Does the European Company Prevent the ‘Delaware Effect’?

• Published date: 01 November 2005
• Author: Erik P. M. Vermeulen,Joseph A. McCahery
• Date: 01 November 2005
• DOI: http://doi.org/10.1111/j.1468-0386.2005.00288.x

Does the European Company Prevent the

‘Delaware Effect’?

Joseph A. McCahery* and Erik P. M. Vermeulen**

Abstract: This article analyses the history of EU company law and locates a stable ‘non-

competitive equilibrium’. This equilibrium follows from Member States that founded the

EU unwilling to give up their lawmaking authority regarding company law issues. From

the outset, Member States were determined to prevent the ‘Delaware effect’. Since then,

stability has ruled. The agenda-setting in EU company law has changed little during the

existence of the EU. Operative incentives, market structure and regulatory results have

been more constant than dynamic, even as the recent enactment of the European Company

has triggered discussion about competitive lawmaking in Europe.

I Introduction

For well over four decades, the European Commission (EC) has been locked in a battle

with Member States over the introduction of a new legal form, the European Company

(Societas Europaea, SE). Although the EC initially assumed that this business form

would provide a complete set of uniform rules without reference to national law, the

EC eventually embraced a significantly more flexible approach in respect of national

law in order to reach agreement on default provisions for employee involvement and

the choice of board structure. Indeed, in October 2001 the European Council and Par-

liament approved a Regulation that has a limited number of provisions,which deal with

the formation of a European Company,its governance structure, employee involvement

and its real seat, and approved a Directive that regulates employee involvement. The

initial sceptical reaction to the passage of the new legislation is entirely consistent with

the repeated and troublesome attempts to secure an agreement on the new company

form. Thus, since the adoption of the Regulation, critics charge that the legislation falls

short of what is needed for entrepreneurs. Some find, moreover, that the absence of

uniform rules will bring few benefits in comparison to national business forms. Impor-

tantly, cumbersome provisions are likely to deter managers from pursuing cross-border

European Law Journal, Vol.11, No. 6, November 2005, pp. 785–801.

© 2005 The Authors

Journal compilation © 2005 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK

and 350 Main Street, Malden, MA 02148, USA

*Professor of Corporate Governance and Business Entrepreneurship, University of Amsterdam Faculty

of Economics and Econometrics, and Professor of International Business Law, Tilburg University

Faculty of Law.

** Professor of Law and Management, Tilburg University Faculty of Law, Fellow Center for Company Law

and Tilburg Law and Economics Center, and Legal Counsel Philips International B.V.

mergers unless they produce significantly large countervailing benefits.1Lastly,

although the adoption of the employee participation provisions offer employees with

protection from opportunistic transfers, these arrangements—which are complex and

time-consuming—provide businesses with little incentive to deviate from the status quo

of national company law forms. These observations raise questions whether the Euro-

pean Company Statue is a sufficiently attractive tool for larger firms to engage in forum

shopping activities.

It is therefore surprising that many company law scholars view the new Regulation

with a mixture of expectation and scepticism, arguing that, in the context of agreed

employee involvement, the new company law form could stimulate regulatory compe-

tition.2A common view attempts to explain that the ultimate appeal of the new

company law vehicle, compared to other national-level company law forms, is a result,

if anything, to absence of legal rules on shares, financing and legal capital. Proponents

argue that the renvoi technique, used by the European Company Statute, creates the

possibility for some firms to choose their place of central administration according to

the law of the Member State that offers the most attractive benefits.3

In this article, we suggest that the European Company Statute could very well

rekindle the interest in and discussions on competitive lawmaking within the EU. To

the extent that the Regulation allows for reincorporation without liquidation of the old

firm, firms may have incentives to migrate to Member States that they prefer. At the

same time, the Statute’s incompleteness and the significant differences in the national

legislations may, we recognise,give rise to firms engaging in regulatory arbitrage.4There

are a number of reasons, however, to believe that the legislation is unlikely to pose a

competitive threat to Member States. First, as tax scholars have noted, the Statute does

not contain tax provisions, leaving it up to national laws, international tax treaties and

other European regulation to sort out the problem of taxation.5Second, the European

Company will be taxed, in absence of a consolidated common tax based with the pos-

sibility of offsetting losses in different Member States, in the Member State where its

head office is located on the basis of its worldwide taxation, leading in the cases of

branches to double taxation. Third, even if lawmakers eventually eliminate the tax

obstacles to the use of the European Company Statute, it is unlikely, because of legal

uncertainty, that firms will move from existing business statutes which continue to give

them significant cost advantages. In addition to the arguments given above, we believe

that the some Member States, particularly Germany, have substantial incentives to dis-

courage other governments from agreeing to EU-legal tax rules that would encourage

European Law Journal Volume 11

786 © 2005 The Authors

Journal compilation © Blackwell Publishing Ltd. 2005

1See S. Lombardo and P. Pasotti, ‘The Societas Europaea: A Network Economic Approach’, (2004) 1 Euro-

pean Company and Financial Law Review 169 (summarising criticisms).

2See J.Rickford, The European Company, Developing a Community Law of Corporations (Intersentia, 2003),

at 140–141 (assessing the competitive effects of the European Company Statute).

3See, e.g.,L. Enriques, ‘Silence is Golden: The European Company Statute as a Catalyst for Company Law

Arbitrage’, (2004) 77 Journal of Corporate Law Studies 77–95; J.Ar mour, ‘Who Should Make Corporate

Law? EU Legislation versus Regulatory Competition’, (forthcoming) Current Legal Problems.

4Regulatory arbitrage is the choice by firms to locate investment or other economic activity based on the

regulatory environment of jurisdictions. See S.Woolcock, ‘Competition among Rules in the Single Euro-

pean Market’, in W. W. Bratton, J.A. McCahery, S. Picciotto and C. Scott (eds), International Regulatory

Competition and Coordination, Perspectives on Economic Regulation in Europe and the United States

(Clarendon Press, 1996), at 298; cf. Enriques, op. cit. note 3 supra.

5See P.Conci, ‘The Tax Treatment of the Creation of a SE’, (2004) 44 European Taxation 15.