Basic Introduction to US Company
Law: Overview of types of Corporate
Entities & Incorporation in the US vs.
the EU
Patrick J. O’Malley, Esq.
Università dell’ Insubria & Università degli Studi di
Milano
Summer school, Como, July 2008
©Patrick J. O’Malley 2008
A bit about myself
US attorney-at-law & Solicitor in Engliand
& Wales
Focus on international capital markets
work
Also, corporate and VC investments
Work in Providence, Spain, Boston, Palm
Beach, London and Milan
Main work w Freshfields Bruckhaus
Deringer LLP
Now, independent int’l legal consultant &
law prof:
To date, 9 countries on 4 continents for
universities, professional training bodies
and corporations
General Points
• Please, if you are not familiar with certain
terms used in class or in these slides, do not
hesitate to ask me to explain. You (& your
colleagues) will get much more out of class.
• Also let me know when points mentioned are of
use to you in your day to day work or study- or you
have specific questions!
• I can spend time on it when you ask me or, if more
complicated, I can deal with it later on.
For follow-up questions
• If you have additional questions, I can be
contacted at the following email(s):
• patrick.omalley@interpresas.com
• Cc to patrick.omalley1971@gmail.com
• An overview of the types of corporate
entities
– Introduction to the US company law
system
– Country-by-country overview, main
focus on US
• The “European company”, the Societas Europaea
or SE
• Freedom of establishment considerations: a look at
the US system and key European Court of Justice
case law
GOALS
• Goal of this module is to give non-lawyers (who
may be working in business in the future) an
introduction to the corporate law systems in the
US (and, if time permits, certain European
jurisdictions).
• Goal also to clarify what types of company forms
exist and what it takes to set up a new company in
the various jurisdictions (especially useful for
future entrepreneurs or those working
internationally)
• Basic comparative philosophical differences
between US law (and to a certain extent English
law) and various European legal systems will be
highlighted
Country by Country Overview
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United States
France
England & Wales
Germany
Italy
Poland
Comparative Law Methodology
• Beware of comparing specific points (i.e. Creditors
rights) without taking into account whole legal
system
• Realise various legal systems have base/radical
philosophical differences (e.g. France vs UK/US
re: “freedom”)
• Legal systems also result from local history,
culture, politics and language
• Often, “false friends” or different terminology:
“notary”, “liability”, “responsibility”, “enjoin”, etc.
Key corporate law terms
• Certificate/Articles of Incorporation and Bylaws
• Limited liability
• Share/stock
• Share capital (minimum)
• Board of Directors
• Shareholders/Stockholders
• Management / Officers
• Other stakeholders (employees, creditors, the
community, etc.)
Key corporate law terms
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Merger
Tender offer
Auditors
Annual accounts
Directors meetings
Shareholders meetings
Worker participation
Commercial / Company register
Corollary areas of company law
• Close overlap with “securities law”, together =
“corporate governance”
• However, need to be attentive to related areas, such
as:
– Intellectual Property Law (EU & national, US)
– Tax Law
– Labour Law (US, EU & national)
– Commercial Law (national, US (UCC), EU & int’l
[WTO]): including sanctions)
– Contracts Law
– Tort Law (multi-jurisdictional: plaintiff &
defendent)
– Environmental Law (US, EU & national)
General Sources of US Law
• Main sources groups: constitutional law,
administrative law, statutory law, & the
common law
• US Constitution Supremacy Clause
establishes Constitution, Federal Statutes,
and US treaties as "the supreme law of the
land.“
• Constitution is highest form of law in US legal
system. State judges are required to uphold
it, even if state laws or Constitutions conflict
with it.
Specific Sources of US Company Law
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Federal & State Constitutions
State corporate law statutes
Common law principles
State and federal courts case law
Special federal and state statutes (i.e. for
banking, insurance, public utilities)
Federal and state securities laws*
Other federal laws (e.g. federal FCPA)
Treaties & international instruments (WTO, ILO)
Stock market listing rules: NYSE, NASDAQ etc.
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Key point: US federalism
• Interplay between local state and federal
(national) laws & regulations
• A question of federalism that has
developed since 1789 and our Constitution
• We will consider in more detail throughout
the course
• Key in understanding the US in general,
not just corporate law (all aspects of life
affected)
The idea & identity of the Company
• Ownership interests in the company
– Shareholders
– other stakeholders
• Employees
• Creditors
• the community
• the nation
The idea & identity of the Company
• Legal Personality
– First by royal decree, then by parliament, etc.
– For endeavors to further well-being (hospitals,
charities/almshouses, then trading companies,
then more private businesses- aiming for profit)
– key CIVIC role originally
• Limited Responsibility
– Ultimately, public policy to favor growth
The idea & identity of the Company
• The principle of agency
– Actions of others recognized through
entity (company an agent of SHs,
managers/employees agents of the co)
• The principle of partnership: duties
Fundamental assumptions of corporate
law
• Voluntary, private, contractual entities
• Broad powers to earn profit in any legal
way, and wherever, they wish to
• Primary obligation of mgmt is to SHs
• Let’s try to represent this graphically
Evolution of views of corporation: US
• Artificial Entity View: most of 19 th c.- artificial
construct based in positive law of the state,
not individual initiative (move from general
chartering to general incorporation laws)view of corp form for general welfaresuspicion/hostility of its use by private
entreprenuers
• Natural Entity Theory – early 20 th c.: corp
really a creation of private initiative, not
artificially from state power – sum of
individuals actions (less ultra vires)
The idea & identity of the Company
Ownership interests in the company
◦ Shareholders
◦ Other stakeholders
Employees
Creditors
the Community
the Nation
Ultimately, corporate law tries to order &
protect the above from company/mgmt
The Agency Problem (Mgmt vs. SHs)
US CORPORATE & SECURITIES LAW
Historical development of US law generally:
Brief overview of the US legal system and how
corporate law fits in to the whole
Federal / state legal dichotomy
19th century US industrial development led to
innovations in corporate law
Convergence – worldwide influence
Direct effect of US laws worldwide – the role of
the US capital markets and M&A activity
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Basic Attributes, Objectives & conduct of the
US corporation
• Enabling statute. – Delaware's General
Corporation Law (DGCL), like most general laws
of incorporation, is an enabling statute
• philosophy underlying it is that public good is
advanced by provision of inexpensive
mechanism allowing all individuals to achieve
benefits the corporate form provides through
establishing management & governance terms
that appear advantageous to those designing
the organization. In re Ford Holdings, Inc.
Preferred Stock, 698 A.2d 973 (Del. Ch. 1997).
22
Basic Attributes, Objectives & conduct of the
corporation in US
• PERSONALITY: Corporation is artificial
being created by law and acting under
authority of law for designated purposes
and being artificial and the mere creature
of the law, it can only act by its officers
and agents. Joseph Greenspon's Sons Iron & Steel Co. v.
Pecos Valley Gas Co., 34 Del. 567, 156 A. 350 (1931).
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Basic Attributes, Objectives & conduct of
corporation in US
• With same status as if created by special act. –
Corporations organized under the general corporation
law have the same legal status as if they had been
created by a special act of the General Assembly. State
ex rel. Cochran v. Penn
- Beaver Oil Co., 34 Del. 81, 143
A. 257 (1926).
• Corporation is entity distinct from its stockholders. Bird v.
Wilmington Soc'y of Fine Arts, 28 Del. Ch. 449, 43 A.2d
476 (1945).
• Even if there is only 1 stockholder. – The fact that 1
person owns all of the stock of a corporation does not
make such person and the corporation 1 and the same
person. Martin v. D.B. Martin Co., 10 Del. Ch. 211, 88 A.
612 (1913).
• But this fiction should be ignored when used as a shield
for fraudulent or other illegal acts. Martin v. D.B. Martin
Co., 10 Del. Ch. 211, 88 A. 612 (1913).
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Powers of a corporation: DGCL
§ 122. Specific powers
Every corporation created under this chapter shall have power to:
• (1) Have perpetual succession by its corporate name, unless a limited period of
duration is stated in its certificate of incorporation;
• (2) Sue and be sued in all courts and participate, as a party or otherwise, in any
judicial, administrative, arbitrative or other proceeding…
• (3) Have a corporate seal…
• (4) Purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or
otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with
real or personal property, or any interest therein, wherever situated, and to sell,
convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all
or any of its property and assets, or any interest therein, wherever situated;
• (5) Appoint such officers and agents as the business of the corporation requires and
to pay or otherwise provide for them suitable compensation;
• (6) Adopt, amend and repeal bylaws;
• (7) Wind up and dissolve itself in the manner provided in this chapter;
• (8) Conduct its business, carry on its operations and have offices and exercise its
powers within or without this State;
• (9) Make donations for the public welfare or for charitable, scientific or educational
purposes, and in time of war or other national emergency in aid thereof;
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(10) Be an incorporator, promoter or manager of other corporations of any
type or kind;
(11) Participate with others in any corporation, partnership, limited
partnership, joint venture or other association…
(12) Transact any lawful business which the corporation's board of directors
shall find to be in aid of governmental authority;
(13) Make contracts, including contracts of guaranty and suretyship, incur
liabilities, borrow money at such rates of interest as the corporation may
determine, issue its notes, bonds and other obligations, and secure any of
its obligations by mortgage, pledge or other encumbrance of all or any of its
property, franchises and income…
(14) Lend money for its corporate purposes, invest and reinvest its funds…
(15) Pay pensions and establish and carry out pension, profit sharing, stock
option, stock purchase, stock bonus, retirement, benefit, incentive and
compensation plans, trusts and provisions for any or all of its directors,
officers and employees, and for any or all of the directors, officers and
employees of its subsidiaries;
(16) Provide insurance for its benefit on the life of any of its directors,
officers or employees, or on the life of any stockholder for the purpose of
acquiring at such stockholder's death shares of its stock owned by such
stockholder.
....
OVERVIEW OF DELAWARE CORPORATIONS
History & Development of Corporate Law in the US
• The preeminence of Delaware corporate law: reasons
for such a role
The First State, post- independence from GB
Problems w legislature (2/3 time spent on
incorporations & divorces, corruption)
Finally 1897 General Corporation Law (copy of NJ
statute)
Competition w New Jersey (1896 1st modern liberal
corporation statute, W Wilson in 1913 lost pre
eminence)
20th century roller- coaster
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The preeminence of Delaware corporate
law: reasons for such a role
• Today: over 575,000 business entities
domiciled in DE
• 58% of the Fortune 500
• Half of co’s traded on the NYSE and the
NASDAQ*
• 68% of IPOs on US exchanges
• Over 95,000 new LLC’s and corps formed
annually
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WHY DELAWARE?
• General Corporation Law
– DE Bar committee constant updating work for
real life problems w DE Corporation Law
Council* and DE legislature (2/3 vote)
• Court of Chancery
– Rare example of US specialized court
– Incredible compendium of case law
• Responsive State Gov’t
– Secretary of State (w private efficient private
agencies- CSC*)
• DE Division of Corporations*
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WHY DELAWARE? cont’d
• The above lead to
–Flexible and modern corporate law
statutes
–Worldwide respected courts
–Business-friendly government &
services
–Best US corporate law expertise
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Incorporation in the US
Remember,
• US corporate law largely province of the
states
• Federal law totally silent until Depression
era Securities Act of 1933
• Corp governed for corp law purposes by
law of state of incorporation, regardless of
business operations
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Corporate Form in US
• Agency issues
– Dichotomy bt SHs and Directors / mgmt: Apparent
authority of principal. – Principal could not deny the
validity of the sale
- leaseback where he had
apparent authority to bind the lessee because he
served as president, sole director, and sole
shareholder of a corporation. Carriage Realty P'ship v. AllTech Auto Auto., Inc., 2001 Del. Ch. LEXIS 144 (Nov. 27, 2001)
– DE and other state corp law focused on maximizing
managers power and decisional efficiency (federals
step in to limit this)
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US state competition
• Theories of state competition
– The Race for the Bottom (but fails to
account for market forces)
– The Race for the Top (e.g. positives of DE
law efficiency, but fails to account for antitakeover measures)
– The Race for Predictability & Stability (but
what about a federal corp law system, in
order to truly maximize SH value?)
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US state competition
• Wish to maximize incorporations focuses
on corporate decision makers, not SH
value
• Tempered by wish to avoid federal
intervention
• What about resident SHs’ interests (e.g.
NY)? difficult bx giving priority would
just mean their state law would NOT
apply, as others go to DE, etc.
• No coincidence then that DE has small SH
base (ergo smaller political impact)
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Length & Costs to Incorporate
• Common law systems US & UK provide for a
relatively simple & expedited process
• content of articles/bylaws, type & severity of
controls on relevant documentation, & legal fees
are relatively minor & not very burdensome
• generally, protect investors & stakeholders via
ex post litigation rather than ex ante controls on
lawfulness of articles/bylaws
Overview of Capital Requirements
In US no significant differences re: minimum
legal capital among states;
Virtually no states require minimum legal
capital & rules re: formation of corporate
capital are not particularly rigorous
Practice point:
Let’s take a look at online incorporation services:
http://www.form-a-corp.com/
http://www.incorp.com/where-to-incorporate.aspx
http://www.bizfilings.com/products/flash/compare/i
ndex.html
Overview of Capital Requirements: EU
In Europe situation is quite different
Second Directive on legal capital, implemented
by all EU states, requires corp (public ones) to
provide for min legal capital of €25,000, which
shall consist of "assets capable of economic
assessment“
Several States impose even higher min capital
requirement
Re: closely-held, non-listed corps, significant
comparative differences exist
Overview of Capital Requirements: EU
In contrast to most in EU, UK follows common
law approach providing for very low level of min
legal capital, &, generally, quite lax in related
rules re: formation of legal capital
•
Differences create significant room for
regulatory arbitrage, especially for smaller firms
incorporating for the first time
• Some SHs prefer to incorporate in a state with
lower capital requirements even if they are
operating exclusively in other jurisdictions
•
EU incorporation
• Most countries adhere to the “siège réel”
(“real seat”) view of incorporation
• Others (UK, Eire, DK, NL) hold a more
open incorporation theory
EU incorporation
• Is fear of a “DE race to the bottom”
justified?
– Labor unions
– Political systems
– Courts
Can harmonization work?
However, the costs of current system to
EU efficiency are there (cannot truly
take advantage of open market).
UNITED STATES - SOLE
PROPRIETORSHIP
Simplest form of business entity. It is a form in which individual
conducts business in his/her own name or under trade name
rather than a separate legal business entity
PROS:
no requirement to register sole proprietorship w state (unless you are
using a trade name, in which case, register it to protect from use by
others)
no double taxation applicable. The sole proprietor is taxed at his or her
individual tax rate for profits earned in business, under his/her individual
name & social security number on his/her individual tax return. No
business entity level tax
no corporate formalities to conduct or maintain
Sole proprietors have complete control over their business
CONS:
no limitation of personal liability for sole proprietor- means that liabilities,
debts, & judgments against business can attach to personal assets of sole
proprietor including personal bank accounts, cars, & homes
UNITED STATES – Partnership /
Joint Venture
Form of business enterprise in which 2 or more
“individuals” (or entities) participate for profit.
Individuals can be deemed to be in a partnership
even if they have not entered into formal partnership
agreement. Absent partnership agreement, state
laws govern rights & responsibilities of partners,
such as requiring that each partners share equally in
profits.
Joint venture : type of temporary partnership
organized to carry out particular business enterprise
Often referred to as “General Partnership”
Be careful how you work together with others
UNITED STATES – Partnership /
Joint Venture
PROS:
no formal requirement to register partnership w state
(although recommended)
no double taxation applicable to partnership.
Partnerships are pass- through entities- each partner is
taxed at his/her individual tax rate for their share of profits
earned in business, under his/her individual name &
social security number
no business entity level tax, although partnership is
considered separate entity from each partner, however
partnership should file informational federal return
corporate formalities not mandatory to conduct or
maintain
All partners can act on behalf of partnership.
UNITED STATES – Partnership /
Joint Venture
CONS:
no limitation of personal liability for partners- thus,
if someone sues business & wins, they can attach
judgment against personal assets of each partner,
including their personal bank accounts, car, and
home.
Partners are financially liable for the actions of their
partners, which means that someone can sue the
partnership for the conduct of one of the partners
in his role as a partner in the business and the
assets of not only that partner, but all partners can
be attached to satisfy judgment
All partners can act on behalf of partnership.
UNITED STATES – Limited
Partnership LP
An entity formed under state law by 2 or more “individuals”
associated for the purpose of conducting business for profit.
Consists of 1 or more limited partners & at least 1 general partner
(general partners can be corporations in order to further limit
personal liability)
PROS:
personal liability of limited partners limited to their capital contribution
to LP
no double taxation. LPs are pass-through entities, which means that
each limited or general partner is taxed at his/her individual tax rate
for their share of profits earned in business, under his/her individual
name & social security number.
no business entity level tax, but LP should file informational federal
return.
corporate formalities are not mandatory to conduct or maintain.
UNITED STATES – Limited
Partnership LP
CONS:
no limitation of personal liability for general
partners of LP, which means that if someone sues
business & wins, they can attach a judgment
against personal assets of general partner(s)
including personal bank accounts, car, & home
General partners are financially liable for actions of
their partners, which means that someone can sue
partnership for conduct of one of partners in his
role as partner & assets of not only that partner,
but all of general partners can be attached to
satisfy judgment
Limited partners can’t participate in management
of LP
UNITED STATES – Limited Liability Partnership LLP
Entity formed under state law by 2 or more “individuals” associated for
purpose of conducting business for profit. Partners in LLP are generally
personally liable for their own wrongful acts & acts of those they directly
supervise
However, their personal assets are protected from claims involving wrongful
acts of another partner
PROS:
personal liability of partners is limited to their contribution of LLP capital
unless they or someone they directly supervise acted wrongfully
no double taxation. LLPs are pass-through entities, which means that each
partner is taxed at his/her individual tax rate for their share of profits earned
in business, under his/her individual name. There is no business entity level
tax, but LLP should file informational federal return
corporate formalities are not mandatory to conduct or maintain LLP
All partners can participate in management & conduct business of LLP
CONS:
Some states limit types of enterprises that can be formed as LLP
UNITED STATES – Limited Liability Company
LLC
• Entity formed by 1 or more individuals under state law. Owners called
members (not shareholders) & it is treated as partnership for federal
tax purposes
• PROS:
• personal liability of LLC member is limited to their contribution of LLC
capital, meaning that if someone sues business & wins, they can
attach a judgment against capital contribution of member(s), but not
personal assets of member(s) (unless corporate veil is pierced)
• generally no double taxation. For federal tax purposes, single-member
LLCs are disregarded as entities separate from their member(s) &
multiple-member LLCs treated as partnerships (pass-through entities)
for federal tax purposes unless LLC has more than 2 of the 4
characteristics that define corporations: limited liability to the extent
of assets; continuity of life; centralization of mgmt; & free
transferability of ownership interests, THEN it will be treated as
corporation
UNITED STATES – Limited Liability Company LLC
If satisfies requirements to be disregarded or treated as a pass-through
entity, member(s) is taxed at his/her individual tax rate for their share of
profits earned, under his/her individual name, & there is no business
entity level tax.
LLC should file informational federal tax return
corp formalities not mandatory to conduct/maintain LLC
LLC members can manage business
LLCs can have 1 member or multiple members
CONS:
Because of its relatively new form in most states, common law
applicable to LLCs is not as established as w partnerships &
corporations.
Thus, principles such as “piercing the corporate veil” are less defined &
predictable when applied to LLCs
In addition to income taxes, LLC members must pay self-employment
taxes if they have earned more than $400 from business during tax
year (rate of self-employment taxes is approximately 15%)
UNITED STATES – S
Corporation
• Corp organized under state law that has elected to be treated as a
“subchapter S corporation” under federal tax law, subject to special
requirements for obtaining & maintaining status
• PROS:
• personal liability of an S corp SH is limited to their contribution of
capital to the S corp, meaning that if someone sues business &
wins, they can attach a judgment against capital contribution of
SH(s), but not personal assets of SH(s) (unless corp veil is pierced)
• no double taxation. S corps are pass-through entities if applicable
federal tax rules are followed (e.g., earnings and profits of S corps
must be distributed to SHs annually as dividends)
• no business entity level tax, but S corporation must file informational
federal return (Form 1120S)
• S corporation SHs can participate in mgmt of business
UNITED STATES – S
Corporation
SHs can receive portion of their income as salary (it must be
reasonable salary) & any additional income above salary will not be
subject to self-employment taxes (a savings of over 15%)
CONS:
corporate formalities to conduct & maintain, such as organizational &
annual meetings, corporate minutes, etc.
All income must be distributed annually to SHs
Specific rules must be followed in order to maintain S corp status:
An S corp must be domestic corporation & not an ineligible
corporation (includes a financial institution, most insurance cos, etc.)
S corp cannot have more than 100 SHs
S corp cannot have SH who is not individual (certain narrow
exceptions apply)
S corporation cannot have nonresident alien as SH
S corporation cannot have more than 1 class of stock
US – C Corporation (Regular corporation)
corporation is a business entity organized under state law
for purpose of making a profit.
Can be closely held (1 or a small no. of SHs) or publicly
traded (shares are sold on public market). SHs of corp
elect directors (for Board of Directors) & officers
(President, Vice President, Secretary, etc.) to manage
corp’s business
PROS:
personal liability of corp SH limited to their contribution of
capital to corp, meaning that if someone sues business &
wins, they can attach a judgment against assets of corp,
which include capital contribution of SH(s), but not
personal assets of SH(s) (unless corporate veil pierced)
Corp SHs can participate in mgmt of business as
directors, officers, or employees
US – C Corporation (Regular corporation)
Cost of benefits to employees deductible
Due to recent changes in tax law, dividends distributed
to corporate SHs taxed at capital gain rates (generally,
15%)
CONS:
double taxation applicable to corporations. Corp taxed
on its earnings & profits at business entity level. Plus,
when profits distributed to SHs as dividends, those
dividends are taxed at individual SH level on
individual's tax return
There are corporate formalities to conduct & maintain,
such as organizational & annual meetings, corporate
minutes, etc.
US – DHC – Delaware Holding
Company
DE intangible holding company strategy is technique used to obtain
savings in state corporate income taxes on investment & certain
types of passive income. Strategy has been under attack by various
state taxing authorities & legislatures
Typically, strategy involves transfer of assets generating nonoperating or portfolio income (patents, patent applications,
trademarks, trade names, stocks, bonds, notes) to a DE holding
company subsidiary (DHC)
Also applicable to other states (e.g. Nevada) not imposing corporate
income tax
Income from these investments considered as being received in DE
& not subject to DE corporate income tax & may not be taxable in
other states
Additionally, parent company may benefit from deduction for state
corporate income tax purposes in a "separate return" state for
royalties, interest or other payments made to DHC for use of
transferred assets
US – DHC – Delaware Holding
Company
strategy is supported, in part, by DE law
provision exempting from DE corp income
tax, any corp whose activities in DE confined
to maintenance & mgmt of its intangible
investments & collection & distribution of
income from such investments
"Intangible investments" include, without
limitation, investments in stocks, bonds, notes
and other debt obligations (including debt
obligations of affiliated corporations), patents,
patent applications, trademarks, trade names
and similar types of intangible assets.
US – DHC – Delaware Holding
Company
• If corp undertakes any other business, tax exemption lost
• there must be a very significant business connection between the
DHC & State of Delaware to prevent parent's state of
incorporation from asserting taxes against DE sub
• In recent cases, state departments of revenue have assessed
taxes on parent companies related to the income of DHCs when
there were significant connections to the assessing state &
insufficient connections to DE
• These states argue that parent companies are using empty corp
shells, engaging in sham transactions, & using other ruses to
make it appear as if parent has separated itself legally from its
DHC subsidiary
US – DHC – Delaware Holding
Company
In order to improve chances that tax-free status of DHC not
challenged, parent co should consider following to establish
sufficient connection to DE:
• Locate physical office in DE from which corporate activities are
directed
• Execute all IP licensing agreements & related contracts in DE
• Maintain its original books, records, & contracts in DE
• Use stationary & business cards with DE address
• Establish DE bank account
• Obtain DE tax identification numbers
• Withhold DE income tax from salaries of all DHC officers &
employees
• File and pay payroll taxes in DE
• Use DE mailing address & telephone number
• Have all officers & employees of DHC perform their duties in
DE, even if only on part-time basis
• Hold board of directors meetings in state
UNITED STATES – Nonprofit
Corporation
Entity formed under state law for socially beneficial, not-for-profit,
purpose that has elected & been qualified to be treated as exempt
from federal taxation due its social purpose
PROS:
personal liability of nonprofit organization organizers is limited to their
contribution of capital to organization, meaning that if someone sues
business & wins, they can attach a judgment against capital
contribution of organizer(s), but not personal assets of organizer(s)
(unless corp veil pierced)
exempt from federal and state taxation
CONS:
corporate formalities to conduct & maintain, such as organizational &
annual meetings, corporate minutes, etc.
Tax-exempt status must be applied for on both federal & state level
Specific rules must be followed in order to maintain nonprofit
organizational status
FRANCE
Société Anonyme (SA)- best-known form-- can be
private co or public co- we will consider private first
2 or 3 organ structure: SH meeting & BOD, or SH
meeting, Mgmt Board and Supervisory Board,
similar to German system (the latter optional)
Minimum 7 natural or legal persons to form; need
formal recording of formation
Minimum Euro 37k share capital
Different classes of share permitted
Transfer by simple agmt (subject to by-laws)
FRANCE
Société Anonyme (SA)- private version,
cont’d
Stock exchange listing not possible
Sole liability of the company; in principle SHs
not liable beyond capital contributions thereto
Employee co-determination: only state co or if
employees own more than 3%
Amendment of articles of association, capital
increase/decrease only by extraordinary
general meeting of SH (w 2/3 majority);
changes to be registered w commercial
register
FRANCE
• Société Anonyme (SA)- private version,
cont’d
• Cross-border merger currently impractical
• Cross-border transfer of seat required
unanimous consent of SHs; co dissolved
unless convention exists btw France &
new host country
FRANCE
Société par actions simplifiée (SAS)
This is a new, simplified type of co, created by law of
Jan. 3, 1994
Main advantage is its flexibility re: setting mgmt powers
(apart this, functions as an SA)
Recommended vehicles for creating joint ventures
(JVs) in France or when planned to be held 100% by
parent co
No prescribed structure, except for appointment of of a
“chairman”; certain key decisions must be adopted
collectively by SHs
Need 1 or more natural or legal persons to form; need
formal recording of formation
FRANCE
• Société par actions simplifiée (SAS)
• Registration mandatory w commercial
register
• Has own legal personality
• Minimum Euro 37k share capital
• Stock exchange listing not possible
• Sole liability of co; SHs not liable in theory
beyond capital contributed to co.
• No complusory employee codetermination
FRANCE
• Société par actions simplifiée (SAS)
• To amend by-laws, increase/decrease
share capitla majority rule set in by-laws;
changes registered w commercial register
• Cross-border mergers currently impractical
• Same other general considerations as w
SA
FRANCE
Société à responsabilité limitée (SARL)
Does not acquire full legal existence & cannot
enter into contracts in own name
May be created w 1 SH, in which case it is an
EURL (Entreprise unipersonelle à responsabilité
limitée)
Sole liability of the company (key consideration to
use it)
Mandatory registration with trade & company
register
2 organ structure: SH meeting & manager(s)
No minimum share capital
No employee co-determination
FRANCE
• Société à responsabilité limitée (SARL)
• ¾ supermajority to amend articles or vary
share capital
FRANCE
Société Anonyme (SA)- public version
(Listed)
2 or 3 organ structure: SH meeting & BOD, or
SH meeting, Mgmt Board & optional
Supervisory Board
Need 7 or more natural or legal persons to
form; need formal recording of formation
Registration mandatory with
companies/commercial register
SA has its own separate legal identity
Minimum share capital of Euro 225k
FRANCE
Société Anonyme (SA)- public version
Different classes of shares permitted; transfer of
shares by simple agmt
Listing on a stock exchange possible
Sole liability of SA, SHs not liable beyond shares
Employee co-determination: compulsory only in
state cos or if they own 3% or more of share (when
an issue?)
To amend articles of association or vary capital,
need 2/3 majority of extraordinary general meeting
(SHs)
FRANCE
• Société Anonyme (SA)- public version
• Such amendments must be registered w
commerical register
• Cross-border merger currently impractical
• Cross-border transfer of seat requires
unanimous SH consent, but SA dissolved
unless convention in place
FRANCE – other business
entities
• Below types are relatively rare:
• General partnership (Société en nom
collectif – SNC)
• Limited partnership (Société en
commandite)
• Société en participation
• Economic Interest Grouping (Groupment
d’intérêt Economique – GIE)
ENGLAND & WALES
• Incorporated companies come in 3 forms:
– Companies limited by shares (most important)
– Companies limited by guarantee – used mainly
for sports clubs and non-profit making entities
– Unlimited companies – no limit on the liability of
the members; gen not used, but sometimes in
certain tax-efficient corporate structures
• Companies limited by shares come in 2
forms:
– Public companies
– All others limited by shares not public (“private”
companies)
ENGLAND & WALES
• Shelf companies can be, & often are,
purchased (especially w time constraints)
• These shelf cos have not traded & exist only
to save time & administration issues relating
to incorporating new cos
• Generally cost about £1,250
• Transaction can be done in several hours, so
long as you can provide new directors (Ds) &
SHs willing to take transfer of subscriber
shares
ENGLAND & WALES
• Public limited company (Plc)
• Structure includes SHs meeting & a Board
of Directors (BOD)
• Minimum 2 SHs to form
• Minimum 2 directors (Ds), plus company
secretary to have certain qualifications
(prior public co sec’y role,
solicitor/barrister, certified accountant or
someone Ds believe has necessary prior
experience in general)
• Public limited company (Plc)
• Need to file w Companies House details of
Ds, Secretary, initial SHs and any new share
issuances, plus annual returns & accounts
must be filed
• Minimum share capital of £50k (of which
£12,500 must be paid up)
• Company must have authority to issue new
shares
• Statutory pre-emption rights on issue (can be
disapplied)
Public limited company (Plc)
Can list a Plc on stock market
Limited liability of SHs; personal liability of Ds for
breach of fiduciary duty or wrongful or fraudulent
trading or certain violations of Companies Act 1985
No employee co-determination
Need SH resolution to amend articles of
association (by-laws) & to increase capital, but Ds
can issue new shares if duly authorised
Capital cannot be repaid to SHs except in very
limited circumstances
• Public limited company (Plc)
• Cross-border merger not possible
(compare to Delaware, US corp law)
• Cross-border transfer of seat not possible
ENGLAND & WALES
Ltd / Limited = private limited liability co
Structure includes SH & Board of directors
(BOD)
Need at least 1 SH, at least 1 director (D) & a
company secretary
Must provide details of all Ds & secretary to
Companies House; mandatory notification of
share issues, annual return & accounts to be
filed (but small co exemptions)
Practical internet law sources exercise:
Companies House, EU Lex website, SEC &
NYSE (French US listed cos), AMF websites
Ltd / Limited cont’d
No minimum share capital
Company must have authority to issues shares
Statutory pre-emption rights on issue of new
shares
Cannot list on stock market
Limited liability of SHs
Personal liability for Ds for breach of fiduciary
duties, wrongful or fraudulent trading or certain
violations of the Companies Act 1985
No employee co-determination
• Ltd / Limited co. Cont’d
• To amend articles of association or effect
capital increase/decrease, need SH
approval
• Directors can issue new shares is authorised
to do so
• Capital generally cannot be repaid
• Cross-border mergers not possible
• Not possible to effect cross-border transfer of
seat
ENGLAND & WALES
• Ordinary partnerships - 2 or more people
carry on business together to make a profit
–
–
–
–
No separate legal personality
Take business decisions together
Share ownership of assets
Share responsibility for debts & obligations w NO
LIMITS
– Such liability JOINT & SEVERAL
– Easy to form & unwind
– Subject the Partnership Act of 1890
ENGLAND & WALES
• Limited partnerships (LPs)
– At least 1 general partner (who has
UNLIMITED LIABILITY & sole responsibility
for management (mgmt) of partnership and 1
or more limited partners
– Limited partners’ liability limited to extent of
capital contribution but no right to participate
in mgmt)
– Subject to Limited Partnerships Act 1907
Limited liability partnerships – LLPs
Created by the Limited Liability Partnership Act
2000
Key feature is that it combines the
organisational flexibility & (for many purposes)
tax status of a partnership w corporate
personality & limited liability for its members
Very common amongst large professional
services organisations: Law firms, accounting
firms, etc.
ENGLAND & WALES
• European Economic Interest Groupings
(EEIGs)
• Rare in the UK, but they offer an
alternative format for joint venture nonprofit making entities
• Also exist other organisations, including
indutrial and provident societies and
friendly societies, often used for “not-forprofit” ventures
ENGLAND & WALES
• LP/LLP (Limited partnership w a limited
liability company as general partner)
• Overseas companies: can establish presence
in GB either by opening a branch or
establishing a place of business there
• A branch is a part of a company used to
conduct business on behalf of co, performing
functions not merely ancillary or incidental to
business
• If not enough activities to justify a branch,
establish “place of business”
ENGLAND & WALES
• 2 different registration regimes for
branches & places of business
GERMANY – System of commercial business
forms
• Sole proprietorship (Einzelkaufman)
• Partnerships (Personengesellschaften)
• Public & private limited liability
companies/corporations
(Kapitalgesellschaften)
• Branches (Zweigniederlassung)
GERMANY
The Stock Corporation (Aktiengesellschaft AG)
3 organ structure: general meeting of SHs, BOD &
Supervisory Board
1 or more natural or legal persons to form; fromal
recording of formation
Minimum Euro 50k share capital (req’d by EU
Directive)
Different classes of shares admitted; transfer by
simple agmt
Listing on a stock exchange possible
Sole liability of AG, SHs not liable in principle for
more
The Stock Corporation (Aktiengesellschaft
- AG) cont’d
Employee co-determination: supervisory
board w 1/3 employee reps if more than 500
employees; up to ½ if more than 2000
employees
Amendment to articles of association (bylaws) or variance of share capital by SH
resolution, to be registered w commercial
register
Cross-border merger not currently possible
Cross-border transfer of seat not possible
either; deemed a liquidation
GERMANY
• The Limited Liability Company (GmbH –
Gesellschaft mit bescrankter Haftung) –
key form in Germany for most small/medium
businesses
• 2 organ structure: SH meetings & Mgmt
Board; Supervisory Board optional, but
employee co-determination may make it
mandatory
• 1 or more natural or legal persons to form,
formal recording of formation
• Registration mandatory
• Has own legal personality
The Limited Liability Company –
GmbH
Minimum share capital of Euro 25k
Equal rights for all SHs if uniform
shareholdings
Transfer of shares by notarial agmt
Listing on a stock exchange not possible
Sole liability of GmbH; in principle SHs not
liable for more than contribution
Employee co-determination: Mandatory
supervisory board w 1/3 employee reps if
more than 500 employees; up to ½ if more
than 2000 employees
• The Limited Liability Company – GmbH
• Need notarial SH resolution to amend
articles of association (by-laws) or to vary
share capital, to be registered w
commercial register
• Cross-border merger currently not
possible
• Cross-border transfer not possible;
deemed a liquidation
GERMANY
• Limited Partnership with Share Capital
(KG a.A. – Kommanditgesellschaft mit
Aktien)
• GmbH & Co. KG (Limited Partnership with
a Limited Liability Company as General
Partner)
– Basis is a typical limited partnership KG –
Kommanditgesellschaft)
ITALY
The Joint Stock Corporation (SpA –
Società per Azioni)
3 organ structure: SH meeting, BOD & Board
of Statutory Auditors; alternative systems of
corporate governance
1 or more natural or legal persons to form;
need formal recording
Mandatory registration w commercial register
Has own legal personality
Minimum legal capital of Euro 120k
The Joint Stock Corporation (SpA – Società per
Azioni)
Different classes of shares admitted; transfer by
simple agmt
Listing on a stock market possible
Sole liability of the SpA; SHs not liable beyond
investment
No employee co-determination
To amend articles of association (by-laws) or vary
share capital, need notarial SH resolution, to be
registered w commercial register
Cross-border merger possible (Lottomatica/GTECH)
• The Joint Stock Corporation (SpA –
Società per Azioni)
• Possible for cross-border transfer of seat,
but co may lose its Italian nationality
ITALY
• Partnership Limited by Shares (Sapa –
Società in accomandita per azioni)
• Has 2 classes of SHs: general partners (soci
accomandatori), who are jointly & severably
liable for all obligations and are co’s Ds, and
limited partners (soci accomandanti), liable
only up to capital subscribed & who cannot
be Ds
• Form seldom used
• Other agircultural companies & cooperatives
also exist
ITALY
Limited Liability Company (Srl – Società a
responsabilità limitata)
2 organ structure (SH meeting & BOD); Board of
Statutory Auditors optional, but mandatory if capital
equal to or greater than Euro 120k
1 or more natural or legal persons to form it; formal
recording of formation
Registration mandatory w commercial register
(companies’ register of local chamber of
commerce, industry & artisanry)
Srl has own legal personality (compare to French
Sarl)
• Limited Liability Company (Srl – Società a
responsabilità limitata)
• Minimum share capital of Euro 10k
• Rights proportionate to quotaholding
(“quotas” not “shares”)
• Transfer of quotas by simple agmt
• Cannot list on stock market
• Sole liability of Srl; in principle SHs not liable
• No employee co-determination
• Limited Liability Company (Srl – Società a
responsabilità limitata)
• Amendment of articles of association,
capital increase/decrease by notarial SH
resolution, to be registered w commercial
register
• Cross-border merger is possible
• As is cross-border transfer of seat (but
may lose Italian nationality)
ITALY
Branches of foreign companies
Art. 2508 of Civil Code provides for possibility of
foreign cos establishing 1 or more branches in Italy
Need to file various co documents (minutes of SH
meeting approving branch, appointment of branch
manger, address, memorandum & articles of
association) w notary, who registers them w
commercial companies register
Docs become public in Italy
Branch is not a separate entity from parent co
(liable 100%)
POLAND
• Limited Liability Company (sp. Z o.o. –
spolka z ograniczona odpowiedzialnoscia)
• The basic type of incorporated co in Poland
• Note on shelf companies – possible to
acquire, but often prior traders need due
diligence, not regulated by Polish
Commercial Companies Code
• 2 or 3 organ structure: SH meeting & mgmt
board mandatory, supervisory board only
mandatory when more than 25 SHs & share
capital exceeds PLN 500k
• Limited Liability Company - sp. Z o.o. Cont’d
• 1 or more natural or legal persons to form
• Sole SH sp.Zo.o. cannot establish another
sole SH sp.Zo.o.; need to formally record
formation
• Registration mandatory w Commercial
Register
• Has own legal personality
• Minimum share capital of PLN 50k (app. Euro
13.3k)
• Listing on stock exchange not possible
• Equal rights of SHs in principle
Limited Liability Company - sp. Z o.o. Cont’d
Transfer of shares by agmt w signatures certified
by notary
Sole liability of sp.Zo.o.; in principle SHs not liable
No mandatory employee co-determination
Amendment of articles of association, capital
increase/decrease by notarial SH resolution, to be
filed (registered) w register court
Cross-border merger not possible
Cross-border transfer of seat not possible- deemed
to be a liquidation
POLAND
Joint Stock Company (S.A. – spolka akcyjna)
3 organ structure: general meeting of SHs, BOD
and Supervisory Board (wide German influence)
1 or more natural or legal persons to form, except
that a sole SH sp.Zo.o. Cannot establish an SA
Registration w commercial register mandatory
SA has own legal personality
Minimum PLN 500k share capital (appr. Euro
133k)
Different classes of shares permitted, transfer
shares by simple agmt
POLAND
Joint Stock Company (S.A. – spolka akcyjna)
Listing on a stock exchange possible
Sole liability of SA, SHs not liable beyond
contributions
No mandatory employee co-determination
To change articles or invrease/decrease share
capital, need notarial Sh resolution, to be
reigistered w register court (version of commercial
register)
Cross-border mergers & transfer of seat not
possible (latter = liquidation)
Practice point: Articles of
Association
• Let’s take a look at the Articles of
Association (Statut, by-laws) of a French
SA
• We will consider certain clauses more
carefully when dealing w issues later in
class
• What strikes you as interesting, or strange,
in the document?
• Are there terms that you are unfamiliar w
or would like explained in more detail?
EUROPEAN COMPANY – SOCIETAS
EUROPAEA (SE)
• Available since Oct. 2004, became reality 35 yrs
after first proposed (political agmt reached in Dec.
2002)
• Gives cos operating in more than 1 Member State
option of being established as a single co under
EU law & able to operate throughout EU w 1 set of
rules
• Also provides for a unified mgmt & reporting
system rather than all the different national law of
each state where they have subsidiaries (subs)
• Prospect of reduced administrative costs & legal
structure adapted to internal mkt as a whole
Societas Europaea
• Statute allows cos incorporated in different
EU Member States (States) to merge or form
a holding company or joint subsidiary while
avoiding legal & practical constraints due to
27 different legal systems
• Registered office of SE designated in
statutes must be place where it has its
central administration, that is to say its true
centre of operations. SE can easily transfer
its registered office w/i EU w/o dissolving the
company in one State in order to form new
one in another State
EUROPEAN COMPANY – SOCIETAS EUROPAEA
(SE)
2 or 3 organ structure: general meeting of SHs plus (i) a onetier BOD (1 admin organ) or (ii) a two-tier board (1
supervisory organ & 1 mgmt organ)
Formation (4 possibilities):
1) Merger into SE: available only to public limited cos from
different EU States;
2) set up Holding SE: available to public & private limited cos w
their registered offices in different EU States or having subs or
branches in EU States other than that of their registered office
3) set up Subsidiary SE: available under same circumstances
to any legal entities governed by public or private law;
4) transformation into SE: conversion of a public company
previously incorporated under nat’l law
Formation formalities governed by national laws of state where
SE is registered
Societas Europaea – Mgmt
Options
Under two-tier system, SE is managed by a Mgmt board. A
member or members of Mgmt board have power to represent
co in dealings w 3d parties & in legal proceedings
They are appointed & removed by supervisory board. No
person may be member of both Mgmt board & supervisory
board of same company at same time. However, supervisory
board may appoint one of its members to exercise functions of
member of Mgmt board in event of absence due to holiday, &
function of person concerned as member of supervisory board
suspended temporarily
Under one-tier system, SE is managed by an
administrative (Admin) board. A member or
members of Admin board have power to represent co in
dealings w 3d parties & in legal proceedings. Under one-tier
system Admin board may delegate mgmt power to 1 or more
of its members.
Societas Europaea miscellaneous
Taxes: SE is treated same as any other multinational,
that is, it is subject to tax regime of national legislation
applicable to co & its subs
SEs are subject to taxes & charges in all EU States
where their administrative centres are. Thus their tax
status is not perfect as there is still no adequate
harmonisation at EU level
Winding
- u
p, liquidation, insolvency & suspension of
payments are in large measure to be governed by
national law
An SE which transfers its registered office outside EU
must be wound up on application of any person
concerned or any competent authority
EUROPEAN COMPANY – SOCIETAS EUROPAEA
(SE)
• Registration & publication in commercial register mandatory:
registration & completion of liquidation of an SE must be
disclosed in “Official Journal of the European Communities”
• Every SE must be registered in state where it has its
registered office, in register designated by law of that state
• SE has its own legal personality
• Minimum share capital of Euro 120k
• For share transfers and listings on stock markets, all
formalities governed by laws of member state in which SE is
registered
• Sole liability of SE; in principle SHs not liable beyond
investment
• Employee co-determination depends on cos involved in
formation
EUROPEAN COMPANY – SOCIETAS EUROPAEA
(SE)
Formalities re: amendment of articles of association or
capital increase/decrease governed by member state
in which SE is registered; registration /publication of
changes is mandatory
Cross
- border merger possible, of SEs though (Treaty
of Rome Art 20 provided this to be goal of EU, but
never realised)
Cross
- border transfer of seat to another State is
possible also, but must be accompanied by transfer
also of head office there (failure to comply cld lead to
liquidation)
So far not yet extensively used by cos, but this is
changing (BASF etc.)
EUROPEAN COMPANY – SOCIETAS
EUROPAEA (SE)
SE meant to enable groups of cos w activities in
various industries to restructure by creating 1 SE
for each geographical sector, 1 SE for each activity
sector & 1 SE for each product line
Close relation to intro of the €, a needed
instrument w/i economic & monetary union in terms
of competition for access to capital
Cos w operations in various States can move
across nat’l borders & avoid complex & costly
procedures of dissolution in original State & reincorporation as new legal entity in country to
which they wish to move
SE – a few examples
• For example, “Subaru France” cld form an
SE, “Subaru SE” w “Subaru Germany”, or an
SE, “Subaru-Peugeot SE” w “Peugeot Spain”.
• Also a holding SE or joint sub SE cld be
formed by 2 cos of the same State if each
had for at least last 2 yrs an establishment
situated in another State
• Thus “Ford France” or “SEAT France” cld
form a sub SE or holding SE if they had
branches in another State (e.g. Czech
Republic)
Societas Europaea
None of above advantages currently available
under national laws in force
Offers cos a “Euro flag”, valuable in publicity terms
w customers, clients, suppliers, creditors, etc.
Removes psychological problems w reincorporation
Text of SE Regulation contains 70 articles, not c.
300 of 1970 or 1975 versions
Represents great improvement in flexibility &
simplicity
More open to SMEs, bx of share capital Euro 120k
(previous proposals had ECU 500k or ECU 250k)
Societas Europaea
For non-EU multinationals, no longer “fortress
Europe”
Access opened to them (w central admin &
strategic decision centres outside EU) so long
as they are registered in an EU State & have
“a real link with a Member State’s economy” =
simply means an establishment in EU
Some commentators believe, beyond
efficiency & productivity gains , may
strengthen EU firms against hostile take over
bids
Increased TRANSPARENCY of EU financial
mkts
SE – Worker Representation
Current battle over character of evolving European
system of corporate governance. Issue is
fundamental choice btw 2 different conceptions of
the firm: the shareholder model, where purpose of
firm is to maximise value in interests of SHs, and
stakeholder model, where firm has responsibility to
broader range of stakeholders
Worker groups argue for EU to use its existing
legal framework to develop a co go regime which
focuses on society: they say an important EU
contribution to realising corporate social
responsibility is establishment & maintenance of
well-balanced corporate governance framework-focus on SE & employee co-determination
SE – Worker Representation
“Council Directive complementing Statute for a European
company w regard to the involvement of employees in the
European company”:
Directive set up standards of employee involvement, guaranteeing
autonomy of social partners & at the same time a degree of existing
rights of employees provided by different nat’l regimes of
participation rights
Several participation models are possible: first, a model in which
employees participate in supervisory board or administrative board,
as case may be;
second, a model in which the employees are represented by a
separate body; &
finally, other models to be agreed btw Mgmt or Admin boards of
founder cos & employees or their representatives in those cos, the
level of information & consultation being same as in case of second
model
SHs may not approve formation of SE unless one of models of
participation defined in Directive chosen.
SE – Worker Representation
• Under this EU Directive on worker
involvement, creation of SE wld require
negotiations on involving employees of cos
concerned
• If impossible to negotitate, standard principle
annexed to Directive apply (SE mgrs to give
regular reports, w consultation & info:
strategy, bus plans, sales, production, M&A,
implications for workers, closures, layoffs,
etc.)
Worker participation in SE
In some cases where negotiations fail & where cos
involved in creation of SE previously subject to codetermination, the SE wld be obliged to have
standard principles to help them participate
Applies to SE created as a holding co or JV, when
majority of employees had rights, prior to the SE,
to participate in co decisions
If SE created by merger, standard codetermination principles apply when 25% plus of
employees had participation rights bf merger
(political “hot potato” blocked agmt on Directive
until Nice Summit 2000)
SE & worker co-determination
• Nice Summit compromise: States could
decide not to implement Directive on
participation for SEs created by merger, but
then SE cld only be registered in that State if
agmt w employees concluded or when no
employees covered by co-determination
previously
• What might happen bx of this last point?
• In case of transformation of nat’l co into SE,
arrangements for worker participation
previously applied wld have to continue to
apply
SE & worker participation
• However, Directive aims to preserve
acquired rights of employees by applying
“before & after principle”, not to export
worker participation to where not exist (but
reading labour advocates, they would like
to push this)
EUROPEAN COMPANY – SOCIETAS
EUROPAEA (SE)
CASE STUDY: BASF: from AG to SE
In Feb 2007, the Board of Executive Directors of BASF
AG proposed to Supervisory Board to convert BASF
AG into a European Company (Societas Europaea,
SE) w effect in 2008.
Dr. Jürgen Hambrecht, Chairman of the Board of
Executive Directors of BASF Aktiengesellschaft
“With our decision to convert BASF into a European
Company we are making a clear commitment to our
main market in Europe and are assuming a pioneering
role in the chemical industry.”
BASF SE conversion timeline
• March 16, 2007: Invitation to Annual Meeting
w detailed information about conversion
• April 26, 2007: Resolution of Annual Meeting
regarding conversion
• Mid-June, 2007: Beginning of negotiations on
employee participation
• Mid-December, 2007: Conclusion of
employee negotiations on employee
participation
• Q1, 2008: Registration of BASF SE in
commercial register
Why BASF doing this?
• Show its pan-EU business
commitment
• Logical outcome of a 10 yr business
structuring process
• Be first in chemicals & related
industries to do so
• Show its dedication to EU integration
What advantages does BASF
see?
• SE a modern responsive structe better
suited to BASF’s 12 member supervisory
board (employee co-determination stays in
effect)
• Emphasise social partnership throughout
Europe by intergrating employee
representatives from rest of Europe into
supervisory board (Italy, England etc. don’t
have)
Established SEs include:
Allianz SE (Germany), Artemis Global Capital SE
(Germany), Carthago Value Invest SE (Germany),
*Conrad Electronic SE (Germany),
Eurotunnel SE (Belgium), *Elcoteq SE (Finland), Galleria di
base del Brennero BBT SE (Austria), Graphisoft SE
(Hungary),
Innovatis SE (France), Jura Management SE
(Netherlands), Lyreco CE, SE (Slovakia),
Media Corner SE (Belgium), MAN B&W Diesel Group
(Germany), MatMar SE (Austria), Narada Europe SE
(Norway), *Plansee SE (Austria), Riga RE- SE (Latvia),
*SE Sampo Life Insurance (Estonia), Schering
- Plough
Clinical Trials SE (UK), SCS Europe SE (Netherlands),
Viel et Compagnie
- F
inance SE (France), World
W
ide
Invest SE (Germany), YSL Beauté Benelux SE (France)
COMPANIES INTERESTED IN ESTABLISHING
AN SE
• Arcelor , Braun-Melsungen,
DaimlerChrysler, EADS, Eurotunnel ,
Fortis, Hypo Real Estate , Linde AG ,
Mazaars , Neumann Partners GmbH ,
SAP , SEB, Suez , TeliaSonera, WAZMediengruppe
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
Freedom of establishment one of 4 fundamental
freedoms of EU internal market
Includes right to take up & pursue activities as a selfemployed person & to set up & manage
undertakings under conditions laid down for its own
nationals by law of country where such
establishment is effected
Thus, Art. 43 of Treaty (Rome) prohibits all
restrictions on freedom of establishment of nationals
of 1 State in territory of another
Also prohibits restrictions on setting up of agencies,
branches or subsidiaries by nationals of 1 State in
territory of any other one
• Freedom of establishment includes freedom of
primary & secondary establishment.
• NB: Treaty puts natural & legal entities on an
equal footing
• Thus, cos formed in accordance w law of given
EU State & having their registered office, central
administration or principal place of business w/i
EU must be treated in same way as natural
persons who are nationals of States (Article 48)
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
• provisions on freedom of establishment do not apply to exercise
of official authority in state concerned: ECJ has interpreted this
exception very restrictively, limiting it to those functions which are
closely related to exercise of sovereign rights, which require
special loyalty to State
• Another exception applies to provisions providing special
treatment for foreign nationals on grounds of public policy, public
security or public health, where proportionality test needs to be
satisfied
• One of main aims of Euro legislation by Council & Euro
Parliament is to increase legal certainty & effectiveness.
• However, since secondary legislation was very much delayed it
was very important to establish whether it was possible for
natural & legal persons to rely directly on EC Treaty provisions
on freedom of establishment
Freedom of Establishment
Building on 1963 Van Gend en Loos decision,
which established the EU legal order as a new &
autonomous legal order in its own right, ECJ
confirmed that:
‘the rule on equal treatment w nationals is one of
the fundamental legal provisions of the
Community. As a reference to a set of legislative
provisions effectively applied by the country of
establishment to its own nationals, this rule is, by
its essence, capable of being directly invoked by
nationals of all the other member states’ (Jean
Reyners v. Belgium- 1974).
EU incorporation theory
• As stated earlier, most countries adhere to
the “siège réel” (“real seat”) view of
incorporation
• While others (UK, Eire, DK, NL) hold a
more open incorporation theory– more like
US
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
European Court of Justice case law on crossborder activities
ECJ has issued several judgments about scope of
freedom of movement of Euro cos defined by an
interpretation of provisions of EC Treaty.
In several decisions, ECJ has emphasised
principle that cos registered in one EU State
should be able to do business throughout EU w/o
being made subject to specific incorporation
requirements in other States.
Decisions have progressively established
European theory of freedom of movement of cos
(more like US)
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
The Centros Case (Case C-212/97; 9 March
1999)
2 Danes established Centros Ltd under laws of
England & Wales. Co was to engage in business
only in Denmark (DK)
incorporators clearly stated that they established
entity under English/Welsh law only to avoid
minimum capitalisation requirement for Danish
LLCs (approx £25,000).
Danish commercial registry considered this to be
an unlawful circumvention of Danish law
minimum capitalisation rules & refused to register
co’s branch office in DK
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
Centros - 2 main ideas: 1) ECJ ruled that where a co
had exercised its right of establishment under Treaty,
EU States are prohibited from discriminating against
this co on ground that it was formed in accordance w
law of another EU State where it has its registered
office but does not carry on business; 2) State is not
authorised to restrict freedom of establishment on
ground of protecting creditors or preventing fraud if
there are other ways of countering fraud or protecting
creditors. Court points to availability to Member States
of option of adopting EC harmonising legislation in this
area of company law;
it constitutes pressure for adoption of 14th directive
(transfer of registered offices)
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
•
•
•
•
The Überseering Case (Case C-208/00; 5 November 2002)
ECJ went further: All SHs of Überseering BV, an LLC organized under
Dutch laws , were resident in Germany, & co’s principal office was located
in Germany. German courts decided that bx of location of co’s principal
office German corporate laws apply to it. The Dutch co was thus dismissed
from court proceedings in Germany.
In judgment, ECJ ruled it was incompatible w freedom of establishment
guaranteed in Arts. 43 and 48 EC for State to deny legal capacity (&
standing to sue or be sued in courts) to co formed in 1 State which moves
its central place of administration to another State.
Against expectations of many German legal commentators &
recommendation of Advocate General, ECJ also held that where a co
incorporated in another EU State exercises its freedom of
establishment in another State, that other State is required to
recognize co’s legal capacity (& to be party to legal proceedings) which it
enjoys under laws of its state of incorporation
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
Überseering Case: Following ECJ judgement, co
incorporated in EU State is entitled to rely on principle
of freedom of establishment to contest any refusal by a
host state to recognise it as a legal entity w capacity to
enter into contracts & be a party to legal proceedings
As matter of German law, this decision signals end of
previous practice where legal capacity of foreign
incorporated cos was not recognised, where effective
seat of admin was in Germany
Will provoke much academic discussion on whether, &
if so to what extent, accepted phenomenon of full
recognition of legal capacity of ‘pseudo
- foreign co’ w/i
single market will be extended to other areas of
company law
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
Inspire Art (Case C-167/02; 30 September
2003)
A Dutchman established co (Inspire Art Ltd)
under laws of England & Wales, requesting
registration of co’s Dutch branch office at
commercial registry in Netherlands (NL)
Registry took position that specific Dutch rules
for foreign entities registered in NL were to
apply to co.
Consequence: Inspire Art Ltd would have been
required, inter alia, to use a co name indicating
its foreign origin, & comply with minimum
capitalisation rules for Dutch LLCs.
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
Inspire Art case: ECJ continued its tendency of
deciding in favour of freedom of establishment by
holding that rules submitting pseudo-foreign
companies to co law of host state were
inadmissible
It held that a foreign co is not only to be respected
as legal entity having right to be a party to legal
proceedings, but rather has to be respected as
such, that is, as a foreign company that is subject
to co law of its state of incorporation
Any adjustment to company law of the host state
is, hence, not compatible with European law
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
• Hughes de Lasteyrie (Hughes de Lasteyrie du Saillant v.
Ministère de l'Économie, des Finances et de l'Industrie, case
C-9/02)
• In case, French Conseil d’Etat referred question to ECJ
whether French legislation which, to avert tax avoidance risk,
established mechanism for taxing increases in value where
tax residence was transferred abroad, was compatible w
principle of freedom of establishment under EC Treaty
• Court said freedom of establishment is one of fundamental
provisions of EU law & that, according to well-established
case law, observance of that freedom precludes EU State of
origin from hindering establishment of one of its nationals in
other EU States, including by tax measures
FREEDOM OF
ESTABLISHMENT
In Hughes de Lasteyrie case, ECJ viewed provision was
likely to restrict exercise of right, having at very least
dissuasive effect on taxpayers wishing to establish themselves
in other EU State, because they are subjected, by mere fact of
transferring their tax residence outside France, to tax on a
form of income that has not yet been realised, & thus to
disadvantageous treatment compared w person resident in
France
Such hindrance can be allowed only if it pursues legitimate
purpose that is compatible w EC Treaty & is justified by
imperative reasons in public interest
Measure, inferring general intention of tax evasion from mere
transfer of tax residence to another Member State, cannot be
justified by imperative reasons in the public interest: it is
disproportionate in relation to the objective sought
EU COMPANIES & FREEDOM OF
ESTABLISHMENT
Hughes de Lasteyrie case:
Provision is aimed generally at any situation where
taxpayer w substantial holdings in co subject to corp
tax transfers residence outside France for any reason
at all, & thus presumes an intention to circumvent
French tax law by taxpayer who transfers his residence
outside France
Court considers that objective– to prevent taxpayer
eluding payment of tax on increased value due in
France – may be attained by measures less coercive
or less restrictive of freedom of establishment & which
relate specifically to risk of such temporary transfer,
e.g. by taxing taxpayer who, after short stay abroad,
returns to France once his increased values realised
Thank You
• Contact information
– Should you have any additional questions,
please feel free to contact me at:
• patrick.omalley@interpresas.com
• www.interpresas.com
© Patrick J. O’Malley 2008