Societas Europaea/European Company

Even if you do business in the US, you might have heard about the Societas Europaea. This article explains more about this type of business structure so you have more of an idea of what it entails and whether you would consider this structure for your business if you operated in Europe.

Not only large companies, but also smaller companies no longer restrict themselves exclusively to their national environment. The ubiquitous term “globalization” and the internet extend the view beyond national borders. For this reason, it makes sense to think internationally when it comes to the choice of business structure. Although the majority of our national forms of business are recognized worldwide, Societas Europaea (SE) also promises to make European business easier.

The associated "SE Implementation Act" (SEAG) came into force at the end of 2004. However, comparatively few companies have opted for it, although their number has increased in recent years (with well-known examples being Puma, SAP, and Zalando). One reason for this could be that the establishment of an SE is a relatively complex undertaking, which also requires an existing international connection.

You may have already seen that some European companies have SE succeeding their name, but do you know the meaning behind it? Companies that have their headquarters in an EU member state can, under certain conditions, choose this legal structure when they are founded.

The Societas Europaea is a business structure for public limited companies within the European Economic Area (EEA). It was created in October 2004 by the EU and is intended for companies that are internationally active within the EEA or intend to be so. For this purpose, this business structure offers special advantages under company law.

The decided starting capital of a company like this takes the form of shares and must amount to at least €120,000 ($138,000). These securities can be traded on the stock exchange as usual. For the company, this business structure offers the advantage of being able to operate throughout the European Union without any hurdles. This makes it much easier for a European Company to open new branches in other EU countries.

If a company is to relocate to another EU country, this is much easier with a Societas Europaea. Under normal circumstances, a company with a national business structure has to set up a completely new company in the new country – at a correspondingly high cost. A European Company, on the other hand, has the freedom to relocate its registered office anywhere within the European Economic Area (EEA – EU plus Iceland, Liechtenstein, and Norway). It is also easier to merge two companies if both have the same SE structure.

However, a German Societas Europaea, for example, is not identical in every way to its counterparts in other countries. The corresponding EU regulation leaves gaps in some areas, which are filled by national company law as well as by already existing EU law. This applies, among other things, to tax law, competition law, industrial property law, and bankruptcy law.

A number of commercial law elements are regulated at national level, although the SE is an international business structure. Since, for example, there is no Europe-wide commercial register, these companies are also included in national commercial registers. The country of the head office is decisive. The formation of the company is then published in the Official Journal of the European Union. If the company moves its registered office to another country, it must be entered in the register again.

The European Company has a number of characteristics that make this business structure stand out. Since it is European law, some of these characteristics may be new to an entrepreneur who has been active only nationally up to now.

A Societas Europaea cannot simply be formed out of the blue. EU regulations provide various options for establishing one, but in all cases, it is reserved for existing companies. In addition, the options mirror the international character of the business structure. These are the ways in which an SE can be formed:

• By merging, two or more public limited companies may form a Societas Europaea. At least two are from different EEA countries.
• A common holding SE may be formed by several joint-stock companies or limited liability companies, at least two of which come from different EEA countries or have had subsidiaries or branches in another EEA country for at least two years.
• A collective subsidiary Societas Europaea may establish several companies of all kinds (including partnerships) and legal entities (corporations, associations, foundations, etc.), of which at least two are from different EEA countries or have had subsidiaries or branches in another EEA country for at least two years.
• An SE can be converted into a stock corporation if it has had a subsidiary in another EEA country for at least two years.

Furthermore, an EEA country may allow a company from a certain country to also participate in a Societas Europaea if it is active in that particular country, but has its head office in another EEA country.

In all cases, you have to overcome quite a few hurdles to set up an SE. If you want to start a company and are considering a European Company, you must either have already gained an international foothold with a company or first look for a partner abroad. Also, the required start-up capital of 120,000 euros ($138,000) and the stock corporation as a legal structure do not seem too appealing for a typical start-up in the initial phase.

Anyone wishing to set up a Societas Europaea can decide on which principle it should be managed: dualistic or monistic. In the dualistic model, which is common in countries such as Germany, the management and the controlling body are separate: there is a management board and a supervisory board. The monistic system, which is particularly common in the Anglo-Saxon world, has only one management body that combines executive and supervisory powers: the board of directors. It brings together directors with and without managerial authority (executive and non-executive).

Both models have their advantages and disadvantages: In the dualistic system, the management of the company and the control of management are clearly separated, so that there is more transparency. On the other hand, the parallelism of the two bodies increases the organizational effort and slows down the company's ability to act. The monistic system functions much more simply: the company management is smaller and thus more cost-effective and capable of acting at the same time.

According to the law, with up to three million euros ($3.5 million) of share capital, a single person can form the board of directors and also act as managing director. In fact, in Germany in particular, the leaner structures are regarded as the reason for switching to the Societas Europaea. On the other hand, the decision-making processes in the company are less transparent.

The accounting of an SE follows the national law of the country in which it has its registered office. Local law also applies in the event of insolvency or regular dissolution.

The Societas Europaea was initially criticized by trade unions. It was accused of encouraging the curtailment of workers' rights. In fact, the EU Commission has endeavored to take into account the different forms of employee rights in the various EU countries when drafting the relevant regulations and, in case of doubt, to always give priority to the respective more far-reaching regulations.

In principle, legal regulations stipulate that the planning and establishment of a Societas Europaea cannot take place without the information and participation of the employees concerned. To this end, the company management(s) should first inform the affected employees about the planned Societas Europaea and then negotiate with them about co-determination in the planned new company in a specially established "special negotiating body" in which the employees are represented according to a precise key.

These negotiations can last up to six months – or up to a year with the unanimous approval of the committee. If the committee does not reach a negotiation result, a so-called standard rule will apply. Previously valid co-determination rights are also to apply as much as possible in a new SE. The aim is to achieve the highest level of co-determination for the various companies involved in the SE.

In practice, it is not least the time-consuming negotiation of employee rights that is proving to be an obstacle to the formation of SE companies. The legal uncertainty associated with the different national regulations is mentioned as an additional obstacle. In any case, various consulting firms are now offering ready-made SEs for sale as so-called shelf companies. They do not have any employees, but are already registered in the commercial register, so that the formal procedure of employee participation, which would otherwise have to take place before the company is founded, can be dispensed.

Companies operating throughout Europe can benefit from an SE business structure. It makes it much easier, for example, to transfer the registered office to another EU member state or to cooperate internationally with other companies in a holding company. This means that profits generated in different countries can also be used within a Societas Europaea without profit distributions.

The comparatively high share capital is a bit off-putting for smaller companies: €120,000 ($138,000), for example, is not necessarily feasible for a start-up in the initial phase. Other – even large – companies see a major advantage in the independent, national subsidiaries (in contrast to the subsidiary SE): if a company fails in one country, the entire company is not immediately at risk.

Many see a further disadvantage in the national differences in the structure of the SE: it is intended to simplify international entrepreneurial work. However, since the associated law has to be replenished nationally in many places, different regulations often come into effect, which in turn increases the effort and uncertainties. In a 2010 report by the EU Commission on experience with the SE Regulation, it even says: "The SE Statute does not create a uniform SE business structure in the European Union, but 27 different SE types".

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