Corporate Group Law

Brigitte Haar1
Encyclopaedia of European Private Law, J. Basedow, Klaus J. Hopt, Reinhard Zimmermann, eds., Oxford University Press, 2011

1. Coverage and background Corporate group law covers issues of protection and organisation, especially those of corporate law as they are relevant to all forms of company alliances. As a sub-discipline of company law, it touches on a broad range of economically important legal fields, such as tax law, group law referring to accounting and auditing, competition law and the law of takeovers as well as insolvency law of corporations. Its subject-matter is affiliations of enterprises which are composed of several independent components that are integrated under the unitary control of a dominant enterprise. The determinants of a corporate group, in particular in the case of a vertical integration, are the notion of control and the dominant influence of one company over another subsidiary company. Economically speaking, the group organisation is usually based on endeavours for improved organisational flexibility, rationalisation, synergy effects and fiscal advantages. As soon as one company is subjected to the unitary control of another, the company policy as well as its business perspectives are left up to the dominant company. The resulting dangers for minority shareholders and the creditors of the subsidiary are addressed by corporate group law. Notwithstanding these regulatory needs, there is little historical background in the field of corporate group law as a whole. With the exception of Germany and Portugal as well as partial codifications in Slovenia, the Czech Republic, and Hungary, neither the member states nor the European Community have a codified, much less a harmonised corporate group law despite its decades long development in German case law and scholarship. Since the formation of cartels was generally allowed in Germany, corporate concentration was spreading and soon after the Second World War the opinion prevailed that regulatory reform was indeed necessary. After the German Corporation Act of 1937 had been limited to regulations on affiliation agreements, only the German Corporation Act of 1965 provided for group-specific, albeit fragmentary regulations. Regardless of remarkable developments in German legislation and doctrine over the course of the decades, a codified or even harmonized group law is missing in the remaining European countries. On the European scale the initial target was maximum harmonisation, but without success. The original constitution of the Societas Europaea provided for creditor and minority protection. In addition, the European Commission suggested a regulation of group law in two preliminary drafts of directives (Preliminary Draft of a Group Law Directive, part I of 1974, part II
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Dr. iur, LL.M. (Univ. Chicago), Chair for Civil Law, German, European and International Business Law, Law and Finance, and Comparative Law, Member of the Executive Committee of the House of Finance at the Goethe-University Frankfurt am Main.

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of 1975; Preliminary Draft of the Ninth Directive of 1984 [Group Law Directive]). 2. Legal development Even without a codified group law, the conflicts of interest occurring within a corporate group require legal regulation. Especially in Great Britain, group conflicts are continuously dealt with by means of conventional instruments of private and company law. In the remaining member states, group law is similarly restricted to narrowly defined company law cases. This touches upon the formation of a corporate group that is regulated by takeover law and thus beneficiary of fundamentally important minority shareholder protections as well as on the general complex of group law problems that are predominantly resolved with the help of the basic instruments of private and company law. In Italy, rules specifically regulating questions of group law were implemented in Art. 24972497-sexies Codice civile in the course of the reform of company law Besides enhanced transparency, they provide for minority shareholder indemnification in cash (Art. 2497-quarter Codice civile) as well as the liability of the parent company in case of a violation of the best interests of the group of companies (Art. 2497 Codice civile). The pan-European approach at implementing a European corporate group law on the basis of a twofold harmonisation was ineffective. Thus, the regulations of the Societas Europaea (SE) specifically relating to corporate groups have not found their way into the regulation proposal of 1989. The Ninth Directive of 1984/85 (Group Law Directive), which had been geared towards the law of affiliated companies in a broader sense, also ended in failure. Instead, in their discussion in the Forum Europaeum Corporate Group Law, European legal scholars have devoted their attention to the regulation of single group-specific conflicts of interest working along a building block principle, without setting the German model as the standard. This universal approach becomes clear from the specific regulatory core underlying the discussion and determining its outcome. Some proposals are strongly characterised by capital market law such as the obligatory offer and appraisal rights. The latter are rooted in English law, which in turn is more closely centred on the capital market. In part, following the discussions of the High Level Group of Company Law Experts, these ideas have made their way into the Action Plan of 2003 and have become European Law. Despite this development, the importance of a pan-European group law and its harmonisation could arguably face a period of future decline. This could be due to an increasing competition of legal systems in light of the case law of the European Court of Justice (ECJ Case C-221/97 Centros Ltd v. Erhvervs- og Selskabsstyrelsen [1999] ECR I-1459; ECJ Case C-208/00 berseering BV v. Nordic Construction Company Baumanagement GmbH [NCC] [2002] ECR I9919; ECJ Case C-167/01 Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art Ltd [2003] ECR I-10155) as well as to the systematic differences and convergences of company law. Harmonisation has lately been superseded by case law of the ECJ that has to some extent developed group law. In its decisions the court has more precisely stated important requirements for a level playing field in the internal market on the basis of the European 2
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 fundamental freedoms. These decisions deal with cross-border changes of the corporate form (ECJ Case C-411/03 SEVIC Systems AG [2005] ECR I10805), with golden shares as controlling interests in a corporate group often being held by a government organisation (ECJ Case C-483/99 Commission v. France ECR I-4781; ECJ Case C-503/99 Commission / Belgium [2002] ECR I4809; ECJ Case C-463/00 Commission / Spain [2003] ECR I-4581; ECJ Case C-98/01 Commission / United Kingdom [2003] ECR I-4641; ECJ Case C112/05 Commission v. Germany [2007] ECR I-8995) as well as with the taxation of corporate groups (first guiding decision in ECJ, case C-446/03, Marks & Spencer v. David Halsey [Her Majestys Inspector of Taxes] [2005] ECR I10837). As has become clear in the subsequent decision of the ECJ in CARTESIO Oktat s Szolgltat bt (Case C-210/06 [2008] ECR I-0000), an important part of necessary regulation is still missing for the achievement of the level playing-field in respect of restructuring and mobility of companies: How to address business relocation. That is the question of business relocation. If the Commissions plan for realising the free relocation of companies places of management is to be implemented, the work on the Proposal for a Fourteenth European Parliament and Council Directive on the transfer of the registered office of a company from one member state to another with a change of applicable law of 20 April 1997 will have to be pursued further. Even so, the European Court of Justice has provided the essential parameters of a European corporate group law in its case law. It is characterised by harmonisation in some core areas of law and for the rest by a competition of legal systems. The latter will particularly increase in importance if the efforts of the European Commission to implement subsidiarity and deregulation as guiding principles of European company law subsist. 3. Conflicts of interest a) Intra-group conflicts The developments outlined above cast an important light on the essential point of departure for the regulatory structures in European corporate group law that have been conceived on the basis of the company laws of the member states and that are therefore strongly characterised by them. Also in the absence of corporate group law, problems specific to group law are resolved with the help of company and corporate law rules in the member states. This becomes immediately apparent with regard to the consolidation of a group, a process which, in all states other than Germany, is viewed in terms of the exercise of control. Thus, in these jurisdictions direct reference is made to the majority of shareholder votes. The alternative rule under German law, on the other hand, declares the dominating influence the determining factor. This influence has to be conveyed via organisational structures but can sometimes add up to a dominating influence thanks to further circumstances, such as a continuously low presence of other organisational stakeholders at the shareholder meeting. This structural difference continues with respect to the process of consolidation. In addition to the mere acquisition of the majority interest, German corporate group law requires a controlling agreement according to 291 of the German Corporation Code that is unknown as such in the other member states. It is marked by organisational legal 3

structures which provide the adequate legal framework for corporate groups to act and to constitute themselves as groups in German law. For the management of the group it is important to note that such a controlling agreement justifies detrimental directions by the dominating company. If there is no dominating agreement, under the law of the other member states as well as under the German law of the de facto group, the controlling company is restrained from initiating any violation of the interests of the subsidiary. Despite the obligations of management to safeguard interests of the subsidiary company, the necessity of an alignment of interests according to the groups interests cannot be completely ignored. Even though a potential primacy of the group interest has long been rejected in German group law, the direction and supervision of subsidiaries in the group interest have meanwhile increased in importance in the European discussion with a view to the second step of the European Commissions Action Plan of 21 May 2003. This is based on proposals of the Forum Europaeum in favour of a consideration of group interests that are rooted in the Rozenblum-Doctrine in French law, derived from a decision of the French Cour de Cassation of the same name (Cass. Crim. 4 February 1985, Rev Soc. 1985, 648). According to this doctrine, primacy of the group interest requires the consolidation of the corporate group, the pursuit of a coherent company policy, as well as an equilibrium between advantages and disadvantages within the group. b) Liability issues Liability issues are closely related to the question of compensation for harm resulting from directions of the management which further the group interest but are detrimental to the subsidiary. In this context, the concept of strict structural liability has to be distinguished from the idea of liability for conduct. In the first case liability is incurred without more by shareholder structure, whereas in the second liability results from the parent companys conduct. A universal structural liability which ultimately would come close to the concept of the corporate group as an organisational entity has not been able to prevail on the pan-European scale. Instead, group liability law in the member states as well as in the European community law features elements of liability for conduct. The liability of the parent company correlates with the violation of duties of conduct by the management. This second approach ascribing liability for conduct has already been reflected by Art. 9 and 10 of the Preliminary Draft of the Ninth Company Law Directive of 1984 (Group Law Directive). It has become particularly clear in the proposals on management duties during a crisis as forwarded by the Forum Europaeum and the High Level Group as well as those in the Action Plan. In this matter the discussion is also not leaning towards a structural corporate veil piercing approach, but has since the Forum Europaeum supported an analogy to the English rules of wrongful trading or, alternatively, to the French and Belgium action en comblement du passif , all of which have elements similar to liability for unduly delaying insolvency proceedings. With regard to insolvency, the question of international jurisdiction is of special relevance as it predetermines the law applicable to cross-border insolvency (lex fori concursus according to Art. 4 Council Regulation on Insolvency Proceedings).

Further instruments for the protection of minority shareholders in the process of group consolidation such as the parent companys squeeze-out rights as well as the minority shareholders sell-out and appraisal rights in case of dissociation are by now common ground in the member states because of the Takeover Directive. 4. Harmonisation projects a) Approaches towards a full-fledged harmonisation The development of a European corporate group law is closely tied to the development of European corporate law. In this context, the European Commission made several attempts to harmonise corporate group law which continued through the eighties. In the beginning the directive proposal for the Societas Europaea of 1970 provided for the constitution of a corporate group along organisational lines. It failed just as did the 1989 directive proposal for the Societas Europaea without corporate group law provisions. The equally unsuccessful second preliminary draft of a Ninth Directive of 1984 (Group Law Directive) had already adopted the distinction between contractual groups, integration and de facto groups instead of the concept of an organisational constitution of the corporate group. In view of the failure of a full-fledged harmonisation, the following regulations are marked by their merely fragmentary, field- and sector-specific character. The law of the Societas Europaea has remained incomplete with regard to corporate group law because the Council Regulation on the Statute for a European company of 8 October 2001 (SECouncil Regulation, Reg 2157/2001) did not include provisions of corporate group law that were tied to legal form such as still had been the case in the directive proposals of 1970 and 1975. Nevertheless, the Societas Europaea still shapes some of the content of corporate group law. Its function of providing a legal form for Europe-wide operating companies to, namely, enter into crossborder affiliations, transfer their seats of business and establish international holdings has turned out to be very important for corporate group law in business practice. b) Group- and industry-specific regulation In addition to these rules tied to legal form, the field of accounting and auditing law relating to corporate groups has to be mentioned. It has been harmonised in several directives. For the consolidated financial statements the Seventh Directive on consolidated accounts (Dir 83/349) applies. In addition, the IAS-Regulation (Reg 1606/2002) that prescribes the International Accounting Standards for consolidated group accounts of all listed corporate groups sets further essential specifications. Finally, as a third important field of harmonisation in European corporate group law the sector-specific group law has to be noted. It provides for specific regulations for banks, insurance companies, and investment firms to ensure a consolidated European supervision over financial services enterprises in the European banking market and in the internal market in insurance. To this end, in the field of banking the Banking Law Directive of 20 March 2000 (Dir 5

2000/12) and in the insurance sector the Directive on the supplementary supervision of insurance undertakings in an insurance group (Dir 98/78, Solvency II) apply. A comprehensive European one-stop financial services group law has finally been included in the regulations on the supervision of financial conglomerates in the Financial Conglomerates Directive of 2002 (Dir 2002/87). Literature Paola Balzarini, Giuseppe Carcano and Guido Mucciarelli (eds), I Gruppi di Societ, Atti del Convegno internazionale di studi, Venezia, 16-17-18 novembre 1995, Vol. I (1996); Forum Europaeum Konzernrecht, Corporate Group Law for Europe, (2000) 1 European Business Organization Law Review 165 ff; Jos Engrcia Antunes, Os Grupos de Sociedades (2nd edn, 2002); Klaus Hopt, Christa Jessel-Holst and Katharina Pistor (eds), Unternehmensgruppen in mittelund osteuropischen Lndern, 2003; Jos Miguel Embid Irujo , Introduccin al Derecho de los Grupos de Sociedades, 2003; Susanne Kalss and Friedrich Rffler (eds), GmbH-Konzernrecht im sterreichischen, slowenischen und italienischen Recht (2003); High Level Group of Company Law Experts, A Modern Regulatory Framework for Company Law in Europe, Report for the Commission, 4th November 2002 (Report II), in: Guido Ferrarini, Klaus Hopt, Jaap Winter and Eddy Wymeersch (eds), Reforming Company and Takeover Law in Europe (2004), Annex 3, 925; Klaus J. Hopt, Konzernrecht: Die europische Perspektive, (2007) 171 Zeitschrift fr das gesamte Handelsrecht und Wirtschaftsrecht 199 ff.; Paola Fasciani, Groups of Companies: The Italian Approach, (2007) 4 European Company and Financial Law Review 195 ff.; Maggie Pariente, The Evolution of the Concept of Corporate Group in France, (2007) 4 European Company and Financial Law Review 317 ff. Brigitte Haar

Index of legal sources 1. First Council Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community, OJ L 65, 14.3.1968, p. 8 12 (Publicity Directive) 2. Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies, OJ L 222, 14.8.1978, p. 1131 (Balance Directive) 3. Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts, OJ L 193, 18.7.1983, p. 1 17 (Directive on consolidated accounts) 4. Twelfth Council Company Law Directive 89/667/EEC of 21 December 1989 on single-member private limited-liability companies, OJ L 395, 30.12.1989, p. 4042 (Single-member private limited-liability companies Directive) 5. Directive 98/78/EC of the European Parliament and of the Council of 27 October 1998 on the supplementary supervision of insurance undertakings in an insurance group, OJ L 330, 5.12.1998, p. 112 (Insurance group supervision Directive, Solvency II) 6. Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions, OJ L 126, 26.5.2000, p. 159 (Bank Coordination Directive) 7. Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, OJ L 160, 30.6.2000, p. 1-18 8. Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), OJ L 294, 10.11.2001, p. 121 (SE-Council Regulation) 9. Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, OJ L 243, 11.9.2002, p. 14 (IAS-Regulation) 10. Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council, OJ L 35, 11.2.2003, p. 1 27 (Financial Conglomerates Directive) 11. Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, OJ L 142, 30.4.2004, p. 1223 (Takeover Directive) 7

12. Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004, p. 38 57 (Transparency Directive) 13. Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies, OJ L 310, 25.11.2005, p. 19 (Tenth Directive on cross border mergers) 14. Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC, OJ L 157, 9.6.2006, p. 87107 (Statutory Audits Directive) 15. Directive 2006/46/EC of the European Parliament and of the Council of 14 June 2006 amending Council Directives 78/660/EEC on the annual accounts of certain types of companies, 83/349/EEC on consolidated accounts, 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions and 91/674/EEC on the annual accounts and consolidated accounts of insurance undertakings, OJ L 224, 16.8.2006, p. 17 16. Communication from the Commission to the Council and the European Parliament - Modernising Company Law and Enhancing Corporate Governance in the European Union - A Plan to Move Forward, COM/2003/0284 final (Action Plan) 17. Preliminary draft of a directive on the basis of Art 54 section 3 lit b) of the ECC treaty on the approximation of group law, part I ,1974, DOK XI/328/74-D and part II, 1975, DOK XI/593/75-D (Preliminary Draft of a Group Law Directive), printed in: Lutter, Europisches Gesellschaftsrecht, 2. Auflage, 1984, S. 187 18. Preliminary draft of a Ninth Directive of 1984 ( Group Law Directive), DOK III/1639/84, printed in: Zeitschrift fr Unternehmens- und Gesellschaftsrecht 1985, 444 ff. 19. Proposal for a Fourteenth European Parliament and Council Directive on the transfer of the registered office of a company from one member state to another with a change of applicable law, 20 April 1997, doc. XV D2/6002/97

Keywords for the index Affiliation agreement Appraisal Rights Company law Minority protection Creditor protection Common purpose Company interest subsidiary Compensation for detrimental effects Constitution of group organization De facto group Dominating company International Accounting Standards Liability for delay in filing for insolvency/wrongful trading/action en comblement du passif Management obligations Societas Europaea/European Stock Corporation Solvency II Squeeze-out