EU Company Law for digital solutions and cross-border operations: the framework for the need to developing and simplifying legislation

The European Commission, in its 2017 Annual Work Programme, announced that the expected initiative on company law is intended “to facilitate the use of digital technologies throughout a company’s lifecycle and cross-border merger and divisions”[1]. These efforts were also underlined in the Commission Work Programme 2018(CWP 2018), where the Commission acknowledged a focus “on revising EU company law to support business with clear, modern and efficient rules”[2]. Current EU company law only addresses the use of digital technologies to a limited degree as in Directive(EU)2017/1132, which includes certain provisions on disclosure of company information online, and Directive(EU) 2017/828 that facilitates the communication and exchange of information between companies and shareholders. However, the existing legislation does not address the use of digital tools in general[3].

Harmonization of EU company law is a prerequisite for a fully-fledged digital single market that would enable all operators,” ……and in particular SMEs, to draw on the potential of digital technology and the digital economy and eliminate unnecessary barriers in the single market, while safeguarding their rights and providing legal and cyber security. Despite the recent codification and amendments to other aspects of EU company law, problems in areas such as legal certainty, administrative burdens, unnecessary costs, the absence of transparency and the ineffective protection of companies, still remain. These points have been highlighted several times by the European Parliament”. [4]

Company Law and its development and simplification

Progress in developing and simplifying various aspects of company law has been made since 2012 when the European Commission presented its “Action Plan on European Company Law and Corporate Governance”[5]. EU company law was recently partially codified in the above mentioned Directive EU/2017/1132, which repealed six directives[6]and amended an additional five[7]. EU company law covers various areas, such as formation, capital and disclosure requirements; domestic mergers and divisions; EU legal entities and business operations involving more than one country. The legal framework of the company law includes, apart from Directive (EU)2017/1132, other legislative acts including the 12^th Company Law Directive 2009/102/EC, Directive 2013/34/EU on annual financial statements, Directive 2004/25/EC on takeover bids, the Shareholders Rights Directive(SRD) 2007/36/EC and the Transparency Directive 2004/109/EC and the Regulation(EU)910/2014 on electronic identification and trust services for electronic transactions in the internal market.

Digitalization of EU company law and cross-border operations

The Commission’s intentions to deal with digitalization of EU company law and cross-border operations were announced in several Communication. For example, in its “Communication on EU eGovernment Action Plan 2016-2020”(April 2016), the Commission noted the need to simplify the access to information under EU business and company law, since “improving the use of digital tools when complying with company-law related requirements throughout different phases of company’s lifecycle would achieve simpler and less burdensome solutions for companies”[8].In the “Communication on upgrading the single market” ( October 2015), the Commission introduced its intentions regarding actions leading to an updates of the single market[9]. Here it noted the uncertainties for SMEs concerning EU company law and promised to consider “further ways of achieving simpler and less burdensome rules for companies”, including “making digital solutions available throughout company lifecycle” and the need to examine the rules on cross border mergers and divisions[10]. “The Commission intended to come forward with these amendments in 2017. The need to simplifying cross-border operations was already noted in the “Commission’s Communication Action Plan: European company law and corporate governance” (December 2012), while the issue of digitalization in company law was raised by an Informal Company law Expert Group. In its March 2016 Report, the expert group provided in this context a list of 29 recommendations concerning inter alia digitalization of the communication between a company and the state and electronic communication between a company and its shareholders and other stakeholders”. [11]

The European Parliament position and the Commission’s responses

In this note we address two main EP Resolutions concerning EU company law.

The first is the European Parliament Resolution of 13 June 2017.  “The Resolution[12] drew attention to two specific issues linked with EU company law, cross- border mergers and cross -border divisions. The Resolution considered it necessary to revise Directive 2005/56/EC on cross border mergers while underlining the effectiveness of the Directive (point 5-6)[13]”. Parliament, in this regard, considered it important to make improvements to various aspects of the Directive, such as managements of assets and liabilities, rights of minorities shareholders and rules on creditors’ protection (point 10). As to cross-borders divisions, Parliament recalled Directive 82/891/EEC that regulated divisions of undertakings within a Member State (point 13)[14]. The Commission was called on to consider the significant economic impact which would ensue from legislation governing cross-border divisions (point 14) while Parliament noted lengthy and complex procedures required for cross-border divisions (point 15). Parliament suggested the amendment on cross-border divisions should include, for instance, the right of creditors and minority shareholders, accounting issues and the harmonization of rules and procedures (point 18).

The Commission follow-up document to this Resolution referred to recent and on-going consultations and announced the upcoming Commission initiative.[15]

In the second EP Resolution of 16 May2017 on the EU eGovernment Action Plan 2016-2020 the Parliament called on the Commission to “…consider further ways to promote digital solutions for formalities throughout a company’s lifecycle, electronic filing of company documents and the provision of cross-border and other information” (point 5)[16].  According to the Parliament “…better access to information and the increased use of improved digital tools for company-law-related formalities throughout the lifecycle of companies should increase legal certainty and reduce company expenses” (letter G).

“The Commission’s follow up document noted that the CWP 2017 envisaged the adoption of a company law package, to include elements facilitating the use of digital technologies throughout a company’s lifecycle and cross-border merger and divisions”.[17]

The Council has not been inactive. In 2007, it established a standing working party on company law, which negotiates proposals on company and corporate law issues, such as corporate governance, corporate social responsibility, accounting and auditing. The working party of the Council deals with various topics including corporate forms in the EU and quality of corporate governance reporting[18].

The European Council, in the Stockholm Programme, an open and secure Europe serving and protecting citizens (2010), considered that the process of harmonizing conflict-on-law rules at Union level should also continue in the area of company law.

In the October 2016 Conclusion, European Council called for various different strategies, including the Digital Single Market, Single Market Agenda and Capital Market Union, to be completed and implemented by 2018 (point 17). In addition, in its June 2017 conclusions, The European Council emphasized the need for further efforts in the Digital Single Market and the Capital Markets Union. It also announced that the Council would report to the June 2018 European Council on progress in deepening, implementing and enforcing the single market in all its aspect (point 13).

The European Court of Justice, has also been called upon to interpret principles of EU company law. In Case C-106/16 Polbud, the Court ruled that “freedom of establishment is applicable to the transfer of the registered office of a company formed in accordance with the law of one Member State to the territory of another Member State, for the purposes of its conversion, in accordance with the condition imposed by the legislation of the other Member State, into a company incorporated under the law of the latter Member State, when there is no change in the location of the real head of office of that company”.[19] 

Conclusion

It is clear that the European Institutions consider company law as an important element of European law. Considering the internal market integration process, company law is in need of continuous upgrading, in particular relating to digital solutions and cross-border legislation. On the basis of the various Council conclusions in the period 2016-2017 we can note the substantial willingness of that Institution to proceed in this direction with in addition, the continued simplification of the legislation.

We consider it highly likely therefore that new proposals will be introduced by the Commission in the course of 2018 and will be “carried on the plate” of negotiations.

This article is for information purposes only and is not intended as a professional opinion.

For further information, please contact Giovanni Moschetta.

[1] COM(2016)710 final, p.8

[2] COM(2017)650 final, p.5

[3] European Commission, REFIT Platform Stakeholders Suggestions, XIII Justice, p. 25.

[4] EPRS-Ex post evaluation Unit. PE 611.014

[5] Action Plan on European Company Law and Corporate Governance-a modern legal framework for more engaged shareholders and sustainable companies, COM(2012)740

[6] Directives 82/891/EEC, 89/666/EEC, 2005/56/EC,2011/35/EU and 2012/30/EU.

[7] Directives 2007/63/EC, 2009/109/EC, 2012/177/EC, 2013/24/EU and 2014/59/EU.

[8] COM(2016)179 final, p.7

[9] COM(2015) 550 final.

[10] Ibid, p.5.

[11] Euoepan Commission, REFIT platform, Stakeholder suggestions, XIII Justice.

[12] P8_TA-PROV(2017)0248

[13]The Directive was repealed by Directive(EU) 2017/1132.

[14] The Directive was repealed by Directive(EU) 2017/1132.

[15] SP(2017)574.

[16] P8_TA-PROV(2017)0205.

[17] SP(2017)511.

[18] Currently, it deals with: corporate forms in the EU, for example the statute for a European foundation and for a single member limited liability company; quality of corporate governance reporting; encouragement of long-term shareholder engagement; accounting and auditing standards; financial programmes in the field of financial reporting and auditing.

[19] Case C-106/16 Polbud, judgement of 25 October 2017, para.44

“The Court also found that the provisions of the TFEU precludes a member State rule “which provides that the transfer of the registered office of a company incorporated under the law of one Member State to the territory of another member State….is subject to the liquidation of the first company”.[19]

In Case C-210/06 Cartesio, the Court noted that the Treaty provisions do 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 a Member State of incorporation.[19] The issue of company law was also discussed in other Court case”, in EPRS, EX post Evaluation, PE 611.014