Reducing the Risk of National Fragmentation in the EU Inc Proposal: Rewrite Article 4 and Introduce Safe Harbours

The EU Inc Proposal represents one of the most ambitious initiatives in European company law in recent memory, for which we commend the European Commission. However, the EU Inc has also received a lot of criticism—as can be seen from the many critical blogposts on this blog. One of the most important criticisms relates to Article 4 of the EU Inc Proposal, which regulates the relationship between the EU Inc Regulation, national law, and the articles of association (see for examples of this criticism, the blogposts of Ringe, Denga and Enriques, Tröger and Nigro). 

In this blogpost, we argue that Article 4 is in many respects ambiguous and inadequate. Unless Article 4 is fundamentally rewritten, the EU Inc risks generating twenty-seven distinct national variants rather than a single uniform European corporate form, as national statutory rules, national judges, and national gatekeepers (notaries, court registrars, and others) each will play their respective roles in effectively re-nationalizing the EU Inc. Therefore, we offer some suggestions on how Article 4 can be improved and, more generally, on how the risk of national fragmentation of the EU Inc can be reduced. The blogpost is based on our submission to the Commission’s public consultation on the EU Inc Proposal.

First, it is unclear in Article 4 whether the drafters intended all provisions of the Regulation to be mandatory unless the Regulation expressly provides otherwise. We propose that the Regulation contains a clear choice on whether its rules are in principle mandatory or only default rules, if nothing is provided in the text. In addition, if the rules are in principle mandatory, at least the provisions relating to shareholder rights and governance should systematically stipulate that the articles of association can deviate from and complement the Regulation.

Second, it is unclear to what extent national law can complement the Regulation and the articles of association. Article 4 states that national law governs matters ‘not covered by this Regulation or by the articles of association’. But what if the Regulation or articles of association impose certain but limited rules to protect stakeholders in a certain situation: can national law still impose additional protections of stakeholders in those situations, or do the Regulation and articles of association completely pre-empt national law? We would propose to clarify in the EU Inc Proposal that national law cannot provide supplementary rules to protect shareholders and other stakeholders if the Regulation or the articles of association have already (partially) regulated this matter. If there are matters that the EU legislator believes should be better left to member states to regulate, the Regulation should contain a provision that explicitly states that such matters are to be governed by national law. To avoid legal fragmentation, however, such matters should be kept to a minimum.

Third, it is unclear to what extent the articles of association rank above national law. Article 4 states that national law only governs if the matter is not covered by the Regulation or the articles of association. Article 7 of the EU Inc Proposal states that ‘the articles of association shall cover at least the matters laid down in this Regulation, as specified in the Annex’. These provisions seem to imply that the articles of association can also cover other matters, pre-empting national law on the matter. We would consider it desirable that the articles of association pre-empt and override national law, but this should be stated more clearly and explicitly in the text of Article 4. 

Fourth, we do not believe that Article 4 should require member states to always designate a (single) national company form, the rules of which apply if the Regulation and articles of association do not regulate a matter. This would not always lead to more legal certainty, because the EU Inc may differ significantly from all national corporate forms in a member state. We therefore propose that the text of Article 4 is amended to allow member states to draft rules that apply specifically to the EU Inc, rather than simply referring to a specific national company form. Such rules could then contain references to rules applicable to other national company forms, or rules drafted specifically for the EU Inc, at the member states’ discretion.

Fifth, we see the role of national courts as a large risk factor for re-introducing national fragmentation. In the absence of an EU Inc court, which is likely unrealistic at the moment, national courts will adjudicate disputes relating to the EU Inc. This could re-introduce the risk of 27 variants of the 28th regime, as national courts could use nationally created legal doctrines to resolve disputes, undermining the uniformity and legal certainty that the EU Inc Proposal aims to create. To reduce such fragmentation, templates could play an important role, in particular if the EU Inc Regulation would include a safe harbour. Such a safe harbour—proposed by the Repasi Report of the European Parliament and by Enriques, Nigro, and Tröger—could stipulate that provisions in the articles of association which are included in the EU template are valid and enforceable, overriding national law and national legal doctrines developed by courts. In addition, as also proposed by Enriques, Nigro, and Tröger, the EU should develop templates for shareholders’ agreements—often the most important document in a venture capital transaction—and develop a similar safe harbour for this template. Such safe harbours would imply that at least for matters included in the templates, there is some legal certainty and uniformity at the EU level.

Finally, to avoid national fragmentation, the EU Inc Regulation should expressly outlaw certain recurring national doctrines that are particularly liable to undermine contractual arrangements in articles of association and shareholders’ agreements, such as the doctrine on ‘leonine clauses’, for example. Generally speaking, we believe there are no good arguments for mandatory rules in the Regulation or in national law that limit the freedom of shareholders in non-listed companies to strike deals concerning the shareholders’ claims to cash flows generated by the company. 

In conclusion, if the European Commission wants the EU Inc to succeed, it needs to rethink the relationship between the EU Inc Regulation, the articles of association of the EU Inc, and national law. Article 4 of the Proposal already contains some interesting ideas, but they are not always clearly formulated. In addition, it should be made clear in the EU Inc Regulation that shareholders can contract freely about shareholders’ claims to cash flows, and that such bargains cannot be second-guessed based on national legal doctrines. Such reforms to the EU Inc Proposal could help to ensure that it constitutes a true 28th regime and avoid excessive national fragmentation.

Hans De Wulf is a Professor at Ghent University.

Tom Vos is an Assistant Professor at Maastricht University, Visiting Professor at the University of Antwerp, and Research Fellow at the KU Leuven.

The authors would like to thank Petar Dakovski for his research assistance in the drafting of this blogpost.

This post is part of the OBLB's series of posts on the EU Inc proposal.