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The European Company (Societas Europaea) – A Successful Harmonisation of... The European Company (Societas Europaea) – A Successful Harmonisation of Corporate Governance in the European Union?
In this Article, Professor Blackburn examines and evaluates the Commission of the European Community's 1991 proposed European corporation statute, which represents the Commission's latest endeavor into creating a new form of business organization that possesses a European identity independent of the laws of the member states that comprise the European Economic Community. Professor Blackburn argues that this proposal fails because it places too much reliance on member state law for matters of basic structure and management, and therefore incorporates by reference the material variations in company law that exist among the member states. Professor Blackburn moreover contends that this proposal would render a European corporation's movement from one member state to another highly problematic and would necessarily subject the corporation to the national company law of the member state where its place of central administration is located. Professor Blackburn concludesr however, that the proposal has been successful in stimulating the harmonization of member state law governing national companies and provides a useful tool for building a consensus in the EC on important social and economic issues.
The Societas Europea: the Evolving European Corporation Statute Terence L. Blackburn 0 0 This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Law Review by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information , please contact Recommended Citation Terence L. Blackburn, Th e Societas Europea: the Evolving European Corporation Statute, 61 Fordham L. Rev. 695 (1993). Available at: http://ir.lawnet.fordham.edu/flr/vol61/iss4/1 - Article 1 THE SOCIETAS EUROPEA: THE EVOLVING EUROPEAN CORPORATION STATUTE TERENCE L. BLACKBURN* In this Article, ProfessorBlackburn examines and evaluates the Commission of the European Community's 1991 proposed European corporationstatute which representsthe Commission's latest endeavorinto creatinga new form of business organization that possesses a European identity independent of the laws of the member states that comprise the European Economic Community. Professor Blackburn argues that this proposalfails because it places too much reliance on member state lawfor mattersof basicstructureand management, and therefore incorporates by reference the material variations in company law that exist among the member states. ProfessorBlackburn moreover contends that thisproposal would render a Europeancorporation'smovement from one member state to anotherhighlyproblematicand would necessarilysubject the corporationto the nationalcompany law of the member state where its place of centraladministration is located. ProfessorBlackburn conclude. however, that the proposal has been successful in stimulatingthe harmonization of member state law governing nationalcompaniesandprovides a useful toolfor buildinga consensus in the EC on importantsocial and economic issues. CONTENTS Introduction ................................................... I. Historical and Procedural Aspects ......................... II. The Need for a European Corporation Statute .............. A. Enabling Goals of the Proposed Statute ................ 1. Operational Goals ................................. A. Formation of the SE .................................. a. Public Limited Liability Company Requirement . 713 b. Diversity Requirement .......................... 715 c. Procedures for Merger .......................... 716 a. Availability to both Public and Private Limited Liability Companies ............................ b. Diversity Requirement .......................... c. Procedures for Creation ......................... * Associate Professor of Law, Seton Hall University School of Law. d. Rights of Minority Shareholders ................ 3. Formation by Joint Subsidiary ...................... 4. Formation by Conversion .......................... 5. Formation by an Existing SE ....................... 6. State of Registration ............................... B. Capital Structure ...................................... 1. Minimum Capitalization and Initial Issuance of Shares ............................................. 2. Issuance of New Shares ............................ 3. Shareholders' Preemptive Rights .................... 4. Repurchase of Shares .............................. 5. Types of Securities ................................. 6. Declaration of Dividends ........................... C. Management of the SE ................................ 1. Rights and Powers of the Supervisory, Management and Administrative Boards ......................... a. Choice between Two-tier and One-tier Systems .. b. Operation of Management Systems .............. c. Duties and Liabilities of Directors ............... 2. Rights and Powers of Shareholders ................. a. General Meeting of Shareholders ................ b. Representation by Proxy ........................ c. Protection of Shareholders ...................... d. Special Problems of Minority Shareholders ...... D. Worker Participation in the Management of the SE ..... 1. General Principle of Worker Participation .......... 2. Models of Worker Participation .................... a. Representation on the Supervisory or Administrative Boards .......................... b. Appointment of Representatives to a Separate Body ........................................... c. Other Models of Worker Participation ........... 3. Selection of Worker Participation Model ............ a. Limitations on Selection of Model ............... b. Procedural Aspects of Selection ................. 4. Evaluation of Worker Participation Directive ....... E. Taxation of the SE .................................... 1. Losses from Permanent Establishments ............. 2. Losses from Foreign Subsidiaries ................... F. Annual and Consolidated Accounts .................... G. Winding Up. Insolvency, and Liquidation .............. 1. Winding Up ....................................... 2. Insolvency and Suspension of Payments ............. 3. Liquidation ........................................ IV. Evaluation of the 1991 Proposed Statute .................... A. Goals of the Proposed Statute ......................... 720 722 723 725 725 727 727 730 731 733 733 734 735 735 735 736 738 740 740 741 741 742 743 743 746 746 INTRODUCTION p ROPOSALS permitting businesses to create European corporations independent of the laws of individual member states of the European Economic Community ("European Community" or 'EC")' predate the formation of the EC itself.2 The first modem proposal for a European corporation statute can be traced to 1959, shortly after the effective date of the Treaty of Rome, which created the European Community.3 The initial proposals were intended to simplify the process of conducting business in more than one member state of the EC. The goal of the early proposals was not to achieve a harmonization of national company laws, or even a unification of these laws, but rather to bypass them entirely using a separate supra-national form of organization.' 1. The European Economic Community was created in 1958 pursuant to the terms of the Treaty of Rome of 1957. See Treaty Establishing the European Economic Community (Treaty of Rome). Another treaty adopted at the same time created the European Atomic Energy Community (Euratom Treaty). These two communities joined the European Coal and Steel Community, which had been formed in 1952 by the Treaty of Paris of 1951. See Treaty Establishing the European Coal and Steel Community (ESCS Treaty). The institutional governance of these communities was unified and simplified by the Merger Treaty, adopted in 1965 and effective in 1967, which established one Commission, one Council, one Court of Justice, and one Assembly (later named the Parliament) for each of the three Communities. See Treaty Establishing a Single Council and a Single Commission of the European Communities. As a result of the merger, and of the recognition that the European Economic Community was engaged in far more than strictly -economic union, the three communities have become referred to as the European Community, or the EC. See The institutionsof the European Community, Eur. File (Commission of the European Communities and European Parliament 1991). 2. One commentator traces the original idea of creating a European business statute to proposals in 1910 for creating international non-profit associations. See Eric Stein, Harmonization of European Company Laws 439 (1971). 3. The proposal was made at the 57th Annual Convention of the French Notaries Public. This development, and the history of other early proposals for creating a European corporation statute, are traced in 2 Hans Smit & Peter Herzog, The Law Of The European Economic Community § 54.03APP-54.07APP (1984). The Commission eventually requested Professor Pieter Sanders, a Dutch scholar, to prepare a preliminary draft of a European corporation statute. That draft was the basis of the Commission's 1970 proposal. See Pieter Sanders, The European Company, 6 Ga. J. Int'l & Comp. L 367 (1976). 4. Professor Pieter Sanders, who drew up the first preliminary draft of the proposed statute, later described the motivation behind the proposed statute as follows: Why should it not be possible to constitute a company that as such would be recognized in all of the Member States and which could do business in those In 1970, the Commission of the European Community ("Commission") submitted to the Council of Ministers ("Council") 5 the first formal EC proposal for a European corporation statute.6 This proposal, as suggested by Professor Pieter Sanders, envisioned the creation of corporations under European law, rather than the law of particular member states; such a corporation was to be known as a Societas Europea ("SE"). The adoption of the proposal has proven highly controversial, due in large part to the disagreement within the EC concerning the role of corporations in general, and the SE in particular, within European society. Much of the disagreement has centered on the proper role that workers should play in the supervisory and decision making processes of SEs. Despite prolonged negotiations and the preparation of numerous drafts since 1970, the EC has not yet been able to adopt a European corporation statute. The EC is once again actively considering the creation of European corporations. In 1991, the Commission drafted an amended proposal for a Council regulation on a European corporation,7 together with an amended proposal for a Council directive concerning worker participation in European corporations.' Although these proposals draw heavily on earlier proposals on this subject, they also make substantial changes from the earlier drafts. countries on an equal footing with domestic corporations: a company not subject to the national company law of the country involved, but to a uniform European company law, applicable directly in all the Member States alongside the national company law? See Sanders, supra note 3, at 368. 5. The Council of Ministers is made up of one minister representing each member state. See Treaty of Rome, supra note 1, art. 146. The Commission is comprised of seventeen persons and must include at least one and not more than two nationals from each member state. Id. art. 157( 1 ). These persons do not represent and do not take direction from the governments of their respective member states. In general, the Council performs a legislation function of adopting directives and regulations, while the Commission performs an executive function of enforcing and administering the Treaty of Rome and the directives and regulations. The Commission also proposes and drafts all regulations and directives that are considered by the Council. For a more thorough discussion of the institutions of the EC, see David Freestone & J. Scott Davidson, The Institutional Framework of the European Communities 55-115; Trevor Clayton Hartley, The Foundations of European Community Law 8-25 (1981). 6. Proposal for a Council Regulation embodying a Statute for European Companies, 3 Bull. Eur. Comm. Supp. 8/70 (1970) [hereinafter 1970 Proposed Regulation]. The term European corporation statute is used to refer generally to the proposed legislation governing the creation of SEs. More precisely, the current proposed legislation takes the form of a Regulation and a related Directive. A regulation of the EC has general application, is binding on member states, and is directly applicable in those states without the necessity of additional member state legislation. A directive, although binding on the members states, permits the member state governments to choose the form and methods of implementation. See Treaty of Rome, supra note 1, art. 189. 7. Amended proposal for a Council Regulation on the Statute for a European Company, 1991 O.J. (C 176) 1 [hereinafter 1991 Proposed Regulation]. 8. Amended proposal for a Council Directive complementing the Statute for a European company with regard to the involvement of employees in the European company, 1991 O.J. (C 138) 8 [hereinafter 1991 Proposed Directive]. The 1991 draft of the European corporation statute represents significant success, as well as substantial failure, in the attempt to create a form of business organization "subject... to a uniform European company law, applicable directly in all the Member States... ."I Companies will find it easier to create SEs under the 1991 proposal than under earlier drafts of the proposed statute, but illogical and unnecessary restrictions still remain. Companies will also find it easier to conduct business across national borders if they organize as SEs, because they will be able tdoerinmteegrrgaetres.t1h2e losses of their foreign branches, and arrange cross-bor On the other hand, under the 1991 proposed European corporation statute, companies will still retain important indicia of member state "citizenship." Even though they are European corporations, they will still be subject to member state laws governing many matters. Furthermore, they will be limited in their ability to move their headquarters from one member state to another without making major changes in their capital structures,' 3 and management structures.1 4 Although the proposed European corporation fails to achieve much of its original objective, it is not a complete failure. It has solved some of the difficulties facing companies doing business in more than one member state of the EC. The fact that it has not yet solved all of those difficulties simply indicates that there is more work to be done with respect to establishing a social and political consensus within the EC concerning the role of business in the society. The proposed European corporation statute is not only the result of the establishment of consensus; it is also one of the mediums through which that consensus is being established. The various drafts of the proposal have helped set the agenda for establishing a consensus on the structure, operation and management of business enterprises. Where consensus has been established, the proposed draft has provided the basis for harmonization of national company law, 5 as well as the law governing SEs. Much work remains, however, before the proposed statute will truly enable businesses in the EC to operate "free from.., the territorial application of national laws."' 6 This Article examines and evaluates the development of the current proposals for a European corporation statute. Part I of this Article briefly reviews the history of the proposals, and the procedural steps that 9. Sanders, supra note 3, at 368. 10. See infra part III.A. 11. See infra part III.E. 12. See infra part III.A.1. 13. See infra part III.B. 14. See infra part III.C-D. 15. See, eg., Second Council Directive of 13 December, 1976, art. 1, 1977 OJ. (L 26) 1, 2 [hereinafter Second Company Law Directive] (dealing with the formation of public limited liability companies and the maintenance of their capital). 16. 1991 Proposed Regulation, supra note 7, at 2. remain for their adoption. 7 Part II considers the need for a European corporation statute and the goals of such a statute, as identified by the various institutions of the EC.18 Part III examines the major substantive provisions of the 1991 Proposed Regulation and the 1991 Proposed Directive, and traces the development of these proposals from prior drafts, thereby illustrating the various opposing views that have been reconciled, compromised, or accommodated.' 9 It also compares the proposed statutes to other EC laws and proposals governing corporations organized under the laws of the member states. The final part of this Article evaluates the proposed European corporation statute.20 I. HISTORICAL AND PROCEDURAL ASPECTS In 1970, the Commission proposed that the Council adopt a regulation permitting the creation of SEs. 2 ' The proposal was lengthy and complicated, and attempted to prescribe rules for virtually every aspect of a corporation's existence, including its formation, capital structure and manegement structure, the rights of its shareholders, the participation of its shareholders and employees in management decisions, mergers, the preparation of its annual financial statements, its taxation, and liquidation and insolvency issues.22 Some of the provisions of the proposal introduced concepts that had never been dealt with in the laws of the member states.23 After receiving favorable comments from the Economic and Social Committee, the European Parliament adopted a number of proposed amendments, the most significant of which related to the participation of employees in management of the SE.24 The Commission then issued an amended proposal in 1975, which incorporated the Parliament's proposed amendments almost verbatim.2 5 Between 1976 and 1982, the proposal was examined by an ad hoc working party of the Council. This work was then suspended pending a 1993] review of the Commission's proposals concerning the harmonization of member state laws applicable to parent-subsidiary groups of companies.2 6 Work was not resumed until 1988, after the Commission called on Parliament, the Council, and industry to once again attempt the creation of a European corporation statute." In furtherance of this request, the Commission prepared a new draft of the proposed statute. In the 1989 draft, the Commission divided the proposal on the European corporation into two separate but coordinate pieces of legislation. The first, the Commission's Proposal for a Council Regulation on the Statute for a European Company,28 addressed all the basic issues of creation, funding, financial structure, management, accounting, tax, and dissolution as they relate to the SE.29 The second, the Commission's Proposal for a Council Directive Complementing the Statute for a European Company,3° separately addressed the issue of the participation of workers in the management of the SE.31 The Commission apparently believed that this division of the proposal was necessary in order to give to the member states the freedom to enact their own national laws governing worker participation in the management of SEs. After receiving the Commission proposals, the Council requested the opinion of the Economic and Social Committee. 2 The Committee offered a number of suggestions; these included making the SE form of organization more readily available, modifying the rules on financial structure and management, and emphasizing the Commission's commitment to employee participation in management.33 In 1991, pursuant to the cooperation procedure established by the Single European Act,34 the Commission adopted an amended proposal which incorporated some of the suggestions made by the Committee and the Parliament.3 5 This amended proposal is the subject of this Article. This proposal is now pending review by the Council to determine if a common position on the proposal can be established through a qualified majority vote.3 6 If a qualified majority vote can be obtained, the common position will be communicated to the Parliament. The Parliament would then have three months to act. If the Parliament failed to act, or if it approved the common position, then the Council would be able to adopt the proposal into law by a qualified majority vote. If the Parliament rejected the Council's common position proposal, then a unanimous vote of the Council would be required for the proposal to be adopted. If the Parliament were to amend the proposal, the Commission would then have one month to review the amendments and transmit its own amended proposal (which need not include the amendments proposed by Parliament) to the Council. The Council could then adopt this final proposal into law by a qualified majority vote; alternatively, it could choose to adopt the proposal containing its own amendments, but only if a unanimous vote were obtained.3 7 II. THE NEED FOR A EUROPEAN CORPORATION STATUTE Despite the enormous growth in inter-European commerce among the member states of the EC that has occurred since the creation of the European Economic Community in 1958,38 companies that conduct business across borders through branches or subsidiaries, rather than through purchases and sales or licensing agreements with unrelated companies, continue to face substantial barriers. The varying and conflicting laws that exist within the member states that comprise the EC make both the creation and the operation of such international enterprises difficult, and occasionally legally or practically impossible.39 The legal systems of the member states of the EC are based on 8. 1993] THE SOCIETAS EUROPE.A three different traditions-the common law system,' the civil law system,4 ' and the Scandinavian law system.4 2 Each of the twelve member states has developed its own body of law within these traditions. Great Britain actually has three different legal systems.4 3 Some of the member states' laws differ substantially from each other with respect to such matters as employee participation in management" and the recognition of single shareholder limited liability corporations.4 5 Therefore, a company seeking to conduct business in more than one member state of the EC must consider the laws of up to fourteen different legal systems.46 Although these fourteen different legal systems have significantly similar approaches to many basic business law issues, differences still remain. For example, all of the member states of the EC recognize the concept that a publicly owned enterprise provides limited liability to its owners for enterprise debts.47 However, not all of the member states recognized single shareholder limited liability enterprises48 until after 1989, when the Council adopted a directive that required them to do so. 49 Corporate laws on a variety of other subjects, such as whether subscribers' capital must be fully paid in to the corporation, 0 or whether workers have rights to be informed of or involved in major decisions concerning the corporation, 5 also differ significantly from country to country. The EC Commission 2 has recognized that the varying laws of the member states create significant barriers both to the efficient conduct of business and to the creation of an economically unified market within the EC. The Commission, therefore, has identified various needs of European companies that should be satisfied in order for them to perform more efficiently on an inter-European basis.5 3 At the same time, the Commission has recognized that the growth of European (as distinct from national) companies makes it necessary to provide additional protections to persons and groups that do business with those corporations. 4 A. Enabling Goals of the ProposedStatute The Commission's general goal of enabling corporations to operate on a fully integrated European basis can be broken down into two related sub-categories: the improvement of companies' ability to make decisions and conduct business operations without regard to national boundaries; and the improvement of companies' ability to organize or reorganize without regard to such boundaries. 1. Operational Goals In its 1970 proposal for a European corporation statute, the Commission expressed concern about the barriers to Community-based company planning and operations. In the preamble to this proposal, the Commission stated that the creation of an economic union within the EC presupposed "a reorganization of the factors of production and distribution on a Community scale in order to ensure that the enlarged market will operate similarly to a domestic market."5 5 The Commission sought to improve companies' activities and competitiveness at the Community level, noting that the development of businesses at the national level could "fragment markets and so constitute an impediment to economic integration" of the Community.5 6 50. See infra note 202. 51. See infra part III.D. 52. The 1991 Proposed Regulation was drafted by the Commission and will not become effective until it is adopted by the Council. Accordingly, this Article regards the proposal as being the work of the Commission. 53. See infra part II.A. 54. See 1991 Proposed Regulation, supra note 7, pmbl.; infra part II.B. 55. 1970 Proposed Regulation, supra note 6, at 5. 56. Id. Based on the Commission's stated goals, it is apparent that the Commission believed that the use of companies organized under national laws would render it difficult to operate efficiently on a European basis, partly because of conflicting national laws, and partly because of lingering nationalistic prejudices against "foreign" European businesses. The only other European form of business organization, the European Economic Interest 1993] Similarly, in 1991, upon concluding that the completion of the internal market of the EC required that "the structures of production ... be adapted to the Community dimension,"5' 7 the Commission called for the "management of companies with a European dimension, free from the obstacles arising from the disparity and the limited territorial application of national company laws.""8 The Commission, moreover, called for the creation of Community-based company law, that would be applicable in all member states, so that companies could operate legally, as well as economically, on a Community-wide basis.5 9 In addition to the need for a general company law that encourages the operation of SEs on a community-wide basis, the Commission has continually recognized the need to allow European companies to coordinate their tax and fiscal policies. In its 1970 proposal, the Commission stated that SEs should be allowed to deduct from their profits any losses incurred by branches or subsidiaries in the other member states. t ° This goal of treating the SE as one entity for tax, as well as operational purposes, has been incorporated into the 1991 proposal.61 These statements by the Commission demonstrate that the encouragement of effective operations on a European basis, rather than on a national basis, constitutes one of the major goals of the European corporation statute. Under the fully integrated market sought by the Commission, companies would be able to make operational decisions, such as choosing sources of supply and locations of production and sale, based solely on market considerations.62 Decisions would not be affected by managers' unfamiliarity with the laws of other member states, or their perceptions of the favorable or unfavorable nature of "competing" national laws. Consequently, inconsistent national laws dealing with corporate governance and control and with tax issues would be harmonized or unified to a Community-wide standard.6 3 It is against this standard that the 1991 proposals will be evaluated." Grouping, does not provide an effective alternative to European businesses because of significant limitations that are placed on its size, and because it must be operated as a partnership, rather than an integrated business entity. See infra note 163. 57. 1991 Proposed Regulation, supra note 7, at 1. 58. Id at 2. 59. See id 60. See 1970 Proposed Regulation, supra note 6, at 7-8. 61. See 1991 Proposed Regulation, supra note 7, at 4. 62. See id. at 1-5. 63. It has been suggested that current levels of harmonization of Member State corporate law are insufficient to minimize the "race to the bottom" tendencies that may result from the growing unification of the EC market as governments compete for companies to incorporate and establish their headquarters in their countries. See Clark D. Smith, Note, Federalismand Company Law: A "Race to the Bottom" in the European Community, 79 Geo. L.J. 1581, 1593-99 (1991). 64. See infra part IV. Organizational Goals Since the time of its first proposal for a European corporation statute, the Commission has recognized that the goal of operational integration of European companies could not be achieved solely by harmonizing the laws of the member states. The Commission noted in 1970 that the harmonization of laws could not eliminate the barriers to either the movement of company headquarters from one member state to another, or the combination of companies across national borders. It also noted that the harmonization of laws would not eliminate the necessity of choosing a single country of "citizenship" and identity for European companies.65 For this reason, the Commission believed that it was necessary to free European companies from legal ties to any particular country. To accomplish this, the Commission concluded that a "full set of standard porpoevraistiioonns"anwdowulidndhianvge utpo boef tchreeaEteudrotopegaonvecronm"ptahneyf.ou6n6ding, structure, In 1988, more than six years after the Council had last considered the idea of a European corporation law, and more than eighteen years after it first proposed the adoption of a European corporation statute, the Commission issued yet another call to action.67 The Commission warned that cross-frontier cooperation had become "imperative" not only for achieving economic integration of the EC market, but also for maintaining the EC's competitive position in relation to the United States and Japan, especially in the high-technology and financial services industries. 68 In its Memorandum, the Commission pointed out that the absence of a European company statute impeded the development of EC-based companies. The Commission also criticized the resulting failure in the development of legal methods for accomplishing the "obvious economic need to restructure companies. '69 According to the Commission, the reorganization of such companies was made frustrated by: ( 1 ) the impossibility of accomplishing cross-frontier mergers and other business combinations under existing laws; ( 2 ) inconsistent and conflicting national tax laws resulting in double taxation and tax-oriented rather than market-oriented decisions by managers; and (3) inconsistent national laws regarding the establishment and recognition of groups of companies." ° The Commission solicited comments from the Council, Parliament, workers, and cor1993] porate managers for their use in the formulation of a new European company law proposal. The resulting proposal, made in 1989 and amended in 1991, reasserts the need to permit the organization of corporations on a European basis. The preamble to this proposal states that European companies should be able to "carry out the reorganization of their business on a Community scale"7 1 without reference to the laws of individual member states, and expresses concern over the obstacles to the creation of groups of companies that was produced by the divergent national laws.7 2 The Commission concludes that it is essential to create a European corporate form of organization "as a means of enabling companies from different Member States to merge or to create a holding company and.., to form a joint subsidiary.""3 A significant addition to the 1989 Proposed Regulation would enable certain companies to become European companies without the need for mergers or other corporate reorganizations.74 Although the Commission briefly addresses the tax implications of subjecting the corporations to tax in the individual member states, the 1989 and 1991 proposals give much less emphasis to these problems than the 1988 Memorandum had provided.7 5 Moreover, because of the progress made in harmonizing member state company law, the Commission, in the 1991 proposal, places much less emphasis on the need for adopting a full set of European company laws covering all aspects of the annual financial reporting requirements and the winding up of European companies.7 6 B. Protective Goals of the ProposedStatute The Commission has consistently acknowledged that if companies were allowed to operate and organize on an EC basis, rather than on a national basis, various protective mechanisms commonly found in member state company laws would need to be adopted. The Commission's main concern has been the protection of the rights of workers in such enterprises. In addition, the Commission has been concerned to a somewhat lesser extent about protecting the rights of minority shareholders and creditors. 1. Protection of Employees The preamble to the 1970 Proposed Regulation, in an effort aimed at achieving "uniformity in the system of management of the European company," warned against the use of national laws in providing a model of employee representation in European company decision-making." The 1970 proposal, however, went far beyond this goal of uniformity, and asserted that it was "necessary... to provide for the formation of a European Works Council"7 " in all European companies, and "equally necessary to allow representation of workers on the Supervisory Board[s]." 79 The proposal would therefore allow workers to become involved in matters of company management and the appointment of executive officers of the companies.8 0 The preamble offered no justification for these worker participation goals other than citing the need for uniformity." In the explanatory notes to the proposal, the Commission stated that European companies should encourage worker participation in management as a means of improving efficiency through the increased level of cooperation both between employees and management and between employees of the same business entity who worked in different member states.s2 In 1988, the Commission expressly acknowledged that its proposals on the European company statute were designed to do more than simply establish uniform laws. In its 1988 Memorandum, the Commission com1993] mented that the necessary restructuring of European companies on an international level would be more readily accepted by European workers if they participated in that restructuring, and their interests were safeguarded. 3 In the Commission's view, worker participation in the management of the European company was essential both as a means of ensuring the smooth operation of such enterprises and as a matter of "social rights."" Therefore, the Commission stated that in addition to encouraging efficient European-wide operations, the European company statute should "at the same time pioneerworker involvement in the decision-making structures of European industry." 5 teed" to all workers. s7 The 1989 and amended 1991 draft directives on worker participation in the European company moderated the Commission's language on the social rights aspect of the proposals. Although the Commission stated that the participation of workers in the supervision of the European company was necessary for achieving the economic and social goals of the EC, the Commission placed greater emphasis on the need for coordinating the diverse laws of member states on this issue.8 6 In addition, the 1991 draft expressed concern over preventing the competitive inequalities that would arise if equal levels of worker participation were not "guaran Protection of Creditors and Shareholders In articulating the goals of the 1970 proposal, the Commission took the position that protection was required for creditors and certain shareholders of parent-subsidiary groups of companies that were SEs. 8 The 83. See 1988 Memorandum, supra note 24, at 2. 84. 1985 White Paper, supra note 67, at 16. It isinteresting to note that the Commission took this position even though it recognized that, in some member states, worker representative groups were reluctant to accept the idea of worker participation. See id.; infra note 338 and accompanying text. The Commission acknowledged the continuing support of the European Parliament for worker participation provisions in the European company statute. 85. 1988 Memorandum, supra note 24, at 3 (emphasis added). 86. See 1989 Proposed Regulation, supra note 28, art. 1,at 69; 1991 Proposed Regulation, supranote 7, art. 7, at 9. 87. See 1991 Proposed Directive, supra note 8, pmbl., at 9. The Commission's position on this point lacks a certain amount of internal logic. If it is true that European companies operate more smoothly and effectively when workers participate in management, then a competitive inequality would result from the statute's failure to require worker participation. Under such circumstances, it would hardly seem necessary to guarantee worker participation, because companies would be led by market pressures to allow worker participation (except that such guarantees of worker participation might avoid a damaging period of non-competitiveness until the companies restructured their operations). Ifo,n the other hand, worker participation would have no effect, then no competitive inequality would result from the adoption of this model of management. If, conversely, worker participation would make European companies less efficient, then it would again be necessary to guarantee worker participation, in order to prevent companies without such participation from gaining a competitive advantage. 88. See 1970 Proposed Regulation, supra note 6,pmbl., at 173-74. The term "creditor" was not defined in the proposal. Because the proposal simply makes parent compaCommission believed that the growth of such groups of companies had already caused problems for the creditors and minority shareholders of the controlled companies.8 9 As European companies were created, and more and larger groups of companies were formed, the Commission foresaw increasing problems and the need for additional regulation. The Commission also thought that its regulation would serve as a model for the member states' revision of their national laws on the subject. 90 The Commission also recognized, in the 1970 Proposed Regulation, that controlling companies and minority shareholders did not have common interests. A controlling company might not act in the best interests of minority shareholders of the controlled company because the controlling company was not necessarily interested in improving the profitability of the controlled company. It might instead use the controlled company for the purpose of improving the controlling company's profitability. The Commission therefore provided special protection for minority shareholders by enabling them to redeem their shares in the controlled company in exchange for either cash or shares in the controlling company. 9 ' With respect to creditors, the Commission was more vague about the need for special protection in groups of companies. The Commission only referred to the "threat ...for creditors who rely on the protection provided for by law" when one company controlled and directed another.92 panies liaNbelevefrotrhethleessd, etbhtes Coof mthmeiirsscioonn'tsroplrleodpocsoamlmpaandieesc.o93ntrolling com The Commission's views on the special protections needed in groups of companies remained unchanged for several years. In its 1975 amended proposal, the Commission noted Parliament's strong support for such provisions, and retained the provisions of the 1970 proposal. 94 In 1988, the Commission acknowledged that it had changed its views on the protection of minority shareholders and creditors in groups of companies. Although the Commission still believed that the legal principle of independence conflicted with the economic demands of groups of companies, the Commission noted that it was "open to question . . . whether the European Company Statute is the proper place to create a nies liable for the "obligations" of their subsidiaries, it apparently protects bondholders as well as trade creditors. See id. 89. The Commission had initially defined control to exist where one company had the power to direct more than half the votes, or appoint more than half the members of the board of management or supervisory board, or exercise a decisive influence on management. See 1970 Proposed Regulation, supra note 6, art. 6( 2 ), at 12-13. This definition of control was later modified to remove the concept of decisive influence. See 1991 Proposed Regulation, supra note 7, art. 6, at 8. 90. Of the six member states of the EC in 1970, only Germany had passed laws dealing with the protection of creditors and minority shareholders in groups of companies. See 1970 Proposed Regulation, supra note 6, pmbl., at 173. 91. See id. arts. 228-238, at 179-87. 92. Id. at 173. 93. See id. art. 239, at 187-88. 94. See 1975 Proposed Regulation, supra note 25, art. 239, at 100-01. body of rules governing groups."95 By 1989, the Commission had fully reversed its position on the need for creating special rules for European companies that operated in groups. The Commission acknowledged that under existing law, the rights of shareholders and creditors in a group were governed by the law of the controlled company. Consequently, specific rules were not required for a European company that acted as part of a group of companies.96 This approach was continued in the 1991 amended proposal.' 3. Protection of Others Aside from its goal of protecting minority shareholders and creditors in groups of companies, the Commission apparently did not see any significant need for providing special protection to creditors and shareholders of European companies that were not members of such groups. The Commission did express a mild concern for proper capitalization of such companies. The Commission wanted to "ensure that such undertakings [would] operate on an acceptable scale," and consequently specified that a minimum paid-in capital would be required.9" The 1970 proposal also gave creditors the opportunity to oppose a merger in the European Court of Justice if their rights would be affected by the merger.99 The provisions of the 1970 proposal that dealt with shareholders' rights were more the product of normal corporate housekeeping concerns (e.g., liability of the board of management for wrongful acts, and rights of the shareholders to convene shareholder meetings, place items on the agenda, and bring derivative suits) than concerns for the special problems of European companies, and were not separately discussed by the Commission in the preamble or the notes to the proposal. 1° The Commission has not changed its view that such additional protective measures are not required. The 1989 and 1991 proposals generally followed the pattern of the 1970 proposal on these issues, with the exception that the right of creditors to contest merger in the European Court of Justice has been eliminated. 01 III. SUBSTANTrvE PROVISIONS OF THE 1991 PROPOSALS This Part will examine the most important provisions of the 1991 Proposed Regulation and the 1991 Proposed Directive and will analyze the changes that the Commission has made from the earlier proposals. In 95. 1988 Memorandum, supra note 24, at 20. 96. See 1989 Proposed Regulation, supra note 28, pmbl., at 42. The only unresolved issue that the Commission has acknowledged in this area is the need for specifying the law that applies if the SE itself is a controlled company. See id 97. See 1991 Proposed Regulation, supra note 7, pmbl., at 4. 98. 1970 Proposed Regulation, supra note 6, pmbl., at 6. 99. See id art. 27, at 29. 100. See eg., id arts. 71, 81, 85( 1 ), 85(3), at 62-63, 69, 73. 101. See 1991 Proposed Regulation, supra note 7, arts. 4, 17-31, at 7, 12-20. addition, this Part will examine the extent to which they coordinate or conflict with EC rules governing national companies. Finally, this Part will evaluate whether the Commission has been successful in meeting its announced goals for the European corporation statute. The 1991 Proposed Regulation allows an SE to be formed by business entities that are organized under the laws of a member state. 2 Each SE is required to be a public limited liability company. 103 There are no limits on the types of business that may be engaged in by an SE. An SE may be formed in four ways: by merger, by creation of a holding company, by formation of a joint subsidiary, or by conversion of an existing company. An SE is allowed to participate in the creation of other SEs according to the same rules applicable to national companies. Detailed provisions limit the availability of each method. The 1991 proposal fails to completely achieve its goal of enabling companies to take advantage of the SE form of organization. Most notably, the availability of the SE has been significantly limited, without apparent advantage. 1. Formation by Merger The 1991 Proposed Regulation permits the formation of an SE through the merger of two or more existing corporations.' °4 The Regu102. See id. arts. 2( 1 ), 2(l)(a), 2( 2 ), 2(3), at 6. 103. See id. art. 1( 1 ), at 5. The English texts of both the 1991 Proposed Regulation and the 1989 Proposed Regulation use the term "public limited liability company" to refer to the form of organization of the SE itself and also the companies that are entitled to participate in the formation of an SE through a merger. See id. arts. 1( 1 ), 2( 1 ), at 5-6; 1989 Proposed Regulation, supra note 28, arts. 1( 1 ), 2( 1 ), at 42-43. The 1970 Proposed Regulation referred to these entities as societes anonymes, which is the French form of organization of public limited liability companies. See 1970 Proposed Regulation, supra note 6, art. 15, at 21. The 1970 Proposed Regulation stated that it intended to include similar forms of organization under the laws of other member states, such as the German Aktiengesellschaft, the Italian societa per azioni, and the Dutch naamloze vennootschap. See id. at 6 (translator's note). Although it is not made explicit in the 1991 Proposed Regulation, it appears clear that the term "public limited liability company" isintended to have the same meaning as the term "societe anonyme." See, e.g., Second Company Law Directive, supra note 15, art. 1,at 2 (specifying its applicability to the formation of public limited liability companies, and also its applicability to the societe anonyme, the Aktiengesselischaft, and other similar forms of organization). This Article uses the approach of the 1991 Proposed Regulation and refers to all such forms of corporate organization as public limited liability companies. The development of the concepts of public and private limited liability companies is traced in Clive M. Schmitthoff, Social Responsibility in European Company Law, 30 Hastings L.J. 1419, 1422-25 (1979). 104. The merger would still be subject to other EC and member state laws and regulations, including the 1989 Mergers Regulation, which establishes EC-level antitrust laws. See Council Regulation 4064/89 of 21 December 1989 on the Control of Concentrations Between Undertakings, 1989 O.J. (L 395) 36. Under the Mergers Regulation, concentrations with a "Community dimension" (based on world-wide and Community-wide turnolation, however, establishes two important limitations. First, formation through merger is only available to companies that are organized as public limited liability companies. Second, at least two of the merging companies must have their places of central administration located in different member states." 5 Public Limited Liability Company Requirement desired to form an SE.'0 Since 1970, the proposed European corporation statute has required all the participants in an SE formed through a merger to be public limited liability companies.10 6 The Commission, in 1970, explained that it allowed only public limited liability companies to create SEs by any method because the extension of this privilege to other forms of corporate organization (a) would add considerably to the difficulties of drafting the statute, and (b) would make it more difficult for the European Court of Justice to supervise the formation of SEs.1 °7 The Commission further explained that other forms of corporate enterprises could first convert into public limited liability companies, as a preliminary measure, if they This requirement was carried forward into the 1989 proposal concerning the creation of SEs by merger without further explanation. °9 The European Parliament thereafter proposed to extend the right of creating SEs by merger to private limited liability companies and other similar companies.' 10 In support of this proposal, the Parliament pointed out that private limited liability companies conducted a major portion of the economic activity taking place in the EC.'11 Nevertheless, the 1991 Commission proposal did not change the limitation that only public limver) may be blocked by the Commission if it concludes that they will significantly impede competition. See 1i. 105. See 1991 Proposed Regulation, supra note 7, art. 2( 1 ), at 6. There is no requirement that the shareholders be nationals of or organized under the laws of a member state. Consequently, a company that was organized under the laws of a member state, but which was a subsidiary of a corporation organized outside of the EC would be able to participate in the formation of an SE through a merger or by any other means. See id. 106. See 1970 Proposed Regulation, supra note 6, arts. 2-3 notes, art. 21, at 10-11, 26. 107. See id. arts. 2-3 note 1, at 10-11. 108. In particular, the Commission suggested that a business entity organized as a societe a responsabilite limitee, a Gesellschaft mit beschrankter Haftung, or a societa a responsabilitalimitatamight convert to a public limited liability company. See id. These types of companies are generally referred to as private limited liability companies. See Twelfth Directive, supra note 49, pmbl. & art. 1,at 40-41. According to Professor Sanders, who drafted the precursor of the 1970 Proposed Regulation, the conversion ofprivate limited liability companies into public limited liability companies is easily accomplished in each of the member states. See Sanders, supra note 3, at 372. 109. See 1989 Proposed Regulation, supra note 28, art. 2( 1 ), at 43. 110. See Proposal for a regulation on the Statute for a European company, amend. 7, art. 2( 1 ), 1991 O.L (C 48) 72, 74-75 [hereinafter 1991 Amendments by Parliament]. 111. See Amended Proposal for a Council Regulation (EEC) on the Statute for a European Company: Explanatory Memorandum, COM (91)174 final at 2 [hereinafter 1991 Explanatory Memorandum]. 1993] apply.' 9 Of the three models, this model is the least intrusive on management's control over the company and the existing relationship between management and employees. It is also the least disruptive to existing member state laws. If a company's management has already been able to work out a method of accommodation with its employees, there is no reason to suspect that such method of accommodation would be affected by the conversion of the company into an SE. However, in those companies in which no worker participation existed, or little or no informational rights have been provided, this third model would still require significant changes in attitudes and procedures. Because the model requires agreement between management and employees, its greatest impact on these companies would be its requirement that management enter into collective bargaining with workers concerning the structure of management. Selection of Worker Participation Model a. Limitations on Selection of Model The 1991 Proposed Directive gives each member state the power to affect the choice of models of worker participation for SEs. A member state may restrict the choice of models that are available to SEs registered in that state, or require that all SEs adopt one of the models."4° This provision may seriously damage the Commission's goals of enabling companies to operate in the EC without regard to national borders, and permitting them to freely transfer their places of central administration. This provision does not even require the member state to adopt the same mandatory form of worker participation for SEs that it does for national companies. If a member state requires SEs to adopt a form of worker participation that is different from the required or permitted form for national companies, then national companies within a given member state may be unwilling to utilize the SE form of organization. Perhaps more importantly, national companies that are registered in other member states will be unwilling either to register as an SE in a member state or to transfer their places of central administration there if they do not like the form of worker participation which is mandated by that member state. This provision also presents difficulties for employees of existing SEs that wish to transfer their states of registration and central administration. Generally, under the proposed statute, the previously agreed upon model of participation may only be changed pursuant to an agreement between the management and the employee representatives.3 51 This means that workers' participation rights could not be altered simply because an SE changed its state of central administration. If, however, the 349. See 1991 Proposed Directive, supra note 8, art. 6(8), at 14. 350. See id art. 4, at 11-12. 351. See id art. 3( 3 ), at 11. management of an SE wished to change or reduce the level of worker participation, it could simply transfer the SE's state of central administration to another member state that required a lower level of worker participation, subject to the approval of the general meeting of shareholders. The SE would now be required to comply with the new state's laws regarding worker participation, thereby rendering the rights of employees to negotiate over the new form of participation meaningless. b. ProceduralAspects of Selection The 1991 Proposed Directive requires that an SE's selection of a model of worker participation from the models allowed by the member state be made pursuant to a written agreement between the SE's management and employee representatives. In reaching this agreement, the two sides are charged with considering the "legal, economic and social consequences of the formation of the SE."35 2 If an agreement can not be reached, the dispute must be presented to the general meeting. A report by management on its proposal and a statement by the employee representatives detailing why the formation of the SE under the management plan is contrary to the interests of the employees would also be presented. The shareholders would then vote on both the model of worker participation to be adopted by the SE and the question of whether an SE should be formed in the first instance.35 3 Once a model of worker participation has been chosen, whether by agreement or by vote of the general meeting, it can be changed only by an agreement between the management or administrative board and the employee representatives. If the registered office of the SE is transferred to another member state, the model of participation may only be altered pursuant to the procedure for selecting a model of participation that was originally adopted.354 This procedure for breaking a deadlock between management and the employee representatives through the vote of the shareholders at the general meeting 355 was first proposed in the 1991 Proposed Directive. The 1989 proposal had allowed the management or the administrative board to impose a choice of model if the board and the workers were unable to reach an agreement. 3 6 The 1991 proposal increases the power of employees in the negotiation process. Previously, if management was reluctant to adopt one of the models of participation, it could simply ignore the workers' position, and then impose the model that management desired. Now, management must persuade the general meeting that its position is reasonable and desirable. In most instances, however, it is likely that the shareholders would vote to support the position of the manage352. Id. art. 3( 1 ), at 10. 353. See id. art. 3( 1 )(a), 3( 1 )(b), 3( 2 ), at 10-11. 354. See id. art. 3(3), 3(7), at 11. 355. See supra note 353 and accompanying text. 356. See 1989 Proposed Directive, supra note 30, art. 3( 1 ), at 69. 1993] ment that they have elected, rather than the position of the worker representatives. Consequently, this change may not have any significant impact on the choice of model. The vote of the general meeting for determining the basic model of worker participation in the event of a deadlock between the SE's management and workers should be distinguished from the selection of a form of employment under the "other models" alternative. In the former situation, the management and the employees would have to reach agreement on a choice among ( 1 ) the representation of employees on the board, selected either through election or nomination; ( 2 ) the establishment of a separate consultative body; or (3) the "other models" system, with details to be worked out later. If agreement on this issue could not be reached, then the general meeting would make the selection. In the latter situation where the "other models" system has been agreed to by an SE's management and employees, or has been selected at the general meeting of shareholders, then both management and the employees would enter into another round of negotiations for establishing the details of the other model of participation. If an agreement could not be reached, the general meeting would not have any power to select the form of participation; in the case of deadlock, the member state standard model of worker participation would be imposed.35 7 These procedures, which may require two separate levels of choices in some instances, present an ample opportunity for strategic decision-making. For example, if an SE were registered in a member state with a relatively weak standard model of worker participation, and the management were reluctant to give significant participation rights to employees, then management would probably refuse to agree with the employees on either the board membership model or the separate body model of participation. Instead, it would urge the general meeting to adopt the "other model," take a very hard position in the collective bargaining process, and then adopt the state standard model after having failed to reach an agreement with the employee representatives. If the standard member state model granted relatively strong participation rights to employees, management would most likely be unwilling to present the general meeting with an "other model" alternative, because the results of collective bargaining or the standard model would give employees more participation rights than they would receive under the separate body model. Employee representatives would face similar choices in deciding whether they could persuade the general meeting to side with them in adopting a strong form of worker participation, or if it was better to opt for the other model form of representation, and then use the standard state model of participation as a floor upon which they would base their negotiations. 357. See Donald, supra note 158, at 46. Evaluation of Worker Participation Directive The 1991 Proposed Directive concerning worker participation in management ultimately fails to meet the goals set forth by the Commission. Under the present circumstances, however, this failure is probably unavoidable. In attempting to accommodate the objections of member states and the representatives of management and employees, the Commission has established a structure which on its face allows a broad range of choices among models of employee representation. The Directive already permits use of the German, Dutch, French-Italian, and ScandinavianUnited Kingdom systems of worker participation in management.3 58 In addition, there has been discussion at the EC about the possibility of further broadening the range of alternatives, to encompass all of the other national models of worker participation. 35 9 Therefore, SEs might have the opportunity to select among at least a half-dozen or more different models of worker participation. If the proposal did no more than this, then the choice of model by the SE would be dictated by the nature of management's relationship with its employees and the competitive forces of the European marketplace. The proposal's inclusion of the right of member states to restrict certain models, or to mandate one particular model destroys the Commission's goal of attaining uniformity in the laws that are applicable to SEs organized in the various member states.3 ° Member states may not be able to resist mandating the model of participation that is most common within their individual states. Once one member state takes such an action, management or labor representatives in other member states will feel greater justification in urging their governments to take similar measures. For example, Germany could mandate the use of the elected board representation model to avoid a dilution of German law. This could compel the United Kingdom or France to mandate their own systems of worker participation in order to prevent the encroachment of the German model or a dilution of their own models. Even if only a few of the member states take such action, the Commission's hope for uniformity of law would be vanquished. Under these circumstances, member states will be pressured to prevent the transfer of an SE's place of central administration out of their countries because of the potential impact on employee representation that the proposal would produce. In addition, SEs will find it difficult, if not impossible, to change freely their places of central administration, because 358. See supra text accompanying note 336. 359. See 3 1992-The External Impact of European Unification (BNA) 6-7 (July 26, 1991). 360. The wide range of choice that is made available to member states is viewed by one commentator as allowing enough discretion to the state to permit the creation of SEs without upsetting the delicate balance between employees and management. See Franceschelli, supra note 311, at 12. 1993] of the necessity of also changing the model of employee representation upon such transfer. Thus, instead of creating uniformity of law, the Commission has created not only diversity, but in all probability, an absolute conflict in member state law governing SEs. This loss of uniformity cannot be effectively rationalized as the price of achieving the social goal of improving employees' rights in SEs. The multiplicity of systems permitted by the 1991 Proposed Directive essentially ensures that any company or any member state that desires to preserve the status quo with respect to worker participation in management will be able to do so-either because of member state action to restrict or mandate the available models, or because of management's ability to resist employee requests and then turn the issue over to the general meeting for decision. Thus, the proposal is unlikely to have any real impact upon employee rights. Despite these problems, the compromises reached by the Commission on the issue of worker participation in management are probably unavoidable at the present time. The resistance of member states to the adoption of any system that would advance employee rights at the cost of flexibility or the elimination of national models of participation has been strong. It appears that the Commission may have to accept far less than it desires on this issue in order to obtain passage of the whole statute. Further harmonization of member state law on this issue may have to await the development of a stronger European political consensus on the underlying issue of the proper role of workers in the management of companies. E. Taxation of the SE 1. Losses from Permanent Establishments The Commission has attempted to enable the SE to operate as a single entity for most business purposes. In order to accomplish this goal, the Commission has proposed to allow an SE that conducts its business through "permanent establishments"3 6 located in more than one jurisdiction to treat its aggregate operations as a single taxable entity for tax loss purposes. Under the primary tax system outlined in the proposal, if the aggregate of profits and losses from all foreign permanent establishments re361. The term "permanent establishment" is not defined in the 1991 Proposed Regulation. The 1970 Proposed Regulation defined the term to include "(a) a seat of management; (b) a branch; (c)an office; (d) a factory; (e)a workshop; (f)a mine, quarry or any other site for extraction of natural resources; (g)work of construction or assembly carried on for more than twelve months." 1970 Proposed Regulation, supra note 6, art. 280( 2 ), at 221. The Commission's recent proposal concerning the integration of losses of national companies defines this term as "any fixed place ofbusiness through which an enterprise of a Member State carries on all or part of its activities." 1990 Proposal for a Council Directive concerning arrangements for the taking into account by enterprises of the losses of their permanent establishments and subsidiaries situated in other Member States, art. 2, 1990 OJ. (C 53) 30, 30-31 [hereinafter 1990 Proposal Concerning Losses]. suits in a loss, the SE would be allowed to offset that loss against the profits generated in the member state in which the SE is registered. Subsequent profits earned by the SE from the foreign permanent establishments would then be treated as taxable income in the state of registration, up to the amount of the losses previously used as an offset.362 Profits in excess of the amount of offset losses would be taxed only in the state in which the foreign permanent establishment was located, and not in the state of registration.36 3 Alternatively, a member state may elect not to utilize this tax loss integration system for SEs, if it instead allows SEs a credit for any taxes paid to foreign jurisdictions that are attributable to the profits derived from permanent establishments located there.36 The credit would be applied against the tax liability in the state of registration based on an SE's combined foreign and domestic operations.3 65 Under this alternative system, if an SE incurred losses in a foreign permanent establishment that produced a tax loss carryover in the foreign jurisdiction in which the permanent establishment were located, subsequent profits produced by such foreign permanent establishment would not be taxed in the foreign jurisdiction until the carried over losses attributable to that establishment had Double taxation of foreign-source income can be avoided using either the exemption method or the credit method. Under the exemption method, the country of residence does not tax income that is taxed or taxable in another country. By contrast, under the credit method, the country of residence computes its tax on the basis of the taxpayer's total income, including foreign-source income, and permits taxes paid abroad to be deducted from its own tax. In practice, most Member States use a combination of both methods: the exemption method for some types of foreign-source income, such as dividends from a substantially owned subsidiary, or branch profits, and the credit method for some other types of foreign-source income, such as interest and royalties. See Comm'n Of The European Communities, Report Of The Committee Of Independent Experts On Company Taxation 31 (1992) [hereinafter Ruding Report]. 365. See 1991 Proposed Regulation, supra note 7, art. 133(4), at 67. This provision is identical in substance to the Commission's proposal that required member states to allow national companies to take either offsets or tax credits, based on their operations in countries other than the country of registration. See 1990 Proposal Concerning Losses, supra note 361, arts. 6-7, at 31-32. The usefulness to national companies of the 1990 Proposal Concerning Losses is limited, however, by another provision that allows member states to "reincorporate" the deducted losses into the enterprises' taxable results if the reincorporation has not occurred (through the earning of subsequent profits) upon the expiration of five years. See id. arts. 8, 10, at 32. The 1991 Proposed Regulation does not contain a similar reincorporation provision. See 1991 Proposed Regulation, supra note 7, art. 8, at 9. 1993] been exhausted. Accordingly, in the state of registration, a foreign tax credit would not be allowed (i.e., there would be current taxation) until the foreign loss carryovers had been exhausted, because the foreign income would not have resulted in a foreign tax liability until that time.3 1' The concept of offsetting the losses of foreign branches against profits in the state of registration has been part of the Commission's proposal on the European corporation statute since 1970.367 Generally, the member states allow their national companies to offset the losses that are incurred by their foreign permanent establishments, although the methods and rules of the offsets vary.36 8 The 1970 proposal only allowed SEs to offset losses that resulted from operations conducted in other member states of the EC, and did not give the member states the option of using a foreign tax credit system.3 69 In contrast, the 1989 and 1991 proposals allow for the offsetting of losses that are incurred through the operation of any foreign permanent establishment, and allows the member states to adopt the tax credit system as an alternative.37 0 The 1991 proposal's tax provisions will generally make it easier for companies to operate internationally. The proposal allows for greater flexibility in offsetting losses generated by an SE's foreign permanent establishments. The portion of the proposal that allows SEs to offset their income by losses incurred through operations outside the EC raises additional policy questions. If the purpose of the proposed statute is to encourage the development of all multinational enterprises, then the proposal makes sense. It should be noted that the proposal requires member states using the loss integration method to accept a deferral of tax revenues where an SE incurs losses in the operation of a foreign permanent establishment that is located outside the EC. It remains to be seen whether member states will be willing to accept this deferral in order to stimulate multinational operations by EC-based SEs. In any event, the Commission has not formally proposed that national companies be allowed a similar offset for non EC-based losses.37 ' If this situation is not changed, it could provide a substantial incentive for utilizing the SE form of organization. The optional tax credit portion of the 1991 Proposed Regulation, which was first added by the Commission in 1989, is mirrored by the Commission's proposals regarding the foreign losses of national companies, presents an additional problem.372 Because this provision is elective by the member states, it institutionalizes yet another variation in the laws applicable to SEs and thereby prevents business enterprises from operating on a truly European basis, without regard to national borders.37 3 Losses from Foreign Subsidiaries The 1991 Proposal does not allow either an offset for losses incurred by an SE's foreign subsidiary,3 74 or a credit for taxes that are paid by an SE's foreign subsidiary to a foreign jurisdiction.37 5 Member states generally have been unwilling to allow national companies to offset their income by losses that are incurred through the operation of foreign subsidiaries, 37 even though nine of the member states allow national companies to offset their income by losses incurred through the operation of domestic subsidiaries.377 Nevertheless, the 1990 Proposal Concerning Losses would allow all national companies to offset their income by the losses incurred by foreign subsidiaries.3 78 If this proposal is adopted, it 372. See id. arts. 5-12, at 12-17. The Commission proposed the 1990 Proposal Concerning Losses because of the objections by companies that SEs would have an unfair tax advantage if national companies were not given the same loss integration/tax credit benefits that were given to SEs. See European Info. Serv., Company Taxation: ProposedDirectives on Removal of Tax Barriersto Restructuring Tabled, 1634 European Report 5 (1990). 373. SEs and other companies that conduct business in more than one state of the EC may have to accept this difficulty for now. The member states are almost equally split on the question of whether to use a tax credit method or a tax exemption method of preventing double taxation on national companies' income from foreign establishments and dividends from foreign subsidiaries. Moreover, the Independent Committee appointed by the Commission believes that it is "unrealistic to expect the member states to relinquish" the opportunity of choosing between the two methods. See Ruding Report, supra note 364, at 204. It is equally unlikely that the member states would relinquish their choice of alternatives with regard to the foreign losses of SEs. 374. Apparently, a subsidiary cannot be a permanent establishment. The 1990 Proposal Concerning Losses defines the term "subsidiary" as a company in which "an enterprise of a Member State has a minimum of [a] 75% [equity interest], giving it a majority of voting rights." 1990 Proposal Concerning Losses, supra note 361, art. 2, at 31. Permanent establishments are treated separately from subsidiaries under the proposal. Compare id., arts. 5-8, at 31-32 with id., arts. 9-12, at 32. 375. See 1991 Proposed Regulation, supra note 7. The 1970 Proposed Regulation, supra note 6, art. 281(l), at 222 had allowed the offset of losses from more than 50% owned subsidiaries in proportion to the percentage ownership by the SE in the subsidiary. See id. 376. See Ruding Report, supra note 364, at 195. 377. See Thommes, supra note 366, at 161. 378. The proposal requires member states to permit the offset of losses from subsidiaries in which the company owns 75% or more of the capital and a majority of the voting rights. See 1990 Proposal Concerning Losses, supra note 361, arts. 2, 9, at 6, 10. As is the case with losses from permanent establishments, the member states are permitted to require the reincorporation of those losses. See id. art. 10, at 10. The provision is would presumably apply to SEs as well, because under the 1991 Proposed Regulation, member state laws governing public limited liability companies apply to SEs when the European corporation statute is silent.379 If the 1990 Proposal Concerning Losses is not adopted, the SEs' inability to offset their income by the losses of foreign subsidiaries would prevent SEs from formulating a fully integrated business and tax strategy. This result is unacceptable, in view of the Commission's position that a national company's choice of whether to operate abroad through a foreign permanent establishment or a subsidiary merely constitutes an election between two different forms of organization that would conduct the same business activities abroad.38 0 Even though SEs could avoid this issue by operating through permanent establishments instead of subsidiaries, overriding business reasons might dictate the use of subsidiaries. Thus a further coordination is required between the tax regulations that govern SEs and the tax regulations that govern national companies.38 I F. Annual and ConsolidatedAccounts The provisions of the proposed corporation statute that deal with the annual accounts and consolidated accounts of SEs present no particular problems. SEs are required to prepare annual financial statements in accordance with the EC Fourth Company Law Directive concerning the financial statements of national public and private limited liability companies.3 82 They are also required by the Fourth Company Law Directive to publish an annual report.38 3 In addition, SEs that are parent companies must prepare and publish consolidated financial statements and annual reports in accordance with the Seventh Company Law Directive that governs similar reporting requirements for national companies."' The auditing of the annual reports is also governed by the same rules that are applicable to national companies.3 85 The Commission's virtually complete reliance on prior EC directives in establishing an SE's financial reporting requirements avoids differences designed to encourage the establishment of cross-border subsidiaries. See Thommes, supra note 366, at 162. 379. See 1991 Proposed Regulation, supra note 7, art. 7( 2 )(b), at 9. 380. See Thommes, supra note 366, at 161. 381. See Wooldridge, supra note 163, at 130. 382. See 1991 Proposed Regulation, supra note 7, art. 101, at 54. The preparation of financial statements of national companies is governed by the Fourth Company Law Directive, supra note 76. The 1991 Proposed Regulation requires SEs to use specific options that are among those available to national companies as prescribed in the Fourth Company Law Directive, but none of them are material to the subject matter of this Article. See 1991 Proposed Regulation, supra note 7, arts. 101( 3 ), 104( 2 ), 104( 3 ), 105 at 54-56. 383. See 1991 Proposed Regulation, supra note 7, arts. 102-104, at 55-56. 384. See id arts. 106, 109-112. The preparation of consolidated accounts for parent undertakings that are national companies is governed by the Seventh Company Law Directive, supra note 76. 385. See 1991 Proposed Regulation, supra note 7, arts. 103, 111, at 56, 59. The auditing of the accounts of national companies is discussed in the Eighth Company Law Directive, supranote 76. between the laws applicable to SEs and national companies. 3 86 In addition, because the directives essentially harmonize national laws on the subject, the proposed European corporation statute avoids national differences as well. Consequently, the financial reporting provisions of the 1991 Proposed Regulation should not present any problems to businesses that wish to use the SE form of organization. G. Winding Up, Insolvency, and Liquidation The Commission has chosen to rely primarily on the laws of the member states in establishing the rules governing the insolvency, winding up and liquidation of SEs. For the most part, this approach is successful, but it does produce some degree of variation in the laws applicable to SEs, because member state laws are not subject to uniform regulations or comprehensive harmonizing directives on these subjects. Winding Up The 1991 Proposed Regulation establishes three different procedures through which an SE may be wound up: ( 1 ) by a vote of the general meeting without particular cause; ( 2 ) by a vote of the general meeting following the occurrence of an event that requires the SE be to be wound up under the instrument of incorporation or the statutes of the SE; or (3) by a vote of the general meeting following the occurrence of an event that requires the SE to be wound up under the laws of the state in which the SE is registered. 3 7 This provision does not present any problems to most SEs. Even though member state laws may differ with respect to the grounds for winding up a company, the SE will be subject to only one set of laws at a time. Managers of an SE may explore the laws of other member states when the SE's registered office is moved from one member state to another, although it seems unlikely that variations in national laws on this subject would affect the choice of the member state in which to register. In addition to the situations described above, an SE may be required to be dissolved under one other circumstance. Under the 1991 Proposed Regulation, if the registered office of the SE is transferred to a location outside of the EC, any concerned person or any competent authority may apply to a court in the state in which the SE last had its registered office to have the SE dissolved. The court is permitted (but not required) to give the SE time to rectify the situation. 8 The provision describing this last circumstance, which was added for the 1991 Proposed Regulation, may present significant difficulties in its 386. The Commission's regulation of the preparation of financial statements and annual reports was made easier by the prior work on the subject. The 1970 draft proposal dealt with these issues at great length, because at that time there was no consensus among the member states. See 1970 Proposed Regulation, supra note 6, arts. 148-222, at 124-72. 387. See 1991 Proposed Regulation, supra note 7, arts. 115-116, at 60-61. 388. See id. art. 117a, at 62. 1993] THE SOCIETAS EUR OPEA application. The provision applies when the "registered office, as defined in Article 5 [of the 1991 Proposed Regulation], has been transferred outside the Community. ' 3 9 Article 5, however, is not entirely clear with respect to the meaning of the term "registered office" in this context. Article 5 states that the registered office of an SE shall be the place specified in the SE's statutes. The provision also states that it "shall be the same place as the place where the SE has its central administration., 3 9 ' The term "central administration" is not defined in the proposal. An SE's statutes could specify that its place of registration is in a particular member state, even though a portion of its management operations were located in another member state. Under these circumstances, it is likely that the true location of the SE's place of central administration could be resolved through a fact-finding proceeding. Where the judicial dissolution of the SE is at issue, however, the situation is much more serious. The 1991 Proposed Regulation may be read to permit a concerned person or competent authority to argue in court that an SE's place of central administration is located outside the EC because a portion of the SE's management is located outside of the EC. If this argument were to prevail, the court could then order the dissolution of the SE. If the Commission intended this interpretation, a problem would be presented to SEs that conduct business outside of the EC. Because the proposed regulation does not provide any standards for determining where an SE's place of central administration is located, SEs would lack guidance as to what operational and management functions were required to be located inside the EC. A court, in making its determination, might choose to consider such factors as the home or office locations of the members of management or the supervisory or administrative boards. Alternatively, the location of company records could be considered in reaching this determination. On the other hand, if the Commission did not intend this interpretation, then the proposal should be clarified to expressly limit its application to circumstances where an SE transfers its registered office outside of the EC. 2. Insolvency and Suspension of Payments With respect to the determination and the ramifications of an SE's insolvency, the 1991 Proposed Regulation simply provides that the SE shall be subject to national laws.3 9 ' The Commission has explained that it deliberately did not limit the laws concerning an SE's insolvency to the laws of the state in which the SE is registered because it wished "to safe389. Id 390. IdL art. 5, at 7. 391. See idL art. 129, at 66. guard any other laws that might be applicable. ' 392 The inability of the Commission to reconcile these national laws, or to provide a single set of laws applicable to the insolvency of an SE,3 93 exposes the SE to varying or conflicting laws, and increases the level of uncertainty that is presented by the SE form of organization. Thus, if managers of SEs conduct business across national borders, they will be required to know and take into account the insolvency laws of a multitude of jurisdictions. Liquidation The proposed European corporation statute presents similar difficulties with respect to an SE's liquidation. The proposal specifies that the liquidation of an SE shall be governed by national law, rather than the law of the state of registration.394 The 1991 Proposed Regulation only addresses the issue of an SE's liquidation in its requirement that creditors be paid in full before shareholders may receive any liquidation distributions.39 5 These provisions also state that an SE in liquidation continues to have legal personality until its liquidation is complete.3 96 The Commission's approach of applying member state law to the liquidation of SEs is identical to its approach with respect to the liquidation of European Economic Interest Groupings (EEIGs). 97 It would perhaps be more beneficial if EEIGs and SEs were not treated similarly in this respect. Although EEIGs may conduct business in the member states, they are essentially limited-purpose joint ventures among companies, firms or persons. Indeed, each member state is given the power to determine whether it will recognize an EEIG as having legal personality.398 Given these circumstances, it is easy to understand why the Commission neither provided one set of laws to govern the liquidation of an EEIG, nor directed that the laws of a single jurisdiction would govern such liquidations. SEs, on the other hand, have a clearly defined legal personality that, for example, allows them to be registered in only one state at a time. Therefore, SEs should be able to rely on a single set of laws governing liquidation. Under the existing draft of the European corporation statute, managers of SEs will be subject to the same uncertainties concerning the appli392. 1991 Explanatory Memorandum, supra note 111, arts. 129-130, at 24. 393. The Commission did not even attempt to establish a uniform law on the insolvency of SEs in its first draft of the statute. See 1970 Proposed Regulation, supra note 6, arts. 261-63, at 202-04 (stating that SEs would be subject to any conventions among member states regarding insolvency and relations among creditors). 394. See 1991 Proposed Regulation, supra note 7, art. 120( 2 ), at 62. 395. See id. arts. 126( 1 ), 126(3), at 64-65. 396. See id. art. 120( 3 ), at 62. The 1991 Proposed Regulation eliminated the extensive provisions concerning an SE's liquidation that had been contained in the 1970 Proposed Regulation. See 1970 Proposed Regulation, supra note 6, arts. 251-260, at 198-202. 397. See 1991 Explanatory Memorandum, supra note 111, arts. 120-128, at 23; see also EEIG Regulation, supra note 163, art. 35( 2 ), at 8. 398. See EEIG Regulation, supra note 163, art. 1( 3 ), at 2. For additional description of the EEIG, see supra note 163. THE SOCIETAS EUROPF cability of member state laws governing liquidation to which they are subject with respect to insolvency issues. This absence of a uniformity of law constitutes an additional risk that is inherent in the SE form of organization. EVALUATION OF THE 1991 PROPOSED STATUTE Although the 1991 Proposed Regulation and the 1991 Proposed Directive take significant steps toward accomplishing the goals and filling the needs identified by the EC, they fall short in several respects. These proposals should not be viewed as an expression of concepts that have already been accepted by all of the participants in the EC. Many provisions of the statute and a number of gaps in it are the result of hard won compromises; others reflect the political realities of what can be accomplished at this stage of the development of the EC itself. Nevertheless, it is important to evaluate the proposed statute against the EC's own statements concerning what the statute is designed to accomplish, in order to determine the extent to which the proposals meet these goals and the extent to which they fail. Goals of the ProposedStatute The basic purpose of the proposed statute, as identified by the Commission, is to promote the fully integrated internal market of the EC.'3 The Commission has identified four principal means of accomplishing this integration: ( 1 ) enabling companies to conduct their daily operations on a true European basis, based solely on market considerations, without regard to national laws pertaining to their operation, governance or tax matters;4°° ( 2 ) enabling companies to operate free of any particular national identity; (3) enabling companies to transfer their headquarters within the EC without regard to national borders; and (4) enabling companies to restructure and form new business combinations across national borders." 1 The Commission has also sought to include the employees in the process by giving them a voice in the operation of these new companies and giving them a sense of loyalty to the European nature of the companies." 2 Although the Commission initially attempted to protect the interests of other participants in the European corporation, it has essentially abandoned this goal (except for traditional shareholder protection provisions) in the most recent draft of the proposal. °3 With these goals in mind, one can now proceed to a final evaluation of whether the 1991 Proposed Regulation and the 1991 Proposed Directive succeed or fail. 399. See 1991 Proposed Regulation, supra note 7, pmbl., at 2. 400. See supra parts III.C., III.E-G. 401. See 1991 Proposed Regulation, supra note 7, pmbl., at 1-4. 402. See 1991 Proposed Directive, supra note 8. 403. See supra part III.C.I.c. B. Formation of the SE The proposed European corporation statute is only fairly successful in enabling companies to take advantage of the SE form of organization. The proposal does, at least, succeed in making available many of the common methods of structuring or restructuring companies, including the merger, and the use of holding companies and joint subsidiaries.4 °4 The only major method of business combination that had been omitted from the 1989 and earlier drafts was the straight acquisition of shares or assets of another company. The addition in the 1991 draft of the conversion method of forming an SE enables companies to become SEs when they either already have operations in other states or simply wish to acquire the shares or assets of companies in other states.4°5 Without this provision, companies would have to either forgo a portion of their independence or control over their operations (as a result of their use of a merger, joint holding company or joint subsidiary) or combine with various shell companies in order to fit within the proposed statute.40 6 Unfortunately, the Commission has allowed only public limited liability companies to use the conversion and merger methods of forming SEs."4 7 This decision has substantially limited the usefulness of the proposed statute. For example, under the proposal, a company that wished to form an SE through a merger would first have to become a public limited liability company in the state in which it was organized; in order to do this, the company might have to make a number of changes in its structure, capitalization, and organization. 4°8 After the company merged with another public company to form an SE, it would no longer be subject to the national laws that had required it to make those changes, even if it were the surviving company. The European corporation statute might not have required some or all of the changes that were made. Consequently, the company would have undertaken a series of changes, in order to be able to form an SE through a merger, that were not required once it became an SE.""9 The proposed statute raises similar problems for companies that wish to convert to SEs. A company might have to undertake a change in its structure so that it could become eligible to convert into an SE.""° The joint holding company and joint subsidiary methods of forming SEs are the only forms that are directly available to private limited liability companies without the intervening step of first becoming a public lim404. See supra part III.A.1-3. 405. See supra part III.A.4. 406. See supra part III.A.4. 407. See supra parts III.A.l.a., III.A.4. 408. See supra part III.A.I.a. 409. See supra part III.A.1.a. 410. See supra part III.A.4. ited liability company.4" These two methods of forming SEs are designed to preserve the essential nature and independence of the founding company, while leaving the SE separate and apart from the founding company. This result is often not desirable for companies that wish to create fully integrated, truly European companies. Finally, the proposed statute is surprisingly inflexible in its requirements of diversity in the operations of the founders of SEs, especially in view of the Commission's announced goal of encouraging the creation of truly European companies.4 12 The most flexible rule for the formation of SEs (short of not requiring any diversity of operations at all) would have been to require that the SE, immediately following its formation, have operations in at least one member state besides the state of its central administration, regardless of the method of formation that had been used. This rule, which the 1991 Proposed Regulation included with regard to the formation of SEs by conversion,4" 3 would have ensured that companies wishing to take advantage of the benefits of the SE form of organization possessed a truly European character. Instead, the proposed statute sets up more restrictive rules. Companies that wish to form an SE through a merger must have their central administrations in different states, regardless of the diversity of their other operations.4" 4 Companies that wish to create SEs by holding companies or subsidiaries must either have their places of central administrations located in different member states, or must each have foreign operations before the time that the SE is formed.41 5 There is no valid reason for requiring such extended levels of diversity for companies that wish to form SEs through a merger, or the use of a holding company or joint subsidiary. In summary, the restrictive nature of the proposed statute frustrates the Commission's goal of enabling the greatest number of companies to take advantage of the SE form of organization. The merger and conversion methods of formation are limited by the requirement that each of the founding companies must be publicly held, and the merger, holding company and joint subsidiary methods of formation are limited by excessive diversity requirements. The proposed statute could be simplified, and the Commission's goals could be achieved if all public and private companies were eligible to use each of the methods of forming SEs, and if the diversity test that presently applies to the conversion method of formation were applied to the other three methods of forming SEs. C. Cross-BorderCombinations The proposed statute is successful in providing companies with a 411. See supra parts III.A.2.a., III.A.3. 412. See 1991 Proposed Regulation, supra note 7, pmbl., at 1-4. 413. See supra part III.A.4. 414. See supra part III.A. .b. 415. See supra parts III.A.2.b., III.A.3. method of combining businesses that are organized under the laws of different member states. Under existing member state laws, there is no procedure that allows companies to fully combine ongoing operations. They can make share acquisitions, create parent-subsidiary relationships, or arrange the purchase and sale of assets, but they cannot actually merge.41 6 Such mergers could be accomplished under the proposal if the surviving company were to become an SE. Consequently, this portion of the proposed statute will be very helpful in achieving the Commission's goal of enabling companies to restructure on a European basis. D. CapitalStructure The inflexibility of the SE's capital structure, as prescribed by the 1991 Proposed Regulation,4" 7 has the effect of discouraging companies from using the SE form of organization. The proposed statute institutionalizes some of this inflexibility; other problems arise from the Commission's decision to allow the laws of the member states to govern these issues even though no effective harmonization of such laws has taken place. The minimum capitalization that is required for SEs, although greater than the level that is required for national companies, is not so high as to discourage the formation of SEs.41 8 The mandatory use of nominal value shares, and the maintenance of stated capital before dividends can be declared, although anachronisms to many Americans, remain familiar cvoenntcetphtes ftoormmaotsitoEnuorofpSeEasn. s4.19 Therefore, these provisions should not pre Other provisions of the proposal present greater difficulty. The statute unnecessarily limits the capital formation process by allowing each member state to place limitations on the initial issuance and new issuance of shares and other equity and debt instruments by SEs that are registered in that member state.420 Consequently, an SE may be at a competitive disadvantage to an SE that is registered in another member state if a disparity exists between the two member states' restrictions on the issuance of financial instruments. Under the proposed statute, the member state laws may also regulate or prevent the general meeting's prior authorization of the issuance of new shares and the repurchase of shares already issued.4 2' These rules make the process of capital formation even more cumbersome for SEs. Furthermore, the Regulation requires that all new issuances of shares 416. See 1988 Memorandum, supra note 24, at 7-8. The Commission has proposed the adoption of a directive concerning the cross-border mergers of national companies, but this proposal remains under discussion. See Proposal for a Tenth Council Directive based on Article 54 ( 3 )(g) of the Treaty Concerning Cross-border Mergers of Public Limited Companies, 1985 O.J. (C 23) 11. 417. See supra part III.B. 418. See supra part III.B.1. 419. See supra parts III.B.2., III.B.6. 420. See supra parts III.B.2., III.B.5. 421. See supra parts III.B.2., III.B.4. must be offered on a preemptive basis to the existing shareholders (first to the shareholders of the same class of shares, followed by offerings to the shareholders of other classes of shares) before a public offering can be made. Regardless of the member states' laws governing national companies, a waiver of these preemptive rights may only be obtained with respect to the particular shares then being issued, rather than pursuant to prior authorization. Because this rule is more restrictive than some of the member states' laws that are applicable to national companies, SEs in such states will be at a disadvantage compared to national companies registered in the same states.4' Managers or controlling shareholders may be unwilling to use the SE form of organization if they can obtain greater flexibility by using national forms of organization. Moreover, they may be hesitant to locate their central administrations in those member states that do not allow the issuance of a sufficiently wide range of financial instruments. Furthermore, because the proposed statute allows for a disparity in the laws that regulate an SE's capital structure insofar as some member states are more restrictive in their regulation of national companies than others, it may be impossible for SEs to transfer freely their places of central administration. These results are not desirable in view of the Commission's goal of creating European companies that can organize and operate without reference to the laws of individual member states. 2 3 E. Management and Worker Representation The proposed statute, on its face, appears to grant SEs a great deal of freedom in creating management structures that fit their needs and interests by presenting a choice between a two-tier and one-tier board, and among various models of worker participation in management. Unfortunately, in an attempt at preserving the various traditions that have evolved in the different member states, the proposed statute allows each member state to restrict the choices available to SEs, and further allows member states to require SEs to adopt specific management structures and models of employee representation. 424 The resulting ability of member states to require that SEs adopt a particular management structure and model of worker participation that may differ from the particular forms mandated by another member state,425 deprives the SE form of organization of much of its usefulness. This reliance on mandatory member state law in establishing basic matters relating to management destroys the hope of attaining uniformity among SEs that are registered in different member states. Instead of creating border-blind companies, that are truly Community enter422. See supra part III.B.3. 423. See 1991 Proposed Regulation, supra note 7, pmbl., at 1-4. 424. See supra part III.C-D. 425. See supra part III.C-D. prises,42 6 the Commission has institutionalized the creation of enterprises that purport to be European, but which retain many of the essential characteristics of the countries in which they are organized. In view of the member states' determination to impose their own national characters on SEs within their borders, it is possible that there will be German SEs, French SEs, and even Northern Ireland SEs.42 Moreover, the Commission's attempt to accommodate the interests of a number of member states affects the protection that is provided to an SE's workers. Despite the Commission's assertions to the contrary,42 s the various models of worker participation fail to provide employees with uniform levels of participation and influence.4 29 The current proposal thus institutionalizes national variations in worker participation models, and accentuates the disparity in employee rights among the various member states. The proposal also fails to accomplish the Commission's goal of promoting employee loyalty to a truly European business entity, instead of to a national business entity. Rather than minimizing the importance to employees of the place of central administration of the SE in which they work, the 1991 proposed statute emphasizes that issue.43 ° Because of the variations that will exist in the required management structures and models of worker participation, the selection of an SE's place of central administration will be of vital importance to both the SE and its employees. An SE might not be able to transfer its place of central administration without effecting wrenching changes in its management structure, the composition of its supervisory or administrative board, and the nature of the body that is designated for accomplishing worker participation in accordance with the prescribed model. An SE's transfer of its state of central administration may also become a political issue; member states may vie to retain local SEs or to persuade foreign SEs to transfer their central administrations there. Sadly, it appears that the Commission's economic and philosophic goal of creating a new form of business organization that truly reflects the unified character of the EC, has been subordinated to the strong desires of the member states to preserve their own local traditions with respect to the management of business and employee rights. F. Operationsand Accounts The proposed European corporation statute also relies heavily on member state law in providing rules that govern the general operation of SEs. Among the events governed by member state law are the proce426. 1970 Proposed Regulation, supra note 6, at 6-7. 427. The proposed statute accepts the laws of territorial units within member states as binding on SEs. See 1991 Proposed Regulation, supra note 7, art. 7( 2 )(b), at 9. 428. See 1991 Proposed Directive, supra note 8, pmbl., at 9. 429. See Wooldridge, supra note 163, at 88 (discussing the similar provisions of the Amended Proposed Fifth Council Directive governing national companies). 430. See supra part III.D. dures to be followed by the general meeting of shareholders,4"3 ' the determination of the actions that require prior board approval,4 3 2 the election of employee representatives and their corresponding duties and status within the SE,4 3 3 and the winding up of SEs. 4" Generally, the most significant of these issues have already been harmonized by other Council directives. Therefore, in contrast to the proposed statute's reliance on member state laws governing capital structure, management structure and employee rights, the reliance on member state law with respect to an SE's operations and financial reporting requirements is unlikely to affect an SE's choice of its place of central administration. G. Insolvency and Liquidation The application of member state law to SEs also presents a significant potential for disparity in the laws that apply to an SE's insolvency and liquidation. Here, the Commission has allowed the application of "national law" without limiting the definition of the this term to the law of the member state in which the SE has its central administration.4 35 This approach could subject an SE to the varying or conflicting laws of different member states, thereby raising the level of uncertainty faced by managers and requiring managerial familiarity with the laws of other member tsitoante.s TbehseidCeso mthme iosnsieonin hwahdicehx pthreessSeEd haasdeitssirpelatoceaovfoicdensturaclhaad mreisnuilstt,r4a3-6 and this particular portion of the proposed statute should be reexamined. H. Taxation The provisions of the 1991 Proposed Regulation that deal with losses from foreign establishments are helpful, but not vitally important. The member states, under tax treaties, already allow for either the integration of profits and losses or the taking of credits for taxes paid on profits of foreign branches.4 3 Under the 1991 Proposed Regulation, the choice between the two methods available to an SE is left to the member state in which the SE has its central administration. The proposed statute ensures that one of these methods will be applied to an SE's foreign operations, but generally does not change the law that would have been applicable if the SE had remained a national company. Furthermore, because the Commission has proposed a harmonization of the rules that apply to national companies, variations among the laws applicable to SEs in different member states will be substantially reduced.4 38 431. See supra part III.C.2.a. 432. See supra part III.C.1. 433. See supra part III.D.3. 434. See supra part III.G. 1. 435. See supra part III.G.2-3. 436. See 1991 Proposed Regulation, supra note 7, pmbl., at 2. 437. See Ruding Report, supra note 364, at 31. 438. See supra part III.E.1. CONCLUSION Once the evolution of the European corporation statute has been traced, and the various provisions of the current proposed statute have been explored, it becomes necessary to step back from the statute and view it as a whole. One must assess whether the Commission, in its 1991 draft, has accomplished its goals, or in the alternative, has set forth a statutory formulation that will be useful to those conducting business in the EC. With one vitally important caveat, it must be concluded that the Commission has failed to achieve either of these objectives. As is the case with any creative project, it is easy for commentators to adopt a critical view of what the Commission has accomplished, finding fault with what it has done, and regretting what it has not, while losing sight of the substantial progress that the Commission has made. Notwithstanding this tendency, an objective analysis of the statute reveals that the 1991 Proposed Regulation has not accomplished its stated goals. As previously discussed, the proposed statute has relied heavily on member state law not only for ministerial matters with respect to which member state laws are substantially alike, but also for matters of basic structure and management with respect to which member state laws greatly differ.43 9 The Commission, unable to reconcile the divergent views of the member states with respect to the nature, structure and management of business enterprises, has attempted to accommodate all of them. In so doing, it has stretched the concept of the societas europea to such an extent that it has become virtually unrecognizable. Instead of creating a form of business organization that has a European identity, the Commission has allowed member states to ascribe particularly national characteristics to SEs with respect to the essential matters of management and worker participation. Instead of creating entities that could move freely from one member state to another, the Commission has allowed member states to prescribe the capital and management structures of SEs with the result that an SE might require major restructuring before it could transfer its place of central administration from one state to another. Instead of granting employees uniform levels of participation in the management of the enterprises for which they work, the Commission, by deferring to member state laws, has accepted widely varying levels of employee participation. Instead of guaranteeing to employees their social right to be involved in the management of the enterprises in which they work, the Commission has established only a minimum requirement that a group of employee representatives, who need not even be organized in a separate body, must be informed and consulted before an SE makes major business decisions. The proposal has achieved its stated goals only with respect to the integration of daily operations and the facilitation of cross-border combi439. See supra text accompanying notes 431-35. nations. Notwithstanding, the integration of daily operations will not be particularly useful unless companies have easy access to the SE form of organization. Moreover, the facilitation of cross-border combinations will be problematic as long as the resulting SEs continue to retain essentially national characteristics. As a whole, viewing the results of the Commission's efforts against the goals announced by the Commission itself, the current proposed European corporation statute has failed. Nevertheless, it is still necessary to determine whether the Commission has accomplished something that, although not quite what it set out to do, is nevertheless useful to European businesses and their employees. Again, the answer to this question is that it has not, subject to certain exceptions. The proposal, if adopted, would permit the merger of companies organized under the laws of different member states. This represents an improvement over the existing laws. The Commission has also made significant progress in reaching a consensus on what business enterprises should be like in a borderless Europe. Ironically, however, the Commission's success in harmonizing member state laws that govern national companies has made this work on SEs less valuable. A national company that must already maintain its accounts in accordance with the Fourth and the Seventh Company Law Directives obtains no new benefit from rules that require SEs to report its annual and consolidated financial statements on the same basis. If a national company with foreign branches is assured by the 1990 Proposal Concerning Losses that it can either integrate losses or obtain a credit for taxes paid to other member states, the company will not obtain any additional tax benefit by becoming an SE. The SE form of organization will only be advantageous to businesses where the Commission's efforts in harmonizing member state laws that govern national companies have been less successful than its efforts in achieving uniformity in the laws that govern SEs. In most circumstances, however, building a consensus among the member states with regard to SEs requires the same effort as building a consensus concerning the laws applicable to national companies. Consequently, it is unlikely that the SE form of organization will provide significant benefits in finance, structure and management that will not be available to national companies. Even when the Commission encourages the SE form of organization by giving such entities special benefits or protections, complaints by national companies about the competitive inequalities that would be produced have led the Commission to extend to national companies the same benefits that have been granted to SEs."4 440. This tendency toward competitive equality is demonstrated by the 1990 Proposal Concerning Losses, supra note 361, which proposes extending to national companies the same right of loss integration that had been provided for SEs. The proposal was introduced at the request of national companies that objected to the special treatment that had been proposed for SEs. See supra note 372. Viewed from this perspective, it appears that the attempt to create a special European form of business enterprise that differs markedly from national forms of business enterprise has not only failed to date, but will also fail in the future. Nevertheless, this does not mean that the work of the Commission has been useless. The Commission's 1970 proposal for creating the societas europea represented its first attempt at regularizing European business. As a result of the Commission's subsequent efforts, substantial portions of member state laws governing national companies have been made uniform or harmonized through the Council's regulations and directives. This progress is continuing under the stimulus of the Commission's current attempts at reaching an agreement on the governance of the European corporation. The discussions in the Commission and the Parliament have focussed attention on some of the difficulties of conducting cross-border business operations and have helped in developing an agenda for resolving these difficulties. Today, national companies find it easier to conduct business across borders than they formerly did. These cross-border operations will continue to be facilitated as the Commission's work on the European corporation statute continues. Consequently, the Commission's efforts have been at least partially successful, even though the European corporation statute has not yet been adopted. One final consideration must be mentioned-and this forms the caveat to the conclusion that the proposed European corporation statute has failed. If the proposed statute were adopted by the Council today, notwithstanding all of its faults and compromises, it still would constitute a significant step toward the full harmonization of European business laws and the full integration of European business operations. The European Community today bears little resemblance to the European Economic Community that was first created by the Treaty of Rome in 1957. That first attempt at unification contained many reservations and accepted many compromises. Even so, it was a beginning. Without that first effort, the economic and social blending of the member states that exists today could not have been achieved. It is probably true that children and fools should not be allowed to see half-finished projects. Perhaps the proposed European corporation statute should be judged not only by what it is today, but also by what the EC hopes that it will be tomorrow. 2. Organizational Goals ............................... 1. Protection of Employees ........................... 2. Protection of Creditors and Shareholders ........... 3. Protection of Others ............................... III. Substantive Provisions of the 1991 Proposals ............... 1. Formation by Merger .............................. 2. Formation by Holding Company ................... B. Formation of the SE ................................... 764 C. Cross-Border Combinations ............................ 765 D. Capital Structure ...................................... 766 E. Management and Worker Representation ............... 767 F. Operations and Accounts .............................. 768 G. Insolvency and Liquidation ............................ 769 H. Taxation .............................................. 769 Conclusion .................................................... 770 17. See infra text accompanying notes 21-37. 18. See infra text accompanying notes 38-101. 19. See infra text accompanying notes 102-398. 20. See infra text accompanying notes 399-440. 21. See 1970 Proposed Regulation , supra note 6. 22. See id. 23. Mr . Paul Storm, who assisted Professor Sanders in drafting the proposal that served as a basis for the 1970 Proposed Regulation, points out that laws mandating the representation of employees in the management of corporations had been introduced only in Germany, and that laws providing for the protection of minority shareholders and creditors of "groups of companies" (essentially a parent company and one or more wholly or partially owned subsidiaries) were new for every member state, although Germany had adopted such laws by 1970 . See Paul M. Storm, A New Impulse Towards a European Company, 26 Bus . Law. 1443 , 1446 , 1449 , 1452 ( 1971 ). 24. Internal Market and Industrial Cooperation - -Statute for the European Company-(Memorandum from the Commission to Parliament, the Council and the two sides of industry) , COM(88)320 final at 28-29 [hereinafter 1988 Memorandum]. 25. See 1975 Proposed Regulation, 8 Bull . Eur. Comm. Supp . 4 /75 ( 1975 ) [hereinafter 1975 Proposed Regulation] . 26. See 1988 Memorandum, supra note 24, at 29. 27. See id. at 2. 28. See Proposal for a Council Regulation on the Statute for a European company, 1989 OJ. (C 263) 41 [hereinafter 1989 Proposed Regulation]. For the purpose of clarity and consistency, references in this Article to the current proposal will be made to the 1991 Proposed Regulation even where that proposal restates identical language contained in the 1989 Proposed Regulation; the 1989 Proposed Regulation will be referred to and cited only where it has been amended by the 1991 Proposed Regulation or when it is important to identify the origin of significant changes from earlier proposals . 29. See id 30. See Proposal for a Council Directive complementing the Statute for a European company with regard to the involvement of employees in the European company, 1989 O.J. (C 263 ) 69 [hereinafter 1989 Proposed Directive] . 31. See id 32. The Council is required to seek the opinion of the Economic and Social Committee before issuing directives that have as their object either the achievement of freedom of establishment or the establishment and functioning of the internal market . See Treaty of Rome, supra note 1 ,arts. 54 , 100A . 33. See Opinion on the proposal for a Council Regulation (EEC) on the statute for a European company, and on the proposal for a Council Directive complementing the statute for a European company with regard to the involvement of employees in the European company , 1990 O.J. (C 124) 34 , 35 - 37 [hereinafter Opinion of Committee]. 34. 1987 OJ. (L 169) 1; see Treaty of Rome, supra note 1, art . 149 . 35. See1991 Proposed Regulation, supra note 7; 1991 Proposed Directive , supra note 36. See Treaty of Rome, supra note 1, art. 149 ( 2 ) (a). When a qualified majority vote is required, the votes of the member states are weighted based upon the number of votes that have been assigned to each member state. All of the votes of a member state must be cast as a bloc. For an act of the Council to be passed by a qualified majority vote, it must receive at least 54 out of a total of 76 weighted votes . In addition, the 54 votes must be comprised of the votes of at least eight member states if the matter being considered is not a proposal from the Commission . See Treaty of Rome, supra note 1 , art. 148 . 37. See id. art. 148 . For more extensive discussion of the legislative process in the EC, see George A . Bermann et al., Cases And Materials On European Community Law 79-90 ( 1993 ) [hereinafter European Community Law]; Hartley, supra note 5 , at 8-48. 38. Total exports from the 12 countries that now comprise the EC to the other member states rose from 12.9 billion ecus in 1958 to 688 billion ecus in 1991. Intra-EC trade represented 40.8% of the total international trade conducted by the member states in 1960 . By 1991, that figure had grown to 61.6%. See Eurostat, External Trade and Balance of Payments-Statistical Yearbook 4 ( 1992 ). 39. See Dominique Carreau & William L. Lee , Towards a European Company Law, 9 Nw . J. Int'l L . & Bus . 501 , 505 - 07 ( 1989 ). 40. The laws of the United Kingdom (except Scotland) and Ireland are based on the common law system. Scotland's legal system is a mixture of civil and common law principles. See I Doing Business In Europe (CCH) 45 - 030 [hereinafter CCH] (Ireland); 2 i. 1 89 - 040 (United Kingdom). 41. The laws of Belgium, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Spain, and Portugal are based on the civil law system . See Iid. 5-060 (Belgium); I id 1 24 - 080 (France); I id 31-070 (Germany); 1 id 41-060 (Greece); I id 50-020 (Italy); I id. 57-040 (Luxembourg); 1 id 1 64 - 040 (The Netherlands); 1 id 75 - 020 (Spain); 1 id 72 - 030 (Portugal). 42. Denmark 's laws are based on the Scandinavian legal system . See 1 id 17 - 060 . 43. England and Wales have a unified legal system, while Scotland and Northern Ireland have their own separate legal systems . The Companies Act of 1985 , which governs England and Wales, applies in Scotland, subject to certain variations that serve to accommodate the civil code base and other elements of Scottish law . In Northern Ireland, the Companies (Northern Ireland) Order 1986 applies, rather than the Companies Act of 1985. See 2 CCH, supra note 40 , 90 - 020 . 44. See infra part III.D. 45. See infra note 58 and accompanying text . 46. See Richard D. English, Company Law in the European Single Market , 1990 B.Y.U. L. Rev . 1413 , 1418 - 19 ( 1990 ). 47. The societe anonyme of France, Law No. 66-537 of 24 July 1966 , art. 72, citedin 1 CCH, supra note 40 , 7 24 - 920 , 24 - 960 ; the Aktiengesellschaft of Germany, Public Limited Company Act of 1965 , § 2, cited in I CCH , supra note 40, f1 32 - 070 , 32 - 090 ; the Societa per Azioni of Italy, cited in I CCH , supra note 40 , 1 50 - 570 , 50 - 600 ; and the public company of Great Britain, Companies Act of 1985, § 1, citedin 2 CCH, supra note 40 , 90 - 020 each provide limited liability for shareholders of publicly held corporations . 48. See . e.g., British Companies Act 1985 , § 24 ; Code Civil art. 2362 , translatedin Mario Beltramo et al., 2 The Italian Civil Code 88 ( 1991 ). 49. The directive requires the member states to adopt laws and regulations that allow a company to have "a sole member when it is formed and also when all of its shares come to be held by a single person." Twelfth Council Company Law Directive 89 /667 of 21 December 1989 on Single Member Private Limited-Liability Companies , art. 2 ( l ), at 41 , 1989 OJ. (L 395) 40 [hereinafter Twelfth Directive]. The member states were required to comply by January 1, 1992, with respect to the formation of new companies, and by January 1, 1993, with respect to existing companies . See id art. 8 ( 1 ), 8 ( 2 ), at 42. 65. See 1970 Proposed Regulation , supra note 6 , at 5-6. 66. Id . at 6-7. 67. See 1988 Memorandum, supra note 24, at 4, 29 . In 1985 , the Commission had previously urged the Council to adopt a European company statute. See Completing The Internal Market-White Paper From The Commission To The European Council , June 1985 , 1137 [hereinafter 1985 White Paper]. The White Paper was concerned primarily with the need for allowing companies to organize on a cross-border basis, and spent little time discussing the improvement of general cross-border operations . See id . 133 - 144 . 68. See 1988 Memorandum, supra note 24, at 5. 69. Id . at 3. 70. See id. at 9. 71. 1991 Proposed Regulation, supra note 7 , at 1. 72. See id at 3. 73. Id 74. See id 75. Compare 1988 Memorandum, supra note 24, at 8-9, 10 , 21 (expressing concern about the taxation of capital gains resulting from mergers, the double taxation of dividends and cross-border transactions among related entities, and distortions caused by perceptions that tax systems are favorable or unfavorable) with 1991 Proposed Regulation, supranote 7, art . 133, at 67, and 1989 Proposed Regulation , supra note 28 , art. 133, at 67-68 ( allowing only the integration of losses from foreign permanent establishments) . See infra part II .E. 76. See infra parts III .F., III.G.I. The Fourth, Seventh, and Eighth Company Law Directives eliminate nearly all variations in member state laws on these topics . See Fourth Council Directive of 25 July 1978 , based on Article 54 ( 3)(g) of the Treaty on the annual accounts of certain types of companies, 1978 O.J. (L 222) 11 , 11 [hereinafter Fourth Company Law Directive]; Seventh Council Directive of 13 June 1983, based on the Article 54 ( 3)(g) of the Treaty on consolidated accounts , 1983 OJ. (L 193) 1 , 1 - 2 [hereinafter Seventh Company Law Directive]; Eighth Council Directive of 10 April 1984 , based on Article 54 ( 3)(g) of the Treaty on the approval of persons responsible for carrying out the statutory audits of accounting documents, 1984 O.J. (L 126) 20 , 20 [hereinafter Eighth Company Law Directive]. 77. 1970 Proposed Regulation, supra note 6 , pmbl., at 7. 78. Id . The European Works Council, which is based on French and Italian systems of employee participation, is a committee of employees in EC scale businesses, that is charged with the responsibility of safeguarding the rights of employees. The committee must be informed and consulted on issues concerning (1) major changes in the business, and (2) conditions of employment. The creation of European Works Councils was finally formally proposed by the Commission in 1990. See Proposal for a Council Directive on the Establishment of a European Works Council in Community-scale Undertakings or Groups of Undertakings for the Purposes of Informing and Consulting Employees, 1991 O.J. (C 39 ) 10 . 79. 1970 Proposed Regulation, supra note 6 , pmbl., at 7. 80. See id. 81. See id. At the time, the 1970 proposal was made , only Belgium, France, Germany, Italy, Luxembourg, and The Netherlands were members of the EC . In addition, only the laws of Germany provided for worker participation in larger public companies . See generally Law on Works Organizations of 1952 & 1972, translated in Heinrich Beinhauer, German Works Council Act 1972 ( 1972 ) ; 1970 Regulation, supra note 6, pmbl ., at 173. Strong opposition to worker participation in the management of the European company has come from Great Britain and Ireland, which did not join the EC until 1973 . See CCH , supra note 40 , 1 40 - 424 , 40 - 663 , 40 - 664 . 82. See 1970 Proposed Regulation, supra note 6, pmbl ., at 87. 362. See 1991 Proposed Regulation , supra note 7 , art. 133 ( 1 ), 133 ( 2 ), at 67. This system already is used in The Netherlands and Germany . See Roger H.A. Muray , European Direct Tax Harmonization-Progressin 1990 , 31 Eur. Tax'n 74 , 84 ( 1991 ). 363. See Muray, supra note 362 , at 84. Although Muray discusses the 1990 Proposal Concerning Losses, supra note 361, rather than the 1991 Proposed Regulation, the basic concepts of the two proposals are the same with respect to the workings of the integration of losses system and the tax credit system as they apply to permanent establishments. 364. The Commission established a Committee, chaired by Onno Ruding, to assess the impact of different member state taxation policies on the functioning of the internal market in the EC . The Committee described the two systems as follows: 366. See Muray, supra note 362 , at 84. This system is currently used in the United Kingdom . See id. The relative merits from a tax and economic standpoint of the loss integration system (which is in essence a foreign profit exemption system), and the tax credit system, are discussed in detail in Fred C. deHosson , The Parent-SubsidiaryDirective, 10 Intertax 414 , 418 - 20 (Spec. ed. Oct. 1990 ). For a description of the actual workings of the loss integration and the tax credit systems, as they are established in the 1990 Proposal Concerning Losses, see Otmar Thommes, The New EC Commission'sproposals for directiveson cross-borderinvestments, 3 Intertax 158 ( 1991 ). 367. See 1970 Proposed Regulation , supra note 6 , arts. 278 - 281 , at 220- 23 ; 1975 Proposed Regulation, supra note 25 , arts. 278 - 281 , at 119-21. 368. Member states generally allow such offsets for losses from operations from foreign branches, but generally do not allow them for losses from foreign subsidiaries . See Ruding Report, supra note 364 , at 195. 369. See 1970 Proposed Regulation , supra note 6 , arts. 275 - 281 , at 215-23. 370. See 1991 Proposed Regulation , supra note 7 , art. 133 ( 1 ), 133 ( 4 ), at 67. 371. See 1990 Proposal Concerning Losses , supra note 361 , arts. 7 ( 1 ), 9 ( 1 ), at 15 , 16 . 2. 1 . 3.

References: § 54
 art. 146
 art. 157
 art. 189
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 art. 6
 art. 6
 art. 239
 art. 239
 art. 27
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 art. 8
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 art. 148
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 § 2
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 art. 2362
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 art. 133
 art. 133