Corporate Mobility and Regulatory Competition in Europe

The following post comes to us from Wolf-Georg Ringe, Professor of International Commercial Law at Copenhagen Business School.

Is there a competition for corporate charters in Europe? Corporate and comparative scholars have been discussing the similarities between the Delaware-led competition in the United States with the slowly emerging market for corporate legal forms in the European Union.

In my recent paper, Corporate Mobility in the European Union – a Flash in the Pan? An empirical study on the success of lawmaking and regulatory competition, recently made available on SSRN, I provide new empirical evidence on the development of the market for incorporations in Europe, and on the impact of national law reforms.

Since the seminal Centros case in 1999, European entrepreneurs have been allowed to select foreign legal forms to govern their affairs. While much academic effort has been spent to evaluate the early market reactions to this case-law, effectively opening up the European market, relatively little attention has been devoted to subsequent developments. This is surprising, since the various national lawmakers’ responses to the wave of entrepreneurial migration offer a rare glimpse on the effects of regulatory competition and subsequent business’ reaction, as well as on the relevance and effects of lawmaking and regulatory responses to market pressure.

I use new empirical data on Germany, the most prominent example of a country that was under pressure by EU regulatory competition. The data confirm earlier findings that entrepreneurs in continental Europe at first increasingly used English letterbox companies to govern their affairs, without doing any business in the UK (much the same as in Delaware). The present analysis goes further, however, and shows that incorporation numbers have dropped considerably since 2006, falling to very low numbers today. I then go on to evaluate the contribution that regulatory reform may have played in this development. Many lawmakers in continental European jurisdictions claim ‘success’ in a sense that legal reforms of their domestic company laws have caused the drop in foreign (English) incorporations by their own entrepreneurs. The data evaluated in this study seem to weaken this claim: first, I show that the numbers of foreign incorporations in Germany have dropped even way before the law reform came into force. Secondly, I go on to compare the German data to the situation in Austria, as the two systems share many similarities – with the exception that Austria did not reform its legal system as a consequence of EU regulatory competition. Surprisingly, however, foreign incorporation numbers in Austria share many characteristics with the development in Germany: in particular, the rate begins to drop at about the same time as in Germany.

This may lead to conclude that other reasons, different from just law reform, must have played a role in shaping business’ preferences. Instead of exclusively relying on law reform as the causal reason for declining foreign incorporation numbers, I offer a number of alternative or complementary explanations for the striking developments. Of particular importance is the closing down of regulatory loopholes that had made the English private company so attractive to many German entrepreneurs. Further, German start-ups had initially underestimated the costs involved with running a foreign company and complying with disclosure obligations that are strictly enforced. They also encountered high acceptance and reputation costs at home. All of these problems in their combination can be framed in terms of diffusion theory, highlighting the sociological aspects of subscribing to innovations or new organisational concepts. These findings are important for our understanding of (defensive) regulatory competition and successful lawmaking.

What are the implications? It would certainly be too much to conclude that competition is over, or that the German law reform was superfluous, wrong or without effect. Law reform has certainly had its share in making the English limited company less attractive in Germany. But the paper at least cautions against overemphasising the importance of the German MoMiG reform. The implications developed here may however well be of interest to lawmakers in general, and to the Austrian government in particular. Austria is currently still debating whether to reform its company law. The data shown in this paper may well put the importance of this project into perspective.

The full paper is available for download here.

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