Recent media coverage has primarily focused on the reform of the rules concerning listed companies under the headline of ‘corporate governance’. Nevertheless the laws on private limited liability companies have been undergoing far-reaching modifications as well. For instance, a bill that dramatically amends the current Dutch law on private companies (Besloten Vennootschap or BV) is on this months agenda of the Dutch Parliament. The bill and explanatory memorandum can be found here (Dutch only). The Dutch proposal fits well in a broader European trend to simplify the law on private companies. This trend is the result of European case law that made cross-border incorporation and migration easier, and therefore led to a competition between the different national equivalents of the private company. National legislatures aim to ensure that their private company law is as attractive as possible, by promoting its efficiency and flexibility, while bearing in mind the interests of the company’s creditors. The system of legal capital has been one of the most important subjects of discussion in this search for better regulation. The new (or proposed) laws of Germany, the UK and The Netherlands alter the rules on raising and maintaining the capital of the private company. Although all three countries have made their private company form more flexible, they choose different regimes of capital or creditor protection, which all more-or-less depart from the classical legal capital doctrine (as imposed on public companies by the Second Directive).
Germany and the United Kingdom have already modified the laws on their private companies (in Germany: Gesellschaft mit beschränkter Haftung or GmbH and in the UK: Private Company limited by shares or limited). A recent German bill (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen or MoMiG) introduced a new and slim version of the German private company (Unternehmergesellschaft (haftungsbeschränkt) or UG), offering limited liability without any minimum capital requirement. It also altered the rules on the subordination of loans granted by shareholders. The bill was approved on June 27, 2008 and is considered to be the most comprehensive reform of the GmbH Act since its introduction in 1892.
The UK Companies Act 2006 is the largest Act of Parliament ever enacted. It is very comprehensive, as its provisions have almost entirely absorbed the Companies Act of 1985 while also codifying certain aspects of case law. The Act received Royal Assent on November 8, 2006 and has to be fully implemented by October 1, 2009. UK law never required a minimum amount of capital to establish a limited (hence its popularity through-out Europe). The Companies Act 2006 made the limited even more attractive for entrepreneurs by removing the requirement to state an amount of authorised shared capital (maatschappelijk kapitaal), abolishing the prohibition to provide financial assistance for the purchase of the company’s own shares and clarifying the rules on distributable profits.
Private Company Law is also on the agenda of the European Commission; June 25, 2008 it presented a proposal for a Council Regulation on the Statute for a European Private Company (Societas Privata Europaea or SPE). (For a critical analysis of the draft Statute, see here.) The proposal introduces a private company on a European supranational level, primarily governed by supranational European laws. It doesn’t require a cross border element, so entrepreneurs are allowed to establish a SPE that will operate in just one Member State. The SPE will therefore offer a direct alternative to the different national company forms. As the European Commission proposes a minimum capital requirement of 1 euro and very flexible rules regarding dividends, capital reduction and financial assistance, the SPE could develop into serious competition for its national equivalents. However, whether the SPE will ever become reality remains to be seen. The European Parliament proposed to alter a fair number of the proposed provisions and the draft statute has met a considerable amount of criticism of legal scholars.
Back to the Netherlands: the pending Dutch bill has been criticised by legal scholars and market participants as well. Especially the proposed rules on distributions to shareholders are under academic fire. Because the bill basically abolishes the system of legal capital, creditor protection largely depends on the rules concerning withdrawals by shareholders and the liability of directors and shareholders. The Dutch legislature recently surprised legal scholars by radically changing the proposed rules on dividends in its second amendment of the proposal (Tweede Nota van Wijziging). Opinions seem to differ on this important topic. It will therefore be interesting to see how the legislative process will further develop. My guess is that it wont be a typical case of ‘signed, sealed and delivered’…
The significance of the different national and European initiatives should not be underestimated: the 23 million small and medium sized enterprises (SMEs) account for 99% of all companies in the European Union and provide around 70% of private sector employment. The Dutch and European legislatures are clearly still searching for a regulation that on one hand offers the flexibility and simplification longed for and on the other hand provides the company’s creditors and other stakeholders with the appropriate protection. Especially the rules on capital formation and maintenance, shareholder loans and liability of shareholders and directors, will play an important part in striking the right balance. I intend to provide you with some more in-depth posts on these topics in the next few weeks.
Thank you very much for this information. I came to the blog while searching for company law. Actually I don't know before about Private Company Law Reform in Europe.
http://legallaw.sosblog.com/llblog-b1/Appropriate-Timing-for-Changes-in-Company-Law-on-Registration-Charges-b1-p27.htm
Posted by: Accidentsdirect | October 20, 2009 at 11:30