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New European Regs Ease Company Registrations

When GM Corp. recently announced it intended to cut $635 million in costs from its European operations by slashing jobs and closing plants, the workers' council at the company's Opel operations in Germany had a better idea.

The council argued the company could achieve its goals by merging its

100 European subsidiaries into a single SE (Societas Europaea), the new corporate creature created by the European Company Statute (ECS). The statute, which came into force in October 2004, allows a business incorporated in one member state to register as a single European entity with an SE designation.

Armed with estimates from the European Commission suggesting that SEs could save European businesses $40 billion annually, the Opel council maintained that an SE could save GM money by ending the duplication of work in human resources, finance, marketing and product planning. GM is currently considering the option.

EU officials also believe SEs will allow companies to better exploit cross-border opportunities and thereby boost their competitiveness.

"The SE will appeal to large corporations that want to present European credentials in their branding, and those engaged in cross-border joint ventures in the European Union," says Martin Mendelssohn, a partner at CMS Cameron McKenna in London.

Despite those advantages, few companies are rushing to form SEs. In fact, at press time, only 12 had shown any interest. "There's no headlong rush to use the SE, that's for sure," Mendelssohn acknowledges.

The primary barriers appear to be the patchy nature of the statute and the statutory requirements for worker involvement in the formation of an SE. "It's a tentative environment where both EU law and domestic laws haven't caught up with the SE concept," Mendelssohn says.

Home Court Advantage

In its final form, ECS requires each member state to treat an SE as if it were incorporated in the country where it has its registered office, known as the "home state." But this is a great deal more complex than it sounds.

In fact, the law allows the home states to determine many of the rules, including those relating to insolvency, directors duties, capital and capital maintenance, and the preparation, audit and publication of financial statements. This means that SEs will be subject to different company and tax laws depending on the state of registration--much like individual subsidiaries in different countries are subject to different laws.

The complexity of the jurisdictional rules governing SEs compounds the problem.

"The legal regime that applies to SEs is very confusing," says Steven Turnbull, a partner at Linklaters' London office. "Business demands certainty and will be reluctant to submit to a structure that is so difficult to understand."

The absence of EU-wide tax rules for SEs makes matters worse. Domestic tax rules will apply wherever an SE has permanent establishments.

"The silence of the European Company Statute on taxation issues creates double taxation problems with cross-border mergers and also with exit taxes," says Luca Enriques, a professor of business law at the University of Bologna.

In other words, there's no clear fiscal advantage to an SE.

"Conforming tax law has not caught up with this new vehicle, so people won't be forming SEs in a hurry," Mendelssohn says.

Still, many observers believe the major obstacle to the use of SEs lies not in the uncertainty of the laws but in the statute's requirement that employees participate in the structuring of the SE.

Employee Power

A registered SE may be subject to different employment laws than those that applied to each subsidiary, so the ECS requires a company to establish a "special negotiating body" of management and employees before creating an SE.

The purpose of this body is to give employees voice in a decision that will impact their job security, compensation, seniority and working conditions. If management and workers cannot agree on which country's employment laws will apply to the SE, the company must adopt laws of the country that offers the greatest rights to employees. So, if an American parent with operations in both Germany and the United Kingdom, for example, wanted to become an SE but couldn't reach an agreement with its workers about the employee participation rules, the company would have to adopt the German laws because they are the most favorable to employees.

"Why would anyone go to the highest common denominator when the British company could take over the German company and leave the UK employees under British law?" Turnbull asks.

In addition, employees in some European companies aren't as active in corporate decision-making as others.

"The greatest skepticism about the SE comes from the United Kingdom where employee participation in corporate decision-making is not high on the agenda, whereas countries such as Germany and France display much greater enthusiasm for such involvement," Turnbull says.

Still, GM's European management has responded to SE proposals from unions by discussing restructuring with a "voluntary economic committee" comprising worker representatives from GM's European subsidiaries--Opel, Swedish car maker Saab, and the UK's Vauxhall.

This suggests that there may indeed be measurable advantages in the SE concept.

Shopping Around

"Most importantly, becoming a single entity may be a real administrative and operational advantage for some companies," Mendelssohn says. That's why the companies that are considering SEs [see "The Pioneers"] are organizations with widespread European operations.

In addition, companies looking to establish a pan-European identity can gain a marketing foothold by forming an SE. Rather than marketing a collection of brands under separate domestic umbrellas, multinationals can now establish a single brand with pan-European credentials through an SE.

Another advantage is that SEs can "forum-shop" for a home state and change that home state in response to changing market conditions and regulatory environments. For example, an organization forming an SE for a cross-border venture can register in the jurisdiction with the laws most amenable to the particular venture. So long as the SE is registered and has its "administrative headquarters" in the home state, the joint venture need not even actually do business there.

If the laws of the home state change to the SE's disadvantage, the SE can change its home state with relatively little fuss and expense. Currently, companies in many European jurisdictions that wish to transfer their registered offices between states must undertake a costly and time-consuming liquidation process.

"There are and will be enthusiasts who will establish the SE as something that is successful and workable," Turnbull says. "If just two or three high profile companies enjoy a successful practical experience with the concept, it could very well take off."

But first the member states will have to do their part.

Getting On Board

Despite the October 2004 deadline, only six of the 25 member states--Belgium, Austria, Denmark, Sweden, Finland and Iceland--had implemented the ECS at press time. But all member states are obliged to do so, and Turnbull doesn't see the delay as a long-term problem.

"It's not unusual for countries to be late in passing legislation implementing EU measures," he says. "In this case, it's certainly the intention of all countries to implement the ECS. The delay is not for lack of commitment to the European cause, but rather a matter of finding time on crowded legislative agendas."

Indeed, the most powerful economic players in the European Union--the United Kingdom, Germany and France--are well on their way to implementation.

The European Commission's recent announcement that it will eliminate double taxation of SEs involved in cross-border mergers may induce countries to speed up those efforts.

Overall, the dominoes could well fall into place. And in that case, the most important question may be one posed by Mendelssohn: "Who will be brave enough to create the first SE while the environment for them remains so insecure?"

Contributor

Julius Melnitzer

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