Germany: A European company for PE investors

Author: | Published: 1 Jul 2008
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Because of massive demand, particularly from small and medium-sized companies, the European Commission started the process of creating a European Private Company (Societas Privata Europaea, SPE) in 2006 in the course of its consultations regarding future action in the field of European corporate law and corporate governance.

In December 2006, the legal committee of the European Parliament made a proposal on the most crucial key points of an SPE, which were adopted by the plenum on February 1 2007. On July 19 2007, the EC Commission started the consultation process concerning the introduction of an SPE by a public survey, the results of which were discussed at an experts' meeting on March 10 2008. Now, the EC Commission is expected to present a proposal for legislation in the course of this year.

Hidden traps

The SPE is considered to offer numerous advantages, not only for small and medium-sized companies but also for private equity investors, some of which are outlined below.

As the European law of limited liability companies has not yet been harmonised, significant differences still exist among the national types of these companies. The management of these different company types within the portfolio of a private equity investor requires a substantial amount of explanatory support, creating significant costs.

The cost reduction potential of an SPE may especially be realised if the SPE, which is equipped with a flexible statute regarding corporate governance, is used as a standard legal vehicle in (almost) all European jurisdictions that are relevant within a private equity portfolio. In such an event, many relevant corporate procedures and operations related to the corporate governance of the companies may be standardised. Private equity investors may also use an SPE as a special purpose vehicle in the course of M&A transactions.

The existing European company types are not an alternative. The European Economic Interest Grouping (EEIG) does not allow for a limitation of liability, and is subject to significant restrictions regarding its object of business because it must not gain any distributable profits. The Societas Europaea (SE) is subject to detailed and intense regulation, has significant administration costs and is specifically designed for major groups of companies.

Furthermore, the SPE is expected to face substantially fewer psychological hurdles than national company types when used abroad. Particularly companies from smaller or new EC member states are confronted with such hurdles because their business partners are not familiar with these entity types. Even worse, such foreign companies are often instinctively suspected of misuse. Therefore, for example, a significant number of private equity investors still use a GmbH instead of a UK limited structure.

An SPE may also be an appropriate instrument for cross-border joint ventures. In the case of cross-border joint ventures, one partner (at least) must agree to the use of a legal entity existing under a foreign jurisdiction from that partner's perspective. Due to its neutral character, the use of an SPE may prevent distrust at an early stage of the joint venture.

A further advantage of the SPE is its enhanced mobility, since an SPE is granted legal personality in all EC member states. Though the European Court of Justice (ECJ) has held that hurdles to the moving in of foreign EC-based companies are violations of Article 249 EC Treaty, a couple of EC member states nevertheless still establish legal traps or hidden obstacles to foreign companies.

Practitioner advice

While the details of the SPE's statute have not yet been determined and are still being discussed, the legal committee of the European Parliament made the following proposals, which were subsequently included in recommendations to the EC Commission by the European Parliament.

  • The statute of the European Private Company shall be governed by an EC Regulation to the extent possible in order to prevent gold-plating by national legislators. This is based on the assumption that any references to national company law would seriously jeopardise the aim of a standardised European company type. (The term gold-plating describes the negative effects for the establishment of a level playing field arising from the fact that the national legislator in the case of EC Directives adds certain provisions which go beyond the minimum standard of  the respective EC Directive).
  • An SPE may be established by one or more natural persons or legal entities and must be registered in a public register; it may also be transformed into an SE and transferred to other EC member states.
  • An SPE shall have its own legal personality and limited liability; while the EC Parliament has proposed a minimum capital of e10,000 ($15,780), the system of creditors' protection is still being intensively discussed. While some voices support the system of minimum capital and its protection, certain other voices support the alternative of a solvency test. According to such a test, payouts and dividends are permissible provided that the managing director declares that after the payout or dividend distribution the company is still able to compensate all due liabilities for a certain period of time. If the forecast turns out to be incorrect and the managing director has violated his or her duties in preparing this forecast, the managing director can be held personally liable.
  • With regard to the corporate governance of the SPE, the shareholders shall have the choice between a one- or two-tier system (that is, including a supervisory board) similar to the German GmbH.
  • The laws of workers' co-determination of the EC member state in which the SPE is registered shall apply and provide assurance that the rights of employees are not derogated in the course of mergers or other transformations. While the debate on workers' co-determination has delayed the legislative process of the SE for years, it is foreseeable that the European legislator will handle all aspects related to workers' co-determination in an SPE in a separate EC directive.
  • Following the model of certain European legislators, for example the UK, it is being considered to provide certain model articles of association to the shareholders of an SPE (note that the German legislator also intends to follow the approach of model articles by amending the German Act on Limited Liability Companies, GmbHG). In this context, it is currently being discussed whether the European legislator shall create a flexible law that may be waived or modified by the shareholders, but which applies subsidiarily if the shareholders have not agreed on a certain provision in the articles; or whether the European legislator should confine itself to requiring the founders of the SPE to establish provisions for certain topics in the articles.
  • The accounting of the SPE shall comply with the EC directives on accounting.
  • The dissolution of the SPE and any bankruptcy procedure shall be performed in accordance with the national provisions of the EC member state in which the SPE is registered.

By developing the SPE statute, the EC Commission hereby satisfies an urgent and massive practical need for a standardised and flexible company type, which is accepted throughout Europe. Because the SPE will be created along the lines suggested by a significant number of practitioners, it is expected that this company type will be frequently used and highly appreciated not only by small and medium-sized companies, but also by private equity investors.

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