The paper analyses the arguments for a 14th Company Law Directive. In analysing this issue, the research will focus on current European company law and analyse the extent to which the free movement of companies is currently provided for. Although Article 8 provides for the free movement of companies, the freedom is somewhat limited by the protection of creditors and shareholders. Article 7, which introduces a requirement to transfer both the head office and the registered office to the same Member State, further restricts the effects of Article 8. In this respect, the research argues that a 14th Company Law directive is needed, although it is not “urgently” needed.
Resulting from the above, this research seeks to answer the following research questions: To what extent does the current law provide for the free movement of companies? And, will the 14th Company Law Directive solve the problems which the Societas Europaea (European Company) could not? In addressing these questions, this research will use qualitative methodology which will involve reference to relevant journals, regulations, case law and internet sources to substantiate the issues and analyse the proposals for a 14th Directive.
The research is structured into four chapters: the next chapter looks at the background behind the concept of free movement of companies. After having set the foundations, chapter three will look into the Societas Europaea (hereafter know as ‘SE’) as a solution to the problems created by the current restrictions on the free movement of companies. The final chapter will conclude with arguments for the implementation of the 14th Company Law Directive.
CHAPTER 2 – THE CONCEPT OF FREE MOVEMENT OF COMPANIES
WHAT IS FREE MOVEMENT OF COMPANIES?
The principle of free movement is very important to the overall founding aim of the European Union. Since 1950 the main aim behind the expansion of the Community has been one of economic integration.  The free movement of capital and labour help create a single European market and are central to the effective functioning of the EU internal market. The free movement of companies has a similar assimilating effect.
Article 43 of the EC Treaty provides for the freedom to “set up and manage undertakings, in particular companies or firms”. The aim behind the free movement of companies is to encourage the formation of a single market in which companies can utilise their entrepreneurial and organisational skills in the enlarged European market.
BACKGROUND TO THE FREE MOVEMENT OF COMPANIES
ROME TREATY / EC TREATY
The EC Treaty addresses the question of freedom of establishment under Article 43. Article 43 prohibits “restrictions on the freedom of establishment of… agencies, branches or subsidiaries by nationals”. Therefore, companies should not be restricted from setting up in another Member State. This is referred to as secondary establishment, as the legal person establishing such branch remains where it is. Essentially, the aim is to treat companies and nationals equally, although this is not strictly possible, given the differences between natural and legal persons.
The second part of the Article presents the rights of an individual to “take up and pursue activities as self-employed persons” and to “set up and manage… companies or firms”. However, such individuals must abide by the conditions laid down by the law of the country of establishment.
Although the EC Treaty has lost some of its importance since the adoption of the Regulation 2157/2001 (the European Company Statute, hereafter known as the ‘ECS’), it remains the main foundational basis of interpretation of the ECS and the Directive.
SPECIFIC NEGOTIATIONS TO RESOLVE THE PROBLEM OF CONFLICT OF LAWS
Despite the current stage of company law harmonisation there is still a basic division on the manner in which a company’s nationality is established. Member States have been divided into two mutually incompatible theories: the incorporation theory and the siège réel (real seat) theory. As a result, the system of law governing the activities of the company differs from one Member State to another.
The incorporation theory affirms that the law governing the activities of a company will be the law of the State in which the company was incorporated. Therefore, countries such as the UK and Denmark look to the laws of the country in which the company was formed when deciding on issues such as the validity of formation of the company.
Siège réel (REAL SEAT THEORY)
The Real seat theory, developed in France and used in most continental countries, takes the line that the law most suitable to govern the affairs of the company is the law of the place in which the company has its head office.
It is assumed that the majority of the corporate stakeholders will be located in the state in which the corporate centre of gravity is located. However, due to information technology, it is now possible for management to be located away from the economic centre of the company. Nevertheless, this theory still exists today and creates conflicts between EU states. It restricts harmonisation efforts and the creation of a single market in which companies can move freely.
ARTICLE 293 – SPECIFIC NEGOTIATIONS
Therefore, Article 293 of the Treaty introduces a concept where Member States shall “enter into negotiations with each other”. Such negotiations must be entered with a view to securing for the benefit of their nationals: the protection of persons and the enjoyment of rights, the “abolition of double taxation within the Community”, the “mutual recognition of companies or firms”, the “retention of legal personality” in the event of a transfer of seat, and the “simplification of formalities”.  Article 293 has had a limited but positive effect in resolving the conflict between laws.
CROSS-BORDER TRANSFERS OF THE REGISTERED OFFICE: DAILY MAIL CASE
Natural persons can move to another EU state without difficulties because the national law of the citizen will still prevail even after relocation. However, in the absence of Article 293 agreements between Member States, if a legal person, i.e. a company, is to move its registered office to another Member State, the original national law regulating the company ceases to apply.
The Daily Mail  case discusses the complications this may cause. Daily Mail plc wanted to move its head office to the Netherlands to take advantage of their more favourable tax regime; however, it planned to remain subject to UK company law. The Treasury exercised its powers  and refused the transfer. Daily Mail subsequently referred the question to the ECJ  , whether Articles 43 and 48 EC Treaty preclude a Member State from obstructing the transfer of the de facto head office.
Whilst Daily Mail argued that this was a restriction on the free movement of companies envisaged by Articles 43 and 48, British Revenue advocated that the intentions of Article 43 were to eliminate discrimination against nationals of another Member State who wished to re-establish. The pro-integration ECJ concluded that the Treaty does not allow for the removal of all protective barriers.
We can begin to see that the free movement of companies and the creation of a true Common Market has been somewhat restricted by the ECJ.
OTHER EU CASE LAW
The ECJ have established progressively a theory of free movement of companies. According to the Centros  judgment, if a company was formed properly in according to the rules of one Member State, other Member States are prohibited from discriminating against it. Furthermore, a Member State cannot restrict the free movement of a company if there are other ways of countering fraud or protecting creditors.
The ECJ went further in the Uberseering  case. It ruled that it was incompatible with Articles 43 and 48 to deny legal capacity to a company which moves its head office to another Member State. It therefore creates a requirement on Member States to mutually recognise the company’s legal capacity. In spite of this, the ECS brought a new vehicle in the form of an SE to counter the restrictions to the free movement of companies.
CHAPTER 3 – THE FREE MOVEMENT OF THE SE: A SOLUTION TO THE PROBLEM?
The SE is a European Company. It is a public limited company with a minimum share capital of EUR 120,000  . Currently, the SE can be created in the following ways: by a merger of two or more public limited liability companies  , by two or more private or public companies setting up a holding or subsidiary SE,  by the transformation of a limited liability company into an SE  and finally by the creation of an SE owned by a single shareholder.  Some authors, including Edbury, have suggested that the introduction of the SE could lead to developments of private European companies in the future. 
The ECS realises a compromise between the trend of integration and the respect of the real seat theory (and principle of subsidiarity). In an attempt to harmonise European Company Law, the ECS provides a single set of rules for the SE. The freedom of movement of the SE established by Article 8 (chapter 3.1. below) is somewhat restricted by Article 7 (chapter 3.3.) and other structural limits. The SE is not the solution, but a step towards the solution.
ARTICLE 8 ECS – FREEDOM OF MOVEMENT OF THE SE
Article 8 deals with the transfer of the registered office from one Member State to another. It aims to create a flexible opportunity within which companies can transfer their registered office without having to undergo liquidation. The freedom is guaranteed by the final sentence of Article 8: “Such a transfer will not result in the winding up of the SE or in the creation of a new legal person”.
As a result, by transferring its registered office, an SE can decide which law governs it. Also, private companies may change into public companies and thereafter into SEs. Article 8 paves the way for a new era in which companies are given the opportunity to change nationality more freely and therefore extends the free movement of companies on the whole.
However, according to Article 9 ECS, for matters which are not dealt with by the ECS, or are only partly regulated by it, an SE shall be governed by “laws adopted by Member States in implementation of Community measures relating specifically to SEs…” The uncertainty created by the inability to harmonise such matter restricts the extent of freedom created by Article 8.
ISSUES ARISING FROM A CHANGE IN THE REGISTERED OFFICE
PROTECTION OF CREDITORS – ARTICLE 8(7)
Creditors are given protection under Article 8(7). According to the article, the interests of creditors must be adequately protected in accordance with the requirements of the Member State in which the SE was registered. Therefore, it is likely that creditor rights will vary from one jurisdiction to another; Member States are given discretion in forming their own creditor protection mechanisms.
Creditors may apply to the court where they believe they are not given “adequate security” in the transfer proposal. As in the proposed 14th directive, the meaning of “adequate” security is not defined. Nevertheless, Article 8(7) appears to give creditors preference over others.
Although Article 8(7) restricts the free movement of companies, it provides a necessary right; creditors will not be willing to extend credit to companies if there is a chance that companies change their registered office and thereby remove themselves of any obligation towards its creditors. Therefore, the new 14th Directive must protect creditors.
PROTECTION OF SHAREHOLDERS – ARTICLE 8(5)
Under Article 8(5) Member States may adopt provisions to protect minority shareholders. Although it appears, that theoretically minority shareholders have the right to be bought out at a fair price, it is difficult to envisage a situation where shareholders would be given the power to block the transfer of the registered office.
According to Article 8(3), the management of the SE is obliged to draw up a report which sets out the implications of the transfer on shareholders, creditors and employees. Therefore, in practice, the ECS does not restrict the freedom of movement; it merely provides a right for shareholders to be taken into account in the transfer process. In this respect, there seems to be a good balance between the protection of shareholder rights and the promotion of the free movement of companies, something which should be carried into the 14th Directive.
PROTECTION OF EMPLOYEES – ARTICLE 8(4)
Article 8(4), gives a right to shareholders and creditors to “decide on the transfer” and examine the “transfer proposal and the report drawn up”. It does not mention employees in this right, implying that they are excluded. However, although the Statute offers no rights to employees, as employees are also shareholders, they have the right to vote at the general meeting.
The extent to which the proposed 14th Directive deals with the above issues will be discussed in chapter 4.
ARTICLE 7 – CHANGE OF HEADQUARTERS
Article 7 of the ECS appears to seek a compromise between the incorporation theory and real-seat theory. Its solution is to require the transfer of both the head office and the registered office to the same Member State. The second part of Article 7 leaves the choice open to Member States.
Although having both offices in the same Member State ensures effective monitoring of an SE, there are a variety of problems for the company: Firstly, it can be difficult to decide where to have the head office. For example, different administrative processes of the company may be taking place in different Member States. This was one of the reasons the Netherlands, being a country adopting the incorporation theory, refused to consent to Article 7 in 1998 at the Internal Market Council meeting.
Secondly, requiring the transfer of both the head office and registered office increases material costs for SEs; it is a major practical and logistical restriction leaving the company quite incapable of responding easily to changing commercial needs. There are also doubts as to the definition of head office as no definition is given in the ECS.
Is Article 7 a necessary evil? It may be argued that Article 7 is needed to ensure the effective supervision of the whole SE and prevent suspicious practice such as tax fraud or money laundering. However, there is a simple solution to this problem. By lifting the corporate veil of such companies the ECJ could reveal abusive practices. Therefore, with provisions in place to check for abusive practices, the Article 7 requirement should be abolished by the 14th Directive. The ECS provides free movement with one hand (Article 8) and takes it away with another (Article 7).
THE DELAWARE EFFECT
Due to the discretion given to Member States, there is much diversity in the law surrounding the transfer of the registered office. This diversity is exploited by companies; they are attracted to those legal systems which provide them the opportunity to derive maximum benefits. This phenomenon of exploitation is referred to as “regulatory arbitrage”.
There is a risk that European companies will start to ‘forum shop’ to find the least regulated environment. This has occurred in Delaware and it is argued that the same would occur in Europe. However, due to European diversity being so wide and well developed, as well as the fact that the EU legislative process is more akin to international treaty drafting than to federal law making, and due to the inexistence in Europe of the historical factors which lead to Delaware, Sachdeva believes there is “no threat of a European Delaware”. 
Professor William Cary, in his 1974 paper, outlined the characteristics of Delaware corporate law as including, inter alia, low standards, ease of access to courts and fewer restrictions upon mortgaging, leasing and merging.  The theory that, in order to secure or maintain for themselves a position of leadership and attraction and not lose the revenue brought in by companies, Member States will embark upon such race of laxity is referred to as the “race to the bottom” theory. To avoid Member States getting involved in this race we would need European-wide minimum standards.
However, in the 1980s, this theory was confronted by the “race to the top” theory which argued that the dynamics of competition also apply to the market for regulation. Therefore, this regulatory competition would lead to more efficient laws. One of the most notable alternative theories was put forward by Prof. Lucian Bebchuk, who argues that “state competition produces a race for the top with respect to some corporate issues but a race for the bottom with respect to others.”  In this respect, the possibility of larger companies shopping around demonstrates that the European harmonisation programme is yet not fully effective and the 14th Directive is needed.
STRUCTURAL LIMITS TO THE FREEDOM OF MOVEMENT
This section will look at some substantive matters which are not covered by the ECS and must be introduced by the proposed Directive:
Taxation is one of the most important issues concerning the SE. As underlined by Commissioner Bolkestein, “the lack of appropriate tax rules significantly reduces the practical attractiveness of the European Company Statute.”  However, in its preamble, the ECS provides that “the provisions of the Member States’ law … are therefore applicable in the above areas [taxation, competition, intellectual property and insolvency].”  The failure to harmonise the law in this respect could lead to a disorganised freedom of movement.
The 10th cross-border merger directive contains some tax provisions; for a statutory cross-border merger any gains that arise are taxable with corporate income tax. Also, the jurisprudence of the ECJ provides a limited solution to the tax issues. The 14th Directive must harmonize the law on taxation of the SE.
OTHER ISSUES NOT COVERED BY THE ECS
Other issues which are not covered by the ECS include: insolvency, accounting matters, directors’ liability, insolvency and pensions, to name just a few. Harmonisation of the law regarding these issues is needed by the Directive to improve clarity and enhance the freedom of movement of companies.
SITUATION AFTER CARTESIO
The recent Cartesio  case concerned a limited partnership incorporated in Hungary which intended to transfer its seat to Italy while maintaining its legal status under Hungarian law. The ECJ upheld, contrary to the recommendation of the Advocate General, that article 48 did not give companies the right to move their head office or registered office to another Member State while retaining the legal status conferred by the law of the state of incorporation.
Cartesio can be seen as a landmark ruling for companies’ migration. Following the legal environment created by Cartesio there can now be three possible situations as regards the cross-border transfer of the registered office: (1) transfer of the head office alone; (2) transfer of the registered office alone, and without a change of the applicable national law; (3) transfer of the registered office, either alone or with the head office, with a change of the applicable national law. Consequently, the ruling seems to open doubts as to which transfers would be allowed.  In this respect, the Cartesio ruling has met strong criticisms. 
CHAPTER 4 – THE CASE FOR A 14TH DIRECTIVE AND CONCLUSIONS
IS THE 14TH DIRECTIVE URGENTLY NEEDED?
The question arises whether, after Cartesio’s attempts at clarifying the issue of the registered seat, it is necessary to implement the 14th Directive on the cross-border transfer of a registered office.
Some improvements can be made to the current law to facilitate the free movement of companies. The Commission, in its impact assessment on the Directive, identified the risks for stakeholders, which this paper highlighted in chapter 3.2. The Commission concluded that further safeguards are needed in some areas. However, with the Cartesio ruling still pending at the time, it decided that it was not clear whether the Directive was the best way of achieving the objectives.
Regarding the protection of creditors, the ECS is silent on ‘new’ creditors created after the transfer and whether they will override the rights of previous creditors. In an attempt to further the protection given to creditors, the 14th directive could insert a jurisdiction clause and perhaps restrict the company from entering new securities until the existing creditors have been provided for.
Although there is no mention of employees in the ECS with regards to the transfer of the registered office, the 14th Directive does deal with the matter, even though in a limited manner. Where employees formed part of the management board of the company prior to the proposed transfer, employees will be allowed to review the transfer report. Essentially, the Directive extends Article 8(4) ECS to employees.
The procedure for seat transfer, i.e. the preparation of a transfer proposal and its approval by shareholders and creditors, is similar in the Directive as the procedure set out in the ECS.  Firstly, the Member State of destination must review the certificate issued by the Member State of origin; the certificate would declare that all acts and formalities required have been completed. Secondly, the Member State of destination must ensure that relevant documents, such as the memorandum, the article of association and the transfer proposal, all meet the requirements of that Member State. Finally, after verifying that the substantive and formal conditions for the transfer are met, the Member State of origin must give immediate notification of registration to the Member State of origin.
However, like the ECS, the Directive would also leave some discretion to Member States. For example, Member States are free to decide the “appropriate period of time” for the presentation of the documents to its competent authority. Also, Member States would be free to decide whether the incoming company should wait until the new legal form has been adopted or whether it should identify itself with the new tax authorities before registration.  Consequently, Cerioni believes that the 14th Directive does not go far enough to prevent differences between Member States. The Directive should “indicate in detail not only the procedural steps required in the Member State of origin, but the conditions to be met in the Member State of destination too”.  Cerioni explains how by complying with the conditions, and ensuring uniformity of all these conditions, there would be a guarantee that the Member State of origin could not hinder the transfer.
The recognition of the incorporation theory by the 14th Directive and consequent pressure for the abandonment of Article 7 and the real seat theory would extend the free movement of companies and solve the problems not dealt with under the ECS. The SE was the result of a “long and sinuous legislative adventure of some thirty-four years.”  The next step forward is the 14th Company Law Directive.
The SE is for sure the best achievement in company law for the realisation of the European Internal Market. This new form of company allows a business to restructure fast and easily, and take the best possible advantage of the trading opportunities offered by the Internal Market. However, it has been impossible for Member States to agree on a uniform set of rules. For a number of company law matters, including taxation, the ECS refers back to national company law. As a result of its failure as a true European Company, there are only as many SEs as the number of Member States.
To reverse the failure of the SE there is no doubt that a 14th Company Law Directive is needed. The Directive must provide a solution to, amongst other things, the taxation issue, to the complexity of the formation process and the issue of employee involvement. As discussed earlier, Article 7 provides a major restriction to the free movement of companies and it is vital that this is solved by the 14th Directive. However, the threat of a Delaware effect translating into the European legislative market is not that imminent to call for the “urgent” implementation of the 14th Company Law Directive. The issues discussed in this paper must be tackled fully before the implementation of the Directive takes place.
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