Assessment of LW7082 Corporations and International Business Law Essay

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Assessment of LW7082 Corporations and International Business Law Essay
Discuss the development of the EC programme for the harmonization of Company Law. Explain why that programme was seen as important to the economic development of the

European Community and outline the various successes and obstacles encountered by that programme.

INTRODUCTION
The European Community is also a community of laws. The aim of the harmonisation of laws in the European Community is not focused on the creation of one single European Law in contrast to the Member States. Instead, it focuses on the harmonisation of the national legal system only to the extent which is required for the functioning of the common market. The harmonisation of Company Law was regarded as an essential part of this process. As a result, Company Law is one of the most harmonized legal areas in the European Community.
This essay will be mainly divided into three Chapters: First, a brief introduction about the development of EC programme for the harmonization of Company Law. Second, analysis and consideration will be given to explain why this harmonization programme was seen as important to the economic development of the European Community. Finally, discussion will focus on the successes the Company Law harmonization programme has achieved and the obstacles it encountered.

CHAPTER 1. DEVELOPMENT OF THE EC COMPANY LAW HARMONISATION PROGRAMME
The development of the harmonization programme of Company Law in EC can be regarded as the issuing of a series of directives and their applications within EC member states. By harmonizing the company law, the subject was, as Scmitthoff defined as “salami tactics”, divided into numerous fields, each being regulated by a separate directive. But before we look into those directives, which form the development of EC Company Law harmonization, the legitimate basis of these directives deserves a mention first.

1.1 The legal Foundation of EC Company Law Harmonization
The legitimacy of the company law of Europe must be found in the authorizing treaty provisions. The Treaty basis for the company law harmonization programme is particularly Article 44(2) (g) (formerly 54(3) (g)) and, more generally, Articles 94, 95, 293 and 308 (formerly 100, 102, 220 and 235) of the Treaty of Rome. However, the Article 44(2) (g) is of significant importance and plays the primary roles among others, since the majority of the legal bases on Company Law area has been based on that Article.

Article 44 (2) (g) set in Chapter 2, “Right of establishment”, in TITLE III, “Free movement of persons, services and capital”, provides:
“2. The Council and the Commission shall carry out the duties devolving upon them under the preceding provisions, in particular:

by coordinating to the necessary extent the safeguards which, for the protection of the interests of members and other, are required by Member States of companies or firms within the meaning of the second paragraph of Article 48 with a view to making such safeguards equivalent throughout the Community; ”

Article 94, set in the chapter on the approximation of laws, require the Council, acting unanimously, to issue directives “for the approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the common market.”

1.2 The Directives of Harmonization Programme of EC Company Law
According to Article 44, the Council shall act in the fields which that Article covers by way of directives. But in the first stage of EC Company Law Harmonization Programme, it is as always, when the harmonization of laws is attempted, progress was very slow and involved great effort.

The first Commission Proposal for a Publicity Directive dates from the beginning of 1964, and the issuing of this First Directive in 1968 marked the beginning of the EC harmonization in Company Law. The first directive sought to harmonize publicity requirements applying to companies, the circumstances in which company transactions will be valid and the rules relating of the nullity of companies.

Eight years later, the 2nd Directive followed dealing with the formation of public limited liability companies and the maintenance and alteration of their capital. In tenor and approach it differs from the First Directive: many of the provisions lay down detailed procedural requirements rather than simply directing the Member States to legislate to a certain end. Thus it has been criticized by some commentators for that reason. However the Second Directive is undeniably of major importance, constituting a significant step towards company law harmonization in the European Community.

Following the Second Directives, it did not take too long for the Third and Fourth Directives to be issued. The Third company law Directive can be regarded as having presented a new framework for exercising cross-border collaborative economic activities. It provided for co-ordination of procedures applying to internal mergers within a Member States. The Fourth Directive dealt with disclosure of financial information and the contents of a company’s annual accounts. It complements the First Directive and is supplemented by the Seventh Directive which deals with group accounts.

After that, it took another six years until the Sixth, Seven and Eighth Directives came into force. The Sixth Directive 1982 (on division of public companies) deals with the division of an existing public company into entities. The allocation of assets and liabilities among the various beneficiary companies require specific provisions to protect creditors. Member countries are not obliged to introduce this form of reconstruction but, if it is used, the process must be in conformity with the Directive. The Seventh Directive specifies how and in what circumstances consolidated accounts are to be prepared and published by companies with subsidiaries. The Eighth Directive deals with the qualifications and independence of auditors of both public and private companies. It places an obligation on Member States to ensure that auditors are independent and properly carry out their task of auditing company accounts.

From the long-lasting intervals of issuing these Company Law Directives mentioned above, we can see that the process of the first stage of EC company law Harmonization programme was slow. In the beginning of the harmonization process only six Member States with six legal systems and traditions had to be considered. The legal system of these Member States based mainly on common continental European legal principles. Later, with the expansion of the European Community, the legal systems of new Member States had to be considered. Hence, the process of harmonization became more difficult. However, until 1984 still five more directives followed. In 1985 the Commission made a new start, and company law developments were given renewed momentum. In a way, this is rather surprising, for “the White Book decided upon a new approach to harmonization, i.e. abandoning the idea of uniformity and attributing equal value and mutual recognition to national legal provisions instead.” Having written “less harmonization” upon its banner, the Commission paradoxically achieved more progress with general, and particularly company law harmonization than anyone had previously considered possible.

So, after 1984 the harmonization process came to a turning point. As a result the Eleventh Directive and the twelfth Directive were passed in 1989. The Eleventh Directive mainly deals with disclosure requirements in respect of branches opened in a Member State by certain types of companies governed by the law of another state. The Twelfth Directive allows the operation of one-member private companies. Although both directives had considerable implication on German Corporate Law they were of a less general and fundamental approach than the First Directives.

So far, there are five more directives that have not yet been passed by the European legislators. The Draft Fifth Directive dealing with corporate structure and worker participation has been the subject of much controversy. One of the most difficult topics in the Fifth Directive is the latter one, “employee participation in corporate decision-making”. The Draft Ninth Directive deals with certain aspects of groups of companies and the relationship between the participating corporations. The Proposed Tenth Directive concerns cross-border mergers and is progressing no further because fears have been expressed that a cross-border merger could be a way of escaping from worker participation provisions. The Proposed Thirteenth Directive deals with takeovers and is influenced by the City of London takeover code. Finally, the Proposed Fourteenth Directive deals with the Relocation of Registered Office.

Besides these Directives known under their numbers, there are some other directives which played a very important role in the EC Company Law Harmonization. For example, The Major Shareholdings Directive focuses on the disclosure of interests in shares. The Insider Dealing Directive, which was implemented in the United Kingdom by Part V of the Criminal Justice Act 1993, with its concise provisions to deal with share market abuse in general and to improve enforcement, virtually placed the investors on an equal footing. Also, a Directive was proposed in 2001 to deal with share market abuse in general and to improve enforcement.

From analyzing those directives in EC Company Law Harmonization Programme, it is obvious that a lot of achievements have been made, such as nullity, minimum capital, disclosure and publicity requirements, mergers of public companies and accounts. However, it is still too early to regard that this programme as successful. Some controversial areas such as management structure, employee participation, groups and international mergers?are still pending. They are what EC and Member States should work on in the future of harmonization programme.

1.3 The suitability of directives as the instrument of harmonization
By virtue of Article 54 of the Treaty, the Council, in order to attain the effectiveness of the freedom of establishment, “shall act by means of directives”. The use of the directive as an instrument has both advantages and disadvantages. Traditionally, the general view is that the advantages predominated. These advantages are flexibility and greater freedom of movement for member states, which makes it easier to introduce Community rules into their national laws. This flexible character of directive has many advantages: in a multicultural, multilingual economic area, agreements on common principles of Company Law can be reached without having to agree about the precise wording in the actually applicable provision. It allows bridging the considerable differences in the legislative traditions of the Member States, and also allows each state to use its own wording and language, as the directive only binds as to its result, not as to its forms and methods. For these and other reasons, there is a greater readiness to agree upon directives.

As Hopt wrote: “the use of directives does, of course, not preclude the possibility of very detailed regulation, nor does it mean that national legislators may not be well advised in particular cases to follow the text of the directives more or less verbatim. The directive may also go into so much detail that member states have little practical alternative to taking over the directive verbatim.”

On the other hand, the Directives still bear some disadvantages as well. The problem arises especially when we look into those particular areas which require comprehensive regulations. Although the directives leaves a degree of discretion to Member States for its transformation, many of them lay down merely the minimum standards to achieve the result specified in those directives. Some of them, such as the Fourth, Seventh and Twelfth Directives, are in the form of a framework for the regulation of a particular matter, as Member States may well introduce additional provisions to create differences between national laws. This fact will inevitably raise the problem of “blocking effect” from Company Law directives. That is, on the one hand, those directives must be detailed in order to cover multiple aspects of particular matters. However, the detailed provisions may lead to a “block effect”. Additionally, despite the detail in the directives there still exist significant differences between company regimes in Member States.

1.4 Adoption of Regulations in EC Company Law Harmonization Programme
The common market implies the creation of Europe-wide companies, which must be able to act throughout the Community in the same way as in their own country. It thus requires making available new forms of association and co-operation. Therefore, the process of harmonization has always been accompanied by “a process aiming at the creation of supranational regulations”.

The use of regulation for harmonization has considerable advantages. Firstly, unlike the directive, it does not need, any further implementation at national level, thus avoiding long process of adoption of the Community provision by Member States. Secondly, being directly and equally applicable all over the Community, the regulation serves to ensure the same features all over Europe. Also, some disputes about the interpretation of the regulation ultimately have to be submitted to the European court, leading to a more uniform interpretation.

In 1985, with the Regulation on the European Economic Interest Grouping (EEIG) a new model for a supranational corporation was introduced. In order to accelerate the introduction of the EEIG the European legislator focused only on the provisions with European background and therefore the national Corporate Laws of the Member States still apply. It is argued that Due to the application of national law besides the provisions of the regulation, the EEIG could not provide the sufficient flexibility and legal certainty that was expected by introducing supranational corporations.

At the conference of Nice in December 2000, the Member States finally agreed on the introduction of the European Company or Societas Europaea (the “SE”). The Regulation on the Statue for a European Company has been adopted by the Council on 8 October 2001. Its virtue is to provide companies that want to act or establish themselves in another Member State with the option of being subject to one set of legislation.

Besides these two most important regulations mentioned hereinabove, other Regulations, such as Insolvency Proceedings Regulation and International Accounting Standards Regulation, also make considerable contribution to the EC Company Law Harmonization Programme.

CHAPTER 2. The reasons why EC Company Law Harmonization Programme was seen as important to the economic development of European Community
Article 2 of the Treaty indicates that its footstone and aim are the establishment of a common market. For that purpose, the activities of the Community are to include the abolition as between Member States, of obstacles to the free movement of goods, persons, services and capital and the approximation of the laws of Member States to the extent required for the functioning of the common market.

The divergences in national laws among Member States will cause a lot of problems and can frustrate the functioning of the internal market. The primary reason is that competition can be distorted. The establishment of companies or other enterprise entities will bring in a lot of relevant attractive economic effectiveness, such as tax revenues, expansion of employment, market development and innovation, shareholder and investor interest, etc. If national company laws governing importance areas of creditor and shareholder protection and company management are fundamentally different, this may be expected to create a European “Delaware effect”, encouraging the establishment of new companies in those Member States with the most attractive and laxest laws and policy. It will then run contrarily to the economic efficiency, since corporate decisions of cross-border establishment and activities should be solely taken on the economic grounds without being significantly influenced by the relative burden of domestic regulation. Different laws will definitely impose administrative and legal burdens on companies with subsidiaries in several Member States. Once companies are free to move their seat or registered office to another Member State, it should be ensured that members and creditors are not prejudiced by the relocation. With the Harmonization of Company Law in European Community, equivalent creditor and shareholder protection should encourage cross-border credit, corporation and investment, thus the economic development of European Community as a whole can be expeditious and rational.

What should be mentioned here is that, regulations play an indirect but important part in the economic development of European Community. For example, The Regulation on the European Economic Interest Grouping (EEIG) has created a new type of co-operation, which enables companies in one Member State to co-operate in a joint venture with companies or legal persons in other Member States. Moreover, European Company Statue Regulation (the SE) is of central importance. It enables companies to act throughout the Community in the same way as in their own country. The regulation, in a sense, can insure that all the Member Countries in EC would have available the same basic structure for a company’s establishment and business, no specific States would prevail over others. In this way, the EC Member States can pursue their economic development in a fair and healthy environment. It can be seen as one of the major successes of that more than 30 years old programme.

CHAPTER 3. The Successes and Obstacles of EC Company Law Harmonization Programme
As mentioned hereinabove, the aim and virtue of the EC Company Law Harmonization, which are reflected in the provisions of the Treaty, is the establishment of a common market. It can be said that the Programme, from its beginning, focused on “the prevention of the so-called Delaware-effect in the European Community”. The successes of this Programme are obvious and impressive.

3.1 Adoption and Implementation of EC Directives within national legislation.
Most of the directives are agreed and adopted among the Member States, which can be seen as the symbol of the significant realization of EC Company Harmonization. The directives in respect of nullity, minimum capital, disclosure and publicity requirements, mergers of public companies and accounts, have been adopted. Most of them have been implemented within the level of national legislation in either some or all EC Member States.

3.2 The breach of legislative barrier among Member States.
As mentioned in CHAPTER 2 of this essay, the process of EC Company Law Harmonization is also a process to break down the legislative barrier among the Member States. The harmonisation programme will directly facilitate the free movement of goods, persons services and capital, which will ultimately benefit the creation of a common market.

3.3 The Achievements of Right of Establishment.
Because of the absence of an overriding European regulation and the great importance of this issue for the freedom of establishment of firms in the EU, the European Court of Justice (ECJ) has been confronted with this issue at several occasions. In its first decision (Daily-Mail) of 1989, the ECJ held that the right of establishment does not include the right of a company incorporated under the legislation of a Member State to transfer its central management and control to another Member State. Later, with the judgments of the ECJ in Centros and Überseering cases, the circumstances of an legislative competition have fundamentally changed. Due to the Court’s displayed, wider understanding of the right of establishment, companies can now move their central management and control from one Member State without the need for further proceedings. In effect, the ECJ has given the right of establishment a “radically new, wider interpretation”. A company can now be found in a Member State without having later any further relations to it, which has been a central obstacle to legislative competition in the past.
However, the Harmonization Programme which lasting over the past 30 years has inevitably arise some question and controversies. They laid the stumbling block for further progress of this programme. Certain criticism of the company law harmonization programme has been mentioned above CHAPTER 1.3, in respect of the suitability of directives as the instrument of harmonization. Apart from that controversy, this programme also encountered some other obstacles.

3.4 Inefficiency of Directive Implementation
The necessity to implement a directive in order to make it more effective in national law sometimes causes problems of inefficiency. Although the European Court of Justice has recognized the direct effect of directives against Member States, this implementation duty is still a weakness, since directives “have no horizontal direct effect, i.e. in relations between individuals.” Moreover, since directives are directly addressed to Member States but not to companies directly, directives do not provide directly enforceable rights to the companies, to investors or other stakeholders.

3.5 Comprehension and Communication of legal Concepts.
A particular problem in seeking to harmonize the Company laws among Member States with disparate legal traditions is the difficulty in dovetailing legal concepts. A directive may focus on an area in which specific concepts are familiar to one State’s understanding of the law but alien and hard for another legal culture to comprehend. For example, the concept of the company organ introduced into Community company law, which was borrowed from German Law, is familiar to the states whose legislation is originated from the Napoleonic code but uneasy for the United Kingdom to analyze the company transactions within the framework of agency. Also, similar problems arise from the use of terms which may not be sufficiently proximate in the different language versions of a directive and in the Member States’ implementation.

3.6 The restrictions of fields harmonized in Directives
Criticisms have been directed at the Commission’s priorities for the subject of adopted directives or the undertakings which are subject to them. For example, the pattern of incorporation as public and private companies in the different Member States is significantly different. The Second Directive, which is restricted to public companies, can obviously distort the harmonizing effect of measures applying only to one category of companies. The United Kingdom and Germany, for example, have relatively small numbers of public compared to private companies.

3.7 The problem of compromises in the EC legislative processes
In the beginning of the harmonization process only six Member States with six legal systems and traditions had to be considered. The legal system of these Member States based in part on common continental European legal principles. Due to the growth in number of Member States, compromises have always been difficult to reach. Hence, the process of harmonization faced with stagnation. At the conference of Nice, the Member States tried to handle this problem by simplifying the legislative process. But these amendments and institutional reforms will most likely not be able to solve this stagnation problem. While the future of the following directives and other legislative acts are uncertain, the existing Directives and Regulations about corporate law will- taken by themselves – be hard to change.

CONCLUSION
Having evaluating the EC programme for the harmonization of Company Law, it can be concluded that the overall progress is impressive. However, it is yet too early to say that this programme is an absolute success. The Commission acknowledges that there is much work remaining to be done regarding the legal framework for company law.

There still exist the problems such as the complete freedom of establishment of companies “in a strict sense” , sufficient protection of creditors and shareholders. Moreover, the rules relating to takeovers and the board are important elements of company law, and harmonisation cannot be brought much further before the conflicts in these areas are resolved. What has been achieved so far for this Harmonization Programme will become the history for tomorrow, what should be done now and in future is more important and crucial for legislators to consider, on both European Community and national legal system levels. Taking for reference the past achievement and obstacles, we are awaiting the further progress and achievements of EC Company Harmonization Programme.

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