive The Regulation on Economic Interest Groupings The Merger Control Regulation Regulation on the European Limited Liability Company: The SE Company Draft Regulation on the European Private Company Draft Regulation on the European Co-operative Society Perspectives Chapter 3. Company types The distinction between personal and capital companies Sole proprietorships/sole trader enterprises Single-member companies Partnerships, including economic interest groupings The European Company, SE The need for a common European company Aims still to be achieved What could more be achieved as per 8 October The hierarchy of the sources of law Legal personality, liability limitation and capital requirements VI

7 The SE s equal position with ordinary public limited liability companies Registration, disclosure, commencement of business and promoters liability The four methods of formation The SE company organs Registered office and transfer Employees The European Co-operative Society The European private company Chapter 4. Company Taxation, Capital Injection Levy, and Stock Exchange Turnover Levy The importance of the equal treatment requirement in company taxation The legal basis for EU law provisions on company tax Becoming a group: Tax free merger and takeover Being a group: The group as a tax unit Capital injection duties and bans against other charges on capital injection Chapter 5. Company and Enterprise: From Entity Law to Enterprise Law Enterprise law and Company law The Treaty and the enterprises Secondary Community law and the enterprises From personally owned to company owned enterprise The enterprise in a company framework The internal relations of the enterprise The external relations of the enterprise A group in a Community law sense From entity law to enterprise law Summarising characteristics of the concept of enterprise in Community law VII

8 Chapter 6. Formation of companies Formation procedure and instruments Non-cash contributions The lack of legal capacity of the company Payments and ban against discounts Registration and publication of the formation Establishment of branches in other EU and EEA states Chapter 7. Injection of capital to the company General on loan capital Loans with a conversion or subscription right Authorised capital Power to decide capital increase Capital increase upon general meeting resolution Non-cash contributions The pre-emption right of the shareholders Duty of payment-up and time limit for subscribed company capital Intermediate forms of loan capital and equity: subordinated loan capital Chapter 8. Capital outflow The power to decide dividend payments Amount at the disposal for dividend Is account dividend payment allowed? Publication of proposed dividend in respect of the accounting year passed Non-distributable reserves Repayment of unlawful payments The company s subscription for, purchase of, loantaking on or financing of its own shares Loan, security or guarantee to the benefit of company shareholders or members of management or supervisory body Disguised dividend VIII

9 8.10. Capital reduction (with payment to the shareholders), amortisation, redemption or re-purchase of shares Companies operating at a loss the company s duty to react, capital reduction without payment to the shareholders Chapter 9. Securities issued by the company Legal basis and security concept Share certificates Securities without nominal value Securities carrying special rights Stock exchange listing of shares Public offers of securities without stock exchange listing Stock exchange law requirements governing securities Chapter 10. The internal regulation of the company Articles of association and memorandum of association Rules of procedure or instructions for bodies of management or supervision Employment contracts Shareholder agreements Chapter 11. The powers of the company bodies Power distribution in general General meeting powers in relation to the rest of the company bodies Meetings of debenture owners The influence of the general meeting and others on the composition of the bodies of management and supervision The mutual delimitation of competence of the bodies of management and supervision Applicable law Proposed law (the Structural Directive) IX

10 Chapter 12. The general meeting Competence Ordinary/extraordinary Convening Right to attend, proxies The shareholders decision basis The binding character of the agenda, list of participants Voting right Ordinary rules Share classes of differing voting rights Voting limitations (voting ceilings) Incapacity Majority rules Minutes Invalidation of decisions General meeting in cyberspace? Chapter 13. Board and management internally: Election, decisions etc Election and removal Executive management and supervision Information and disclosure of documents Remuneration, side-jobs Decisions of particular scope Incapacity Equality between the members of the individual boards Duty of loyalty and secrecy Majority, quorum, absence Outsourcing of management functions: management contracts Chapter 14. Board and management externally: Representation, liability etc The power to bind the company The liability of the body members Insider dealing X

11 Chapter 15. Company and shareholder: Takeover, groups etc List of shareholders (register of shareholders) Public access to know the identity of major shareholders in the company The company s duty to treat the shareholders equally Majority take-over via a bid to the company s shareholders Group relationships and issues Introduction Judge-made group law A Community law group definition Directive-made group law A wider perspective Chapter 16. Company and employee European Works Councils Company and Group representation: Actual co-decision power Employee shares, etc Business transfer, outsourcing and tender invitations Company insolvency: Securing employee pay Chapter 17. The company and the authorities National authorities Community law authorities Chapter 18. Accounts and Audit Annual Accounts General Balance sheet Profit and loss account Notes Annual report Publication Six-Months reports in listed companies XI

12 18.3. Consolidated accounts The group concept Exclusion of individual undertakings Contents of consolidated accounts Audit, auditors and audit committees Annual accounts and tax accounts: Tax governed annual accounts (Massgeblichkeit) The future European accounts: value-based accounts Environmental issues and environmental accounts Social accounts Chapter 19. Merger and Division The Merger Concept Merger between companies in the same state Merger between companies in different states Division Community law merger control The background of the merger control rules Result: A regulation on merger control Four basic principles Amounts (threshold values) The wide-reaching group concept of the regulation Undertakings of registered (group) offices outside the EU also comprised The wide-reaching merger concept of the Regulation Establishment of collective dominance (oligopoly) is also comprised Establishment of common holding company also comprised Reference from and to the Commission (German clause, Dutch clause) Notification to the Commission Is the merger compatible with the common market? The merger is not to be carried out pending the deliberation of the case XII

13 Considerations included in the Commission s evaluation Flat refusal or approval on certain terms? The contents of terms and their enforcement Judicial review of the Commission s decisions No access to sue for minority shareholders Chapter 20. Voluntary dissolution: Liquidation Liquidation concept and the need for regulation Liquidation decision Liquidators The liquidation procedure Chapter 21. Mandatory dissolution: Bankruptcy, etc Mandatory dissolution in company law Bankruptcy etc International insolvency law Reconstruction Lateral insolvency and company law measures A Newco holding solution A Newco-subsidiary solution A Newco-sister solution Common requirements in respect of Newco solutions: arms length terms XIII

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15 Introduction It will make history when, in the future, the company law of 28 states will be founded on the same basic principles in that the central rules of the EU company law will be binding on not only the old 15 EU states, but also the three EEA states and the 10 new EU Member States to be. The company law of these many states is not uniform nor is it required to be so but all the main company rules will, or shall, be reflected in the company law of each individual state. Add to this the importance to company law of the basic freedom rights in the EU Treaty, i.e. the right of establishment, the right to provide services, the free movement of labour, etc. These basic rights which derive from primary EU law are very important to the mobility of all companies. Further, the advent of common European company types in the form of the European Economic Interest grouping and from 8 October 2004 the European Company will change the European company law scenario for ever. In the old days European law accounts of company law necessarily had to be comparative. The accounts would show a lot of features which were common from state to state but basically the emphasis was on the differences in the company law of the states. Now the emphasis will be on the common, cross-border features of company law and this is the main aim of the present account of the EU company law. The book will focus on the cross- border mobility of companies in the form of access to establish themselves in other states and the requirement of equal treatment of foreign and domestic companies. Secondly, various company types are treated, including the cross-border partnership: the European Economic Interest Grouping, and, from 8 October 2004, the common European company: the SE. Subsequently, the common European tax rules securing the access to cross-border mobility via take-over and merger without releasing of tax, and the access to cross-border groupinternal merger of reserves in the form of dividend, likewise without tax release. Having focused on the EU law enterprise concept in contrast to the company law concept the book goes on to describe the events which will or may occur in a company s lifetime: Its formation, infusion of capital, XV

16 loss of capital, its issue of securities, the set of rules of the individual company in the form of articles and formation document, the company bodies and shareholders, mutual competence, external and internal relations of board and management, the general meeting, equal treatment of shareholders, including on a majority take-over, employees rights on transfer of an enterprise from one company to another and on outsourcing of services from company to company, annual report and consolidated accounts, merger, division, merger control liquidation, bankruptcy and reconstruction. All of which is treated from a common European point of view which may seem a bold but not impossible venture. I have endeavoured to ensure that the book does not provide the reader with a barren enumeration of existing and proposed EU provisions but really presents a comprehensive account of the law as it stands. Further the case law of the EC Court, the practice of the European Commission and of the courts of the individual states, especially German courts, is integrated naturally in the account which also goes for the common European legal literature. Aalborg University, October Erik Werlauff XVI

17 Abbreviations AktG BGB BGH BverfG CA CELEX CMLRev Código civil DB EBLR EC ECR ECHR EEA EEC EEIG EFTA EHRC ELR ERT ET EU EuZW H J ICCLJ L NJW NTS (German) Aktiengesetz (German) Bürgerliches Gesetzbuch (German) Bundesgerichtshof (German) Bundesverfassungsgericht (Danish) Companies Act Data base of legal acts (communitatis europae lex) Common Market Law Review (Spanish) civil code Der Betrieb European Business Law Review European Community Compilation of ECJ decisions European Court of Human Rights European Economic Area European Economic Community European Economic Interest Grouping European Free Trade Area European Human Rights Convention European Law Review (Swedish) Europarättslig Tidskrift European Taxation European Union Europäische Zeitschrift für Wirtschaftsrecht (Danish) Supreme court judgment or order (Danish) Juristen (law periodical) International and Comparative Corporate Law Journal (in OJ context) section L (legislatio) (German) Neue Juristische Wochenschrift Nordisk Tidsskrift for Selskabsret (Nordic company law periodical) XVII

18 OECD OJ OLG PCA Rabels R & R SvJT TfR TfS UfR V ZGR ZIP Ø Organisation for Economic Cooperation and Development Official Journal of the European Communities (German) Oberlandesgericht (Danish) Private Companies Act Rabels Zeitschrift für ausländisches und internationales Privatrecht (Danish) Revision og Regnskabsvæsen (accountants monthly magazine) (Swedish) Svensk Juristtidning (Nordic) Tidsskrift for Rettsvitenskap (original language versions of decisions) (Danish) Tidsskrift for skatter og afgifter (tax and duties journal) (Danish) Ugeskrift for Retsvæsen (weekly law reports) (Danish) High court decision (V signifies Western Division ) Zeitschrift für Gesellschafts- und Unternehmensrecht Zeitschrift für Wirtschaftsrecht (Danish) High court decision (Ø signifies Eastern Division ) XVIII

19 CHAPTER 1 Legal Personality And Cross-border Mobility of Companies 1.1. Determining the concept of legal person In the following, legal personality is deemed to exist when property is separated from its owner/s in such manner that it has acquired its own legal capacity, capacity to make contracts and accomplish other legal acts ( contractual capacity ), capacity to be a party in legal proceedings in its own right, and procedural capacity. Legal capacity may be defined as the power to hold rights and become liable to duties in one s own name without such right or duty lying with the owners of the property involved. Capacity to make contracts ( contractual capacity ) is the power to use one s legal capacity in external dispositions aimed at such purpose. Since the legal person cannot write letters or speak its mind the acts undertaken must necessarily be through the agency of its organs or a certain amount of these. The organs are not the agents, properly speaking, of the legal person since one prerequisite of such agency is that the principal might have elected to perform the acts in question himself. The legal person does not have such choice. It is forced to act through its organs and can only express itself through such channel (or via an agent appointed by one of the organs) in the same way as a person of minority status has to express his mind through his guardian in e.g. contract law matters. The capacity to be a party is the capacity to sue or be sued in legal proceedings before a court of law or arbitration court. The party in the case is the legal person and not the owners behind it, if any. Likewise, the judgment creditor or debtor is the legal person, not its owner. A judgment against the legal person is not a judgment against its owners. The procedural capacity is the power to dispose of one s party capacity. Thus, proce- 1

20 Legal Personality and Cross-border Mobility of Companies dural capacity is the procedural equivalent to the capacity to act in civil law, in the same way as capacity to act relates to party capacity, procedural capacity relates to party capacity. Hence, what was said above relating to the organ dispositions on behalf of the legal person is also true in a procedural context. It is no mandatory requirement for legal personality that the owners are not liable for its debts. Although it was established above that such debts lie with the legal person and not with the owners this starting point does not prevent that the legal system a) endows such organisation for which the participants are liable with a legal personality, or conversely, b) allows the owners liability to be limited to the property without endowing the latter with a legal personality of its own. One example of the a) category is the Regulation on European Economic Interest Groupings which allows each state to determine whether or not the grouping of undertakings is to rank as a legal person, cf. Art 1(3), whereas the requirement of the unlimited, joint and several liability for the grouping s debts is an absolute one, cf. Art 24(1). One example of b) is the Directive on Single-Member private limited liability companies which provides in Art 7 that states which do not recognise single entrepreneurs in company form shall recognise the concept of single member undertakings with limited liability A community law definition of legal personality The 1 st Company Directive contained provisions on the legal person s external acts and dealt with the issue when a legal person may exceptionally be declared invalid and thereby annulled but it failed, somewhat unaccountably, to define the concept of legal person. Therefore we must address the Regulation on Economic Interest Groupings which deals with a personal company type and not a capital company, to find a definition in Community law of the concept. In Art 1(2) it is established that the grouping of undertakings from the date of registration will acquire the capacity in its own name to have rights and obligations of all kinds (i.e. legal capacity), to make contracts or accomplish other legal acts (i.e. the contractual capacity), and to sue and be sued (i.e. the capacity to be a party in legal proceedings). Combining these statements with Art 20 which provides that only the manager/s may represent the grouping in respect of dealings with third parties we have achieved an adequate 2

21 Company nationality dertermination... Community law definition of the legal capacity, contractual capacity, the capacity to be a party in legal proceedings, and the procedural capacity which are all inherent in the legal personality concept. That this Community law definition requires priority over an individual state s possibly deviating concepts is evident from Art 2(1) in the Regulation on groupings, which although leaving the construction of memorandum and articles etc. to the domicil state excludes from such renvoi matters relating to natural persons status and capacity (legal capacity), and capacity to contract or accomplish other legal acts as well as a legal person s status and (contractual) capacity Company nationality determination and -change; international choice of law The EC Treaty contains no sanction, whether by directive or regulation, for imposing on the Member States a duty to recognise personal or capital companies from the other Member States in a company law context (whereas the rules on establishment, which are discussed below, require the Member States to recognise the freedom of establishment of commercial legal persons to the same extent as natural person freedom of establishment). On the other hand the Member States are under a duty to negotiate an agreement on several important issues, including mutual recognition of the companies mentioned in Art 48(2) (formerly Art 58), cf. Art 293, third dash? (formerly Art 220). On this basis an agreement on mutual recognition of companies and legal persons was made as early as Since that Treaty cannot take force until it has been ratified by all EU states, cf. Art. 14, and since one Member State has declined such ratification it is not yet applicable law in the Member States. Nor is it likely to be. Hence it would seem that the individual state s own private international rules will determine nationality of a company. Would seem is used because this area is also governed by Community law which provides that the nationality determination of a company obtained by such application of private international law must not result in a failure to recognise the legal personality status of lawfully established companies from other EU or EEA countries and thereby provide the means to deny them access to establish themselves, cf. below. This presents a problem especially in 3