Catherine Cathiard of Wildgen discusses whether the European Company structure presents an opportunity post-Brexit for Luxembourg.
The triggering of Article 50 in March 2017 has set into motion the formal process for the United Kingdom (UK) to leave the European Union (EU). Unless otherwise agreed upon during the ensuing negotiations, the UK’s membership in the EU will end on 29 March 2019. The legal and tax consequences of Brexit can only be fully assessed after the negotiations between the UK and the EU have been finalised. In the meantime, there is a need to immediately measure potential outcomes and to consider the reorganisation of the group’s corporate structure in order to face the future. Luxembourg stands among a number of European countries prepared to be a host for companies which consider leaving the UK in order to maintain their access to EU markets, and the advantages of being located within the European Economic Area (EEA).
Increasing interest in obtaining the status of the European Company (Societas Europaea or “SE”), whose numbers are growing steadily throughout Europe, can be considered as a possible reaction to the legal uncertainties of Brexit. Outbound migration of a UK company, which is not incorporated as an SE, is impossible. This means that the only way to move a UK company’s registration to another country is by dissolving it in the UK and incorporating it through the relevant registrar of companies in another country. Currently, adopting SE status before Brexit is the only way enabling UK companies to transfer their seats in a Member State of the EEA without entailing their winding-up or loss of their legal personality. The growing uncertainity compels companies to consider the impact of Brexit, whether positive or negative, on their business, and eventually to search for appealing alternatives before Brexit is complete (such as the adoption of the SE status). How does the SE incorporated in Luxembourg compare to a public limited company? There is flexibility, attractiveness and a growing interest in adopting SE status before Brexit is complete for those already considering relocating or creating a European hub.
Four ways to create an SE
According to Regulation n° 2157/2001, there are four ways to create an SE: (i) by merger of national companies from at least two different Member States, (ii) by the formation of a holding SE, (iii) by the creation of a subsidiary SE, or (iv) by the conversion of an existing public limited-liability company into an SE. Before Brexit is complete, a UK company intending to be active in Europe can either convert itself into an SE and perform a transfer of its registered office(s) and head office to Luxembourg; or it can create its European hub through the creation of a holding SE or a subsidiary SE in Luxembourg (or any other Member State of the EEA), under conditions set forth by Regulation n° 2157/2001. The SE, which would establish its registered office and head office in the Grand-Duchy of Luxembourg, may be regulated under EU law (Regulation n° 2157/2001), Luxembourg law applicable to SE and, when applicable, the public limited-liability company (Société Anonyme). In such cases, the SE would be able to benefit from the flexibility of the Luxembourg law.
Legal existence in Luxembourg
In Luxembourg, the SE is very similar to a Société Anonyme except for the following: both SE and Société Anonyme companies may be constitued by means of a notarial deed but the SE shall have a legal existence in Luxembourg at the time of its registration with the company register (Registre de Commerce et des Sociétés), whereas the Société Anonyme has legal existence at the time of the notary deed. The minimum share capital of the Société Anonyme must be at least €30,000 compared to €120,000 for the SE.
The SE offers two options of corporate governance structure: a monistic structure (with a board of directors) and a dualistic structure (with a management board and a supervisory board). This is based on the legislation of the Member State in which it is registered. In some countries (such as the UK), where companies do not have a choice in the matter of governance, the SE can freely choose between a monistic or dualistic board structure. In Luxembourg, the same choice of governance is available for a Société Anonyme.
Finally, SE status offers more flexibility than a Société Anonyme. For example, the articles of association of the SE can freely provide for (i) the number of members of the management body and the rules of quorum and majority of its corporate bodies and (ii) the list of actions of the management that require prior authorisation of the board of directors or supervisory board of the SE company.
Attractiveness of SE status
The legal and tax consequences of Brexit can only be fully assessed after negotiations between the UK and the EU have been finalised. In the meantime, there is a need to measure potential outcomes and to consider the reorganisations of the group’s corporate structure to face the future. The decision to set up an SE in Luxembourg provides a number of benefits.
Brexit will lead to substantial modifications for international and European groups. First, the end of the freedom of establishment applicable to companies as specified by the European Court of Justice (ECJ) case law could occur. This change will impact the creation of subsidiaries or branches in the UK of companies located in Europe, the cross-border transfer of company seats and cross-border mergers.
All types of companies
Setting up an SE on the basis of a single set of rules as provided for by Regulation n° 2157/2001 appears to work in favour of all types of companies, from small and medium-sized enterprises interested in expanding in the EEA, and even outside the EEA, and on the international scale to large groups. Becoming an SE ensures legal stability as its rules are governed by an EU Regulation which cannot be amended except upon consensus among all EEA Member States.
Moreover, greater mobility in the integrated EEA market and a simpler way to run a business across more than one country under a single European brand name (instead of setting up a network of subsidiaries), are a few of the many advantages which could attract potential entrepreneurs.
The SE also has specific advantages. For international groups, the adoption of SE status can facilitate the integration of the European market by non-European groups and the establishment of UK groups in Member States of the EEA like Luxembourg. It would make cross-border restructurings within Europe, and beyond, easier, (for example, cooperating with Asian or American markets). For listed companies, the SE can be considered as a vehicle for a European project, an adjunct to a European tender offer or to prepare for an intial public offering (IPO) on multiple European stock markets. For medium-sized companies, the SE would definitively facilitate its European expansion, and the company would then benefit from greater flexibility in corporate statutory requirements than a Société Anonyme, while choosing a corporate form which reassures third parties such as banks and commercial partners. Banks and insurance companies would experience the loosening of regulatory control.
For companies in other sectors, becoming an SE can also be an advantage for the creation of a EU project having a political dimension. For pan-European projects, for example Trans-European network projects in the transport or energy sectors, a single SE could attract private venture capital more easily than a series of national companies all operating under national rules. One hundred and six SEs have been registered in the UK and 42 SEs are curently active. Twenty-three of them relocated from the UK to another Member State.
Company re-domiciliation and the impact of Brexit
The methods of re-domiciling from the UK to Luxembourg (or another EEA jurisdiction) may appear more limited following Brexit because, in principle, the EU cross-border merger regulation only applies to mergers between EU incorporated entities. (This is also applicable for re-domiciling from an EEA jurisdiction to the UK.)
One of the main advantages of an SE over domestic entities is its ability to transfer its registered seat and head office without dissolution of the SE, without the need to create a new legal entity in another EEA Member State and with no change of corporate structure. That mobility is expected to be one of the major motivations for companies, and especially UK companies, intending to establish themselves within the EEA before Brexit is complete. SE companies with commercial interests in more than one Member State will be able to move across borders easily as the need arises in response to the changing needs of its business.
The adoption of SE status appears as the more suitable status to perform a cross-border reorganisation. By adopting SE status, companies established in more than one EEA Member State will be able to merge and operate throughout the EU on the basis of a single set of rules and a unified management and reporting system. They will therefore avoid the need to set up a financially costly and administratively time-consuming complex network of subsidiaries governed by different national laws. Instead, they can do business within the EEA by establishing branch offices. By establishing themselves as an SE, a business can restructure quickly and easily in order to take advantage of trading opportunities offered by the EU market.
The SE in Luxembourg as an attractive form of international expansion
As an international place of business, Luxembourg offers a highly favourable framework for the establishment and administration of an SE. An SE registered in Luxembourg can benefit from the advantages of Luxembourg’s tax law and the double tax treaties signed between numerous countries and Luxembourg. Luxembourg’s public limited liability companies (sociétés anonymes) are free to choose the currency in which they wish to prepare their financial statements, which can be any currency other than the euro. This will save such companies from foreign exchange gains and losses that do not reflect the economic reality of their business and will have an impact on their taxable basis. Such accounting rules are applicable to an SE registered in Luxembourg according to article 61 of the Council Regulation n° 2157/2001/EEC on the statute for a European Company (SE). Companies are also exploring moving their UK staff to Luxembourg.
The clear framework for involving staff employed in more than one Member State in an SE, as provided for by national (including Luxembourg) rules implementing Directive 2001/86/EC supplementing the Statute for an SE with regard to the involvement of employees, is also a reason to choose SE status to federate the European employees of a group from Luxembourg.
Will Luxembourg be the choice for UK-based international cross-border groups reassessing their business models in light of Brexit? Post-Brexit, Europe will verify that image. In any case, considering the advantages of SE status before Brexit is complete is an urgent strategic direction.
Catherine Cathiard is a Director at Wildgen