Select Committee on European Scrutiny Seventh Report




Amended proposal for a Council Regulation on the Statute
for a European Company — guideline for political

Council Directive supplementing the Statute for a
European Company with regard to the involvement of

Legal base: Article 308 EC; consultation; unanimity
Document originated: (a) 18 December 2000
(b) 1 February 2001
Forwarded to the Council: (a) 20 December 2000
(b) —
Deposited in Parliament: (a) 24 January 2001
(b) 13 February 2001
Department: Trade and Industry
Basis of consideration: EM of 19 February 2001 and Minister's letters of 18 December 2000, 2 January 2001 and 16 February 2001
Previous Committee Report: None; but see paragraphs 12.1 to 12.5 below
To be discussed in Council: 6 March 2000
Committee's assessment: Legally and politically important
Committee's decision: (Both) Cleared


  12.1  The proposal for a European Company Statute (ECS) was first put forward by the Commission in 1970. We have considered a series of drafts over the years and some of these have been debated.

  12.2  Between 1991 and 1998, the proposal remained dormant. On 19 March 1998, the Minister of State at the Department of Trade and Industry (Mr Ian McCartney) commented that negotiations had stalled, largely owing to differences over employee involvement:

    "Member States have generally sought to protect their own national systems and, owing to the diversity of those arrangements, it has not been possible to identify a single set of arrangements acceptable to all".

  12.3  In a bid to break the deadlock, in late 1997 the Luxembourg Presidency produced a compromise text for an Employee Involvement Directive, as a separate proposal from the draft Regulation establishing the ECS, but complementary to it. The draft Regulation covers the core company law issues, while the draft Directive specifies the employee involvement requirements that would apply to a European Company or Societas Europaea (SE).

  12.4  On 29 April 1998, we cleared the draft Regulation, but not the draft Directive.[40] On 3 June 1998,[41] we cleared an amended draft Presidency compromise text of the draft Directive, which was expected to be taken at the Social Affairs Council on 4 June. The Minister said that the UK would be making every effort to secure political agreement on it. However, it was not agreed and, on 25 November 1998, we cleared a later amended draft Presidency compromise text.[42] We asked for further information, which the Minister provided in a letter of 7 January 1999.[43]

  12.5  The German Presidency cancelled a meeting of the Labour and Social Affairs Council on 22 June 1999 when the only item on the agenda for discussion was the draft Directive and it was deadlocked. The European Trade Union Confederation (ETUC) was reported to have strongly criticised the attitude of the Spanish Government. On 7 July, the Minister gave evidence to the Committee on this and other employment issues.[44] He followed this session with a letter, dated 14 July 1999, in which he brought the Committee up to date.

Recent letters from the Minister for Competitiveness

  12.6  We consider here three subsequent letters from the Minister for Competitiveness (Mr Alan Johnson). On 18 December 2000, he wrote to say that there had been no formal discussion of the Directive during the Finnish and Portuguese Presidencies but that at the Employment and Social Policy Council on 28 November the French Presidency had stated that it was involved in bilateral discussions with "the Member State concerned" about a possible compromise solution. These discussions came to fruition, the Minister said, at the Nice European Council. He quotes the relevant part of the Conclusions:

    "The European Council welcomes the agreement reached on the social policy aspects of the European Company. That agreement, which takes into account the different types of employment relations existing in the Member States, will leave Member States the option of whether to transpose into their national law the reference provisions relating to participation applicable to European companies constituted by merger. In order for a European company to be registered in a Member State which has not transposed these reference provisions, an agreement must have been concluded on the arrangements for worker involvement, including participation, or none of the companies involved must have been governed by participation rules prior to the registration of the European company. On this basis, the European Council calls on the Council to complete before the end of this year the texts enabling the Statute for the European company to be established."

  12.7  The Employment and Social Policy Council was expected to meet on 20 December to seek "an orientation for a political agreement" on the texts of both the draft Directive and the draft Regulation.

  12.8  European Voice of 20 December 2000 comments that, with agreement reached "in the political melting pot of the summit", speculation was rife about the significant sweetener that the Spanish would have received in return for agreeing to the draft Directive, which was important for the French.

  12.9  On 2 January 2001, the Minister wrote again to say that the revised texts were agreed unanimously on 20 December. In his Explanatory Memorandum of 19 February he describes this as an "agreement constituting a guideline for a political agreement". He assures us that the UK's agreement remains subject to the parliamentary scrutiny reserve. In his letter of 16 February, he says that the Swedish Presidency intends to consult the European Parliament again, with a view to adopting the proposals at the Employment and Social Policy Council on 6 March, if the European Parliament has given its Opinion by that time.

The draft Regulation

  12.10  The Minister provides an Explanatory Memorandum on each proposal. On the draft Regulation he sets out the principal differences between the version considered by the Committee on 28 November 1998 and the latest text. In summary, he says:

— Recital 29

The Commission proposed that this paragraph should be added to the recitals, following agreement by a large majority of Member States in favour of the present Article 7. This Article provides that the registered office of a European Company (SE) must be Article 7 provided that the registered office of an SE must be located within the Community and in the same Member State as the head office. Although the UK would have preferred not to have this requirement in the Regulation, it was prepared to accept it in the interests of reaching overall agreement.

Two other Member States would also have preferred the Regulation to have allowed, albeit as a Member State opt-out, the registered office and head office to be located in different Member States. However, they agreed to the additional recital and dropped their opposition to Article 7. The recital recognises the unique status of an SE and states that the requirement for the registered office and head office to be in the same Member State is not to be regarded as setting a precedent in respect of future EU Directives or as prejudicing existing national legislation on company law.

— Articles 2.4 and 36

  12.11  These Articles have been reinserted, after being deleted from the November 1998 version. They provide that a public limited liability company, formed under the law of a Member State, may, if certain other conditions are met, be transformed into an SE. The Government supports the reinsertion of these Articles, which could make SEs more readily accessible to UK companies and, in particular, SMEs.[45]

— Article 11.2

  12.12  The Minister says:

"In the previous version, dated 10 November 1998, Article 11.2 provided that an SE could not be registered unless arrangements for employee involvement had been determined in accordance with national legislation implementing the Directive. This has been expanded so that an SE may be registered only if:-

    "—  an agreement on arrangements for employee involvement (provided for in Article 4 of the Directive) has been concluded; or

    "—  the special negotiating body representative of the employees (provided for in Article 3 of the Directive) has decided not to open negotiations, or to terminate negotiations, on employee involvement and to rely instead on information and consultation rules in force in the Member States where the SE has employees; or

    "—  the period for negotiations (provided for in Article 5 of the Directive) has expired without an agreement with the special negotiating body having been concluded (in which case, if the companies concerned wished to proceed with registration of an SE, the standard rules on employee involvement in the annex to the Directive would apply).

    "The Government is not opposed to this change".

— Article 11.2a

  12.13  The Minister says:

    "Article 7.3 of the Directive provides that the standard rules on employee participation may be disapplied by Member States in the case of 'merger' SEs... Article 11.2a — which is new — provides that an SE may only be registered in a Member State which has taken advantage of this derogation if:-

    "—  an agreement on arrangements for employee involvement, including participation, has been concluded; or

    "—  none of the companies which are to be merged to form the SE has been governed by participation rules prior to registration of the SE.

    "The Government is not opposed to this addition, which creates additional flexibility in implementing the employee involvement Directive".

— Article 28.4

  12.14  This Article concerns the formation of an SE by merger. The Minister comments that it adds little to what is already provided by the Acquired Rights Directive.

The Government's view

  12.15  The Parliamentary Under-Secretary of State for Competitiveness at the Department of Trade and Industry (Mr Alan Johnson) comments:

    "The ECS would create a framework by which UK companies could engage in cross-border mergers with companies from other Member States. At present, there are no harmonised rules in the EU governing cross-border mergers. If the resulting SE were to be incorporated in the UK it would be subject, in large measure, to existing legislation applying to UK public companies. Secondly, a UK company wishing to take over a company from another Member State, or wishing to establish a joint venture with a company in another Member State, might find it easier to reach agreement with the overseas company if it decided to form a joint holding company or joint subsidiary in the form of an SE. The SE could be incorporated in the UK, in which case it would be subject in large measure to existing legislation applying to UK public companies. Thirdly, a UK public company wishing to operate in several Member States simultaneously might consider that there were presentational advantages in adopting the SE name and form.

    "The Government supports the concept of the ECS and its aim of facilitating the operation of the Single Market. The optional nature of the Regulation means that companies need only use the SE form where they consider that doing so will provide advantages. The Government recognises that the dependence on the application of national law means that there may be significant differences between the legal frameworks for SEs incorporated in different Member States. However, it considers that the positive effects on the single market mean that the Regulation is worthwhile.

    "Currently, there appears limited interest in the ECS amongst UK companies. However, there is potential for business interest to grow in the longer term as UK companies increasingly seek to expand their operations in the rest of Europe".

—Regulatory Impact Assessment

  12.16  A Regulatory Impact Assessment has not been produced as the European Company Statute would be an optional legal framework for companies. Compliance costs would only be incurred by those companies that chose to adopt the SE form.

—Impact on the law in the UK

  12.17  The Minister says that the Regulation would not have a direct impact on existing law in the UK as this applies to national companies. However, it might be necessary to apply existing national laws in a modified way to SEs. He says that the Regulation would require a certain amount of supplementing legislation, for example to provide sanctions for non-compliance. He notes that there are a number of provisions where Member States have discretion to adopt different rules, or impose additional requirements specific to the SE.

The draft Directive

  12.18  The draft Directive provides for the employee involvement arrangements which will govern the SE, covering information, consultation and, where appropriate, participation.

  12.19  In the first instance, these arrangements are to be freely negotiated between the management and the employees, acting through a Special Negotiating Body. If a voluntary agreement is not reached, then the standard rules set out in an Annex to the directive apply, provided management wants to carry on with the registration of an SE.

  12.20  On information and consultation, the standard rules are based on the provisions of the European Works Council Directive[46]. These are that a representative body of employees shall have the right to meet management once a year to be informed and consulted on questions which concern the SE itself and any of its subsidiaries or establishments situated in another Member State or on matters which exceed the powers of the decision-making organs in a single Member State.

  12.21  On worker participation ("co-determination"), the basic principle set out in the standard rules is that this should be established in the SE at the highest level at which it existed in any of the companies which are forming the SE. For example, if the employees were entitled to 20% of the seats on the board in one of the participating companies, this level would apply to the SE. If there was no participation previously, there would be no entitlement to it in the SE.

  12.22  The Minister recalls that discussion of the compromise text produced by the Luxembourg Presidency in 1997 revealed a wide range of views amongst Member States, particularly on the proposal that, in the absence of agreement to the contrary, employee representatives should be entitled to a proportion of seats on the SE's board. The debate centred on recommendations in the Davignon Group's Report on which the Luxembourg text drew. These were that the employee involvement arrangements in an SE should, in the first instance, be left for negotiation between management and a "special negotiating body" (SNB) of employee representatives. If no agreement could be reached, a set of standard rules would apply, including requirements for informing and consulting employees at European level, similar to those set out in the European Works Council Directive, which concerns European-level information and consultation in large organisations. The standard rules proposed by the Davignon Group also provided for the allocation to employee representatives of a proportion of seats on the SE's management or supervisory board.

  12.23  The Minister then runs through the various subsequent proposals. The UK Presidency proposed the "before and after" principle, according to which the level of worker participation imposed through the standard rules would depend on the arrangements which already existed in the participating companies. It was also agreed that the parties involved in the negotiations should be free to decide not to negotiate any new employee involvement arrangements for the SE, or could agree a lower level of participation than previously existed, provided such a decision was subject to special voting arrangements within the SNB.

  12.24  The Austrian Presidency proposed two main amendments which set thresholds in certain circumstances. The French Presidency introduced a derogation from the Austrian text so that the standard rules for worker participation need not be implemented where an SE was formed by merger.

  12.25  Article 7.2, which sets out the circumstances in which the standard rules shall apply, has been re-instated in the Directive, together with Part 3 of the Annex, which sets out the standard rules. They reflect the threshold approach agreed during the Austrian Presidency.

  12.26  Article 7.3 contains the French derogation in respect of an SE formed by merger.

The Government's view

  12.27  The Minister comments:

    "One of the fundamental characteristics of the ECS is that it is an entirely optional arrangement. Companies would form SEs by choice and the management would be free at any time up to the registration of the SE to withdraw plans for its formation. Therefore, the proposal represents an opportunity for UK companies to take advantage of a new corporate entity if they consider it would be advantageous to them. Given the optional nature of the ECS it would not have any major implications for existing UK law and practice as regards employee involvement.

    "The Government was concerned that the directive should not in every case impose a rigid model of employee involvement arrangements which took no account of traditions in the UK. The arrangements in the directive are flexible in that they give priority to free negotiations, which may result in different arrangements than those which previously existed (except in the case of an SE formed by 'transformation' of an existing company). And the standard rules no longer impose participation in every case where the free negotiations fail, but enshrine the 'before and after' principle... The variations in this basic approach which were introduced during the Austrian and French Presidencies ... increase somewhat the flexibilities and are therefore welcome.

    "Equally the Government acknowledges that the directive also had to meet the concerns of some other Member States that the ECS should not undermine their own traditions of participation. The Government, therefore, accepts that the Directive must to some extent safeguard existing participation arrangements in companies wishing to form an SE, whilst respecting those traditions which do not include such arrangements.

    "The Government believes that the arrangements for employee involvement in the latest text strike a fair balance between the concerns of those Member States that already have co-determination systems and wished to ensure those nationals systems were safeguarded and those that did not have such systems".

— Consultation

  12.28  The Government consulted in 1989, 1992 and 1996. It issued a further consultation paper on 31 July 1997. There was almost unanimous support, the Minister says, for the Davignon Group's recommendation that priority should be placed on free negotiations between management and employees on the employee involvement arrangements to be established in the SE. However, there was considerable unease with the recommendation for the automatic inclusion in the reference framework of employee representation on the boards of SEs. This feature has now been modified in the proposed Directive. Article 2 (k) now reads:

    "'Participation' means the influence of the body representative of the employees and/or the employees' representatives in the affairs of a company by way of:

    "—  the right to elect or appoint some of the members of the company's supervisory or administrative organ; or

    "—  the right to recommend and/or oppose the appointment of some or all of the members of the company's supervisory or administrative organ".


  12.29  For legislation for which the Minister says that there has been limited interest among United Kingdom companies, much time and effort has been expended on these proposals. However, we note that he believes that they offer potential for United Kingdom companies as these "increasingly seek to expand their operations in the rest of Europe".

  12.30  The legislation in its present form is more flexible and leaves greater discretion to Member States than it did in earlier drafts. It is up to companies to decide whether or not they wish to form a European Company or Societas Europaea (SE), so that the crucial question left is whether the worker participation provided for, following the "before and after" principle proposed by the United Kingdom and modified by the Austrian and French Presidencies, proves to be acceptable in practice. We note that the Minister does not believe that it has major implications for United Kingdom law and practice in this respect.

  12.31  We now clear both documents.

40  (18941) - (18942) - ; see HC 155-xxvi (1997-98), paragraph 11 (29 April 1998). Back

41  (18942) - ; see HC 155-xxix (1997-98), paragraph 6 (3 June 1998). Back

42  (19550) - ; see HC 34-i (1998-99), paragraph 2 (25 November 1998). Back

43  (19543) - ; see HC 34-vi (1998-99), paragraph 8 (20 January 1999). Back

44  European Scrutiny Committee Minutes of Evidence, 7 July 1999: Employment Issues. Back

45  Small and medium-sized enterprises. Back

46  Directive 94/45/EC. Back

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