EU Inc. Opens the Door to a European Delaware

Last March, the European Commission presented a draft European regulation it dubbed “EU Inc.”, as part of the “One Europe, One Market” roadmap, which aims to complete the unification of the European market by the end of 2027. The regulation proposes to create a 28th company law regime alongside the 27 existing national regimes, so that companies can operate throughout the Union without having to set up subsidiaries in each Member State. In practice, this means creating a European limited liability company (LLC) status, just as a European public limited company (PLC) status already exists in the form of the Societas Europaea, established in 2004.

According to the European Commission, the proposal is intended to foster EU-wide start-ups finally capable of competing with the American tech giants. In practice, however, it is likely above all to exacerbate social and fiscal dumping within the European Union and to undermine workers’ rights, whilst also facilitating money laundering and criminal activity. We recall the backlash the Bolkestein Services Directive draft provoked in 2005 and 2006 over fears of social dumping through posted workers. There is reason to fear that “EU Inc.” could provoke a similar anti-European backlash should the proposal go ahead.

Facilitating the creation and growth of start-ups in Europe: no one can object in principle to such an objective, given the EU’s current total dependence on American Big Tech and the increasingly threatening consequences this has for the survival of our businesses, our private lives, our freedoms and, ultimately, our democracies. But the Commission’s proposal is not just about that, far from it: this 28th regime would in fact be open to all businesses of all sizes, of any age, and across all sectors of activity.

The Commission justifies this choice by pointing to the great legal difficulty of restricting access to such a regime by a company’s age, size or sector of activity. Where and how should the boundaries of the relevant sectors be drawn? What should be done with these companies once they exceed the size or age limits set at the outset? The objection is a serious one, but as a result the stakes attached to this new company law regime become colossal for the EU and its citizens. Robust safeguards must be put in place from the outset to guard against potential abuses if we are to avoid a fiasco that would damage the European project.

Yet the least one can say is that, at this stage, the proposal exhibits every characteristic that alarms those who wish for a more social Europe. That means a Europe that defends and strengthens workers’ rights, a Europe that better safeguards Member States’ tax bases and enables them to provide their citizens with high-quality public services and social protection that effectively shields them from life’s uncertainties, and a Europe that combats white-collar crime, money laundering and tax and regulatory havens more effectively.

These “EU Inc.” companies, which would then be able to operate anywhere in Europe without further ado, are supposed to be set up online by anyone within 48 hours, for less than €100 and with no minimum capital requirement. The ongoing management of these companies, including their liquidation, would be greatly simplified: board meetings, general meetings of shareholders and the like could all be conducted online, with no need for verified physical attendance.

One can well imagine the windfall for those who need shell companies to cover up one nefarious activity or another, or to set up fraudulent schemes to deceive a particular Member State over VAT or any other tax or social security contribution. If one were determined to make life easier for criminals of all kinds, one could hardly have gone about it differently.

Furthermore, this “28th regime” is not really a 28th regime at all: the European Commission has not created a 28th fictitious Member State to host these companies. The companies in question remain, in reality, registered in one of the 27 Member States, and that is precisely the problem. Every aspect of their existence that is not directly covered by the Regulation remains subject to the law of the country of registration: “Matters not covered by this Regulation or by the articles of association shall be governed by national law, including provisions transposing Union law, which applies to the relevant national legal forms in the Member State where the EU Inc. company has its registered office”, as Article 4 of the draft Regulation states.

An Open Door to a European Delaware

This would apply in particular to labour law, social security law and the tax regime of these companies. Nor does the Regulation oblige a company to register as an EU Inc. in a Member State where it actually carries out economic activity. It is easy to imagine the scope this opens up, even more than today, for social, fiscal and regulatory dumping. We risk seeing a dynamic in Europe similar to that experienced in the United States with the state of Delaware, one of the smallest states in the US, which, thanks to its low tax rate and minimal regulatory requirements, is home to more than half of all US publicly traded companies and two-thirds of the Fortune 500.

“EU Inc.” could, first and foremost, enable companies to circumvent the rules that exist in many Member States on employee representation on boards of directors, and the obligations to consult and inform employee representative bodies on certain types of managerial decision, as has already been observed with European Companies, whose legal status has frequently been used for this purpose since 2004.

The Commission’s proposal does, admittedly, state that the labour law applicable to individual employees of these companies should remain that of the State in which they are based, but it does so only in a recital, which has no legally binding force. Furthermore, whilst these individual rights could probably be safeguarded under the Rome I Regulation, which governs contracts within the Union, and existing case law, the same cannot be said for employees’ collective rights, such as the obligation to engage in collective bargaining, the existence of economic and social committees, and employee representation on the board of directors, which Rome I does not explicitly cover.

This is all the more so given that the EU Inc. Regulation imposes no obligation on these companies to provide Member States regularly with information about their establishments and the number of their employees. Should it be adopted, the Regulation would likely keep the European courts occupied for many years with the disputes it would inevitably provoke over the social rights of EU Inc. employees.

Furthermore, the regulation would allow EU Inc.s to replace employees’ remuneration, over and above statutory and collectively agreed minimum wages, with stock options on highly favourable terms, by creating a new status known as the “EU employee stock option plan” (EU ESO), reserved for EU Inc.s and applying uniformly across Europe. The main feature of these EU ESOs would be to prohibit Member States from taxing such remuneration, whether as income from employment or as capital gains, until the shares in question are actually sold by their holder.

First and foremost, these forms of remuneration by their very nature expose employees to very significant financial risks that are difficult for them to assess. It is therefore hard to see why the EU should have any reason to favour them. Furthermore, these EU ESOs risk costing Member States significant revenue, particularly in social security contributions, should the EU Inc. status and this method of remuneration come to be used on a large scale.

From a tax perspective, moreover, given that no legal structure is provided for at the level of each Member State where an EU Inc. is established and operates, this status would make it easier to book profits in the state of registration. It is easy to imagine how this status risks further fuelling a race to the bottom on taxation, which already deprives EU Member States of essential tax revenue.

Lastly, the Regulation provides for fast-track liquidation procedures for EU Inc.s, which look likely to undermine the interests of employees, or those of Member States in relation to taxation or social security contributions.

Company Law Is Not What Holds Start-Ups Back

In short, this regulation has the potential to open a whole host of Pandora’s boxes without, at this stage, providing a satisfactory response to the many potential abuses to which its implementation could lead.

Is it at least worth the effort? Will EU Inc. finally give us European equivalents of Amazon, Facebook and Google? The figures put forward by the European Commission itself do not really support this view: in its impact assessment, the Commission estimates that, thanks to EU Inc., businesses could save between €328 million and €440 million in administrative costs over 10 years, based on 308,000 EU Inc. companies being set up. Savings of €40 million a year, in a Union that generates €19,000 billion in new wealth annually, represent just 0.0002 per cent of the EU’s GDP. Is it with measures of this magnitude that we are going to catch up with the United States?

The problems preventing start-ups from emerging in Europe are, in reality, only marginally related to company law. They stem primarily from the persistent fragmentation of national markets, particularly in telecoms, finance and defence, and from linguistic and cultural barriers that hinder both standardised offerings across Europe and the mobility of workers within the Union. They stem, too, from the misallocation of European households’ savings, the lack of pan-European venture capital of sufficient scale, and the absence of a common European budget on a par with those the United States or China can commit to supporting innovative high-tech companies, particularly through their defence budgets. Yet the EU Inc. regulation does nothing to resolve any of these problems.

It is therefore difficult, at this stage, not to conclude that the risks associated with the EU Inc. regulation likely outweigh the benefits that would result from its adoption. Trade unions are strongly opposed, as are notaries and many business service professionals.

For its part, the Council finalised its position on this draft regulation on 23 October, approving it whilst seeking to introduce further safeguards like limiting the scope of EU ESOs to companies with a turnover below €150 million and fewer than 750 employees, and rejecting the proposals on insolvency procedures for EU Inc.s. The European Parliament has yet to adopt its own position. The Commission would like to finalise it this year, following negotiations between the Council, the Parliament and the Commission.

Given the current composition of the Council, and the right-wing and far-right majority that now dominates the Parliament, there is a real fear that the “sorcerer’s apprentices” will have their way, and that this proposal will ultimately be adopted without the essential minimum safeguards being put in place, particularly with regard to employees’ rights.