Renato Kenda

Faculty of Law, University of Maribor, Slovenia

Master’s student

Research interest: EU Law, Contract Law, Company Law

I. Introduction

EU’s Single market is dependent on SMEs, that form up to 99,8% of EU’s non-financial business economy. It is considered that, they are the single most important factor in job creation and innovation in the EU. Most of these enterprises face immense difficulties doing business abroad, setting up a subsidiary or even joining forces with a foreign enterprise by way of joint venture, is proving to be challenging at least. Only 8% of these enterprises engage in cross-border trade and merely 5% of them own a joint venture or subsidiary abroad.

Horizontal competition between Member states in the field of company law and different regulations regarding formation and operation of SMEs, are slowing down the development of the Single Market. SMEs often don’t have knowledge of foreign company law, or financial resources to obtain legal expertise. It could present them less difficulties, if EU provided the framework for such activities. Costs for international expansion would reduce significantly if enterprises would have the possibility to establish a European form of company, independent of national rules.

As a part of the Small Business Act, in 2008 the Proposal for a Council Regulation on the Statute for a European private company was presented by the Commission. In 2009 the European Parliament passed a legislative resolution approving the Commission’s proposal in an amended version. Subsequently, 8 Presidency compromise proposals have followed, but none have been accepted. After French and Czech’s Presidency compromise have failed, in 2009 three subsequent Swedish Presidency compromise proposals have been rejected. The latest compromise solution was presented by Hungarian Presidency on 30 May 2011. It was rejected by Sweden because of different opinions regarding employee participation and Germany, which was of the opinion that an SPE should not be allowed to have its registered office and central administration in different member states. Lacking legislative support, in 2013 the Commission withdraw the proposal for the SPE.

Despite the relative failure of the SPE proposal, the Commission proposed another legal form to enhance SMEs. In 2014 a Proposal for a Directive on Single-Member Private Limited Liability Companies (SUP) was presented. The Directive aims to make it easier for businesses to establish subsidiaries in other Member States, as subsidiaries often tend to have only one single shareholder. The proposal is still in the process of evaluation by the European Parliament’s Committee on Legal Affairs.

At first, the post presents areas of contention between member states, that caused the initial proposal to fail. Secondly, the author briefly presents potential initiatives to reinstate the SPE proposal on the Commission’s agenda.

II. Areas of contention among member states

After the Commission’s proposal in 2008, a total of eight Presidency compromise proposals were presented by Presidencies of France, Czech, Sweden and Hungary. All of these compromise proposals failed to secure unanimity required for the proposal to be legislated. In this section author provides general outline of the principal issues, that lead to tensions among Member States, as set out in the latest Presidency compromise proposal by Hungary in 2011.

  1. Seat of an SPE

Commission’s proposal that the SPE can have its registered office and central administration in different Member States, was supported by several delegations, but vast majority of delegations opposed this proposal and are in favour of prohibiting such separation. Some delegations, would even prefer that national laws entirely govern this area.

The Presidency suggested, that the registered office, central administration and main place of business of the SPE should be in the EU in accordance with applicable national law. Additionally, the compromise proposal proscribes, that Member States must ensure, that SPEs are not used to avoid obligations in the territory of the Member State in which they are established. Germany still found this  part of the compromise susceptible to violations and consequently unacceptable, as it could lead to tax evasion by the potential SPE founders.

One should observe that, Germany’s views on this part of the proposal oppose the fundamental concept of the European Single market, which aims to enhance the free movement of goods, one of which is freedom of establishment (article 49 TFEU). Additionally, even Germany itself realised the unsustainability of its argument, as it proposed the introduction of other instruments, that would prevent tax evasion in the case of SPEs.

  1. Minimum capital requirement

The Presidency’s proposal on this area, remained hardly unchanged from the previous Presidencies’ proposals. The minimum capital requirement remains at least 1 euro, and allows States to set up the capital requirement to a maximum of 8000 euros for SPEs registered in their territory. Additionally, a reference about the minimum capital requirement was proposed to be included in the review clause in Article 48. This part of the compromise proposal was also rejected by Germany, which insists on a higher minimum capital requirement.

Germany’s reasoning is in some view quite paradoxical, as it was Germany who in 2008 presented the Unternehmergesellschaft (UG) or Mini GmBH, which at the time of the formation demands only 1 euro of minimum capital. On the other hand, some authors, such as Winkler, agree with Germany on this part of the proposal. Winkler claims, that such conservative approach should be widely accepted, as one of the main objectives of the SPE is to create a supra-national legal form, that would enjoy the reputation of reliability and trust. In order to ensure this trust, reliable sources of financing and creditor protection must be ensured.

  1. Employee participation

Employee participation emerged as an issue in the proposal, because of the fact, that different Member States have different traditions in this area. Some delegations expressed concern, that the SPE proposal could cause the loss of rights acquired under national law. On this aspect of the proposal, the issue was of the threshold above which the employee participation rules set out in the proposal should apply.

The Presidency suggested, the introduction of a minimum threshold of 500 employees, who work in a Member State that provides better rights on employee participation, than the Member State where the SPE has its registered office. Sweden rejected the proposal, observing that the threshold in their country is significantly lower, therefore providing better access to employee participation.

  1. A new momentum of the European Private Company

In this section, author explores possible initiatives to reinstate the proposal for a Regulation on the SPE, on the Commission’s agenda. After years of trying to reach unanimity in the Council, in 2013 the Commission withdraw the proposal for the SPE as a part of the Refit Program.

Since 1990’s when the idea of the SPE was conceived, it has been legal scholars and other academic circles which kept the project alive through  symposiums, literature and scientific essays. Despite the fact, that EU’s Impact Assessment survey concluded, that up to 1,15 million  SMEs could benefit from this new business form, chambers of commerce  and businesses throughout the EU area remained fairly inactive. Therefore, it is not surprising that even though the SPE project was a part of the EU’s Company Law Action Plan in 2003, it took another 3 years and a speech from the German chairman of the EU’s Legal committee to set the EU’s legislative wheels in motion.

The history repeats itself a decade later, as interstate and EU activities regarding European private company, have largely fallen out of popularity. Although, the Commission terminated negotiations and other activities, there are still some strong initiatives which demand, that a European Private Company Statute is established in EU law.

Despite strong objections from the German government regarding the SPE proposal, the biggest German bank – The Deutsche Bank in its survey raised several important facts, on the impact the SPE would have in assisting German companies on the Single Market.

The most prominent initiative comes from The High Level Group on Business Services (HLG). In its 2014 Final report, several recommendations regarding the reinstatement of the SPE are included. The HLG reported, that besides double taxation and cross border insurance, the lack of a European Private Company Statute proves, that administrative and bureaucracy obstacles which exist within the internal market, significantly affect the ability of companies to act cross-border. Especially, technical engineering and architect services dealing with multinational long-term projects, experience legal complexities of operations with enterprises from different countries, thus slowing the development and productivity of this sector. Additionally, the HLG reported, that a European Private Company Statute is necessary in order to remediate the problem of fragmented corporate structures, as the Statute would allow SMEs to become truly European.

IV. Conclusions

Since the Commission’s withdrawal of the proposal for the Regulation on the European Private Company in 2013, little progress was made on the SMEs situation. SMEs still face major obstacles when establishing businesses or subsidiaries in other Member States. The initial proposal from the Commission was tailored to the exact needs of SMEs. The compromise proposals that followed later, gradually gave in to the interests of more prominent Member States, that are not willing to sacrifice their traditional values for the greater good. The legislation that would be the outcome of these interests, would render the SPE not the European company form, but rather a hybrid company structure. Consequently, the outcome the Commission, was initially trying to achieve would ultimately fail, as the SPE would be highly susceptible to the provisions of national legislations of different Member States.

All in all, the SPE in its primary version would render numerous benefits for the SMEs without considerable disadvantages. In spite of the obvious, rare although strong initiatives such as the HLG report, will have great difficulties overcoming the political and cultural dissension that caused the initial SPE proposal to fail.