Introduction:

·       It is now two years since the Breton law No. 2005-842 of 26 July 2005 introduced into French law the European Company Statute (“ECS”) created by Regulation (EC) No. 2157/2001 and Directive 2001/86/EC of 8 October 2001. This law was supplemented by decree 2006-448 of 14 April 2006 concerning the “company law” aspect of the ECS and decree 2006-1630 of 9 November 2006 concerning the involvement of employees of the ECS.

·       The Lenoir Report of 19 March 2007[1] entitled “La SE ou Societas Europaea, pour une citoyenneté européenne de l’entreprise” (www.justice.gouv.fr), is intended to pave the way for desirable improvements in the French ECS which is subject to review in 2009, following France’s presidency of the Union in the second half of 2008. This report contains a wealth of information likely to answer the questions of companies wishing to embark on the process of creating a European company (“SE”) in France. 

·       The French SE has certain non-negligible advantages (I).  By evaluating the ECS based on the experiences of companies that have adopted it (II), the Lenoir Report addresses the SE’s shortcomings and opens the debate on possible improvements (III).

·       The establishment of an SE in France already appears as a real opportunity for French companies that have subsidiaries in other EU countries. Certain conditions must however be met to ensure that the SE’s establishment is a success (IV).

I.         The advantages of the French SE

France already offers the following key advantages to attract French or foreign companies that opt for the ECS:

·       the articles of association of the SE must choose between the two-tier system (with a supervisory board and a management board) and the one-tier system (with a board of directors only), two modes of governance which are already well known in France;

·       the registration of the SE presupposes in particular that the procedures for involving employees within the SE have been defined; the involvement of employees entails informing and consulting with employee representatives, and, as the case may be, the participation of employees on the SE’s board of directors or supervisory board; these mechanisms allow employees to play a part in the SE management (whether in an informative/consultative and/or decision-making capacity) and are also well known in France;

·       an SE that does not make public offerings benefits from a certain freedom which allows it to control its share capital; thus, its articles of association may contain clauses that restrict the free transferability of its shares as well as right of first refusal, inalienability, squeeze-out or change of control clauses, all of which are familiar to French practitioners, particularly in the articles of association of sociétés par actions simplifiées (simplified joint stock companies – SAS) or in shareholders’ agreements.

II.                    First experiences of companies set up as SEs

The Lenoir Report identifies approximately 70 SEs registered in the EU as at 1 March 2007 (2 of which are in France) and 20 or so more in the process of formation.

• Access to information on SEs that have been set up in the EU is difficult because the registration of many SEs is not published in the Official Journal of the European Communities (a formality of which the breach is not punished) and because an ECS companies register does not exist.

• The late transposition of the ECS into countries’ national law[2], the length of the operations (employer/employee negotiations of between 6 and 12 months) and the scepticism surrounding the creation of the SE may explain its limited success to date.

• Concerning the typology of the SEs set up to date:

§       The SE is a corporate form that has attracted the countries of northern Europe most, and especially Germany, which currently has 28 of the 70 registered SEs (40%). It is followed by the Netherlands (12%), Austria (10%) and Belgium (10%).

As for France, at present it only has 2 SEs, the listed company Viel et Compagnie-Finance SE, a worldwide leader in banking intermediation, and the company Innovatis et Cie, a property trader, both created by converting an existing company into an SE.

Of the SEs that are apparently in the process of formation in France, one may cite the listed reinsurance group Scor which has been conducting 3 SE formation steps since July 2006: Scor SA, a French holding company, is apparently being converted into an SE and its two operating subsidiaries, Scor Global Life (life reinsurance) and Scor Global P&C (non-life reinsurance) are to be transformed into an SE following two mergers.  Scor Global P&C is expected to become an SE by merging with its German and Italian subsidiaries. These transactions are scheduled to take place in June 2007.

§       Of the numerous business sectors represented (services, foodstuffs, IT, real estate, industrial sector, etc.), that of banking and insurance predominates.  One of the reasons for this is the fact that the conversion of subsidiaries into branches[3] in the banking sector or that of insurance makes it possible to avoid numerous controls by national supervisory bodies, since the supervision of a bank or of an insurance company which only has branches is the responsibility of a sole supervisory body: that of the State where the bank or insurance company has its registered office.

§       The size of the SEs varies, ranging from the large (such as the insurer Allianz SE) to the small, such as shell corporations.  Most SEs have few or no employees and 15% of existing SEs are “standby” entities designed to offer entrepreneurs wishing to benefit from the advantages of the SE the possibility of immediately using a pre-established entity as soon as the opportunity will arise.

§       Merger and transformation are the preferred ways of setting up an SE (as opposed to the creation of a subsidiary SE or of a holding SE for example).

·       Considerations that are known to have led companies to opt for the ECS include:

§       the image attached to the “European Label”,

§       their greater efficiency on the EU market thanks to the possibility of cross-border consolidation pursuant to a simplified regime (by transfer of registered office or by merger),

§       the simplification of structures (thus making it possible to cut back costs and reduce the number of applicable corporate governance rules, the centralisation of decision-making power and greater legal certainly),

§       the simplification of group organisation thanks to the possibility of setting up a holding SE subject to common rules (irrespective of the nationality of the participating companies) and/or the possibility of setting up a subsidiary SE (a regional holding company for instance) that may itself be wholly owned by another SE.

III.       Certain improvements to the ECS that are proposed by the Lenoir Report

The main proposed improvements to EC and French legislation[4] in order to enhance the ECS’ attractiveness are the following:

·       to permit any joint stock company (in France, not only SAs but also SARLs or SASs) to set up an SE:

§       in this way, any joint stock company, irrespective of its form, could be converted into an SE if it has had a subsidiary in another Member State for at least one year (instead of two); it should also be able to participate in the setting up of an SE by way of merger, the setting up of a holding SE or of a subsidiary SE if at least two of the companies concerned are subject to the law of two different Member States; a natural person should also be able to participate in the formation of an SE;

§       any joint stock company that has had a subsidiary in another Member State for more than one year should be able to convert any of its subsidiaries into a holding SE or subsidiary SE, without the additional requirement of having  the subsidiary thus created possessing itself a sub-subsidiary in another Member State;

• to extend the definition of a merger to other merger-like or consolidation schemes such as a spin-off/ split-up or the partial contribution of assets in France;

• to permit an SE to merge with any other company (SE or joint stock company) of another Member State;

• to permit companies that are participating in a merger to chose a single legislative system applicable to the transaction provided that they choose the national system that is the most favourable to the protection of shareholders and creditors;

• to allow an SE to have its registered office and its central administration in two different Member States (the “registered office theory”);

• to lower the minimum capital requirement, currently €120,000, for SEs that do not make public offerings and to permit these same companies to define in their articles of association their management structure and the status of their managers (as with SASs in France);

• to create, in the interests of greater transparency and to protect third parties’ rights, a European companies register that would ultimately be used for all companies, and not solely for SEs (EEIGs, SCEs, SEs, EPCs[5], etc.);

• to establish a common consolidated corporate tax basis consisting in the determination of such basis with a mechanism for allocating that basis to the various countries concerned and applying the national taxation rate to each portion so allocated ;

• to abolish “exit taxes”;

• to give companies wishing to set up an SE the possibility of initiating with the national tax administrations concerned a preliminary dialogue on the future possible tax consequences of such a decision;

• to modify French regulations in order to resolve certain matters of interest primarily to law practitioners: to bring French law into compliance with Community legislation on certain points[6], to better define the role entrusted to the Public Prosecutor (who has the right to object, for reasons of public policy, to the registration in France of an SE being set up by way of a merger or to the transfer of the seat of a French SE to another Member State), to specify the competent court for remedies against such an objection, to specify the legal means of publicity when an SE is set up by way of merger, etc.

Despite its current advantages, France should make the statute of the French SE even more attractive in coming years in order to attract more SEs to its territory. 

IV.       Guarantees of success:

From the point of view of practitioners, the following minimum conditions should be met in order to guarantee the successful formation of an SE by a group of companies: 

·       the SE formation should be planned a long time in advance because the negotiations on the involvement of employees in the SE must be completed prior to the actual SE’s formation.  The time factor is also very important because certain practical difficulties may arise in the case of European groups having complex structures and more than one subsidiary in different Member States, which will require carrying out restructuring stages prior or complementary to the formation of the SE;

·       the SE formation also requires the assistance of competent and creative professionals (lawyers, notaries, HR departments) that can provide their clients with an integrated, multidisciplinary and cross-border team capable of dealing with the many cultural and legal questions of tax law, labour law or company law posed by the SE’s formation, in as many different legal systems as the jurisdictions concerned by virtue of the nationality of each of the participating legal entities;

·       the tax consequences of the formation of the SE, whether  positive or negative, must be carefully analysed and then managed (or neutralised);

·       the SE formation may be subject to an authorisation or prior notification procedure under a country’s foreign investment regulations; all the more so since companies located outside the EU will also be able to participate in the control of an SE by repurchasing holdings in an existing SE. This point is especially important in “sensitive” sectors relating to national interest (military, explosives, gaming and casinos for example).

Paris, 30 April 2007

Roland Montfort / Véronique Deau