How does corporate mobility affect lawmaking? A comparative analysis

American Journal of Comparative Law

Volumn 57, Issue 2, 2009, Pages 347-386

  Bratton, William W ^a   Mccahery, Joseph A ^b,c,d   Vermeulen, Erik P M ^c,e  

^a GEORGETOWN UNIVERSITY LAW CENTER   (United States)

^b UNIVERSITY OF AMSTERDAM   (Netherlands)

^c TILBURG UNIVERSITY   (Netherlands)

^d European Corporate Governance Institute   (United States)

^e Corporate Legal Department ^*

Author keywords

[No Author keywords available]

Indexed keywords

EID: 67649560509     PISSN: 0002919X     EISSN: None     Source Type: Journal    
DOI: 10.5131/ajcl.2008.0010     Document Type: Review

References (91)

1. See Joseph A. McCahery & Erik P.M. Vermeulen, The Evolution of Closely Held Business Forms in Europe, 26 J. CORP. L. 855 (2001)
2. ERIK P.M. VERMEULEN, THE EVOLUTION OF LEGAL BUSINESS FORMS IN EUROPE AND THE UNITED STATES (2003)
3. See also John Armour, Who Should Make Corporate Law? EC Legislation versus Regulatory Competition, in 58 CURRENT LEGAL PROBLEMS 2005, at 369 (Jane Holder & Colm O'Cinneide eds., 2006)
4. Martin Gelter, The Structure of Regulatory Competition in European Corporate Law, 5 J. CORP. L. STUD. 247 (2005), for a second wave of research.
5. See Case C-212/97, Centros Ltd. v. Erhvervs-og Selbskabsstyrelsen, 1999 E.C.R. 1-1459, §34 ("[I]t should be borne in mind that, according to the Court's case law, national measures liable to hinder or make less attractive the exercise of fundamental freedoms guaranteed by the Treaty must fulfil four conditions: they must be applied in a non-discriminatory manner; they must be justified by imperative requirements in the general interest; they must be suitable for securing the attainment of the objective which they pursue; and they must not go beyond what is necessary in order to attain it.").
6. See William W. Bratton & Joseph A. McCahery, The Equilibrium Content of Corporate Federalism, 41 WAKE FOREST L. REV. 619, 626-30 (2006).
7. See Case C-208/00, Uberseering BV v. Nordic Constr. Co. Baumanagement GmbH (NCC), 2002 E.C.R. 1-9919; Case C-167/01, Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art Ltd., 2003 E.C.R. 1-10155.
8. See Bratton & McCahery, supra note 3, at 679-86.
9. See ERIK P.M. VERMEULEN, THE EVOLUTION OF LEGAL BUSINESS FORMS IN EUROPE AND THE UNITED STATES (2003)
10. John Armour, Who Should Make Corporate Law? EC Legislation versus Regulatory Competition, in 58 CURRENT LEGAL PROBLEMS 2005, at 369 (Jane Holder & Colm O'Cinneide eds., 2006).
11. See Luca Enriques, Silence Is Golden: The European Company Statute as a Catalyst for Company Law Arbitrage, 4 J. CORP. L. STUD. 77 (2004).
12. See Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on Cross-Border Mergers of Limited Liability Companies, 2005 O.J. (L 310) 1; Case C-411/03, Sevic Systems AG v. Amtsgericht Neuwied, 2005 E.C.R. I- 10805.
13. See Case 81/87, The Queen v. Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust, 1988 E.C.R. 5483. For an integrated review of tax barriers and corporate law barriers to international migration, see Mitchell A. Kane & Edward B. Rock, Corporate Taxation and International Charter Competition, 106 MICH. L. REV. 1229 (2008).
14. See Christian Kirchner, Richard W. Painter & Wulf A. Kaal, Regulatory Competition in EU Corporate Law after Inspire Art' Unbundling Delaware's Product for Europe, 2 EUR. CO. & FIN. L. REV. 159 (2005).
15. See JOSEPH A. MCCAHERY & ERIK P.M. VERMEULEN, UNDERSTANDING (UN)INCORPORATED BUSINESS FORMS (2005).
16. Treaty Establishing the European Economic Community, Mar. 25, 1957, 298 U.N.T.S. 3, [hereinafter Treaty of Rome, or the Treaty] (now The Treaty Establishing The European Community, 2006 O.J. (C321) E37) provided for the right of foreign corporations to establish branches in another member state, without being subject to more restrictive corporate law provisions of the host state.
17. See David Charny, Competition Among Jurisdictions in Formulating Corporate Law Rules: An American Perspective on the 'Race to the Bottom' in the European Communities, 32 HARV. INT'L L.J. 423 (1991).
18. In The Treaty Establishing The European Community, 2006 O.J. (C321) E37, 179, art. 308, it specifies two preconditions for unification: (1) action by the Community should prove necessary to attain, and (2) the powers provided in the Treaty are insufficient See Richard M. Buxbaum & Klaus J. Hopt, Legal Harmonization and the Business Enterprise, in 4 CORPORATE AND CAPITAL MARKET LAW HARMONIZATION POLICY IN EUROPE AND THE UNITED STATES 210-12 (1988).
19. See Marco Becht, Colin Mayer & Hannes F. Wagner, Where Do Firms Incorporate? Deregulation and the Cost of Entry, 14 J. CORP. FIN. 241 (2008).
20. See also Wilhelm Niemeier, GmbH und Limited im Markt der Unternehmen- srechtstrager, 27 ZEITSCHRIFT FUR WIRTSCHAFTSRECHT 2237 (2006).
21. See Idier Martin & Forrest G. Alogna, New Delaware, WALL ST. J. EUR., Dec. 20, 2007, at 12.
22. See Charny, supra note 13. See also Joseph A. McCahery & Erik P.M. Ver- meulen, The Evolution of Closely Held Business Forms in Europe, 26 J. CORP. L. 855 (2001).
23. See William W. Bratton & Joseph A. McCahery, Tax Coordination and Tax Competition in the European Union: Evaluating the Code of Conduct on Business Taxation, 38 COMMON MKT. L. REV. 677 (2001).
24. See William J. Carney, The Political Economy of Competition for Corporate Charters, 26 J. LEGAL STUD. 303 (1997).
25. See Stephen Woolcock, Competition Among Rules in the Single European Market, in INTERNATIONAL REGULATORY COMPETITION AND COORDINATION, PERSPECTIVES ON ECONOMIC REGULATION IN EUROPE AND THE UNITED STATES 289, 289-321 (William W. Bratton, Joseph A. McCahery, Sol Picciotto & Colin Scott eds., 1996).
26. See CHARLOTTE VILLIERS, EUROPEAN COMPANY LAW - TOWARDS DEMOCRACY? (1998).
27. The European Community has adopted an array of directives (First, Second, Third, Fourth, Sixth, Seventh, Eight, Eleventh, Twelfth, and the Securities Directives), which regulate disclosure and ultra vires, capital requirements of public corporations, mergers and divisions of public corporations, corporations' annual and consolidated accounts, the qualification of accountants, disclosure of branches, formation of single member corporations, admissions to stock exchange listing, public offers of listed and unlisted securities, acquisitions and sales of major holdings, and insider trading. See VANESSA EDWARDS, EC COMPANY LAW (1999).
28. Besides constraining the Commission's role through the subsidiarity principle, the Maastricht Treaty also introduced the co-decision procedure. As a consequence, the European Union's decision-making structure closely resembles the constitutional form of democratic federalism in which central government policies are agreed to by a simple majority of elected representatives from lower-tier governments. See Robert P. Inman & Daniel L. Rubinfeld, Rethinking Federalism, 11 J. ECON. PERSPECTIVES 43 (1997).
29. Areas within the exclusive competence of the Union are subject to the proportionality test of Article 5 §3 of the Treaty, which provides that "action by the Community shall not go beyond what is necessary to achieve objectives of the Treaty"; proportionality and subsidiarity both apply to nonexclusive areas.
30. First of all, it has to be determined whether there is a power under the Treaty to take action. The subsidiarity principle then determines whether and how the Community may act. It must be shown that the objectives of the proposed action cannot be sufficiently achieved by the member states. The finding must then justify the further conclusion that in view of the measure the objective can be better achieved at Community level. The proportionality test as defined in §3 of Article 5 still has to be satisfied.
31. See rEPORT OF THE HIGH LEVEL GROUP OF COMPANY LAW EXPERTS ON A MODERN REGULATORY FRAMEWORK FOR COMPANY LAW IN EUROPE (2002), http://ec.europa.teu/internal-arket/company/docs/modern/ repor-n.pdf.
32. A first draft of the Directive on cross-border mergers was presented in 1984. Commission Proposal for a Tenth Directive of the Council Based on Article 54 (3) (G) of the Treaty concerning Cross-Border Mergers of Public Limited Companies, COM (1984) 727 final (Jan. 8, 1985), 1985 O.J. (C 23) 1.
33. See Paul Leleux, Corporation Law in the United States and in the E.E.C., Some Comments on the Present Situation and the Future Prospects, 5 COMMON MKT. L. REV. 113 (1967-68).
34. Council Regulation 2157/2001 of 8 October 2001 on the Statute for a European Company (SE), 2001 O.J. (L294) 1.
35. See id. art. 2, at 4, title II, at 7-12.
36. Id section II at 7.
37. The registered office of an SE may be transferred to another member state. Such a transfer shall not result in the winding up of the SE or in the creation of a new legal person. Council Regulation 2157/2001, supra note 30, art. 8 1, at 4.
38. Allianz bought out minority shares of RAS, an Italian insurer, in connection with its conversion to SE status. See Patrick Jenkins & Tobias Buck, On the move: why European companies may see benefits in a corporate statute with fewer limitations, FIN. TIMES (London), Oct. 11, 2005, at 19.
39. See Joseph A. McCahery & Erik P.M. Vermeulen, Does the European Company Prevent the 'Delaware-effect'?, 11 EUR. L. J. 785 (2005).
40. The significant amount of minimum capital that is required to form an SE is yet another dissuasive element in the SE Statute. The minimum capital requirement of &120,000 would certainly prevent start-up firms from opting for this EU-level business form. See Council Regulation 2157/2001, supra note 30, § 4.
41. See Council Directive 2001/86, 2001 O.J. (L294) 22.
42. A feasibility study of a European Statute for SMEs (financed by the European Commission) shows that businesses, especially small and medium-sized enterprises, are not familiar with the possibility of forming an SE; 91.3% were not familiar with this EU level business form. See AETS, Etude de faisabilite d'un statut europeen de la PM(2005),ttp://ec.europa.eu/enterprise/ entrepreneurship/crafVcraft-prioritis/doc/f-appo-final-sme.pdf.
43. See Conversion Documentation, Conversion of BASF Aktiengesellschaft into a European Company (Societas Europaea, SE) with the company name BASF SE.
44. This figure depicts the information available on 306 registered SEs.
45. One SE was liquidated.
46. Two SEs were convete to private limited companies residing in the Cayman Islands.
47. Almost fifty percent of the operating SEs are concentrated in the financial sector.
48. See http://www.manbw.com.
49. This explains the specificity of the SE and its virtual absence in jurisdictions without stringent participation rights. For German companies, the SE could be a relatively quick and efficient means to transform their board structure to meet international standards, whereas for other firms it constitutes a burdensome and costly alternative. +
50. See Ivar Simensen & Gerrit Wiesmann, German Blue Chips Ponder Switch to SE Format Corporate Governance, FIN. TIMES (London), Apr. 12, 2007, at 24; Richard Milne, Porsche's Designs on VW Lead it to Steer to a Different Company Structure, FIN. TIMES (London), Apr. 12, 2007, at 24; Ivar Simensen & Gerrit Wiesmann, Unions Weakened on Supervisory Board Allianz's Change from AG to SE Has Given Greater Flexibility to Management, say Ivar Simensen and Gerrit Wiesmann, Fin. Times (London), Apr. 12, 2007, at 24; Reinhard Honighaus & Ivar Simensen, Allianz Plans to Raise-3.5bn in -German Property Sale, FIN. TIMES (London), May 4, 2007, at 21.
51. See Press Release, Beiten Burkhardt Establishes Its Own European PLC, Dec. 5, 2005, available at http://www.bblaw.com/Press- releases.571.0.html?&cHash= 0abe6d5f47&t--ttnews [tt-news] =488.
52. See http://www.foratis.com.
53. For instance, it follows from the available data that two companies purchased a shelf SE at Foratis AG: (1) Atrium Erste Europaische W SE was renamed into Convergence CT SE in January 2006, and (2) Donata Holding SE was before the acquisition called Atrium Funfte Europaische W SE. Both companies have a one-tier board structure. In the first months of 2006, Foratis registered four new SEs. Atrium Achte Europaische W SE and Atrium Neunte Europaische W SE were registered in April 2006. Atrium Dritte Europaische W SE and Atrium Vierte Europaische W SE were established in March and February 2006 respectively. In October 2007, Atrium Elfte Europaische W SE and Atrium Zehnte Europaische W SE were incorporated.
54. For instance, since May 2007 more than 100 SEs were established in the Czech Republic See also AETS, Etude de faisabilite d'un statut europeen de la PME (2005), supra note 38, for similar conclusions. An unnoted, but equally important development is the leading role played by registration agents in the market for shelf- SEs.
55. See ROBERTA ROMANO, THE GENIUS OF AMERICAN CORPORATE LAW 14-24, 32-51 (1993)
56. Ralph K. Winter, State Law, Shareholder Protection,and the Theory of the Corporation, 6 J. LEG. STUDIES 251 (1977).
57. See Werner F. Ebke, Centros - Some Realities and Some Mysteries, 48 AM. J. COMP. L. 623 (2000).
58. Case 120/78, Rewe Zentrale AG v. Bundesmonopolverwaltung fur Brannt- wein, 1979 E.C.R. 649.
59. At the time of the Ceniros-decision, most member states viewed minimum capital requirements as essential to obtaining limited liability protection. However, these requirements do not pass the four factor test. See Case C-212/97, Centros Ltd. v. Erhvervs-og Selbskabsstyrelsen, 1999 E.C.R. 1-1459, §34. ("[I]t should be borne in mind that, according to the Court's case law, national measures liable to hinder or make less attractive the exercise of fundamental freedoms guaranteed by the Treaty must fulfill four conditions: they must be applied in a non-discriminatory manner; they must be justified by imperative requirements in the general interest; they must be suitable for securing the attainment of the objective which they pursue; and they must not go beyond what is necessary to attain it.")
60. This trend is far from new. In Case 79/85, Segers v. Bestuur Bedrijfsverenig- ing voor Bank- en Verzekeringswezen, Groothandel en Vrije Beroepen, 1986 E.C.R. 2375, the court already decided that under Article 43 (ex 52) a Dutch sole proprietor could incorporate in England, because setting up a Dutch close corporation took considerably longer ven if he intended to continue to operate wholly in the Netherlands.
61. See Case C-212/97, Centros Ltd. v. Erhvervs-og Selbskabsstyrelsen, 1999 E.C.R. 1-1459, §§31-38.
62. The ECJ rejected German case law principles under which a Dutch corporation was denied legal entity status and, consequently, the right to bring an action in a German court. The ECJ took the view that since member states defer negotiating the mutual recognition of firms under Article 293, denying the Dutch corporation of the procedural right to bring an action fails to comply with Articles 43 and 48 of the Treaty.
63. Case C-411/03, Sevic Systems 2005 E.C.R. 1-10805.
64. See Case C-9/02, Hughes de Lasteyrie du Saillant v. Ministerie de l'Economie, des Finances et de l'Industrie, 2004 E.C.R. 1-2409.
65. See Bratton & McCahery, supra note 19, for the four-factor test. A subsequent case, Marks & Spencer, does not achieve the extension. There the ECJ recognized that limiting the possibility of offsetting subsidiaries' losses against profits of the parent company can be justified (1) to protect the fiscal cohesion of the national tax system, (2) to avoid the double offset of losses, and (3) to restrict tax evasion. Since ECJ decisions are interpreted restrictively, it is fair to argue that we still need a clear decision that reverses the conclusions of the Daily Mail case. See Case C446/03, Marks & Spencer pic v. David Halsey (Her Majesty's Inspector of Taxes), 2005 E.C.R. 1-10837.
66. Section 482 ( 1 ) ( a ) of the Income and Corporation Taxes Act 1970.
67. Case 81/87 The Queen v Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust [1988] ECR 5483 paragraph 16.
68. See Klaus J. Hopt, Concluding Remarks at the 1st ECFR Symposium (Oct. 13, 2006), in 4 Euro. Co. & Fin. L. Rev. 169 (2007) (arguing that the ECJ should "issue a clear statement that it is doing away with the specter of Daily Mail, maybe when it decides the recent Hungarian referral case.").
69. See Case C-210/06, Cartesio, 2006 O.J. (C165) 17.
70. Opinion of Advocate General Poiares Maduro, Case C-210/06, Cartesio, §§ 26- 35, 22 May 2008.
71. Case C-210/06 Cartesio Oktato es Szolgaltato bt (a limited partnership) (Case C-210/06); [2008].
72. The Netherlands considers a company as "economically active" if it employs at least one person for at least fifteen hours per week.
73. In Germany, we see a similar trend: the evidence shows that about fifty percent of "German" Limiteds fail already after one year, and more than ninety percent are dissolved after two years of trading. See Wilhelm Niemeier, Die "Mini GmbH" (UG) trotz Marktwende bei der Limited1?, 28 ZEITSCHRIFT FOR WIRTSCHAFTSRECHT (ZIP) 1794 (2007).
74. In Germany, just more than half of the private limited companies register their trading activities in Germany. See id.
75. See Becht et al., supra note 15.
76. See Simeon Djankov et al., The Regulation of Entry, 117 Q. J. ECON. 1 (2002).
77. See Niemeier, supra note 68.
78. The costs for creating a British limited for a foreign company are not excessive. For example, the German registration company Go Ahead offers a UK limited for ε260. However, there are some additional costs that users of the UK private limited company tend to discount or overlook. For instance, VAT registrations, opening a bank account, domain and website charges are not included. Also, there are major legal costs associated with the translation and legalization of the incorporation documents. See Robert R. Drury, Senior Lecture in Law, Univ. of Exeter, The EPC Versus the Private Limited Company, at the 5th European Company Law and Corporate Governance Conference (June 28, 2007).
79. See also Hugh Williamson, Germany's love of the 'Limited', FIN. TIMES (London), Oct. 3, 2006, at http://www.ft.eom/cms/s/ 0/8a9afcl4-5344-lldb-99c5-0000 779e2340.html.
80. Letter from Thomas Smith, Director of Communications of Companies House, to William W. Bratton, Joseph A. McCahery and Erik P.M. Vermeulen (July 13, 2007) (on file with the authors).
81. See Ulrich Seibert, Close Corporations - Reforming Private Company Law: European and International Perspectives, 8 EUR. BUS. ORG. L. REV. 83 (2007).
82. See T.P. VAN DUUREN, HENDRIK J. PORTENGEN, ERIK P.M.VERMEULEN & B. BIER, DE VEREENVOUDIGDE BV (2006).
83. Scholars have made a similar point for the US. See Ian Ayres, Judging Close Corporations in the Age of Statutes, 70 WASH. U. L. Q. 365 (1992);
84. William W. Bratton & Joseph A. McCahery, The Equilibrium Content of Corporate Federalism, 41 WAKE FOREST L. REV. 619 (2006).
85. See Joseph A. McCahery, Erik P.M.Vermeulen, Masato Hisatake & Jun Saito, Traditional and Innovative Approaches to Legal Reform: The 'New Company Law', 8 EUR. BUS. ORG. L. REV. 7 (2007).
86. In this respect, it is worth noting that Delaware's legislature strives to maintain legislative pre-eminence by periodically amending its corporate laws. See JOSEPH A. MCCAHERY & ERIK P.M. VERMEULEN, CORPORATE GOVERNANCE OF NON-LISTED COMPANIES 141 (2008).
87. The wrongful trading regulation requires directors to monitor the firm's health and, if necessary, to take some remedial or preventive measures that prevent their firms from sliding into insolvency.
88. See Seibert, supra note 76.
89. The increased incorporation mobility arguably puts some pressure on the formal use of lawyers as notaries in the incorporation process. That is not to say that their function is outdated in the modern business world. Much will depend on the value-added content of the services they provide.
90. See the special edition of the German Law Journal, Renovating the German Private Limited Company - Special Issue on the Reform of the GmbH, Volume 9 (2008).
91. Among other things, the system of voting, supervision, and regulations concerning the conduct of the shareholders general meeting.