
An Established Balancing Act? Navigating through the Complexities of EU Corporate Law and Freedom of Establishment
Europe’s corporate landscape is a mosaic of diversity, reflecting the economic vibrancy ruling in the region of the internal market, therefore transnational companies may appear attractive, however, the question arises as to whether supranational company law has fulfilled its role in realizing fundamental freedoms in the European Union. Beneath this “facade” of unity lies a complex web of laws and regulations that can pose significant challenges and difficulties to the freedom of establishment, a fundamental principle of the European Union. While the EU has made strides in harmonizing corporate laws across member states, navigating these regulations remains a daunting task for businesses and natural persons seeking to operate across borders.
It has been recognized that the trend towards globalist economic policies within the EU is growing significantly. Corporate organization forms based on national legislation are considered by some to be not quite suitable to respond to new economic trends and challenges in the common European market. The European Union’s first corporate law principles have been constituted after several years of struggling preparatory work and a long process of legal harmonization. This has resulted in the creation of company law directives and supranational corporate models, available for member states. These forms of companies operate throughout the entire internal market which enables the availability of the four fundamental freedoms throughout the territory of the EU, specifically within this area of business legislation.
These four freedoms are crucial in establishing a unified European market, which has been the primary objective of the European Union since its creation among the member states. One of the most important freedoms is the free movement of persons as it includes two types of freedom: the free movement of workers and the free movement of establishment. It is worth noting that the freedom of establishment is especially important in the context of corporate law, due to today’s very rapidly changing economic conditions. However, it is important to acknowledge that with regard to companies, the right to freedom of establishment remains incomplete and requires various reforms. At the heart of the issue lies the tension between national sovereignty and the EU’s biggest objective of creating a single market. While the EU directives aim to standardize corporate laws to facilitate cross-border business activities, member states retain significant autonomy in implementing and interpreting these directives, due to the rapidly changing economic environments. As a result, disparities persist in corporate governance practices, company formation procedures, and shareholder rights among EU countries.
One of the most significant obstacles faced by businesses operating in multiple EU jurisdictions is the lack of uniformity in company law. Varying requirements for company formation, registration, and reporting can create a bureaucratic nightmare for enterprises seeking to expand their operations. As on the one hand, the EU tries to give financial assistance and opportunities for companies, on the other hand, it is partly impossible to adapt to the context created by the cross-border market. Especially costs associated with compliance and legal counsel to navigate these intricacies can deter small and medium-sized enterprises (SMEs) from seizing opportunities in other EU markets, thus stifling innovation and economic growth.
Moreover, divergent corporate governance practices across EU member states can undermine investor confidence and hinder cross-border investments. The Polbud case provides a clear illustration of this phenomenon. The Court aimed to clarify the freedom of establishment by stating that a company incorporated under the law of one Member State must have its legal status under the articles of association recognized by another Member State. In essence, the Polbud case concerns the ability of companies to transfer their registered offices across EU member states without having to dissolve and reincorporate in the new jurisdiction. Prior to this case, EU company law required companies to liquidate and then re-establish themselves in the new member state, a process that could be time-consuming and costly. Moreover, the Polbud ruling underscores the broader principle of freedom of establishment within the EU. This principle allows individuals and companies to set up and manage businesses in any member state under the same conditions as domestic entities. It is a cornerstone of the EU’s single market, promoting competition, innovation, and economic growth across the union.
The question raised in this case appears to be fundamental, but the fragmented nature of company law meant that a judgment was specifically required to resolve the question of whether the legal environment of the national law of the Member States accepts companies incorporated in other States. For some corporations, the cross-border operation of the company may raise creditor protection issues. Capital protection is therefore not guaranteed, and consequently, the transparency required of companies is not fully achieved in the decentralized European corporate law. The harmonization of company registration across EU Member States was not implemented until later, which caused legal complications in the internal market regarding copyright and name registration. Despite the EU’s efforts to regulate this area, the standardized database remains non-transparent, which can make it difficult to avoid errors in the register, particularly at the national level. Differences in board structures, shareholder rights, and disclosure requirements can complicate decision-making processes for investors and expose companies to legal risks for natural persons, as partnership or co-ownership is very high in risk. Even in the case of crowdfunding, which has emerged as a new economic format, it is very risky for individuals to invest under these circumstances abroad. The lack of harmonization in insolvency laws further exacerbates these challenges, making it difficult for companies to restructure or wind up their operations across borders efficiently. This raises the question of how the freedom of movement of individuals is being undermined. Large economic multinational companies have all the means to operate in this company law environment, but individuals as workers and small entrepreneurs are deprived of an equal share of the European market.
The European Commission’s efforts to address these challenges through initiatives like the European Company (SE) and the Single Digital Gateway mechanism are commendable steps towards harmonizing corporate laws and reducing administrative barriers. The SE framework allows companies to operate throughout the EU under a single legal entity, streamlining cross-border mergers, acquisitions, and relocations. However, these initiatives fall short of achieving full harmonization and eliminating the complexities associated with cross-border business activities. The fragmented nature of EU corporate law continues to pose significant challenges to the freedom of establishment, particularly for SEs with limited resources to navigate regulatory mazes.
In conclusion, while the EU has made significant strides in harmonizing corporate laws and promoting the freedom of establishment, many formidable challenges remain. Achieving true regulatory convergence and streamlining administrative processes across member states will require sustained commitment, political will, and cooperation between the states. By addressing these challenges head-on, the EU can unlock the full potential of its single market and drive economic prosperity for all its individuals. Furthermore, fostering a culture of supranational corporations and mutual recognition of corporate law among member states is crucial to building trust and confidence in the European single market. It is required to have a commitment to open dialogue, collaboration, and compromise among EU institutions, national governments, and stakeholders to overcome entrenched differences and advance the common interests of European businesses. To address these challenges effectively, EU policymakers must prioritize further harmonization of corporate laws and enhance cooperation between member states to ensure consistent implementation and enforcement, rather than making the legal environment optimized for large corporations only. This includes simplifying company formation procedures, standardizing corporate governance practices, and facilitating cross-border restructuring and insolvency proceedings.
Benedikt Levstok is a fourth-year undergraduate law student at the University of Szeged, Hungary, Faculty of Law and Political Sciences, holding a talent scholarship from the Aurum Foundation. He is a former Vice President in charge of marketing and communication at ELSA Szeged in the academic year of 2022/2023, and Member of the ConSIMium Council simulation experience national team of Hungary at the University of Szeged, Faculty of Law and Political Sciences. His research focuses on the European values and the future of Europe.