The evolution of closely held business forms in Europe

I. INTRODUCTION This Article grows out of the ongoing debate among European academics on the need to expand the menu of available business organization forms to meet the needs of firms at all levels. Advocates of such reforms claim that company law structures in Europe, which provide a highly developed legal framework and limited liability, are cumbersome and costly for closely held firms to apply. Commentators who favor reform suggest that lawmakers address these problems by devising new business organization statutes that are more varied, less complex, and can potentially enhance efficient outcomes. Traditionally, the business organization law available to small businesses has been structured around the needs of larger, publicly owned firms. In most jurisdictions, closely held business forms are burdened by a number of regulatory requirements which cause firms to incur substantial costs in carrying out their normal business activities. Moreover, the imposition of many of the European Community's harmonized company law provisions on small firms is viewed as disproportionate and over-regulatory, and tends to impede the development of an efficient supply of legal rules. The current debate on the regulation of closely held firms can be explained in terms of a tradeoff between the need for creditor protection in case of firm failure and the commitment to supply legal rules which enable owners to maximize wealth.1 European scholars who express concern about the importance of mandatory requirements as a mechanism to protect creditors and other interests in the firm have justified harmonized rules as a means to avoid a race to the bottom.2 According to this view the mandatory rules, such as minimum capital requirements, disclosure rules, and accounting rules, play a fundamental role in the development of corporate law.3 This position is rhetorically forceful because it relies on the idea of uniformity to provide a basis for creditor protection, but it is conceptually limited by the bargaining problems that creditors inevitably face. The law and economics perspective stands in contrast to the European Community's uniform approach. A large body of work has focused on the costs and benefits of uniformity. On the one hand, uniform rules have the advantage of simplicity and lower administrative costs. Moreover, uniform rules are more appealing to the extent that the benefits of regulation are the same for all firms. On the other hand, uniform rules lead to higher costs for different types of firms. If firms are heterogeneous, efficient regulation calls for the provision of diverse menus of rules in order to reduce the risk of suboptimal uniformity. In the E.C. context, the common thread in this body of work has been the effort to demonstrate that harmonized rules are cumbersome and costly measures which are not sufficient to regulate externality problems. For instance, minimum capital requirements aimed at protecting the welfare of creditors are costly and haphazard restrictions which interfere with private orderings.4 Consequently, the ability of private parties to obtain superior protection in the market demonstrates that, in certain circumstances, the E.C. mandatory law framework cannot be an efficient approach to limit externalities for closely held firms. More recently, the relative merits of designing legal rules aimed at the needs of the closely held firm has been stimulated by product and capital market pressures to supply the most competitive business statute for small and medium businesses (SME). 5 While scholars have debated the advantages of close corporation statutes for more than a decade, the discussion of competition-based lawmaking for limited liability companies in Europe represents a new departure. Given the presence of market-driven pressures, monopolistic regulators are being forced to make changes in their corporate law regimes. However, in the absence of freedom of choice in corporate law, it cannot be assumed that lawmakers will generate optimal business law forms for different types of firms. …