ARTICLES

ARTICLES A SHIFTING PARADIGM OF EUROPEAN COMPANY LAW? Friedrich Kilbler* I. THE EUROPEAN COMPANY LAW REGIME A. The Basic Model Traditionally, company law on the European continent has been quite different from the structures which have evolved in the U.S. The various national systems di ffer in many ways, but there appears to exist a common pattern that shows its own distinct features. I This pattern appears particularly obvious in Germany; thus I will use the Gem1all system as a starting point for my inquiry without always explaining how the rules and practices of countries like France, Italy, Spain, the Netherlands, Sweden, or Austria differ from German patterns. The basic model is characterized by three features. I. The model follows a stakeholder philosophy. The overall purpose of European corporate law is not maximization of shareholder wealth or return on equity investment, but the accommodation and reconciliation of conflicting interests, primarily among shareholders, creditors and employees. This basic approach is reflected on the individual firm level. First, employees are entitled to board representation;2 this generally implies a two-tier board structure, separating a managing or executive board from a supervisory board that serves as the organ implementing workers' co-detem1ination. The other distinct feature reflecting this philosophy is a comprehensive regime of legal capital, which is designed to serve as a "cushion" for the benefit of the creditors of the corporation. It imposes minimum amounts of capital for the formation of companies, excludes certain assets like future services from being used as shareholder contributions, requires cumbersome procedures for contributions in-k ind and severely restricts the distribution of dividends and corporate stock repurchases. This burdens not only the . Professor of La\\'. I)nlversity of Pennsylvania Law School. Professor emeritus. University of FrankfUr1 I wish tll thank panicipants of a workshop at the Univcrsit) of Pennsylvania Law School and iii panicular Alison Franklin for her research and drafting assistance. Mark Roe. PoliticI Id. at para ..\5 (,J Cbersecring llV v Nordic Constructilln Co. Case C-20S/00. 2002 I-:CR 1-9019. .. 1 Dwll Muil_ I YXX ICR 5483 (.; Oh,,;·seering 2002 FCR 1-9914_ para 66. ,,; Id. para SUo 228 COI.UMBIA JOUR 1\1. 01- HIRUPL!\i· 1.;\\" [Vol II inconceivable that an overriding interest, such as the protection of creditors, minority shareholders, employees, or the tax authorities. could justify restrictions on the freedom of establishment, but they would not suppOtt denial of "the legal capacity and, consequently, the capacity to be a patty to legal proceedings of a company properly incorporated in another Member State in which it has its registered ofllce.,,66 Less than a year later the Court had the opportwl ity to return to the issue. 67 Inspire Art was a private company limited by shares incorporated and registered in the UK. It operated an art dealing branch in Amsterdam; there were no other activities, and in palticular none in the UK. The sole director was a Dutch resident. It was uncontested that Inspire Alt was set up in the UK in order to avoid the legal capital regime imposed by the Netherlands. The branch was registered in the Netherlands, but the Dutch authorities required it to follow WFBV,68 a statute 69 requiring pseudo-toreign companies to form and maintain capital in the same way and to the same amount 70 a Dutch company is obliged to do. Inspire Art complained, and the Dutch Court referred the case to the ECJ. This time the Netherlands sided with Germany, [taly and Austria against the UK, and this time they lost. The ECJ 71 affirmed its ruling in the Cenlros case and extended it to the regulation of pseudoforeign companies. The imposition of the legal capital regime and other provisions of WFBV impeded the exercise of the freedom of establishment and therefore violated Alticles 43 and 48 EC Treaty.72 Again Daily Mail was distinguished: there the UK was impeding the exit of a company established under its own law. n Moreover, there was no justification for WFBV, either under the "public policy, public security or public health" exception of Art. 46 EC Treaty or for any other "overriding reason relating to the public interest.,,74 The Court confirmed that under Art. 43 and 48 "a national of a Member State who wishes to set up a company can choose to do so in the Member State the company-law rules of which seems to him the least restrictive and then set up branches in other Member States ....,,75 It did not matter if the finn had no other link to the Member State of its incorporation: " ... the fact that a company does not conduct any business in the Member State in which it has its registered office and pursues its activities only or principally in the Member Id., paras. 92 and 93. Kamer van Koophandel en Fabrieken voor Amstcrdam v Inspire An Ltd, Case C-167/0 I, 2003 E.cR.I-10155. 6~ Wet op de Formcel 8uitcnlandse Vennootschappen (Nctherlands Law on Formally Foreign Companies), Stb. 1997,697 ( elh.) [hereinafter WFBV I. GO Id at art. 1 (WFBV defines as formally foreign a company formcd under laws other than those of the Netherlands and having legal personality which carrics on its activities enlirely or almost entirely in the Nctherlands and also does not have any real connection with the State within which the law under which the company was formed applies). 70 For Inspire Art this would have been 18,000 Euro. See Inspire Art. 2003 E.C.R. 1-10155, at para. 27. 7J Sce supra note 54. 72 Inspire Arl, 2003 [C.R 1-10155. paras 95-104. 7J Id. al para. 103. This can be vicwed as an application of the "intcrnal an'airs doctrinc". Sec European Union Law, supra note 27, at Ill. H Inspire Arl. 2003 L.CR 1-10155, paras 107 and 131 - 143. 75 Id. at para. 13il 1>6 (,7 2005] , A SIIIFTIN(i PARADIGM OF EUROPEAN 1./\ W 229 State where its branch is established is not sufficient to prove the existence of abuse or fraudulent conduct. ... ,,76 C. Another Preliminary Conclusion In Germany these decisions have sparked controversy as to which components of German law can still be applied to German business operations incorporating in 77 another Member State. Although not generally admitted, it is obviously no longer true that the rules establishing the legal capital regime may be applied to such operations. Yet the line of ECl precedent cannot be understood as a complete victory for the incorporation theory. Member States have lost the power to keep their national business people from incorporating abroad and operating as British or Luxembourger companies, but under the Daily Mail doctrine they can still block exit moves of firms incorporated under their laws. However, the question remains whether the most recent legislative innovations have opened this alley. IV. TilE SOCIETAS EUROPAEA: A NEW VEHICLE FOR CHANGE? A. A Long History The European Company, or Societas Europaea ("SE"), has a long history quite similar to that of the Fifth Directive. The Commission published a first draft in 1970 78 and presented an amended and enlarged version in 1975. 79 This proposal suggested a comprehensive and exhaustive codification of more than 400 articles, again following the basic pattern of German law. It mandated separate executive and supervisory boards, works councils, and generous employee representation on the supervisory board, and included detailed regulation of conglomerates (Konzernrecht). For obvious reasons this was not acceptable for many Member States. The Commission in fact dropped the draft by 1982, and came back with a completely new proposal in 1989, including both a regulation 80 and a directive 81 to address the matter. The regulation presented a mere framework of no more than 137 articles, referring frequently to the corporate laws of the Member States. Employee participation was reserved for the Directive which would allow Member States the choice between three models: codetermination in a corporate board (following the German model); representation of workers' interests through a separate works council (as suggested by French law); or patterns of representation fixed by an 7(1 Id. at para. 139. See Ono Sandlllck. I)le Schrumpl"ung der CJheriagaungstheorie, 102 Zeilschrili fUI Vaglcichende Rechtswissenschali 447 (2003); Peter Ulmer. GlaubigerschulZ hci Schelllausiandsgesellschaften. ,,7 Neue Juristishe Wochenschrili 120 I (2004): Ilorsl Eidenmuller. Niederlassungsl"reihcit versus SchulZ des inlandischcn Rechlsverkehrs_ 33 Zcilschrift fUr Ucsellschaftsrecht 159 (2004) 7" Proposal for a Council regulation embodying a slalUle for Ihe Luropean Company, 1970 OJ (l" 77 124) I. 7'J Proposal for a l'nullcil regulation on the statute lor a European C'oJnpany_. Bull. f:_(~. 4-1975. at I. it xu Proposal for xl Council reg.ululiun on the :-ilatule for a European C'oI11pany. 1984 ().J_ (C' 263) 4] Proposal for a Council j)irel~live Supplementing Ihe Sialule for a European Conpany With R.egard to the Involvement 01" f:rl1ployel'~_ Bull. FC 5-1 <)8':1, al I 230 COLliMHI!\ .JOUR if\1 OF UJRUI'I/\N lAW [Vol. It agreement between enterprises and unions (retlecting practices in Sweden and Ireland). Germany rejected this approach. In 1996 the Commission established a group of experts, chaired by the former Commission President Etienne Davignon. 8 Its report recommended retaining only the agreement option ? The deliberation in the EC Council added "Standard Rules". incorporating the "before and after" principle which is designed to prevent the toundation of a Societas Europaea from depriving employees of their participation rights without their consent. This compromise provided the foundation for the "miracle of Nice" at the end of 2000: the heads of governments unanimously adopted the proposal; a year later the EC 84 83 Council enacted the Regulation and the Directive. B. The Regulation un the Statute Jor a European Company (SE) The SE-Regulation consists of 70 articles; it is much shorter than the earlier proposals and drafts. It provides for a mere fragment of the proposed initiatives of the original concept. Employee p3lticipation has been outsourced to the SEDirective, and the text regularly refers not only to the corporate law statutes of the Member States but also to "the provisions of laws adopted by Member States in implementation of Community measures relating specifically to SES."85 The result is a highly complex regulatory pattern, which cannot be described here in all of its 86 details. The SE "shall have legal capacity;,,87 it must have a "subscribed capital" of not 88 less than 120,000 Euro. More importantly, the SE must have its registered office 89 within one of the Member States of the Ec. This Member State is important, as its laws will determine all the issues not resolved by the SE-Regulation. From this it tallows again that there will be not one type (or legal form) of the SE, but a considerable number of differing institutions. This opens the possibility of choice between these variations. This choice is limited by several rules restricting the use of the SE. Such a company cannot be formed by natural persons but only by existing corporations, and 90 . 9\ . 9' only by a merger, by a transformatIon, as a (common) holdIng company, - or as a subsidiary.93 All participating corporations have to be "formed under the law of a "2 Final Report of the Group of Experts on Furop\:an Systems of Worker Involvement (with Regard to the European Company Stalute and other pending proposals), May 1997 (generally referred to as tht: Davignon Report), available af hltp://europa.eu.int/comm/ employment__social/ labourJaw/docs/davignonreport_en.pdf ", EC Council Regulation 2157/01(£C) on the Statute for a European Company, 20010.1 (I. 294) I [hereinalier Sf-Regj ~.j fC CoulKil Directive 200 1/86/EC, Supplementing the Statute for a European Company with Regard to the Involvement of Employees, 200 I 0.1. (L 294) 22 [hereinafter Sf-Dir.l. s; SE-Reg, supra note 83, at art. 9, para.l(c)(i). "I, For a detailed account, see Friedrich KObler, Die luropaische Aktiengescllschali., in rvtOnchner Kommentar wm Aktienrecht. Vol 9 (WulfGoette & Mathias Ilabersack cds .. forthcoming 2005) S7 Sf-Reg. supra note 83, at art 9, para I(c)(i). "" Id. at art. 4, para. 2. "9 Id at arts. 7 & 8 ~o Id. at art. 2, para. 1. "lid. at art. 2, para. 4. <)2 Id. at art. 2, para. 2. ", Id. at art. 2, para 3. 2005] A SHIFTING PARADIGM OF EUROPEAN LAW 23\ Member State,,,94 and they must either be registered in different Member States or operate through a subsidiary or branch outside the home country.95 A particularly significant feature of the SE relates to its legal complexity: the structure of a specific SE is governed by a hierarchy of norms including no less than nine different levels. 96 At the top of the pyramid are the mandatOlY provisions of the SE-Regulation. The next level consists of the provisions of the articles of incorporation, which are based upon an explicit authorization by the Regulation. The most important example is the choice between the two-tier system and the onetier systems. 97 Another step down we find the enabling provisions of the Regulation;98 at the next level reside the mandatory provisions authorized by the Regulation and enacted by the Member State. 99 These are followed by the agreement, to be formed by the participating enterprises and their employees in order to determine the participation or codetermination by the employees. IOO If such an agreement cannot be reached, it is substituted with the "standard rules" provided for in the Annex to the Directive. At the next level we find the mandatory rules of the stock corporation laws of the Member States; they are to be applied where the Regulation does not provide for its own rules, require specific rules to be enacted for the SE, or specifically authorize regulation by agreement or by the articles of incorporation. 101 Step eight is composed of the provisions of the articles of incorporation (as far as they are not based upon a specific authorization by the Regulation). At the bottom we find the enabling or default rules of the stock corporation laws of the Member States, which give way to deviating charter prov isions. The remaining content of the Regulation deals primarily with the formation of the SE 102 and with the structure of the two-tier and the one-tier systems. 103 A pal1icularly important provision appears towards the end of the text: two years atter its registration in its Member State of incorporation, an SE can be transformed into a public limited liability company governed by the law of this Member State; the Regulation emphasizes that such a conversion shall not result in the winding up of the company or in the creation of a new legal person. 104 C. The Directive Supplementing the Statute for a European Company with Regard to the Involvement of Employees The Directive establishes a regime that is hardly less complicated than the institutional arrangement provided by the Regulation. The core is a "negotiating Id. at art 2, paras. 1,2.3. & 4. Id. at art. 2. "" This hierarchy is mentlllTled. but not I'ully rellecled in SL-Reg Id. at an lJ. "7 This choice IS granted by SE-Rcg Id at art. 38(b J. This is binding for the Member Staks "" See, eg.• id. at art. 46. para 2 'n See. e.g.. id. at art. 43. para. '! (allows countric:s admilllllg so rar only the two-tic:r systc:m tu enact rules implementing the one-tier ll10det !l)r the SL) lOll The procedure is deterrnlllcd b) the SF-()1rI:ctJvc~ this is explained in Sectiun C. '01 SE-Reg. supra note 83. arts. 10& 15 101 Id. at ans 15-37. '0; Id. at arts. 38-60. '0. Id. at an. 66. para. 2. 'J. 'J5 CUUlivtlll/\ JUlJKI AL 01 U!I{UPLi\ Ll\W [Vol. II procedure,"'os designed to achieve "arrangements for the involvement of employees in the SE.,,106 The formation of such an arrangement or agreement is essential; it is a condition for the registration of the SE, IlJ7 which entails legal capacity. 108 The agreement is to be negotiated between the companies- involved in the formation of the SE and a "special negotiating body" representing the employees of these companles.)(>9 Whenever the agreement reduces the participation rights of any workers, it has to be adopted by a qualified majority of the special negotiating body.lllJ If such an agreement cannot be reached, the "Standard Rules" contained in the annex to the Directive apply. Part I and Part :2 of these Rules provide for a works council-type body representing the employees and endowed with rights of information and consultation. Part 3 requires that the most comprehensive regime of codetermination of any of the participating companies will be applied to the SE. D the Practiced Irnpact of the S£ The Regulation and the Directive present a regulatory framework of unusual complexity. The Member States should havl: transformed and implemented the Directive "no later than 8 October 2004.,,111 However, only five of the 25 Member 112 States were able to achieve this in time. Some firms have indicated some interest in making use of the new legal form, but at present it remains unclear when and to what extent such a transition will happen. Nevertheless, the adoption of the SE can and should be understood as another event signaling institutional change. Compared with the traditional systems of the Member States, the SE otfers new opportunities for choice and presents corporations with new strategic challenges. Businesses, thal is managers and investors, can move a company to a jurisdiction which will present an (at least somewhat) more attractive regulatory environment. Moreover, national legislators can provide incentives for such a decision by either making their laws more inviting or establishing rules that impede the move to another Member State. This can be further explained by a hypothetical. If we assume that a German stock corporation with more than 2000 employees, Widget AG ("Widget"), wants to get rid of the German regime of worker participation on the supervisory board, it can merge with a British public limited company by forming a European Company, 3 Widget SE, to be registered in the UK." The British paltner in the merger could be small and unimportant; it could be a wholly owned subsidiary of Widget. This move will not free Widget from codetermination; it will have to negotiate with its employl:es and their union the agreement provided for in the Directive.11-l Due to the SL-Dir, supra note 84, scc. 2. IOh Id. at al1. 3. para. I. I'" SF-Reg, supra note 83, art. 12, para 2. lOX Id. at al1 16, para. I. For details, see SE-Oir, supra note 81, al1. 3. II" Id. at al1. 3, para. 4. 1IIId.atart.14,para. I. II'The Member States are Austria, Belgium. Denmark, Finland, and Sweden. Die Europa ACi verzogert sich. Frankfurter Allgemeine Zeitung, Oct l.!. 2004, at 12 II; SF-Reg, supra note 83, al1. 2, para I. I" SF-Dir. supra notc 84, art 4. I,>, 1(1') 2005] A SHifTING PARAJ)lejM OF EUROPEAN LAW 233 "Standard Rules" of the Annex,115 it may well be that the "special negotiating body," which represents the employees of both merging companies, will not be inclined to settle for less than the German model allocating half of the seats in the supervisory board to the representatives to the workers. If Widget does not agree with this solution but still wants to achieve the merger it has to accept exactly this outcome under the "Standard Rules" in order to get the registration. But two years after the date of the registration Widget can make a next move: now the firm is able to transfonn the (British) SE into a British pIc. UK law does not impose any form of employee participation on companies. Neither the SE-Regulation nor the SEDirective require the preservation of codetermination in such a case. Following such a strategy Widget has been able to transfonn itself from a Gel111an Aktiengesellschaft into a British public limited company by shares without having to dissolve and liquidate in Germany and to reincorporate in the UK. This opens the 116 door that had been previously kept closed by the Daily Mail ruling of the ECJ. Since October 8, 2004, Germany has lost the power to prevent its stock corporations from this form of exit into another jurisdiction. 117 There are other strategic options for businesses: in all Member States firms now have the choice between the two-tier and the one-tier structure. But the freedom to move and thus select the preferred corporate law regime appears to be the most important innovation. There can be no doubt that such a transformation will be burdensome and time consuming. In our hypothetical, Widget will have to allow the employees at least six months for negotiations. I IS After the registration of Widget SE, the enterprise will have to wait two years before it can start the transformation into Widget Ltd., the British pic. More time will be needed for the preparation of documents and for the process of registration. Member States implementing the Regulation and transforming the Directive into national law can establish additional barriers by legislation. This is another important feature of the SE regime: national legislation will have an impact on the incorporation and relocation decisions of companies. The Member States are faced with a comparatively simple, but They can either try to provide a desirable legal fundamental alternative. environment in order to keep their companies and to attract others. I f they are unable to do this, they can increase the burden on the exit decision. As mentioned before, most of the Member States have not yet finalized their SE legislation, but the available drafts indicate sufficiently clearly in which direction they intend to move. Again, the situations in UK and Germany are particularly interesting. In the UK, the Depaltment of Trade, which is in charge of preparing legislation, will take "the narrowest possible view of what has to be done;,,119 it will follow a "minimalist approach". 120 In effect, it will not introduce any rules implementing the two-tier system, thus preserving companies all the freedom the SE-Regulation See supra nOle 102 and accompanying texl. Sel.: Datly Mai'- 1988 I--:CR 54~3 and accompanying text. supra nn!C 54 117 See I.uca Enriques. Sikncc is CJnlden The Luropean Company Statute as a Catalyst lor Clllllpan\' I.a\\ Arhilrage, ECGI Working Paper No 0712(J(J3 (Mar. 20(3), uvwlable al www.ecgi.org/wp II~ SL-Dir .. supra notc X4. art 5. para I. II. Paul Davies. I mplemcntation or The I':uropean Company (SE) in Creal I3riIain. 111 Die Lunlpaische Akliengcsellschaft - Umscvung,l'ragen und Perspektiven 10, J 3 (rheodm Baums & i\ndreas e'ahn cds 2U04 ) 120 Id. at 39 II' II" 234 COLlJMl3It\.J( Jl RNA!. OF H!ROPEf\N li\ W [Vol. II offers. 121 But it will make use of a provIsIOn in the SE-Regulation 122 permitting Member States to require or allow companies adopting a two-tier system to provide that the members of the managing organ shall be appointed and removed at the shareholders' meeting and not by the supervisory board.lL> This of course reduces the impact of employee participation within the supervisOIY board to a large extent. The UK thus will give Widget AG an additional incentive to merge into Widget SE (UK): the employees and their unions can be excluded from the decision of who should run the company. On the other side of the spectrum, Germany will not make use of this possibility. 124 It will stay with the tradition of heavy mandatory regulation of corporate law. Its statute for the introduction of the SE provides for no less than 30 125 articles for the implementation of the one-tier system. It requires the board to appoint one or more executive directors to manage the company and have the exclusive authority to represent it. '26 The most important feature of the German approach, however, is its excessive appraisal rights. The Department of Trade and Industry in the UK thinks that the SE-Regulation provides for sufficient protection of 127 shareholders : the formation of an SE has to be based on comprehensive disclosure of all material circumstances, and it requires a quali fied majority of the shareholders of all involved companies. 128 The German draft intends to give opposing shareholders the right to tender their shares to their company and to ask for cash compensation. The govemment argues that shareholders should not be forced to accept a foreign legal regime of their company.129 This justification is not in line with the legislative intentions behind SE-Regulation: the European Company is conceived as a basically homogenous legal form for doing business throughout the European internal market. JJ() The appraisal rights are generally viewed and rejected as a device designed to burden the transition from a Gennan AG to a non-Gem1an 31 SE with additional costS.1 Unlike the UK, Germany does not show any aspiration to become the Delaware of the EU. The two approaches to the implementation of 121 122 121 Id. at 16 See SF-Reg. supra note 83, art. 39. Davies, supra note 119, at 22 (the UK will allow but not require companies to make use of this option) IH See Gesetz zur EinfOhrung der Europaisehen Gesellsehati (SLFCi), Bundesgesetzblalt Jahrgang 13675 (Dec. 22. 2004 L Art. I; Gesetz zur Ausflihrung der Verordnung (EG) No. 2157/200 I des Rates vom 8. Oktober 200 I Ober das Statut der Europaisehen Gesellschati (SL-i\usrLihrungsgesetz - SEAG) (Dec. 7, 1995) 12' SEAG, arts. 20 to 49. This approach is generally criticized and rejected; see Michael HotTmannBeeking, Organe: Strukturen und Verantwortliehkeitcn. Zcilsehrift fUr Unternehmens- und Gesellschatisrecht 335, 377 (2004); Peter Forstmoser. Monistlsehe oder dual istische LJnternehmensverrassullg'), Zeitschrift fOr Unternehmens- und Gesell:;ehaltsrecht 68lS, 718 (2004). 126 SEAG. art. 40, para. I. It is doubted that this is compatible with the SE-Regulation; see Hoffmann-Becking, supra note 125, at 370. 127 Davies, supra note 119, at 14. m SE-Reg, supra note 83, art. 8, para. 6; art. 18; art. 23; art. 32. para. 6; art. 37, para 7; and 59 12" Sec Christian Teichmann, Minderheitenschutz bei GrUndung und Sitzverlegung der SE, Zeitschrift fOr Untemehmens- und Gesellschaftsrecht 367, 383 & 394 (2003). 130 The whereas clause (6) orthe Regulation refers to the SE as a "legal unit."' 111 See discussion and references in Friedrich KObler, Barabtindung bei der GrUndung einer Europa AG'), 167 Zeitschrift fOr das Gesamte Handelsrccht & Wirtschaftsreeht 627(2003). 2005] A SHIFTING PARADIGM UF ElJlWPFAN LAW 235 the SE retlect the sharply differing attitudes of both countries in the Uberseering l12 and Inspire Art l33 litigations. V. THE MECIIANICS OF CI lANGE: ACTORS ON AND FORCES BEHIND THE STAGE A. F/'om Here to Where? Each of the developments described in Parts II, III and IV have been and continue to be controversial. But there could be a new dimension: should - or even does - the perspective change if we consider the developments in context? If we do, it becomes more obvious that the situation has changed and it appears rather likely to continue to change. The transfonnation will be slow; it will take a long time to reach a state of affairs more closely resembling the American model. The question of how long this will take is of more than mere theoretical interest; the political and economic implications of such a transition are rather obvious. Any fornl of forecast would certainly be imprudent; but the view of the future might become less clouded if the factors generating the change could be taken into somewhat closer consideration. At the moment this carmot be more than a rough estimation; the pieces of available evidence cannot be put together without a strong element of speculative reasoning. B. Legislation: The Decline (4Harmoni::.ation Reconsidered Looking at the process of harmonization by directive, there appears to exist an obvious conclusion: the Member States were just not or no longer able to agree. The continuing enlargement may fUliher explain this: with each additional member, agreement becomes more difficult to achieve. 134 This is ceriainly not misconceived, but a few qualifying aspects should be taken into consideration. Originally, the EC Treaty required the Council to adopt directives for the approximation of law by unan imous vote. 13 ) In 1987 the SEA granted an exception for directives designed to promote the establishment of the internal market: from that time forward, they could be adopted by a qualified majority. 136 This was intended to facilitate and speed up the legislative process by depriving single Member States of their veto power. On the other hand, the Treaty on European Union ("TEU") formally adopted the subsidiarity principle, limiting the competence of the EU to measures which "cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community,,,I:i7 thus strengthening the position of Member States opposed to further hanl1onization. But in fact, the Regulation and the Directive establishing the SE were adopted, and the various proposals pleading for the deregulation or even the abolition of the Ii i JI Ii' ~ j' w S.:e (;berseerll1g. 2002 LC R I-LJLJ 19. and aceoll1panving l.:xl S.:e II1.\jJlre An. 2003 EeR 1-10155. and aeeumpanYll1g lext 111 I q CIJrlsllafl Timmerman. Ilarmolllzallun in the Fulure or Company L.aw in Lurope. Markets and CompclllY Law 625. 626 (Klaus HopI & Eddy Wymeerseh cds. 20(2) 11' TFe art. lOO (flOW art. (4) ""Id al art. I()()(a) (now art. LJ4) 11' Id. at art. 3(h) (now art. 5) Capnal 2.36 COLUMBIA JOUR :\1. 01 UJROI'Li\N L/\ W lVol. II Second Directive U~ cannot be explained by the mechanics of the voting requirements. At a closer look there appears to be a deeper and more complex history. It has several aspects that are interrelated but separable. The first has to do with American law. It was perceived through the lens of William Cary: 139 Delaware was a product of the "race to the bottom."I.IO It took a long time before the literature pointing to the benefits of the system III was received; I~~ the psychological mechanics of selective perception obviously had an im pact. Second, the EC Commission started to work on company law harmonization in the early to mid-sixties. At that moment the German model looked very attractive. The British industries were plagued by continuing labor conflicts. In France and Italy the unions were split into Catholic, socialist, and communist organizations, the latter being strongest and fighting for the nationalization of the core industries. Germany at that time gave workers and their unions one third of the seats in the supervisory boards,143 labor relations looked excellent, and the major industries and the economy generated satisfying rates of regular growth. At least some of the French and Italian business leaders showed sympathy for this approach. As the European Parliament by then was limited to a merely consultative role, the Commission would discuss legislative projects in staff meetings with the most impoltant interest groups, which in the case of company law are the federations of employees and the unions. Furthermore, the European Pari iament was dom inated by the Christian-Democratic and Social-Democratic groups; both could easily agree on a corporate law system emphasizing the stakeholder approach. The initial drat1s of the Fifth Directive and the statute for a European company retlected not only the sincere beliefs of their framers but also the political environment which would allow them to pass through the legislative process. Third, the slow erosion of these assumptions has been fed by many factors. One of them is certainly the growing involvement of the UK in the deliberations; for this Member State the original drafts of the Fifth Directive and of the SE Statute were equally unacceptable. But, again, there are more general reasons. With the increasing competition from newly industrialized or industrializing countries, the German model started to lose its glamour and attraction. Moreover, the internationalization of financial markets was confronted with the experience that stakeholder corporations had difficulties competing for capital on these markets.ll~ Finally, the legislative adoption of the statute for the SE cannot be considered a late success of the program of corporate law harmonization. As we have seen, the 11K 1l VLll:; Metaalni.lverheld. Case 33/74. 197-lI:"l.·.K. 1299 15u Je,Ul Reyners v. Belgian Slate, Case 2174. 1974 E.CR 631 151 Only free movement or capital took more lime~ see Criminal Proceedings .Again'l (iU"1 Casati. Case 203/XO. 1981 1':.c.R 2)95~ see also Graziana I.uisi and Giuseppe Carhone v MlIlis!ci: Tresoro. Cases 286/82 and 26/83. ICJX4 LeX 377 15) This had been the target or lhe Commission. Commission Directive 70/:'(). 1CJ70 OJ. (!. I.; art. 2, para I (aimed only againsl "measures, olher than those applicable equally ll) d,)meSlic or imp' products") 15.' Procureur du Roi v. Benoil allo (justave Dassollville. Case 8/74. 1974 Fe R Xl7 238 COLUMHIA JOURNAL 01 U:ROPFAN 1./\ \Iv [Vol. I I established elements of Member States' laws. 15-1 And not only did the Member States have to abstain from enacting, maintaining and enforcing restrictive rules, but also the COLlli imposed the duty to oppose and remove obstacles caused by acts of ls5 their citizens. .. . ) . A 111 /" Th e d eClslons . Lentros, 156 U"b erseermg 1'-7 an d I nsplre' rt 1"8 can an d s h ou Id b e read as being in line with and continuing case law that emphasizes and expands the impact of the basic freedoms of the EC Treaty. But they differ from the former cases in one important aspect. It must be remembered that the original treaty explicitly looked for company law harmonization by EC lawmaking and not by legislative competition between the Member States, and that it encouraged or even requested an agreement between the Member States regarding the transfer of companies across ls9 borderlines. This has to be understood as excluding an interpretation of the free establishment provisions which would invalidate the real seat theory and thus impose the incorporation doctrine upon all the Member States. This can be seen as a limitation of a basic freedom by reserving legislative powers for the Member States. In Centros, Oberseering and Inspire Art the CCJ has disregarded these limitations. This has an interesting parallel in the Golden Share Cases. 160 They are very similar: Portugal, France and Belgium had privatized formerly state owned enterprises but wanted to retain some control of future ownership. Portugal and France subjected the acquisition of shares in their companies to prior government authorization. Belgium introduced a more modest regime: the government would retain some "golden shares" providing the authorities with the right to block the sale of"strategic assets" of the firm. The Commission brought actions against the three Member States, blaming them inter alia for interfering with the free flow of capital. Advocate General Ruiz-Jarabo ColomeI' referred to Article 295,161 a provision which reserves to the Member States the power to determine "the rules ... governing the system of propeliy ownership .... " This means that it is left to the Member States to determine how far they wish to nationalize or to privatize their industries. ColomeI' strongly argued that Aliicle 295 had to be applied to any measure regarding ownership rights in enterprises of national interest. The "golden share" provisions "constitute means by which the public authorities may participate in the activities of ceriain undertakings of strategic interest for the national economy, with the purpose of imposing economic policy objectives ... ;" and this is what Article 295 reserves for the sovereignty of the Member States. 162 There are good reasons to assume that this interpretation reflects the intentions of the framers of the original EEC Treaty. But the ECJ rejected this argument: Ariicle 295 should not and does not allow a property 154 Rewe-Zenlral AG v. Bundesmonopolverwaltung I'ur 13ranntwein , Case 120178, 1979 E.C R. 649: Commission of the European Communities v. Federal Republ ic of Germany. Case 171;/84, 1987 E.C R 1227. 155 Commission v. French Republic, Ca~e C-265/95. 1997 ECR. 1-6959. 151> Cen/ras, 1999 E.CR. 1- 1459. 157 Uberseering, 2002 EC R. 1-9919 "" /nspireArt, 2003 E.CR 1-10155 "" See supra notes 9 - II, and accompanying lex!. 161J Commission of European Communilies v Portuguese Republic, Case C-367/98. [20031 40 CML.R. 493: Commission of European Communilies v. French Republic, Case C-483/99 [20031 40 CM.L.R .. 493: Commission of European Republic v. Kingdom of Belgium, Case C-503/99. [2003140 C l.L.R. 493 (collectively known as Ihe Golden Shares Cases) [hereinafIer "Golden Share Cases"1. 161 Originally TEC art. 222. II.' Commission v. Portugal, Case C-367N8. [2003140 CMLR. 493, al A62 2005] A SHIFTING PARADIGM OF U!lWPEAN LAW 239 rights regime interfering with the basic freedoms guaranteed by the Treaty. "The free movement of capital, as a fundamental principle of the Treaty, may be restricted only by national rules which are justified by reasons referred to in Article 73d( I )163 of the Treaty or by overriding requirements of the general interest and which are applicable to all persons and undertakings pursuing an activity in the territory of the host Member State.,,164 This is to say the Court's reasoning in the Golden Share Cases follows the same patterns we have seen in Centros, Uberseering, and Inspire Art: original reservations of Member State power, designed to allow the States to retain their national systems of industrial organization, are increasingly restricted by the enhanced importance given to the basic economic freedoms. It is evident that the Court has been moving to an understanding of the Treaty that emphasizes a market approach to corporate law. It is, however, much less clear what exactly motivates the Court to follow this direction; in this respect all the opinions are silent. But it is obvious that the Court is in line with the movements of legislation. This invites the conclusion that the case law, too, is evidence of a broader shift in assumptions and attitudes. IV. A BROADER CONTEXT: CONVERGENCE RECONSIDERED Even if there are good reasons to assume that the future evolution of corporate law structures in Europe will be slow, piecemeal, and cumbersome, there can be no doubt that significant changes have occurred that are moving the system towards the more sophisticated patterns that have emerged in the U.S. Companies will have more freedom to choose between jurisdictions; this will stimulate legislative competition between the Member States and thus provide for incentives to further deregulate the rigid structures that continue to constrain some of the national systems. This happens in a time when the U.S. - in a rather surprising move - has returned to the idea of regulating corporate law at the federal level. The Sarbanes-Oxley Act of 2002 165 may deal mostly with securities regulation, but it imposes organizational safeguards like the establishment and the composition of an audit committee, 1(,(, which are basically of a corporate law nature. Thus we can see some form of 167 convergence from both sides of the Atlantic. But this convergence will hardly mean that the history of corporate law will come to an end. 168 It is true that Europe is moving away from its traditional stakeholder approach, but the steps are small and the pace is slow. The regime of the SE opens up the traditional system and allows for some new options and strategies. But the complex rules and the cumbersome and lengthy procedures are the result of political compromises, which are very much shaped by the ideas and assumptions of 1< •.' Now TI·:C art 56. para. I. 1"< Id. at para 49: see also Commission v. France. Case C-4B3/99 12003] 40 C.MLR 493. at para. 44 tbutlhe Belgian rules wen: upheld as a proporlionatc protecllon of the public interest, al para. 46) 1/,; IJub. L. No 107-204. I 16 Stal 745 (caddied in scallcred sections of 15, 18. 21\. and 29 USC) Il,,, Id. ~ ](J I. I'm an carl) prediction of such convergence. see Rllberla S Karlllei. Is it Tllne ]\)r a I'eckral Corporation la\\,·). 57 11rook. L Rev. 55,90 (1991). 1", See lien') Hansmann and Reinier Kraakman. The LnJ of HiSlU') lor Corporalc I.a\\'. 1N (je\1 1..1. 4]!) anu the stickiness of well-established institutional arrangements. Even if German-style codetermination slowly disappears, Europe will retain a mandatory regime of works councils completely unknown to the U.S. At the same time, the adoption of the SarbanesOxley Act can be understood as a political reaction not only to the losses suffered by shareholders but also to the harm inflicted upon the employees of Enron. And this legislation may be interesting for still another reason. It has been convincingly argued that convergence proceeds not only by ""formal" changes of corporate law but also by the "functional" effects of cross border securities transactions. 170 Listings of non-American companies on U.S. stock exchanges provide a persuasive example: the listings agreement imposes corporate governance obligations; 171 the listing of Daimler-Chrysler on the New York Stock Exchange "is a paradigmatic example of ' . I ,,17 0 t unctlona convergence.· But Sarbanes-Oxley has significantly contributed to the costs of maintaining a listing in the U.S. Therefore the interest of European companies to have direct access to the American exchanges has sharply decl ined; and German fim1s Iike Siemens are considering del isting their shares from the New York Stock Exchange. 173 This could mean that we will see less of this type of "'functional" convergence in the near future. What we may see in Europe instead is a complex and perhaps confusing mixture of formal and functional elements. 17-1 The legislative process and the Court of Justice have amended the fOlmal rules, which provide the framework conditions for corporate activities and strategies. The national legislators have appeared to respond 175 to some extent. At this moment it is unclear how the private actors - investors, managers, unions - will react. In any case: there is more room for "'formal" convergence. 1(,'> Compare Lucian A. 8c:bchuk and Mark J. Roe, A Theory of Path Dependence in Corporate Ownership and Gocrnance, 52 Stan I.. Rev. 127 (1999), and Coffee, supra note 16, at 660, and Ronald J. Gilson, Globalizing Corporate Governance:: Convergence of Form or Function, 49 Am. J. Compo 1.. 329, 334 (2001) 170 Gilson, supra note 169, at337: Coffee, supra note 16, a1679. 1)1 Gilson, supra nOlC 169, at 349. m Coffee, supra note 16, at 681. IJJ Mark Landler, Germans Weigh Taking Stocks Orf Wall Street, N.Y. Times, November 20,2004, alel. IH Gilson, supra note 16l). at 351: ··In its Cenlros decision, the European Court of Justice introduced regulatory competition - a hybrid bdween formal and functional convergence- into the European Union." 17; See supra note 120. and accompanying tex!.