EU corporate law, directives and regulations

1. EU corporate law, directives and regulations TAIEX Ana Maria DOBRE Chisinau, 14 - 15 May 2012

2. General remarks • Objective of EC Treaty : to establish a common market; • remove obstacles to the free movement of goods, persons, services & capital between Member States (MS) • Harmonise the laws of MS as required to ensure proper functioning of common market, avoiding distortion of competition and increasing trust in cross-border economic relationships.

3. European company law represents the cornerstone of the internal market. • EU company law has evolved significantly over the last 40 years. • The rationale behind the EU harmonization process: It was believed that the diversity of national company laws would frustrate the goal of an optimally functioning internal market, distort competition and lead to a race-to-the-bottom=>Member State, in order to attract companies to incorporate in their jurisdiction, would create as flexible as possible company law, ignoring an appropriate level of protection of shareholders and creditors.

4. The scope of EU Company Law harmonizationThe Treaty on the Functioning of the European Union provides the legal basis to adopt Directives harmonizing EU company law (Article 50). the protection of interest of shareholders and others, the constitution and maintenance of public limited-liability companies' capital, takeover bids, branches disclosure, mergers and divisions, minimum rules for single-member private limited-liability companies, shareholders' rights and related areas such as financial reporting and accounting. Considerable work has also been accomplished on different legal forms such as the European Company (SE), the European Economic Interest Grouping (EEIG) and the European Cooperative Society (SCE).

5. The role of the Court of Justice of the European Union • Enforcement of the freedom of establishment; • Please see CJEU cases like: • Centros Ltd, • Überseering, • Inspire Art Ltd; • Viking Line; • Cartesio;

6. Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies • http://europa.eu/legislation_summaries/internal_market/businesses/company_law/l26041_en.htm; • The Directive applies to mergers of limited liability companies: • formed in accordance with the law of a Member State; • with their registered office, central administration or principal place of business within the Community; • if at least two of them are governed by the law of different Member States. • Member States may decide not to apply the Directive to cross-border mergers involving a cooperative society even in the cases where the latter would fall within the definition of "limited liability company". • Lastly, companies the object of which is the collective investment of capital provided by the public (UCITS) are excluded from the scope of the Directive.

7. Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies Procedures governing cross-border mergers • The management or administrative organ of each of the merging companies is required to draw up the common draft terms of cross-border merger. The Directive contains a list of the twelve compulsory particulars that constitute the minimum content of the common draft terms, which must be published in the manner prescribed by the law of each Member State in accordance with the Directive on disclosure by limited liability companies at least one month before the date of the general meeting which is to decide on them. • The management or administrative organ of the merging companies must prepare a report on the proposed cross-border merger for the members and employees that explains the legal and economic aspects of the cross-border merger and its implications. • An independent expert report on the merger must be drawn up. It will not be required if all the members of each of the companies involved in the merger have so agreed. The expert report and the proposed cross-border merger report must be made available at least one month before the date of the general meeting. • On the basis of the documents referred to above, the general meeting of each of the merging companies must decide on the approval of the common draft terms of cross-border merger.

8. Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies Scrutiny of legality • Each Member State must designate the authority competent for scrutinizing the legality of the cross-border merger as regards that part of the procedure that concerns each merging company subject to its national law. That authority must issue a pre-merger certificate attesting to the proper completion of the pre-merger acts and formalities. • Each Member State must designate the authority competent for scrutinizing the legality of the cross-border merger as regards that part of the procedure that concerns the completion of the cross-border merger and, where appropriate, the formation of a new company resulting from the cross-border merger where the company created by the cross-border merger is subject to its national law. That authority must ensure that the merging companies have approved the common draft terms of cross-border merger in the same terms.

9. Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies Legal effects • Following scrutiny of legality, the law of the Member State to whose jurisdiction the company resulting from the cross-border merger is subject must determine the date on which the cross-border merger takes effect and the arrangements for publicising completion of the merger in the public register. The old registration must not be deleted until that notification has been received. • Cross-border mergers have the following effects: • the companies being acquired or the merging companies cease to exist; • all the assets and liabilities of the companies concerned by the merger are transferred to the new entity (either the acquiring company or the new company); • the members of the companies being acquired become members of the new entity. • Where the laws of the Member States require the completion of special formalities before the transfer of certain assets, rights and obligations by the merging companies becomes effective against third parties, the company resulting from the cross-border merger is responsible for carrying out those formalities.

10. Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies • where the national legislation applicable to the company resulting from the cross-border merger does not provide for employees of establishments of that company that are situated in other Member States, the same entitlement to exercise participation rights as is enjoyed by those employees employed in the Member State where the company resulting from the cross-border merger has its registered office. • Under the Directive supplementing the Statute for a European Company with regard to the involvement of employees, the threshold for applying the benchmark provisions laid down for the European Company is increased to 331/3% of the total number of workers in the merging companies that have had to operate under any form of worker participation system. For a period of three years after the cross-border merger has taken effect, the rights of the workers are protected in the event of any subsequent domestic mergers. • The provisions on worker participation apply to any domestic merger subsequent to a cross-border merger for a period of three years after the cross-border merger has taken effect.

11. Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies • Legal effect: • The general principle as regards the employees' rights of participation is that national laws governing the company resulting from the cross-border merger apply. • By way of exception, the principles and arrangements relating to worker participation laid down by the relevant regulation and the Directive on the European Company (SE) apply as follows: • where at least one of the merging companies has, in the six months before publication of the draft terms of the cross-border merger, an average number of employees that exceeds 500 and is operating under an employment participation system; • where the national legislation applicable to the company resulting from the cross-border merger does not provide for at least the same level of employee participation as operated in the relevant merging companies, measured by reference to the proportion of employee representatives amongst the members of the administrative or supervisory organ which covers the profit units of the company, subject to employee representation;

12. Why was there a need for cross-border mergers EU Directive? • Before the enactment of this directive, the European companies had to be subjects to their own jurisdiction, therefore, subjects to different legislations of the Member States. • They could be either legally prevented from merging with a company incorporated in another Member State or subject to strict procedures. • The harmonization of national rules on internal mergers was not sufficient to reach an agreement also on cross-border mergers due to the significant differences still existing among national rules, in particular in relation to the employees’ participation in the decision-making body of companies.

13. Why was there a need for cross-border mergers EU Directive? • Cross-border mobility of European companies, from a taxation point of view was possible already in the 90’s=> Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States; • The directive aims at reducing the cost of cross-border transactions, at guaranteeing their legal certainty and offering the option of merging to the maximum number of companies=> those who do not wish to set up an European Company(SE).

14. Why was there a need for cross-border mergers EU Directive? Case C-411/03, SEVIC Systems AG: Freedom of establishment – Articles 43 EC and 48 EC – Cross-border mergers – Refusal of registration in the national commercial register – Compatibility • The reference is made in the context of an action brought by SEVIC Systems AG (‘SEVIC’), a company established in Neuwied (Germany), against a decision of the Amtsgericht Neuwied rejecting its application for registration in the national commercial register of the merger between itself and Security Vision Concept SA (‘Security Vision’), a company established in Luxembourg, on the ground that the German law on company transformations provides only for mergers between companies established in Germany.

15. Case C-411/03, SEVIC Systems AG: Freedom of establishment – Articles 43 EC and 48 EC – Cross-border mergers – Refusal of registration in the national commercial register – Compatibility • 1.        Freedom of movement for persons – Freedom of establishment – Provisions of the Treaty – Scope – Cross-border mergers – Included (Art. 43 EC); • 2.        Freedom of movement for persons – Freedom of establishment – National provision preventing registration of cross-border mergers in the national commercial register – Restriction on the freedom of establishment – Justification – Conditions (Arts 43 EC and 48 EC); • The right of establishment covers all measures which permit or even merely facilitate access to another Member State and the pursuit of an economic activity in that State by allowing the persons concerned to participate in the economic life of the country effectively and under the same conditions as national operators.

16. Case C-411/03, SEVIC Systems AG: Freedom of establishment – Articles 43 EC and 48 EC – Cross-border mergers – Refusal of registration in the national commercial register – Compatibility • Cross-border merger operations, like other company transformation operations, respond to the needs for cooperation and consolidation between companies established in different Member States. They constitute particular methods of exercise of the freedom of establishment, important for the proper functioning of the internal market, and are therefore amongst those economic activities in respect of which Member States are required to comply with the freedom of establishment laid down by Article 43 EC. (see paras 18-19); • Articles 43 EC and 48 EC preclude registration in the national commercial register of the merger by dissolution without liquidation of one company and transfer of the whole of its assets to another company from being refused in general in a Member State where one of the two companies is established in another Member State, whereas such registration is possible, on compliance with certain conditions, where the two companies participating in the merger are both established in the territory of the first Member State.

17. Case C-411/03, SEVIC Systems AG: Freedom of establishment – Articles 43 EC and 48 EC – Cross-border mergers – Refusal of registration in the national commercial register – Compatibility • Such a difference in treatment can be permitted only if it pursues a legitimate objective compatible with the Treaty and is justified by imperative reasons in the public interest, such as protection of the interests of creditors, minority shareholders and employees, and the preservation of the effectiveness of fiscal supervision and the fairness of commercial transactions. Furthermore, application of such a difference in treatment must be appropriate for ensuring the attainment of the objectives pursued and not go beyond what is necessary to attain them (see paras 23, 28, 31, operative part);

18. Case C-411/03, SEVIC Systems AG: Freedom of establishment – Articles 43 EC and 48 EC – Cross-border mergers – Refusal of registration in the national commercial register – Compatibility Possible justification for the restriction The German and Netherlands Governments argued that internal mergers are subject to conditions more particularly designed to protect the interests of creditors, minority shareholders and employees, and to preserve the effectiveness of fiscal supervision and the fairness of commercial transactions. They submit in that respect that specific problems arise in relation to cross-border mergers and that the solution to those problems presupposes the existence of specific rules designed to protect those interests in the context of a cross-border merger that involves the application of several national legal systems in a single legal operation. Such rules, they submit, presuppose a harmonization of the legislation at the Community level.

19. Case C-411/03, SEVIC Systems AG: Freedom of establishment – Articles 43 EC and 48 EC – Cross-border mergers – Refusal of registration in the national commercial register – Compatibility • In that context, the Netherlands Government points out that the Commission of the European Communities submitted to the Community legislature on 18 November 2003 the Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital (COM(2003) 703 final), the first and second recitals of which state: • ‘(1)      The need for cooperation and consolidation between companies from different Member States and the difficulties encountered, at the legislative and administrative levels, by cross-border mergers of companies in the Community make it necessary, with a view to the completion and functioning of the single market, to lay down Community provisions to facilitate the carrying-out of cross-border mergers … • (2)–      … The above-mentioned objectives cannot be sufficiently attained by the Member States in so far they involve laying down rules with common features applicable at transnational level; owing to the scale and impact of the proposed action, they can therefore best be achieved at Community level …’

20. Case C-411/03, SEVIC Systems AG: Freedom of establishment – Articles 43 EC and 48 EC – Cross-border mergers – Refusal of registration in the national commercial register – Compatibility It should be noted in that respect that, whilst Community harmonization rules are useful for facilitating cross-border mergers, the existence of such harmonization rules cannot be made a precondition for the implementation of the freedom of establishment laid down by Articles 43 EC and 48 EC (see, to that effect, Case C‑204/90 Bachmann [1992] ECR I‑249, paragraph 11). It should nevertheless also be noted that whilst, by reason of the adoption of the Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies (OJ 1978 L 295, p. 36), harmonised rules exist in the Member States concerning internal mergers, cross-border mergers pose specific problems.

21. Case C-411/03, SEVIC Systems AG: Freedom of establishment – Articles 43 EC and 48 EC – Cross-border mergers – Refusal of registration in the national commercial register – Compatibility It is not possible to exclude the possibility that imperative reasons in the public interest such as protection of the interests of creditors, minority shareholders and employees (see Case C-208/00 Überseering [2002] ECR I-9919, paragraph 92), and the preservation of the effectiveness of fiscal supervision and the fairness of commercial transactions (see Case C-167/01 Inspire Art [2003] ECR I‑10155, paragraph 132), may, in certain circumstances and under certain conditions, justify a measure restricting the freedom of establishment. • But such a restrictive measure would also have to be appropriate for ensuring the attainment of the objectives pursued and not go beyond what is necessary to attain them.

22. Case C-411/03, SEVIC Systems AG: Freedom of establishment – Articles 43 EC and 48 EC – Cross-border mergers – Refusal of registration in the national commercial register – Compatibility • To refuse generally, in a Member State, to register in the commercial register a merger between a company established in that State and one established in another Member State has the result of preventing the realization of cross-border mergers even if the interests mentioned in paragraph 28 of this judgment are not threatened. In any event, such a rule goes beyond what is necessary to protect those interests. • Articles 43 EC and 48 EC preclude registration in the national commercial register of the merger by dissolution without liquidation of one company and transfer of the whole of its assets to another company from being refused in general in a Member State where one of the two companies is established in another Member State, whereas such registration is possible, on compliance with certain conditions, where the two companies participating in the merger are both established in the territory of the first Member State.

23. What about international mergers? • Corporate aspects of International Mergers are not governed by a single set of rules. • The implementation of an International Merger requires complying with the international private law and the applicable national law. • Should the principle of International Mergers be permitted (or not prohibited) by the applicable jurisdictions? • Technical difficulties; • There are some alternatives to International Mergers;

24. Second Directive (77/91/EEC) General remarks: minimal harmonization=>MS are allowed to choose stricter rules; • Scope: to ensure minimum equivalent protection for both shareholders and creditors of public limited liability companies in the EU; • Applies to public companies – in some MS the provisions were made applicable also to private co’s; • Member States may decide not to apply this Directive to investment companies with variable capital and to cooperatives;

25. Second Directive (77/91/EEC) General remarks: The Directive has been amended by Directive 92/101/EEC of 23 November 1992, with effect from 1 January 1994, so as to extend the rules on the acquisition of the company’s own shares to cover acquisitions by subsidiaries. Further amendments have been introduced by Directive 2006/68/EC, which was meant to reduce administrative burdens.

26. Second Directive (77/91/EEC) Main aims: -the coordination of national provisions relating to their formation and to the maintenance, increase or reduction of their capital; - ensure that public companies start off with adequate capital; - ensure that during life of company, the capital is properly maintained;

27. Second Directive (77/91/EEC) Deals with : • Formation of public companies; - minimum subscribed capital (€25000); - shares may not be issued at a price lower than nominal value; - shares at least 25% paid up ; - non cash consideration for shares must be valued by expert ;

28. Second Directive (77/91/EEC) • Maintenance of capital - rules regarding distribution of dividends; - prohibition of company to subscribe to its own shares; - rules regulating the acquisition of own shares; - financial assistance given by company for purchase of its own shares; - procedures to be followed in case of serious loss of capital; - rules on reduction of capital;

29. Second Directive (77/91/EEC) • Increase in capital; - the decision to increase the capital of the company rests with the shareholders; - shares issued for cash are to be offered on a pre-emptive basis to existing shareholders; In implementing this directive MS must ensure equal treatment of all shareholders who are in the same position.

30. Second Directive (77/91/EEC) CJEU Article 25 and 29, concerning the increase of capital has Direct effect within national legislation=>the two articles may be relied upon by individuals against the public authorities before national courts. Karella v Minister for Industry, Energy and Technology and Organismos Anasygkrotiseos Epicheiriseon AE. (Joined cases C-19/90 and C-20/90): National rules providing for the capital of a company in difficulties to be increased by administrative act - Not permissible; Governments was not permitted to direct an increase in share capital without the consent of existing shareholders (see also Siemens AG v Henry Nold, Case C-42/95);

31. Thank you kindly! anamariadobre@gmail.com