Changes from report parliamentary committee draft to plenary report

EXPLANATORY STATEMENT

The European Commission with the new mandate has announced its intention for the creation of a new legal status for companies - a ‘28th Regime’. The ‘28th regime’ describes a legislative technique, by which legally binding rules adopted at EU level co-exist within the territories of the Member States with national rules. Their application depends on the voluntary choice by private parties to be bound by these EU rules. From the perspective of these private parties, EU rules must be more advantageous for them than the otherwise applicable national law in order to chosen. The EU has previously made use of this legislative technique when adopting the Pan-European Pension Product (PEPP), the undertakings for collective investment intransferable securities (UCITS), the Societatas Europaea (SE). The Commission proposed the Societas Privata Europaea (SPE), Societas Unius Personae (SUP) and the Common European Sales Law (CESL) as ‘28th regime’ but never concluded the legislative process.

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ChangedMaking use of the ‘28th regime’ legislative technique in order to support innovative companies had resurfaced, in Enrico Letta’s report Much More Than a Market, where he called for the establishment of a “Simplified European Company”. Similar references can also be found in different recent Communications by the European Commission and the Draghi Report on The Future of European Competitiveness. The European Parliaments legislative initiative report intends to outlineoutlines a pathway on the design and framework of such a corporate form, with a specific view on how such a status could benefit SMEs, start-ups and scale-ups and their founders wanting to operate and expand across the Internal Market, without being limited to them.

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ChangedThere have been previous attempts by the European Commission at setting up a regime for a private European company, none of which proved fully successful. The reasons for their failure stem from the loopholes in their design and missing safeguards for consultation and participation rights of workers, as a resultbecause of which, the necessary consensus could not be reached. The creation of additional legal, administrative, and financial burdens associated with these attempts also contributed to limiting the uptake by young companies.

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ChangedEstablishing the necessary safeguards to effectively prevent abusive use of a ‘28th Regime’ in particular in regardsregard to codeterminationemployee participation rules (as defined by Article 2 (k) of Directive 2001/86/EC) are of the utmost importance and a necessary pre-condition for the success and societal acceptance of this project. Repeating past mistakes and failing to establish safe solutions that do not undermine existing standards would endanger the idea from the outset.

Many years later, while important steps have been taken regarding the harmonization of company law in Europe, many challenges in particular for smaller and emerging companies remain unresolved while new economic challenges have emerged.

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ChangedThe rapporteurLegal Affairs Committee therefore recommends, that the corporate form proposed by the Commission be named the ‘European Start-‘Societas andEuropaea Scale-Up’Unificata’ (ESSU)(S.EU) company. Instead of establishing an autonomous pan-European corporate form, through a regulation – which would necessitate Article 352(1) TFEU as a legal basis and risk repeating past mistakes – the rapporteurreport recommends being ambitious in substance rather than in form and the setting up of a national corporate form automatically recognised in all Member States. This can be implementing by upgrading existing national limited liability corporate forms or by creating new tailor-made national corporate forms. Such a way of supranationalising essential elements of an otherwise national corporate form can be achieved by means of a maximum harmonising directive on the basis of Articles 50 and 114 TFEU.

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ChangedThe ‘European Start-‘Societas andEuropaea Scale-Up’Unificata (ESSU)(S.EU) corporate form would address burdens by creating a simplified, digitalised, understandable, and user-friendly regulatory environment tailored to the needs for SMEs, start-ups and scale ups, while not being limited to a new category ‘innovative’ companies or other limiting criteria, to create and strengthen innovation in Europe. Making access to the legal form conditional on the parties providing the necessary evidence to qualify as eligible - for example to showcase their ‘innovative’ character - would increase the administrative burden that particularly small and medium-sized companies struggle to manage. In order to serve best the needs of SMEs, start-ups and scale-ups, the ESSUS.EU has to be a limited liability company that is not listed on the stock market.

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ChangedNext to simplifying company formation and registration procedures, the rapporteurreport proposes that the legal framework should address various elements to strengthen the competitiveness of SMEs, start-ups and scale-ups choosing to opt-into the new corporate form. The proposal therefore outlines different components that should be included to improve access to capital and talent for ESSUs,S.EUs, and encourage long-termism. In particular, start-ups that transform innovative ideas into marketable products are prone to so-called ‘killer acquisitions’, which can hardly be controlled by means of merger control laws. The rapporteur therefore wishes to explore elements of long-term, purpose-driven corporate forms, for which existing and emerging examples in different Member States already exist. In particular, with regard to ‘asset locks’ and possible challenges with regards to cross-border conversions. In order to remain attractive to investors, companies that opt for a legal regime that serves long-termism, any such proposal must be accompanied by EU-wide harmonised rules on equity-like debt instruments that allow for investors to invest into companies without acquiring control rights over a company (such as profit participation rights, silent partnerships, or profit-linked loans).

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ChangedThe success of other corporate forms in other countries (such as the Delaware Inc. in the US) is linked to the efficiency, the speed und the degree of specialisation of the court system adjudicating on matters relating to this corporate form. An alternative dispute resolution mechanism for the ESSUS.EU can achieve this objective as could a system special panels specialized on matters relating to the ESSUS.EU at courts in the Member States. Both may only judge on civil law disputes between companies, disputes arising from or in connection with the acquisition of ESSUS.EU companies or shares in ESSUS.EU companies, and disputes between a ESSUS.EU company and members of its governance structure. Participation in these special forms of dispute resolution is subject to the consent of the parties involved. Disputes relating to individual and collective labour law are excluded from this mechanism.

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ChangedIn terms of safeguards for Union and national labour law and in particular the rules of codetermination,employee theparticipation, rapporteurthe proposesreport aoutlines conflict-of-lawstheir solutioncrucial insteadimportance. ofIt substantivestates rulesthat asthe theyS.EU canmust be foundwithout inprejudice theto SE.Union and national labour law. Rules on codeterminationemployee participation differ meaningfully between Member States. Their existence and their importance are closely linked to the social fabric of a Member State’s economy,economy itand isthe stronglyS.EU recommendedcarries toa keeprisk of being used as a vehicle for circumvention of national arrangements on codetermination untouchedemployee byparticipation. theThe ESSU.report Respectingtherefore nationalproposes specificitiesto is,effectively inprevent the eyesartificial use of the rapporteur, betterS.EU achievedwith bya conflict-of-lawsview rulesto harmonisingcircumventing thecurrent determinationlevels of employee participation protection in the applicableMember nationalStates. lawIt thanstates harmonisedthat EUthe rules,S.EU conducting an economic activity which willentails alwaysemployment meanin aanother politicalMember compromiseState withis highersubject standardsto ofthe codeterminationrules foundin force concerning employee participation in somethe Member States.State Itof isthe thereforeplace recommended,of foremployment provided that the ESSU,legal toorder determineof the lawS.EU’s applicableregistered tooffice mattersdoes relatingnot toprovide codeterminationfor accordingat toleast the locationsame level of theemployee realparticipation seatrights ofas therequired ESSU,under whichthe islaw of the place of employment. As a fall-back option, where law applicable to employee participation cannot be determined in accordance with the centraljust management.mentioned principles, a negotiation procedure equivalent to that provided for in Articles 3 to 7 of Directive 2001/86/EC would have to be triggered.

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RemovedMoreover, the ESSU is without prejudice the individual and collective labour law, the law applicable to individual employment contracts is determined by Article 8 of the Rome-I Regulation.