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EU Company Law Directives watchword: fostering stakeholders’ trust and Corporate Mobility.

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The recent financial crisis hitting Europe revealed the lack of due diligence of today’s business leaders and the interconnectivity between Financial Market and Company Regulations. As a matter of fact, both structures evolve with the same constraints: the necessity to build up trust in their relationships with shareholders/investors and creditors, the necessity to foresee external risks and the duty to comply with Corporate policies. Financial Market Liberalisation implies the Free Circulation of Capital and Financial Services provided by companies- Public Companies find their resources on Financial Markets.

EU Company Law Policy has been to a large extent shaped by an ongoing harmonisation process lead by EU directives, respectful of national regulations and tailored to attract investors and shareholders. The hidden objective of these directives being to avoid a European Delaware Effect where Member States with lax company regulations could more easily attract EU companies than others with more stringent rules.

Although their harmonisation action was partly limited by the subsidiary powers confer upon the EU in the field of company law -which restricted their scope to mere « necessary measures »-, the legal base found in the Freedom of Establishment provisions contributed to liberalise the Movement of Companies in the EU.

The EU directives regulating company law can be therefore divided into two main categories: the directives leading to EU Corporate Mobility and the directives aimed at harmonising EU Company Law with a focus on the protection of company stakeholders.

Since the first EU company law directive in 1968, the subsequent thirteen directives and their amending versions have built a laudable degree of legal certainty shaping an harmonised framework for businesses where company investors/shareholders/creditors and employees are granted better protection when they deal with undertakings regulated by a another MS law. However due to the permissive attitude of EU regulators (many directives allow companies to opt-out of some provisions), to date, EU Company Laws are still heterogeneous.

The achievements of the EU Company Law Directives in terms of Company Mobility (Freedom of Establishment) and Restructuring has encouraged cross-border transactions and therefore contributed to the creation of an efficient and competitive “EU Common Market for Companies”.

The concepts of Corporate Governance and Disclosure Requirements responding to the “crisis of confidence” of investors, whose trust in the Financial Market and in the Corporate Finance has been undermined -mainly by the financial scandals in the early 21th century[1]– has finally emerged in the EU company lawmaking.

Despite the reluctance to edit an EU company Law codex, MS have engaged in a transformation of their own company regulations to converge with an EU Company framework of Due Diligence and Best Practices.

However despite their rather valuable harmonisation success, many issues remain where MS did not find a common agreement. This is the case inter alia for the project of the 14th directive on the Transfer of the registered office of limited companies which was therefore abandoned. As a result, the only way today to set up a primary establishment in another MS is by way of liquidation, unless the national legislation is more permissive. Albeit even in that case certain conditions may apply such as the payment of very high taxes.

EU company law directives aimed essentially at harmonising national company laws by implementing a fine-tuned regulation framework. Therefore it can be argued that this in fact lead to a race-to-the-top policy where shareholders were attracted by better Corporate Governance and not by the temptation of lax regulations. This tendency might be counter-effective when playing at an international level with public companies adopting an outsider system of financing, that is to say where shareholders have a less important role to play. That is one of the reasons why deregulation of EU Company Laws with its subsequent simplification might be the forthcoming alternative to the former regulatory Action Plan on the Modernisation of Company Law and Corporate Governance adopted by the Commission in 2003. This could also be a means to frustrate today’s EU deindustrialization process due to the relocation of firms to countries where rules are less stringent.

[1] Enron Financial Fraud in 2001

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