European and Comparative Company,

Financial Markets and Bankruptcy Law

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.)

LMU München and Oxford University

Summer Term 2013

Tuesdays 4:00 PM – 6:15 PM and Wednesdays 10:00 AM – 12:15 AM

Course Description

The global financial and economic crisis has demonstrated the importance of European Com-

pany, Financial Markets, and Bankruptcy Law, especially for multinational enterprises. This

course covers the fundamentals of European Company, Financial Markets, and Bankruptcy

Law in an international and comparative perspective. It will start out with an introduction to

the law-making process in the EU. With respect to European Company and Financial Markets

Law, the following topics will be covered: the proper scope of European Company Law –

harmonization versus regulatory competition; mobility and restructuring of companies in Eu-

rope; harmonization of company law rules; European corporate entities (Societas Europaea,

European Private Company); special issues relevant to listed companies (e.g., free movement

of capital, International and European Financial Markets Law). Topics covered with respect to

European Bankruptcy Law will include: the theoretical debate on transnational bankruptcies

(universalism versus multiplicity of proceedings); transnational bankruptcies under the Euro-

pean Insolvency Regulation; regulatory competition in bankruptcy; issues of group insolven-

cies; out-of-court restructurings (workouts) in Europe.

The primary focus of the course will be on the existing legal framework. However, policy

issues will also figure prominently (proportion of law to policy approximately two to one).

The European legal framework will be compared frequently to other jurisdictions. Within

Europe, the focus will be on the UK, France, and Germany. Comparisons will also be drawn

to the legal position and the policy debates in the US.

Reading List

Introduction

Unit 1: Introduction to the European Legal Framework

Treaty on European Union [TEU], December 13, 2007, 2010 O.J. (C 83) 13

Treaty on the Functioning of the European Union [TFEU], December 13, 2007, 2010 O.J.

(C 83) 47

Commission of the European Communities, Modernising Company Law and Enhancing

Corporate Governance in the European Union A Plan to Move Forward, COM

(2003) 284 final (May 21, 2003)

European Commission, Report of the Reflection Group On the Future of EU Company

Law, April 5, 2011

European Commission, Green Paper: The EU corporate governance framework, COM

(2011) 164 final (April 5, 2011)

European Commission, Action Plan: European company law and corporate governance –

a modern legal framework for more engaged shareholders and sustainable compa-

nies, COM (2012), 740/2 (December 12, 2012)

ECJ, Case 26/62, NV Algemene Transporten Expeditie Onderneming van Gend & Loos v.

Netherlands Inland Revenue Administration, 1963 E.C.R. 1

ECJ, Case 6/64, Flaminio Costa v. E.N.E.L., 1964 E.C.R. 585

Damian Chalmers, Gareth Davies & Giorgio Monti, European Union Law: Cases and

Materials chs. 1-2, 3 (pp. 92-112), 5 (pp. 203-23), 9 (pp. 361-72), and 16 (2d ed.

2010)

Paul Craig & Gráinne de Búrca, EU Law, Text, Cases, and Materials chs. 19-20, 21 (pp.

715-733), and 22 (5th ed. 2011)

John Armour & Wolf-Georg Ringe, European Corporate Law 1999-2010: Renaissance

and Crisis, 48 COMMON MARKET L. REV. 125 (2011)

Erik Werlauff, Principles of European Company Law, 7 EUR. COMP. L. 183 (2010)

Company Law

Unit 2: Company Formation and Corporate Governance

Directive 2009/101/EC of the European Parliament and of the Council of 16 September

2009 on Coordination of Safeguards for the Protection of the Interests of Members

and Third Parties, 2009 O.J. (L 258) 11 (replaced First Council Directive 68/151/EEC

of 9 March 1968)

Second Council Directive 77/91/EEC of 13 December 1976 on Coordination of Safe-

guards for the Protection of the Interests of Members and Others in Respect of the

Formation of Public Limited Liability Companies and the Maintenance and Altera-

tion of Their Capital, 1977 O.J. (L 26) 1

Reinier Kraakman et al., The Anatomy of Corporate Law chs. 3 and 4 (2d ed. 2009)

Horst Eidenmüller, Andreas Engert & Lars Hornuf, Incorporating under European Law:

The Societas Europaea as a Vehicle for Legal Arbitrage, 10 EUR. BUS. ORG. L. REV.

1 (2009)

Jeffrey N. Gordon, The Rise of Independent Directors in the United States, 1950-2005: Of

Shareholder Value and Stock Market Prices, 59 STAN. L. REV. 1465 (2007)

Klaus J. Hopt & Patrick C. Leyens, Board Models in Europe – Recent Developments of

Internal Corporate Governance Structures in Germany, the United Kingdom, France,

and Italy, 1 EUR. COMP. & FIN. L. REV. 135 (2004)

Klaus J. Hopt, Comparative Corporate Governance: The State of the Art and Internation-

al Regulation, 59 AM. J. COMP. LAW 1 (2011)

Carsten Jungmann, The Effectiveness of Corporate Governance in One-Tier and Two-Tier

Board Systems – Evidence from the UK and Germany, 3 EUR. COMP. & FIN. L. REV.

426 (2006)

Pavlos E. Masouros, Is the EU Taking Shareholder Rights Seriously?, 7 EUR. COMP. L.

195 (2010)

Unit 3: Creditor Protection and Financial Reporting

Fourth Council Directive 78/660/EEC of 25 July 1978 on the Annual Accounts of Certain

Types of Companies, 1978 O.J. (L 222) 11

Seventh Council Directive 83/349/EEC of 13 June 1983 on Consolidated Accounts, 1983

O.J. (L 193) 1

Regulation 1606/2002/EC of the European Parliament and of the Council of 19 July 2002

on the Application of International Accounting Standards, 2002 O.J. (L 243) 1

ECJ, Joined Cases C-435/02 & C-103/03, Axel Springer AG v. Zeitungsverlag Nieder-

rhein GmbH & Co. Essen KG and Hans-Jürgen Weske, 2004 E.C.R. I-8663

Reinier Kraakman et al., The Anatomy of Corporate Law ch. 5 (2d ed. 2009)

John Armour, Legal Capital: An Outdated Concept?, 7 EUR. BUS. ORG. L. REV. 5 (2006)

Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior,

Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305 (1976)

William W. Bratton, Rules, Principles, and the Accounting Crisis in the United States, 5

EUR. BUS. ORG. L. REV. 7 (2004)

Paul Davies, Directors’ Creditor-Regarding Duties in Respect of Trading Decisions Tak-

en in the Vicinity of Insolvency, 7 EUR. BUS. ORG. L. REV. 301 (2006)

Horst Eidenmüller, Trading in Times of Crisis: Formal Insolvency Proceedings,

Workouts and the Incentives for Shareholders/Managers, 7 EUR. BUS. ORG. L. REV.

239 (2006)

Wolfgang Schön, Corporate Disclosure in a Competitive Environment – the Quest for a

European Framework on Mandatory Disclosure, 6 J. CORP. L. STUD. 259 (2006)

Unit 4: Cross-Border Mobility, Transformation of Companies, and Regulatory

Competition between the Member States

Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011

Concerning Mergers of Public Limited Liability Companies, 2011 O.J. (L110) 1 (re-

placed Third Council Directive 78/855/EEC of 9 October 1978)

Tenth Directive 2005/56/EC of the European Parliament and of the Council of 26 October

2005 on Cross-Border Mergers of Limited Liability Companies, 2005 O.J. (L 310) 1

ECJ, Case 81/87, The Queen v. H. M. Treasury and Commissioners of Inland Revenue, ex

parte Daily Mail and General Trust plc., 1988 E.C.R. 5483

ECJ, Joined Cases C-19/90 and C-20/90, Marina Karella and Nikolaos Karellas v. Minis-

ter for Industry, Energy and Technology, and Organismos Anasygkrotiseos

Epicheiriseon AE, 1991 E.C.R. I-2691

ECJ, Case C-212/97, Centros Ltd v. Erhvervs- og Selskabsstyrelsen, 1999 E.C.R. I-1459

ECJ, Case C-208/00, Überseering BV v. Nordic Construction Company Baumanagement

GmbH (NCC), 2002 E.C.R. I-9919

ECJ, Case C-167/01, Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire

Art Ltd., 2003 E.C.R. I-10155

ECJ, Case C-411/03, SEVIC Systems AG, 2005 E.C.R. I-10805

ECJ, Case C-210/06, Cartesio Oktató és Szolgáltató bt., 2008 E.C.R. I-9641

ECJ, Case C-378/10, VALE Építési Kft. (not yet reported)

Reinier Kraakman et al., The Anatomy of Corporate Law ch. 7 (2d ed. 2009)

John Armour, Who Should Make Corporate Law? EC Legislation versus Regulatory

Competition, 58 CURRENT LEGAL PROBLEMS 369 (2005)

William W. Bratton, Joseph A. McCahery & Erik P. M. Vermeulen, How Does Corporate

Mobility Affect Lawmaking? A Comparative Analysis, 57 AM. J. COMP. L. 347 (2009)

Marco Becht, Colin Mayer & Hannes F. Wagner, Where Do Firms Incorporate? Deregu-

lation and the Cost of Entry, 14 J. CORP. FIN. 241 (2008)

Reiner Braun, Horst Eidenmüller, Andreas Engert & Lars Hornuf, Does Charter Compe-

tition Foster Entrepreneurship? A Difference-in-Difference Approach to European

Company Law Reforms, ECGI – Finance Working Paper No. 308/2011

Richard M. Buxbaum, Is There a Place for a European Delaware in the Corporate Con-

flict of Laws?, 74 RABELSZ [RABELS ZEITSCHRIFT FÜR AUSLÄNDISCHES UND INTER-

NATIONALES PRIVATRECHT] 1 (2010) (F.R.G.)

Marcel Kahan & Ehud Kamar, The Myth of State Competition in Corporate Law, 55

STAN. L. REV. 679 (2002)

Oliver Mörsdorf, The Legal Mobility of Companies Within the European Union Through

Cross-Border Conversion, 49 COMMON MARKET L. REV. 629 (2012)

Arianna Ugliano, The New Cross-Border Merger Directive: Harmonisation of European

Company Law and Free Movement, 18 EUR. BUS. L. REV. 585 (2007)

Unit 5: Control Transactions

Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on

Takeover Bids, 2004 O.J. (L 142) 12 (formerly known as Thirteenth Company Law

Directive)

ECJ, Case C-503/99, Commission of the European Communities v. Kingdom of Belgium,

2002 E.C.R. I-4809

ECJ, Case C-112/05, Commission of the European Communities v. Federal Republic of

Germany, 2007 E.C.R. I-8995

ECJ, Case C-531/06, Commission of the European Communities v. Italian Republic, 2009

E.C.R. I-4103

ECJ, Case C‑543/08, European Commission v. Portuguese Republic (not yet reported)

ECJ, Case C-95/12, European Commission v. Federal Republic of Germany (pending)

Reinier Kraakman et al., The Anatomy of Corporate Law ch. 8 (2d ed. 2009)

John Armour & David A. Skeel, Jr., Who Writes the Rules for Hostile Takeovers, and

Why? – The Peculiar Divergence of US and UK Takeover Regulation, 95 GEO. L. J.

1727 (2007)

Wolf-Georg Ringe, Company Law and Free Movement of Capital, 69 CAMBRIDGE L. J.

378 (2010)

Jaron van Bekkum, Golden Shares: A New Approach, 7 EUR. COMP. L. 13 (2010)

Paul Davies, Edmund-Philipp Schuster & Emilie van de Walle de Ghelcke, The Takeover

Directive as a Protectionist Tool?, ECGI – Law Working Paper No. 141/2010

Unit 6: European Corporate Entities: Overview and the European Company (SE)

Council Regulation 2157/2001/EC of 8 October 2001 on the Statute for a European Com-

pany (SE), 2001 O.J. (L 294) 1

Council Directive 2001/86/EC of 8 October 2001 Supplementing the Statute for a Euro-

pean Company with Regard to the Involvement of Employees, 2001 O.J. (L 294) 22

European Commission, Report from the Commission to the European Parliament and the

Council, The application of Council Regulation 2157/2001 of 8 October 2001 on the

Statute for a European Company (SE), COM(2010) 676 final (Nov. 17, 2010)

Andrew Johnston, EC Regulation of Corporate Governance chs. 5 (pp. 165-213) and 7

(pp. 247-66) (2009)

Horst Eidenmüller, Andreas Engert & Lars Hornuf, Incorporating under European Law:

The Societas Europaea as a Vehicle for Legal Arbitrage, 10 EUR. BUS. ORG. L. REV.

1 (2009)

Horst Eidenmüller, Lars Hornuf & Markus Reps, Contracting Employee Involvement: An

Analysis of Bargaining Over Employee Involvement Rules for a Societas Europaea,

12 J. CORP. L. STUD. 201 (2012)

Horst Eidenmüller & Jan Lasák, The Czech Societas Europaea Puzzle, 12 J. CORP. L.

STUD. 237 (2012)

Horst Eidenmüller, Andreas Engert & Lars Hornuf, How Does the Market React to the

Societas Europaea?, 11 EUR. BUS. ORG. L. REV. 35 (2010)

Paul L. Davies, Employee Involvement in the European Company, in THE EUROPEAN

COMPANY, DEVELOPING A COMMUNITY LAW OF CORPORATIONS 67-82 (Jonathan

Rickford ed., 2003)

Gerco C. van Eck & Erwin R. Roelofs, SE Mobility: Taking a Short Cut? A Recommen-

dation for Amendment of the SE Regulation, 6 EUR. COMP. L. 105 (2009)

Edwin R. Roelofs, Shelf SEs and Employee Participation, 7 EUR. COMP. L. 120 (2010)

Unit 7: The European Private Company and Regulatory Competition between

the Member States and the EU

European Commission, Proposal for a Council Regulation on the Statute for a European

Private Company, COM(2008) 396/3 (June 25, 2008)

Horst Eidenmüller, The Transnational Law Market, Regulatory Competition, and Trans-

national Corporations, 18 IND. J. GLOBAL LEGAL STUD. 707 (2011)

Paul L. Davies, The European Private Company (SPE): Uniformity, Flexibility, Competi-

tion and the Persistence of National Law, in FESTSCHRIFT FÜR KLAUS J. HOPT ZUM

70. GEBURTSTAG AM 24. AUGUST 2010, UNTERNEHMEN, MARKT UND VERANTWOR-

TUNG 479-98 (Stefan Grundmann et al. eds., 2010) (F.R.G.)

Joseph A. McCahery & Erik P. M. Vermeulen, Does the European Company Prevent the

“Delaware Effect”?, 11 EUR. L. J. 785 (2005)

Financial Markets Law

Unit 8: Regulation of Primary and Secondary Financial Markets

Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003

on Insider Dealing and Market Manipulation (Market Abuse), 2003 O.J. (L 96) 16, as

amended

Directive 2003/71/EC of the European Parliament and of the Council of 4 November

2003 on the Prospectus to Be Published when Securities Are Offered to the Public or

Admitted to Trading and Amending Directive 2001/34/EC, 2003 O.J. (L 345) 64, as

amended

Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on

Markets in Financial Instruments [MiFID], 2004 O.J. (L 145) 1, as amended

Directive 2004/109/EC of the European Parliament and of the Council of 15 December

2004 on the Harmonisation of Transparency Requirements in Relation to Information

About Issuers Whose Securities Are Admitted to Trading on a Regulated Market and

Amending Directive 2001/34/EC, 2004 O.J. (L 390) 38, as amended

Niamh Moloney, EC Securities Regulation chs. I.4-I.6, II.6-II.7, IV.1, IV.4-IV.5, V.4-

V.8, VI.4-VI.7, VII.7, X.1, X.4-X.7, XII.1-XII.2, XII.4-XII.8 (2d ed. 2008)

Luca Enriques & Tobias H. Tröger, Issuer Choice in Europe, 67 CAMBRIDGE L. J. 521

(2008)

Tanja Bošković, Caroline Cerruti & Michel Noël, Comparing European and U.S. Securi-

ties Regulations: MiFID Versus Corresponding U.S. Regulations, World Bank Work-

ing Paper No. 184 (2010)

Roberta Romano, Against Financial Regulation Harmonization: A Comment, Yale Law

& Economics Research Paper No. 414 (2010)

Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation,

107 YALE L. J. 2359 (1998)

Unit 9: Recent Financial Crisis and Policy Responses

European Commission, Towards more Responsibility and Competitiveness in the Europe-

an Financial Sector (2010)

European Commission, Restoring the Health and Stability of the EU Financial Sector

(2012)

Regulation 1060/2009/EC of the European Parliament and of the Council of 16 Septem-

ber 2009 on credit rating agencies, 2009 O.J. (L 302) 1, as amended

Directive 2010/76/EU of the European Parliament and of the Council of 24 November

2010 amending Directives 2006/48/EC and 2006/49/EC as regards capital require-

ments for the trading book and for re-securitisations, and the supervisory review of

remuneration policies, 2010 O.J. (L 329) 3

Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on

Alternative Investment Fund Managers and amending Directives 2003/41/EC and

2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, 2011 O.J.

(L 174) 1

Emilios Avgouleas, The Global Financial Crisis and the Disclosure Paradigm in Euro-

pean Financial Regulation: The Case for Reform, 6 EUR. COMP. & FIN. L. REV. 440

(2009)

Paul Davies, Liability for Misstatements to the Market: Some Reflections, 9 J. CORP. L.

STUDIES 295 (2009)

Samuel Gregory Hanson, Anil K. Kashyap & Jeremy C. Stein, A Macroprudential Ap-

proach to Financial Regulation, Chicago Booth Research Paper No. 10-29 (2010)

Yannick Hausmann & Elisabeth Bechtold-Orth, Changing Remuneration Systems in Eu-

rope and the United States – A Legal Analysis of Recent Developments in the Wake of

the Financial Crisis, 11 EUR. BUS. ORG. L. REV. 195 (2010)

Niam Moloney, EU Financial Market Regulation After the Global Financial Crisis:

“More Europe” or More Risks?, 47 COMMON MARKET L. REV. 1317 (2010)

Peter O. Mülbert & Alexander Wilhelm, Reforms of EU Banking and Securities Regula-

tion after the Financial Crisis, 26 BANKING & FIN. L. REV. 187 (2011)

John Biggins & Colin Scott, Public-Private Relations in a Transnational Private Regula-

tory Regime: ISDA, the State and OTC Derivatives Market Reform, 13 EUR. BUS.

ORG. L. REV. 309 (2012)

Glenn Morgan, Reforming OTC Markets: The Politics and Economics of Technical Fixes,

13 EUR. BUS. ORG. L. REV. 391 (2012)

Jennifer Payne, The Regulation of Short Selling and Its Reform in Europe, 13 EUR. BUS.

ORG. L. REV. 413 (2012)

Insolvency law

Unit 10: Comparative Insolvency Law

Reinier Kraakman et al., The Anatomy of Corporate Law ch. 5 (2d ed. 2009)

Thomas H. Jackson, The Logic and Limits of Bankruptcy Law chs. 1 and 2 (1986, reprint-

ed 2002)

Jay L. Westbrook, Charles D. Booth, Christoph G. Paulus & Harry Rajak, A Global View

of Business Insolvency Systems (World Bank 2010)

Gerard McCormack, Corporate Rescue Law - an Anglo-American Perspective chs. 1, 2,

3, 8 and 9 (2008)

Roy Goode, Principles of Corporate Insolvency Law chs. 2 and 3 (4th ed. 2011)

Douglas G. Baird, Bankruptcy’s Uncontested Axioms, 108 YALE L. J. 573 (1998)

Kenneth Ayotte & David A. Skeel, Bankruptcy or Bailouts?, 35 JOURNAL OF CORPORA-

TION LAW 469 (2010)

Sefa Franken, Creditor- and Debtor-Oriented Corporate Bankruptcy Regimes Revisited, 5

EUR. BUS. ORG. L. REV. 645 (2004)

Horst Eidenmüller, Trading in Times of Crisis: Formal Insolvency Proceedings,

Workouts and the Incentives for Shareholders/Managers, 7 EUR. BUS. ORG. L. REV.

239 (2006)

Timothy Cleary, Lehman Brothers and the anti-deprivation principle: current uncertain-

ties and proposals for reform, 6 CAPITAL MARKETS L. J. 411 (2011)

Michelle J. White, The Costs of Corporate Bankruptcy: A U.S.-European Comparison, in

CORPORATE BANKRUPTCY – ECONOMIC AND LEGAL PERSPECTIVES 467-500 (J. S.

Bhandari and L. A. Weiss eds., 1996)

Unit 11: European and International Cross-Border Insolvency

Council Regulation 1346/2000/EC of 29 May 2000 on Insolvency Proceedings, 2000 O.J.

(L 160) 1

European Commission, Report from the Commission to the European Parliament, The

Council and the European Economic and Social Committee on the application of

Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings,

COM(2012) 743 final (December 12, 2012)

European Commission, Proposal for a Regulation of the European Parliament and of the

Council amending Council Regulation (EC) No 1346/2000 on insolvency proceed-

ings, COM(2012) 744 final (December 12, 2012)

ECJ, Case C-1/04, Susanne Staubitz-Schreiber, 2006 E.C.R. I-701

ECJ, Case C-341/04, Eurofood IFSC Ltd, 2006 E.C.R. I-3813

ECJ, Case C-339/07, Christopher Seagon v. Deko Marty Belgium NV, 2009 E.C.R. I-767

ECJ, Case C-396/09, Interedil (not yet reported)

ECJ, Case C-191/10 Rastelli Davide (not yet reported)

ECJ Case C-213/10 F-Tex SIA/Lietuvos-Anglijos UAB “Jadecloud-Vilma” (not yet re-

ported)

Re BRAC Rent-a-Car International Inc [2003] EWHC (Ch) 128

Re Daisytek-ISA Ltd [2004] BPIR 30

Re Collins & Aikman Corp Group [2006] EWHC 1343 (Ch)

Stanford Int. Bank Ltd [2010] EWCA Civ. 137

Re Rodenstock [2011] EWHC 1104 (Ch)

Roy Goode, Principles of Corporate Insolvency Law chs. 13 and 14 (4th ed. 2011)

Lucian A. Bebchuk & Andrew T. Guzman, An Economic Analysis of Transnational

Bankruptcies, 42 J. L. & ECON. 775 (1999)

Horst Eidenmüller, A New Framework for Business Restructuring in Europe: The EU

Commission’s Proposals for a Reform of the European Insolvency Regulation and

Beyond, 20 MAASTRICHT JOURNAL OF EUROPEAN AND COMPARATIVE LAW 133 (2013)

Horst Eidenmüller, Abuse of Law in the Context of European Insolvency Law, 6 EUR.

COMPANY & FIN. L. REV. 1 (2009)

Horst Eidenmüller, Free Choice in International Company Insolvency Law in Europe, 6

EUR. BUS. ORG. L. REV. 423 (2005)

Gerard McCormack, Jurisdictional Competition and Forum Shopping in Insolvency Pro-

ceedings, 68 CAMBRIDGE L. J. 169 (2009)

Gerard McCormack, Universalism in Insolvency Proceedings and the Common Law, 32

OXFORD J. LEG. STUD. 325 (2012)

Philipp M. Reuß, Taking Creditors for a Ride – Insolvency Forum Shopping and the

Abuse of EU Law, 53 SEOUL L. J. 667 (2012)

Horst Eidenmüller6/3/2013

LMU München

European and Comparative Company, Financial Markets and Bankruptcy Law

Summer Term 2013

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.)LMU München and Oxford University

www.horst-eidenmueller.dewww.law.ox.ac.uk/profile/horst.eidenmueller

These slides are incomplete without the accompanying oral presentation.Slides and presentation are protected by copyright.

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Horst Eidenmüller6/3/2013

Course content and methodological approach

• European company, financial markets, and insolvency law

– Course covers the fundamentals

– Focus will be on the existing legal framework

– However, policy issues will also be given due attention (e.g. regulatory competition vs. harmonization)

• Comparative and functional perspective

– How is a particular problem solved in a particular jurisdiction? – abstraction from jurisdiction-specific categorizations and doctrinal classifications

– The problem of the measuring rod/benchmark: economic perspective efficiency –but: highly controversial as a normative goal

• The importance of this course to practitioners and academics

– Practitioner’s viewpoint: advising multinational corporations will often involve questions of European law and several national jurisdictions

– Academic’s viewpoint: Europe as an intriguing multi-level legal system that partially mirrors similar problems as are known to the federal system in the US

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Horst Eidenmüller6/3/2013

Course outline

• Introduction to the European legal framework (Unit 1)

– Its relevance for company law issues and the development of EU company law

• European company law (Units 2-7)

– Essential features of EU company law such as corporate governance,creditor protection, and financial reporting (Units 2-3)

– Cross-border mobility of EU companies, transformation of companies, and Regulatory Competition between the Member States (Unit 4)

– Control transactions (Unit 5)

– EU corporate entities and Regulatory Competition between the Member States and the EU (Units 6-7)

• Financial markets law (Units 8-9)

– Organization of financial markets, issuer- and intermediary-related provisions

– Recent financial crisis and policy responses

• Insolvency law (Units 10-11)

– Comparative aspects of international insolvency laws and the EuropeanInsolvency Regulation

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Horst Eidenmüller6/3/2013

Unit 1: Introduction to the European Legal Framework

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Horst Eidenmüller6/3/2013

Overview

1) Structure and functioning of the European Union (EU)

2) A “United States of Europe”?

3) Rules fundamental to the internal market

4) Process of integration in European company law

5) Summary

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Horst Eidenmüller6/3/2013

Functioning of the European Union (EU)

• Case No. 1:

A German company imports and trades coffee from Brazil. The European Union enacts a Regulation which puts a ban on imports from non-EU countries under certain conditions. Suppose those conditions are met in the case of Brazil.

Can the German company claim a possible infringement of its freedom to conduct its business under the German constitution?

• Case No. 2:

A German company wishes to export goods to the Netherlands. The Dutch fiscal authorities impose an import duty of 8% on goods to be imported into the Netherlands.

Is this in line with European law?

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Structure and functioning of the European Union

Horst Eidenmüller6/3/2013

The origin of the EU and recent developments

• Six founding countries

– Belgium, France, former West-Germany, Italy, Luxembourg, and the Netherlands

– European Coal and Steel Community (ECSC, 1951) and European Economic Community (EEC, Treaties of Rome 1957)

• Original core objectives

– Establishing a common market and a customs union

• Gradual growth

– In number of Member States (MS) (currently 27) and in policy areas

• Fall of the Iron Curtain in 1989/90: deepening of integration

– Treaty of Maastricht established the European Union (EU) (1993)

– Treaty of Lisbon (2009) as a “reform treaty”: Treaty on European Union (TEU) and Treaty on the Functioning of the European Union (TFEU)

7

Integration as an ongoing process, ultimate goal can hardly be foreseen

Structure and functioning of the European Union

Horst Eidenmüller6/3/2013

Growth of the EU

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Source: http://www.bbc.com/

Structure and functioning of the European Union

Horst Eidenmüller6/3/2013

EU institutions (1)

• The European Council (Arts. 13, 15 TEU)

– Supreme political authority of the EU

» Defines the EU's overall policy agenda

» Exercises no legislative functions

– Inter alia composed of the Heads of State or Government of the MS

– Decisions in general to be taken by consensus

• Executive body: European Commission (Arts. 13, 17 TEU)

– Comprises 27 Commissioners building a cabinet government

– Responsibilities comprise inter alia:

(1)Power of legislative initiative

(2)Day-to-day administration

(3)Oversees the proper implementation and enforcement of EU laws

(4)Develops and implements medium-term strategies

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Structure and functioning of the European Union

Horst Eidenmüller6/3/2013

EU institutions (2)

• Legislative branch

– European Parliament (Arts. 13, 14 TEU)

» Directly elected by universal suffrage

» Legislative and executive oversight powers

– Council (“Council of Ministers”) (Arts. 13, 16 TEU)

» Legislative, policy-making, and budgetary functions

» Competences in adopting, rejecting, and amending legislation

» No power of legislative initiative

• Judiciary: the Court of Justice of the European Union (ECJ)

– Arts. 13, 19 TEU

– Provides authoritative interpretation and application of EU law

– National courts may – and sometimes must (if no judicial remedy available) – request preliminary rulings on questions of the interpretation or validity of EU law (Art. 267 TFEU)

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Structure and functioning of the European Union

Horst Eidenmüller6/3/2013

Sources of European law

• Primary law: Treaties

– Treaty on European Union (TEU)

– Treaty on the Functioning of the European Union (TFEU)

– “Constitutionalizing” function

» Establish the EU and its institutions, set broad policy goals, vest powers in the EU institutions to implement policy goals

• Secondary law (Art. 288 TFEU)

– Regulations direct effect in all MS

– Directives must be transposed into national laws by the MS

– Decisions direct effect, but limited in scope (individual cases)

– Recommendations no binding force

• ECJ’s case law

– Aims at uniform interpretation and application of Union law in the MS

11

Structure and functioning of the European Union

Horst Eidenmüller

• Supremacy of Union law

– Takes precedence over MS’s laws

– Conflicting MS’s laws must not be applied

ECJ, Case 6/64, Costa v ENEL (1963): “The law stemmingfrom the Treaty […] could not because of its special and original nature,be overridden by domestic legal provisions, however framed, without[…] the legal basis of the Community itself being called into question.”

Cf. principle of federal preemption as stipulated by US Const. Art. VI Cl. 2 (Supremacy Clause)

• Scope of supremacy

Case 1: all types of EU legislation take precedence over any layer of national law, including national constitutional law

Still some debate as to conflicting national constitutional provisions

6/3/2013

Supremacy of European law

12

Structure and functioning of the European Union

Horst Eidenmüller6/3/2013

Hierarchy of laws

13

MS’s laws(including constitutional law)

Secondary law

Primary law

EU as a multi-level legal system

ECJ’s case law

• Interpretation and application of Union law

•At least de facto binding effect

Structure and functioning of the European Union

Horst Eidenmüller6/3/2013

Legislative competences (Arts. 2-6 TFEU)

• EU lacks a legislative “competence-competence”

– Principle of conferral of powers (Art. 5(2) TEU, Art. 7 TFEU)

Cf. enumerated powers in US Const. Art. I § 8 and the US Const. Amend. X

• Exclusive and shared competences

– Exclusive: matters such as customs union, competition rules, monetary policy (Euro), common commercial policy

– Shared: MS may legislate until the EU does, matters such as internal market, consumer protection, energy

• Limits on the use of conferred competences

Art. 5(1) TEU: “The limits of Union competences are governed by the principle of conferral. The use of Union competences is governed by the principles of subsidiarityand proportionality.”

only if the EU competence is not exclusive

14

EU lacks legislative “competence-competence”: principle of conferral of powers

Structure and functioning of the European Union

Horst Eidenmüller6/3/2013

Legislative procedure (1)

• Dominant players in lawmaking

– Traditionally, Commission and the Council

– By virtue of recent Treaty reforms, Parliament gained more powers

• Ordinary legislative procedure (Art. 294 TFEU)

– Applies to the vast majority of EU’s lawmaking

– Power to initiate and draft legislation is vested in the Commission

– Consent needed from both Parliament and the Council for adoption of new legislation

– National parliaments also have a say and can if certain thresholds are met trigger a suspensory veto on grounds of subsidiarity

• Average time for proposed legislation to become law: 1½ to 2 years

15

Strong position of the Commission and the Council in the legislative procedure

Structure and functioning of the European Union

Horst Eidenmüller6/3/2013

Legislative procedure (2)

16

Ordinary legislative procedure

Commission

Initiates andproposeslegislation

Parliament

Council

Directive/Regulation

Simplified: [Request for legislation by Parliament/Council ](i) Commission submits a proposal to Parliament and Council (ii) Assent of both Parliament and Council needed (iii) In case of disagreement: Conciliation Committee (tripartite dialogue)

Structure and functioning of the European Union

Horst Eidenmüller6/3/2013

A “United States of Europe”?

Churchill 1946 (Zurich Speech): “We must build a kind of United States of Europe.”

• EU’s governance system resembles certain traits to be found in the US and other polities

• Characteristics of federal polities

EU as a supranational polity with multi-level governance

EU institutions: “bicameral” legislative branch, directly elected parliament

• Characteristics of confederations (e.g. British Commonwealth)

EU MS remain the “masters of the Treaties”

EU lacks an autonomous “tax and spend” capacity

17

EU as a unique association of states with traits of a federation and of a confederation

A “United States of Europe”?

Horst Eidenmüller6/3/2013

The EU’s internal market: overview

• The “legacy” of Adam Smith & David Ricardo

– Enhancing societal welfare by removing obstacles to cross-border trade

• European Single Market

– Completion by the end of 1992

– Art. 26(2) TFEU: “[…] an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured”

– Cross-border activities of individuals and companies enabled and/or facilitated by different means of integration and competition law

• Rules fundamental to the internal market

(1) “Negative integration” through deregulation and liberalization Fundamental Freedoms (Arts. 28 et seq. TFEU)

(2) “Positive integration” through secondary law Directives, Regulations

(3) Ancillary function of competition law

18

Different instruments to build a completely integrated market

Rules fundamental to the internal market

Horst Eidenmüller6/3/2013

The EU’s internal market at eye level with the US

19

Historically ...

Percentage of world GDP (last 500 years):

China, India, Japan, Latin America, Western Europe, and the US

... and presently

The EU and the next seven largest economies in the world by nominal GDP

Source: Angus Maddison, University of Groningen

Source: IMF (2009)

Rules fundamental to the internal market

Horst Eidenmüller6/3/2013

Integration through liberalization:Fundamental Freedoms

• “Negative integration”: Fundamental Freedoms

– Removal of discrimination and (non-discriminatory) restrictions

– Direct effect if matters exhibit cross-border relevance (ECJ, Case 26/62, van Gend (1963))

– Broad interpretation by the ECJ

» E.g. principle of mutual recognition in company and financial markets laws

• Free movement of the factors of production and of goods/services

– Persons (Arts. 21, 45 TFEU) and services (Art. 56 TFEU)

– Freedom of establishment (Arts. 49, 54 TFEU) (FoE)

– Capital (Arts. 63, 64 TFEU)

– Goods (Arts. 28, 30, 34, 35 TFEU)

Case 2: the German company can rely on Art. 30 TFEU (ban on customs duties on imports and exports) this provision has direct effect

20

Rules fundamental to the internal market

Horst Eidenmüller6/3/2013

Integration through secondary law

• “Positive integration”

– Promotes the full unfolding of the internal market in fields where obstacles to market integration remain in place

– Facilitates cross-border activities by establishing(minimum) standards

» E.g. creditor protection through minimum capital rules, cross-border mergers by providing appropriate mechanisms in national law

• Secondary law instruments (Art. 288 TFEU)

– Directives: bind the MS to more or less detailed policy goals, transposition needed

» E.g. Company Law Directives

– Regulations: have direct effect in the MS in which they apply, no transposition needed

» E.g. establishment of genuine European corporate entities (e.g. Societas Europaea)

– Decisions: apply to more closely specified settings, such as particular companies

» Relevant especially in competition law

– Recommendations: “threat” of future legislative measures

21

Rules fundamental to the internal market

Horst Eidenmüller6/3/2013

Integration and the role of competition law

• Ancillary function for establishing the single market

– Goal: undistorted competition

» Combating business practices that restrict competition within the EU

– Commission scrutinizes monopolies, mergers, collusion, cartelization, and state aid

» Arts. 101-106 (antitrust provisions), 107-109 (state aid) TFEU

• High-profile cases (selection)

Prevented merger of GE and Honeywell (2001)(merger would have created/strengthened a dominant position on the markets for large commercial jet aircraft engines)

Fines imposed on Microsoft and Intel for abuse of dominant position(from 1998 onward and 2009, respectively)

Proceedings initiated against Google for abuse of dominant position in online search at the end of 2010 (ongoing investigations)

22

Rules fundamental to the internal market

Horst Eidenmüller6/3/2013

Company law: integration until 1989

• Legal basis

– Company Law Directives

» Approximation of rules that provide safeguards for the protection of creditors, employees, and other stakeholders

» Arts. 50(2)(g), 114, 115 TFEU (ex Arts. 44(2)(g), 95, 94 EC Treaty)

– European legal entities: Art. 352 TFEU (ex Art. 308 EC Treaty)

• Early “maximum harmonization” Directives (from 1968-1989)

– Strategy of seeking to harmonize the essential fields of company law, MS’s laws must not exceed the terms of the legislation

– Main rationale: third party and shareholder protection

– Focus on stock corporations

– Matters covered inter alia: formation and safeguards for continued existence, legal capital, representation, disclosure of financial/legal status

23

Process of integration in European company law

Horst Eidenmüller6/3/2013

Company law: 1989 until 2002/03 – deadlock

• Political deadlock and policy critique

– National idiosyncrasies stalled further harmonization (e.g. German co-determination)

– Critique of over-regulation, negative impact of regulation on the needs of businesses,

inattentiveness to the principle of subsidiarity

• Revisiting corporate governance frameworks

– Prompted by

» Enron collapse (2001) ( Sarbanes-Oxley Act of 2002)

» Parmalat scandal (2003)

• ECJ’s case law on FoE paved the way for regulatory competition

24

Early “maximum harmonization” strategy rendered unfeasible

Process of integration in European company law

Horst Eidenmüller6/3/2013

Company Law DirectivesFirst Directive (1968) on compulsory disclosure and safeguards for continued existence

Replaced by Directive 2009/101/EC on coordination of safeguards

Second Directive (1976) on the formation and maintenance of legal capital

Third Directive (1978) on mergers of public limited liability companies

Replaced by Directive 2011/35/EU on mergers of public limited liability companies

Fourth Directive (1978) on the annual accounts

Sixth Directive (1982) on divisions of public limited liability companies

Seventh Directive (1983) on consolidated accounts

Eighth Directive (1984) on auditors

Replaced by Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts

Tenth Directive (2005) on cross-border mergers

Eleventh Directive (1989) on disclosure requirements in respect of branches

Twelfth Directive (1989) on single-member private limited liability companies

Replaced by Directive 2009/102/EC law on single-member private limited liability companies

Takeover Directive (2004) on takeover bids

Shareholder Rights Directive (2007) on the exercise of certain rights of shareholders

Not enacted: Fifth (on the structure of public companies), Ninth (on corporate groups), andFourteenth Directive (on the transfer of seat)

25

Corporate GovernanceStakeholder RightsFinancial Reporting

Restructuring

Process of integration in European company law

Horst Eidenmüller6/3/2013

The Commission’s Company Law Action Plan (2003)

• Key policy objectives

– Strengthening shareholders rights and protection of third parties

– Combating fraud and abuse of legal forms: extended disclosure requirements

– Fostering efficiency and competitiveness of businesses

» Focus on certain cross-border issues, e.g. adoption of the Directives on cross-border merger and Shareholder Rights

» More flexibility for companies, e.g. creation of European corporate entities

– Improving corporate governance

» E.g. Recommendation on the remuneration of directors

• “Better regulation” strategy

– Enhancing efficiency of rules

– Simplification and reform of existing legislation

– More optional company law and recommendations

26

Process of integration in European company law

Horst Eidenmüller6/3/2013

Reflection process on the future of EU company law

• Commission set up an ad-hoc expert group in Dec. 2010

– Growth of cross-border trade and e-commerce challenge existing EU company law

– The Reflection Group was tasked to address current problems by suggesting initiatives (where appropriate) to adapt the EU framework to the landscape of the 21st century

• Report of the Reflection Group (2011): recommendations for action

– Cross-border mobility: introduce a legal regime for cross-border conversions (= 14th

Directive) and cross-border divisions

– Corporate governance & long-term viability of companies

» Current EU legislation and CG codes should be reviewed and amended against the background of whether the rules promote/facilitate a long term perspective

» Favor long-term shareholder commitment by the possibility to provide for benefits in the Companies’ Articles (enhanced voting rights, higher dividends)

» Institutional shareholders should explain their voting policies indicating whether they will adopt a long-term engagement

» “Activate” absentee shareholders by simplifying voting mechanisms

27

Process of integration in European company law

Horst Eidenmüller6/3/2013

The Commission’s Company Law Action Plan (2012)

• Enhancing transparency

– Disclosure of board diversity policy and of risk management arrangements

– Improving the quality of corporate governance reports

– Improving the visibility of shareholdings in listed companies in Europe

– Disclosure of voting / engagement policies / voting records by institutional investors

• Engaging shareholders

– Improving transparency on remuneration policies / individual remuneration of directors

– Improving shareholder control over related party transactions

– Regulating proxy advisors

– Clarification of the relationship between investor cooperation on corporate governance issues and the ‘acting in concert’ concept

• Improving the framework for cross-border operations of companies

– Enabling transfer of registered office and cross-border divisions

– Improving the mechanism for cross-border mergers

• Codification of EU company law

28

Process of integration in European company law

Horst Eidenmüller6/3/2013

Summary

• EU as a multi-level legal system

– Supranational polity with traits of a federation and a confederation

– Principle of conferral of powers

– Supremacy and direct effect of Union law

– Legislative procedure

» Strong position of the Commission and the Council

» Power to initiate legislation vests in the Commission

• Establishing the internal market

– “Negative integration” Fundamental Freedoms(persons, services, establishment, capital, goods)

– “Positive integration” Directives, Regulations

• Company law

– Importance of Fundamental Freedoms, especially FoE and Free Movement of Capital

– Harmonization through Directives, mostly mandatory law

– Early “maximum harmonization” strategy failed

29

Summary

Horst Eidenmüller 1

Unit 2: Company Formation and Corporate Governance

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.) LMU München and Oxford University

6/10/2013

LMU München

European and Comparative Company, Financial Markets and Bankruptcy Law

Summer Term 2013

Horst Eidenmüller

Overview

1) Company formation

2) Board structure

3) Employee involvement

4) Shareholder rights

5) Protection of (minority) shareholders

6) Summary

2 6/10/2013

Horst Eidenmüller

Company formation (1)

• General requirements

– Instrument of constitution/statutes of the company

– Shares are to be paid up (public limited liability companies)

– Registration

• Instrument of constitution/statutes

– Minimum requirements such as:

» Stating the type, name, and objects of the company

» Objects of the company must not be unlawful or contrary to public policy

» Compliance with national provisions on minimum legal capital

– Cf. Art. 12(1)(b) Dir. 2009/101/EC & Art. 2 Dir. 77/91/EEC

• Shares are to be paid up

– At the time the company is incorporated or authorized to commence business at not less than 25% of their nominal value (Art. 9 Dir. 77/91/EEC)

– Valuation in case of non-cash consideration (Arts. 10 et seq. Dir. 77/91/EEC)

3 6/10/2013

Company formation

Horst Eidenmüller

Company formation (2)

• Registration

– Company acquires legal personality (comes into existence as such!) with registration

– Cf. Art. 8 Dir. 2009/101/EC

• Consequences of irregularities

– Nullity of the company only by court decision (Art. 12(1)(a) Dir. 2009/101/EC)

– Effects of a decision of nullity (Art. 13 Dir. 2009/101/EC)

» Company: winding-up

» Third parties:

• May challenge the court decision where the national law so provides

• Nullity as such does not affect the validity of any commitments entered into

• Liability for actions during formation

– Protection of third parties contracting with the company in its formation stage

– Persons who acted are jointly and severally liable (cf. Art. 8 Dir. 2009/101/EC)

4 6/10/2013

Company formation

Horst Eidenmüller

Corporate governance and board structure

• Corporate governance

– Investor ownership: ultimate control over the firm in the hands of the shareholders

– Delegated management: shareholder influence is exercised indirectly

• Principal-agent-conflict between owners and management

– Welfare of the shareholders (principals) depends on actions of the directors (agents)

– Goal of corporate law: motivating the agents to act in the principals’ interest

• Divergent board structures in Europe

– Fifth Company Law Dir. on the structure of public companies abandoned

– One-tier board: e.g. UK public limited company (plc), such as BP plc

» Administrative board supervises and manages the corporation

– Two-tier board: e.g. German Aktiengesellschaft (AG), such as Daimler AG

» Supervisory board of non-executive directors: monitoring powers

» Management board of executive officers: designs and implements business strategy

5 6/10/2013

Board structure

Horst Eidenmüller

Board structures illustrated

6

Shareholders

Supervisory board

Management board

Shareholders

Board of directors

Ultimate control

Monitoring

Management

6/10/2013

Board structure

Horst Eidenmüller

One- and two-tier boards

Prima facie advantages and disadvantages

7

One-tier board Two-tier board

Separation

of powers

Self-control:

management + control of

management

Separation

of control and

management

Review of

management decisions Assessment ex ante Control ex post

Information of

board members No information asymmetry Information asymmetry

6/10/2013

Board structure

Horst Eidenmüller

Convergence of board models in practice

• Informal coalitions

– Strong influence of incumbent management on shareholders’ pick of supervisory board members in companies with dispersed ownership

– Former practice in Germany: members of the management board “retired” to the supervisory board, e.g. Volkswagen AG, Siemens AG

• Quasi-supervisory one-tier boards in the UK

– UK CG Code (2010) demands that the chairman of the board and the chief executive (responsible for the running of the company’s business) should be different persons

– Majority of independent directors + independent chairman

» At least half of the directors should be independent

» Chairman also required to meet independence criteria

• Empirical studies do not find one model to be superior

– See, e.g. Jungmann (2006)

8 6/10/2013

The board structure model is less important than how it is put to use

Board structure

Horst Eidenmüller

“Deutschland AG”: a close-knit web of control

9 6/10/2013

Source: MPI für Gesellschaftsforschung (2008)

Supervisory board seats held by

Financial sector

Industrial sector

Cross-director-

ships between

large companies

Board structure

Horst Eidenmüller

Shareholders and board(s)

• The tectonics of power between shareholders and board(s)

– Director nominations, shareholder voting, and removal rights shape power balance

• Delaware illustrates a board-centric model

– Shareholders face tedious proxy fights against the board’s nominations of directors

– Removal of directors obstructed by staggered boards

• Shareholder-centric models reign in UK and French laws

– Shareholders can nominate directors

– Non-waivable right for shareholder majority to remove directors without cause

• Board discretion arising from multi-directional fiduciary duties?

– Under German law, the duty of loyalty of the management is owed to the company as a whole rather than to any constituency – smokescreen for board discretion?

10 6/10/2013

European corporate governance models range from shareholder-centric (UK, France) to board-centric (Germany)

Board structure

Horst Eidenmüller

Employee involvement

• Why employee involvement?

– Promotes dialogue and mutual trust between management and employees through information-sharing and consultation

– Increases competitiveness through employee engagement

• Development of employee involvement

– Late 19th century: works councils appear in some countries

» Institutionalized body for communication between management and employees

» Involvement in the day-to-day running on the establishment level

– Mid-20th century

» Some laws grant employees rights to participate in the management and in the monitoring of the firm

11 6/10/2013

Some involvement models allow employees to participate in the management and in the monitoring of the firm

Employee involvement

Horst Eidenmüller

Employee participation on establishment level

• “General framework for informing and consulting employees”

– Directive 2002/14/EC mandates information and consultation rights with respect to all undertakings with at least 50 employees

– Information and consultation are required regarding the economic situation, employment, and substantial changes in work organization

– MS are flexible in implementing the arrangements for information and consultation

» No obligation to introduce works councils

• European Works Councils Directive 2009/38/EC

– A European Works Council must be established in community-scale undertakings

» At least 1,000 employees in the EU and at least 150 employees in each of at least two different MS

» One EWC for the entire company

– Purpose: information and consultation limited to transnational issues

12 6/10/2013

European law creates information and consultation rights for employees on the establishment level

Employee involvement

Horst Eidenmüller

Board-level representation on two-tier boards

13

Shareholders

Supervisory board

Management board

Employees

6/10/2013

Employee involvement

Horst Eidenmüller

Board-level representation on one-tier boards

14

Shareholders

Board of directors

Employees

6/10/2013

Employee involvement

Horst Eidenmüller

Board-level representation: comparative view

Board

structure Companies

Repre-

sentation

Number of

representatives Election

UK monistic none

Italy monistic

or dualistic none

France

monistic private

companies none

monistic

or dualistic

public

companies optional max. ¼ of seats employee vote

Germany dualistic

500-2,000

employees mandatory

1/3 of supervisory

board seats employee vote

> 2,000

employees

½ of supervisory

board seats

employee vote;

2-3 union seats

15 6/10/2013

Employee involvement

Horst Eidenmüller

Board-level representation in Europe

16

Source: European Trade Union Institute

6/10/2013

Employee involvement

Horst Eidenmüller

Assessing board-level representation

• Employees as third constituency – Classic models based on principal-agent-theory exclude employees

• Gains from mutual trust, information, and expertise – Early and credible information can avoid wasteful bargaining and prolonged strikes

– Operational expertise brought to the boardroom can enhance company management

– Additional checks on management’s empire building strategies

• Divergent goals of shareholders and employees – Employee representatives might press for inefficiently high work-force levels

• Board-level participation raises governance costs – Heterogeneity of interests on the board, higher costs of decision-making

– Multiple-party governance issues and conflicts of interests might reduce effective control over management

17 6/10/2013

Board-level representation of employees has significant influence on corporate governance

Employee involvement

Horst Eidenmüller

Empirical studies on board-level representation

• Board-level representation can increase firm efficiency and market value (Fauver/Fuerst (2006))

• Market-to-book-value of corporations with equal representation is 31% lower than that of corporations subject to one-third representation (Gorton/Schmid (2004))

• Reincorporating as a Societas Europaea (SE) in order to mitigate mandatory board-level representation raises market value of firms (Eidenmüller/Engert/Hornuf (2009))

• For an overview of existing studies refer to Conchon (2011: 16-18)

18 6/10/2013

Empirical evidence on the efficiency of board-level representation is inconclusive

Employee involvement

Horst Eidenmüller

Shareholders

• Who is a shareholder?

– Art. 2(b) Shareholder Rights Directive 2007/36/EC: the natural or legal person that is recognized as a shareholder under the applicable law

• Different types and classes of shares

– Bearer vs. registered/name shares

– Paper vs. paperless shares

– Voting vs. non-voting shares

• Shareholder rights (overview)

– Participation rights

– Financial rights

– Information rights

– Minority shareholder protection

19 6/10/2013

Shares evidence and entitle their holders to various rights

Shareholder rights

Horst Eidenmüller

Shareholder rights: participation rights

• Put items on the agenda/table draft resolutions

– Cf. Art. 6 Dir. 2007/36/EC

– Right to initiate a general meeting

– Upper bound for required minority stake: 5%

• Participate in a general meeting (Art. 7 Dir. 2007/36/EC)

– Eligible shareholders determined

» On a specified date prior to the general meeting (“record date”); or

» By identification from a “current” (“real-time”) shareholders’ register

• Voting rights

– Voting during the general meeting

– Voting by correspondence in advance of meetings (Art. 12 Dir. 2007/36/EC)

– Proxy voting (Arts. 10 et seq. Dir. 2007/36/EC)

» No restrictions on the eligibility of persons as proxy holders permissible

» However, MS may restrict proxy voting regarding conflicts of interest-situations

20 6/10/2013

Shareholder rights

Horst Eidenmüller

Other shareholder rights

• Financial rights

– To receive dividends

– To participate in the liquidation proceeds

– Preemptive rights: Art. 29 Dir. 77/91/EEC

» In cases when the capital is increased by consideration in cash

» Exclusion possible by a decision of the general meeting

• Information rights

– Prior to a general meeting (Art. 5 Dir. 2007/36/EC)

» Convocation of a general meeting: effective Community-wide dissemination

» Information to be made available on the Internet: convocation, proxy forms, etc.

– Additional information regarding particular items on the agenda

» E.g. report on the exclusion of pre-emptive rights (Art. 29(4) Dir. 77/91/EEC)

– Right to ask questions and receive replies during the general meeting (Art. 9 Dir. 2007/36/EC)

21 6/10/2013

Shareholder rights

Horst Eidenmüller

Protection of minority shareholders

• Principal-agent-conflict between majority and minority

– Welfare of the minority (principals) depends on actions of the majority (agents)

– Empirical evidence suggests that controlling shareholders obtain private benefits

» Control premia: higher price per share is paid for the control block (Dyck/Zingales (2004))

» Share price differentials in firms with different share classes (Nenova (2003))

• Multi-dimensional agency problems

– Mitigating the majority/minority conflict usually means to constrain the majority

– But constraining the majority may aggravate the shareholder/management conflict

• Strategies to protect minority shareholders

– Trustees to represent minority interests: independent directors

– Equal treatment rules, e.g. Art. 4 Dir. 2007/36/EC & Art. 42 Dir. 77/91/EEC

– Decision rights (“voice”), e.g. majority requirements for charter amendments

– “Exit” rights, e.g. appraisal rights upon fundamental changes

22 6/10/2013

Protection of minority shareholders

Horst Eidenmüller

Control-enhancing mechanisms (CEMs)

• Control rights without dividend rights

– Proliferation of control-enhancing mechanisms, e.g. priority shares, voting right ceilings, multiple voting right shares, non-voting shares

• Aggravate agency conflict between minority and majority

– Disparity between control and dividend rights provides (further) incentive to extract value from the company at the expense of non-controlling shareholders

23

Source: ISS et al. (2007)

6/10/2013

Protection of minority shareholders

Horst Eidenmüller

One share/one vote?

• One share/one vote-rule to protect non-controlling shareholders?

– Should the creation of CEMs be prohibited?

– Is there a principle of proportionality between control and ownership?

• Ambiguous assessment

– Voting power can improve monitoring on behalf of all shareholders

– Main impact of one share/one vote-rule would be to disempower large owners to the benefit of managerial control

• CEMs can be replaced by other techniques

– Pyramid structures: already widespread and arguably efficient in financing family-owned businesses

– New forms of separating control rights from ownership: “empty voting” – naked votes acquired by way of stock lending

24 6/10/2013

Case for one share/one vote-rule is problematic

Protection of minority shareholders

Horst Eidenmüller

European regulatory process on one share/one vote

• Prohibition of CEMs by European law?

– External study (ISS et al. (2007)) and impact assessment (SEC(2007) 1705)

• Regulatory options and their assessment by the Commission

– Option 1: prohibit the creation of CEMs by companies

» Extent of extraction of private benefits and their economic impact unclear

» Risk of circumvention by shareholders: pyramids, shareholder agreements

» Undesirable effects: increasing the monitoring costs for shareholders

– Option 2: enhance the transparency regarding CEMs and their use

» Might produce merely formalistic explanations with little practical effect

• Conclusion = option 3: stick to existing law and market pressure

– Regulation entails risk of significant costs to issuers and shareholders without a corresponding benefit

25 6/10/2013

No one share/one vote-rule under European company law

Protection of minority shareholders

Horst Eidenmüller

Summary

• European corporate laws feature a variety of board models

– The differences between one- and two-tier board models are less important than they may seem and depend on how the respective models are put to practical use

– Corporate governance models range from shareholder-centric (UK, France) to board-centric (Germany)

• Employee involvement

– Board-level representation of employees has a significant influence on corporate governance

– However, empirical evidence on its efficiency is inconclusive

• Various strategies to protect minority shareholders

• Case for one share/one vote-rule is problematic

– Regulation entails risk of significant costs to issuers and shareholders without a corresponding benefit

26 6/10/2013

Summary

Horst Eidenmüller 1

Unit 3: Creditor Protection and Financial Reporting

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.) LMU München and Oxford University

6/11/2013

LMU München

European and Comparative Company, Financial Markets and Bankruptcy Law

Summer Term 2013

Horst Eidenmüller

Overview

1) The concept of legal capital

2) Alternative mechanisms

3) The Directives on financial reporting

4) The IAS-Regulation

5) Impact of financial reporting standards on legal capital rules

6) Summary

2 6/11/2013

Horst Eidenmüller

Approaches to creditor protection

• The rationale for creditor protection – Creditors take precedence over equity holders on company assets

– Shareholders have only residual claims on the company’s assets

– Risks:

» Insufficiency or depletion of company assets through distributions

» Hazardous strategies of shareholders/managers (agency costs of debt)

• Mandatory disclosure of financial information – Information facilitates creditors’ self-help efforts

» (Adjusting) creditors can adapt the pricing of debt, credit and bond terms, etc. to the financial health of a company

• Mandatory rules concerning the financing of the company – Requirements for the initial capitalization of the company and restrictions of

distributions can provide standardized protection of creditors

3 6/11/2013

Creditor protection is mainly afforded by disclosure of financial information and by rules governing the capitalization of a company

The concept of legal capital

Horst Eidenmüller

• The concept of legal capital

– Legal restrictions on corporate actions by reference to the shareholders’ capital investment as shown on the balance sheet

• Goals of legal capital rules

– Raise assets for the company

– Prevent distributions of assets

• Types of legal capital rules

– Minimum initial equity capital

– Distribution restrictions

– Mandatory action upon serious loss of capital

Creditor protection through legal capital

4 6/11/2013

A core objective of legal capital rules is creditor protection

The concept of legal capital

Horst Eidenmüller

Second Company Law Directive 77/91/EEC

• European legal capital rules – Second Directive (1976) heavily inspired by German concepts

– Goals: creditor and shareholder protection

• Minimum capital for public companies: €25,000 (Art. 6) – Consideration other than in cash: expert valuation required (Arts. 10, 10a)

» Excluded: undertaking to perform work or supply services (Art. 7)

• Distribution restrictions – Balance sheet test (Art. 15), requires annual accounts

– Acquisition of own shares only up to the limit of distributable reserves (Art. 19)

– Financial assistance to the acquisition of shares by a third party only up to the limit of distributable reserves (Art. 23)

• Serious loss of capital (Art. 17) – Loss of more than ½ of the subscribed capital

– General shareholder meeting must consider winding-up or other measures

5 6/11/2013

Directive employs all three concepts of creditor protection through “legal capital”

The concept of legal capital

Horst Eidenmüller

Minimum capital rules

• Minimum capital provides minimum corporate asset pool at the time of incorporation

• “Cushion”: buffer against company losses

• Minimum capital raises the hurdle for distributions

6

Assets Liabilities

Liabilities

Minimum capital

6/11/2013

Subscribed capital

The concept of legal capital

Horst Eidenmüller

Distribution restrictions: capital maintenance

Balance sheet test

– No distributions when the company’s net assets are, or would become, lower than the subscribed capital

– Problem: protects against distributions, not losses

7

Assets Liabilities

Liabilities

Subscribed capital

Assets Liabilities No distributions

allowed

Amount available for distribution

6/11/2013

The concept of legal capital

Horst Eidenmüller

Critical assessment

• Minimum capital rules – Minimum capital is set irrespective of the capital requirements of a specific firm

– Some usefulness as an “entry test”: entrepreneurs must demonstrate the seriousness and thus the quality of their project/business by committing capital

– However, adverse consequences on entrepreneurship

(Braun/Eidenmüller/Engert/Hornuf (2011))

• Distribution restrictions with a view to capital maintenance – Can operate regardless of minimum capital

– However, do not protect against losses, only against distributions

– Creditor self-help available through credit terms: covenants

– A forward-looking test regarding distribution restrictions based on solvency of the company might be more helpful for the creditors than a balance sheet-test

Unfavorable cost/benefit analysis of legal capital system

8 6/11/2013

The efficiency of legal capital rules is doubtful: beneficial effects are limited, the (opportunity) costs of the system are high

Alternative mechanisms

Horst Eidenmüller

Distribution restrictions based on solvency

• Concept of a solvency test – The company must be able to meet its liabilities that are due or fall due within a

certain period of time, e.g. one year

• Assessing solvency tests – Take business prospects into account rather than past developments reflected in the

annual accounts – but suffer from the limited time frame taken into consideration

– Hence, long-term liabilities, such as pension liabilities, are usually not adequately reflected in a solvency model (they are in the legal capital regime, however)

• Review of the Second Directive – Because of criticism mostly from the UK

– Feasibility study on an alternative to the capital maintenance regime (KPMG (2008))

– Position of the Commission: no changes required

» Legal capital rules do not cause significant problems or compliance costs

» MS can introduce solvency tests in addition to balance sheet tests

9 6/11/2013

A solvency test for distributions implies a more forward-looking approach, but it is subject to concerns regarding long-term liabilities (pension liabilities, etc.)

Alternative mechanisms

Horst Eidenmüller

Comparative overview: distribution restrictions

10

Second Company

Law Directive

Art. 15

MBCA

§ 6.40(c)

Delaware

§ 170(a)

Balance sheet test Assets

= liabilities + €25,000

Assets

=

liabilities

Assets

=

liabilities

Solvency test ✓

Both tests required ✓

Exception:

nimble dividends

6/11/2013

Alternative mechanisms

Horst Eidenmüller

The Springer case

Axel Springer AG is one of the largest media companies in Europe. It publishes several hundred newspapers, magazines and online sites and has holdings in TV and radio stations. In Germany, it controls close to a quarter of the market for daily newspapers.

Zeitungsverlag Niederrhein GmbH & Co. Essen KG is a company that publishes a single regional newspaper. Radio Ennepe-Ruhr-Kreis mbH & Co. KG is a company that runs a local radio station.

Axel Springer AG initiates court proceedings against Zeitungsverlag Niederrhein and Radio Ennepe-Ruhr-Kreis, asking the court to order the respective companies to produce and publish their annual accounts, so that Springer could inspect them.

11 6/11/2013

The Directives on financial reporting

Horst Eidenmüller

Financial reporting

• Importance of financial reporting – Information for investors and creditors

– Guides future financial decisions of the company: balance-sheet restrictions of distributions

– Recent scandals reflect the importance: Enron, Parmalat

• Divergent traditions and goals – UK/US law: provide current and potential creditors and investors with meaningful

information on the state and the prospects of the company

» Central principle: true and fair view

– German law: protect creditors through conservative financial statements

» Central principle: prudence

• High costs of divergent standards – Dual-listings require double reporting: e.g. German companies listed on the NYSE

12 6/11/2013

Harmonization of reporting standards reduces reporting costs and eases securities’ pricing

The Directives on financial reporting

Horst Eidenmüller

Harmonization in Europe

• Early harmonization by European law

– Directives on annual accounts, on consolidated accounts, and on statutory audits

• Fourth Directive 78/660/EEC on annual accounts

– Central objective: information of the public

– Drawing up annual accounts (Arts. 2 et seq.)

» Balance sheet, profit-and-loss account, notes on the accounts

» True and fair view of assets, liabilities, financial position, and profit or loss

» Auditing and publication required (Arts. 51, 47)

– Applies to certain types of companies enumerated by the Dir. regardless of size/listing

– Provisions on valuation

» MS have numerous options when transposing the Directive

» No uniform European reporting standards resulted

13 6/11/2013

Fourth Directive failed to establish uniform reporting standards

The Directives on financial reporting

Horst Eidenmüller

Overstretching disclosure?

• The Springer case

– Zeitungsverlag Niederrhein and Radio Ennepe-Ruhr-Kreis trade as limited partnerships whose general partners are private limited liability companies

– Since 1990, the Fourth Directive applies to such firms, here: “GmbH & Co. KG”

– ECJ, Joined Cases 435/02 & 103/03 (2004): publication of accounts serves to protect (also) the interests of “others” – this is not limited to creditors but includes competitors

– Publication duty not constrained by freedom to conduct business

• Problems of mandatory disclosure for non-listed firms

– Shareholders/creditors of close corporations can normally obtain financial information on their own: need for mandatory disclosure?

– Detrimental effects of disclosure

» Access to certain information may impede innovation

» Abuse of disclosed information by dominant market actors: predatory pricing

14 6/11/2013

The current European disclosure regime for non-listed firms poses problems

The Directives on financial reporting

Horst Eidenmüller

Consolidated accounts

• Seventh Directive 83/349/EEC on consolidated accounts

• Scope (Art. 1)

– Any parent undertaking governed by the national law of a MS that controls a subsidiary undertaking

– Control exercised through voting rights, nomination and removal of board members, contractual domination

• Drawing up consolidated accounts

– Consolidated balance sheet, consolidated profit-and-loss account, and notes on the accounts (Art. 16)

– Parent undertaking and all of its subsidiary undertakings are to be consolidated regardless of the registered offices of such subsidiary undertakings (worldwide)

» MS may grant various exemptions (Arts. 3 et seq.)

– True and fair view with regard to all the undertakings consolidated taken as a whole

– Provisions on how to consolidate: eliminate intra-group transactions, etc.

– Auditing and publication required (Arts. 37 et seq.)

15 6/11/2013

The Directives on financial reporting

Horst Eidenmüller

IAS-Regulation

• Regulation 1606/2002/EC on the application of IAS

– Adoption of IAS and IFRS in Europe

– Goal: transparency and comparability of financial statements

– Direct and uniform application in all MS

• Regulatory technique

– Standards issued by a private body: International Accounting Standards Board

– Commission decides on applicability of each standard in Europe

– Endorsement of a standard requires compliance with the true and fair view-principle

• Scope of IAS/IFRS

– Listed parent undertakings are to draw up consolidated accounts in accordance with approved IAS/IFRS standards

– MS can extend application to non-listed parent undertakings and may even allow/require companies to draw up annual accounts accordingly

16 6/11/2013

Creates a uniform regime for listed firms based on the true and fair view-principle

The IAS-Regulation

Horst Eidenmüller

Impact of financial reporting standards on legal capital rules

• Legal capital protection depends on financial reporting standard

– Legal capital rules regulate distributions based on the balance sheet

– Protection rises and falls with the reporting standards used

• Fair value measurements increase distribution potential

– Prudence-based standards show more liabilities

– Fair value-based standards show more assets

» Hence, more assets available for distributions

• Higher distributions negatively impact on creditor protection

17 6/11/2013

IAS/IFRS valuations put the effectiveness of distribution restrictions based on legal capital (further) at stake

Impact of financial reporting standards on legal capital rules

Horst Eidenmüller

Summary

• Creditor protection is (mainly) afforded by

– Disclosure of financial information

– Rules governing the capitalization of a company

• European company law still retains the concept of legal capital

– Minimum capital rules seek to curtail entrepreneurial moral hazard

– Distribution restrictions on the basis of a balance sheet – not a solvency – test

– Arguably, the cost/benefit assessment of the legal capital regime is negative

• Financial reporting is being harmonized in Europe

– Requiring disclosure from non-listed firms is subject to criticism

– IAS-Regulation creates a uniform reporting regime for listed firms based on the true and fair view-principle

– Fair value-measurements under IAS/IFRS put the viability of distribution restrictions based on legal capital (further) at stake

18 6/11/2013

Summary

Horst Eidenmüller 16/19/2013

Unit 4: Cross-Border Mobility, Transformation of Companies, and

Regulatory Competition between the Member States

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.)LMU München and Oxford University

LMU München

European and Comparative Company, Financial Markets and Bankruptcy Law

Summer Term 2013

Horst Eidenmüller

Overview

1) Freedom of establishment for companies

2) Competition for charters: initial choice of law

3) Domestic mergers

4) Cross-border mergers

5) Reincorporations

6) Regulatory Competition between the Member States

7) Summary

26/19/2013

Horst Eidenmüller

The Centros case

Centros Ltd is a private limited company registered in

England and Wales. Its registered office is situated in the

UK. Centros has never traded since its formation. Its

shares are held by two Danish nationals residing in

Denmark, one of which is the director of Centros.

The Danish authorities refuse to register a branch of

Centros on the grounds that it was seeking to circumvent

the Danish minimum company capital of DKK 200,000

(ca. € 27,000).

36/19/2013

Freedom of establishment for companies

Horst Eidenmüller

Freedom of establishment (Art. 49 TFEU)

• Relevance of Freedom of establishment (FoE)

– Early stages of economic integration dominated by movement of goods

– FoE protects the movement of the providers of goods and services

– Growing importance with the rise of the service sector

• Scope of FoE

– Right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms

• Delineating FoE and Free movement of services (Art. 56 TFEU)

– FoE concerns permanent activities of a stable and continuous nature

• Multiple establishments

– Primary FoE: set up a new establishment while giving up an existing establishment

– Secondary FoE: set up a new establishment while maintaining an existing establishment

46/19/2013

Freedom of establishment for companies

Horst Eidenmüller

Scope and effect of FoE

• Restrictions prohibited by Art. 49 TFEU

– Restrictions are “[a]ll measures which prohibit, impede or render less attractive the exercise” of FoE (ECJ, Case 439/99, Commission v Italy (2002), para. 22)

» Open or hidden discriminations

» Non-discriminatory restrictions (ECJ, Case 55/94, Gebhard (1995), paras. 37-39)

• Limits and exceptions

– Gebhard-test: imperative requirements in the general interest (Gebhard, para. 37)

» Non-discriminatory measure

» Suitable for attaining a specific imperative requirement in the general interest

» Must not go beyond what is necessary

– Keck-exception (ECJ, Joined Cases 267/91 & 268/91, Keck/Mithouard (1993), paras. 16-17 concerning Free movement of goods)

» Non-discriminatory requirements which do not prevent market access

56/19/2013

Freedom of establishment for companies

Horst Eidenmüller

FoE for companies (Art. 54 TFEU)

• Companies “shall be treated in the same way as natural persons”

– Cf. Art. 54(1) TFEU

– Exception: non-profit companies

• Connecting factor: nationality of a company

– Formation under the laws of a MS, and

– Registered office, central administration or principal place of business in the Union

• FoE for companies

– Primary FoE: transfer of seat

– Secondary FoE: establishment of a branch

• Limits and exceptions

– Gebhard-test: imperative requirements in the general interest

» E.g. protection of creditors, minority shareholders, and employees

66/19/2013

Freedom of establishment for companies

Horst Eidenmüller

The real seat conflicts rule as obstacle

• Divergence in conflict of laws rules

• Real seat-rule impedes the Internal Market

– Hinders corporate mobility

– Impedes free choice in corporate law

– Necessary to protect (local) third-party and general interests?

7

Real seat

The place of the central administration determines

the applicable company law

Place of incorporation

The place of incorporation determines the applicable

company law

Foreign companies subject to local law at place of central administration

Foreign companies are treated as such, regardless of the

place of central administration

6/19/2013

Freedom of establishment for companies

Horst Eidenmüller

Case law (1)

• ECJ, Case 81/87, Daily Mail (1988)

– FoE under the Treaty “…cannot be interpreted as conferring on companies incorporated under the law of a Member State a right to transfer their central management and control and their central administration to another Member State while retaining their status as companies incorporated under the legislation of the first Member State.” (para. 24)

• ECJ, Case 212/97, Centros (1999)

– It is contrary to FoE under the Treaty for a Member State “…to refuse to register a branch of a company formed in accordance with the law of another Member State in which it has its registered office but in which it conducts no business where the branch is intended to enable the company in question to carry on its entire business in the State in which that branch is to be created, while avoiding the need to form a company there, thus evading application of the rules governing the formation of companies which, in that State, are more restrictive as regards the paying up of a minimum share capital.” (para. 39)

86/19/2013

Freedom of establishment for companies

Horst Eidenmüller

Case law (2)

• ECJ, Case 208/00, Überseering (2002)

– Where a company formed in accordance with the law of a Member State ('A') in which it has its registered office exercises its FoE in another Member State ('B'), FoE requires Member State B to recognise the legal capacity and, consequently, the capacity to be a party to legal proceedings which the company enjoys under the law of its State of incorporation ('A'). (para. 95)

• ECJ, Case 167/01, Inspire Art (2003)

– It is contrary to FoE under the Treaty to impose on the exercise of freedom of secondary establishment by a company formed in accordance with the law of another Member State certain conditions provided for in domestic company law in respect of company formation relating to minimum capital and directors' liability. (para. 143)

• ECJ, Case 210/06, Cartesio (2008)

– FoE under the Treaty does not preclude legislation of a Member State under which a company incorporated under the law of that Member State may not transfer its seat to another Member State whilst retaining its status as a company governed by the law of the Member State of incorporation. (para. 124)

96/19/2013

Freedom of establishment for companies

Horst Eidenmüller

ECJ: break-up of the real seat rule (1)

• Host state

– Must recognize companies from another MS as such (Überseering, para. 95)

– Permissible restrictions

» Combating abusive behavior or fraud (Centros, para. 24)

» Gebhard-test: imperative requirements in the general interest (Überseering,para. 92)

• The Centros case

– Denmark must recognize Centros and register a branch

– Circumvention of minimum capital does not constitute abusive behavior or fraud

– Application of Danish minimum capital rules not justified under the Gebhard-test

» Not fit to secure the attainment of its objective (creditor protection)

» Even if it were, it would go beyond what is necessary for creditor protection

10

Obligation of host state to recognize foreign companies as such

6/19/2013

Freedom of establishment for companies

Horst Eidenmüller

ECJ: break-up of the real seat rule (2)

• State of incorporation– MS of incorporation retains power over legal status

– Corporations as “creatures of national law” (Daily Mail, para. 19)

» “The State gave; and so we must acquiesce when the State hath taken away” (Cartesio, Opinion of the Advocate General (2008), para. 26)

» State of incorporation may require a connecting factor, such as domestic place of central administration (Cartesio, para. 110)

– But must not hinder reincorporation in another state

» Winding-up or liquidation prohibited (Cartesio, paras. 111-113)

– FoE precludes a MS to prescribe the immediate recovery of tax on unrealized capital gains relating to assets of a company which transfers its place of effective management to another MS at the very time of that transfer(ECJ, Case 371/10, National Grid Indus (2011))

11

Power of the state of incorporation over legal status

6/19/2013

Freedom of establishment for companies

Horst Eidenmüller

Impact on foreign company incorporations

12

Source: Becht et al. (2008), p. 249

6/19/2013

Freedom of establishment for companies

Horst Eidenmüller

Competition for charters

13

• Initial choice of the applicable corporate law

– Entrepreneurs shop for the best corporate law regime

– Facilitated by intermediaries

• Remaining obstacles

– Cost of advice on foreign law

» E.g. annual accounts: rules of the MS of incorporation apply

– Legal uncertainty

» Application of local law subject to Gebhard-test

– Legal frictions: e.g. divergent conflict of laws rules

» Directors’ liability in insolvency may arise under corporate law or insolvency law

» Different conflicts rules apply to corporate and insolvency law

» Lex fori concursus: insolvency proceedings governed by the laws of the forum –may differ from the incorporating state

FoE has triggered a competition for charters

6/19/2013

Competition for charters: initial choice of law

Horst Eidenmüller

English companies for German startups:www.go-limited.de

146/19/2013

Competition for charters: initial choice of law

Horst Eidenmüller

Total cost of Centros-style incorporations

15

Source: Becht et al. (2009), p. 177

6/19/2013

Competition for charters: initial choice of law

Horst Eidenmüller

Domestic mergers

• Dir. 2011/35/EU on mergers of public limited liability companies

• Merger by acquisition of existing or by formation of a new company– Issue to the shareholders of shares in the acquiring/new company and, if any, a cash

payment of up to 10% of the nominal value of the shares so issued (Arts. 3 et seq.)

• Effects of a merger ipso jure (Art. 19(1))– Transfer of all assets and liabilities

– Shareholders become shareholders of the acquiring/new company

– Acquired/merging company/ies cease(s) to exist

• Protection of creditors (Arts. 13 et seq.)– National laws must at least provide for “adequate safeguards”

• Procedure– Directors draw up common draft terms (Art. 5)

– Independent expert report on legal and economic aspects and implications (Art. 10)

– Shareholder approval by the general meeting of each merging company with not less than a two-thirds majority (Art. 7)

166/19/2013

Domestic mergers

Horst Eidenmüller

Cross-border mergers

• Merger law in the US– Each participating corporation is subject to the merger requirements of its respective

jurisdiction (Del. G.C.L. § 252(c))

– A cross-border merger can often serve to effect a change of company law

• Cross-border mergers are protected under FoE, but rare in the EU– Equal access to company transformations which are open to domestic companies (ECJ,

Case 411/03, SEVIC Systems (2005), para. 22)

– It remains an open question whether FoE requires a MS to allow an inbound cross-border merger when it does not permit domestic mergers

• Tenth Directive 2005/56/EC on cross-border mergers– Merger by acquisition of existing or by formation of a new (national) company

– Multiplicity of laws: all companies must comply with their national law (Art. 4(1)(b))

– Procedure based on the model of Directive 2011/35/EU; additional/modified elements:

» Securities instead of shares can be issued (Art. 2(2))

» Scrutiny of legality: pre-merger certificate by respective state authorities required (Art. 10)

176/19/2013

Cross-border mergers

Horst Eidenmüller

Employee participation

• Escaping employee participation by way of cross-border merger?

– Some MS laws provide for employee participation on the board

– Companies seek access to corporate forms of MS without employee participation

• Directive: barriers against the erosion of employee participation

– General rule: employee participation determined by the national laws governing the resulting company (Art. 16(1))

– However, negotiation procedure required (Art. 16(3)) if

» One of the companies has more than 500 employees and participation system, or

» Law applicable to the resulting company does not provide for at least the same level of employee participation as in the merging companies, or

» Law applicable to the resulting company does not provide for the same level of employee participation for all employees (Art. 16(2))

– Fall-back solution: the most extensive participation model prevails if negotiations fail

18

Cross-border mergers subject to the respective national laws of each company –detailed procedures aim to preserve the status quo of employee participation

6/19/2013

Cross-border mergers

Horst Eidenmüller

Mid-stream transfers: reincorporations

19

• Reincorporation: change of place and law of incorporation

– Transfer of seat: relocation without change of governing law

– Reincorporation: transfer of seat plus conversion into a legal form of the host MS

• Exit protected under FoE (Cartesio, paras. 111-113)

– State of incorporation may block transfer of seat: connecting factor

– But must not prevent conversion of a company by reincorporation

• Entry protected under FoE (VALE)

– Entry by way of reincorporation/cross-border re-establishment is protected by FoE

– Legislation disallowing companies of other MS to convert into a domestic legal form of the host MS impedes FoE if the host MS accepts a conversion of a domestic company

• Lack of procedures

– No secondary law (Fourteenth Directive abandoned for now)

– Solution: cross-border merger into a new entity

Precise impact of FoE on reincorporations still unclear

6/19/2013

Reincorporations

Horst Eidenmüller

• Existence of a market for corporate law

– Competitive federalism as an old phenomenon

» Firms have always been able to incorporate in any state (charter competition)

» Dominant position of the State of Delaware: roughly 60% of the largest 500 US companies are incorporated there

» Massive (direct) incentives to facilitate incorporations: tax revenues and franchise fees from incorporations

• Does regulatory competition promote societal welfare?

– Race to the bottom regarding creditor and employee protection?

Liggett Co. v. Lee, 288 U.S. 517, 558-559 (1933), Justice Brandeis (diss.):

“Companies were early formed to provide charters for corporations in stateswhere the cost was lowest and the laws least restrictive. The states joined inadvertising their wares. The race was one not of diligence, but of laxity.”

6/19/2013

Regulatory competition in the US

20

Regulatory competition between the Member States

Horst Eidenmüller

• Discovery process for innovative legal products (von Hayek)

• Counteracting “public choice failures” on the local level

• Event studies

– Positive effects on share prices of firms that reincorporate in Delaware (Romano(1985)) or choose the SE corporate form (Eidenmüller/Engert/Hornuf (2010))

– Higher company value (Tobin’s Q) of firms incorporated in Delaware (Daines (2001))

On balance, shareholder value seems to increase

• Caveats

– Studies measure only effects on shareholders, not on other stakeholders

– Delaware too has anti-takeover statutes (Bebchuk/Cohen (2003))

6/19/2013

Economics of regulatory competition in corporate law

21

Regulatory competition in corporate law seems to benefit shareholders no data on the influence on other stakeholders available

Regulatory competition between the Member States

Horst Eidenmüller6/19/2013

Emergence of regulatory competition in Europe

• Framework conditions for the corporate law market

– Diversity among MS’ corporate law systems significantly greater than in the US

Stronger regulatory competition to be expected

– EU MS cannot charge incorporation taxes or fees

Lack direct financial incentives to market their laws

• Significant changes

– Historically, physical “exit” as the only possible reaction mode of dissatisfied “customers”

– ECJ’s judgments on FoE: free choice of the applicable corporate law regime regardless of physical location

– Service providers and technological progress have facilitated “informed” choices

22

ECJ’s case law on FoE since Centros as the main trigger for regulatorycompetition in corporate law in Europe

Regulatory competition between the Member States

Horst Eidenmüller6/19/2013

English Ltd.’s inroad into the German startup market

23

By the end of 2006, approximately 40,000 “German” Ltds. existed

• Main drivers for legal arbitrage in corporate law (Becht et al. (2008))

– Lack of minimum legal capital requirements

– Speed of incorporation

Sources: Eidenmüller (2007); Becht et al. (2008)

Regulatory competition between the Member States

Horst Eidenmüller

• MS improve/market their laws globally in response to demand

– Lowering of legal capital requirements and increased incorporation speed

» Spain: Sociedad limitada nueva empresa (2003)

• €3,012 minimum capital

• Registration within 24 hours

» France: reform of the Société à responsabilité limitée (2003/04)

• No minimum capital

» Germany: Unternehmergesellschaft (haftungsbeschränkt) (2008)

• No minimum capital

• Apparently a great success

• MS have strong indirect incentives

Taxes, employment, and GDP contributed by the country’s service providers

6/19/2013

The Member States responded

24

Regulatory competition between the Member States

Horst Eidenmüller

“England and Wales: the jurisdiction of choice”

256/19/2013

Regulatory competition between the Member States

Horst Eidenmüller

“Law made in Germany”

266/19/2013

Regulatory competition between the Member States

Horst Eidenmüller6/19/2013

Problems of regulatory competition in corporate law

• Negative effects on third parties (externalities)

– Involuntary creditors such as tort creditors

– Non-adjusting creditors such as small claims creditors, employees, consumers

• “Unbundling” of complementaries

– “Cherry-picking”

– E.g. creditor protection rules in corporate and bankruptcy law

• Path dependencies

– Due to lock-in effects, a switch to a new legal regime may not take place, even though the change would lead to more efficient rules

– E.g. the system of “legal capital” in German corporate law

27

Pitfalls of regulatory competition need to be addressed

Regulatory competition between the Member States

Horst Eidenmüller6/19/2013

Policy implications for the EU and its MS (1)

• Regulatory competition in corporate law as a tenable policy choice in principle

• EU: setting necessary limits to counteract potential pitfalls

– Protection of third parties, combating unbundling problems and path dependencies

– Possible tools

» Soft law: recommendations and guidelines

• E.g. European Model Company Law Act Project

» Minimum harmonization: stipulating essential standards

• E.g. uniform wrongful trading rule in corporate law

» Full harmonization: uniformity simplification, but loss of flexibility

28

The EU should guarantee regulatory competition in corporate law in principle, but set appropriate “rules of the game”

Regulatory competition between the Member States

Horst Eidenmüller6/19/2013

Policy implications for the EU and its MS (2)

• Enriching regulatory competition by European corporate entities

– Horizontal competition complemented by vertical competition between EU’s and MS’ corporate legal forms

– The aim is thus not to replace existing company law

– Enlarged choice set for entrepreneurs/companies who wish to restructure

– Yardstick competition with the MS’ corporate entities

• Tasks of the MS

– Should enhance competitiveness of their corporate law

– Should limit choice opportunities (if allowed to do so by European law) only when detrimental effects of “free choice” are obvious in a specific case

29

The EU should enrich regulatory competition in corporate law by European corporate forms – MS should enhance the competitiveness of their corporate legal products

Regulatory competition between the Member States

Horst Eidenmüller

Summary (1)

• Free choice of the applicable corporate law under FoE

– Host state: obligation to recognize companies “as such”

– State of incorporation: power over legal status

• Domestic mergers: Directive 2011/35/EU

– Merger by acquisition of existing or by formation of a new company

• Cross-border mergers: Directive 2005/56/EC

– Merger subject to the respective national laws of each company

– Detailed procedures aiming to preserve the status quo of employee participation

• Reincorporations

– Exit and entry (= non-discrimination) protected under FoE

306/19/2013

Summary

Horst Eidenmüller6/19/2013

Summary (2)

• Regulatory competition in European corporate law

– ECJ’s judgments on FoE prompted significant changes in framework conditions

– MS have strong indirect incentives to market their laws globally in response to demand

– Empirical findings regarding the welfare effects of regulatory competition in corporate law are inconclusive; however, they do not indicate systematic market failure

– Hence, regulatory competition in corporate law is a tenable legal policy choice

– EU should guarantee and enrich regulatory competition by EU corporate forms

– Pitfalls of regulatory competition should be addressed on the European level

– MS should enhance competitiveness of their corporate law forms

31

Summary

Horst Eidenmüller 16/26/2013

Unit 5: Control Transactions

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.)LMU München and Oxford University

LMU München

European and Comparative Company, Financial Markets and Bankruptcy Law

Summer Term 2013

Horst Eidenmüller

Overview

1) Free movement of capital

2) “Golden Shares”

3) Takeover Bids Directive

4) Summary

26/26/2013

Horst Eidenmüller

The Pharmacy case

Under Italian law, the right to operate a

pharmacy is restricted to natural persons who

have graduated in pharmacy and to companies

and firms composed exclusively of members who

are pharmacists.

36/26/2013

Free movement of capital

Horst Eidenmüller

Free movement of capital (1)

• Importance of Free movement of capital (FMC)

– Foreign direct investments: greenfield investment and M&A related flows

• Delineating Freedom of Establishment and FMC

– Distinction crucial

» No violation of the FMC if restrictions are compatible with FoE (Art. 65(2) TFEU)

» FMC – unlike FoE – applies to third countries (non-EU MS) (Art. 63 TFEU)

– ECJ case law: definite influence on a company’s decisions as criterion and purpose of the legislation

» ECJ, Case 326/07, Commission v Italy (2009), paras. 33-36

» ECJ, Case 543/08, Commission v Portugal (2010), paras. 40-43

4

FoE

For measures targeted (only) at holdings that provide definite

influence

FMC

For measures concerning direct investments of any kind that do not provide definite influence

FoE and FMC

For measures concerning all holdings irrespective of definite influence

6/26/2013

Free movement of capital

Horst Eidenmüller

Foreign direct investment in the EU

5

Source: London Economics (2010), p. 10

6/26/2013

€ billion

Free movement of capital

Horst Eidenmüller

Free movement of capital (2)

• Scope of FMC (Art. 63 TFEU)

– Direct investments: participation in management and control

– Portfolio investments: purely financial investments

– Extends to third countries

• Restrictions prohibited

– Restrictions are all measures liable to prevent or limit the acquisition of shares in the undertakings concerned or to deter investors of other (Member) States

• Limits

– Gebhard-test: imperative requirements in the general interest

• The Pharmacy case

– ECJ, Case 531/06, Commission v Italy (2009)

– Restriction of FMC: excludes investors from other MS who are not pharmacists

– Justified by the protection of public health: risk of overconsumption or incorrect use of pharmaceuticals

66/26/2013

Free movement of capital

Horst Eidenmüller

The Distrigaz case

Société de distribution du gaz SA is a company in-corporated in Belgium and engaged in the supply of gas. The government intends to privatize the company.

A Royal Decree vests in the State a “golden share” in Distrigaz, which carries the right to oppose, first, any transfer, use as security or change in the company's strategic assets, and, secondly, certain management decisions regarded as contrary to the guidelines for the country's energy policy.

76/26/2013

“Golden Shares”

Horst Eidenmüller

The Porsche-Volkswagen case

Porsche Automobil Holding SE intends to take over Volkswagen AG. Volkswagen is subject to the German VW law which provides:

§ 2(1) The voting rights of a shareholder whose par value shares represent more than one fifth of the share capital shall be limited to the number of votes granted by the par value of shares equivalent to one fifth of the share capital.

§ 3(5) At the general meeting, no person may exercise a voting right which corresponds to more than one fifth of the share capital.

§ 4(1) The Federal Republic of Germany and the Land of Lower Saxony may each appoint two members to the supervisory board on condition that they hold shares in the company.

(3) Resolutions of the general meeting which, under the Law on public limited companies, require the favorable vote of at least three quarters of the share capital represented at the time of their adoption, shall require the favorable vote of more than four fifths of the share capital represented at the time of that adoption.

86/26/2013

“Golden Shares”

Horst Eidenmüller

Golden shares

• MS attempt to retain special rights in privatized companies

– Infrastructure: British Airport Authorities (BAA plc), Telefónica de España SA

– Energy: Repsol SA, Société Nationale Elf-Aquitaine, ENI SpA, Energias de Portugal SA

– Defense: British Aerospace plc, Finmeccanica SpA

– But also banks (Corporación Bancaria de España SA) or industry (Volkswagen AG)

• Rights to control changes in ownership

– Acquisitions above a certain threshold may require government authorization

– Caps on the level of foreign investment and/or voting rights above certain thresholds

• Veto rights on management decisions

– Strategic management decisions subject to government approval

– Veto power over changes to the articles of association and/or the disposal of assets

– Power to appoint members of the board of directors

• Created by specific laws, sometimes under general company law

96/26/2013

“Golden Shares”

Horst Eidenmüller

Limits of golden shares

• MS invoke power over system of property ownership

– Art. 345 TFEU: “The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership.”

– ECJ: no exemption of systems of property ownership from Fundamental Freedoms

• ECJ: golden shares restrict FMC

– Golden shares might deter investors from other MS

– No Keck-exemptions for non-discriminatory measures (unclear)

• Justification in the public interest (Gebhard-test)

– Restrictions permissible for services in the public interest or strategic services

– No justification for economic policy objectives or purely financial interests

– Special rights must not be unduly restrictive and must provide legal certainty

10

State golden shares permissible only for services in the public interest or strategic services (energy, infrastructure)

6/26/2013

“Golden Shares”

Horst Eidenmüller

Golden shares: the good and the bad

• The Distrigaz case: permissible golden share– ECJ, Case 503/99, Commission v Belgium (2002)

– Restriction of FMC: golden share might deter investors

– Justification of the golden share: Gebhard-test

» Public interest objective: safeguarding energy supply

» Appropriate to attain the objective and necessary (no less restrictive measures)

• Specific rules, objective criteria, subject to court review

• Power of opposition rather than requirement of prior approval

• ECJ, Case 112/05, Volkswagen (2007): violation of FMC

– Restriction of FMC: special rights might deter investors

» A 20% voting cap (§ 2(1) VW law), a 20% blocking minority (§ 4(3) VW law), and automatic representation of public authorities on the board (§ 4(1) VW law)

» No public interest-justification for protection of workers proffered

– VW law amendment 2009 kept the 20% blocking minority

» Does not satisfy Commission: new Case 95/12 filed against Germany in Feb. 2012

116/26/2013

“Golden Shares”

Horst Eidenmüller

Extending FMC beyond state measures?

• FMC restrictions without involvement of the state?

– E.g. special rights under general company law for the benefit of private individuals

• Horizontal direct effect of Fundamental Freedoms?

– Free movement of goods: obligation of MS to prevent restrictions caused by individuals

» Blockades of imported food products (ECJ, Case 265/95, Comm. v France (1997))

» Demonstration on the Brenner motorway over 30h (ECJ, Case 112/00, Schmidberger (2003))

– Freedom of establishment: prohibition for individuals to impose restrictions vis-à-vis others

» Quasi-regulatory bodies: e.g. sports associations (ECJ, Case 415/93, Bosman (1995))

» Regardless of regulatory power: e.g. boycott (ECJ, Case 438/05, Viking Line (2007))

• ECJ: FMC applies where measure is attributable to the State

– Volkswagen case, paras. 40, 45 and ECJ, Case 543/08, Comm. v Portugal (2010), para. 53

12

Whether private law rules/measures can amount to an infringement of FMC, must be viewed as an open question

6/26/2013

“Golden Shares”

Horst Eidenmüller

Cross-border M&A activity within the EU

13

0

500

1.000

1.500

2.000

2.500

0

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

450.000

500.000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total value of deals (€ million) Number of deals

6/26/2013

Data: London Economics (2010), p. 19

Takeover Bids Directive

Horst Eidenmüller

Takeovers: policy issues

• Beneficial economic effects of takeovers

– “Market for corporate control” (Henry Manne) → reducing agency costs of equity

• Takeover policy needs to account for ownership structure

– Agency and coordination issues depend on ownership structure

– Dispersed ownership (US, UK): de facto control of the board

» Divergence of interests between board and shareholders (agency costs of equity)

» Coordination problem for dispersed shareholders

– Continental Europe: often dominant shareholders, importance of bank holdings

» Divergence of interests between controlling and non-controlling shareholders

• Decision-making on the offer: defensive tactics by management

– May increase the offer, but also deter bidders

• Protection of (non-controlling) target shareholders

– Minority shareholders suffer from sale to acquirer who “loots” the company

– Two-tier bids: pressure to tender

146/26/2013

Takeover Bids Directive

Horst Eidenmüller

Regulatory models and European approach

• UK: shareholder supremacy

– Shareholder protection: equal treatment, mandatory bid

– Decision-making: board neutrality (no frustration-rule)

– Regulator: Takeover Panel – self-regulatory approach

• US: managerial discretion

– Decision-making: defensive tactics limited only by fiduciary duties

– Shareholder protection: no mandatory bid

– Regulator: courts

• Goals of European takeover policy

– Assumption: takeovers beneficial for the economy as a whole

– Internal Market: takeovers facilitate creation of pan-European companies

– Level playing field: equal conditions for cross-border takeovers throughout Europe

156/26/2013

Transatlantic level playing field is missing

Takeover Bids Directive

Horst Eidenmüller

Directive 2004/25/EC on takeover bids

• Political resistance

– Enactment of the Directive took over 20 years

– Some MS feared takeover threats with respect to national champions with dispersed ownership structures

– Some MS feared that takeovers might compromise the interests of other stakeholders such as employees, the general public, etc.

• General principles (Art. 3)

– Shareholders of the offeree company

» Equal treatment within each class

» Sufficient time and information concerning the bid

– Decision-making: target board must act in the interests of the company as a whole

• Two types of bids

– Voluntary and mandatory takeover bids

– Acquisition of control as the trigger for a mandatory bid

166/26/2013

Takeover Bids Directive

Horst Eidenmüller

Types of (takeover) bids

176/26/2013

Voluntarybids

Mandatorybid

Simple bid:not resulting in/

aimed atacquiring control

Takeover bid:with the objective

of acquiring control(Art. 2(1)(a))

Holding securities that give control

(Art. 5(1))

Takeover Bids Directive

Horst Eidenmüller

Takeovers in Germany

186/26/2013

Source: BaFin, Annual Report (2010), p. 212

Takeover Bids Directive

Horst Eidenmüller

Protection of (minority) shareholders

• Mandatory bid and equitable price (Art. 5)

– When a buyer acquires control of a company, he is required to make a bid to all holders as a means of protecting the minority shareholders

– Equitable price: the highest price paid by the buyer in a time span (6 < 12 months) before gaining control

– Impact on takeover market: higher costs for buyers may result in lower probability for change of control; however, minority protection may have positive stock price impact

• Protection of the exit of remaining shareholders

– Squeeze-out right (Art. 15): after a successful bid, the offeror may require all remaining shareholders to sell at a fair price; rationale: benefits of 100%-ownership

– Sell-out right (Art. 16): after a successful bid, a remaining shareholder may require the offeror to buy at a fair price

– Thresholds for squeeze-out and sell-out set by MS, must range between 90%-95%

– Fair price determined by reference to bid price

19

Takeover Directive places strong emphasis on (minority) shareholder protection

6/26/2013

Takeover Bids Directive

Horst Eidenmüller

Optional arrangements

• Directive seeks to facilitate takeovers

– Breakthrough rule: extraordinary shareholder rights frozen during the bid (Art. 11)

– Board neutrality (Art. 9)

» Defensive action requires prior authorization by the shareholders

» Exception: seeking alternative bids

• However, MS may opt out of this facilitative regime (Art. 12(1))

– Fundamental rules regarding decision-making on the offer are optional to the MS

» Breakthrough of shareholder rights (Art. 11) and board neutrality (Art. 9)

– Political compromise to overcome last minute resistance

– Double option: if a MS opts out, a company can opt in (Art. 12(2))

– Reciprocity exception: MS may permit companies applying breakthrough and board neutrality to disapply them against a bidder who is not subject to them (Art. 12(3))

20

Takeover Directive fails to create a level playing field for takeovers in Europe as key provisions on decision making are optional

6/26/2013

Takeover Bids Directive

Horst Eidenmüller

Implementation of the Takeover Directive

6/26/2013 21

Source: SEC(2007) 268, p. 19

Takeover Bids Directive

Horst Eidenmüller

Summary

• FMC as a central plank

– Facilitates foreign direct investments

– Prohibits restrictions that prevent or limit the acquisition of shares in undertakings or that deter investors of other (Member) States

• FMC limits the use of state golden shares

– Such shares permissible only for services in the public interest or strategic services (energy, infrastructure)

– ECJ case law currently only prohibits golden shares attributable to state action: no horizontal direct effect of FMC

• Takeover Directive fails to create a level playing field

– Protection of shareholders: equitable price, mandatory bid, sell-out right

– But MS may opt out of breakthrough rule and board neutrality requirement

– Moreover, transatlantic level playing field is also missing

226/26/2013

Summary

Horst Eidenmüller 17/3/2013

LMU München

European and Comparative Company, Financial Markets and Bankruptcy Law

Summer Term 2013

Unit 6: European Corporate Entities: Overview

and the European Company (SE)

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.)

LMU München and Oxford University

Horst Eidenmüller7/3/2013

Overview

1) European corporate entities: overview

2) The European Company (Societas Europaea, SE)

3) Regulatory interplay and formation

4) Governance system and employee involvement

5) Transfer of registered office

6) Reasons for the choice of the SE legal form

7) Allianz SE case study

8) Summary

2

Horst Eidenmüller7/3/2013

European corporate entities: overview

• The European Company

– Societas Europaea (SE), available since 2004

– Public company: European stock corporation

– Designed for large corporations that operate multinationally

– E.g.

» Allianz SE

» BASF SE

• Proposal for a European Private Company in 2008

– Societas Privata Europaea (SPE)

– Closely held company

– Designed for small and medium-sized enterprises

3

European corporate entities: overview

Horst Eidenmüller7/3/2013

Further European legal entities

• European Economic Interest Grouping (EEIG, since 1985)

– Developing the economic activities of its members by pooling resources and skills

– Cross-border context: easing cooperation among members from different countries

– Multiple references to the law of the MS in which the EEIG has its registered seat

– E.g.

» DIRO EEIG (European network of law firms)

• European Cooperative Society (SCE, since 2006)

– Easing cross-border activities of cooperatives by providing a single set of rules

– Supplemented by the national laws on cooperatives

– E.g.

» Cassia Co-op SCE (growing of spices and crops)

» Euromovers SCE (moving nationally/within Europe)

4

European corporate entities: overview

Horst Eidenmüller7/3/2013

Why European corporate entities?

• Expected welfare gains by provision of a uniform set of rules

– Significant cost reductions with regard to incorporation and administration

– Facilitating cross-border business by simplified decision and governance structures (e.g. unified board structure and reporting requirements)

– Easier cross-border restructuring within the EU

– Reduction of psychological hurdles for merging/taking over companies fromdifferent MS

• Yardstick competition with the MS’ corporate entities

• European identity for multinational firms

5

European corporate entities are a key element of the Internal Market

European corporate entities: overview

Horst Eidenmüller7/3/2013

History of the European Company

• Early developments

– First (private) draft from Professor Pieter Sanders (1966)

– Commission’s first drafts date back to the 1970s

– Initial aim: providing one uniform set of rules

– Enactment was stalled by a struggle over the issues of employee involvement, board structure, and corporate groups

• Legal basis: Art. 352 TFEU (ex Art. 308 EC Treaty)

• Complex regulatory interplay

– Regulation 2157/2001/EC (hereinafter SER) & Directive 2001/86/EC

– Multiple layers of regulation

– Cross-references to the MS’ laws (Art. 9 SER)

• Review process since 2008

– Amendments to the SE statute are currently being considered

6

The European Company (Societas Europaea, SE)

Horst Eidenmüller7/3/2013

Strong increase in SE incorporations

7

Source: Eidenmüller/Engert/Hornuf (2010)

The European Company (Societas Europaea, SE)

Horst Eidenmüller7/3/2013

Number of incorporations tripled: 2009 – 2012

8

Source: ETUI SE Factsheets

Total number of registered European Companies as of 21 January 2013

The European Company (Societas Europaea, SE)

Horst Eidenmüller7/3/2013

Incorporations by countries as of March 2012

9

1,601 European Companies, registered in 25 countries

Source: ETUI SE Factsheets

The European Company (Societas Europaea, SE)

Horst Eidenmüller7/3/2013

Incorporations by sectors as of January 2013

10

Source: ETUI SE Factsheets

The European Company (Societas Europaea, SE)

Horst Eidenmüller7/3/2013

The SE enjoys increasing popularity

11

The European Company (Societas Europaea, SE)

Horst Eidenmüller

Art. 9 SER

1. An SE shall be governed:

(a) by this Regulation,

(b) where expressly authorised by this Regulation, by the provisions of its statutes or

(c) in the case of matters not regulated by this Regulation or, where matters are partly regulated by it, of those aspects not covered by it, by:

(i) the provisions of laws adopted by Member States in implementation of Community measures relating specifically to SEs;

(ii) the provisions of Member States’ laws which would apply to a public limited-liability company formed in accordance with the law of the Member State in which the SE has its registered office;

(iii)the provisions of its statutes, in the same way as for a public limited-liability company formed in accordance with the law of the Member State in which the SE has its registered office.

2. The provisions of laws adopted by Member States specifically for the SE must be in accordance with Directives applicable to public limited-liability companies referred to in Annex I.

3. If the nature of the business carried out by an SE is regulated by specific provisions of national laws, those laws shall apply in full to the SE.

7/3/2013 12

Regulatory interplay and formation

Horst Eidenmüller7/3/2013

Complex regulatory interplay

13

MS’ laws(i) Law specific for the SE

(ii) Law on stock corporations

(iii) Provisions of the SE’s corporate charter

where authorized by national law

Provisions of the SE’s

corporate charterwhere authorized by the SER

SER

“27 different SEs” dependent on the registered seat’s location

Regulatory interplay and formation

Horst Eidenmüller7/3/2013

Formation of a European Company

• Requirements for use of any route of formation

(1) Existing entities have their registered office and head office within the EU

(2) Some cross-border element

• Four routes of “national” companies to form an SE

– Merger of national stock corporations (Arts. 2(1), 17-31 SER)

– Formation of a holding SE by public/close companies (Arts. 2(2), 32-34 SER)

– Formation of a subsidiary SE by public/close companies (Arts. 2(3), 35, 36 SER)

– Transformation of a national stock corporation into an SE (Arts. 2(4), 37 SER)

• “Secondary formation”

– Establishment of a subsidiary SE by existing parent SE (Art. 3(2) SER)

14

An SE cannot be formed ex nihilo by individuals

Regulatory interplay and formation

Horst Eidenmüller7/3/2013

Chosen routes of formation as of January 2013

15

Source: ETUI SE Factsheets

Regulatory interplay and formation

Horst Eidenmüller7/3/2013

Main features of the European Company

• Full (European) legal personality

• Acquires legal personality with registration (Art. 16(1) SER)

• Minimum registered share capital €120,000 (Art. 4(2) SER)

• Limited shareholder liability (Art. 1(2) SER)

• Governance system

– Board structure (Arts. 38-51 SER)

» Single-tier or dual-tier model

» Chosen in the company’s charter

– General meeting of the shareholders (Arts. 52-60 SER)

» Basic decisions such as charter amendments, transfer of seat, conversion, appointment of board members (save for employees’ representatives)

– Internal governance structure governed primarily by national legislation

16

Governance system and employee involvement

Horst Eidenmüller7/3/2013

Choice of board structure as of March 2012

17

Source: ETUI SE Factsheets

Governance system and employee involvement

Horst Eidenmüller7/3/2013

Employee involvement (1)

• Information and consultation rights

– Keeping employees informed on matters that concern the SE

– Employee representatives may express their views on measures planned by the SE

• Board-level participation

– On the supervisory (dual-tier) or administrative board (single-tier)

– Electing, appointing, or otherwise influencing the selection of some of the members of the SE’s supervisory/administrative organ

• National laws (if at all in place) do not apply

• Primacy of negotiations

– Arrangements for the involvement of employees (i.e. information, consultation, and participation) to be negotiated prior to registration (Art. 12(2) SER)

– Allows flexibility and company-specific solutions (“tailor-made”)

– Agreement to be reached within a six-month period by negotiations between employees (represented by a special negotiation body [SNB]) and management

18

Governance system and employee involvement

Horst Eidenmüller7/3/2013

Employee involvement (2)

• Protection of the status quo ante

– Employees’ vested rights before establishment of the SE as the starting point for negotiations on the involvement in the SE (cf. Recital 18 to the SE-Directive)

– Lowering existing participation rights requires a two-thirds majority in the SNB

– If negotiations on employee involvement fail, the most rigid participation regime to be found among the founding entities will apply to the SE

– Policy of the SE-Directive is defensive: preventing the SE from being used as a means of undermining existing national board-level participation

• Contracting employee involvement: empirical evidence

– Eidenmüller/Hornuf/Reps (2012): relevant actors make use of contractual freedom to craft firm-specific information, consultation, and participation rules

• Data for Germany (as of Nov. 2010)

– 83 operating SEs, 26 co-determined, 41 would be co-determined under German law

19

SE-Directive treats board-level representation prior to SE formation as vested right of employees

Governance system and employee involvement

Horst Eidenmüller7/3/2013

Selected European Companies and their features

20

Governance system and employee involvement

Horst Eidenmüller7/3/2013

Transfer of registered office

• Transfer of the registered office (Art. 8(1) SER)

– No liquidation of the SE or change to a new legal person are triggered

• Mandatory link of head office and registered office (Art. 7 SER)

– Both must be maintained in the same MS

– Hence, transfer of the registered office requires simultaneous relocation of head office functions

– Conformity of Art. 7 SER with FoE is questionable

• Procedure (Art. 8 SER)

– Shareholder approval with qualified majority (Arts. 8(6), 59(1) SER)

– Safeguards for the protection of creditors and opposing minority shareholders are left to the MS (Art. 8(5), (7) SER)

21

Transferring an SE’s registered office necessitates relocation of head office functions and hence triggers substantial restructuring costs

Transfer of registered office

Horst Eidenmüller7/3/2013

Potential reasons for choice of the SE legal form

• Assumption of the European Commission: formation reasons depend on the needs of the individual business

– Simplification of cross-border group structures

» Subjecting subsidiaries to the same governing law

» Standardization of the governance system(e.g. board structure, decision-making)

– Enhanced corporate mobility

– European corporate identity

• What role is played by co-determination on the board level?

– “Freezing” the mandatory co-determination in place at formation

– Downsizing the number of employees’ representatives

– Internationalization of their composition

22

Reasons for the choice of the SE legal form

Horst Eidenmüller7/3/2013

Motives behind German SE formations: survey results

23

Eidenmüller/Engert/Hornuf (2009):

Corporate

mobility is

tax driven

(nobody

mentioned

corporate

law

arbitrage)

Reasons for the choice of the SE legal form

Horst Eidenmüller

Motives behind SE formations in the EEA:regression results

24

Costs of setting up an SE negatively influence

SE incorporations in a jurisdiction

Eidenmüller/Engert/Hornuf (2009):

7/3/2013

Strong

influence of

mandatory co-

determination

– increases

number of SE

incorporations

by a factor of

app. 10-13

Main drivers for SE incorporations: mitigating co-determination on the board level, European image, and streamlining corporate governance

Reasons for the choice of the SE legal form

Horst Eidenmüller7/3/2013

The Czech Societas Europaea Puzzle

• Clear market leader for SE incorporations is the Czech Republic

– 676 SEs, i.e. roughly 60% of all existing SEs, were established here by March 2012

– GDP in the Czech Republic was EUR 145,049 million, roughly 17 times smaller than that of Germany, Europe’s largest economy

– Only a tiny minority of Czech SEs conduct (significant) business activities, and the overwhelming majority are either “shelf” or “UFO companies”

• What are the reasons/drivers? – Eidenmüller/Lasák (2011)

– Incorporations are mainly driven by the desire to economize on enhanced governance flexibility (esp. board size) and the positive European image

– Supply of SEs further fueled by

» Professional shelf company providers who incorporate and sell for profit

» A special “financing technique” that renders the SE, despite its high minimum capital, attractive even for start-ups

25

Shelf company providers might grossly overestimate current market demand

Reasons for the choice of the SE legal form

Horst Eidenmüller7/3/2013

Allianz SE: a case study

• Formation in 2006 (cf. Arts. 2(1), 17-31 SER)

(1) Statutory merger of Riunione Adriatica di Sicurtà S.p.A. (RAS, Italian subsidiary) into Allianz AG by way of acquisition pursuant to Art. 17(2)(a) SER

(2) Conversion of Allianz AG into Allianz SE (cf. Arts. 17(2), 29(1)(d) SER)

• Official motives

– Establishment of a European corporate identity

– Cost reduction by streamlining corporate governance and group activities

– Effectuation of a cross-border merger

• Potential “unofficial” key drivers

– Downsizing the size of the supervisory board (from 20 members to 12)

– Internationalization of the composition of employees’ representatives

» 4 Germany, 1 France, 1 UK divide et impera (management perspective)

26

Allianz SE case study

Horst Eidenmüller7/3/2013

Structure of Allianz SE: before and after

27

Source: Allianz SE, transaction documentation (p. 7)

Allianz SE case study

Horst Eidenmüller7/3/2013

Summary

• European corporate entities as a key element of the Internal Market

– Expected welfare gains by provision of a uniform set of rules

– Yardstick competition with the MS’ corporate entities

– European identity for multinational firms

• The European Company (Societas Europaea)

– Full (European) legal personality and limited shareholder liability

– Complex regulatory interplay of multiple layers of regulation (“27 different SEs”)

– Choice of governance system (single-tier or dual-tier) in the corporate charter

– Registered office can be transferred to another MS

– Main reasons for formations

» Mitigating co-determination on the board level

» European image

» Simplification of cross-border group structures

28

Summary

Horst Eidenmüller 17/3/2013

LMU München

European and Comparative Company, Financial Markets and Bankruptcy Law

Summer Term 2013

Unit 6: European Corporate Entities: Overview

and the European Company (SE)

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.)

LMU München and Oxford University

Horst Eidenmüller7/3/2013

Overview

1) European corporate entities: overview

2) The European Company (Societas Europaea, SE)

3) Regulatory interplay and formation

4) Governance system and employee involvement

5) Transfer of registered office

6) Reasons for the choice of the SE legal form

7) Allianz SE case study

8) Summary

2

Horst Eidenmüller7/3/2013

European corporate entities: overview

• The European Company

– Societas Europaea (SE), available since 2004

– Public company: European stock corporation

– Designed for large corporations that operate multinationally

– E.g.

» Allianz SE

» BASF SE

• Proposal for a European Private Company in 2008

– Societas Privata Europaea (SPE)

– Closely held company

– Designed for small and medium-sized enterprises

3

European corporate entities: overview

Horst Eidenmüller7/3/2013

Further European legal entities

• European Economic Interest Grouping (EEIG, since 1985)

– Developing the economic activities of its members by pooling resources and skills

– Cross-border context: easing cooperation among members from different countries

– Multiple references to the law of the MS in which the EEIG has its registered seat

– E.g.

» DIRO EEIG (European network of law firms)

• European Cooperative Society (SCE, since 2006)

– Easing cross-border activities of cooperatives by providing a single set of rules

– Supplemented by the national laws on cooperatives

– E.g.

» Cassia Co-op SCE (growing of spices and crops)

» Euromovers SCE (moving nationally/within Europe)

4

European corporate entities: overview

Horst Eidenmüller7/3/2013

Why European corporate entities?

• Expected welfare gains by provision of a uniform set of rules

– Significant cost reductions with regard to incorporation and administration

– Facilitating cross-border business by simplified decision and governance structures (e.g. unified board structure and reporting requirements)

– Easier cross-border restructuring within the EU

– Reduction of psychological hurdles for merging/taking over companies fromdifferent MS

• Yardstick competition with the MS’ corporate entities

• European identity for multinational firms

5

European corporate entities are a key element of the Internal Market

European corporate entities: overview

Horst Eidenmüller7/3/2013

History of the European Company

• Early developments

– First (private) draft from Professor Pieter Sanders (1966)

– Commission’s first drafts date back to the 1970s

– Initial aim: providing one uniform set of rules

– Enactment was stalled by a struggle over the issues of employee involvement, board structure, and corporate groups

• Legal basis: Art. 352 TFEU (ex Art. 308 EC Treaty)

• Complex regulatory interplay

– Regulation 2157/2001/EC (hereinafter SER) & Directive 2001/86/EC

– Multiple layers of regulation

– Cross-references to the MS’ laws (Art. 9 SER)

• Review process since 2008

– Amendments to the SE statute are currently being considered

6

The European Company (Societas Europaea, SE)

Horst Eidenmüller7/3/2013

Strong increase in SE incorporations

7

Source: Eidenmüller/Engert/Hornuf (2010)

The European Company (Societas Europaea, SE)

Horst Eidenmüller7/3/2013

Number of incorporations tripled: 2009 – 2012

8

Source: ETUI SE Factsheets

Total number of registered European Companies as of 21 January 2013

The European Company (Societas Europaea, SE)

Horst Eidenmüller7/3/2013

Incorporations by countries as of March 2012

9

1,601 European Companies, registered in 25 countries

Source: ETUI SE Factsheets

The European Company (Societas Europaea, SE)

Horst Eidenmüller7/3/2013

Incorporations by sectors as of January 2013

10

Source: ETUI SE Factsheets

The European Company (Societas Europaea, SE)

Horst Eidenmüller7/3/2013

The SE enjoys increasing popularity

11

The European Company (Societas Europaea, SE)

Horst Eidenmüller

Art. 9 SER

1. An SE shall be governed:

(a) by this Regulation,

(b) where expressly authorised by this Regulation, by the provisions of its statutes or

(c) in the case of matters not regulated by this Regulation or, where matters are partly regulated by it, of those aspects not covered by it, by:

(i) the provisions of laws adopted by Member States in implementation of Community measures relating specifically to SEs;

(ii) the provisions of Member States’ laws which would apply to a public limited-liability company formed in accordance with the law of the Member State in which the SE has its registered office;

(iii)the provisions of its statutes, in the same way as for a public limited-liability company formed in accordance with the law of the Member State in which the SE has its registered office.

2. The provisions of laws adopted by Member States specifically for the SE must be in accordance with Directives applicable to public limited-liability companies referred to in Annex I.

3. If the nature of the business carried out by an SE is regulated by specific provisions of national laws, those laws shall apply in full to the SE.

7/3/2013 12

Regulatory interplay and formation

Horst Eidenmüller7/3/2013

Complex regulatory interplay

13

MS’ laws(i) Law specific for the SE

(ii) Law on stock corporations

(iii) Provisions of the SE’s corporate charter

where authorized by national law

Provisions of the SE’s

corporate charterwhere authorized by the SER

SER

“27 different SEs” dependent on the registered seat’s location

Regulatory interplay and formation

Horst Eidenmüller7/3/2013

Formation of a European Company

• Requirements for use of any route of formation

(1) Existing entities have their registered office and head office within the EU

(2) Some cross-border element

• Four routes of “national” companies to form an SE

– Merger of national stock corporations (Arts. 2(1), 17-31 SER)

– Formation of a holding SE by public/close companies (Arts. 2(2), 32-34 SER)

– Formation of a subsidiary SE by public/close companies (Arts. 2(3), 35, 36 SER)

– Transformation of a national stock corporation into an SE (Arts. 2(4), 37 SER)

• “Secondary formation”

– Establishment of a subsidiary SE by existing parent SE (Art. 3(2) SER)

14

An SE cannot be formed ex nihilo by individuals

Regulatory interplay and formation

Horst Eidenmüller7/3/2013

Chosen routes of formation as of January 2013

15

Source: ETUI SE Factsheets

Regulatory interplay and formation

Horst Eidenmüller7/3/2013

Main features of the European Company

• Full (European) legal personality

• Acquires legal personality with registration (Art. 16(1) SER)

• Minimum registered share capital €120,000 (Art. 4(2) SER)

• Limited shareholder liability (Art. 1(2) SER)

• Governance system

– Board structure (Arts. 38-51 SER)

» Single-tier or dual-tier model

» Chosen in the company’s charter

– General meeting of the shareholders (Arts. 52-60 SER)

» Basic decisions such as charter amendments, transfer of seat, conversion, appointment of board members (save for employees’ representatives)

– Internal governance structure governed primarily by national legislation

16

Governance system and employee involvement

Horst Eidenmüller7/3/2013

Choice of board structure as of March 2012

17

Source: ETUI SE Factsheets

Governance system and employee involvement

Horst Eidenmüller7/3/2013

Employee involvement (1)

• Information and consultation rights

– Keeping employees informed on matters that concern the SE

– Employee representatives may express their views on measures planned by the SE

• Board-level participation

– On the supervisory (dual-tier) or administrative board (single-tier)

– Electing, appointing, or otherwise influencing the selection of some of the members of the SE’s supervisory/administrative organ

• National laws (if at all in place) do not apply

• Primacy of negotiations

– Arrangements for the involvement of employees (i.e. information, consultation, and participation) to be negotiated prior to registration (Art. 12(2) SER)

– Allows flexibility and company-specific solutions (“tailor-made”)

– Agreement to be reached within a six-month period by negotiations between employees (represented by a special negotiation body [SNB]) and management

18

Governance system and employee involvement

Horst Eidenmüller7/3/2013

Employee involvement (2)

• Protection of the status quo ante

– Employees’ vested rights before establishment of the SE as the starting point for negotiations on the involvement in the SE (cf. Recital 18 to the SE-Directive)

– Lowering existing participation rights requires a two-thirds majority in the SNB

– If negotiations on employee involvement fail, the most rigid participation regime to be found among the founding entities will apply to the SE

– Policy of the SE-Directive is defensive: preventing the SE from being used as a means of undermining existing national board-level participation

• Contracting employee involvement: empirical evidence

– Eidenmüller/Hornuf/Reps (2012): relevant actors make use of contractual freedom to craft firm-specific information, consultation, and participation rules

• Data for Germany (as of Nov. 2010)

– 83 operating SEs, 26 co-determined, 41 would be co-determined under German law

19

SE-Directive treats board-level representation prior to SE formation as vested right of employees

Governance system and employee involvement

Horst Eidenmüller7/3/2013

Selected European Companies and their features

20

Governance system and employee involvement

Horst Eidenmüller7/3/2013

Transfer of registered office

• Transfer of the registered office (Art. 8(1) SER)

– No liquidation of the SE or change to a new legal person are triggered

• Mandatory link of head office and registered office (Art. 7 SER)

– Both must be maintained in the same MS

– Hence, transfer of the registered office requires simultaneous relocation of head office functions

– Conformity of Art. 7 SER with FoE is questionable

• Procedure (Art. 8 SER)

– Shareholder approval with qualified majority (Arts. 8(6), 59(1) SER)

– Safeguards for the protection of creditors and opposing minority shareholders are left to the MS (Art. 8(5), (7) SER)

21

Transferring an SE’s registered office necessitates relocation of head office functions and hence triggers substantial restructuring costs

Transfer of registered office

Horst Eidenmüller7/3/2013

Potential reasons for choice of the SE legal form

• Assumption of the European Commission: formation reasons depend on the needs of the individual business

– Simplification of cross-border group structures

» Subjecting subsidiaries to the same governing law

» Standardization of the governance system(e.g. board structure, decision-making)

– Enhanced corporate mobility

– European corporate identity

• What role is played by co-determination on the board level?

– “Freezing” the mandatory co-determination in place at formation

– Downsizing the number of employees’ representatives

– Internationalization of their composition

22

Reasons for the choice of the SE legal form

Horst Eidenmüller7/3/2013

Motives behind German SE formations: survey results

23

Eidenmüller/Engert/Hornuf (2009):

Corporate

mobility is

tax driven

(nobody

mentioned

corporate

law

arbitrage)

Reasons for the choice of the SE legal form

Horst Eidenmüller

Motives behind SE formations in the EEA:regression results

24

Costs of setting up an SE negatively influence

SE incorporations in a jurisdiction

Eidenmüller/Engert/Hornuf (2009):

7/3/2013

Strong

influence of

mandatory co-

determination

– increases

number of SE

incorporations

by a factor of

app. 10-13

Main drivers for SE incorporations: mitigating co-determination on the board level, European image, and streamlining corporate governance

Reasons for the choice of the SE legal form

Horst Eidenmüller7/3/2013

The Czech Societas Europaea Puzzle

• Clear market leader for SE incorporations is the Czech Republic

– 676 SEs, i.e. roughly 60% of all existing SEs, were established here by March 2012

– GDP in the Czech Republic was EUR 145,049 million, roughly 17 times smaller than that of Germany, Europe’s largest economy

– Only a tiny minority of Czech SEs conduct (significant) business activities, and the overwhelming majority are either “shelf” or “UFO companies”

• What are the reasons/drivers? – Eidenmüller/Lasák (2011)

– Incorporations are mainly driven by the desire to economize on enhanced governance flexibility (esp. board size) and the positive European image

– Supply of SEs further fueled by

» Professional shelf company providers who incorporate and sell for profit

» A special “financing technique” that renders the SE, despite its high minimum capital, attractive even for start-ups

25

Shelf company providers might grossly overestimate current market demand

Reasons for the choice of the SE legal form

Horst Eidenmüller7/3/2013

Allianz SE: a case study

• Formation in 2006 (cf. Arts. 2(1), 17-31 SER)

(1) Statutory merger of Riunione Adriatica di Sicurtà S.p.A. (RAS, Italian subsidiary) into Allianz AG by way of acquisition pursuant to Art. 17(2)(a) SER

(2) Conversion of Allianz AG into Allianz SE (cf. Arts. 17(2), 29(1)(d) SER)

• Official motives

– Establishment of a European corporate identity

– Cost reduction by streamlining corporate governance and group activities

– Effectuation of a cross-border merger

• Potential “unofficial” key drivers

– Downsizing the size of the supervisory board (from 20 members to 12)

– Internationalization of the composition of employees’ representatives

» 4 Germany, 1 France, 1 UK divide et impera (management perspective)

26

Allianz SE case study

Horst Eidenmüller7/3/2013

Structure of Allianz SE: before and after

27

Source: Allianz SE, transaction documentation (p. 8)

Allianz SE case study

Horst Eidenmüller7/3/2013

Summary

• European corporate entities as a key element of the Internal Market

– Expected welfare gains by provision of a uniform set of rules

– Yardstick competition with the MS’ corporate entities

– European identity for multinational firms

• The European Company (Societas Europaea)

– Full (European) legal personality and limited shareholder liability

– Complex regulatory interplay of multiple layers of regulation (“27 different SEs”)

– Choice of governance system (single-tier or dual-tier) in the corporate charter

– Registered office can be transferred to another MS

– Main reasons for formations

» Mitigating co-determination on the board level

» European image

» Simplification of cross-border group structures

28

Summary

Horst Eidenmüller 17/9/2013

LMU München

European and Comparative Company, Financial Markets and Bankruptcy Law

Summer Term 2013

Unit 7: The European Private Company and Regulatory

Competition between the Member States and the EU

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.)

LMU München and Oxford University

Horst Eidenmüller7/9/2013

Overview

1) Why a European Private Company?

2) Proposal for a European Private Company

3) Principles of closed corporations in Europe

4) Regulatory Competition between the Member States

and the EU

5) Summary

2

Horst Eidenmüller7/9/2013

Why a European Private Company (SPE)?

• Current legal environment for SMEs’ cross-border business

– SE aims at large companies ( minimum capitalization €120,000)

– ECJ’s case law enabled free choice of governing law and mobility of companies

» SMEs set up under national company law can operate throughout Europe if permitted to do so by the home state

» But customers in general prefer to deal with a local legal entity

» If SMEs wish to meet this preference, they have to operate through subsidiaries set up under the respective national company law ( legal costs)

• Other reasons for introducing the SPE

– Expected welfare gains by provision of a uniform set of rules (cf. Unit 6)

– European corporate identity lends credibility

– Yardstick competition with the MS’ corporate entities

3

The SPE as a vehicle to facilitate cross-border business of SMEs

Why a European Private Company?

Horst Eidenmüller7/9/2013

Proposal for an SPE: the state of play

• First reflections on a European Private Company in the 1970s

• Commission presented a proposal in June 2008

• Amendments by the European Parliament (2009)

• Company Law Action Plan 2012: The Commission will continue to work on the follow-up to the SPE proposal

• Chief matters of the ongoing debate

– Uniform set of rules to be stipulated by a Regulation is envisaged

» Avoiding the SE’s complex regulatory interplay

» Enhancing legal certainty

– Minimum legal capital requirement? ( English Ltd. vs. German GmbH)

» Commission proposal: €1, distributions only after balance-sheet test

– Creation by individuals ex nihilo?

– Employee involvement? Threshold?

4

Proposal for a European Private Company

Horst Eidenmüller 57/9/2013

Principles of closed corporations in Europe

Principles of closed corporations in Europe

Horst Eidenmüller

Goals of the Working Group

• Develop principles for closed corporations

– Clean-slate-approach: build the ideal closed corporation from scratch

– Not: pros/cons of the draft regulation on the Societas Privata Europæa (SPE)

• Project limited to principles

– No comprehensive comparative analysis of existing statutes

– Specific rules or a full “Model Business Corporation Act” are not presented

• Focus on closed corporations

– Issues specific to public corporations are omitted

• Analysis and principles are based on an economic perspective

– Efficiency as an important goal of a company statute

– Limits of economic reasoning taken into account (“Behavioral Law & Economics”)

67/9/2013

Develop the modern design of a “Volkswagen” model for a closed corporation

Principles of closed corporations in Europe

Horst Eidenmüller

Regulatory issues

• Characteristics of a closed corporation

– No public trading of shares; trading may be subject to further restrictions

– Diversity of uses: start-ups, SMEs, group holding companies … design should fit all

• Impact on agency issues

– Conflicts among shareholders are aggravated compared to a public corporation

» Lock-in of the minority and hold-ups of the majority

» Relational background between shareholders (often family)

– The shareholder/director conflict is less severe compared to a public corporation

» Management frequently not delegated but assumed by shareholders

» Coordination between a limited number of shareholders facilitates control

– Creditor protection issues are more severe

» Higher incidence of risk shifting as directors often are shareholders

77/9/2013

Principles of closed corporations in Europe

Horst Eidenmüller

Protecting minority shareholders

• Opportunistic behavior of the majority looms large

– Related party transactions, siphoning of profits, etc.

– Facilitated by majority voting, lock-in of the minority, valuation difficulties, limited court review (BJR)

– “Achilles’ heel of close corporations”

• Mandatory super-majority requirements, fiduciary duties and exit rights

– Deficits of ex ante contracting, e.g. due to relational embeddedness

– Legal tools to restrain behavior which is contrary to the interest of the company as a whole and in the sole interest of favoring the majority at the expense of the minority

• Procedures to enforce minority rights and resolve disputes

– Direct and/or derivative actions and information rights

– Arbitration and mediation schemes

87/9/2013

Principles of closed corporations in Europe

Horst Eidenmüller

Other issues among shareholders

• Abuse of minority protections: “tyrannie des faibles”

– Veto rights and super-majority requirements used contrary to their purpose

– Mandatory rules advisable to prevent such abuse

» Expulsion upon court review should be available to address abusive hold-outs

» But squeeze-outs should not be available generally

• Closed corporations are susceptible to deadlock

– Relational element and governance: family background in many closed corporations

» “Small corporations emulate marriages in the frequency and bitterness of their breakdown” (Paul Davies)

– 50/50-corporations

– Various means of resolving deadlock

» Mandatory resolution mechanisms as ultima ratio where party agreement fails,

» E.g. appraisal rights, auctions, third party decision rights

97/9/2013

Principles of closed corporations in Europe

Horst Eidenmüller

Controlling directors’ behavior

• Duty of care – confined by robust BJR

Limits liability to cases of evident breach

Duty owed to company, but also protects creditors, esp. in the vicinity of bankruptcy

» But unfettered business judgment

• Duty of loyalty: avoid conflicts of interest

Specific rules for frequent conflicts of interest, e.g. corporate opportunities, director compensation, loans to directors, self-dealing, competitive behavior

Statutory safe harbor: shareholder ratification

• Control by shareholders

– Elect and dismiss directors at any time

– Articles can provide for a more independent role

– Liability of shareholders as shadow or de facto directors presumed if they persistently and significantly interfere with management

7/9/2013 10

Principles of closed corporations in Europe

Horst Eidenmüller

Creditor protection

• The case for creditor protection– Limited liability of the shareholders

» Fundamental prerequisite for efficient allocation of capital

– Risks (agency costs of debt)

» Insufficiency or depletion of company assets through distributions

» Hazardous strategies (risk shifting) of shareholders/managers

• Mandatory disclosure of financial information?

– Information facilitates self-help: adjusting creditors can price debt (loans, bonds, etc.) according to the financial health of the company

– But public filing of financial information benefits competitors

• Termination rights

– Articles matter: business purpose, line of business, directors’ scope of liability, etc.

– Right to terminate continuing obligations in case of amendment

117/9/2013

Principles of closed corporations in Europe

Horst Eidenmüller

Further creditor protection tools

• Liability and duties of the directors

– General duty: maximizing company value by pursuing positive NPV investments

– During ordinary course of business

» Liability towards the company (general duties of care and loyalty, BJR)

» Liability of shareholders adversely influencing management (shadow directors)

– During times of distress (→ overinvestment/risk-shifting incentives)

» Change in the content and direction of directors’ duties?

» General duty remains, but duty to trigger timely restructuring (→ wrongful trading rule or duty to file for insolvency proceedings)

• Checks on depletion of company’s assets

– No mandatory initial minimum capital, but (voluntary) statutory capital as a signaling device to which distribution restrictions would apply

– Distributions only after a conservative balance sheet test (principle of prudence)

127/9/2013

Principles of closed corporations in Europe

Horst Eidenmüller

Company formation

• Facilitating formation by minimizing transaction costs

– Speed and cost of formation matter regarding the choice and attractiveness of a corporate entity and liability risks during the formation stage

– Legitimate substantive requirements

» At least shareholder(s), manager(s), seat, legal name, stated capital

» For purposes of evidence and disclosure: written or text form is sufficient

– Procedural requirements

» Formal review whether the substantive requirements have been met

» Responsibility should be vested in the same authority (administrative or judicial body) that keeps the register

– Making use of modern communication technology

» Enabling fully electronic, real-time formations as an option

137/9/2013

Principles of closed corporations in Europe

Horst Eidenmüller

Transfer of shares

• Efficient allocation vs. restrictions on transferability

– Free transferability of shares at low cost as a precondition for an efficient allocation of resources (Coase theorem) and a tool for protecting minority shareholders (exit)

– However, restrictions on the transfer of shares may be legitimate

• Regulatory tasks

– Reduce legal uncertainty (transaction costs)

– Straightforward reference point for acquisitions in good faith

• “Register only”-solution

(1) Agreement on the transfer in written or text form; and

(2) Electronical and decentralized entry in the Commercial/Company Register with constitutive effect

– In case of restrictions: transfer would require unanimous consent (default rule)

– Entry as the reference point for acquisitions in good faith

147/9/2013

Principles of closed corporations in Europe

Horst Eidenmüller

Regulatory Competition between the Member States and the EU

• Vertical dimension of Regulatory Competition

– Company forms offered by the EU (especially Societas Europaea): competition between national public limited-liability company forms and SE

– ‘Common European Sales Law’ as an optional instrument: competition between the MS’ contract laws and that of the EU

• Benefits of vertical regulatory competition in the EU

– Citizens / companies decide on the appropriate degree of Europeanisation in the field of company law

– Vertical regulatory competition can improve the acceptance of European law

– Vertical regulatory competition is in line with the principle of subsidiarity

• Limits of vertical regulatory competition in the EU

– Little incentive for the European legislator to compete with national legislators; European legislation depends on the political will of the Member States

– Few European case law / no specialised European court system for company law issues

157/9/2013

Regulatory Competition between the Member States and the EU

Horst Eidenmüller7/9/2013

Summary

• The SPE (Societas Privata Europaea)

– Could facilitate cross-border business of SMEs by providing a European identity

– Company Law Action Plan 2012: Commission will continue to work on the follow-up to the SPE proposal

• Principles of closed corporations in Europe

– Characteristics of a closed corporation

– Agency issues: conflicts among shareholders, shareholder/director conflict, creditor protection

• Regulatory Competition between the Member States and the EU

– Societas Europaea has added a vertical dimension to Regulatory Competition in that the EU itself offers its own company forms

– Vertical regulatory competition seems – at least in the field of company law – to be much less pronounced than horizontal competition between the Member States

16

Summary

Horst Eidenmüller

Unit 8: Regulation of Primary and SecondaryFinancial Markets

17/9/2013

LMU München

European and Comparative Company, Financial Markets and Bankruptcy Law

Summer Term 2013

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.)LMU München and Oxford University

Horst Eidenmüller7/9/2013

Overview

1) Introduction to financial markets regulation and the process of

integration in European financial markets law

2) Regulatory technique: the Lamfalussy procedure

3) Organization of financial markets

4) Primary markets regulation

5) Secondary markets regulation

6) Financial intermediaries

7) Summary

2

Horst Eidenmüller7/9/2013

Financial markets

• Sub-markets

– Capital markets

– Money markets

– Foreign exchange markets

• Capital markets

– Long(er)-term financial instruments

» Equities

» Fixed income: bonds, ABS, MBS, CDOs (different tranches)

» Investment certificates, ETFs (exchange traded funds)

» Derivatives: options, swaps, forwards, futures

• Primary and secondary markets

– Initial issuance of securities

– Trading of securities

3

Introduction to financial markets regulation and the process of integration in European financial markets law

Horst Eidenmüller7/9/2013

Some characteristics of efficient financial markets

• Informational efficiency

– Information reflected in market prices immediately after disclosure

– Semi-strong form of the Efficient Capital Market Hypothesis (Fama (1970))

» Market prices adjust to publicly available new information very rapidly

» Investors can only realize excess returns based on private information

– But Behavioral Finance: bubbles and stock market crashes cannot be explained on the basis of rational investor behavior

• Allocative efficiency

– Capital flows are allocated to where they can be best used

• Institutional efficiency and stability of markets

– Trust of investors being placed in the functioning of the market and its institutions

– Excessive volatility impairs trust speculation flourishes

• Operational efficiency: liquidity of markets ( transaction costs)

4

Introduction to financial markets regulation and the process of integration in European financial markets law

Horst Eidenmüller7/9/2013

Functions and aims of financial markets regulation

• Ensuring transparency of markets

– Fair and full disclosure of all material information relating to the markets

Fostering informational and allocative efficiency

• Strengthening market confidence and investor protection

– Regulatory framework for conduct of market participants as well as for fair trading on an equally informed basis

– Safeguarding market institutions and the financial system against systemic risk and contagion

Enhancing institutional efficiency and market stability

• Common regulatory traits on both sides of the Atlantic

– Promotion of fair and efficient markets, inter alia by a broad use of disclosure requirements ( investor protection)

– Trend to shift powers from the (Member) States to the EU/federal level

5

Introduction to financial markets regulation and the process of integration in European financial markets law

Horst Eidenmüller7/9/2013

Financial markets law: origin and FSAP 1999

• Early steps

– Creating a single market for financial services, investments, and securities trading

– Gradual harmonization since the 1970s: first generation of Directives

• Free movement of capital gained momentum

– Fueled by the ECJ’s case law and the introduction of the Euro in 1999

• Commission’s Financial Services Action Plan (FSAP, 1999)

– 42 measures: second generation of Directives replacing former legislation

– Shaped the (still) current regulatory framework at the EU level

– Developing a single market in wholesale financial services

– Delivering a framework for open and secure retail transactions

– Ensuring financial stability by putting prudential rules and supervision in place

6

FSAP led to a new generation of Directives, significantly fostering integration

Introduction to financial markets regulation and the process of integration in European financial markets law

Horst Eidenmüller

The EU’s financial markets law: overview

• Key legal instruments

1. Market Abuse Directive (2003) on insider dealing and market manipulation

2. Prospectus Directive (2003) on the prospectus to be published when securities are offered to the public or admitted to trading

3. Directive on Markets in Financial Instruments (MiFID, 2004)

4. Transparency Directive (2004) on the harmonization of transparency requirements

• Organization of financial markets: MiFID

• Issuer-related regulation

– Primary markets: Prospectus Directive

– Secondary markets: Market Abuse Directive and Transparency Directive

• Regulation of financial intermediaries

– MiFID: framework for market behavior

77/9/2013

Introduction to financial markets regulation and the process of integration in European financial markets law

Horst Eidenmüller7/9/2013

Integration of EU’s financial markets

• European-wide financial markets are more efficient

– Higher liquidity, lower transaction costs, and more efficient pricing compared to MS

• Tools to further the integration

– Integration by deregulation: Fundamental Freedoms (Freedom of services, FMC)

– Integration by harmonization

» Minimum harmonization through Directives

• Removing remaining obstacles to cross-border financial services

• More stringent requirements can be imposed by the host MS

» In the recent past, partial shift to maximum harmonization (e.g. MiFID 2004)

• Legal basis

– Treaties lack an explicit competence for financial markets regulation

Instruments mostly rely on competences to approximate the rules that provide safeguards for the protection of creditors, employees, and other stakeholders

» Arts. 50(2)(g), 53(1), 59, 62, 115, 169 TFEU

8

Introduction to financial markets regulation and the process of integration in European financial markets law

Horst Eidenmüller7/9/2013

Financial markets law: recent developments

• The Commission’s approach since 2005: consolidation

– Called a halt on new financial services legislation

– Further implementation and consolidation of the existing FSAP framework

– Strengthening cooperation in supervision

– Mandatory review of FSAP Directives (after 5 years)

• Impact of the recent financial crisis

– Legislative initiatives focus on improving

» The supervisory framework

• New regulatory authorities on both sides of the Atlantic

» Regulatory framework for banks and other large financial institutions

• E.g. bank resolution regimes

» The corporate governance framework

• E.g. improving directors’ incentive structures

9

Introduction to financial markets regulation and the process of integration in European financial markets law

Horst Eidenmüller

• Four-level regulatory approach

Interplay of the European Commission (EC) and the European Securities and Markets Authority (ESMA)

Framework Directives/Regulations

Drafting subordinate acts(delegated and implementing acts)

Issuing guidelines and recommendations regarding efficient supervisory practices and uniform application of EU law

Supervision and enforcement

7/9/2013

Regulatory technique: the Lamfalussy procedure

10

Lamfalussy procedure facilitated lawmaking: insertion of expert knowledge, agreement on the principal terms can be reached more easily

Regulatory technique: the Lamfalussy procedure

Horst Eidenmüller7/9/2013

Organization of financial markets: trading venues

• MiFID 2004/39/EC covers a broad range of issues

– Organization of securities markets, inter alia trading venues, trading systems, trading execution, and trading supervision

– Lays down minimum powers for regulators

• Trading venues (Arts. 5, 9, 27, 36-47 MiFID)

– Regulated markets run by market operators (e.g. Deutsche Börse AG as the operator of the Frankfurt SE)

US: § 6 SEA 1934: “securities exchanges”

– Multilateral trading facilities (MTFs) run by investment firms or market operators (e.g. London-based Chi-X Europe)

US: Alternative Trading Systems (ATS)

– Systematic internalizers (SIs)

» Investment firms dealing on own account by executing client orders outside a regulated market or an MTF

US: § 15 SEA 1934: “brokers and dealers”

11

Organization of financial markets

Horst Eidenmüller7/9/2013 12

Scope of EU’s financial markets law: overview

OTC (including SIs & dark pools)

MTFsRegulated markets

Derivatives

Fixed-income

EquitiesTy

pe

of

fin

an

cial

inst

rum

ent

Trading venue

MiFID: Transparency obligations only for trading equities

(cf. Arts. 27-30, 44-45 MiFID)

Issuer-related EU regulation on primary and secondary markets: only issuers/issues listed on regulated markets

(cf. Art. 1(1) Prospectus Dir., Art. 9(1) Market Abuse Dir., Art. 1(1) Transparency Dir.)

• Scope of issuer-related EU regulation

– Applies in general only to issuers/issues listed on regulated markets

Organization of financial markets

Horst Eidenmüller7/9/2013

Market shares of trading venues

13

Source: Bošković, Cerruti & Noël (2010) Source: Aite Group

By types of financial instruments:

EU equities trading as of May 2009, fixed income as of December 2008

US equities as of July 2009 in exchange listed stocks, fixed income as of July 2009 (TRACE)

Less regulated Over-the-Counter (OTC) trading soared in recent years

Organization of financial markets

Horst Eidenmüller7/9/2013

Organization of financial markets: trading execution

• Regulatory goals in the US and the EU

– Promotion of fair, transparent, and efficient trading

– Ensuring equal access to all material information relating to market transactions

• Transparency obligations for trading equities (MiFID)

– Pre-trade transparency: make public current bid and offer prices

– Post-trade transparency: make public price, volume, and time of transactions

– Apply to all three trading venues

US: NMS Regulation Rules 601, 602 (dissemination of quotations & transactions)

• Best execution obligation for investment firms (Art. 21 MiFID)

– Execute orders on terms most favorable to the client

– Trades to be executed at venues with the lowest transaction costs

US: NASD Conduct Rule 2320 (best execution, price is paramount)

14

Transparency obligations only for trading equities

Organization of financial markets

Horst Eidenmüller7/9/2013

Primary markets regulation: prospectus requirements

• Governing the (initial) issuance of securities by companies

• Why prospectus requirements?

– Fostering informational and allocative efficiency of financial markets

» Information asymmetries might lead to adverse selection of issuers as well as, consequently, misallocation of capital and market failure

– Enhancing operational efficiency of financial markets

» Avoiding high and multiple search costs

• Common regulatory approach in the US and the EU

– Entry strategy: mandatory disclosure (draw up a prospectus) upon any offering of securities to the public and/or trading on a regulated market

– EU: Art. 3 Prospectus Directive (2003); US: § 10 SA 1933

15

Prospectus requirements as a means to enhance the informational,allocative, and operational efficiency of financial markets

Primary markets regulation

Horst Eidenmüller7/9/2013

Primary markets: Prospectus Directive

• Content of the prospectus (Art. 5)

– Completeness, clarity, accuracy, and timeliness of information

US: § 10 SA 1933 & SEC Rules 421(b), (d)

• No publication without prior approval (Art. 13)

• Cross-border offers and admission to trading

– Frictions would likely occur when securities are issued in several MS

– Solution: country of origin principle and mutual recognition (“European passport”)

» Home country law of issuer governs ( registered office, Art. 2(1)(m)(i))

» Non-EU issuers can choose the home country to some degree (affected market principle, Art. 2(1)(m)(iii))

» Prospectus approval by the issuer’s home MS to be recognized by any host MS (Arts. 13(1), 17(1))

• Some issues are left to the MS

– E.g. prospectus liability, administration and enforcement of harmonized rules

16

Primary markets regulation

Horst Eidenmüller7/9/2013

Secondary markets regulation: overview

• Two main pieces of regulation on the EU level

– Transparency Directive and Market Abuse Directive

» Centerpieces: information disclosure and control of wrongful market conduct

» Correspond in their regulatory function to the SEA 1934: govern the trading of securities issued by companies

• Why information disclosure?

– Fostering informational efficiency of financial markets

» Reducing informational asymmetries on secondary securities markets by providing market participants with material information as soon as possible

– Enhancing efficient capital allocation ( market for corporate control)

– Increasing the operational efficiency of financial markets ( search costs)

– Strengthening institutional efficiency and investors’ confidence

» Equal treatment of investors with regard to information supply

» Fostering informed investment decisions

17

Secondary markets regulation

Horst Eidenmüller7/9/2013

Transparency Directive

• Periodic financial reporting of issuers (Arts. 4(2), 5(2))

– Annual, half-yearly, and quarterly financial reports

– True and fair view of the financial position and performance of the issuer

US: §§ 13(a), 15(d) SEA 1934 (periodical reports)

• Disclosure of major shareholdings (Arts. 9-15)

– Change in shareholder composition can send out major signals concerning the fundamental value of the issuer to the market

– Shareholders must notify the issuer when the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50%, or 75% are reached, exceeded, or fallen below

• Country of origin principle

– In general, disclosure requirements of the issuer’s “home MS” (Art. 2(1)(i)) apply

» European issuers: determined by registered office

» Non-EU issuers: can choose the home country to some degree

– Home MS of issuer may/host MS must not impose more stringent provisions

18

Secondary markets regulation

Horst Eidenmüller7/9/2013

Market Abuse Directive: case

The German pharmaceutical company P-AG, listed on the Frankfurt SE, invented a new antidepressant agent. Many market observers expect it to be a blockbuster drug. While market approval by the FDA is still pending, W, the wife of an FDA officer involved in the approval proceedings, gained knowledge of an imminent FDA approval.

Is she allowed to purchase P-AG shares in Europe?

Upon notification of approval, is P-AG required to disclose this information promptly (pursuant to EU law)?

19

Secondary markets regulation

Horst Eidenmüller7/9/2013

Ban on insider dealing: introduction

• The case against insider dealing

– Ban on insider dealing was historically not an uncontested policy choice

» Potential positive effects of insider dealing (Manne (1966))

• Material information is reflected faster in (then fair) market prices

• Incentives for management (extra profits) to further shareholder value –however, the same holds true for share sales upon any downside risk

» But threats to market integrity and investors’ confidence

• Non-insiders would systematically lose money to insiders due to information asymmetries

• Investors would lack confidence in market integrity lower liquidity

• Ban on insider dealing in the US and the EU

– EU: Arts. 2-4 Market Abuse Directive

– US: § 10(b) SEA 1934 & SEC Rule 10b-5 (anti-fraud provisions)

20

Insider dealing should be banned because negative effects outweighpotential beneficial effects

Secondary markets regulation

Horst Eidenmüller7/9/2013

Market Abuse Directive: details

• “Inside information” (Art. 1(1))

(1) Precise information, (2) not yet public, (3) relating to issuers of/or to financial instruments, (4) likely to have significant effect on the prices of those instruments

• Prohibition on using inside information by

– Acquiring or disposing of financial instruments (Art. 2)

– Disclosing or recommending inside information to any other person (Art. 3)

Case: W is not allowed to purchase P-AG shares

• Prompt (ad-hoc) disclosure of information by issuers (Art. 6(1))

– Issuers shall promptly disclose inside information which directly concerns them

– Delay of disclosure only for legitimate interests (e.g. ongoing negotiations)

Different emphasis in the US: Regulation Fair Disclosure (no selective disclosure)

Case: upon notification of drug approval, P-AG is required to disclose

• Ban on market manipulation by any person (Art. 5)

21

Secondary markets regulation

Horst Eidenmüller7/9/2013

Financial intermediaries: functions and problems

• Arrange deals between issuers and investors or between investors

• Fulfill crucial functions with regard to informational efficiency

– Making (the mass of) market information comprehensible to investors

– Equipping investors with their expertise (investment strategies, etc.)

• But principal-agent conflicts loom large

– Investors lack the means to ensure comprehensive supervision of intermediaries

– Investment firms might be inclined to pursue goals contrary to those of their clients

• Common regulatory approach in the US and the EU

– Ensuring prudent management of investment firms and investment decisions on an informed basis by

» Putting a supervisory framework in place

» Establishing a framework for market behavior (adequate business conduct)

22

Financial intermediaries

Horst Eidenmüller7/9/2013

Financial intermediaries: the MiFID framework

• Supervisory framework and pre-clearance

– Performance of investment services subject to prior authorization (Art. 5)

– Fit and proper tests for investment managers and major shareholders (Arts. 9, 10)

US: § 15 SEA 1934

• Country of origin principle and mutual recognition (Art. 6(3))

– European “single passport”: freedom to provide EU-wide investment services once authorized by home MS

– Maximum harmonization (Art. 31(1)): MS must not impose more stringent requirements on investment firms in respect of matters covered by the Directive

• Obligations when performing financial services (Art. 19)

– Services must be carried out in

» An honest, fair, and professional manner

» Accordance with the best interests of the clients

US: NASD Conduct Rule IM-2310-2

23

Financial intermediaries

Horst Eidenmüller7/9/2013

Summary

• EU aims at establishing an entirely uniform single capital market

– Deregulation: Freedom of services and FMC

– Harmonization through Directives (esp. country of origin principle)

• Common traits in EU and US regulation

– Promotion of fair and efficient markets, inter alia by a broad use of disclosure

– Trend to shift powers from the (Member) States to the EU/federal level

• Lamfalussy procedure as a special EU regulatory technique

• A framework for securities markets’ organization: MiFID

• Issuer-related regulation

– Primary markets: Prospectus Directive

– Secondary markets: Transparency Directive and Market Abuse Directive

• Regulation of financial intermediaries

– Rules on market conduct

24

Summary

Horst Eidenmüller

Unit 9: Recent Financial Crisis andPolicy Responses

17/15/2013

LMU München

European and Comparative Company, Financial Markets and Bankruptcy Law

Summer Term 2013

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.)LMU München and Oxford University

Horst Eidenmüller7/15/2013

Overview

1) Major causes of the recent financial crisis

2) Policy responses and outlook

3) Summary

2

Horst Eidenmüller7/15/2013

The global financial crisis: major causes (1)

• Widespread failures in financial supervision

– Regulators did not adequately address “financial innovations” (derivatives such as MBS, CDOs in the wake of the US housing boom)

– Policymakers did not keep pace with the increasing importance of less regulated “shadow” banks (mortgage banks, hedge funds, conduits, etc.) in providing credit

– No effective resolution regimes for ailing financial institutions in place

• Moral hazard problems

– Mortgage banks could pass credits in securitized form on to investors (off-balance)

– Incentives for becoming “too big to fail”/systemically relevant

• No sufficient capital buffers and too high leverage ratios

– Debt maturity mismatch: short-term borrowing and long-term, risky investments

– No adequate capital cushions to absorb loan defaults/value decreases of securities

Solvency crisis: rapid deleveraging (selling assets) when housing bubble bursted in 2007 triggered downward spiral

3

Major causes of the recent financial crisis

Horst Eidenmüller7/15/2013

Pre-crisis leverage ratios of US investment banks

4

Source: http://freerisk.org/

Source: OECD Report (2009), at 2

Major causes of the recent financial crisis

Horst Eidenmüller7/15/2013

Majority of US banks’ debt was short-term (as of 2009)

5

Source:Hanson/Kashyap/Stein (2010), at 35

Major causes of the recent financial crisis

Horst Eidenmüller

• “Shadow” financial institutions lend and borrow money just like banks, but are less regulated (e.g. mortgage banks, money market funds, hedge funds, conduits)

• Mortgage banks (Fannie Mae, Freddie Mac) played a significant role in providing credit, fueling the housing bubble

7/15/2013

Increasing importance of “shadow” banks

6

“Shadow” bankliabilities v.

traditional bankliabilities (US-$ tn.)

Source: Federal Reserve Bank of New York (2012), at 8

Major causes of the recent financial crisis

Horst Eidenmüller7/15/2013

The global financial crisis: major causes (2)

• Global interconnectedness of large financial institutions

– Securitized financial instruments (MBS, CDOs) enabled (institutional) investors around the world to invest in the US housing market

– Though initially “only” a subprime crisis, it could become a global financial crisis

• The role of credit rating agencies (CRAs)

– CRAs failed to price accurately the risk involved with mortgage-related products

– Investors relied too heavily on the CRAs’ opinion credit was granted even where not economically justified

• Corporate governance failures

– Poorly designed incentive compensation, geared to short-term profitability

– Weak internal risk management fostered a culture of excessive risk-taking

– Investment managers often compensated based on the volume of client assets

7

Financial crisis revealed multiple regulatory failuresin EU and US financial markets laws

Major causes of the recent financial crisis

Horst Eidenmüller7/15/2013

Securitization markets nearly shut-down in 2008/09

8

Securitization market activity

Source: Wikipedia

Major causes of the recent financial crisis

Horst Eidenmüller7/15/2013

Approaches to financial regulation (1)

• Microprudential approach

– Aims at preventing the costly failure of individual financial institutions

– Banks finance themselves with government-insured deposits ( moral hazard)

– Central tool: capital requirements internalize losses and mitigate moral hazard

– Regulation is efficient when it reduces deposit insurance losses to an adequate level

• The lessons learned from the recent crisis

– Regulators were indifferent to the method of capital adjustment upon distress

» Banks could restore their capital ratios by raising capital or shrinking assets

» Debt overhang problem (Myers (1977)): banks more prone to shrinking assets

– Asset shrinkage caused social costs as multiple financial institutions were distressed

» Credit crunch due to a strong cut-back of overall new lending

» “Fire-sales” effects: prices of toxic securities dropped sharply

9

Distressed financial institutions did not adequately internalize social costs –pre-crisis regulatory framework was largely microprudential and thus deficient

Policy responses and outlook

Horst Eidenmüller7/15/2013

Approaches to financial regulation (2)

• Macroprudential approach (Hanson/Kashyap/Stein (2010))

– Seeks to safeguard the financial system as a whole

– Aims at controlling the social costs associated with excessive asset shrinkage in the event of common distress of financial institutions

• Some possible tools of the macroprudential toolbox

– Requirements to maintain more and higher-quality capital reserves

– Tougher supervisory framework to enable rapid regulatory intervention

» Covering the entire financial sector, not only the largest players

» Authority to restructure/resolve financial institutions on the brink of failure

– Tighter/special rules for systemically relevant institutions

– Making insiders bear downside risks by regulating profit-linked compensation

– Harmonizing regulation across organizational forms “shadow” banking

10

A shift to a more “macroprudential” approach to financial regulation is needed this is a complex task that requires a variety of specific tools

Policy responses and outlook

Horst Eidenmüller7/15/2013

The EU’s financial reform agenda

• Aiming at a more stable financial system

– Increasing the capital reserves in financial institutions

– Crisis management and resolution tools

» Regulatory framework for distressed banks on the brink of failure

– Better and stronger regulation of CRAs

– Remedying corporate governance shortcomings

» Better design of directors’ incentive structures and internal risk management

• Strengthening the supervisory framework

– All types of financial institutions must receive efficient government oversight

– Addressing the issue of systemic relevance

• Enhancing transparency

– Derivatives trading

– “Shadow” banking sector(hedge funds, money market funds, private equity funds, conduits, etc.)

11

Policy responses and outlook

Horst Eidenmüller7/15/2013

Financial reform agenda: state of play

12

Source: European Commission (2012), at 24

Policy responses and outlook

Horst Eidenmüller7/15/2013

Increasing the capital reserves in financial institutions

• Why capital reserves?

– Holding a minimum level of financial resources (i.e. capital)shall serve as a buffer against potential failure and losses

– Protecting depositors and financial stability

• “Basel III”: the core of the global reform agenda

– Basel Committee on Banking Supervision at the Bank forInternational Settlements (BIS) in Switzerland

» Basel Accords are agreements amongst the Heads of theNational Banks and of national supervisory authorities of 27 countries

» Committee agreed on Sep. 12, 2010 upon stricter liquidity and capital requirements, formally endorsed at the Seoul G-20 summit (Nov. 2010)

– “Basel III” is not legally binding, requires national implementation

• The EU’s response

– European Commission tabled a Capital Requirements Package (“CRD IV”) to implement “Basel III” in July 2011

– Legislative procedure still ongoing, enactment expected for the 3rd quarter of 2012

13

Basel III

Basel II

Basel I

Foundation of theBasel Committee

Policy responses and outlook

Horst Eidenmüller7/15/2013

“Basel III”: stricter capital requirements

• Increasing the capital levels in financial institutions

– Strengthening the resilience of the banking sector

– Preventing it from generating losses, avoiding the need of taxpayers’ money

• Key challenge: the “right” level of capital needed

– A too low level: banks cannot adequately absorb potential losses

– A too high level: lending to the real economy may become too expensive

• The “Basel III” approach

– Increasing the minimum regulatory capital ratios

» Common equity is most important for bank stability

» Common equity up from 2% to 4.5% of risk-weighted assets (from 2013 on)

» Introducing an additional capital buffer of a further 2.5% (from 2016 on)

– Common equity ratio states how much of the risk-weighted assets of the bank (esp. loans) have to be backed by the bank’s common equity (stocks, retained earnings)

– “Higher quality” of common equity: only stocks and retained earnings

14

Policy responses and outlook

Horst Eidenmüller7/15/2013

“Basel III”: phase-in arrangements and capital buffers

15

Source: BIS Source: BIS

Common equity requirementsPhase-in arrangements(shading indicates transition periods, all dates are as of January 1)

Policy responses and outlook

Horst Eidenmüller7/15/2013

Four major US banks: common equity-to-assets ratio

16

Source: Wikipedia

Policy responses and outlook

Horst Eidenmüller7/15/2013

Strengthening supervision on both sides of the Atlantic

• New authorities were entrusted with macroprudential oversight

• US: Dodd-Frank Act (2010)

– Established new authorities, focus: systematically relevant institutions

» The Financial Stability Oversight Council

» The Bureau of Consumer Financial Protection

– Strengthened SEC’s supervisory powers relating to financial institutions andrating agencies

• EU: supervisory architecture reform (2011)

– New European Systemic Risk Board (ESRB): shall monitor, detect, and resolve potential threats to financial stability

– Three new European supervisory authorities for different markets

» Banking: European Banking Authority (EBA)

» Securities: European Securities and Markets Authority (ESMA)

» Insurance: European Insurance and Occupational Pensions Authority (EIOPA)

17

Policy responses and outlook

Horst Eidenmüller7/15/2013

The new European supervisory architecture

18

Source: European Commission (2010), at 15

Shortcomings of the former EU supervisory framework

• Supervision remained mostly at national level and often uncoordinated

• It was not sufficiently equipped with powers

New architecture introduced mechanisms for

• Co-ordination between national supervisors

• Consistent application of rules

• Co-ordinated decision-making in some areas in emergency situations

Policy responses and outlook

Horst Eidenmüller7/15/2013

Better and stronger regulation of CRAs

• Lessons learned

– The “Big Three” (Standard & Poor’s, Moody’s Investor Service, Fitch Ratings) failed to produce sufficiently reliable ratings

• Regulatory responses must address potential conflicts of interest

– Issuers mostly pay for their own ratings, demanded top-rated assets (“AAA”)

– “Issuer-pays” model may lead to assigning higher ratings than warranted

• Regulation 1060/2009/EC

– Introduced rules on registration, supervision, conduct of business, and transparency of CRAs however, the Regulation is neutral as to the remuneration model

– Since July 2011, ESMA is entrusted with registration and supervision of EU CRAs

• In 11/2011, new proposals to toughen regulation further

– Issuers would have to rotate every three years between CRAs rating them – rotation rule is expected to mitigate conflicts of interest issues relating to the issuer-pays model

– For complex structured finance instruments, 2 ratings from different CRAs proposed

– Civil liability regime

19

Policy responses and outlook

Horst Eidenmüller7/15/2013

Executive compensation

• Remedying corporate governance shortcomings

– Better design of directors’ incentive structures and internal risk management

» Making insiders bear downside risks without any additional upside potential

» Encouraging alignment of compensation and long-term performance

• Directive 2010/76/EU

– Introduced rules on compensation in banks and investment firms from 2011 on

– Binding provisions on variable compensation require

» Upfront cash bonuses be capped at 20% to 30% of total variable compensation

» At least 40% of variable remuneration be deferred for at least 3 to 5 years, at least 50% of it be in shares and be kept for a certain period

– Enhanced control by remuneration committees and disclosure of compensation practices to the public

20

New rules on executive compensation aim at removing incentives for inappropriate short-term risk-taking and promoting prudent risk-taking

Policy responses and outlook

Horst Eidenmüller7/15/2013

Crisis management and resolution tools

• Crisis management

– Costs of a banking crisis should be borne by shareholders, creditors, and the banking sector as a whole, avoiding the need of taxpayers’ money

» E.g. MS’ bank levies to (re-)finance governmental bailout spending(e.g. UK from 2012 on, Germany from 2011 on)

• Bank resolution regimes

– No effective resolution regimes for ailing (cross-border) banks in place

– MS’ regulatory responses: UK’s Banking Act of 2009, similar Germany in 2011

• Proposal for crisis prevention and management for banks (06/2012)

– Institutions have to prepare “living wills” for financial failure, (national) banking authorities tasked with preparing resolution plans

– Introduce EU network of bank resolution funds, contributions levied from banks

– New and harmonized (national) banking authorities’ powers

» New comprehensive re-restructuring tools and their use in a cross-border context

» E.g. appointment of a special manager, transfer or sale of assets/parts of business to bridge banks/other financial institutions, bail-in of shareholders and creditors

21

Policy responses and outlook

Horst Eidenmüller7/15/2013

Derivatives trading has grown exponentially

22

Source: European Commission (2010), at 18

The size of derivatives markets (in US-$ tn.)

Policy responses and outlook

Horst Eidenmüller7/15/2013

Enhancing transparency

• Derivatives trading

– Financial instruments whose value depend on underlying assets (e.g. securities, oil)

– Fulfills important functions in the real economy (e.g. insurance against defaults), but they are also associated with certain risks

– EU’s twofold response: Proposal for a Regulation on OTC Derivatives (Sep. 2010)

» Greater transparency: disclosure of information on OTC derivatives contracts

» Reducing counterparty risks: standard OTC derivative contracts to be cleared through central counterparties

• “Shadow” banks (hedge funds, money market funds, etc.)

– Their activities amplified cyclical market movements, lack of transparency

– Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD)

» Registration requirements (“European passport”)

» Robust internal arrangements to mitigate micro-prudential risks

» Disclosure of their investment policy and of the principal markets/instruments in which fund managers trade support macro-prudential oversight

– European Commission, Green Paper Shadow Banking and consultation (March 2012)

23

Policy responses and outlook

Horst Eidenmüller7/15/2013

Outstanding OTC derivatives

24

Source: European Commission (2012), at 15

Notional amount

(in US-$ tn.)

Policy responses and outlook

Horst Eidenmüller

The regulatory squeeze on banking

25

Source: http://www.businessinsider.com/

• Loose monetary policy and faulty regulation creates a new bubble

7/15/2013

Policy responses and outlook

Horst Eidenmüller7/15/2013

Summary

• Financial crisis revealed wide gaps in EU and US securities laws

– Distressed financial institutions did not adequately internalize social costs

– Pre-crisis regulatory framework was largely microprudential and thus deficient

• A shift to a more “macroprudential” approach to financial regulation is needed

– This is a complex task that requires a variety of specific tools

• Shadow banking, too, needs to be tamed

– The stronger the regulation of the banking sector the more money is channeled into less regulated shadow banks such as hedge funds, private equity firms, and conduits

– E.g. higher capital and liquidity requirements

» Help to insulate banks from the consequences of large shocks

» However, will also drive a larger share of intermediation into the shadowbanking system

→ Case for harmonizing regulation across organizational forms

26

Summary

July 16, 2013 1

Unit 10: European and International Cross-Border Insolvency

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.) LMU München and Oxford University

LMU München European and Comparative Company, Financial Markets

and Bankruptcy Law Summer Term 2013

July 16, 2013 2

Overview

1) Issues in international insolvencies

2) Universalism versus territorialism

3) Scope of the European Insolvency Regulation

4) Features of the European Insolvency Regulation

5) Jurisdiction under the European Insolvency Regulation

6) Forum shopping and regulatory competition

7) Reform of the European Insolvency Regulation

July 16, 2013 3

International insolvencies

• Debtor is incorporated in a particular jurisdiction and has – subsidiaries / branches / offices in other countries or – creditors that are situated in other countries or – assets that are located in other countries

• Not only multinationals but also SMEs increasingly engage in cross-border transactions

→ More and more insolvencies become international or have at least an international component

Issues in international insolvencies

July 16, 2013 4

Issues in international insolvencies

• How many proceedings? • Where are the proceedings conducted? (jurisdictional issues) • Which rules govern the proceedings? • Must foreign proceedings and decisions taken in them be

recognized domestically? • How are multiple proceedings coordinated? • What is the position of foreign creditors in domestic proceedings? • How shall an insolvent corporate group – consisting of separate

legal entities – be dealt with?

Issues in international insolvencies

July 16, 2013 5

Universalism versus territorialism

• The fundamental policy issue: universalism versus territorialism – Universalism: One proceeding over the assets of a debtor with world-wide effect, i.e.

regardless of the assets’ location – Territorialism: Multiplicity of proceedings in all jurisdictions in which the debtor has

assets, effect of these proceedings limited to the respective jurisdictions – See McCormack, 32 (2012) OJLS 325; Franken SSRN Working Paper No 2047399

• Universalism supported by strong (economic) arguments – Universalism (1) lowers transaction costs, (2) facilitates restructurings, (3) prevents an

international asset race, (4) does not skew investment decisions – However, burden on creditors to pursue claims in a foreign forum

• World-wide trend towards ‘modified universalism’ – Modified universalism: one ‘main proceeding’ with principally world-wide effect, but

possibility of territorial proceedings with local effect – European Insolvency Regulation, UNCITRAL Model Law on Cross-Border Insolvency

Universalism versus territorialism

July 16, 2013 6

History of the European Insolvency Regulation

• Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (1968) (→ Brussels I Regulation 2000)

– Does not apply to insolvency proceedings, Art. 1(2)(b) Brussels I Regulation – ECJ Case C-133/78 Gourdain v Nadler [1979] ECR 733

• European Union Convention on Insolvency Proceedings (CIP) (1995) – Failed to receive UK support (‘beef war’)

• European Insolvency Regulation (EIR) No 1346/2000 of 29 May 2000 – Almost identical with CIP – Legal basis: Art. 61c), 65 EC Treaty (Art. 67(4), 81 TFEU) – Entered into force on 31 May 2002

Scope of the European Insolvency Regulation

July 16, 2013 7

Text of the European Insolvency Regulation

• 33 Recitals – Mostly on the purposes of the EIR’s provisions → interpretative guidance

• 5 Chapters – Chapter I: General Provisions

» Scope, definitions, international jurisdiction, applicable law – Chapter II: Recognition of Insolvency Proceedings – Chapter III: Secondary Insolvency Proceedings – [Chapters IV and V]

• 3 Annexes – Insolvency proceedings, winding up proceedings, liquidators

Scope of the European Insolvency Regulation

July 16, 2013 8

Scope of the European Insolvency Regulation (1)

Art. 1 (1) This Regulation shall apply to collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator. Art. 1 (2) This Regulation shall not apply to insolvency proceedings concerning insurance undertakings, credit institutions, investment undertakings which provide services involving the holding of funds or securities for third parties, or to collective investment undertakings. Art. 2 For the purposes of this Regulation: (a) ‘insolvency proceedings’ shall mean the collective proceedings referred to in Article 1(1). These proceedings are listed in Annex A …

Is inclusion in Annex A conclusive with respect to fulfilment of the criteria stipulated in Art. 1?

Scope of the European Insolvency Regulation

July 16, 2013 9

Scope of the European Insolvency Regulation (2)

• No rules on jurisdiction specifically regarding corporate groups – ECJ C-341/04 Eurofood IFSC Ltd [2006] para. 30: ‘... each debtor constituting a distinct

legal entity is subject to its own court jurisdiction.’ – ECJ C-191/10 Rastelli Davide [2011] paras 25-29: Procedural consolidation only if

COMI of all companies is in the same jurisdiction (intermixed property not sufficient) – Can the EIR’s rules on jurisdiction and procedural coordination be used to achieve

some coordination of multiple procedures in a group setting?

• It is questionable whether the EIR applies vis-à-vis non-EU states – Recital 14: ‘This Regulation applies only to proceedings where the centre of the debtor’s

main interest is located in the Community.’ – Re BRAC Rent-a-Car International Inc [2003] 2 All ER 201 (only test for application of

the EIR to a given debtor is whether the debtor’s COMI is in a MS) – Also, Art. 44(3) EIR seems to presuppose application vis-à-vis non-EU states – However, provisions of EIR only appear to regulate intra-Community conflicts (see,

e.g., Art. 3(2), 16(1) and 39 EIR) and the Virgos Schmit Report clearly confirms this

Scope of the European Insolvency Regulation

July 16, 2013 10

Features of the European Insolvency Regulation

1) Potential multiplicity of procedures (‘modified universalism’)

• Main procedures • Territorial procedures (independent and secondary)

2) Application of the lex fori concursus – but exceptions

3) Automatic recognition of proceedings

Features of the European Insolvency Regulation

July 16, 2013 11

Potential multiplicity of proceedings

• Main insolvency proceedings – these affect, in principle, all the debtor’s assets – at the debtor’s ‘centre of main interests’ (COMI) (Art. 3(1) EIR)

• Territorial proceedings in other countries in which the debtor has an establishment – effects limited to assets in that country (Art. 3(2) EIR) − ‘Secondary proceedings’ if main proceedings have already been

opened in another country – must be winding-up proceedings (Art. 3(3) EIR)

− ‘Independent proceedings’ prior to such opening (Art. 3(4) EIR)

Features of the European Insolvency Regulation

July 16, 2013 12

Application of the lex fori concursus

• The basic principle: insolvency proceedings and their effects are governed by the lex fori concursus (Art. 4 EIR) − Rationales: courts comfortable with applying laws of their own country, lex

fori reflects a country’s insolvency policy − Problems of characterization: what are ‘insolvency rules’?

Functional approach: rules that aim at maximizing the debtor’s net assets (for the benefit of the creditors) = insolvency rules

Example: German rules on tort liability of directors that fail to file an insolvency petition in a timely manner (§§ 15a InsO, 823 BGB) should be characterized as insolvency rules for the purpose of Art. 4 EIR

• Exceptions in Art. 5 et seq. EIR − Rights exempted from insolvency proceedings: Art. 5-7 EIR − Application of a different national law: Art. 8 et seq. EIR

Features of the European Insolvency Regulation

July 16, 2013 13

Some important exceptions

• Art. 5: Third parties’ rights in rem – Not affected by opening of proceedings if assets situated in another MS – What are rights in rem? To be derived from Art. 5(2) and a comparative assessment of

the laws of the MS – Does a right in rem exist? To be assessed on the basis of the lex rei sitae

• Art. 6: Set-off – A creditor may demand set-off even if not allowed under the lex fori concursus if allowed

under the law applicable to the debtor’s claim

• Art. 7: Reservation of title – Protection of seller upon the insolvency of the purchaser under Art. 7(1) and of

purchaser upon the insolvency of the seller under Art. 7(2)

• Art. 13: Detrimental acts – An act cannot be set aside as a preference or fraudulent conveyance under the lex fori

concursus if it is subject to a law of another MS and cannot be challenged under that law

Features of the European Insolvency Regulation

July 16, 2013 14

Automatic recognition of proceedings

• Decisions to open proceedings must be recognized in all other MS without further formalities, Art. 16 and 17 EIR – No ‘exequatur proceedings’ – ECJ C-341/04 Eurofood IFSC Ltd [2006] paras. 54-58: the decision to

appoint a preliminary liquidator involving the divestment of the debtor is an opening decision within the meaning of Art. 16 EIR

» Can this be squared with Art. 38 EIR?

• Other decisions on the course and closure of the proceedings are also to be recognized without further formalities, Art. 25(1) EIR

• A MS may refuse recognition in case of a violation of its ordre public, Art. 26 EIR

• ECJ C-444/07 Probud [2010]

Features of the European Insolvency Regulation

July 16, 2013 15

Jurisdiction with respect to main proceedings (1)

Art. 3(1): The courts of the Member State within the territory of which the centre of a debtor’s main interests is situated shall have jurisdiction to open insolvency proceedings. In the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary. Recital 13: The ‘centre of main interests’ should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.

Jurisdiction under the European Insolvency Regulation

July 16, 2013 16

Jurisdiction with respect to main proceedings (2)

• ECJ C-341/04 Eurofood IFSC Ltd [2006] para. 34: ‘... the ... presumption ... can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which locating it at that registered office is deemed to reflect.’

• Importance of ‘objectivity’ and ‘ascertainability’ – Pricing of credit risks – Protection of third parties against easy midstream changes

• ECJ C-341/04 Eurofood IFSC Ltd [2006] paras. 35-36: – Rebuttal (+) in case of a mere ‘letterbox company’ – Rebuttal (-) in case of a subsidiary company controlled by another company in

another MS if control is the only factor pointing to that other MS

Jurisdiction under the European Insolvency Regulation

July 16, 2013 17

Jurisdiction with respect to main proceedings (3)

• ECJ C-396/09 Interedil [2011] paras 48-51: – Objectivity and ascertainability requirement stressed

– Recital 13 importance of location of central administration of the debtor company

– Comprehensive assessment of facts necessary which comprises:

» Location of central management

» Places of economic activity

» Places in which the debtor holds assets

… provided those places are ascertainable by third parties

• ECJ C-191/10 Rastelli Davide [2011] confirms findings in Interedil

Jurisdiction under the European Insolvency Regulation

July 16, 2013 18

Jurisdiction with respect to main proceedings (4)

• COMI to be determined by objective and ascertainable criteria – Weighing of facts necessary – ‘Mind of management’ test not suitable to determine COMI – ‘Head office functions’ test

» Where are the principal management decisions with respect to strategy, financing, personnel, IT, production and marketing taken?

» Importance of ‘ascertainability’ especially for the company’s creditors » COMI should correspond roughly to ‘real seat’ of the company

• English courts have (initially) been generous in assuming rebuttal of the presumption

– Daisytek-ISA Ltd (2003), Re Ci4net.com Inc (2005), Re Collins & Aikman Corp Group (2006) – but recent trend towards ‘ascertainability’: Stanf. Int. Bank Ltd (2010)

→ The problem of forum shopping, abuse of law and regulatory competition

Jurisdiction under the European Insolvency Regulation

July 16, 2013 19

Jurisdiction with respect to territorial proceedings

• Territorial proceedings possible where debtor has an ‘establishment’, Art. 3(2) EIR

• Art. 2(h): ‘establishment’ shall mean any place of operations where the debtor carries out a non-transitory economic activity with human means and goods

– Mere presence of assets does not suffice

• Coordination between main and secondary proceedings – Art. 32(1): Creditors may lodge claims both in main and in secondary proceedings;

Art. 20(2): Dividends obtained in one proceeding are imputed in the others – Liquidators in the proceedings must communicate, share information and cooperate,

Art. 31 EIR; protocols on the terms of the cooperation may be concluded – Provisions to secure the ‘dominance’ of the main proceedings, Art. 33 et seq.;

liquidation in secondary proceedings may be stayed on request of liquidator in the main proceedings

Jurisdiction under the European Insolvency Regulation

July 16, 2013 20

Forum shopping and regulatory competition (1)

• Forum shopping (FS): selecting an advantageous forum – (1) Presenting (distorted) facts to the court suggesting a specific COMI – (2) Changing/manipulating the facts on the basis of which COMI is determined

• EIR tried to prevent FS, see Recital 4 • But fact-sensitivity of COMI concept creates potential for FS • FS initiated by debtors and/or influential creditors: engaging in legal

arbitrage with respect to specific insolvency law rules • Jurisdictions have an incentive to attract restructurings: business for

‘service industries’ • As a consequence, regulatory competition ensues

– Examples: DNick Holding plc, Schefenacker plc (German firms that were transformed into English ones and then restructured in London), Wind Hellas Telecommunications

Forum shopping and regulatory competition

July 16, 2013 21

Forum shopping and regulatory competition * (2)

* Source: Banda, Study (2011)

Forum shopping and regulatory competition

July 16, 2013 22

Forum shopping and regulatory competition (3)

− HB GmbH was incorporated in Germany; 720 employees based in Germany; head office located in Nürnberg

− November 2005: HB GmbH transferred all assets and liabilities to Hans Brochier Holdings Ltd. (incorporated in London) under German laws of ‘universal succession’; business premises and head office remained in Germany

− 2006: Preliminary administrator appointed in England; COMI held to be in England

− 45 minutes later preliminary administrator appointed in Germany; COMI held to be in Germany

− English opening order nullified after communication of courts; COMI in Germany

Forum shopping and regulatory competition

July 16, 2013 23

Forum shopping and regulatory competition (4)

• However, less forum shopping and regulatory competition with respect to insolvency proceedings than one might expect

– See the empirical study by Eidenmüller/Frobenius/Prusko NZI 2010, 545 – Arranging a COMI shift is costly – pays only with respect to large companies – Situation is different in company law: regulatory competition as a mass phenomenon significant pressure on MS to reform their national laws (e.g. Germany: success of English Ltd. triggered introduction of Unternehmergesellschaft without minimum capital requirement)

• More forum shopping activity with respect to pre-insolvency restructurings

– English SoA popular (Eidenmüller/Frobenius WM 2011, 1210): Rodenstock, Tele Col. – International jurisdiction determined by Brussels I Regulation:

» By analogy with Art. 22 No 2, 60 (Statutory seat of debtor company within England) or according to Art. 23 (Choice of English [Law &] Courts)

» SoA can affect only claims that are subject to English law

Forum shopping and regulatory competition

July 16, 2013 24

Forum shopping and regulatory competition (5)

• Beneficial effects of regulatory competition – Search process for the best restructuring regime – May facilitate coordinated restructuring of companies forming a corporate group

(proceedings administered in one jurisdiction by the same court)

• Detrimental effects of regulatory competition – Exploitation of non-adjusting creditors (small claims creditors, workers, etc.)

» However, these creditors are protected by the possibility of secondary proceedings – Discrepancies between the applicable insolvency law and company law

» However, such discrepancies arise only with respect to ‘isolated COMI shifts’ (COMI shifts without a parallel change in the registered office and hence the applicable company law)

Forum shopping and regulatory competition

July 16, 2013 25

Comparative Recovery Rates*

* Source: Blazy/Petey/Weill (2009)

Forum shopping and regulatory competition

July 16, 2013 26

Responses to forum shopping de lege lata

• COMI changed after the insolvency petition: the ‘old’ COMI – at the time of the petition – stays decisive

– EJC Case C-1/04 Staubitz-Schreiber [2006] paras. 21 et seq. – This is efficient; beginning with the time of the petition, costs will be sunk in the first

proceedings

• COMI changed shortly before the insolvency petition: application of an abuse of law concept?

– EIR does not only aim at preventing forum shopping; efficient administration of assets also an important goal, see Recitals 2, 8, 16 and 20

– COMI shifts that evidently do not contribute to maximizing the debtor’s net assets are abusive; COMI shifts that evidently benefit one creditor at the expense of others are suspicious in particular

– If a COMI shift is abusive, it is to be disregarded for the purpose of determining jurisdiction

Forum shopping and regulatory competition

July 16, 2013 27

Reform of the European Insolvency Regulation

• Forum shopping is a problem with respect to isolated COMI shifts in particular

• Taking the presumption in Art. 3(1) EIR more seriously or making it irrefutable: only the registered office would count

– Procedural safeguards under the 10th Directive with respect to creditor and worker protection in case of a cross-border merger

– Insolvency law and company law would always be the law of the same jurisdiction – no cherry picking

– Effect would be beneficial regulatory competition with respect to corporate rescue proceedings

• EU Commission’s Report (Art. 46) on the application of the EIR (published Dec 12, 2012)

• Reform-Proposal published Dec 12, 2012, COM(2012) 744 final

Reform of the European Insolvency Regulation

July 16, 2013 28

A New Framework for Business Restructuring in Europe: The EU Commission’s Proposals for a Reform of the EIR

and Beyond (cf. Eidenmüller, 2013)

Prof. Dr. Horst Eidenmüller, LL.M. (Cantab.) LMU München and Oxford University

LMU München European and Comparative Company, Financial Markets

and Bankruptcy Law Summer Term 2013

July 16, 2013 29

Outline

1) Regulatory Objectives

2) Regulatory Roadmap

3) Scope of EIR

4) Forum Shopping / COMI Concept

5) Multiplicity of Proceedings

6) Treatment of Corporate Groups

7) Summary

July 16, 2013 30

Regulatory Objectives

• A business in financial distress (FD) should be kept alive only if it is economically viable ( going concern value > liquidation value) − Most businesses in FD should be liquidated — also in a cross-border context

• However, EU Commission seems to believe otherwise − “The benefits of business rescue can be summarized as follows: Maximisation of asset

value … Better recovery rates for creditors …” (SWD(2012) 416 final, p. 11)

• It also seeks to distinguish ‘honest’ and ‘dishonest’ bankruptcies — which is difficult and irrelevant for the rescue / liquidation decision − “Second chance for entrepreneurs in honest bankruptcies” (COM(2012) 742 final, p. 5) − This is a fact sensitive and hence difficult distinction to draw in practice − It may have some relevance for deciding who should get a second chance as a

businessperson — it is irrelevant for the rescue / liquidation decision

→ The Commission’s proposals are not based on sound regulatory objectives

Regulatory Objectives

July 16, 2013 31

Regulatory Roadmap

• Commission focuses on updating the EIR framework • It considers harmonization of substantive insolvency laws of the MS

but believes that more comparative analysis is needed as a first step • However, certain harmonization measures are clearly needed now

− Rescue / restructuring efforts should be undertaken as early as possible: a uniform European wrongful trading rule as suggested in the 2003 Company Law Action Plan (COM(2003) 284 final, p. 16) is desirable

− A security interest in moveable property should not depend on where the property is located (however, it does under the situs rule): uniform rules on a European security interest in moveable property are necessary

→ The Commission is too cautious regarding the harmonization of substantive insolvency laws of the MS

Regulatory Roadmap

July 16, 2013 32

Scope of EIR

• Commission proposes to include ‘pre-insolvency’ and ‘hybrid proceedings’ → universal recognition, mitigate hold-out problem

• ‘Hybrid’ strange wording for debtor in possession proceedings • Concept on when universal recognition is justified is lacking

− EIR shall cover private, contractual procedure ‘as from the moment it becomes (sic!) public’ (COM(2012) 744 final, p. 6)

− Art. 1 retains concept of ‘collective’ proceedings, Commission terms pre-insolvency proceedings ‘semi-collective’ proceedings (SWD(2012) 416 final, p. 48)

• Decisive is the collective nature of proceedings due to the multi-party prisoners’ dilemma associated with financial distress − Universal recognition of proceedings that do not bind all creditors is not justified

→ The scope of the EIR should be restricted to (fully) collective proceedings

Scope of the European Insolvency Regulation

July 16, 2013 33

Forum Shopping / COMI Concept

• Commission has a biased approach to forum shopping − Good with respect to businesses ( England): ‘… the flexible regime for

restructuring companies offered by English law … attracts companies from other European jurisdictions’ (SWD(2012) 416 final, pp. 21-22)

− Bad with respect to individuals ( France) : ‘Bankruptcy tourism is problematic …’ (SWD(2012) 417 final, p. 5)

− Forum shopping by businesses may be undertaken not for efficiency reasons but to exploit non-adjusting creditors or other third parties (e.g. Brochier case)

• Commission retains COMI concept − Distinctly second-best solution — making the registered office the one and only

criterion for businesses would be more sensible − Moreover, the Commission’s position is contradictory: it praises COMI because of its

‘real connection’ with a jurisdiction, but also praises forum shopping to England

→ The COMI concept should be substituted by the registered office

Forum Shopping / COMI Concept

July 16, 2013 34

Multiplicity of Proceedings

• Cautious move towards universalism − ‘Synthetic secondary proceedings’ and quashing liquidation-restriction − Full move towards universalism not considered for political reasons even though

universalism more efficient

• Coordination of main and secondary proceedings improved − Communication and cooperation of administrators and courts − Protocols explicitly allowed — these are, in essence, ‘bankruptcy contracts’

→ Universalism remains on the reform agenda in the long run

Multiplicity of Proceedings

July 16, 2013 35

Treatment of Corporate Groups

• Commission does not consider ‘substantive consolidation’ as a possibility, e.g., in the US — this is a wise decision

• Instead, Commission proposes ‘procedural coordination’ − Communication and cooperation between administrators and courts, protocols

• Group concept used more restrictive than that used by recent reform proposal in Germany − Contrast Art. 2 (i) and (j) EIR-new with § 3a (4) InsO-new

• German reform proposal envisages ‘procedural consolidation’: more efficient coordination mechanism − One court, one administrator (§§ 3a, 3b, 56b InsO-new)

→ Procedural consolidation more efficient than procedural coordination

Treatment of Corporate Groups

July 16, 2013 36

Summary

• The Commission’s proposals are not based on sound regulatory objectives — preserving businesses is not an end in itself

• The Commission is too cautious regarding the harmonization of substantive insolvency laws of the MS

• The scope of the EIR should be restricted to (fully) collective proceedings

• The COMI concept should be substituted by the registered office • Universalism remains on the reform agenda in the long run • Procedural consolidation more efficient than procedural

coordination in a group setting

Summary