Cross-border business in the European Union and statutory disclosure requirements: using IT as a catalyst for further market integration

• Author: Kristof Maresceau; Michel Tison
• Position: K. Maresceau is a researcher at the Financial Law Institute, Ghent University (Belgium). In that position he is preparing a doctoral thesis on a possible 'Delaware'-effect in the European Union. M. Tison is professor of financial and commercial law at the Financial Law Institute, Ghent University (Belgium).
• Pages: 84-93

Page 84

1. Introduction

One of the main objectives of the European Union is to promote throughout the Community a harmonious, balanced and sustainable development of economic activities (Article 2 EC Treaty). The creation of a single European market, of which the internal market is a fundamental component, is believed to be the most important way to achieve this ambitious goal (Article 3, 1), c) EC Treaty). By the abolition of obstacles to the free movement of goods, persons, services and capital, the European Union wishes to make of the integrated European market world's most competitive and dynamic market (Lisbon European Council 2000).

As a part of this project, the European Community is aiming at the 'transnationalisation' of companies, i.e. the process by which companies extend their economic activities to other Member States than those where they are incorporated. ¹ In this way competition between companies or firms deploying economic activities in the European Union will increase. This should in turn result in better company performance and thus in lower prices for consumers. It is precisely with this objective that the EC Treaty grants the freedom of establishment to companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community (which we call hereafter 'EU-companies') (Article 43 in combination with 48 EC Treaty). Hence, the freedom of establishment has a clear economic function as it is one of the most significant tools to increase the mobility of factors of production. An overview of the content of the freedom of establishment as currently envisaged by the European Court of Justice will be provided in section ².

However, the achievement of the freedom of establishment cannot be realised solely by the Treaty. Notwithstanding the direct applicability of the principle of freedom of establishment in the legal order of the EU Member States² , the cross-border establishment of companies involves the submission to local rules in the state of establishment designed to protect various stakeholders (creditors, shareholders etc.). In order to eliminate the costs associated with the disparities of regulations across EU Member States, the Treaty has vested the European legislator with powers to adopt harmonization directives (Article 44 EC Treaty). As regards the setting-up and the cross-border establishment of companies, part of this harmonization relates to the disclosure of corporate Page 85 information³. Section 3 will look into the filing obligations of private and public limited companies, as well as the access to that information. This analysis will demonstrate that, in the present stage of EU harmonization, the cross- border establishment of companies still involves substantial costs due to the mere national organisation of business registers and the limited access possibilities to these registers.

In section 4, we develop the viewpoint that after taking into account the modification of the First Company Law Directive (Directive 68/151/EEC), the current European regulatory framework regarding the dissemination of corporate information still lags behind the possibilities offered by today's information and communication technologies. In order to eliminate multiple filing of identical information in different countries when taking advantage of the freedom of cross-border establishment, three theoretical models will be presented with their different impact on the accessibility of the information by end-users. However, in the light of the present legal framework, only one model could and should effectively be implemented.

Section 5 will provide some comments on the BRITE project, the aim of which is to create a platform offering advanced features regarding the interconnection and interoperability of business registers across Europe. This research project further explores the possibilities to improve the delivery as well as the retrieval of company and financial data in a significant way. If its technical solution would be in place, the 'several-stop-shop' concept in terms of delivery, as currently envisaged within European company law, could evolve towards a 'one stop shop'-system, and trigger a simplification of the European legal framework while reducing regulatory costs for businesses.

Section 6 will stress the potential advantages of the BRITE platform for many users in other areas of economic life. The prospect of value added services that enhance the transparency of business registers opens up opportunities for adequately using business register data in the fight against money laundering and terrorism financing in particularly. The linkage between business registers and officially appointed mechanisms (OAMs) to be set up for the dissemination of information by listed companies could also contribute to better performing securities markets and more investor protection through improved access to relevant information.

We will conclude with the standpoint that the realization of a system of cross-border and cross-domain interoperability of company data is currently feasible. This technical platform, in combination with a simplification of the current legal framework, could do its part in the ongoing efforts for the establishment of a true European single market. However, further research will be needed to assess the consequences of the increased mobility and use of business register data on privacy protection, as the European Data Protection Directive (Directive 95/46/EC) does not seem to be fully adapted to this evolution.

2. Recent developments in the field of freedom of establishment

At first glance, Articles 43 and 48 of the EC Treaty provide the necessary conditions for companies to be able to fully exercise their freedom of establishment. These provisions amount to a clear prohibition for Member States to restrict the setting-up on their territories of agencies, branches or subsidiaries established in their territory (i.e. a secondary establishment) It further clarifies that EU companies have the right to take up and pursue activities and to set up and manage other EU companies under the conditions laid down for its own nationals by the law of the country where such establishment is effected.

However, since the EC Treaty came into force, numerous legal obstacles prevented companies from enjoying the same freedom of movement as natural persons. After a wave of harmonisation which brought down many burdens on the cross-border mobility of companies, the regulatory activity came to a dead end. The lack of further legislation on the mutual recognition of EU-companies, on the retention of legal personality in the event of cross-border seat transfer and on the possibility of mergers between companies or firms governed by the laws of different countries (Article 293 EC Treaty), constituted a restraint on the exercise by EU-companies of the freedom of establishment. (Wymeersch, 2003) The yawning gap between European company law systems that adhere to the so-called 'Incorporation theory' on the one hand and those that follow the 'Real Seat theory' on the other hand symbolised the political interests at stake ⁴ (Hirt, 2004). Irrespective of the company law system, Member States took measures to prevent the circumvention of their national legislation, thus creating market fragmentation.

In the last decade the European Court of Justice (ECJ), through a number of landmark judgments ⁵, has played a pronounced pro-active role in improving the conditions for cross-border establishment of companies in Europe. As a result of these judgments, there is currently no doubt that Member States should allow companies that have been incorporated in other Member States to freely enter their territory, according to the rules under which they have been formed in their state of origin. (Omar, 2005) This ECJ case law has also triggered other significant regulatory developments in European company law. Member States eventually managed to reach the necessary agreement to adopt a Directive governing the cross-border merger of companies (Directive 2005/56/EC) as well as to introduce a new type of company, namely the 'Societas Europaea' (SE) (Council Regulation No 2157/2001). These legal instruments indirectly enable companies to transfer their corporate seat to another Member State without being wound-up. Whether a direct transfer of the company seat for other company forms Page 86 will be possible, depends on the outcome of the draft Fourteenth Company Law Directive and/or the judgment of the ECJ in the 'Cartesio'-case (C-210/06).

The evolution in the ECJ case law and in European company law harmonization seems to illustrate that the freedom of establishment is more and more heading at the 'home country control'-principle. Once a company is constituted in a legally valid way according to the State of incorporation, other Member States cannot deny its legal capacity or impose burdens on the freedom of establishment, unless it would be justified on the basis of the 'general good'⁶. As a result of this, companies can now freely choose the legal system they...