Law Company Integration

Recent case law by the ECJ opens the door for a race to the bottom in company law:

Discuss this statement against the background of the cases decided by the ECJ AND in light of the theoretical debate whether or not there is necessarily a race to the bottom when company law systems compete.

Introduction:

The EU is based on four freedoms which are freedom of goods, freedom of workers, freedom of establishment and freedom of services. These freedoms ensure that the market is open and deregulated in order to promote competition and it is these freedoms that have led to the belief that the race to the bottom is necessary for an open market. The following discussion will consider how these four freedoms have possibly led to the belief that the race to the bottom is inevitable. In order to do so this discussion will consider the conflict of laws by considering whether the recent case law within the EU law is limiting the choice of laws for domestic systems and the introduction of regulations on areas such as labour law and social protection, i.e. the opening of the door to the race to the bottom has put too much emphasis on a truly free competitive market, rather than the right of states to choose laws and also restricting the choice of jurisdiction; whereby every act is tied to the competition of companies and the economic market rather than certain important practises, which may be classed as protectionism, that protect social and cultural policies. The cases that are the cornerstone of the EU's economic integration are the Cassis de Dijon holds that there can be no barrier to the free movement of goods, such as banning imports or creating unfair taxing or barriers for these goods. Bosman holds the same basic precept for workers as does Gebhard for establishment and Alpine Investments for services. Finally the Dassonville formula has been created to force member-states towards integration rather than allowing derogations and the case of Keck and Mithouard imported goods cannot be treated any differently from domestic goods. Even if this was not so and the tax or limitation to trade was fair, non-discriminatory, objective and proportionate there is the added problem that possibly the money or trade advantage is going back to the member-state manufacturers and sellers. However, the EU must consider if it does create a truly free market but would the cost be too high, i.e. the social policies. The race to the bottom usually has a highly negative effect on social policies. This can be seen in the effects of using developing countries labour by exploiting them where social considerations are left on a backburner for economic goals. An example of this can be seen in the banana wars between the EU and the US where:

The wars reached their most dangerous point for workers with an EU proposal called first come, first served (FCFS). FCFS would have accelerated the race to the bottom in the banana industry by rewarding low-wage, non-union Ecuador, and therefore the Dole Food Company because it has more investment in Ecuador then other US companies, at the expense of banana workers and their unions in Colombia and Central America.

Therefore following discussion will consider the movement towards the race to the bottom in current EU law, considering whether the economic benefits are enough to compensate the possible social costs. Also it will consider whether the race to the bottom, which promotes state competition, has been confused with regime shopping.

Race to the Bottom:

The race to the bottom is the belief that promoting competition between states will attract investors and businesses; however as recent EU law will illustrate this is done through de-regulation of social and labour policies, i.e. to promote true competition there needs to be as little involvement from the state as possible. The basic premise is that when opening up the race to the bottom is that competition will become truly unrestricted and fair, leaving a freehand for companies to achieve their economic goals. It has also been suggested that that this opening of markets is not necessary and the race to the bottom through competition between states, rather those markets which allow a freer hand in the states are those that companies choose to invest in, i.e. regime shopping. Therefore the promotion of competition between states is not necessary, rather having the market that a race to the bottom dictates is. The problem that is created here is that the competition goals that are promoted are not necessarily anything about promoting competition between states, but the deregulation of labour and social policies so that companies can exploit the resources of the country they have invested in at the cheapest price:

[The] possibility of "shopping around" for suitable legislation is often said to be most influential since the other elements depend on the controversial aim of deepening European integration. It is possible that the United States situation may be a precedent. In the United States individuals are free to incorporate under the laws of any state since the location of the company is not relevant.

Centros Decision:

This decision was based around the requirements of registration and trade within Denmark, which raised an issue of conflict between the laws of the UK, Ireland and the Netherlands whereby a properly registered foreign company is to be recognized; whereas Nordic law depends upon registration and whether refusal of registration was permissible to stop the circumvention of national law. The ECJ decided that this refusal went against the principles of competition law, which resulted in regional competition law outweighing domestic law therefore undermining the sovereignty of the state. The aim of the two Danish nationals by registering their company Centros in the UK and then transferring to Denmark was purely to circumvent the fee associated with registration. The question was whether the Danish court could refuse registration in Denmark because the aim was to defraud the Danish state; the ECJ advised that refusing registration was imposing an obstacle of the basic freedoms that make up company law. This case basically has caused competition law to become prevalent over national concerns. In fact it has possibly weakened the regulations of company law so that social and cultural policies will soon be under fire. This seems to be falling under the trap of companies for regime shopping, i.e. the weaker the regulation the higher the investment. In this case the act of defraud was not taken into account, the Danish nationals set out to misuse EU competition law to abuse the requirements of Danish national law. On the other hand, theorists, such as Siems, argue any law that circumvents the goal of a truly competitive market should be overruled:

I think that the result of the OGH was correct. The refusal to register a pseudo foreign company is a breach of European law regardless of whether the domestic state applies the Nordic registration theory or the real seat theory. First, it is important that the European Court of Justice in Centros did not

Siems also argues that such as decision does not necessarily lead to a race to the bottom; however the premise of the laws of least resistance and the promotion of competition of EU states is the basis of the argument for an inevitable race to the bottom. The Centros decision belies this inevitability; however the problem with such lax laws is that it is not the race to the bottom which promotes businesses and investments but the laxness of the laws, i.e. lax laws equate to easier exploitation and perfect for regime shopping. The following discussion will illustrate how the race to the bottom has been confused with regime shopping, which means the inevitable race to the bottom will create a system open to exploitation in the name of competition.

Effects & Inevitability of the Race to the Bottom & EU Law:

EU law provides many protections to its citizens in the form of labour and social rights. The problem with the race to the bottom is whether it means all aspects of company law will become deregulated, i.e. the social and labour protections. This is very unlikely in the EU, rather the deregulation will be aimed at ensuring that companies can become more efficient and is not barred by technicalities of burdensome rules that are not integral to protecting social and labour rights. The problem may not be the race to the bottom per se, i.e. the promotion of competition between states, but the deregulation of social policies which may be seen to impede this competition. It may not be the race to the bottom that promotes business investment rather the notion of regime shopping, i.e. the less restrictive markets are the target of investment. Therefore the rulings of the ECJ that promote the race to the bottom causes problems because it creates a conflict in laws between what is prudent in the protection of social and labour policies and a regime creates an open, competitive market with minimal regulation. In order for true competition to occur there should be no barriers or regulations governing companies, i.e. a true laissez faire society. On the other hand, this creates problems for protecting workers and protecting the markets from unfair advantages and dominance of companies. Therefore it is necessary that there is some regulation; however the following discussion will illustrate that the ECJ's focus on strict adherence to competition laws has led to promoting competition between states; however the investment from companies have more to do with the deregulation associated with promoting competition than the race to the bottom, i.e. company investment is primarily based upon regime shopping where the freer the market the likelihood of investment is higher. Therefore the goals of promoting competition between states backfire and the social policies that the EU is based upon are jeopardized. Also where is the rule that there cannot be social regulation and not competition between the states? Rather the EU's actions in the stricter laws than the EU's minimum should be respected on social policies, i.e. the Smoking Directive, because they are not truly impeding competition between states on the whole rather protecting society. In fact for a truly stable market there has to be some regulation, rather than the deregulated chaos that regime shopping promotes, as Bagheri in Competition and Integration among Stock Exchanges: The Dilemma of Conflicting Regulatory Objectives and Strategies argues:

In a further attempt, we discuss the tension between the principles of competition and prudence. Regulatory objectives in securities markets could clash as the applicability of competition principles to the securities markets could be counterbalanced by principles of prudence. The unique characteristics of such markets may not allow the absolute application of competition principles. Free competition in the exchange business does not necessarily work as it does in other sectors. Financial services are different from others in the sense that free trade and competition arguments are counterbalanced by prudential concerns. In other words, excessive free trade and a race to the bottom in financial services may have serious repercussions, destabilising the markets. On the other hand, an obsession with prudential concerns should not undermine the proper application of competition policy.

In this argument the race to the bottom, Bagheri is arguing, is not appropriate for the financial markets because it can adversely affect the markets by destabilising them. This could also be the case for the goods and services markets because if a truly laissez faire system then the social policy which the EU prides itself on in respect to its social and labour protections are at risk. These protections include the regulation in respect to the protection of consumer protection and equalization of wages throughout the EU. This will probably not be the problem in the EU's race to the bottom strategy, rather lesser important social policies as contained under Directive 98/43/EC which prohibited all consumer-orientated advertising of tobacco products away from the point of sale. This directive has now seen to be illegal because the ECJ has started to question the limits of the EU's incursion into state law on the basis of company and competition law. In the case of Germany v European Parliament and Council the Court emphasised that the Community Legislature had not been afforded a general power to regulate the internal market. It emphasised that the only time that the EU can become involved within internal markets with further regulation, under Article 95EC is when national laws which either constitute barriers to the exercise of the four freedoms or distort conditions of competition in an economic sector; whereby the actions in respect to regulation must be consistent with the establishment and the functioning of the market. The point of this directive was to limit competition and advertisement of tobacco products on social and health reasons; however because of its limitations on the market and restriction of competition it decided to reverse this directive, find it illegal and heralds the new approach of the ECJ of the EU's race to the bottom approach. As Syrpis states the reasoning for finding that the Directive was not a legal contribution to competition of the common market was:

[It] did not contribute to the establishment and functioning of the market. First, the Directive was not adopted in response to the differences between the laws of the Member States capable of impeding free movement or creating appreciable distortions of competition. Second, because the Directive did not harmonise the laws of the Member States (or at least the free movement of products in conformity with its provisions), it did not, in any event, contribute to the elimination of any barrier and/or distortion.

Therefore this illustrates the first step of the EU from protecting social policies and the liberalizing of the market regardless of the consequences. This case has wider implications other than allowing liberalized advertisement of tobacco products, because no longer can Articles such as 95 be used to institute social policy unless it specifically refers to remedying distortions of competition. The fears that this may adversely affect labour provisions is not a huge concern because of the substantive rights that the EU is afforded in the Protocol and Agreement on Social Policy, which is contained in Articles 136-145EC allows for the protection and development of collective labour law without strict adherence to competition law, integration and deregulation of the market. However as Syrpis argues:

The effect of the internal market case law is stark. National rules which creates barriers may be annulled by the courts; unless they can be justifies according to a set of Community law requirementsThe central problem is that by invoking rules aimed at protecting the integrity of the internal market, the Court has often limited the autonomy of Member States and thereby restricted the scope for differentiation and experimentation at state level. The European project cannot require simultaneously both differentiation and experimentation, and the elimination and of differences between the laws of Member States. A reconciliation between the social an internal market is required.

Therefore the argument of Syrpis sets forth that it is not necessary for there to be a complete deregulation of the EU markets and still promote competition because this is at the expense of the social policies that the EU is equally formed upon. The case of Albany International supported collective labour agreements even though they impede competition in the EU; however this victory is a double-edged sword for labour and social policy lawyers because only those cases that are beyond the scope of Article 81(1)EC are capable of this protection. Therefore lesser social policy objectives such as the previously mentioned Smoking Directive would be subject to competition and race to the bottom objectives. In Rush Portuguesa a problematic conclusion occurred because it was held that collective labour agreements were the ambit of national law where the person was employed and protected by that set of laws even if higher; however this causes problems with hindering the free movement of workers because it limits the relocating of employees and therefore is incompatible with Germany v European Parliament and Council. Another possible reason could be because the social objectives are justifiable, but as the court did not divulge this the case seems to be an anomaly and possibly creates false hope for social policy lawyers.

The realization that such actions constituted false hope has been argued by Antoine Lyon-Caen and Simitis because the focus on race to the bottom economics became the key within EU law. These cases held that allowing different standards between member states in respect to labour law impedes internal market liberalization and integration. However the case of Keck and Mithouard seems to be arguing that no differentiation in national law should be held as incompatible, even if it impedes the liberalization of the internal market, unless it specifically falls within the scope of an EU Article and breaches it or is held as discriminatory. This approach was based upon the Weiler approach where:

Market regulation rules - whether selling arrangements or otherwise - that do not bar market access should not be caught unless discriminatory in law or in fact.

Therefore this approach would create a fairer method to market integration; however allowing member states to protect social policies which are higher than the minimums set by the EU. The leading case promoting the liberalization of the economic over the protection of social policies is Germany v European Parliament and Commission and the race for the bottom. If this approach was allowed to continue and forwarded by the ECJ then the extent it would go to may recreate the situation of the Banana Wars. If not in Europe, it would mean that companies becoming less socially conscious and turning to exploitative methods in developing nations. The social conscience of the EU has a positive effect on company law and balances the cost of social policy with the benefits of economic gain. Yet if the ECJ continues on an avenue of promoting the bottom line over social policies it will defeat the original spirit of the creating the EU. The conclusion will further this discussion and aim to illustrate that the race to the bottom is not the only method of promoting competition because affording the cost benefit analysis of company decisions - the social cost cannot be justified by the economic gains.

Conclusion:

The new approach of the ECJ in promoting the bottom line has failed the original basis of the creation of the EU and fails to take into account the social costs. In the 21st Century where social conscience is being advanced with a higher trade in fair-trade goods it seems that the EU is stepping back into the 1980s where the market was heralded the key aim of the community. The focus on the race to the bottom through creating competition between member states has had highly negative effects of social policies. There may be problems with the idea behind the race to the bottom whereby the competition between states is not the key for business and company investment, rather it is regime shopping, i.e. the most deregulated systems allow exploitation for the cheapest price therefore the source of investment. Therefore in its inevitable race for introducing further investment from companies is through the deregulation of EU law and arguably the only real reason of investment, which is through regime shopping for the truly laissez faire market. This has been illustrated by the EU case law that has promoted competition law over restricted social policies, which the EU now turning its back on social policy for economic gains, also the competition it seems to be advancing may not be the outcome with deregulation, it could possibly destabilize the market by allowing large companies to dominate the market which will shut out the enterprise of new small companies. Also such an approach could reduce employment in favour of developing countries and consequently the employment conditions of the EU in order to promote domestic and regional employment. Therefore an approach such as Weiler needs to be advanced where higher social policies should be protected as long as they do not breach a specific competition article or is discriminatory, i.e. they do not impede competition between states but create an obstacle in respect to businesses who are regime shopping. Therefore if it is a race to the bottom the EU is promoting then the dismantling of social policies are not necessary; however it seems that regime shopping and state competition have been confused. The cases that have opened up deregulation and the Centros Case seem to imply the inevitable road that the EU's race to the bottom, which is not necessarily a bad road; however if it is confused with regime shopping and deregulation of social policies on the belief of promoting state competition then the exploitation by companies will ensue. Therefore regime shopping is based on the competition laws overpowering social policies; rather the race to the bottom relies on the balancing of social policies and competition laws to promote the maximum state competition, without the exploitation of labour and social policies.

Bibliography:

  • Bagheri, 2004, Competition and Integration among Stock Exchanges: The Dilemma of Conflicting Regulatory Objectives and Strategies, OLJS 24(69)
  • Bananalink, Banana Trade Wars can be found at: Case 120/78 [1979] ECR 649


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