Brussels should withdraw EU Inc before it goes off

When Mario Draghi and Enrico Letta called for a ‘28th regime’, the idea was disarmingly simple. A start-up anywhere in Europe should be able to incorporate in a couple of days, raise venture capital on terms investors recognise, hire across borders and scale up without retaining a lawyer in each of the 27 jurisdictions it enters. The Commission’s EU Inc proposal promised to deliver that: one legal form, one rulebook, online formation for €100.

Seven months on, what is being negotiated under its name is something else. The Commission should acknowledge as much and withdraw the text.

Start with the Council’s position, agreed two weeks ago. It ‘supports the proposal’s main objectives’ and then takes them apart. The insolvency chapter is gone. National law fills the many gaps the regulation leaves. Member states may refuse registration on grounds drawn from their own anti-money-laundering rules. Employee participation follows the law of the registered office, except that host states (read: Germany) may impose co-determination on foreign-registered EU Incs with large operations there. The employee stock option plan, the one feature founders actually asked for, is confined to a narrower set of firms.

The European Parliament is heading somewhere different but no better. The rapporteur’s rewrite bans listing and would let German-style co-determination travel with the company. Any compromise will have every faction bolting its own safeguards onto a vehicle designed to be light.

Add the two together and the ‘28th regime’ becomes 27 regimes wearing the same badge: a thin layer of EU rules, a thick layer of national default law, and a name. Founders would still need local counsel in every member state; investors would still find that a Delaware-style term sheet collides with mandatory rules on capital, share classes and directors’ duties.

The proposal rests on article 114 of the Treaty on the Functioning of the European Union (TFEU), the internal-market power to approximate national laws by qualified majority. Every European legal form so far—the European Company and its siblings—was adopted under what is now article 352 of the TFEU, which requires unanimity and, in Germany, the assent of both chambers. 

Udo Di Fabio, a former German constitutional judge, concluded last week in an opinion for the Federal Chamber of Notaries that the regulation is unlawful as proposed and likely to be struck down in Luxembourg or Karlsruhe. One may discount the messenger; notaries have skin in this game. But the Council’s own legal service and the Bundesrat have raised the same doubt. A regulation annulled by the Court falls away retroactively. Companies formed under it would wake up as partnerships or sole traders, their shareholders personally liable. No venture fund will put money into a legal form whose existence a court can erase after the fact. That is a time bomb that amendments cannot defuse: the fix—switching to article 352—requires the unanimity the Commission intended to avoid by choosing article 114.

So withdraw, and start from the right end. The aim was to give young companies flexibility, lower costs and a European reach. The text on the table delivers none. Hence, EU Inc would do little to implement Draghi’s and Letta’s vision of better prospects for innovation and growth through a tailored 28th regime.

A new proposal for a directive could require each member state to offer at least one domestic company form with the features start-ups and scale-ups need: fully digital formation, free design of share classes and liquidation preferences, vesting and drag-along rights, convertible and hybrid instruments, and unrestricted mutual recognition across internal EU borders. Member states could restrict that form to SMEs or to new or innovative firms, and let their companies call it EU Inc. That is harmonisation of national law, which is what article 114 is for. No one would doubt the legal basis.

And it should contain something the current text lacks entirely: rules about rules. Experience in Germany and Italy shows that the real threat to venture-capital contracts often comes from courts reading a general clause—good faith, abuse of rights, the ‘nature’ of the company—to set aside terms the parties negotiated. Harmonising legislation may pre-empt that by requiring courts to read limits on private ordering narrowly, to uphold financing arrangements rather than override them on the strength of open-ended standards, and to judge good faith by the actual practices of start-up finance. Those ‘meta-rules’ would do more for European founders than any amount of digital-by-default plumbing.

Delaware became the world’s incorporation hub by letting parties write their own deal and enforcing it. The EU can learn that lesson without a legal form of its own—and without the risk that a court will send legislators back to the drawing board.

Luca Enriques is a Professor of Business Law at Bocconi University.

Casimiro A Nigro is a Business Law Lecturer at Leeds University.

Tobias H. Tröger is a Professor of Law and Finance at Goethe University and the Leibniz Institute SAFE.