The Simplified European Company (“SEC”) follows the current trend toward meeting the needs of small and medium-sized enterprises (“SME”), which comprise more than 98% of the economic fabric of the European Union.
In the past, three regulations were used to create European companies: the Societas Europaea (“European company” or “SE”), the European economic interest grouping (“EEIG”) and the Societas Cooperativa Europaea (“European Cooperative Society” or “SCE”). None of these legal structures corresponds to the needs of SMEs. In particular, as the Winter report1 emphasized: “the European Company was designed for large companies and does not at all meet the needs of SMEs”.
Two bills to establish simplified companies failed to reach fruition: the European Private Company (“EPC”, 2008) and the single member limited liability company (“SMLC”, 2014).
It is therefore natural to question whether a third attempt can succeed, in spite of the growing support for such a structure.
The creation of the Simplified European Company is one of the aims of the two successive action plans of the Capital Markets Union (“CMU”), which places real importance on the need to make financing and the financial markets more accessible to SMEs2. Furthermore, in January 2020, the Bundesverband der Deutschen Industrie (the Federation of German Industries or “BDI”) and the Mouvement des Entreprises en France (the Movement of Enterprises in France or “MEDEF”) published a joint statement calling for a new initiative of this type.
At the beginning of 2021, the Henri Capitant Association published a report exhorting the European Union to adopt the Simplified European Company. The report came out of the European Business Law project, led in France by the Fondation pour le droit continental (also known as the Civil Law Foundation) and the Henri Capitant Association, in charge of the project’s scientific aspects, in participation with approximately one hundred major European legal experts. The SEC is a key part of the Code.
The Haut Comité Juridique de la place financière de Paris (the High Legal Committee for the Financial Market of Paris or “HCJP”) released a report on March 2021 that included recommendations on the essential characteristics that should be included in the new simplified company structure.
Two factors pave the way for the creation of a Simplified European Company: changes to the legal, economic and geopolitical context, and the increased need of economic actors for such a structure.
The legal, economic and geopolitical context has changed strongly in favor of the creation of a Simplified European Company
The globalisation and digitisation of the economic environment has established the need for a new initiative. In addition, decisions of the EU Court of Justice have eliminated obstacles to the development of EPCs and SLMCs.
Towards greater globalisation and the digitisation of corporate law
From the end of the 20th century, digital development and the boom in globalisation and innovation have rewritten the economic landscape. An SEC is required to be competitive in a business context that is reorganising around new practices such as the growing importance of communication networks and the rise of new centres of economic and geopolitical influence. A strong European label with a higher profile would free investors from the legal and administrative labyrinths that arise whenever the corporate laws of different nations are involved. A simplification in the way companies are created and operated with respect to their trans-border European partners and a reduction in general costs, especially start-up costs is an objective of general European policy and the development of SMEs.
The purpose of an SEC is to enable start-ups to thrive which is key to the development of European competitiveness. A flexible and trans-national company structure would help secure and support both the development of these businesses and of employment, by making not only start-ups more agile, but also all SMEs. This ecosystem would ultimately encourage the expansion of European SMEs and would prevent these new companies from transferring their flag to an Asian or American fleet.
Recent changes to European Union legal policy
Changes to the European Union’s legal and regulatory context are favourable for the establishment of a Simplified European Company that would be competitive throughout Europe and would dampen the practice of ‘Law Shopping.’
Since the end of the ‘90s, the Court of Justice of the European Union’s rulings on the freedom of establishment3 have served to cement the predominance of the registered office over the company’s real office. The most recent decision was the Polbud ruling of October 25th, 2017, in which the CJEU ruled that a company can transfer its registered office without moving its real office in order to become subject to the law of another Member State, provided that the criteria for the connection of the company to the new Member State are met, “even though” the company conducts all of its business in the first Member State.
In reality, ‘Law Shopping’ and the creation of off-shore companies (which do not conduct their business in the State in which they are registered) demonstrates a real need for a competitive and uniform company structure designed for SMEs and at the European level. As the SEC would be an unlisted company, it would make financing easier for SMEs in Europe as investors, both European and foreign, are in search of a corporate structure that is flexible and understandable. Thus, an unlisted European company structure could help in obtaining financing for European SMEs from private equity funds or crowdfunding. The needs and expectations of economic actors are best met by such a structure.
Economic actors are increasingly seeking to set up a Simplified European Company
Different economic actors in France, Germany and the Netherlands have expressed their needs and expectations for a Simplified European Company. This is true for both issuers and investors, all of whom need a European company structure adapted for SMEs.
A necessity for issuers
Most economic actors that establish subsidiaries in several European Union Member States systematically use locally-available company structures. For them, the Simplified European Company would bring genuine added value. The SEC’s attractiveness would be strengthened by the systematic use of digital advances (electronic registration, remote voting, electronic signatures, etc)4. Electronic operation should be encouraged, in particular in order to lessen the need for the services of notaries, attorneys, auditors and even registries for formalities (registration, KYC, LAB/FT, etc.) and to prevent repeating formalities in each country in which the company operates. Nonetheless, legal restrictions require that the digitisation of these formalities comply with the institutions in place in each country.
The SEC will also have the advantage of significantly reducing legal costs associated with the incorporation and operation of SMEs in the European Union.
An essential driver to the development of small and medium-sized enterprises lies in opening up their capital to their employees and directors, especially in the technology and life sciences sectors. In this respect, in the United States, the use of stock options is often presented as having been a key – even indispensable – component in the success of Silicon Valley since the 1970s. Business Creator Subscription Warrants (BCSW) or free shares at the European level must be developed as much as possible, so that European SMEs can attract the best talent and more generally align employee success with company success without affecting the company’s liquid assets. Itwould be a considerable accomplishment to have the SEC as the European pioneer.
The Simplified European Company will encourage management companies who play a key role in corporate finance to engage in geographic diversification in Europe and simplify the long-term acquisition of the permits required to operate in several European countries.
A legal status that is established and consolidated at the European level will be equally useful for banks, as it will make it easier to discuss financing problems. It will also stimulate trans-border private equity financing and make crowdfunding easier for European SMEs.
In addition, apart from the benefit of European status when it comes to the guarantees demanded by financial institutions, a European label, such as the SEC, will also, without a doubt, be easily recognised and respected by suppliers and clients, who until now have used price as the sole decision-making factor in deciding to contract.
The need for a unique structure that can reassure banks/suppliers/employees is present throughout the European market. It will enable the standardisation of operating rules in companies within a single group, and might even improve European competitiveness with respect to other international economic centres of influence that do not have this type of simple structure.
A necessity for investors
Investors have unanimously called for the establishment of a Simplified European Company that combines flexibility and standardisation, as the patchwork of existing national laws are not adapted to investor needs, expectations or constraints. The plethora of national laws and significant variation in regulation contributes to the complexity and burden of administrative costs for both asset management companies and the SMEs in which they invest. In France and Germany, for example, there is no uniformity in investment vehicles: the AG, GmbH, SA and SAS all have different characteristics. Creating an SEC would both simplify operations for investors through one or more standardised management structures and decrease the administration costs associated with the companies in their portfolio. The SEC structure must also take full advantage of advances in digitisation (electronic registration, remote voting, electronic signatures, etc.).
Creating an SEC could also support the objective of developing capital investment tools for employees and directors at the European level. The SE structure currently does not solve this problem, and SMEs and growing companies are perpetually in search of ways to cut costs.
The Simplified European Company also meets investors’ need for a standardised, consistent and secure legal investment structure. This corporate structure would help to solve the problem of adapting to different investor rights in each Member State depending on the structure of the companies invested in and where their registered office is located. The Simplified European Company will simplify European investments, so investors will no longer need a separate report for each company structure in Europe. While the SEC has just been proposed, investors have already indicated that they would not only likely use the structure when setting up their management companies, but they would also gladly encourage the companies they have invested in to use it too, as it would simplify the analysis and management of their investments and minimise the legal risks.
Source : HCJP – 9 rue de Valois 75001 Paris – Tel.: 33 (0)1 42 92 20 00 – hautcomite@hcjp.fr – www.hcjp.fr
1 Internal work conducted in 2001 by the “Winter” group, named for the Chairperson, Jaap Winter.
2 Action 5 of the Plan of September 24th, 2020 – Orienting SMEs towards other providers of finance. ; Action 15 – Protecting and facilitating financing. ; Action 6 – The digital and green transition for SMEs.
3 CJEC, March 9th, 1999, Centros, case C-212/97, Rec., p. 1459. ; CJEC, September 30th, 2003, Inspire Art, case C-167/01: the application of mandatory provisions to a company registered in another Member State is an infringement on the freedom of establishment, and cannot be justified, except in the case of overriding general interest or abuse of rights: therefore solely the law of the Member State in which the company is registered shall apply to the company; the Host State cannot impose the criteria of real office.
4 Directive 2019/1151/EU of June 20th, 2019, on the use of digital tools and processes in company law combined with Directive 2012/17/EU of June 13th, 2012, on the interconnection of central, commercial and companies registers that have already achieved a certain standardisation in this regard.