Today, SMEs face too many obstacles that hamper their economic activities within the Single Market. From the perspective of company law, they often find it costly and difficult to do business across borders. Only a small number of SMEs (2%) invest and establish subsidiaries abroad. The proposal for a Directive on single-member private limited liability companies tackles these obstacles as it would standardise requirements for the creation of companies with a single shareholder. It would remove the burdensome process of registering subsidiaries and make it easier for SMEs to operate across the EU.
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1. Why has the Commission put forward this proposal?
European small and medium-sized enterprises (SMEs) are the backbone of the EU economy: the 20.7 million SMEs produce 58% of EU GDP and account for 67% of all jobs in the private sector. SMEs which are active outside of their countries have also substantial potential to boost growth, e.g. SMEs with foreign direct investment showed four times higher employment growth than non-active SMEs.
But to do so, they need to be able to take full advantage of the opportunities of the single market, in particular its 500 million consumers. At present, many SMEs face obstacles trying to do so. They find it in particular costly and difficult to be active outside their own country and as a result, only around 2% of SMEs take up activities abroad (in the form of a subsidiary, branch or joint venture).
This is in part because of legal, administrative or linguistic constraints and also due to the lack of trust in foreign companies amongst customers and business partners. The lack of trust is one of the reasons why SMEs establish subsidiaries in other Member States, which provide customers with the brand and reputation of the parent company but also offer the security of dealing with a national company law form.
From the perspective of company law (i.e. rules governing the formation, registration, governance and dissolution of companies), setting up of subsidiaries abroad is often burdensome due to divergent requirements in national legislations across the EU. Meeting legal and administrative requirements in other countries leads to costs related to legal advice and translation. These costs are likely to be even higher for groups companies which want to establish in a number of Member States and need to follow different regulatory requirements in relation to each subsidiary.
The Commission aimed to address the above-mentioned problems in its 2008 proposal for a European Private Company Statue (SPE). Despite strong support from the business community, it was not possible to reach unanimous agreement on the proposal among Member States, due to differences of opinions on a number of contentious issues. Therefore, the Commission decided that it would withdraw the SPE proposal in its REFIT exercise. In view of that withdrawal, the current proposal aims to address some of the obstacles that SMEs face by facilitating the setting up of companies with a single shareholder across the EU.
2. What is the main objective of the Commission proposal?
This proposal aims to make it easier and less costly to set up companies across the EU. In particular, it aims to encourage SMEs, including individual entrepreneurs, to carry out their activities in other Member States. At the same time, it should also benefit groups consisting of SMEs and larger companies by allowing them to set up single-member subsidiaries according to the same main requirements across the EU. Its particular focus is on subsidiaries (i.e. companies in which another company holds all or parts of the shares or a majority of the voting rights, or has the right to appoint/remove a majority of the board members, or over which another company has the right to exercise a dominant influence) as this is the most frequently chosen legal form of establishment abroad.
3. Why does the proposal focus on single-member private limited liability companies?
Creating subsidiaries is a key tool for companies to develop a business presence in other Member States. In most cases, these subsidiaries are single-member companies, since the single member is a parent company which “wholly owns them”. More than 40% of all limited liability companies in the EU are single member companies. Facilitating the creation of single-member companies across the EU should make it easier for businesses to establish subsidiaries in other countries. The focus on single member companies will therefore provide clear benefits for companies while avoiding difficult discussions on matters of concern for companies with more than one member, such as the issues of interaction between shareholders and minority protection. The proposal should also make it easier, at least in some Member States, to set up private limited liability companies at national level.
It focuses on private limited liability companies, i.e. those that are not listed and do not offer shares to the public, because this is the legal form most commonly used by SMEs.
4. In what ways is this proposal different to the proposal for a European Private Company statute?
First, the proposal focuses on the harmonisation of national laws and thus avoids the creation of a new legal from at European level which would exist independently from national law with all the complexities that entails.
Second, the proposal is limited to harmonisation of those areas of national law which are essential to reduce the burden linked to setting up a company. The other areas of company law, which are less relevant to this objective but which proved to be contentious in the negotiation on the European Private Company Statute, are left to national law.
5. Would this proposal introduce a new company law form at EU level, such as e.g. the legal form of European Company (Societas Europaea) adopted in 2001?
No, this proposal would not introduce a new legal form at European level, a so-called “29th regime”. Instead, it would ask Member States to make available in their national legal orders a national company law form for single-member private limited liability companies with a number of harmonised main requirements and one common name, Societas Unius Personae (SUP).
The proposed Directive would leave Member States the choice of how to introduce such a company law form at national level. For instance, such legal form of an SUP might be an additional company law form, co-existing with the other national forms for single-member private limited liability companies in a particular Member State. In such case, the founders of companies would be able to choose the most suitable one for their business. Alternatively, if a particular Member State so decided, the SUP legal form could become the only national company law form available for such companies in that country.
As the SUP would be a national and not a European legal form, it would not need to provide for a self-standing independent legal framework and therefore, more issues (e.g. involvement of employees, transfer of seat) could be regulated by national law.
6. Why is action at EU level necessary?
The recent policy developments and trends at national level show the improvement of the business environment for European companies, in particular SMEs. In particular, a number of Member States have introduced reforms simplifying the requirements for companies, including single-member private limited liability companies, e.g. reducing the minimum capital and the set up costs. However, these reforms are undertaken by Member States in their own national contexts and are not coordinated at EU level. This means that the requirements concerning the formation, registration and operation of single-member companies still continue to differ across the EU and company founders continue to bear the related costs when they want to operate in more than one country.
Action at EU level is necessary to offer a national company law form for single-member private limited liability companies that would have to comply with identical or, at the very least, similar requirements all over the EU.
The Commission consulted the stakeholders in April 2013. The overwhelming majority of respondents (86 %) agreed with the finding that the overall participation of SMEs in cross-border activities in the EU was low in relation to their potential. 63% of respondents (including 75% of companies and 52% of business federations) supported a legislative initiative on single-member private limited liability companies to encourage and/or facilitate an increase in cross-border activity of SMEs.
7. Are there already rules for single-member companies at EU level?
Yes, at EU level there is already a Directive on single-member private limited liability companies, which was adopted in 1989 and codified in 2009 (2009/102/EC). This Directive provides for limited harmonisation of the relevant national laws by requiring that companies may have a single-shareholder in all Member States and regulating the powers of that single member in relation to a company (e.g. that the single member would exercise the powers at the general meeting and that his decision would need to be recorded in writing). The Directive does not address many key issues such as formation, registration requirements, creditors’ protection or minimum capital requirements. As it currently stands, it does not help to reduce the costs of setting up abroad for companies.
The current proposal would in practice replace the existing Directive.
8. What are the key elements of this proposal?
The proposed Directive would provide an EU-wide set of harmonised rules for single-member private limited liability companies.
As a result there should be in each Member State a national company law form called SUP (Societas Unius Personae) with the same requirements across the EU as regards:
- registration (possibility of completing the whole registration process electronically)
- uniform template of articles of association
- minimum capital requirement of 1
- and adequate protection of creditors.
9. Who would benefit from this proposal and how?
The founders of companies both new single-member entrepreneurs (start-ups) but also existing companies (SMEs and larger companies) acting as the only shareholder in single-member companies (wholly owned subsidiaries) would be the main beneficiaries of this proposal. They could establish subsidiaries in other countries according to the same rules and have the same legal framework for the whole group of companies. The proposed Directive would provide them with easier means of setting up companies across borders and therefore, gains in terms of cost and time. According to the calculations carried out in the impact assessment for this proposal, potential savings for the founders of single-member private limited liability companies in the EU could be in the range of approximately 230-650 million in one year. The savings depend on how many entrepreneurs opt for the form of SUP.
Allowing companies, and in particular subsidiaries, to be created abroad more easily could also encourage more entrepreneurial activity, with positive impacts on job creation, more choice of goods and services on offer for consumers, more business co-operation prospects for other companies, and therefore, should have a positive impact on growth in the EU.
10. How would the registration of SUPs work in practice?
Member States would be obliged to allow for direct on-line registration of SUPs. This would mean that any founder resident or having a seat in the EU would be able to establish a subsidiary in another Member State directly from their computer without a need to travel to the country of registration for this purpose. Member States would decide how they organise their registration systems and would need to recognise the identification issued in other Member States (mutual recognition).
Other types of registration than on-line would also be possible. However, in such cases, travelling to the country of registration might be required. Company founders would have the option to register a company on paper, and they could ask a notary or legal advisor or any company creation agent for help in paper or on-line registration.
11. What role would notaries play in the registration of SUPs?
First of all, the registration of an SUP on paper would be still possible, taking into account national requirements, including the involvement of notaries. At the same time, Member States would be obliged to allow for direct on-line registration. In that case, the role of notaries would depend on the choice made by a particular Member State. A Member State could decide that notaries would not take part in the electronic registration process (as is currently the case in France or Poland). Another option is that notaries might be involved in the registration process by having a website on which companies would be registered or by taking part in the control of the registration once a company uploaded the required documents on the designated website. Whichever system is chosen by a particular Member State, the end-result for companies should be the same across Europe, i.e. companies should be able to register a company electronically without the need for the physical presence of the founder before any authorities, including a notary.
12. What would the template for articles of association include and would its use be compulsory?
The main elements of the template are set out in the proposed Directive, e.g. it should cover the questions of formation, shares, capital, organisation, accounts and dissolution of an SUP. On this basis, its more detailed content and its format would be established by the Commission in delegated legislation following the adoption of this proposal, in close cooperation with Member States.
The content of the template would be identical across the EU, available in all EU languages and would contain the necessary elements to run single-member private limited liability companies.
The use of this template would be compulsory when an SUP is directly registered on-line. In other registration procedures (e.g. on paper but also on-line through an intermediary) where in many Member States the participation of a notary or a lawyer is in one form or another compulsory, the use of the template would not be obligatory, but the articles of association would have to comply with the Directive.
13. Why does the proposal introduce a minimum capital requirement of 1 for SUPs?
A low minimum capital requirement would offer savings for company founders in Member States where the level of minimum capital is higher than 1 and would be in line with the approach already taken for private limited liability companies in the majority of Member States (a 1 or lower minimum capital requirement). The lowering of this requirement could also stimulate start-up activities as was the case in some Member States, for instance, in France, Germany and Poland, where there was a significant increase in the number of new companies after the reforms which lowered the minimum capital requirement.
14. How would creditors be protected?
The proposed Directive would introduce a balance sheet test and a solvency statement in order to offer more security to creditors.
As regards the former, the management of the company would need to compare assets and liabilities before any distribution of profits is made to the single member, in order to prevent any distribution which could result in liabilities exceeding the assets.
As regards the latter, the management would need to do a form of liquidity check and sign a solvency statement, in which it would guarantee that the SUP would be able to pay its debts as they fall due in the normal course of business in the year following the date of the proposed distribution.
15. How does this proposal address employees’ rights?
The proposed Directive would not introduce any new rules as regards employee involvement, i.e. how employees might be informed, consulted or participate in the running of a company. Instead, the rights of SUPs’ employees would remain covered by existing national laws.
16. What would happen if an SUP expanded and had more shareholders?
The proposal makes it clear that an SUP would not be able to issue more than one share and that this share cannot be split among shareholders.
Therefore, if an SUP wanted to increase its number of shareholders, it would have to convert into another national company law form. This would require, amongst other things, altering the articles of association, taking necessary resolutions and complying with national law regarding conversions from one company law form into another.
17. What’s next?
The proposal will be submitted to the Council and the European Parliament for their consideration and final adoption. Once adopted, the new Directive would have to be implemented into the laws of all EU Member States.
