[A-List] EU integration struggles: company law

["Michael Keaney" <michael.keaney@xxxxxx>]

This very important article by the FT's John Plender highlights the sort of
damage that the European Commission, in cahoots with the European Round
Table and other neoliberal lobbyists, is intent on inflicting upon the EU as
a whole.

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Continental capitalism à la carte
By John Plender
Financial Times, February 21 2003

Few business people in the European Union have taken the measure of the
European company statute, agreed at the Nice summit in December 2000. Yet
its blueprint for a new European company, known formally by the Latin name
of Societas Europaea, could prove to be an explosive demonstration of the
law of unintended consequences.

Because the proposed regime will allow a public company to opt out of its
domestic law and choose from those available in the other member states, it
will open the way to jurisdictional arbitrage. The background and
consequences bear thinking about.

The history of the European company statute would make even a sturdy
Europhile despair of the EU's ability to adapt to a fast-changing world. Put
forward by an academic in 1958 and adopted as a Commission proposal in 1975,
it was originally intended as a harmonising measure.

Because it proposed a mandatory two-tier board along with mandatory employee
participation on the supervisory board, it was unacceptable to the EU states
with other traditions of corporate governance. By the time the fudge reached
on the issue in Nice is reflected in national legislation, supposedly by
October 2004, 30 years of horsetrading will have taken place.

The resulting European company statute will be established first by an EU
regulation, which has the direct force of law in all member states. This
sets the company's constitution. Then there is a directive, which has to be
implemented in national law, covering worker involvement. Until the
directive is enacted in individual member states, the outcome is uncertain.
But the principles are clear.

The laudable aim is to give companies operating in more than one member
state the option of being established as a single company with one set of
rules. A key point is that the corporate founders can choose the state in
which to register the new company. So there will be at least as many forms
of the new European company as there are member states. And all EU countries
will be required to give the company a choice under national law between the
single and two-tier board, as well as various forms of worker participation.
Employees have to be involved in a negotiation over the establishment of the
new company. But there are default rules to cope with a stand-off between
management and workers whereby a weaker regime of information and
consultation will apply, in lieu of real participation.

It seems likely that some member states will give freedom of choice over the
two-tier or unitary board to domestic public companies as well as the new
corporate format. And since it will be relatively easy to set up a European
company if the UK or Ireland is chosen as the place of registration, the new
legal format will also provide the option of a board structure that is not
permitted back home.

While the detail is complex, the message is not. Jonathan Rickford, former
project director of the UK Company Law Review and latterly a visiting
professor at the University of Leiden, points to the paradox that a
harmonising legislative proposal designed to promote integration in the old
European Community has ended up encouraging greater diversity of company law
in the EU. It could, he believes, be the basis of US-style jurisdictional
competition in Europe.

This points towards a kind of à la carte capitalism. Industrialists may be
able to choose, to some degree, between Europe's different models of
corporate governance. This will be welcomed by those who see systemic
competition has business-friendly and excoriated by those fear a race to the
bottom.

In fact, it seems unlikely that there will be any rush to a lowest common
denominator by, say, UK managers who are up in arms over the Higgs report on
corporate governance. In theory, a British company that merged with a Dutch
one and chose the Netherlands as a place of registration might dilute
shareholder rights, for example, in relation to resolutions controlling the
composition and actions of the board. But as Mr Rickford points out, under
the new legal regime such a merger decision could only be taken by statutory
majority and with specific protections for minority shareholders.

In Germany, in contrast, many industrialists would not be averse to opting
out of the more onerous aspects of worker involvement. They may soon have
the means to do so.

It is impossible to predict the volume of legal arbitrage that might take
place. But if the pressure of systemic competition is real, the traffic may
well be largely one-way, towards an Anglo approach that confers fewer rights
and privileges on employees.

Only in the EU could 30 years of horsetrading achieve precisely the opposite
of what was originally intended.