OJ 28 L199/1. Some researchers believe this form is not a compromise but an alternative and define it as a supranational “trans-European institution” produced through “interbreeding” of a small company, a partnership (unlimited joint and several liability of participants, lack of a legal status), a non-commercial partnership, a cooperative, an association of legal persons (limited legal capacity, i.e. ability to carry out only activities directly related to the participants’ activities. Consequently, EEIG does not fall into the area of company law regulation but is of interest as the first experience of creating a supra-national legal institution at the micro-level.
Policy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK grouping’s debts. In accordance with the national law of Germany and Italy, for example, an EEIG can not be a legal entity.
The Regulation left unresolved a range of important issues, such as internal structure of the governing bodies, legal capacity, bankruptcy, implications of unlimited joint and several liability, etc. These gaps should be filled up with national rules which means, that in spite of the Regulation being a direct-action document serious differences remain between EEIGs formed across the EU Member States.
The French legal institution functioning since 1967 and bearing the same name served as a model for the “grouping” (see. Jamin, Lacour, 1993). “Economic interest groupings” existing under the commercial law of France make it possible even for competing enterprises to save considerable resources (through joint purchase of raw materials or R&D). However, they much less often make direct profits. According to some estimates the introduction of the provision on simple-type public companies (1992) into the French legislation should result into a considerable reduction in the number of the groupings.
In 1991 the EU Commission made public a proposal on developing the Regulation and the Directive that together are known as European Company Statute - ECS. The adoption of the documents was supposed to open the way to establishing a business which is partially subject to the European law (in accordance with the Articles of association) as and partially – to the law of a Member State where it will have its registered office. Thus, new opportunities will be open for businesses although the proposal requires neither all the companies to become “European” nor national corporate laws to be amended. Therefore, a business is given a chance of becoming a “European company” from the outset.
Only in 2001 the documents: Council Regulation 2001/2157/EC of 8 October 2001 on the Statute for a European Company (SE) and Council Directive 2001/86/EC on amending the Statute for a European Company to take into account employee involvement were adopted.36 The documents shall come into force simultaneously in three years from the date of their formal adoption.
Procedural problems (the necessity to have a Council Regulation to be adopted by all the EU Member States by consensus) were cited as the official explanation for almost a 30-year-long delay in adopting the documents. Reaching a compromise on employee involvement is named as an important component of finding a common approach. Member States with strong employee involvement traditions are concerned with a possibility of a European company to be used to bypass the national rules on employee involvement. Conversely, Member States having no such traditions feared that a European company would be used to impose on them additional requirements concerning employee involvement.
The Statute for a European Company is officially interpreted as a new legal instrument based on the EU law and permitting the creation of a European public limited liability company (“Societas Europeae” – SE - in Latin). The Regulation is directly applicable in all the Member States while the Directive shall be implemented within the framework of national law.
SE can be created within the EU territory in the form of a European public limited liability company. Four ways of forming a European public limited liability company are envisaged:
- public limited-liability companies may form an SE by means of a merger provided that at least two of them are governed by the law of different Member States;
OJ 1991 C176/1 and COM (91) 174.
OJ 2001 L294/1 and OJ 2001 294/Policy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK - public and private limited liability companies may promote the formation of a holding SE provided that each of at least two of them is governed by the law of a different Member State;
- companies and firms may form a subsidiary SE by subscribing for its shares provided that at least two of them are governed by the law of different Member States;
- a public limited-liability company may be transformed into an SE provided it has for at least two years had branch situated in another Member State.
An SE may be formed as a public or as a private medium-sized company. The subscribed capital of an SE should be not less than 120 000 euros. If an SE’s shares are traded, the process should be under the regulation applicable to public companies created in accordance with the national legislation. The Statute prescribes no restrictions concerning the type of commercial activities of such a company and the number of its employees.
This legal institution offers the following advantages:
- companies created in more than one Member State can merge and operate on the basis of a single set of rules, single legal structure, unified management and financial reporting structure;
- the necessity to create a costly (in terms of finance, administrative and legal effort) network of subsidiaries operating within national legal systems 37;
- within the given institution an opportunity arises of an easy and simple restructuring of the business to use advantagesâ of the single internal market.
It is important to note that the Statute permits of transferring the seat of a company from one EU Member State to another without going into liquidation. Nevertheless, SEs should be registered at the national level with the relevant information published in the official EU publication.
Board of Directors (Supervisory Board) might or might not be among the management bodies (Articles 38-60 of the Statute). However, the national legislation of the country of SE registration can not prescribe any definite system of management (one-tier or two-tier). Under Article 38, an SE should comprise (a) a general meeting of shareholders and (b) either a supervisory organ and a management organ (two-tier system) or an administrative organ (one-tier system) depending on the form adopted in the statutes.
Thus, the company structure issue that had been a stumbling block for discussing the Fifth Directive was resolved by reaching a compromise that in fact fixes the multitude of national models.
Similar conclusions might be made on the issue of employee involvement.
SEs should follow a certain system of employee involvement in making decisions. In case of failure to come to a mutually acceptable agreement through a negotiations process, standard principles should come into force (Annex to the Directive). The principles oblige the SE managers to provide regular reports that should serve as a basis for regular consultations and informing the body representing the interests of the company employees. In some cases (formation of SE by merger, as a holding or a mutual venture) 25 % or majority of employees have the right to participate in making the company’s decisions before the SE is formed.
According to some estimates, until now the harmonization programme has failed to produce “common European outlook” for companies. The reason behind the situation lies in the fact that the A company operating in several EU Member States are not obliged to abide by the Se Statute. However, cost cutting can serve as an incentive.
Policy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK Directive-driven harmonization is not capable of reaching such a result as the implementation would require its incorporation into the national legislation. Contrary-wise, the Statute of a European Company brought into force by the Regulation opens an opportunity of reaching harmonization in that all the countries have a chance of establishing a single company structure.
However, as legislative systems of the EU Member States to a considerable degree themselves fill the “gaps” in the Statutes (as was the case with the EEIG), there is a risk of producing 15 different types of “European companies”.
2.4. Mergers and takeovers 2.4.1. Terms and models: some by-country differences The problem of harmonization of the EU Member States legislation in this area is also to a large extent related to differences in the national models of corporate governance (see Chapter 1, and Belenkaya, 2001) and in business practices.
In countries of the Anglo-Saxon model of corporate governance mergers and takeovers are a traditional tool of corporate control. The well-developed (perhaps even excessively developed if compared with the real sector of the economy) stock market, diffusion of the share capital, cultural traditions (“an enterprise is nothing but a block of shares for the owner”) contribute to the situation.
The 80s–90s witnessed an upsurge in the number of mergers and takeovers. In the period of 1995– 2000 in the USA 26 000 companies merged with the deals amounting to US $5 trillion. At the same time deals of this type underwent a qualitative change. While previously mergers and takeovers had been performed in the interests of strategic development of business and upon an agreement by the parties involved, the 80s–90s brought in an new tendency. Globalization of stock markets and new standards of information transparency resulted in the emergence of a new market player – “raiders” having as their aim an aggressive buying of the undervalued companies in order to increase their market value in the short-term and sell them later.
Many researchers believe that the takeovers market is the only mechanism of protecting shareholders against management’s arbitrariness. They point to the fact that the method is most effective when it is necessary to “overcome” the resistance on the part of a conservative Board of Directors not interested in rationalization (breaking down) a company, in particular, when company diversification is involved (Coffee, 1988). The literature on theory of the issue offers a thorough analysis of the relation between takeovers entailing “private” (special) interests for large shareholders and an increase in economic efficiency after control passes on to a new owner.
At the same time criticism is increasingly leveled at efficiency of the method for corporate management purpose. In particular, it is noted that the threat of a takeover pushes managers towards implementing short-term projects only for fear of a downturn in share prices. The conflict between short-term and long-term business objectives makes companies take care, first and foremost, of increasing prices of their shares and current (quarterly) profits (“the tyranny of quarterly financial reports”). “Stock exchange pressure” as a reaction to the event acquires higher importance than the event. The ENRON affair is to some extent the result of the situation. Other critics believe that takeovers serve exclusively the interests of shareholders and do not meet the needs of all the “stakeholders”. Finally, there is (empirically proved) risk of destabilizing of activities of both the buyer company and the acquired company (see Grey, Hanson, 1994).
In Europe (the continental “Rhein” model) enterprise has been traditionally viewed as not only as an exclusive property of the shareholders but also as a social institution accountable to all the stakeholders. Concentrated structure of ownership “chains” the enterprise to the strategic owner interested in its long-term development. “Friendly takeovers” (that are in fact mergers) prevail Policy Paper • RECEP Alexander Radygin, Revold Entov • UNIFICATION OF CORPORATE LEGISLATION:
WORLD TRENDS, EU LEGISLATION AND RUSSIA’S OUTLOOK while “hostile takeovers are rejected in principle and condemned by the society and by the business community. That is why raiders’ operations are much less widespread than in the USA.
However, while in the second half of the 90-s in the USA the number of hostile takeovers decreased (from 1995 to 1999 the volume of transactions dropped from US $50 to 10 bln.) Europe became the world leader by hostile takeovers (Leonov, 2000). The share of hostile takeovers increased both in the total number of all the merger and takeover transactions and in the number of cross-country hostile takeover in Europe. In 1999, out of the total volume of US $1487 bln of all the mergers and takeovers in Europe, the share of hostile takeovers amounted to US $393 bln (i.e. was 4 times higher than in the whole period of 1990-1998). Intensification of the process necessitated adequate measures at the EU level.
The Japanese model is characterized by voluntary unifications. Hostile takeovers are subject to tough institutional and social barriers. The institutional barriers consist in the company management providing itself with “permanent shareholders” – normally they are companies from the same holding group (“kairetsu”) or friendly banks. At the same time, cross-holding of shares is widespread. “Permanent shareholders” owning 60–80% of the shares remove the threat of taking over of the company through buying the shares on the market. Under the circumstances companies can focus effort on strategic objectives.