Simplified Structure

At the end of June, the European Commission (EC) released its proposal for the creation of a new pan-European corporate legal entity for small and medium-sized business (SME) to be known as the European Private Co., or Societas Privata Europaea (SPE). The EC's previous attempt to create a European corporate brand, the Societas Europaea (SE), for public companies has hardly been a resounding success. In the four years since the SE's creation, only about 100 companies have taken advantage of the opportunity to register as a single European
entity, a status that requires each member state to treat the SE as if it were incorporated in the country where it had its registered office.

"The SE was intended to appeal to large corporations that wanted to present European credentials in their branding, and those engaged in cross-border joint ventures in the EU," says Martin Mendelssohn, a partner at CMS Cameron McKenna in London. "But there has been no headlong rush to use the SE, that's for sure."

The outlook for the newest corporate creature, however, seems a little brighter.

"It was business interests themselves who wanted us to design a common structure for SMEs that would allow them to operate seamlessly across European borders, and our proposal is the fruit of extensive consultations with these interests," says Ludmilla Zalik, a policy desk officer with the corporate governance and financial crime unit of the EC's Internal Market directorate.

The EC listened well. The result is an SPE concept that is significantly different--and from all appearances, decidedly more workable--than the ill-fated SE.


Simple Setup
The SPE is not limited to SMEs: Any private company whose shares are not publicly traded is eligible for registration.

The key to the SPE concept is a single registration. No longer will SMEs that want to do business in several member states have to set up subsidiaries in each country they wish to operate in--a time-consuming and expensive process.

A single EU law will govern SPE formation and creditor and minority shareholder protection, regardless of the member state in which the company is actually formed. SPEs, however, will remain subject to the national labor, tax, accounting and insolvency laws of each country in which they operate.

"But the important point is that SPEs will have uniform rules on core company law issues that will apply wherever they operate in the EU," Zalik says.

The EC estimates that registering as an SPE could cut corporate set-up costs by as much as $15,000 and reduce annual operating costs by some $12,000. Member states will be expected to establish one-stop shops to facilitate start-up procedures. According to the EC, starting up an SPE should take less than a week, and obtaining licenses and permits no more than a month.

There is virtually no minimum capital requirement for an SPE start-up, which will be welcome relief for entrepreneurial ventures faced with thresholds of as much as $50,000 in some European countries, such as Austria. And shareholders will have a virtual free hand in defining their share, management and decision-making structures in the SPE's articles of association.

"Americans will recognize important similarities with the regime that apply in Delaware," says Paolo Santella, a researcher at the Bank of Italy.

Indeed, it is the very flexibility of the SPE that is behind a widely held belief that its usefulness will easily outstrip the uptake the SE has seen.


Major Obstacle
In concept, the SE is similar to the SPE in that it allows a business incorporated in one member state to amalgamate its various subsidiaries and register the enterprise as a single European entity. But the SPE is far more accessible than the SE, which can only be used by public companies having a minimum capital of $180,000. SEs also are only available to pre-existing companies (not start-ups) that wish to obtain EU-wide status, and its shareholders must come from more than one member state.

The law and jurisdictional rules governing SEs also are considerably more complex. Member states retain jurisdiction to determine many core corporate governance issues and capital requirements, much as they do over individual subsidiaries of multinational companies.

But perhaps the biggest obstacle to SE acceptance is the requirement that employees participate in the SE's structuring. Because the domestic employment laws affecting an SE's operations could differ among the subsidiaries amalgamated to form the SE, employees are given a say in the impact the formation of the SE would have on the right of employees to share in company decisions relating to issues such as job security and compensation. If management and company cannot agree on the employment laws that would apply to the SE, the law requires the SE to adopt, as a minimum, the highest level of employee participation that exists in any of the countries from which the SE was created.

If an American parent with operations in both Germany and the UK, for example, was trying to establish an SE but couldn't reach an agreement with its workers about the employee participation rules, the German regime would apply, bringing the British employees under the more onerous German laws.

"It was difficult to see why anyone would go the SE route," Santella says. "By contrast, while employee representation does exist in the SPE, the provisions are far less onerous for employers because their rights are left to the national law of the member state in which the SPE is registered--which is the choice of the employer."

The final fate of the SPE proposal, however, is not yet sealed.

Logical Solution
To be sure, French President Nicolas Sarkozy, whose country currently holds the rotating EU presidency, lists the SPE proposal as a priority. The Small Business Act, which contains the SPE proposals, requires unanimous adoption by the European Council and passage by the European Parliament before the EC can implement the concept.

Negotiations at the Council started in July and were continuing at press time. Charlie McCreevy, the EC's Internal Market commissioner, has stated publicly that he hopes the measure will become law by May 2009. For his part, Mendelssohn believes the SPE or some version of it is the wave of the future.

"Investors will soon recognize the logic of the SPE," he says. "At first, there may be slow uptake because of vested national interests, but that should fall away over about five years. Ten years hence, I expect the SPE to be the main form of private company in Europe."

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