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Incorporating under European Law: The Societas Europaea as a Vehicle for Legal Arbitrage

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Abstract

After a slow start, the European Company (Societas Europaea — SE) has become increasingly popular. Besides documenting the growth of this new company type, we examine whether firms choose to incorporate in the SE corporate form because they engage in ‘legal arbitrage’ by exploiting differences in legal rules between jurisdictions. We specify a number of hypotheses on particular legal arbitrage motives. To validate our hypotheses, we use a broad telephone survey among SE users in Germany as well as a simple country-level regression model based on a unique, hand-collected dataset on SE incorporations. We find strong evidence that firms use the SE to mitigate the effect of mandatory co-determination rules. Establishing a one-tier board structure (in jurisdictions that impose a two-tier structure on their national public companies) and taking advantage of the SE’s mobility for tax purposes also seem to be driving SE formations. By contrast, our analysis fails to support the suggestion that firms use the SE to shop for the most favourable national company law to fill the gaps in the SE Regulation.

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References

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  2. By transferring the registered office to another Member State, the SE can also be used to shop for the most favourable gap-filling company law, see infra our hypothesis H3.2 in section 3.

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  26. We define ‘incorporation costs’ as the expenses, delay, risk and loss in flexibility incurred for setting up a company. A minimum capital requirement imposes incorporation costs in the sense that it restricts the company’s flexibility. Of course, the amount of the minimum capital as such does not constitute a cost as it can be invested by the company.

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  28. In the case of Allianz SE it should be noted that the conversion was consummated as part of a major cross-border merger, which would always entail considerable transaction costs.

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  30. Of course, incorporation costs can be reduced by registering the SE in another (low-cost) Member State. However, this would require (re)locating the company’s head office in the state of incorporation, see SE Regulation, Arts. 7 and 64. Also, an existing company cannot be merged into an SE without the involvement (and hence the regulatory cost burden) of its home state, cf., SE Regulation, Art. 25. If the company is converted into an SE under SE Regulation, Arts. 2(4) and 37, it cannot, at the same instance, transfer its registered office to another Member State, SE Regulation, Art. 37(3). For all of these reasons, we only consider domestic SEs as an alternative to domestic national companies.

  31. Council Directive 2001/86/EC supplementing the Statute for a European company with regard to the involvement of employees.

  32. This follows from the SE Employee Involvement Directive, Art. 13(2), which precludes the general Member State rules on employee representation at board level.

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  34. Furthermore, companies using the legal form of the SE should tend to have less stringent co-determination rules than comparable national corporations.

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  36. The home state can prevent its companies from shifting their head office abroad, see ECJ, Case C-210/06 Cartesio Oktató és Szolgáltató bt [2008].

  37. Cf., Art. 4(3) of the OECD Model Convention with Respect to Taxes on Income and Capital (as it reads on 15 July 2005).

  38. For instance, German companies still run a considerable risk of forced dissolution when shifting their head offices abroad. The issue is being addressed by § 4a GmbHG, § 5a AktG as amended by the 2008 Act to Modernise Private Company Law and to Combat Abuses (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen — MoMiG). On the European level, Art. 3(1), sentence 2 of Council Regulation (EC) No. 1346/2000 on insolvency proceedings establishes a presumption that the centre of a (company) debtor’s main interests coincides with its registered office.

  39. See Bratton, McCahery and Vermeulen, supra n. 4, at p. 15; Enriques, supra n. 3, at p. 79.

  40. Cf., the general reference in SE Regulation, Art. 9(1)(c)(ii).

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  43. An up-to-date overview of SEs is maintained by the European Trade Union Institute and the Hans Böckler Foundation, see supra n. 24.

  44. See Bayer and Schmidt, supra n. 23, at p. R31.

  45. The recent Commission proposal for a Council Regulation on the Statute for a European Private Company provides for such a requirement, see COM (2008) 396 final, Art. 46(1).

  46. The sample represents 74 percent of active (i. e., non-shelf.) SEs in Germany.

  47. We define a ‘shelf company’ as a company which is to be sold to a firm or entrepreneur and which does not yet carry out any business activity. Companies that are used as a vehicle for holding assets, such as investment companies, are considered ‘active’, not ‘shelf.’ companies.

  48. This is in line with the reasoning behind our Hypothesis 3.1 that firms choose the SE corporate form with a view to moving to another Member State later on.

  49. The OECD defines a firm (‘enterprise’) as ‘a legal entity possessing the right to conduct business on its own; for example to enter into contracts, own property, incur liabilities for debts, and establish bank accounts. It may consist of one or more local units or establishments corresponding to production units situated in a geographically separate place and in which one or more persons work for the enterprise to which they belong.’

  50. As the first incorporations occurred already in the year 2004 and the year 2008 has not ended yet, we tried different intervals without obtaining a significant impact on the results.

  51. World Bank, Doing Business (Washington, July 2008), available at http://www.doingbusiness.org.

  52. For the definition of the ‘standardised company’ see Djankov, et al., supra n. 27, at p. 7. The minimum capital requirement was included as one of several proxies for the regulatory burden. The SE uniformly requires a minimum capital of €120,000 (SE Regulation, Art. 4(2)).

  53. N. Kluge and M. Stollt, The European Company — Prospects for Worker Board-Level Participation in the Enlarged EU (Brussels, February 2006), available at http://www.seeurope-network.org, at pp. 64–65.

  54. European Commission, Directorate General Taxation and Customs Union, Structures of the Taxation Systems in the European Union (Brussels, 2006).

  55. KPMG International, KPMG’s Corporate and Indirect Tax Rate Survey 2008 (October 2006).

  56. See Kluge and Stollt, supra n. 53, at pp. 64–65.

  57. See http://www.eurospolecnosti.cz, http://www.czechcompanies.cz/en and http://www.smartcompanies.cz.

  58. Two of the European Companies moved to Luxembourg only to reincorporate from there to the Cayman Islands, thus providing ‘smoking gun’ evidence of legal arbitrage. See on these cases, J. Heuschmid and C. Schmidt, ‘Die europäische Aktiengesellschaft — auf dem Weg in die Karibik? Eine rechtliche Würdigung der Sitzverlagerungen europäischer Aktiengesellschaften von Luxemburg auf die Cayman Islands’, 2 Neue Zeitschrift für Gesellschaftsrecht (2007) p. 54, and J. Schmidt, ‘“Offshore in drei Zügen” — Die Europäische Aktiengesellschaft (SE) als “Fähre” auf die Cayman Islands’, 41 Der Betrieb (2005) p. 2221.

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  59. Small enterprises are defined as having up to 9 employees and less than €1 million annual turnover, while medium-sized enterprises have 10 to 499 employees and €1 to 50 million annual turnover. See Definition 01/01/2002 at http://www.ifm-bonn.org/index.php?id=89 (last visited 15 October 2008).

  60. Cf., SE Regulation, Art. 2. An exception is provided for in Art. 3(2), under which an existing European Company can set up subsidiary SEs.

  61. One fairly well-known example is Adi Drotleff, who is both the CEO and controlling shareholder of the IT company Mensch und Maschine SE.

  62. Some European Companies in the United Kingdom have a supervisory board but only because they retained the two-tier structure after having moved to the United Kingdom. In no case did a European Company actively seek a two-tier board structure in a jurisdiction adhering exclusively to the one-tier structure.

  63. See also Keller and Werner, Arbeitnehmerbeteiligung, supra n. 25, at pp. 610–611.

  64. As compared to the size prescribed by the default rule of SE Employee Involvement Directive, Annex, Part 1, lit. e. the Representative Body is the SE equivalent of the European Works Council established by Council Directive 94/45/EC, cf., SE Employee Involvement Directive, Art. 13(1).

  65. For details, see M. Rehberg, ‘Chancen und Risiken der Verhandlungen über die Arbeitnehmerbeteiligung’, in V. Rieble and A. Junker, eds., Vereinbarte Mitbestimmung in der SE (Munich, ZAAR Verlag 2008) p. 45, at p. 56.

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  66. Since the unobserved fraction of German SEs consists most likely of investment or shelf companies, we would rather expect to underestimate the importance of tax motives.

  67. We took the natural logarithms of the dependent variable rrse (number of SEs divided by total number of firms) and the two explanatory variables (gdp0508 and corptax), which are measured at the interval level, as this improved the distribution of these variables and helped us to deal with outliers. Since the sample size is already rather small and we are dealing with almost the entire population, we decided to take the data as it is and did not drop the two outliers Germany and the Czech Republic. If a country does not have a single SE, we cannot take the natural logarithm of zero. Instead, we insert a very small number (10-14). Choosing a number closer to the range of positive values of rrse (e. g., 10-8) does not affect the statistical significance of our results whereas an even smaller number would have worsened the distribution of the data. Because all country values of rrse are close to zero, their natural logarithm is negative. For this reason, the constant is not positive and should not receive an economic interpretation.

  68. When interpreting these results, one should keep in mind that we scale our dependent variable (the number of SEs) by the total number of firms. This control should already capture the impact of a country’s incorporation costs on firms generally.

  69. The idea behind the Eurobarometer variables is that the European image of the SE should be more attractive when public opinion is generally in favour of European integration.

  70. We use robust standard errors to account for residual heteroscedasticity.

  71. Supra n. 45.

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Authors and Affiliations

  1. Department of Economics, University of Munich, Germany

    Horst Eidenmüller LL.M. (Research Professorship),  Andreas Engert LL.M. (Lecturer) & Lars Hornuf M.A. (Ph.D. student)

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  1. Horst Eidenmüller LL.M.
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  2. Andreas Engert LL.M.
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  3. Lars Hornuf M.A.
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Correspondence to Horst Eidenmüller LL.M..

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We would like to thank the 26 interview participants without whom this project would not have been possible. Furthermore, we are indebted to John Armour, Matthias Dischinger, Andreas Haufler, Tobias Tröger, Joachim Winter, Klaus Wohlrabe and participants in the Public Economics Seminar at the University of Munich, the Conference on Changing Perspectives on Corporate Law and Economics at the Erasmus University Rotterdam and the Conference on New Developments in Law and Economics at the University of Innsbruck

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Eidenmüller, H., Engert, A. & Hornuf, L. Incorporating under European Law: The Societas Europaea as a Vehicle for Legal Arbitrage. Eur Bus Org Law Rev 10, 1–33 (2009). https://doi.org/10.1017/S1566752909000019

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