1. Faculty of Law, Economics and Finance The Concept of Group Interest and the Possibility of Implementing Group Interest in Europe Pierre-Henri Conac University of Luxembourg 23 October 2015 20 years of Commercial Code: Estonian and European Company Law Experiences and Perspectives 1

2. Faculty of Law, Economics and Finance Outline I. The concept of group interest in the Member States A. The recent reforms in the Member States B. The European Model Company Act (EMCA) II. The Possibility of Implementing Group Interest in Europe A. The recent trends and developments at the EU level B. The possible way towards a recognition of group interest at the EU level 2

3. Faculty of Law, Economics and Finance Various approaches towards group interest in the EU Member States recognizing the interest of the group (16) Case law : Belgium, Cyprus, Denmark, France, Ireland, Luxembourg, Malta, Netherlands, Poland, Romania, Spain, Sweden and the UK Legislative regime : Italy (2003), Czech Republic and Hungary (2014) Member States not recognizing the interest of the group (12) Legislative regime : Germany, Portugal, Croatia, Latvia and Slovenia Case law (or without case law) : Austria, Slovakia, Lithuania, Bulgaria, Estonia, Finland, Greece and Slovakia 3

4. Faculty of Law, Economics and Finance 4 The French Rozenblum approach Supreme Criminal Court (1985) case on abuse of corporate assets Existence of a « structured » group : capital links (no group if natural person at top holder) and coherent group policy Conditions relative to the operations Financial support should not be without counterpart or break the balance between the respective commitments of the companies Need for a compensation but can be non monetary and future : in practice, courts assume that they would be a future compensation Financial support should not exceed the financial possibilities of the company supporting it : no risk to the existence of subsidiary

5. Faculty of Law, Economics and Finance 5 Renewed interest for the regulation of corporate groups Classic debate between Rozenblum, which offers little protection for minority shareholders, and German approach which is too rigid Academic and business support (especially in the banking and insurance sectors) for the Rozenblum approach but with protections Debate at the EU level (Reflection Group on the Future of EU Company law 2011) and reforms towards Rozenblum in the MS Intervention at the European Union level is possible but needs to be justified by a cross-border dimension in order to gather support

6. Faculty of Law, Economics and Finance I. The Concept of Group Interest in the Member States 6

7. Faculty of Law, Economics and Finance A.The recent reforms in the Member States 7

8. Faculty of Law, Economics and Finance 8 Italy (2003) Criteria to identify a group unitary direction: instructions of the parent company, cash-pooling, internal governance codes, veto rights of the parent, close contractual relationships Recognition of the interest the group Minority shareholders‘ protection: sell-out right when direction by the parent is established or ends, significant change in the activity or the structure, and abuse by the parent company Creditors‘ protection: subordination of intra-group loans

9. Faculty of Law, Economics and Finance 9 Czech Republic (2014) Recognition of the interest the group Right of the parent company to give instructions Dependency report to be established by the subsidiary and accessible to the minority shareholders Minority shareholders‘ protection: sell-out right in case of „significant deterioration of the situation of the minority shareholder“ or „considerable damage on the shareholder“

10. Faculty of Law, Economics and Finance 10 Case law developments in MS go in the same direction Poland (Szczecin court of appeal, 2009): in a criminal action, directors of a subsidiary were released of liability for intra-group transactions unfavourable to the subsidiary by using the Rozenblum approach Spain (Sentencia del Tribunal Supremo, 8 nov. 2012): in case of insolvency proceedings, validity of intra-group transactions have to be analysed as „group transactions“ and the existence or not of a damage has to take into account the existence of the group“

11. Faculty of Law, Economics and Finance B. The European Model Company Act (EMCA) 11

12. Faculty of Law, Economics and Finance 12 European Model Company Act (EMCA) EMCA has been developed since 2007 by a group of academics and often practitioners from 22 European Member States Inspired by the US Model Business Corporation Act (MBCA) EMCA is designed for EU Member States but could also be of interest for countries outside the EU (accessing and neighbouring) The EMCA includes a specific Chapter on groups (Chapter 15)

13. Faculty of Law, Economics and Finance 13 EMCA Chapter 15 on Groups Simplified Rozenblum Test : all conditions except coherent policy Right of the parent company to give instructions, subject to the Rozenblum test, with some exceptions: independent directors, employee representatives and directors not appointed by the parent company (minority) or by the controlling shareholder Directors and managers may refuse to apply instructions if they violate Rozenblum test and are liable if they apply those instructions No dependency report by the subsidiary

14. Faculty of Law, Economics and Finance 14 EMCA Chapter 15 on Groups Simplified Rozenblum test for 100 % subsidiaries : financial support not to exceed the financial possibilities of the subsidiary Regime for non 100 % subsidiaries : Right of shareholders to request an investigation (also upstream) Sell-out right : if the parent company controls 90 % of capital and votes, or if decided by courts for cause (to be defined by courts) Right of the parent company to squeeze-out minority shareholders if it controls 90 % of capital and votes (also non listed companies) All subsidiaries: parent company is liable for wrongful trading

15. Faculty of Law, Economics and Finance II.The Possibility of Implementing Group Interest in Europe 15

16. Faculty of Law, Economics and Finance A.The recent developments and trends at the EU level 16

17. Faculty of Law, Economics and Finance 17 Forum Europaeum on Company Groups (2015): directive No opt-in but right of the parent to give instructions Service companies : auxiliary function within the group and 100 % subsidiary and may not exceed any of the EU limits for SMEs Obligation to apply instructions unless they have the effect of precluding the Service Company from fulfilling its obligations falling due within a 12 month period following the instruction or if the parent provides a guarantee for this same period Report on intra-group transactions by parent and subsidiary Ordinary Companies: sell-out right organised by each MS Protection of creditors (all companies) : wrongful trading

18. Faculty of Law, Economics and Finance 18 Business support at EU Level Paris Think Tank Club des Juristes (2015) : recommendation Rozenblum-Test but no right to give instructions (fear of liability) Simplified Rozenblum-Test for 100 % subsidiaries: financial support should not exceed the possibilities of the subsidiary Safe-harbour for ordinary related parties transactions within a group (White List): cash-pooling, intra-group loans, etc... Protection of creditors and minority shareholders by MS, but includes measures of transparency as to the belonging of the group

19. Faculty of Law, Economics and Finance 19 Report of the High Level Group of Company Law Experts on Modern Regulatory Framework for Company Law in Europe (2002): Member States should be required to provide for a framework rule for groups that allows those concerned with the management of a group company to adopt and implement a co- ordinated group policy, provided that the interest of the company’s creditors are effectively protected and that there is a fair balance of burdens and advantages over time for the company’s shareholders. Report of the Reflection Group on the future of EU Company law (2011): The EU Commission should consider, subject to evidence that it would be a benefit to take action at the EU level, to adopt a recommendation recognising the interest of the group.

20. Faculty of Law, Economics and Finance 20 Arguments against : Subsidiarity principle Cross-border plundering of national subsidiaries Germany would not accept (but most critics are in Germany) Arguments in favor: Simplify cross-border management of companies, especially SMEs Difficulty to deal with many regimes which are not clear Recommendation would create impetus for change at the MS level Some large companies request such recognition (article by Chiapetta and Tombari in ECFR)

21. Faculty of Law, Economics and Finance 21 Action Plan of the EU Commission on Company Law and Corporate Governance (December 2012) The Commission will, in 2014, come with an initiative to improve (the) recognition of the concept of ‘group interest’ Public consultation (2012) with large number of responses : Support essentially from academics, lawyers, notaries, the financial and insurance sectors, some business associations (Assonime in Italy, BVMW in Germany) Stronger support in MS which have rigid rules (Germany, Austria, Hungary, Poland, Slovakia) or uncertain laws (Romania)

22. Faculty of Law, Economics and Finance Recognition of the interest of the group in company law would facilitate the application of recent EU banking legislation Financial and insurance sector supports the recognition of the interest of the group in order to prevent regulatory nationalism and facilitate risk management of cross-border subsidiaries Recognition of the interest of the group in Article 19 (intra-group financial support) and specific detailled regime in the Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms (BRRD) 22

23. Faculty of Law, Economics and Finance B. The way towards a recognition of the interest of the group at the EU level 23

24. Faculty of Law, Economics and Finance 24 Probable reluctance of Member States to a directive Differences between the two main approaches cannot be reconciled Hostility of MS towards an EU intervention in substantive company law even if the EU would use the law of one or some MS as model Fear of transfer of assets to companies in other MS (creditors’ protectionism) and of loss of tax substance (tax protectionism)

25. Faculty of Law, Economics and Finance 25 Probable reluctance of companies to a directive Fear of intervention of the EU legislator in a sensitive area and of possibly further intervention in the area of company management Fear of liability of parents companies for giving instructions Fear of having a rigid legal system instead of a flexible case law

26. Faculty of Law, Economics and Finance 26 Recommendation to the Member States Recommendation probably acceptable to MS and companies because not binding and have an influence on judges and legislators Debate between a framework or a more precise recommendation EMCA, Forum Europaeum, FECG, Club des juristes etc.. as well as national laws (France, Italy, Germany on certain aspects, Czech Republic and also Turkey) could be sources of inspiration

27. Faculty of Law, Economics and Finance 27 Recommendation to the Member States Rozenblum-Test and right of the parent company to give instructions Simplified Test for 100 % subsidiaries White list of transactions usual within a group (cash pooling etc...) Protection of minority shareholders (sell-out rights) and creditors (wrongful trading)

28. Faculty of Law, Economics and Finance 28 Targeted Directive could be considered too Recognition of the interest of the group in the Societas Unius Personae (SUP) which is an harmonised 100 % private limited liability national company form (GmbH, Sarl…) currently being negotiated Compulsory or option for the Member States and/or the subsidiary Recognition of the interest of the group in all 100 % subsidiaries (public and private limited liability companies)

29. Faculty of Law, Economics and Finance Conclusion 29

30. Faculty of Law, Economics and Finance 30 Recent academic, legislative and case law developments in Europe all go in the direction of the recognition of the interest of the group Developments at the MS level are easier and could lead to a de facto harmonisation but action at the EU level would also be very useful Distinction between 100 % subsidiaries and others could be the way forward for the EU since distinction is not much used at MS level Informal Company Law Expert Group (ICLEG) has been asked to develop a report on the recognition of the interest of the group