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Free 2.1 Law Essay

By reference to the US debate on corporate regulatory competition, critically examine whether there is regulatory competition in European Corporate law

Corporate regulatory competition is the phenomenon that arises as a result of freedom to incorporate as a corporate seat in an area outside the location of the real seat. In the US, this playing field of choice is naturally that of each of the individual states where corporate law is designated as a matter for each federal state. By contrast, in the EU the freedom to choose a corporate seat in another Member State that is different from the State of location for the real seat is only a recent development.

This piece will begin by giving a brief overview of the corporate regulatory competition that is very much alive in the USA. This analysis will then be followed by an account of the EU judgements that have, at the very least, made it possible for corporate regulatory competition to become a reality for Governments of all Member States. Finally, with the use of empirical data and examples, it will be determined whether a culture of corporate regulatory competition now really exists for European Corporate Law.

A US Corporate Regulatory Competition - a Brief Introduction and Overview

Kamar writes that it is trite law that companies in the USA are entitled to incorporate in any one of the fifty jurisdictions of the States and Columbia while still conducting their business outside their State of incorporation. From a European perspective, the scope for influence and cross-state corporate law observation is greatly increased on account of the complete absence of language barriers that are integral to an entity such as the EU. This is further exasperated by the relative ignorance of the various legal professions of each Member State for the laws of their neighbours. By contrast, any US attorney specializing in re-incorporation will be extremely professionally qualified to give advice on Delaware corporate law, regardless of the jurisdiction of the attorney . The result in the US is a climate of Corporate Law tailoring where, currently, the most attractive State is Delaware and there is unanimous agreement on this point.

The only area of dispute lies in the notion of whether other US States, in addition to Delaware, also lobby for corporations to set themselves up within their jurisdictions . In other words, the presence of Corporate Regulatory Competition is not a mutually recognised fact. It is however difficult to imagine that this kind of lobbying would not occur considering the fact that there is freedom to do so. Romano addresses this criticism of the existence of a competitive culture that is argued on the basis that there is no evidence of duplication of the Delaware incentives by other States and also that many States have no such interest in attracting incorporation within their borders . He argues that these arguments are not adequate in that they do not attempt to take into account other strategies that are employed by other States and asserts three pieces of evidence that are clear indicators for the phenomenon. The first is that there is a phenomenon whereby innovations of corporate law will be adopted at greater rates as time progresses and more and more jump on the band wagon . The second is tax related in that the level of fiscal revenue for franchises reflects, in many States, the demands of the corporations themselves . Finally, there is clear evidence of migration of corporations from one State to another for the purpose of falling under the more favourable jurisdiction .

It is clear that these three assertions are ample proof of the existence of Corporate Regulatory Competition in the USA and, clearly, assertions that such a phenomenon is also rife the EU could benefit by taking onboard the USA commentators' data analytical approaches. The usefulness of this will be analysed below under Part C.

B The ideal recipe for creating a climate that encourages Corporate Regulatory Competition? the outcomes of Centros , Überseering and Inspire Art

Prior to Centros on March 9, 1999 there was no EU mutual policy on the issue of correlating the place of incorporation with the place of administration. The difference was profound with countries like the UK and Holland adopting the simple corporation strategy, whereby the place of incorporation was the jurisdiction under which the company would be legally regulated. The contrasting method was that of the 'real-seat' method, whereby it was not the place of incorporation that determined the jurisdiction of regulation, but it was the location of the 'real seat' or place of administration that would instead determine this. The immediate drawback was of course a need to wind up and re-incorporate every time operations were moved elsewhere.

However, in Centros the European Court of Justice ruled that the company registrar of Denmark was not allowed to refuse registration of a UK incorporated company with its real seat in Denmark. Denmark was of course a follower of the 'real-seat' theory of incorporation but the ECJ ruled against the Danish policies on account of this constituting a breach of freedom of establishment.

The second ground breaking case was that of Überseering whereby a company founded under Dutch law transferred its real seat to Germany as a result of the selling of all its shares to two Germans. An action was raised under contract law and this fell under the jurisdiction of the German courts. Unfortunately, as a result of Germany's observance of the 'real-seat' theory, the court deemed that the claimant was null and void and therefore lacked the requisite legal personality for status as a claimant in a civil procedure. The case was referred to the ECJ who decided that this kind of technicality should never be utilised to deprive a company of its right to be repaid. Further to this, the ECJ ruled that the German Courts were under an obligation as an EU Member State to follow Articles 43 and 48 of the EC Treaty, whereby the German jurisdiction must recognize the legal personality of a foreign company 'as it was founded' provided that its incorporation under the foreign jurisdiction of the other EU Member State was lawfully executed in accordance with those laws . The outcome of this case was that Germany was forced to abandon the 'real seat' theory and this paved the way for a move towards the 'incorporation' method that would create a culture for Corporate Regulatory Competition.

The third case of Inspire Art concerned a UK incorporated company with the entirety of its commercial activities being carried out in Holland where limitations were provided under the incorporation theory of company establishment. The main condition was that all companies carrying out business in Holland would have to adhere to a number of rules including minimum capital rules , which, if not followed, would result in the lifting of the corporate veil, thereby rendering the directors fully liable for the company's debts.

These three cases effectively removed the 'real seat' theory of incorporation thereby creating an EU policy that allows companies to be incorporated in any of the 25 Member States. The result, therefore, is an environment where Corporate Regulatory Competition between the Member States is possible, but will this happen?

C Does Corporate Regulatory Competition exist in EU Corporate Law?

The problem with ascertaining the current existence of Corporate Regulatory Competition is that, by comparison to the US, the Inspire Art case was only decided in 2003, which therefore means that the climate for such competition is not old enough to yet show convincing evidence of competitive corporate lobbying of Member State Governments. This is especially confounded by the relative preoccupation during this time of the EU campaign to install the new European Constitution, which has only recently failed. In essence, it means that Romano's first method of ascertaining Corporate Regulatory Competition, which is to analyse the empirical data of re-incorporations following the creation of a new incentive, would not be suitable during these early days.

Despite this however, Keininger has stated that the creation of an EU model for the ascertainment of Corporate Regulatory Competition is possible at this early stage if incentives for moving to a State in particular are present as they are in the USA with Delaware. In relation to this, it would therefore be useful to identify the incentives that drive the US law makers to attract companies and find out if they are useful comparators for the EU. In relation to Romano's second method which is also referred to by Keininger as adhering to the needs of the corporations.

This therefore means that there is harmony among academics of both the US and EU sides in relation to the methods of scrutiny that are required to ascertain Corporate Regulatory Competition. However the similarity takes an abrupt end at this point and this is due to the fact that Delaware's competitive fiscal revenue for franchises is the main reason for its success as the favoured incorporation location. Unfortunately, Keininger points out that in the EU no such incentive could exist as it is contrary to Arts 2(1) and 10 of Directive 69/335/EEC which states that corporate revenues cannot be demanded by the Government of the State of incorporation. Instead, the fiscal claim occurs only for those profits that are generated in a given Member State.

This does not however mean that Romano's second point is useless for the purpose of ascertaining Corporate Regulatory Competition. It does however mean that the correct approach is to ascertain EU equivalents for the Delaware incentive although Keininger believes that there are no such incentives in existence.

The failure of the USA model for ascertaining Corporate Regulatory Competition is not however indicative of no such phenomenon in the EU. It simply means that reference to the US is futile for this pursuit and separate, wholly independent research is required to ascertain the correct EU model for establishing the existence of Corporate Regulatory Competition. Kieninger believes that the most likely Delaware of the EU will be the UK and there are two reasons for this. The first is that the UK Government has instigated positive intention to adopt reforms for the specific purpose of attracting overseas companies, which was stated in the Government White Paper released in March 2005 . The second reason is that London is the most significant financial centre of the EU, with the result that it is already highly advantageous to be incorporated in the UK and current empirical data does reveal that the comparatively low minimum share capital for private companies incorporating in the UK does attract start-ups to this EU State. In contrast to this positive hypothesis for an EU version of Delaware, the development of harmonising laws for public listed companies and the creation of the Societas Europae , which requires no State of incorporation, means that any incentives for incorporation in a particular EU state are only relevant for private companies.

 

 

Conclusion

Part A reveals that there is significant debate continuing over the existence of Corporate Regulatory Competition in the USA but according to Romano, clear evidence of such activity is obtainable if the correct data is analysed. This data is to be found when, firstly analysing the types of incentives that are created to meet corporate demands, as well as trends following new introductions of re-incorporation incentives in terms of, secondly, bias towards a single US State and, thirdly, increased expediency to the State as time progresses. Part B revealed that European Union law now allows for companies to choose their preferred jurisdiction of incorporation as a result of ECJ decisions that have effectively eradicated the 'real-seat' theory of incorporation in favour of the 'incorporation' method. However, this law is not a conclusive indicator of any imminent creation of Corporate Regulatory Competition in the EU. Furthermore, as was shown in part C, the relative youth of this new status, coupled with the non-existence of the fiscal incentive that creates such competition in the US shows that reference to the US on this matter is completely futile. Finally, reference to data concerning the EU does give rise to a suspicion that there may be interest towards the UK but this will be limited to the small private companies due to EU harmonization of plcs and the new Societas Europae.

In full conclusion, time is needed to ascertain whether there will be a Corporate Regulatory Competition in Europe but, if there is, its impact will be extremely minimal.

 

Bibliography

Legislation
Treaty of the European Union
Directive 69/335/EEC
Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE)
SI 2004/2326
Wet op de foreel buitenlande vennootschappen (WFBV) OF 12/17/1997, Staatsblad van het Koninkrijk der Nederlanden 1997, No 697 (Holland)

Case Law
Centros Ltd v Erhvervs- og Selskabsstyrelsen, Case C-212/97
Überseering B.V. v Nordic Construction Company Baummanagement GmbH (NCC) Case C-208/00
Kamer von Koophankel en Fabriken voor Amsterdam v Inspire Art Ltd, Case C-167/01

Government Publication
White Paper, 2005, Company Law Reform, [Available Online] At: www.dti.gov.uk/cld/WhitePaper.pdf

Articles
Kamar. E, 2005, Beyond Competition for Incorporations, ECGI Law Working Paper Series, Working Paper No: 42/2005
Kahan M & Kamar. E, 2002, The Myth of State Competition in Corporate Law, 55 Stan. L. Rev. 679
Romano. R, Is Regulatory Competition Irrelevant for Corporate Governance? 21 Oxford Rev. Econ. Pol
Bebchuk, L.A. and Hamdani. A, 2002, Vigorous Race or Leisurely Walk: Reconsidering the Competition over Corporate Charters, Yale Law Journal, 112(3), 553-615. at pp 568-56
Roth, W.H, 2003, From Contros to Überseering: Free Movement of Companies, Private International Law, and Community Law, 52 ICLQ 177
Thoma. I, 2003, The Überseering ruling: a tale of serendipity, EUROPEAN REVIEW OF PRIVATE LAW (ERPL) 545
Mock. S, Harmonization, Regulation and Legislative Competition in European Corporate Law, [Available Online] At: www.germanlawjournal.com/article.php?id=216
Kieninger, E.M., 2005, The Legal Framework of Regulatory Competition Based on Company Mobility: EU and US Compared, [Available Online] At: www.germanlawjournal.com/article.php?id=741

Web Resource
Jones Day LLP: www.jonesday.com

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