The New European Model Company Act

Marco Ventoruzzo is a comparative business law scholar with a joint appointment with the Pennsylvania State University, Dickinson School of Law and Bocconi University.

On September 10 and 11, 2015, at the annual conference of the European Company and Financial Law Review at WU University in Vienna, the “European Model Company Act” (“EMCA”) made its debut to an audience of corporate law professors, practitioners and judges, introduced to society by its drafters (your correspondent must disclose that, while not involved in the drafting of the EMCA, he is one of the editors of the journal co-organizing the event, and was one of the discussants of the document).

As the name suggests, the EMCA is intended as a model statute regulating corporations, somehow akin to the American Model Business Corporation Act. The document has been prepared by an independent group of academics and practitioners not formally affiliated with political institutions or interest groups upon the initiative of Professors Paul Krüger Andersen from Denmark and Theodor Baums from Germany. The group includes roughly 20 law professors and 10 experts, from over 20 countries. The project, launched in 2007, took eight years to produce this first draft, a massive documents of over 430 pages. After a methodological introduction, the EMCA is divided in 12 chapters dedicated, respectively, to general principles, formation of companies, registration, transformation and re-registration, shares, financial structure, capital, governance and management, directors’ duties and liabilities, shareholders’ meeting and protection of minorities, financial statements and auditing, restructuring, dissolution and liquidation, groups of companies, and branches of foreign companies. Each chapter includes some general comments, and each article is followed by explanatory notes. The draft is not publicly available yet, however the Introduction and other information can be obtained here.

The intention of the drafters is to offer a coherent and comprehensive model act that might be the basis for further European harmonization (E.U. corporate law directives and regulations have often been criticized for being incomplete and not tackling some important issues), or used by current and future Member States as a blueprint for their legislation, bypassing the political compromises and bureaucratic hurdles of European legislation. The drafters should be commended for a significant effort, and the project is a welcomed occasion to discuss the future of European corporate law. The EMCA will definitely contribute to a deeper understanding of corporate law, and might concretely contribute to the development of the corporate laws of the European Union and single States, especially new Members with a less advanced corporate law system.

If the premises of the project are interesting and promising, the current draft also raises several questions and some doubts, both concerning its overall methodological approach and structure, and specific solutions. The space available here only allows a cursory overview of some issues, and I will focus on possible critical considerations primarily on the general framework.

The EMCA, as explicitly stated in the Introduction, is intended to avoid over-detailed provisions and offer primarily general principles. This approach is justified by the need to leave enough fine-tuning room to single legislatures to adapt the model to local needs. This aspiration, not surprisingly, is not always fulfilled since some provisions are in fact quite specific and analytical (e.g. detailed rules on proxy voting or on notice to call shareholders’ meetings), and the very 430 pages of the documents do not suggest a reluctance to deal with details. More importantly, this approach raises some questions in terms of the actual utility that the document will have, especially for jurisdictions characterized by a modern and sophisticated corporate law system. Some of the principles expressed, e.g. on directors’ duties and conflicts of interest or on equal treatment of shareholders, in fact, are quite broad and largely accepted, at least at this level of generality, by most modern legal systems. In this perspective several parts of the EMCA seem more the minimum common denominator of corporate law rather than provisions clear and precise enough to be easily followed by practitioners and applied by adjudicators. While for countries lacking a mildly sophisticated corporate legislation and court expertise these principles might still have a value, it is questionable that a sizable number of European States (or the European Union) will adopt the EMCA in whole or in part just for the sake of harmonization, exactly because their own systems already address many issues that the EMCA covers only generally or leaves unresolved.

Secondly, the theoretical underpinnings of the EMCA are not entirely clear. For example, the Introduction indicates that the aim is to favor harmonization, but that the EMCA can also promote regulatory competition. Since a certain tension exists between harmonization and regulatory competition (obviously, complete harmonization renders regulatory competition moot), a more explicit position on the desirable balance between harmonization and regulatory competition might have represented a useful guidance. The implied assumption of the drafters seems to be that the EMCA should represent a minimum harmonization, but that single States should be free to “fill in the blanks” and engage in regulatory arbitrage, if deemed advantageous. In light of the general nature of the EMCA principles, however, the room for regulatory competition is significant also if the entire Model Act is adopted. Similarly, the Introduction refers to goals set also by the E.U. Commission in terms of simplification of regulation, flexibility, and reduction of agency and transaction costs. These broad aspirations are hardly disputable, but they do not say much, also because, once again, reducing agency costs might require mandatory rules that conflict with flexibility and simplification. Refusing to completely embrace one particular theory or perspective shows a pragmatic approach that might be effective, but a more explicit choice of specific goals would have helped in assessing the proposal and its achievements.

Thirdly, the EMCA claims to be not restricted by European legislation, and therefore to contain also solutions at odds with existing European law when the latter is not optimal. This claim is fair but it must also be observed that, in reality, often the EMCA was drafted with a careful eye aimed at making it compatible with EU law. In addition and not surprisingly, often the solutions offered follow the experience of one or a few Member States, rather than advancing new approaches. These features are not, in themselves, undesirable as they increase the chances of the project to have a role in the law making process; and of course no statute, either a model act or an actual one, is developed in an empty space. A similar project could however be more compelling, at least intellectually, focusing on innovative and effective solutions regardless of existing laws, rather than largely restating what are considered best provisions. For example, the occasion could have been used to rethink mandatory pre-emptive rights when new shares are issued, or to introduce monetary damages as an alternative remedy to the voidability of shareholders’ meetings: the former is preferable also because it makes strike suits and blackmailing litigation less likely.

Finally, stylistically and technically this first draft still requires an attentive fine-tuning for consistency and precision in its language and wording. This is particularly important since one of the purposes of the document is to be a reference for jurisdictions less conversant in corporate law.

An analytical discussion of the single provisions is utterly impossible here, and should be postponed to the official, public presentation of the entire document. Let us just say that also specific rules raise several questions. I will offer only a couple of examples. The first paragraph of the rule on conflicts of interest of directors (Chapter 9, Part II, Section 5) requires directors to disclose their conflicts to the board and to abstain from participating in the decision or the transaction. The following paragraph provides that “This duty is not infringed if the matter has been authorized by the disinterested directors or the general meeting.” The consequences of the approval of disinterested directors or shareholders are not entirely clear: does it simply allow the conflicted director to participate in the decision? Or does it cure the possible illegality of the transaction; making it unchallengeable and exculpating conflicted directors from liability? In addition, the provision does not clearly indicate that approval of disinterested directors or shareholders is relevant only if they were fully informed about the conflict. Another example concerns appraisal rights, regulated in Chapter 11, Part I, Section 30. One might wonder why appraisal rights are granted only to dissenting shareholders in case of divisions or spin offs in which shareholders are not given the same percentage of shares that they originally owned in the beneficiary corporations, but are not provided for mergers, that can equally jeopardize the position of minority investors.

In short, this ambitious project must be saluted as a courageous and welcome initiative: the very existence of a Model Act in English is an important step toward further discussion and a sign of European integration. The newborn EMCA has now been thrown in the water, but it needs to refine and strengthen its crawl in order to be able to swim smoothly in the often perilous currents of European law.

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