EU-Inc, or the emergence of a new European corporate form

As it had previously announced by making it a priority in its action programme for the year 2026, the European Commission presented on March 18 its proposal concerning the – misnamed – EU Inc., that is to say an optional legal framework which, without being confined to a “28^th regime”, is intended to encompass companies operating on the European market and wishing to be subject to autonomous corporate rules, at least to a significant extent.

This proposal was particularly eagerly awaited, and for several reasons.

It is first intended to respond to various academic initiatives, in particular that of Association Henri Capitant (in December 2020) and that of Haut Comité Juridique de la Place financière de Paris (in March 2021), in favour of a simplified European company, designed to revive regulatory initiatives aimed at increasing the integrated nature of the single market, at a time when divergences between the laws of the EU Member States continue to fragment it and to generate excessive compliance costs for undertakings. Admittedly, under the effect of numerous directives, those laws have gradually converged, while the case law developed by the CJEU has over time made it possible to facilitate the incorporation and migration of companies within the European area. However, this project remains, in its current state, unfinished, which conversely increases the attractiveness of markets which, by contrast, offer largely unified rules, extending even beyond company law alone.

The proposal then falls within the scope of the follow-up to the Letta and Draghi reports, which have emphasized the need to improve the competitiveness of European undertakings in many areas. The simplification resulting from the creation of a corporate structure common to all Member States would be such as to achieve that objective, by offering undertakings a legal instrument that is (relatively) uniform and secure, so that their cross-border growth would be less hindered by the constraints arising from certain national rules.

To consolidate this objective, the proposal presents several advantages, even though it must be regretted that its designation is so disembodied and does not take its roots in European legal culture. The Commission thus makes the strong choice of a regulation of general scope (I) in an attempt to offer a simplified and liberal framework to its addressees (II). It remains to be determined whether it will be able to overcome the obstacles to its definitive adoption (III).

1.     A regulation of general scope

As regards the overall framework of the proposal, two issues were the subject of intense debate, one relating to the type of normative instrument to be adopted, the other concerning the undertakings to which it is addressed.

With regard, first, to the instrument selected, the proposal has favored the choice of a regulation, which calls for some explanation. In company law, the European authorities generally proceed by way of directives, with the combined objective of harmonizing the national legislation of the Member States while at the same time preserving a certain decision-making autonomy for the latter in order to take account of cultural differences. However, when it is a matter of proposing a European corporate structure in due and proper form, that instrument no longer appears appropriate, since by its very nature it allows for divergent rules depending on the State of incorporation. Thus the European Company (SE) was established in 2001 by means of a regulation. The choice of this latter instrument is therefore, in reality, part of a certain continuity, but displays greater originality as regards the legal basis adopted to justify it. It was in fact usually maintained that such basis could only be found in the flexibility clause laid down in Article 352 of the Treaty on the Functioning of the European Union (TFEU), which enables the EU to act in fields where it has no competence expressly conferred upon it, in return for requiring a unanimous decision of the Council, that is, a constraint liable seriously to jeopardize the prospects of adoption of a legislative act in this area. To circumvent that constraint, and as it had already done in the digital sphere with the DSA and the DMA, the Commission relied on Article 114 TFEU, which grants the European legislature full scope to act in order to strengthen the functioning of the internal market, in accordance with the ordinary legislative procedure of co‑decision, with the result that the Council’s approval may be obtained by a qualified majority rather than unanimously. This approach is skilful, and is supported by the contours of the text, which somewhat exceed the traditional scope of company law, in particular with a view to simplifying the rules on cross‑border recognition and use of information relating to the entities concerned, organizing the establishment of European employee share ownership plans (EU-ESOP) and providing for specific provisions in matters of winding‑up or insolvency.

With regard, moreover, to the recipient undertakings, the discussion was reduced to an alternative: either confine the use of the new structure to a certain type of operators, namely those most directly disadvantaged by market fragmentation and the costs arising therefrom, or extend its accessibility to every form of undertaking. Having initially inclined towards the first option, by specifically targeting innovative undertakings at the stage of their launch (startups) and of their development (scaleups), the Commission ultimately appears to have been receptive to the arguments advanced by the proponents of a general opening of the new structure, who in particular highlighted the difficulty of defining, with the requisite rigour, the innovative undertakings concerned. On this point, the draft regulation is clear: any natural or legal person, alone or jointly with others, may incorporate an EU Inc., whether ex nihilo or by way of conversion, merger or demerger of an existing company. It should nevertheless be noted that certain provisions relating to simplified liquidation and insolvency procedures are indeed directed solely at undertakings that may be classified as innovative start-ups within the meaning of a recommendation published in parallel by the Commission.

2.     A simplified and liberal framework

Upon examination of the text, the key guiding principles of the framework offered by EU-Inc. are simplicity and freedom.

Regarding the first point, it is clear that the promoters of EU-Inc. primarily sought to simplify the formalities inherent in the incorporation and operation of the company. To this end, digital tools are constantly employed, so that EU-Inc. is fundamentally based on the principle of digital-only. By way of illustration, at the incorporation stage, one may mention the need for the articles of association to be capable of relying on standardized templates, to be processed by computer systems, and for registration to be capable of being carried out digitally within 48 hours (fast track formation) by using a European central interface connected to all national registers. However, as regards this latter point, it must be noted that this expedited process depends on the choice actually to use the proposed templates; otherwise, the national authority responsible for ex ante control would have five working days to complete it. Likewise, during the life of the company, in addition to entries in a digital register kept by the company, any issuance as well as any transfer of securities would have to be carried out entirely online, while meetings of the corporate bodies, whether of the board of directors or of the shareholders’ meeting, could also all be held by this dematerialized means. Finally, the dissolution and winding-up of solvent EU-Inc. companies would again give rise to procedures conducted entirely online.

On the second point, the freedom sought by the authors of the proposal is first observed in the source of the rules applicable to the structure. In substance, the latter would be governed by the mandatory provisions of the regulation and by the clauses of its articles of association that comply with the regulation. Admittedly, national law remains potentially applicable to matters not covered by these instruments, but only on a subsidiary basis, so that the articles of association appear able freely – at least to a very large extent – to shape the governance of the structure. With regard to the directors, only the existence of a board of directors members would be dismissible at any time by the body of shareholders would be required, it being specified that the board could be reduced to a single member. As for the shareholders, they would have full discretion to determine the procedures for the adoption of collective decisions. The articles of association could also freely restrict the transferability of the shares and provide for the creation of share classes endowed with distinct political and financial rights and obligations. They could finally delegate to the directors the power to decide on distributions, subject to compliance with balance sheet and solvency tests that are mandatory for any form of distribution. In terms of financing, the freedom is likewise almost absolute: no minimum capital, no required nominal value for the shares, and the use of any form of deferred equity securities… The EU-Inc. are authorised to access the financial markets through the listing of their shares on a multilateral trading facility such as Euronext Growth, or even on a regulated market provided that the national legislation of the company so permits. Consequently, it is not certain that other corporate forms proposed by the legislation of the Member States attain such an extremely high degree of contractual freedom.

Nonetheless, certain limitations remain, the assessment of which will in practice depend to a large extent on the national courts of the Member State in which the EU-Inc. is registered. Thus, the directors will be required to comply with duties of loyalty, diligence and disclosure in the event of a conflict of interest, it being specified that, for the remainder, any action seeking to establish their liability will continue to be governed by the national law of the State with which they are connected. Likewise, it would be necessary to guarantee the shareholders a right of withdrawal, subject to evidence of “oppressive” conduct on the part of the company towards them, that is to say a situation whose precise contours are difficult to anticipate. Finally, the rules governing employee participation in the management bodies of the entity – a particularly sensitive issue for certain Member States keen to maintain such involvement – would continue to be determined by the national law of the State of registration.

3.     Adoption remains uncertain

There can be no doubt that the proposal appears attractive for companies required to expand beyond their original market. This observation applies not only to those whose core activity is based on innovation. More generally, both private equity operators and groups establishing subsidiaries in different States could be drawn to such a model of common structure, which is liable to overshadow the traditional corporate forms inherent in the Member States.

As they had been able to do in the case of previous aborted projects for a European private company, some of them might very specifically voice strong reservations about this development, for fear of forum shopping taking place to their detriment. Thus, by prohibiting the imposition of a requirement that the company’s central administration or principal establishment be located within the state of registration, the proposal sets aside the real seat doctrine and more readily enables the founders to select the state deemed the most attractive in which to establish their EU-Inc. Furthermore, the restriction of the role of notaries, particularly in capital increase transactions and in the transfer of securities, could be viewed unfavourably by those states in which notaries continue to occupy a predominant position in ensuring compliance with corporate formalities. Finally, the preservation of the co-determination system in the states in which it is mandatory could deter companies from making use of this new corporate form, a prospect liable to arouse hostility on the part of the latter.

Let us here express the hope that these obstacles will in fine be overcome, and that the creation of this European structure will constitute a decisive step towards a more far-reaching unification of business law within the EU.