Legal Business Forms & Company Group Structures

1. Legal Business Forms & Company Group StructuresCESL Beiijng (Module ‘E’)Dr. S.F.G. Rammeloo, Law Faculty, Maastricht University - Netherlands (Edition - April 2013)

2. Business Forms & Company Groups -Treatment Plan Std Basics business ‘formats’; national law EU MS Mnd - EU law harmonizing national company laws… - Companies crossingborders - Freedom of establishment Single Market EU Tsd - Company groups, domestic and cross-bordermergers; divisions (EU law and national law) Wdnsd - Company groups: national law concepts EU MS laws; EU law concepts: EEIG and SE

3. Business conduct - (European) Single Market

4. Business formats…; company groups I Business formats – stand alone… A National law ‘borne’ • Sole trader • Partnerships • Limited liability companies (incl. single-member companies) • Other…? (cf. Trust, ‘Treuhand’, foundation) B EU law ‘borne’ II Business formats embedded in group structureNational law and EU law concepts

5. Business – Zooming out... Global scale developments • US, the end of the year 2008: Ford Motors on salary caps and new initiatives, cf. same rise for employees at shop floor level • US, 2009, GM: General Motors..., or Government Motors...? • NL, July 9 2010: Dutch Hoge Raad (Supreme Court) ASMI: Stakeholder v. Shareholders value? Common Law – versus Rhine Delta (cf. Germany)? • Sweden/NL, January 2010: SAAB taken over by Spyker... By (cf. Volvo!) Chinese..., or ultimately by Turkish investors (February 2012 – another failed attempt)?

6. Companies operating in an ever globalizing world... ‘Forget about Europe...!’ • Autumn 2010 Organon, pharmaceutics NL, ‘local shop’ closed and ‘outsourced’ by US parent company MSD... • Autumn 2010 – today... Chinese enterpreneurs are coming...! - Draka NV, Netherlands listed public limited company (high tech wire industries), targeted by European ‘investors’ and by Xinmao, China... - but at the end of the day, January 2011, the Italians (Prysmian) came, saw and conquerred... • Sept 2012: 8th EU-China Business summit (Brussels)http://www.businesseurope.eu/Content/Default.asp?PageID=752.

7. Business – ‘Zooming in’ on Europe again... The ‘financial crash 2008’ – European responses • EBA: European Banking Authority (London) • EIOPA: European Insurance and Occupational Pensions Authority (Frankfurt) • ESMA: European Securities and Markets Authority (Paris) • ESRB: European Systemic Risk Board (Frankfurt)

8. Entrepreneurship - Economic Drives How to reconcileopposing interests? By ‘formalizing’ business activities • how to get business on track? • how to balance interests? Contractual cooperation by making use of partnership: • either as partners ‘behind closed doors’ • or ‘in public’

9. Potential ‘stand alone’ business ‘formats’ 1 ‘Sole entrepreneurship’ (Einmanngeschäft; eenmanszaak, sole propriétaire) Advantages: • Easy and cheap formation • Easy to control • Distribution of profits • Easy to dissolve • Beneficial ‘tax law regime’ owner subject to tax income only, rather than ‘double taxation’ at company + shareholder level

10. Potential ‘stand alone’ business ‘formats’ 1 ‘Sole entrepreneurship’ (Einmanngeschäft; sole propriétaire) Disadvantages: • Unlimited liability for business conduct • Limited financial resources • Joined powers with other investors hardly possible • Continuity of business entity thwarted • Since Dec. 10, 2010: Art. L 526-6 et seq. French Code de Commerce: owner of an Entreprise Individuel à Responsabilité Limitée (EIRL) liable with property ‘affected’ to the business only

11. Potential ‘stand alone’ business ‘formats’ 2 General partnership (Offene Handelsgesellschaft, OHG;Societe en Nom Collectif (SNC) • Agreement/contract • Between 2 or more persons • Assets belong to the partners as a whole (community of goods) • Mutual agents and managers • Pursue a common goal • (General) partners jointly and severally liable • Contributions in kind, in cash or services

12. Potential ‘stand alone’ business ‘formats’ General partnership (cont.) Advantages + Easy organisation + Easy formation + Flexibility + Contractual basis Disdvantages - Unlimited liability - Limited financial resources - Continuity?

13. Potential ‘stand alone’ business ‘formats’ General partnership (cf. ‘silent’ partnership!) (cont.) • Internal legal relationships: decision making process; profits and losses • External legal relationships: binding partners; liability schemes ‘Harsh’ (external) legal regime - Justification: - No (minimum) capital (preservation) requirements - Assets at the disposal of partnerships often remain property of partners in private Note: any clause ‘restricting’ or even ‘excluding’ external liability?

14. Potential business ‘formats’ 3 Limited partnership Société en commandite simple; Kommanditgesellschaft; CV(R) • Internal legal relationships: (identical; cf. above) • External legal relationships: * general partners: cf. above * limited partners: liable only to the extent of ‘money put in the partnership pot’, unless they operate in name and on behalf of the limited partnership (punitive legal effect)

15. Potential business ‘formats’ 4 Legal persons (limited liability companies) - Public company (Aktiengesellschaft, Société Anonyme) - Private company (Gesellschaft mit beschränkter Haftung/Unternehmensgesellschaft UG, Société á responsabilité limitée) Note: In some legal orders, other legal persons as well can be made use of for business purposes (cf. NL: Vereniging and Stichting; UK: trust; G: Treuhandgesellschaft)

16. Potential business ‘formats’ 5 Amalgamation of partnerships and companies: cf. company groups - German GmbH und Co. KG - Joint venture between two or more companies - Parent company with (various subordinated levels of) subsidiaries 6 Sui generis EU Company types: - EEIG (EESV, EEWiG, GIE) - Societas Europea (SE, public limited liability company) - Societas Cooperativa Europea (SCE) - (Near) future: European Private company (EPC/SPE)?

17. Companies in Europe - Limited liability companies The best of both worlds - Limited liability concept Explanation: • European Single Market calls for innovating (therefore risk carrying!) activities Risks being counterbalanced by (investors’ safeguard) • The privilege of limited liability: risks should not result in deterrence: businessmen going broke should not be ‘sentenced for lifetime’

18. Companies in Europe - Limited liability companies Characteristics… at the same time advantages • Legal personality: distinct from its members; mutual safeguard for business creditors and private creditors • Limited liability: of shareholders, not managers • Transferable shares: uniterrupted business (continutity!) + possibility of portfolio investment • Delegated management under a board structure + fiduciary duty of company officers towards company (‘Treu und Glauben’, ‘bonne foi’) • Investor ownership = control rights (resolution making) + earnings (dividend)

19. Companies in Europe - Limited liability companies The other side of the sun... Disadvantages • Formation/incorporation • Seperation between ownership and control • Disclosure requirements and other rules of law • Less flexible (cf. Constitution, resolution making, etc.)

20. Public Limited Company - Terminology To avoid (further) misunderstandings: 1 Expression ‘public’ company (unlike ‘French’ terminology) - ‘Public’ company is neither a ‘governmental’ institution, nor is it ‘owned’ by government (cf. energy supplying or public transport rendering companies) 2 Only public companies can be listed at stock exchanges - Note, however, that most public companies are not listed - On the occasion companies even decide to de-list! (volatility of stock ratings; vulnerability for takeovers)

21. Company actors - Shareholders ‘Share’; ‘stock’ (Aktie/Geschäftsanteil/action) 1 Decision making process: • Casting votes (not/restricted: depositary receipts) • Acting alone, acting ‘in concert’; shadow meetings in advance • Right to initiate special (majority/minority) action/initiate court proceedings; derivative suits (acting in name and on behalf, i.e. not of themselves but of the company)

22. Company actors - Shareholders ‘Share’; ‘stock’ (Aktie/Geschäftsanteil, action) 2 Financially entitled to: • Dividend (i.e. turning out of profits) • Pro rata remaining amount of money in case of dissolution, winding up and liquidation of the company - Pro rata preemption right in issuance of the same class of shares

23. Shareholders - Limited Liability Avoid other misconception: Share: company debt..., or company possession? Company possession! (cf. balance sheet) Explanation: ‘Repayment’ by the company can never ever be claimed by shareholder. Selling stock to another interested shareholder is the only ‘way out’ for investor!

24. Public/Private Limited Company - Shareholders ‘Accessible’ to any ‘investor’ (shareholder) ‘One man one vote…’ (pro rata voting)? Not necessarily! Cf. articles of association (Satzung; Statuten; constitution) increasing… or restricting shareholders influence in the company’s ‘resolution making process’ - ‘Classes’ of shares (cf. exclusion of preemption rights) - Registered (priority) shares (attributing power to appoint MB) - Oligarchic clauses (‘ceiling vote’, multiple voting rights attached to certain shares only)

25. Public/Private Limited Company - Shareholders ‘Accessible’ to any ‘investor’ (shareholder) ‘One man one vote…’ (pro rata voting)? Not necessarily! - Depositary receipts (‘certificaten’; stimmrechtlose Aktien/Gesellschaftsanteile) to investors, shares being transferred to another company or legal person… - ‘Golden shares’ in the hand of governments, cf. vital (energy) sectors; EU law limitations

26. Private Limited Company – Distinct features ‘Close’ corporation; intuitu personae character. Cf., however, differentnational law concepts: - Restriction to transfer shares (cf. NL) or not? - Restricted number of shareholders (cf. France)? - Instruction powers attributed to shareholders meeting (cf. Germany: Weisungsbefugnis) or not? - Additional obligations to be imposed on shareholders or not? (cf. Germany: Nebenleistungen)? - No access to stock markets Trend (from CJEU Inspire Art Ltd. onwards, 2003): mitigation of formation and capital requirements for private companies

27. Company actors – Dualistic concept Mandatory in all legal systems 1 Shareholders/General meeting (Hauptversammlung; Assemblement générale) • Investors, providing company’s capital (cf. further: loans by banks) • Involvement in the company’s resolution making process (e.g. appointing, suspending, dismissing (executive) managers, non-executives/supervisory board members, company dissolution, etc.

28. Company actors – Dualistic concept Mandatory in all legal systems 2 Management board (Vorstand/Geschäftsfüher; Conseil d’administration) - Daily management - (External) company representation: transactions, court proceedings (cf., however, ‘derivative suit’)

29. Company actors – Other company ‘organs’? Mandatory or optional? Depending on national law EU MS: 3 Supervisory officials: basically, two company ‘board structures’ A Two separate ‘administrative’ boards: MB and… (Supervisory board; Aufsichtsrat) B Single board structure, with executive and non- executive board members

30. Company actors – Management Powers and duties of managing directors (i.e. irrespective of single or dual board structure) • Managing the company. Cf. ‘BJR’, Business Judgment Rule • Representing the company to the outer world (i.e. the board as a whole or individual members); 1st EU Company Law Directive - Business transactions - Court proceedings (plaintiff/defendant) 3 Further assignments: cf. company’s articles of association (commonly: issue new shares): cf. Ch. on capital requirements and 2nd EU Company Law Directive

31. Company actors – SB members/‘non-executives’ Powers and duties of ‘non-executives’ (independent of single or dual board structure) • Advising managing directors ex ante • Supervising managing directors ex post • Representing the company in case of conflicting interests between the company and its managers (‘corporate opportunities’ - Examples) • Further assignments on the basis of the company’s articles of association (cf. appointing company executive directors)

32. Company actors – Other company ‘officials’? This ultimately depends on: • EU law being absent: national Law, and • Company’s articles of association Example: - Board of auditors Note: ‘inventing’ another ‘name tag’ for no other purpose than trying to avoid mandatory laws is not allowed for Cf. (past) Philips ‘Raad van Toezicht’, rather than ‘Raad van Commissarissen’ with a view to avoidance of special rules for ‘large’ companies under NL company laws

33. Companies and Firms – Sizes; EU law classifications European Commission (Source: May 2003, C(2003) 1422, OJ L 124, p. 36-41) • Micro enterprises: with less than 10 employees and an annual turnover/balance sheet total of maximum EUR 2 million • Small enterprises with at least 10, but less than 50 employees and an annual turnover/balance sheet total of maximum EUR 10 million • Medium-sized enterprises with at least 50, but no more than 249 employees and an annual turnover not exceeding EUR 50 million, and/or a balance sheet total not more than EUR 43 million

34. Companies and Firms – Sizes; EU law classifications Relevance of these records...? EuroStat: (http://epp.eurostat.ec.europa.eu > Statistics > Statistics A-Z >) Over 99% of businesses in the non-financial sector consists of SME’s • SME’s employ over 67% of the European workforce…! Commission: SME’s remain the ‘backbone of the European economy’ Source: COM (2007) 592 final, p. 3. Note: first Action Plan: 1986) Cf. Zaibatsus and Keretsus in Japan...

35. EU (Company) Law... Think small first? Current developments… (EU websites) - ‘European Commission Enterprise & Industry’, http://ec.europa.eu/enterprise/index_en.htm. - ‘Company Law & Corporate Governance’http://ec.europa.eu/internal_market/company/index_en.htm. - Small and Medium Sized Enterprises (SME):http://ec.europa.eu/enterprise/policies/sme/index_en.htm/ (Cf. quote next slide)

36. Commission’s view… The more than 20 million SMEs in the EU represent 99% of businesses, and are a key driver for economic growth, innovation, employment and social integration. The European Commission aims to promote successful entrepreneurship and improve the business environment for SMEs, to allow them to realise their full potential in today's global economy Initiatives: less regulatory burden; SPE

37. Company Law - National law

38. National law - Partnerships - Germany: sec. 1 et seq. Handelsgesetzbuch (HGB) • France: art. L-110-1 et seq. Code de Commerce • UK: no general law on merchants but (modified) application of general principles of civil law How about EU law ‘level’? • EU: no legislation on merchants (reasons!) except for Directive 86/653/EEC on ‘self-employed commercial agents’

39. National law - Partnerships ‘Companies… and firms… (cf. art. 49 and 54 TfEU) Partnerships (Personengesellschaften, sociétés civiles) Based on private contract concluded between at least 2 persons Germany: ‘Ordinary’ partnership (BGB-Gesellschaft):sec. 705 et seq. BGB Commercial partnership (offene Handelsgesellschaft): sec.105 et seq. HGB

40. National law - Partnerships Partnerships (continued) France: Ordinary partnership (société civile): art. 1832-1 et seq. Code civil Commercial partnership (société en nom collectif): Art. L 221-1 et seq. Code de Commerce

41. National law - Partnerships UK: Partnership Act 1890 for profit making partnerships (cf. ‘The fire brigade’ example) EU: Regulation EEC 2137/85 on European Economic Interest Grouping – EEIG (numbers?; practical relevance?)

42. National law - Partnerships Advantages Few requirements for the formation of company Only commercial partnerships to be registered No minimum capital requirements (!) Party autonomy as to governance of association Germany: Beneficial tax regime by ‘single taxation’; No participation of workers in management of company

43. National law - Partnerships Disadvantages Unlimited liability of partners for business debts (!) partners jointly and severally liable in D & UK, in F: unlimited liability in proportion to member’s participation Exception: concept of ‘limited liability partnership’ Germany: Kommanditgesellschaft, sec. 161 et seq. HGB France: Société en commandite simple, Art. 222-1 et seq. Code de Comm. UK: Limited Partnership Act 1907

44. National Law - Partnerships Partnership Creditor limited liablity, sec. 171 HGB unlimitedliablity, sec. 128 HGB generalpartner limited partner

45. National law - Partnerships Complementary legal consequences… GB: no legal personality of general partnership, DE & F: legal personality widely acknowledged No access to capital markets Personalized structure and governance makes business format hard to handle with great number of members

46. Private or public Limited Company? - Recall ‘Close’ corporation; intuitu personae character. Cf., however, differentnational law concepts: - Restriction to transfer shares (cf. NL) or not? - Restricted number of shareholders (cf. France)? - Instruction powers attributed to shareholders meeting (cf. Germany: Weisungsbefugnis) or not? - Additional obligations to be imposed on shareholders or not? (cf. Germany: Nebenleistungen)? - No access to stock markets Trend (from CJEU Inspire Art Ltd. onwards, 2003): EU Member States mitigate formation and capital requirements for private companies

47. Private or public Limited Company? - Recall Main features Relatively larger enterprises Idem number of shareholders Professional governance Access to capital/stock markets Limited party autonomy in order to protect minority shareholders and creditors

48. Public limited liability companies - Sources Corporations in EU Member States UK (Companies Act 2006): public limited company (plc); private limited company (Ltd) Germany: Aktiengesellschaft – AG (AktG); Gesellschaft mit beschränkter Haftung – GmbH (GmbHG); Note Law Reform Nov 2008 ‘Light GmbH’, i.e. Unternehmernsgeschäft UG

49. Public limited liability companies - Sources Corporations in EU Member States F (Code de Commerce) + L nr. 66-537 and nr. 67-236 and decretes nr 89-888 and 1989, and LRNE 1994 Société anonyme (SA) Société à responsabilité limitée (sarl) Société par actions simplifiée (SAS), simplified public company for merger/joint venture operations by at least 2 companies (min. capital €37000-)

50. National company laws EU MS - Divergences National laws differ widely on… 1 Capital protection regimes 2 Company Board structures 3 Employee ‘involvement’