INTRODUCTION :

 

The European Company Statute, adopted by EU Member States on 8 October 2001 and effective, at least in theory, since 8 October 2004, has created a legal framework for a new kind of corporate entity, the European Company or “Societas Europaea” (“SE”). This Statute consists of a Regulation[1] setting out the core company law framework and an accompanying Directive[2] concerning employee involvement in the SE (i.e., information sharing and consultation process). However, the Regulation does not cover other areas of law such as taxation, competition, intellectual property or insolvency[3].

 

The main objective of the SE is to allow certain companies of different Member States to combine their potential and cooperate with a minimum of legal and psychological difficulties and tax problems. Ultimately, this would permit the creation and management of companies with a European dimension, free from the obstacles arising from the disparity of the limited territorial application of national company law[4] since they would, in principle, be operating under a single set of rules. 

 

An SE is governed in principle by the national law applicable to public-limited liability companies in the Member State in which the SE establishes its registered office.

 

As a caveat to this simplified presentation, it must be stressed that the various going concerns of an SE located in a Member State other than the Member State in which the SE is incorporated, shall be considered as “branches”, that is, a well-known status which shall be subject to various local and international regulations applicable to this type of businesses deprived of legal personality (including being treated, for tax purposes, as “permanent establishment” under applicable bilateral double tax treaties). The simplification is thus not total.

 

An SE may be listed (subject to complying with all specific provisions applicable to listed companies provided for in the Regulation and in force in the national law concerned) or remain private. 

 

Undoubtedly, the SE shall create a certain competition among EU Member States by inducing them to amend their legislation in order to better accommodate the specific needs of a pan-European legal entity. This credo must be somewhat nuanced in light of the forum shopping limitation embodied in the Regulation itself, as detailed below.

 

France has added the Directive to its national laws by Law No. 2005-842 dated 26 July 2005, referred to as the “Loi Breton,” in the interest of economic modernization and confidence. The long-awaited implementing Decree - which was a prerequisite to any incorporation of SE in France - has been enacted recently (Decree No. 2006-448 of 14 April 2006). Consequently, French jurisdiction is now fully operational in this respect. 

 

According to our information gathered from EU data bases, to date:

 

- 22 out of 28 Member States have implemented the Directive (including France): Denmark, Sweden, Hungary, Iceland, Austria, Finland, Slovak Republic, United Kingdom, Belgium, Malta, Czech Republic, Germany, Cyprus, Estonia, The Netherlands, Norway, Poland, Latvia, Lithuania, France, Italy, and Portugal. Have still not implemented it: Greece, Spain, Ireland, Luxembourg, Slovenia and Liechtenstein. The implementation status in all EU Member States is obviously critical since without it the participation of a legal entity domiciled in a non-implementing Member State in the formation of an SE would in practice be impossible;

 

- no SE has been incorporated in France, unlike in Germany, Sweden, The Netherlands and Belgium, the latter Member States thus appearing as quite ahead in adapting their domestic legislation to allow the formation of SEs in their territory. 

 

Past polls from the European Commission indicated that approximately 25% of companies domiciled in the EU would become SE, particularly those of certain industry sectors such as banks, chemicals, energy producers, transportation, telecoms, automobile manufacturers, etc. Observers of various Members States have predicted that at some point the SE would ultimately have the preference of small and medium-size companies. Public announcement of future formation of SEs has been reserved for a long time for large listed companies (such as Suez in France).

 

The Regulation applies to all SE’s matters covered by its provisions. In the case of other company or labor law matters not covered by the Regulation, the following provisions apply to SE incorporated in France, with the following order of priority:

 

(i)        new provisions of French Commerce Code and French Labor Code and implementing decree;

(ii)       provisions applicable to French “sociétés anonymes”; and

(iii)      provisions contained in the SE’s Articles of Association.

 

I.         GENERAL CHARACTERISTICS

 

1.         Corporate:

 

Form the outset, it should be noted that no SE may be registered in France unless one of the following situations applies in respect of the employees’ involvement in the life of the SE:

 

- an agreement or arrangement for employee information and consultation has been concluded;

- the period for negotiations (i.e., 6 months) of such agreement or arrangement has expired;  or

- the “special negotiation group” (further mentioned below) in charge of completing these agreement or arrangement decides either not to take up the negotiations or to terminate negotiations that had begun.

 

Under French law, only companies having their registered and head offices in a Member State may participate in the formation of an SE. By contrast, the Regulation allows for a larger freedom of choice: as long as a company has its registered office in and economic ties with, a EU Member State, it may participate in the formation of an SE; however, this option has not been retained by the French legislation.

 

Since both the registered office and the head office of an SE must be located within the same Member State, forum-shopping alternatives appear limited.

 

Under the Regulation and French law, subject to one exception, companies participating to the formation of an SE must be themselves incorporated under either the form of a “société anomyme” (“SA”) or “société à responsabilité limitée” (“SARL”).

 

There are four possible methods for forming an SE.

 

1.         Merger of SAs (not SARL), provided that at least two of them have registered offices and head offices in two different Member States.

 

The intervention of a Notary Public (“notaire”) in France shall be critical under this formation method. Indeed, it will be up to him to ensure the legality of the procedure followed by the participating entities for the completion of the merger and the formation of the SE in the Member State for which he has competence. In France[5], each participating entity will have to submit a certificate together with the merger treaty to the Notary, who will then be in charge of making sure that each participating company has actually approved the draft merger treaty pursuant to the same terms and conditions and that the modalities for the information and consultation of employees have been decided. It is fair to assume that Notary Public offices are getting organized rapidly in order to be in a position to handle these new developments, as the case may be, by establishing close business relationships with Notaries established in other EU Member States or with other practitioners such as lawyers in their own jurisdiction.

 

2.         Formation of a “holding SE” between SA or SARL, provided that at least two of them have registered and head offices in two different Member States, or have had a subsidiary for the past two years governed by the laws of a different Member State.

 

In practice, this means that the respective shareholders of each participating companies shall, at the invitation of their management bodies, agree to contribute their shares at the time of formation of the SE and receive in exchange shares of the SE, provided that the SE would hold upon incorporation more than 50% of the permanent voting rights of each participating company. The participating companies will survive to the formation of the SE holding; as in the case of the formation of a “subsidiary SE” (see under 3 below) the formation of a “holding SE” will add a legal structure whereas under a merger scenario (under 1 above) the number of legal entities is reduced.

 

3.         Formation of a “subsidiary SE” through subscription of its shares by several companies (of whatever type) or other legal entities (public or private), provided that at least two of them have registered and head offices in two different Member States or have had a subsidiary for the past two years governed by the laws of another Member State;

 

In France, neither the “Loi Breton” nor the implementing decree do specify any additional condition for this formation method. Therefore it is fair to assume, as the majority of French Commentary does, that a French “société par actions simplifiée” (or SAS), being neither an SA nor an SARL, shall be entitled to form a subsidiary SE, whereas this type of company format may not be involved in any other formation method, except, subject to its prior conversion into an SA or SARL format. This additional condition is certainly unfortunate when considering that numerous French subsidiaries of foreign-based parent companies have been formed or converted into SAS before the implementation of the Regulation.

 

4.         Conversion of an existing SA into an SE, provided that the former has had a subsidiary for the past two years in another Member State (this creation mode will be neutral on the resulting number of legal entities).

 

Relevant national laws shall apply in relation to the protection of creditors’, bondholders’ and other securities holders’ interests (i.e., through adequate filing, publication or opposition right processes). This protection is embodied in France in the Commerce Code as well as in the implementing decree. Clerk’s offices of the local Commercial Courts will need to acquire rapidly the necessary competences in order to handle the various SE formation files soon to be submitted to them.

 

If the formation methods are plural, any formation of an SE is submitted to a common set of legal rules. These rules can be summarized as follows: 

 

The SE enjoys legal personality. Its share capital shall be not less than € 120,000 and shall be divided into shares, provided no shareholder shall be liable for more than the amount for which he has subscribed (i.e., limited liability company). Each SE shall be registered in the Member State in which it has its registered office on the same register as companies established under national law. The registration shall be published in the EU’s Official Journal.

 

One of the main advantages of forming an SE in France, is the great flexibility offered by French law, provided that the French SE is not listed. Indeed, the French SE shall enjoy a high degree of contractual flexibility quite identical to that granted to existing SAS under French law. In particular, the management structure of a French SE shall be very flexible. The SE shall have: (i) a general shareholders’ meeting; and (ii) either a Board of Directors (one-tier management structure), or the combination of a Supervisory Board and an Executive Board (two-tier management structure), depending on the form adopted in its Articles of Association.

 

Like in Germany, the experience gained by the French practice from the presence of these two possible types of management structures in existing French SA can be viewed as an asset for forming an SE in France. 

 

Further to new provisions of the French Commerce Code (L. 229-11 to L. 229-15), the Articles of Association of an SE not making any public offering may include clauses to the effect of restricting the free negotiability of SE’s shares, such as inalienability (for up to 10 years), exclusion, or change of control provisions. These provisions are designed to allow an SE incorporated in France to operate, to a certain extent, as a “closed” company.  Any transfer of shares which would not comply with such provisions shall be null and void, unless approved by unanimous decision of the shareholders not participating in the transaction. Should the purchase price of the shares not be provided by the SE’s Articles of Association, this exit price shall be fixed by an expert under conditions of article 1843-4 of the French Civil Code. If the shares have been purchased by the SE itself, the latter may sell within a six-month period or cancel them. All these contractual provisions may be modified unanimous vote of the SE’ shareholders.

 

2.         Labour:

 

The Directive is designed to ensure that employees have a right of involvement in issues and decisions affecting the life of their SE. Other social and labour questions, in particular the right of employees to information and consultation, are governed by the national provisions, to a large extent of a mandatory nature, under the same conditions to public limited liability companies domiciled in the Member State where the SE is incorporated[6].

 

Further to the principles contained in the Directive, French law provides for the obligation to set up a “special negotiation group” in connection with the preparation of the SE formation. This requirement applies to each French company taking part in the formation process of an SE.

 

The special negotiation group should be set up as soon as possible after publication of the formation (apparently, no mechanism is provided for towards the setting-up of this group at an earlier stage). This group shall define the information and consultation process to be followed on employment issues, as well as the level at which the employees’ representatives shall intervene in the SE’s management. The group may also decide to apply the related legal provisions of the Member States where the SE has employees.

 

Should no agreement be concluded within the special negotiation group, a European Company Committee (“Comité de la Société Européenne") shall then be set up.

 

The second advantage which can be seen in the formation of an SE in France, is the mandatory involvement of employees’ representatives in the SE’s management, which already exists at the level of certain corporate bodies of French companies (mainly the management body, be it the Board of Directors, the Management Board or even the sole-member presidentship, depending on the French company format concerned, or the shareholders’ meeting), as soon as the set up of a works council (“Comité d’Entreprise”) is compulsory. This has been in practice for many years already in France. In France, this involvement of employees’ representatives, takes place via delegates appointed by the works council who have a right to attend in person any meeting of the management body and/or the shareholders’ meeting. In the SE, the procedure of designation of the delegates is ruled by specific provisions depending on the way the SE is formed.

 

Said involvement in an SE should clearly be differentiated from certain obligation, applicable in certain Member States, to appoint a quota of employees as members of the company’s management body (e.g., as member of the Board of Directors). However, depending on the applicable law, the SE may be subject to mandatory participation of employees’ representatives at the management body level, but this feature does not derive from the Directive itself. 

 

Once in place, certain economical and financial information on the SE must be communicated to its European Company Committee.

 

3.         Tax:

 

In the absence of specific tax provision provided for by the Regulation[7], the SE is subject to the corporate tax laws of the Member State in which it shall be incorporated. The SE’s branches located in other Member States (as well as in other countries) shall be most likely treated as “permanent establishments” under the applicable bilateral double-tax treaties. Repatriation of profits under the parent-subsidiary regime will no longer be possible. 

 

The formation stage of an SE will need thorough tax advice in particular in respect of possible capital gains to be incurred upon contributions made to the SE or transfer of tax losses. Applicable exemptions or other beneficial schemes exiting under domestic law (as the case may be, subject to a prior approval (“agreement”) from the French tax administration) might not be applicable.

 

The transfer of the registered office of an SE from another EU Member State to France or from France to another EU Member State should not trigger adverse tax consequences, except possibly in respect of certain hidden capital gains.

 

II.        PRACTICAL CONSIDERATIONS

 

1.         A valuable tool to simplify group structures:

 

The SE Statute gives companies operating in more than one Member State the opportunity to operate throughout the EU as a single company with a single set of rules, rather than through subsidiaries incorporated under different national laws. In addition, an SE may transfer its registered office from one Member State to another without winding-up or re-incorporating, thereby maintaining its legal personality.

 

However, the actual benefits expected from such a common structure (i.e., economy of scale versus implementation costs) will likely be enjoyed after a certain period of time only. The length of that period will depend mainly on:

 

(i) the correctness of the assumptions and objectives that have been retained at the time of taking the decision to form an SE;

(ii) the choice, when applicable, of the group perimeter that shall be governed by the new SE; and

(iii) the right anticipation and control of all associated costs.

 

Moreover, as indicated above, the various going concerns of an SE located in counties other than the Member State in which the SE is incorporated, shall be considered as branches and dealt with accordingly.

 

2.         Strict time management:

 

The formation of an SE must be planned very early on.

 

This is mainly due to the fact that successful negotiation towards employee involvement in the SE must be completed prior to its final formation.

 

As already indicated above, no SE may be registered unless an agreement on arrangement for employee involvement has been reached.

 

Timing is also critical due to the fact that, for groups of companies with numerous entities in various EU or non-EU Member States, the SE structure shall not suffice to respond to the group management’s desire to simplify the organizational chart: additional, prior, complementary or post-transaction steps will have to be envisaged in order to achieve more than just converting an SA or merging two SAs, into an SE. Certain practical difficulties will emerge in the presence of European groups having complex pyramidal or rake structures with more than one subsidiary in different Member States: one could imagine in that case structuring the group in various steps in order for it, finally, to be composed of one SE in each Member State (each having different branches in the same jurisdiction), all of them being controlled, ultimately, by a "parent SE" located at the European headquarter.

 

3.         The right team of professional advisers:

 

First, like any other group consolidation or restructuring project, the formation of an SE shall trigger numerous interrelated tax, labour and company law issues. Second, the SE statute requires the intervention of Notary Public and statutory auditors, ideally working in close cooperation with lawyers. Third, cross-border by essence, the project will also require the intervention of local advisers in each country where participating companies to a new SE are incorporated.

 

From the practitioners’ point of view, it will be of utmost importance to offer to their clients an integrated, multi-disciplinary and cross-border team, tailored-made for each client's project and capable of handling all or almost all of the legal issues that shall be entailed by a project of such nature.

 

4.         Possible side effects:

 

Possible side effects (some of which may be seen as adverse) shall need to be measured as much and as best as possible; in particular, all taxes which could be due at the time of the formation of an SE (see under I, 3 above) must be taken into account, whereas said taxes would not have been due (or only due at a later stage) without such a formation. One could also think of certain corporate governance issues, such as the absence of control at the level of each foreign branches by accountable local management and statutory auditors (unlike at the time where said branches were operated through legal entities) thereby triggering the obligation to staff adequately the general administration and management services of the SE headquarter to accomplish the same tasks from that central location across Europe.

 

 

 

 

5.         Foreign investments:

 

France, like certain other EU Member States, has adopted foreign investment regulations, the purpose of which is either to subject foreign investments to prior authorization process (for example, in the case of an investment in sensitive industry sectors such as military, toxic products, dual-technologies items, armaments, etc.) or to a prior and/or post information process. Since these regulations are also applicable to a certain extent to investments from other EU Member States, it remains to be seen how they will apply in practice to the various SE formation scenarii or to any subsequent evolution of the SE’s capital. This is even more delicate since companies located in non-EU Member States will also be able to participate in the control of an SE, for example through the purchase of shareholding in an existing SE, or through the formation of an SE by two subsidiaries of a US parent company already incorporated in two different Member States. In that respect, the SE can be viewed as a tool to penetrate the EU market by group of companies domiciled outside of it. 

 

6.         International bankruptcy:

 

As we have seen above, one of the constraints of the SE, or alternatively one of the limits to forum- shopping temptations, at the time of the SE formation, comes from the fact that the registered office must be located where the “head office” is located. When compared to the definition of the “center of debtor’s main interests” concept used in Regulation n° 1346 of 29 May 2000 on cross-border insolvency, it remains to be seen, in furtherance of the quite recent ECJ judgment on Eurofood case (May 2006), whether, in practice, main insolvency proceedings under that insolvency regulation shall possibly be opened against an SE in a Member State other than that where its registered office is located: undoubtedly, the presumption entailed by the mandatory presence of the head office where the registered office is located shall render the rebuttal of that presumption quite difficult.  Article 63 of the Regulation seems indeed quite old-fashioned on this issue.

 

Conclusion :

 

An SE facilitates merging companies incorporated under different EU Member States as well as the restructuring of cross-border activities, by acting as a single company operating through the intermediary of branches located in other EU Member States, without the costly and time-consuming burden of setting-up a complex network of subsidiaries governed by different national laws. It enables simplification of management structure, reduction of the number of legal entities in a group and reduction of the costs of compliance with local/applicable law. However, the implementation of such a scheme shall only be successful if carefully planned and fitted to realistic objectives under the adequate timing. France enjoys certain competitive advantages to attract the formation of SE on its territory.

 

 

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