Communication from the Commission on a simplified business environment for companies in the areas of company law, accounting and auditing
Date: 2007-07-10
Institutions: European Commission
Subjects: administrative formalities, auditing, legal status, management accounting, organisation, simplification of formalities

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 10.7.2007 
COM(2007) 394 final 

COMMUNICATION FROM THE COMMISSION 

on a simplified business environment for companies in the areas of company law, 
accounting and auditing 

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COMMUNICATION FROM THE COMMISSION 

on a simplified business environment for companies in the areas of company law, 
accounting and auditing 

The European Council of 8/9 March 2007 underlined that reducing administrative burdens is 
important in boosting Europe's economy, especially given the potential benefits this can bring 
for SMEs. It stressed that a strong joint effort of the European Union and the Member States 
is necessary to reduce administrative burdens within the EU.1 

The Commission has outlined the way for achieving this by adopting, on 14 November 2006, 
an  updated  simplification  programme2  and  the  main  elements  for  measuring  administrative 
costs  and  reducing  administrative  burdens3.  These  documents  were  complemented  by  an 
Action  Programme  adopted  on  24  January  20074.  Both  programmes  emphasise  the  need  to 
generate tangible economic benefits. 

European company law, accounting and auditing have been identified as priority areas within 
this  initiative.  First  analyses  carried  out  by  a  number  of  Member  States  have  shown  that 
administrative costs caused by EU rules in these areas are particularly high.5 In parallel, the 
Commission  has  started  to  measure  the  administrative  burdens  in  company  law  and 
accounting  throughout  the  European  Union,  as  announced  in  November  200667.  A  broad 
review  of  the  EU  acquis  in  these  areas  is  indispensable  to  allow  European  businesses  to 
compete  more  effectively  and  to  be  more  successful  in  a  highly  competitive  global 
environment. 

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Presidency Conclusions of the Brussels European Council - doc. 7224/07 Concl 1 
Communication  from  the  Commission  to  the  Council,  the  European  Parliament,  the  European 
Economic  and  Social  Committee  and  the  Committee  of  the  Regions  -  "A  strategic  review  of  Better 
Regulation in the European Union" (COM(2006)689 final, OJ C 78, 11.4.2007, p. 9) 
Commission  working  document  of  14/11/2006  –  "Measuring  administrative  costs  and  reducing 
administrative burdens in the European Union" (COM(2006)691 final) 
Communication  from  the  Commission  to  the  Council,  the  European  Parliament,  the  European 
Economic  and  Social  Committee  and  the  Committee  of  the  Regions  on  "Action  programme  for 
reducing  administrative  burdens  in  the  EU",  (COM(2007)23  final,  not  yet  published  in  the  Official 
Journal) 
See COM(2006)689 
See Commission Working Document of 14 November 2006 – "First progress report on the strategy for 
the  simplification  of  the  regulatory  environment",  COM(2006)690  final,  page  12:  "Concerning 
company law, the Commission has planned to launch before end of this year a comprehensive initiative 
to  measure  the  administrative  costs  originating  from  the  company  law  directives  with  the  view  to 
identifying  together  with  Member  States  and  stakeholders  the  scope  for  reduction  of  these  costs.  The 
outcome of this exercise will be presented in a Communication in the second half of 2007." 
This  measurement  is  currently  carried  out  with  the  help  of  external  consultants.  The  results  of  this 
exercise will feed into the impact assessments that will accompany any future legislative proposal on 
the subject. 

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The  exercise  will  contribute  to  the  on-going  review  of  the  single  market  initiated  by  the 
Commission as part of the citizens' agenda in May 20068. In particular, it will support work 
towards a well regulated Europe,  which  involves a critical assessment  of  how existing laws 
can be improved and administrative burdens can be reduced.  

1. 

WHY SIMPLIFY EUROPEAN COMPANY LAW? 

As  central  elements  to  achieve  the  common  market,  company  law  and  accounting  were 
among  the  first  areas  of  legislation  that  were  harmonised  at  European  level.  The  field  of 
auditing  followed  shortly  afterwards  (with  the  first  version  of  the  Eighth  Directive  on 
statutory  audit  dating  from  the  early  80ies).9  Since  then,  the  relevant  directives  and 
regulations have been updated several times in order to adapt them to new developments.10 A 
number of these revisions are recent and still need time before their effects can be measured 
and determined. However, none of these modernisation measures touched on the scope or the 
basic  content  of  the  directives  concerned.  They  have  remained  fundamentally  unchanged 
since their adoption. 

In  the  last  twenty  to  thirty  years,  the  business  environment  of  European  companies  has 
changed  at  high  speed,  with  globalisation  of  economies  and  radical  developments  in 
technology.  The  legal  environment  too  has  evolved  with  the  adoption  of  international 
standards in the field of accounting and the development of the jurisprudence of the Court of 
Justice of the European Communities. In recent years, this case law has helped to clarify the 
scope  of  the  fundamental  freedoms  in  the  Treaty,  paving  the  way  for  enhanced  corporate 
mobility within the European Union. 

There is a need to review existing EU directives in the light of these developments to assess 
their continued relevance. This assessment must also take account of the principles of better 
regulation together with subsidiarity and proportionality. 

2. 

THE WAY FORWARD 

There are essentially two options on how to proceed for certain company law directives that 
address mainly domestic situations: 

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A first interim report was presented to the European Council in March 2007 (Communication from the 
Commission to the Council, the European Parliament, the European Economic and Social Committee 
and the Committee of the Regions - A single market for citizens - Interim Report to the 2007 Spring 
European Council (COM(2007)60 final, not yet published in the Official Journal)) 
A  list  of  the  main  measures  in  the  areas  of  company  law,  accounting  and  auditing  is  contained  in 
Annex 1. 
In the context of the fourth phase of the Simplification of the Legislation on the Internal Market Process 
(SLIM), the First and Second Company law Directives were modernised; furthermore, the Fourth and 
the  Seventh Directives were updated,  the  Tenth  Company  law Directive  on  cross border  mergers  and 
the Directive on the exercise of shareholders' voting rights were adopted. In the field of accounting and 
auditing,  the  level  of  international  harmonisation  achieved  has  contributed  to  the  acceptance  of  new 
standards which allow for transparency and increase the credibility of annual financial statements. For 
listed  companies,  the  IAS  regulation  therefore  requires  the  use  of  International  Financial  Reporting 
Standards (IFRS) for consolidated accounts. In addition, a new directive on statutory audit was adopted 
in 2006. 

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–  The  first  option  is  to  address  the  question  whether  today  all  existing  directives  are  still 
needed or whether the EU acquis in the area of company law should be reduced to those 
legal acts specifically dealing with cross-border problems. 

–  The  second,  less  far-reaching  option  consists  in  focusing  only  on  concrete,  individual 

simplification measures in order to help EU companies.  

With  regard  to  the  rest  of  the  company  law  acquis  that  addresses  specific  cross-border 
problems  as  well  as  to  the  areas  of  accounting  and  auditing,  individual  simplification 
measures seem to be the right response. In accounting and auditing, the focus should be on 
reducing administrative costs for SMEs for which these costs are particularly heavy, whereas 
all companies should benefit from simplification measures in the field of company law. 

With this communication, the Commission wants to present its first views on the subject and 
trigger  a  discussion  involving  Member  States,  the  European  Parliament  and  stakeholders  in 
order to identify the measures in the areas of company law, accounting and auditing that are 
best suited not only to make European companies fit for the Internal Market but also to make 
them  more  competitive  globally.  The  objective  is  to  build  a  political  consensus  on  the  way 
forward so that appropriate legislative proposals can be submitted by early 2008.  

Stakeholders are invited to comment on the questions raised and on the proposals put forward 
in  this  document  and  its  annexes.  In  addition,  stakeholders  are  also  welcome  to  submit 
additional proposals for further simplification measures. 

This exercise should be based on the understanding, underlined by the European Council on 
8/9  March  2007,  that  any  simplification  measure  at  EU  level  can  only  be  effective  if  the 
measures  taken  at  EU  level  are  fully  endorsed  by  Member  States  at  national  level  and  if 
Member  States  make  use  of  possibilities  that  already  exist  today  under  EU  law  to  ease  the 
burden  on  companies  in  the  EU.  Only  a  combined  strategy  will  allow  companies  to  benefit 
from clear improvements in the business environment. 

3. 

HOW MUCH REGULATION DOES EUROPE NEED IN THE FIELD OF COMPANY LAW? 

3.1. 

The general approach to EU company law 

In the field of company law, the increased mobility of companies today, not only at EU but 
also at international level, requires flexible responses to a constantly changing environment. 
These changes can only be addressed if Member States are able to react swiftly to these new 
developments.  In  this  situation,  a  rigid,  harmonised  European  framework  might  sometimes 
appear  to  be  more  of  an  impediment  to  innovation  than  a  benefit  for  the  Internal  Market. 
Furthermore,  the  competitiveness  of  companies  also  depends  on  the  level  of  the 
administrative costs related directly or indirectly to their activity. Some of these costs derive 
from EU rules. It should be asked whether the benefits of these rules in all cases outweigh the 
costs related to them. 

At  the  same  time,  harmonisation  has  also  positive  effects  on  the  competitiveness  of 
companies. Harmonisation is a strength for cross-border markets and can clarify the relation 
between  two  or  more  national  legal  systems  involved.  It  also  increases  legal  certainty.  The 
same applies where minimum transparency standards are set up to protect third parties from 

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the dangers that increased mobility of companies can imply for them. In this case, common 
rules provide for the basis of trust that is needed for a functioning Internal Market.  

However, the situation may be different for directives such as the Third, the Sixth, the Second 
and  the  Twelfth  Company  law  Directives.  These  directives  focus  on  mainly  domestic 
situations and do not aim at solving specific cross-border problems. 

3.1.1.  Option 1: Placing the focus on cross-border problems 

The Third and the Sixth Company law Directives regulate mergers and divisions 
of  public  limited  companies  in  the  same  Member  State.  When  these  rules  were 
adopted  decades  ago  they  played  a  role  in  opening  up  new  possibilities  for 
companies  and  promoting  the  internal  market.  Today,  they  guarantee  a  minimum 
level  of  protection  for  shareholders  and  creditors  of  public  limited  companies 
throughout the European Union. 

However, given that these directives do not provide for full harmonisation, they do 
not  create  a  level  playing  field;  instead,  some  rules  continue  to  differ  between  the 
Member States. At the same time, the existence of minimum requirements in EU law 
prevents  Member  States  from  adapting  their  national  laws  to  changing  needs.  This 
leads  to  the  question  whether  the  advantages  resulting  from  these  directives  justify 
the restrictions that they impose on businesses. 

Similar considerations apply to the Second Company law Directive that deals with 
the  capital  of  public  limited  companies.  The  capital  maintenance  system  of  the 
directive has been subject to discussions for a long time so that at least a review of 
that system should be considered in order to give companies more flexibility in the 
field  of  distributions  to  their  shareholders.11  New  national  legal  forms  that  fall 
outside the scope of the Second Company law Directive have been created in some 
Member States to offer the flexibility that the Directive lacks, notably with regard to 
minimum capital requirements. 

The Twelfth Directive in principle is of an enabling nature as it allowed individuals 
to create private limited companies in Member States where, before the transposition 
of the directive, more than one member was required to form a company of that type. 

However, at the same time, the directive sets a number of minimum requirements for 
the internal procedures of such a company. The question is whether such restrictions 
need to be determined at EU level. 

In  all  these  cases,  the  Commission  considers  that  repealing  the  EU  rules  and 
increasing flexibility by leaving it to Member States to determine the conditions in 
the relevant areas would be a viable option. Indeed, the Commission considers that 
such  an  approach  would  fit  best  with  better  regulation  principles  and  the  need  to 
equip the EU with a streamlined company law acquis for the 21st century. 

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The forthcoming study on an alternative to the capital maintenance system of the Second Company Law 
Directive that was launched by the Commission in September 2006 will provide additional information 
that should facilitate the assessment in this case. 

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Stakeholders are therefore invited to give their views on whether  

–  the rules on domestic mergers and divisions contained in the Third and the Sixth 

Directive; 

–  the  rules  on  the  capital  of  public  limited  companies  or  at  least  the  capital 

maintenance system of the Second Directive; and/or 

–  the  rules  on  single-member  private  limited  liability  companies  of  the  Twelfth 

Directive  

should be repealed entirely or in parts.  

If such repeal is not considered appropriate it should be explained what the benefits 
are  of  having  these  rules  at  EU  level  and  why  these  benefits  outweigh  the  costs 
related to them. 

3.1.2.  Option 2: More principle-based, less detailed regulation 

The total repeal of the directives referred to above might seem to be too far reaching 
to  some.  In  this  case,  at  least  parts  of  the  Third,  the  Sixth  and  probably  also  the 
Second  Company  law  Directives  should  be  simplified.  In  their  current  form,  these 
directives contain rules to a level of detail that leave Member States little flexibility 
to  adapt  their  respective  national  systems  to  the  evolving  needs  of  businesses  and 
stakeholders in general. 

A first proposal for a simplification of the Third and the Sixth Directives was tabled 
by  the  Commission  on  7  March  200712  as  one  of  the  measures  contained  in  the 
Commission's  Action  programme  for  reducing  administrative  burdens  and  was 
endorsed by the European Council on 8/9 March 200713. 

However, apart from this modification there are more substantial ones that should be 
tackled. In particular, a number of the reporting requirements contained in the Third 
and the Sixth Directive seem excessive from today's perspective. 

Detailed  proposals  that  address  these  problems  under  this  option  are  contained  in 
Annex 2. In addition, measures to simplify the Second Directive further could also 
be  proposed  once  the  study  that  currently14  is  being  carried  out  on  behalf  of  the 
Commission has been assessed. 

Stakeholders are invited to give their views on the proposals presented in Annex 2.  

If  any  of  the  proposed  measures  are  not  considered  appropriate,  the  benefits  of 
keeping the rules unchanged should be explained. 

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Proposal  for  a  Directive  of  the  European  Parliament  and  of  the  Council  amending  Council  Directive 
78/855/EEC  concerning  mergers  of  public  limited  liability  companies  and  Council  Directive 
82/891/EEC concerning the division of public limited liability companies as regards the requirement for 
an  independent  expert's  report  on  the  occasion  of  a  merger  or  a  division  (COM(2007)91,  not  yet 
published in the Official Journal) 
Presidency Conclusions of the Brussels European Council - doc. 7224/07 Concl 1 
See footnote 11. 

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3.2. 

Additional simplification measures in Company law 

As explained above, further steps are needed, in addition to the measures envisaged 
in the previous section, in order to simplify other parts of the company law acquis.  

This concerns first and foremost the First and the Eleventh Company law Directives. 
The  ways  of  publishing  information  on  companies  that  these  directives  provide  for 
still do not exploit all possibilities that today's technology offers. 

According to the rules of the First Company law Directive, certain information that 
has to be entered into the Member States' commercial registers, in addition has to be 
published in the national gazettes. In most cases, this publication entails unnecessary 
additional  costs  for  the  companies.  These  costs  could,  in  the  future,  be  avoided 
taking  into  account  that  nowadays  all  this  information  is  available  online  through 
electronic company registers. 

For  branches,  the  Eleventh  Company  law  Directive  lays  down  special  disclosure 
requirements.  These  requirements, 
imply  considerable  costs  for  many 
companies,  due  to  national  rules  on  translations  and  certifications  related  to  the 
disclosure  obligation.  Efforts  are  necessary  to  reduce  these  costs  to  a  minimum  by 
restricting the formal requirements that Member States may impose on companies in 
this context. 

too, 

Proposals to this end are contained in Annex 3. The annex, furthermore, contains a 
proposal  for  an  adaptation  of  the  European  Company  Statute  to  the  recent 
jurisprudence  of  the  European  Court  of  Justice  that  could  be  carried  out  at  the 
occasion  of  the  modernisation  and  simplification  measures  proposed  in  this 
Communication. 

Stakeholders are invited to give their views on the proposals presented in Annex 3.  

If  any  of  the  proposed  measures  are  not  considered  appropriate,  the  benefits  of 
keeping the rules unchanged should be explained. 

4. 

SIMPLIFYING BUSINESS FOR SMES IN THE AREAS OF ACCOUNTING AND AUDITING 

In  the  field  of  accounting  and  auditing,  small  and  medium-sized  companies  would  benefit 
from further simplification of the Directives. 

With the Fourth, the Seventh and the Eighth Directives, harmonised accounting and auditing 
requirements  have  significantly  raised  the  quality  of  financial  reporting  and  auditing  in  the 
EU. Whilst the overall goal pursued through these Directives to keep and improve accounting 
and  auditing  quality  in  the  EU  should  be  maintained,  the  existing  requirements  under  those 
directives entail administrative work which companies, and notably small and medium-sized 
entities, criticise as being unnecessarily burdensome.  

A successful reduction of the administrative burden for SMEs however needs to be addressed 
both at EU and national levels. It is of crucial importance to combine reporting for different 
purposes (such as tax, statistics, social security, employment reporting) at Member State level 
and thereby reduce the overall burden of keeping different accounting and reporting systems. 
This could also facilitate the use of electronic reporting formats such as XBRL. 

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The  present  simplification  project  for  SMEs  coincides  with  the  publication  of  the 
International  Accounting  Standards  Board  (IASB)  Exposure  draft  of  a  proposed  IFRS  for 
Small and Medium-sized Entities. After a first analysis, the Commission, however, does not 
believe that the current IASB work on SME accounting would provide sufficient elements to 
simplify the life of European SMEs.  

The Commission has instead identified a number of other measures that could lead to tangible 
simplification for SMEs. 

The  first  measure  in  this  context  is  to  exempt  "micro  entities"  from  the  application  of  the 
accounting directives. For these smallest enterprises the burden related to the establishment of 
the annual accounts is particularly heavy. At the same time there is a lack of broad demand 
for their financial statements. With an exemption in the accounting directives, it would be left 
to Member States to determine which rules micro entities should be required to comply with. 
It should be noted in this context that a "micro entity" category has already been introduced in 
many Member States.  

Stakeholders  are  therefore  invited  to  give  their  views  on  whether  they  agree  with  an 
exemption  of  micro  entities  from  the  scope  of  the  Fourth  Directive  and  on  the  following 
possible definition for these micro entities: 

–  less than ten employees, 

–  balance sheet total below 500,000 EUR, and 

–  turnover below 1,000,000 EUR.  

In addition, the following simplification measures in favour of SMEs are proposed: 

–  To extend the transition period for SME's crossing the thresholds from two to five years. 
Companies  in  the  start-up  phase  will  particularly  benefit  from  a  longer  transitory  period 
before more detailed accounts have to be prepared; 

–  To exempt small entities from the requirement to publish their accounts;  

–  To make it possible for certain medium-sized entities to use exemptions currently available 
only  for  small  entities.  This  measure  would  in  particular  concern  companies  where  the 
structure of members is such that there are no particular external user needs and unlimited 
liability companies.  

Further  measures  could  be  taken  regarding  the  procedure  for  the  regular  adaptations  of  the 
SME thresholds, in the areas of consolidation requirements, regarding accounting for deferred 
taxes and to remove certain disclosure requirements.  

Details on the measures proposed in this section can be found in Annex 4. 

Stakeholders are therefore invited to give their views on the proposals presented in Annex 4.  

If  any  of  the  proposed  measures  are  not  considered  appropriate,  the  benefits  of  keeping  the 
rules unchanged should be explained. 

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5. 

NEXT STEPS 

Member  States,  the  European  Parliament  and  other  stakeholders  are  invited  to  submit  their 
views on the proposals contained in this communication15 with a view to establishing a broad 
consensus  on  the  changes  that  should  be  envisaged.  Considering  the  timeframe  for  the 
simplification exercise, contributions are invited by mid-October 2007. 

In  the  follow-up  to  this  communication  and  on  the  basis  of  the  responses  received,  the 
Commission will prepare full and comprehensive impact assessments that will also take into 
account the results of the measurement of administrative costs currently under way. Subject to 
the  outcome  of  these  impact  assessments,  the  Commission  intends  to  submit  legislative 
proposals in the areas covered by this communication early in 2008.  

15 

This communication is also available under 
http://ec.europa.eu/internal_market/company/simplification/index_en.htm 

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ANNEX 1 

First Directive: Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for the 
protection of the interests of members and others, are required by Member States of companies within 
the  meaning  of  the  second  paragraph  of  Article  58  of  the  Treaty,  with  a  view  to  making  such 
safeguards equivalent throughout the Community (OJ L 65, 14.3.1968, p. 8; last amended by Directive 
2003/58/EC  of  the  European  Parliament  and  of  the  Council  of  15  July  2003  (OJ  L  221,  4.9.2003, 
p. 13)) 

Second  Directive:  Second  Council  Directive  77/91/EEC  of  13  December  1976  on  coordination  of 
safeguards which, for the protection of the interests of members and others, are required by Member 
States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect 
of  the  formation  of  public  limited  liability  companies  and  the  maintenance  and  alteration  of  their 
capital, with a view to making such safeguards equivalent (OJ L 26, 31.1.1977, p. 1, last amended by 
Directive 2006/68/CE of 6 September 2006 (OJ L 264, 25.9.2006, p. 32)) 

Third Directive: Third Council Directive 78/855/EEC of 9 October 1978 on mergers of public limited 
liability companies (OJ L 295, 20.10.1978, p. 36) 

Fourth Directive: Fourth Council Directive 78/660/EEC of 25 July 1978 on the annual accounts of 
certain types of companies (OJ L 222, 14.8.1978, p. 11; last amended by Directive 2006/46/EC of the 
European Parliament and of the Council of 14 June 2006, OJ L 224, 16.8.2006, p. 1)  

Sixth Directive: Sixth Council Directive 82/891/EEC of 17 December 1982 on the division of public 
limited liability companies (OJ L 378, 31.12.1982, p. 47) 

Seventh Directive: Seventh Council Directive 83/349/EEC of 13 June 1983 on consolidated accounts 
(OJ L 193, 18.7.1983; last amended by Directive 2006/46/EC of the European Parliament and of the 
Council of 14 June 2006, (OJ L 224, 16.8.2006, p. 1)) 

Eighth  Directive:  Directive  2006/43/EC  of  the  European  Parliament  and  of  the  Council  of  17 May 
2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 
78/660/EEC  and  83/349/EEC  and  repealing  Council  Directive  84/253/EEC (OJ  L157,  09.06.2006, 
p. 87) 

Tenth  Directive:  Directive  2005/56/EC  of  the  European  Parliament  and  of  the  Council  of 
26 October 2005 on cross-border mergers of limited liability companies (OJ L310, 25.11.2005, p. 1) 

Eleventh  Directive:  Eleventh  Council  Directive  89/666/EEC  of  21  December  1989  concerning 
disclosure requirements in respect of branches opened in a Member State by certain types of company 
governed by the law of another State (OJ L 395, 30.12.1989, p. 36) 

Twelfth  Directive:  Twelfth  Council  Company  Law  Directive  89/667/EEC  of  21 December 1989  on 
single-member private limited-liability companies (OJ L 395, 30.12.1989, p. 40) 

Takeover  bids  Directive:  Directive  2004/25/EC  of  the  European  Parliament  and  of  the  Council  of 
21 April 2004 on takeover bids (OJ L 142, 30.4.2004, p. 12) 

Statute of the European Company: Regulation (EC) 2001/2157 of 8 October 2001 on the Statute for 
a European company (SE) (OJ L 294, 10.11.2001, p. 1) 

IAS  Regulation:  Regulation  (EC)  No  1606/2002  of  the  European  Parliament  and  of  the  Council  of 
19 July 2002 on the application of international accounting standards (OJ L 243, 11.9.2002, p. 1) 

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ANNEX 2 

Individual simplification measures concerning the Third and the Sixth 
Company law Directives (section 3.1.2. of the Communication) 

1. 

REPORTING  REQUIREMENTS  UNDER  THE  THIRD  AND  THE  SIXTH  COMPANY  LAW 
DIRECTIVES 

Under  the  Third  and  the  Sixth  Company  Law  Directives,  companies,  in  the  context  of  the 
preparation of a merger or a division, are subject to a number of reporting requirements. Thus, 
the  management  or  administrative  bodies  of  the  companies  involved  have  to  draw  up  a 
detailed written report explaining the draft terms of the operation and setting out the legal 
and  economic  grounds  for  them16.  Furthermore,  the  report  of  an  independent  expert  is 
needed in order to assess in particular whether the proposed share exchange ratio is fair and 
reasonable17.  In  addition,  an  accounting  statement  has  to  be  drawn  up  if  the  latest  annual 
accounts relate to a financial year that ended more than 6 months before the date of the draft 
terms  of  merger  or  division18. Finally, where in the case of a division both an expert report 
under the Second Company law Directive and a report on the draft terms of division have to 
be  set  up,  the  rules  of  the  Sixth  Directive  only  allow  Member  States  to  provide  that  both 
reports  can  be  established  by  the  same  expert19;  an  exemption  from  one  of  the  reporting 
requirements cannot be granted. 

The  latter  requirement  appears  to  be  a  typical  example  of  an  administrative  burden.  In  a 
modern business environment, double reporting should be avoided to the extent possible as it 
creates additional costs for companies without providing real added value to shareholders and 
creditors. But also the other three requirements appear to be very burdensome and leave little 
room for flexibility when established at EU level. In order to render the process of mergers 
and  divisions  less  cumbersome  it  seems  appropriate  to  leave  it  to  Member  States  to  decide 
whether they wish to leave more room to directors' liability, possibly on the basis of a specific 
decision by the general meeting, or require the provision of the relevant financial data on each 
occasion. There seems to be no reason for giving, at EU level, a clear preference to either of 
these two solutions. Furthermore, in order to reap the full benefits of the recent modernisation 
measures, the mechanisms concerning the assessment of the share exchange ratio should take 
account  of  the  flexibility  that  has  been  introduced  in  2006  into  the  Second  Company  law 
Directive with a view to the related case of the valuation of a contribution in kind20. 

2. 

PROTECTION  OF  SHAREHOLDERS  AND  CREDITORS  UNDER  THE  THIRD  AND  THE 
SIXTH COMPANY LAW DIRECTIVES 

Directive 2006/68/EC modifying the Second Directive modernised the creditor protection rule 
applicable  in  case  of  a  reduction  in  capital21.  The  procedure  for  protecting  creditors  whose 

16 
17 
18 
19 
20 
21 

Article 9 of Directive 78/855/EEC, Article 7 of Directive 82/891/EEC 
Article 10 of Directive 78/855/EEC, Article 8 of Directive 82/891/EEC 
Article 11(1)(c) of Directive 78/855/EEC, Article 9(1)(c) of Directive 82/891/EEC 
Article 8(3) of Directive 82/891/EEC 
See Art. 10a of Directive 77/91/EC, introduced by Art. 1(2) of Directive 2006/68/EC 
Article 32 of Directive 77/91/EC as modified by Art. 1(9) of Directive 2006/68/EC 

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claim antedate the publication of the decision on the reduction was specified more in detail. It 
was  also  clarified  that  these  creditors  have  to  show  credibly  that  their  claims  are  being 
jeopardised  by  the  capital  reduction  if  they  want  to  obtain  security.  The  first  step  in 
modernising the creditor protection rules under the Third and the Sixth Directives should be 
to align the relevant provisions of these directives22 with this new system. 

However,  the  question  is  whether  it  is  appropriate  to  subject  the  acquiring  company,  in 
general, to the same procedure as the company being acquired although there are cases where 
the  effect  of  a  merger  on  the  shareholders  and  creditors  of  the  acquiring  company  does  not 
differ from normal trading transactions. 

In  this  context,  it  should  be  noted  that  the  rules  of  the  Second  Directive,  too,  protect  the 
interests  of  the  shareholders.  Mergers  often  necessitate  capital  increases  that  via  Article  29 
paragraph 1  of  the  Second  Directive  lead  to  granting  pre-emption  rights  to  pre-existing 
shareholders.  At  the  same  time,  Article  19  of  the  Second  Directive  limits  the  scope  for 
mergers  by  acquisition  without  a  capital  increase.  Creditors  are  protected  by  other  rules,  as 
explained above. 

Under  the  condition  that  shareholders  and  creditors  continue  to  be  entitled  to  inspect  the 
relevant documents at least one month before the general meeting of the acquired companies, 
one  could  therefore  consider  leaving  it  to  the  Member  States  to  determine  whether  and  in 
which cases the approval of the general meeting of the acquiring company should be required. 
However,  this  flexibility  should  at  least  exist  in  the  cases  of  the  transfer  of  the  assets  of  a 
wholly owned subsidiary and of the acquisition of a subsidiary whose parent company holds 
90% of the shares, which are already today subject to specific rules (Articles 24 and 25 of the 
Third Directive).  

22 

Article 13 of Directive 78/855/EEC and Article 12 of Directive 82/891/EEC 

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ANNEX 3 

Additional simplification measures in company law  
(section 3.2 of the Communication) 

1. 

PUBLICATION OBLIGATIONS UNDER THE FIRST AND THE ELEVENTH COMPANY LAW 
DIRECTIVES 

In  particular  the  First  Company  law  Directive  requires  companies  to  publish  certain 
information that has to be entered into the Member States' commercial register in addition in 
the  national  gazettes.  In  most  cases,  this  publication  entails  additional  costs  for  the 
companies. 

Since  January  2007,  the  Member  States  have  to  give  companies  the  possibility  to  file  their 
documents  and  particulars  by  electronic  means  (First  Directive,  Art.  3  paragraph  2).  This 
information,  through  the  electronic  registers,  is  accessible  to  third  parties  in  all  Member 
States, and the European Business Register facilitates the access to national registers further. 
The  obligation  to  publish  registered  data  in  the  national  gazette  has  therefore  become 
superfluous,  all  the  more  so  as  the  gazettes  often  do  not  reproduce  the  full  information  but 
only contain a reference to the register. This function of the gazettes can therefore easily be 
replaced by a simple service of the register that provides information on the register's latest 
changes. 

In  order  to  allow  companies  to  save  costs,  the  requirement  of  a  publication  in  the  national 
gazette  in  Article  3  paragraph  4  of  the  First  Directive  should  consequently  be  repealed. 
Furthermore, Member States should not be allowed to require, in addition to the publication 
pursuant to Article 3 paragraph 2, a publication in the national gazette to the extent that such a 
publication would entail additional costs for the companies. 

Specifically  for  branches,  the  Eleventh  Company  law  Directive  lays  down  special 
disclosure requirements.  

These rules imply a double cost for companies: they have to ensure the translation of certain 
documents  relating  to  the  company  into  the  local  language  of  the  Member  State  where  the 
branch  is  situated  and  they  have  to  register  these  documents  and  their  particulars,  together 
with the particulars referring to the branch, at the register of the branch. The national rules of 
the  Member  States  that  determine  the  details  around  the  certified  translation,  furthermore, 
often entail excessive requirements (notarisation etc.) that raise the costs further. 

In order to reduce these costs to an acceptable level, it is essential that the Member State of 
the branch accept the certified translation prepared in another Member State. This obligation 
should at least apply where the certificate that has been issued is accepted by the judicial or 
administrative  authorities  of  that  other  Member  State.  Article  4  of  the  Eleventh  Directive 
should therefore be adapted accordingly. 

However,  there  is  further  scope  for  simplification  with  a  view  to  the  establishment  of 
branches. The existence of electronic registers all over Europe makes it possible for registers 
to  communicate  with  each  other.  The  so-called  BRITE  project  that  provides  a  common 
multi-language interface to access the registers in form of the European Business Register 
(EBR)  aims  at  allowing  European  citizens  and  companies  to  reap  the  full  benefits  of  this 

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technology. The Commission will continue to encourage this work in order to pave the way 
for  a  future  review  of  the  Eleventh  Directive  that  would  allow  reducing  the  administrative 
burdens  related  to  the  establishment  of  a  branch  in  another  Member  State,  in  particular  by 
giving  the  possibility  to  file  the  particulars  of  the  branch  in  the  Member  State  where  the 
parent company is registered.23 

2. 

REGISTERED OFFICE OF THE EUROPEAN COMPANY 

In 2009 at the latest the Commission will submit a report on the European Company Statute, 
in  accordance  with  Article  69  of  the  Statute24.  A  general  overhaul  of  the  Statute  and  in 
particular of the issues listed in Article 69 does only seem realistic on the basis of that report.  

However, Article 7 of the SE statute provides inter alia for that the registered office of an SE 
shall  be  located  in  the  same  Member  State  as  its  head  office  and  allows  Member  State  to 
provide in addition that SEs registered in their territory have the obligation of locating their 
head office and their registered office in the same place. 

In light of case law of the European Court of Justice, e.g. the judgment in the case C-208/00 
("Überseering", judgment of 5 November 2002) a modification of Article 7 of the SE-Statute 
may be considered.  

23 

24 

The same principles should then apply to the registration of a grouping establishment of a European 
Economic  Interest  Group  (EEIG)  situated  in  a  Member  State  other  than  that  in  which  the  official 
address of the EEIG is situated (Article 10 of the Council Regulation on the EEIG (Council Regulation 
(EEC) No 2137/85 of 25 July 1985 on the European Economic Interest Grouping (EEIG) (OJ L 124, 
15.5.1990, p. 52) 
Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE) 
(OJ L 294, 10.11.2001, p. 1) 

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ANNEX 4 

Simplification measures for SMEs in accounting and auditing  
(section 4 of the Communication) 

The purpose of this annex is to further outline and describe what the individual measures are 
and  how  small  and  medium-sized  companies  can  benefit  from  them.  The  measures  will  be 
explained in the following order: 

1. Introduction of "micro entities" 

2. Thresholds for SMEs 

3. Relieve from publication requirements for small entities 

4. Extension of exemptions for medium sized entities without particular external user 

5. Simplification for all companies 

1. 

INTRODUCTION OF "MICRO ENTITIES" 

In order to facilitate significant simplification for the smallest limited liability companies, the 
Commission considers that a category of "micro entity" should be introduced into the Fourth 
Directive. Such a category has already been introduced in many Member States.  

Inspiration  could  be  taken  from  the  definition  in  the  2003  Commission  Recommendation25 
which  defined  micro  entities  as  companies  with  less  than  ten  employees,  two  million  Euro 
turnover and a balance sheet total below two million Euro. Earlier consultations with Member 
States  have,  however,  indicated  that  the  thresholds  in  the  Commission  Recommendation  of 
2003  may  be  too  high  for  accounting  and  auditing  purposes.  The  thresholds  defined  in  the 
recommendation  for  small  and  medium-sized  enterprises  are  much  higher  than  those  in  the 
Fourth Directive, and a full use of these exemptions could therefore nearly lead to a repeal of 
this  Directive  for  small  companies.  This  result  does  not  seem  desirable  as  harmonised 
accounting  requirements  are  needed  for  cross-border  investments  and  company  operations 
also for many small companies.  

The  definition  of  micro  entities  in  the  Fourth  Directive  should  therefore  be  based  on  lower 
thresholds than those contained in the 2003 Recommendation. The Commission would like to 
consult on the following tentative definition for micro entities: 

–  less than ten employees,  

–  balance sheet total below 500,000 EUR, and 

–  turnover below 1,000,000 EUR.  

25 

Commission Recommendation C(2003)1422 of 6 May 2003 concerning the definition of micro, small 
and medium-sized enterprises (OJ L 124, 20.5.2003, p. 36) 

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The  Member  States  would  be  allowed  to  exclude  such  micro  entities  entirely  from  the 
accounting directives, and there would be an exemption for micro entities from the directives' 
requirements  concerning  statutory  audits.  As  a  consequence,  national  authorities  can  allow 
micro  entities  to  use  a  simpler  accounting  framework  at  national  level  (normally  national 
requirements  require  accounting  for  tax  reporting)  so  that  the  amendment  to  the  Fourth 
Directive could lead to a substantial decrease in administrative burdens for micro entities.  

2. 

TRESPASSING THRESHOLDS FOR SMES 

At  present,  a  small  entity  must  already  apply  accounting  and  auditing  requirements  of  a 
medium sized company if it trespasses the threshold for two consecutive years. The two-year 
period in Article 12 of the Fourth Directive is however ill adapted to actual economic cycles 
of  SMEs.  It  often  takes  more  than  two  years  for  a  small  entity  to  consolidate  growth  of  its 
business.  The  chances  that  a  successful  company  permanently  exceeds  the  thresholds  are 
much higher after five years. Yet, should a company cross the thresholds and for any reason 
(e.g.  economic  difficulties,  higher  thresholds  implemented  by  law,  etc.)  fall  below  the 
thresholds again, the Directive requires the (now again small) company to apply for at least 
two  years  the  provisions  of  a  medium  sized  company.  More  flexibility  whereby  a  five-year 
period  for  companies  exceeding  the  thresholds,  and  a  one  year  period  for  those  ceasing  to 
exceed  the  thresholds  would  certainly  reduce  the  potential  for  administrative  burden 
introduced by the current two years rule. 

The  accounting  directives  define  “small”  and  “medium-sized”  companies  where  a  company 
meets 
(thresholds  after  amendments  by 
two  of 
Directive 2006/46/EC):  

three  criteria 

following 

the 

“Small” 
(Article 11 
companies) 

“Medium-sized” 
(Article 27 
companies) 

Turnover 

8 800 000 EUR 

35 000 000 EUR 

Balance sheet total (i.e. gross assets) 

4 400 000 EUR 

17 500 000 EUR 

Number of employees 

50 

250 

The  thresholds  were  recently  increased  by  around  20%  by  the  above  mentioned  Directive. 
This will allow the Member States to offer by no later than mid 2008 the possibility for small 
and medium-sized entities to benefit from further simplification via exemptions.  

However, the procedure for adapting  thresholds should be  simplified.  At present,  Article 53 
provides that it is the Council that adapts the thresholds upon proposal from the Commission; 
the European Parliament is not involved in the procedure. In addition, a contact committee is 
established under Article 52. For the future, it could be considered to leave the adaptation of 
the  thresholds  to  the  Commission  which  would  be  assisted  by  the  Accounting  Regulatory 
Committee  set  up  under  the  IAS  Regulation  within  the  framework  of  the  new  regulatory 
procedure,  with  scrutiny  rights  for  the  Council  and  the  European  Parliament.  Such  a  new 
procedure  would  also  allow  smoother  and  faster  adaptations  of  thresholds  compared  to  the 
somewhat cumbersome adoption by the Council itself. 

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3. 

RELIEVE FROM PUBLICATION REQUIREMENTS FOR SMALL ENTITIES 

The publication requirements  for  small companies create major  administrative burdens. The 
Commission  therefore  suggests  abolishing  these  requirements  for  this  category.  It  is  less 
important  for  small  companies  to  publish  financial  statements  because  they  are  used  by  a 
limited  number  of  stakeholders,  such  as  credit  institutions  and  suppliers  that  have  the 
possibility  to  require  financial  information  directly  from  the  company.  Therefore  a  full 
exemption for small companies from publication requirements would benefit those companies 
considerably without having a significant negative impact. 

4. 

EXTENSION  OF  EXEMPTIONS  FOR  COMPANIES  WITHOUT  PARTICULAR  EXTERNAL 
USER 

There should be fewer requirements for those companies which do not have a wide range of 
external  users  of  financial  statements.  Consequently,  in  order  to  reduce  the  administrative 
burden  for  those  companies,  the  Commission  proposes  adopting  a  risk-based  approach.  It 
would  allow  the  following  medium-sized  companies  to  use  the  regime  applicable  for  small 
companies: 

–  Companies  where  the  managers  are  also  the  owners:  for  instance,  a  managing  director 
being the main shareholder or member (provided that no other member has more than 5%).  

–  Unlimited  liability  companies  falling  under  the  scope  of  the  second  subparagraph  of 

Article 1 and under Article 47 paragraph 1a of the Fourth Directive. 

5. 

SIMPLIFICATION FOR ALL COMPANIES 

Consolidation 

Article 57 of the Fourth Directive allows Member States to use the option of not submitting 
audited  financial  statements  for  certain  subsidiaries  of  groups,  subject  to  certain  conditions. 
Full use of Article 57 should be encouraged, in particular, when these subsidiaries are either 
small or medium-sized. The exemption would be mandatory for small companies. A further 
option offered to the Member States to exempt medium-sized companies in this situation from 
statutory  audit  should  be  examined.  The  main  reason  is  that  Article  27,  point  a,  of  the 
directive on statutory audit will introduce the responsibility of the group auditor. 

Further  simplification  could  be  achieved  through  a  clarification  of  the  relationship  between 
the  IAS  Regulation 1606/2002  and  the  Seventh  Directive.  It  needs  to  be  clarified  whether 
parent companies that have subsidiaries of no material significance (Article 13 of the Seventh 
Directive) would fall under the IAS Regulation and would therefore, be required to prepare 
IFRS  financial  statements.  Elimination  of  consolidation  requirements  or  requirements  to 
provide  IFRS  financial  statements  in  cases  where  there  are  only  such  subsidiaries  could  be 
seen  as  a  substantial  simplification.  In  addition,  requirements  to  provide  consolidated 
accounts for personal holdings (where  the main holder of the group is a natural person) are 
burdensome and could be abolished. 

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Accounting for deferred taxes 

Feedback from preparers confirms that accounting for deferred taxes (Article 43 paragraph 1, 
number 11, of the Fourth Directive) is very burdensome for companies in general. In addition 
it has been confirmed by preparers and users, e.g. credit institutions and rating agencies, that 
deferred  tax  information  (whether  recognised  in  the  balance  sheet  or  provided  in  the  notes) 
often is not considered  a  relevant  input for the decisions to be taken. If preparers and users 
agree  on  the  irrelevance  of  this  information,  the  Commission  suggests  decreasing  the 
administrative burdens for SMEs significantly by abolishing this requirement. 

Disclosures 

The accounting directives contain a large number of disclosure requirements. The number of 
requirements has increased each time the directives were amended. The accumulation of these 
disclosure  requirements  could  be  seen  as  burdensome  particularly  for  SMEs  although  they 
have  to  be  weighed  up  against  the  relevance  for  users  of  financial  statements.  Significant 
exemptions already exist for small entities to provide abridged disclosures. 

The Commission therefore has been encouraged to explore further possibilities of abolishing 
requirements. A first analysis indicates that the deletion of the following disclosures could be 
considered: 

–  Disclosure of an explanation of formation expenses (Article 34 paragraph 2), 

–  Disclosure  of  the  breakdown  of  net  turnover  into  categories  of  activity  and  geographical 

markets (Article 43 paragraph 1, number 8). 

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