Company Law

From Max-EuP 2012

by Andreas M Fleckner

1. Function

The law of business associations (hereinafter referred to as ‘company law’, see 2. below) governs the internal relationships and external affairs of partnerships, companies, corporations and other business entities that are, at least to some degree, separated from the person or persons that own them. Company law has an enabling function to the extent that it makes exceptions to general principles of contract and property law that would otherwise constrain the creation and organization of business associations. Where company law instead establishes new requirements or alters general rules that otherwise pose no problems for business associations, it has a regulating function. Rules of the latter type by far outnumber those of the former.

Lawyers will gain a first insight into the function of their national company law by exploring whether and in which respects its provisions offer options that the general rules fail to provide. This differs between countries. For one essential question, though—the allocation and attribution of assets—company law seems to have an enabling function in all European jurisdictions. Because contractually it is not possible, at least for larger business associations, to sufficiently separate the common (business) assets of the firm from the individual (private) assets of its owners (‘principle of two-sided asset separation’). Here, certain statutory provisions or comparable court decisions provide for remedies.

Understanding the functions of company law has important implications both for its abstract conception and its concrete application, in particular when drawing the borderline between company law and neighbouring branches of law such as capital markets law or insolvency law.

2. Terminology

Unlike in French (société) and in German (Gesellschaft), there is no single English term that covers the wide range of business associations or entities that have emerged over the last centuries. Therefore, while French law knows a droit des sociétés and German law a Gesellschaftsrecht, English lawyers would have to less succinctly refer to ‘company and partnership law’, the ‘law of business associations’ or ‘enterprise law’. To complicate matters further, in the United States the predominant terms (in addition to ‘partnership law’) are ‘corporate law’ and ‘corporation law’.

The English terminology reveals that the business associations of today have two distinct roots: the corporation (universitas, association, Körperschaft) and the partnership (societas, société, Sozietät/Gesellschaft im engeren Sinne). Corporations pursue supra-individual goals and are, accordingly, independent from the current composition of their members. Partnerships, in contrast, advance the common interests of the specific partners and have, in principle, no isolated existence; in their purest form, partnerships are therefore dissolved if a partner dies (Inst 3,25,5), quits (Inst 3,25,4) or becomes insolvent (Inst 3,25,7/8).

National and European Union law provide for a great variety of legal regimes under which business associations can be organized. These different forms cover a wide spectrum ranging from partnerships of a few businessmen to international conglomerates with several million shareholders. This Encyclopaedia has dedicated articles to the most important national types (partnership; Gesellschaft mit beschränkter Haftung (GmbH); private limited company (England and Wales); stock corporation) and to all supranational forms that have appeared on the European level (European Economic Interest Grouping (EEIG); European Cooperative (Societas Cooperativa Europaea); European Company (Societas Europaea)). The European Private Company (Societas Privata Europaea) might follow next, at least in some Member States (see 5. b) below).

In the European context (see generally Art 54(2) TFEU/48(2) EC), the term ‘company’ is often used in a very broad sense to mean all private associations of persons that carry on a business in common (as well as, although not ‘common’ enterprises, distinct single-member entities). For instance, observers discuss both the European Economic Interest Grouping and the European Company under the heading of ‘European company law’, even though both are conceptually far apart: the European Economic Interest Grouping is an example of a partnership, the European Company of a (stock) corporation. For brevity and convenience, the remaining sections will follow this practice and use the term ‘company law’ in the broader sense that includes partnerships and similar business associations.

3. History

Common business activities have been dealt with in texts dating as far back as the 18th century BC Codex Hammurabi (§§ 77+f, 100–107). Most detailed among the ancient laws and later the primary basis of European company law is the Roman law on the societas, the ius societatis. Both the Institutes of Gaius (Gai Inst 3,148–3,154b) and of Justinian (Inst 3,25) as well as the Digest (Dig 17,2) and the Code of Justinian (Cod Iust 4,37) devote a separate chapter to the societas. A second basis of modern company law are the Germanic rules and customs of the Middle Ages (well known, but apparently partly influenced already by Roman law, is the Sachsenspiegel of the 13th century, Landrecht I 12). With the reception of Roman law, Germanic and Roman rules became increasingly mixed and merged—at least locally (for example, the Frankfurter Reformation of 1578, part II, title XXIII)—into a largely homogeneous body of law, the ius commune societatis, the common law of business associations. In some discussions, however, the different historic roots are still apparent, eg in the 19th century German dispute over the legal nature of the stock corporation, or in many Romanic jurisdictions with regard to unequal shares and the exclusion of the famous societas leonina. Mostly unnoticed is that today’s English law of partnerships appears to be closer to the Roman ius societatis than the legal regimes in France and Germany.

The provisions of the Code civil (21 March 1804) du contrat de société (Arts 1832–1873) and the Code de commerce (15 September 1807) des sociétés (Arts 18–64) had the most significant impact on the development of modern company law in continental Europe. Many of these sections have been revised several times since, but the greater part of French company law is still codified in the Code civil (Arts 1832–1873) and the Code de commerce (Arts L 210-1–L 252-12). For the German legal system, the draft of a general German commercial code, the Allgemeines Deutsches Handelsgesetzbuch (ADHGB) (12 March 1861) constituted the first codification of company law to come into force nationwide (Arts 85–270). Four decades later, these provisions were transferred—partly revised—to the new commercial code (§§ 105–342), the Handelsgesetzbuch (10 May 1897); at the same time, the Bürgerliches Gesetzbuch (BGB) (18 August 1896) dedicated a chapter to the civil partnership, the Gesellschaft (§§ 705–740). The rules on civil and commercial partnerships have seen only a few amendments since that time; the other company forms, however, were often reformed and are now codified outside of the commercial code. The Gesellschaft mit beschränkter Haftung (GmbH), an invention of the German legislature, received a statute of its own at its inception (20 April 1892); the law on stock corporations was transferred to a distinct codification (Aktiengesetz of 30 January 1937) and has been kept separate to date (Aktiengesetz of 6 September 1965). English company legislation was initially event-driven and therefore fragmentary and unsystematic. This changed with the Companies Act 1862 (7 August 1862), the first consolidation or codification, which was thereafter many times replaced, most recently by the Companies Act 1985 (11 March 1985) and the Companies Act 2006 (8 November 2006). Partnerships are governed by the Partnership Act 1890 (14 August 1890).

4. Legal comparisons

From the very first days of company law, comparative study (comparative law) has been one of the most important sources of knowledge. The Code de commerce (1807) in general and its provisions on business associations in particular functioned as a model for various other commercial codes in Europe, such as the Spanish Código de Comercio (1829), the Portuguese Código Commercial (1833) and the Dutch Wetboek van Koophandel (1838) as well as—to a lesser degree—the draft of the Allgemeines Deutsches Handelsgesetzbuch (ADHGB) (12 March 1861).

In areas where the legislation has largely remained unchanged since the middle of the 19th century, comparative study has almost come to an end. The most striking example is the law of partnerships (see 2. above). Where legislatures, judges and scholars are still struggling for an adequate regulatory regime—ie especially for corporate entities (stock corporation; private limited company (England and Wales); Gesellschaft mit beschränkter Haftung (GmbH)) —comparative study has been continuously (though with differences in quality and quantity) influential (more in the respective articles of this Encyclopaedia that deal with the individual legal forms).

5. Legal harmonization

European legal harmonization is well advanced in some areas of company law. The reason is, as for capital markets law, that the harmonization of company law is believed to be important for the accomplishment of a European internal market.

a) Harmonized national company law

(i) Twelve main directives aim at harmonizing national company law (subsequently listed in order of adoption, not according to the sometimes differing and now abandoned official numbering): (1) First Council Directive (Dir 68/151 of 9 March 1968) on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies […] with a view to making such safeguards equivalent throughout the Community. (2) Second Council Directive (Dir 77/91 of 13 December 1976) on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies […] in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent. (3) Fourth Council Directive (Dir 78/660 of 25 July 1978) […] on the annual accounts of certain types of companies. (4) Third Council Directive (Dir 78/855 of 9 October 1978) […] concerning mergers of public limited liability companies. (5) Sixth Council Directive (Dir 82/891 of 17 December 1982) […] concerning the division of public limited liability companies. (6) Seventh Council Directive (83/349 of 13 June 1983) […] on consolidated accounts. (7) Eighth Council Directive (Dir 84/253 of 10 April 1984) […] on the approval of persons responsible for carrying out the statutory audits of accounting documents, replaced by Directive (Dir 2006/43 of 17 May 2006) on statutory audits of annual accounts and consolidated accounts […]. (8) Eleventh Council Directive (Dir 89/666 of 21 December 1989) concerning disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State. (9) Twelfth Council Company Law Directive (Dir 89/667 of 21 December 1989) on single-member private limited-liability companies. (10) Directive (Dir 2004/25 of 21 April 2004) on takeover bids [originally proposed as the thirteenth company law directive]. (11) Directive (Dir 2005/56 of 26 October 2005) on cross-border mergers of limited liability companies [originally proposed as the tenth company law directive]. (12) Directive (Dir 2007/36 of 11 July 2007) on the exercise of certain rights of shareholders in listed companies.

(ii) Not further pursued or not yet adopted are the: (1) Proposal ([1991] OJ C 321/09 of 20 November 1991) for a fifth Council directive […] concerning the structure of public limited companies and the powers and obligations of their organs; (2) Draft (Doc No III/1639/84 of 1984) for a ninth company law directive [on groups of companies]. (3) Draft (Doc No XV/43/87 of 1987) for a company law directive [on the liquidation of companies]. (4) Draft (22 April 1997) for a fourteenth company law directive [on the transfer of seat].

(iii) The European Commission has also issued recommendations (under Art 288(5) TFEU/ 249(5) EC) in recent years: (1) Recommendation (2004/913 of 14 December 2004) of fostering an appropriate regime for the remuneration of directors of listed companies. (2) Recommendation (2005/162 of 15 February 2005) on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board. (3) Recommendation (C(2009) 3177 of 30 April 2009) complementing the former two recommendations as regards the regime for the remuneration of directors of listed companies.

b) Supranational company law

In the area of company law, the European institutions have also created directly applicable supranational company law in addition to the aforementioned measures to harmonize national company laws.

(i) All listed companies must, per virtue of a regulation (Reg 1606/2002 of 19 July 2002), prepare their financial statements according to International Accounting Standards (IAS) or, now, International Financial Reporting Standards (IFRS) (accounting).

(ii) Most perceptible as phenomena of supranational company law are the three European company forms: (1) The European Economic Interest Group (EEIG) was created in 1985 by means of a regulation (Reg 2137/85 of 25 July 1985) as well as by national implementation laws. The EEIG, which is modelled after the French groupement d'intérêt économique (Arts L 251-1–L 251-23 Code de commerce) is a not-for-profit partnership that allows the organization of ancillary cross-border services. The EEIG has, however, almost no practical relevance; in Germany, as the largest Member State of the European Union, there are no more than 256 such associations (as of January 2011, according to Udo Kornblum, 2011) and only 27 with significant activities (Umsatzsteuerstatistik 2008; the Unternehmensregister shows for 2010 a total of 74 releases by 65 firms). (2) The European Company (Societas Europaea) (SE) is the ‘flagship’ of European company law (Klaus J Hopt). The SE is, despite its confusing name, functionally and structurally a stock corporation, created a decade ago through a regulation (Reg 2157/2001 of 8 October 2001) and a supplementing directive (Dir 2001/86 of 8 October 2001) as well as through national implementation laws. Although expectations were frequently reduced over the slow course of its development, the success of the SE has nonetheless surprised many observers. Two years ago (as of April 2009), there were 389 such companies across Europe: in Germany 115, in France 14, in the United Kingdom also 14 (according to Horst Eidenmüller, Andreas Engert and Lars Hornuf, 2009); in the meantime, Germany has witnessed a rise of almost 50 per cent to 159 companies (as of January 2011, according to Kornblum, 2011). (3) The European Cooperative Society (Societas Cooperativa Europaea) (SCE) is based, like the SE, on a regulation (Reg 1435/2003 of 22 July 2003) and a directive (Dir 2003/72 of 22 July 2003) as well as national implementation laws. So far the SCE has not proved to be a practical success.

(iii) There have been and still are plans to create additional supranational forms: (1) The Commission has put forward a proposal (COM (2008) 396 final of 25 June 2008) for a European Private Company (Societas Privata Europaea) (SPE). The key difference between the SPE and the SE (see (ii) above) is that the shares of the SPE cannot be publicly traded; the SPE is meant to be a close corporation, a sort of European private limited company or Gesellschaft mit beschränkter Haftung (GmbH). The proposal failed mainly due to Germany’s opposition (in June 2011), but other Member States might, through the mechanism of ‘enhanced cooperation’, move forward and adopt the proposal regardless of other countries’ reluctance. (2) The drafts of a directive (most recently [1993] OJ C 236/05 of 6 July 1993) and a regulation (most recently [1993] OJ C 236/06 of 6 July 1993) to create a European Mutual Society were withdrawn by the Commission in spring 2006 ([2006] OJ C 64/03). (3) A similar fate was met by the idea of a European Association which, notwithstanding drafts for a directive (most recently [1993] OJ C 236/01 of 6 July 1993) and a regulation (most recently [1993] OJ C 236/02 of 6 July 1993), was also abandoned ([2006] OJ C 64/03). (4) In the context of European legal forms, one should also mention the initiatives for a European Foundation.

c) Fundamental freedoms

Another central component of European company law is the jurisdiction of the European Court of Justice (ECJ) on the freedom of establishment (Arts 49–55 TFEU/43–48 EC) and the free movement of capital and payments (Arts 63–66, 75 TFEU/56–60 EC).

(i) The six most important decisions on the freedom of establishment, which the treaty expressly extends to companies (Art 54 TFEU/48 EC), are: ECJ Case 81/87 – Daily Mail [1988] ECR 5483; ECJ Case C-212/97 – Centros [1999] ECR I-1459; ECJ Case C-208/00 – Überseering [2002] ECR I-9919; ECJ Case C-167/01 – Inspire Art [2003] ECR I-10155; ECJ Case C-411/03 – SEVIC [2005] ECR I-10805; and ECJ Case C-210/06 – Cartesio [2008] ECR I-9641. These judgments have both a legal and a political dimension. Legally, they deal with the question of whether and under what circumstances business associations that have been founded according to the laws of one Member State can focus their activities on another Member State or completely ‘move’ to it; this can pose problems in both the first and the second state. Politically, the decisions are of relevance because a broad interpretation of the freedom of establishment may lead to legal competition for the ‘better’ (often from the founders’ perspective) law (in general: competition between legal systems).

(ii) For investments in business associations, the free movement of capital and payments overlaps with the freedom of establishment (seen, but not resolved by Art 49(2) TFEU/43(2) EC). All of the Court’s rulings in this area so far have involved measures to prevent takeovers. Eight times the Court had to decide on so-called ‘golden shares’. These are special rights granted to public bodies making it more difficult to take over (previously privatized) companies. The relevant judgments concerned provisions in Portugal (ECJ Case C-367/98 [2002] ECR I-4731; ECJ Case C-171/08 of 8 July 2010, nyr; ECJ Case C-543/08 of 11 November 2010, nyr); in France (ECJ Case C-483/99 [2002] ECR I-4781); in Belgium (ECJ Case C-503/99 [2002] ECR I-4809); in Spain (ECJ Case C-463/00 [2003] ECR I-4581); in the United Kingdom (ECJ Case C-98/01 [2003] ECR I-4641); and in the Netherlands (ECJ Joined Cases C-282/04 and C-283/04 [2006] ECR I-9141). On related issues, the Court had to decide in two proceedings brought against Italy (ECJ Case C-174/04 [2005] ECR I-4933 and ECJ Joined Cases C-463/04 and C-464/04 [2007] ECR I-10419). Not only a ‘golden share’, but some provisions of a ‘golden act’, the so-called Volkswagen-Gesetz (Act of 21 July 1960), were reviewed in the Volkswagen case (ECJ Case C-112/05 [2007] ECR I-8995). Whether the deletions made by the German legislature in the aftermath of the decision (Act of 8 December 2008) are sufficient to bring the law in accordance with European requirements remains to be seen.

6. Current challenges

Most of the challenges for today’s company law are confined to certain forms of business associations; these challenges are discussed in the respective articles of this Encyclopaedia (for an overview, see 2. above). Only a few problems are understood as those of European company law in general and not of particular legal forms.

The question of co-determination, ie the participation of employees in the decision-making process of the (supervisory) board has been highly controversial for decades, but is not a genuine issue of company law. Germany, the country that has become (in)famous for giving employees seats on the supervisory board in larger firms (a system known as Mitbestimmung), has been blocking numerous efforts to harmonize European company law or create European legal forms, most recently the European Private Company (Societas Privata Europaea) (SPE), because of fears that the position of German employees might suffer. To discuss this issue at length is somewhat futile because empirical data or other objective arguments have received little political attention so far.

A general problem at the borderline of company law and insolvency law (see 1. above) is the question of which provisions that protect creditors are to be classified under company law and which under insolvency law. In Germany, the legislature (Insolvenzantragspflicht, duty to file for insolvency proceedings, § 15a Insolvenzordnung) and the Federal Supreme Court (Existenzvernichtungshaftung, existence destruction liability, § 826 Bürgerliches Gesetzbuch (BGB)) have recently reclassified two issues from company law to insolvency and tort law, respectively. It is likely that both adjustments are tacit attempts to remove these matters from the scope of the freedom of establishment (Arts 49–55 TFEU/43–48 EC) in order to make foreign companies, despite recent rulings by the ECJ, subject to the same provisions as those established in Germany. In the European context, however, it is very probable that the functional content of the law, not the site, will be central to the qualification under company or insolvency law. From this perspective, the duty to file for insolvency proceedings might indeed belong to insolvency law, while existence destruction liability might have to be classified as company law.

Another issue of general importance is the power that the European institutions have or should have to harmonize national company law and to create supranational company law. The treaty authorizes the European Parliament, the Council and the Commission only to coordinate ‘to the necessary extent the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or firms […] with a view to making such safeguards equivalent throughout the Union’ (Art 50(2)(g) TFEU/44(2)(g) EC). This mandate is quite narrow, perhaps narrower than the numerous directives (see 5. a) above) in the area of company law might suggest.

7. Outlook

European company law is facing a number of major policy decisions. The first phase of harmonizing national company law and of creating uniform European law has almost come to an end—not because all of the original objectives have been achieved, but because only, if at all, the Transfer of Seat Directive and the European Private Company seem politically feasible at present. Whether existing measures are sound and whether further initiatives should follow requires careful investigation. Legal scholarship could contribute to this discussion with a more thorough comparison of the national legal systems. This input will be most helpful if legal scholars compare more than the current statutes.

First, a great gap in historical research should be closed by meticulously exploring to what extent modern company laws follow a common model and where they follow separate paths. Contrary to widespread belief and the frequently repeated stereotype of the common law’s distinctiveness and uniqueness, the English law on business associations seems, in many regards—at least based on a cursory review of its historical foundations and a preliminary appraisal of its current shape—closer to Roman law than to French or German law. For the rise of a new European company law, this common foundation is a great opportunity because it gives the political discussion a starting point that might seem agreeable to all parties involved. Secondly, legal scholarship should team up with the social sciences and conduct empirical studies to better understand the practice of European business associations. A French société anonyme and a German Aktiengesellschaft differ in more ways than name and legal framework.

Therefore, in light of the policy decisions ahead and the wide areas that legal scholarship has so far left unexplored, more functional research, with vertical and horizontal legal comparisons as well as interdisciplinary studies, appears as the current desideratum in the area of European company law. While such work might be helpful in assessing calls for centralized harmonization, it might itself prove a nucleus for a decentralized development of European company law towards a novum ius commune societatis.


Marcus Lutter, Europäisches Unternehmensrecht (4th edn, 1996); António Menezes Cordeiro, Direito europeu das sociedades (2005); Marco Cassottana and Antonio Nuzzo, Diritto commerciale comunitario, part I (2nd edn, 2006); Klaus J Hopt, ‘Comparative Company Law’ in Mathias Reimann and Reinhard Zimmermann (eds), The Oxford Handbook of Comparative Law (2006, corrected paperback edition 2008) 1161; Stefan Grundmann (with Florian Möslein), European Company Law (2007); Paul L Davies (with Sarah Worthington and Eva Micheler), Gower and Davies’ Principles of Modern Company Law (8th edn, 2008); Michel Menjucq, Droit international et européen des sociétés (2nd edn, 2008); Mads Andenas and Frank Wooldridge, European Comparative Company Law (2009); Reinier H Kraakman and others, The Anatomy of Corporate Law (2nd edn, 2009); Michel Germain, Traité de droit commercial, vol I/2: Les sociétés commerciales (19th edn, 2009); Andreas M Fleckner, ‘Europäisches Gesellschaftsrecht’ in Festschrift Klaus J Hopt, vol I (2010) 659; John Armour and Wolf-Georg Ringe, ‘European Company Law 1999-2010: Renaissance and Crisis’ (2011) 48 CMLR 125.


Codex Hammurabi (18th century BC), cited according to the edition of Mervyn EJ Richardson, Hammurabi’s Laws (2000); Sachsenspiegel (13th century AD), cited according to the edition of Karl August Eckhardt, Sachsenspiegel—Landrecht (2nd edn, 1955); Der Statt Franckenfurt erneuwerte Reformation (1578); Code de commerce (10–15 September 1807), Bulletin des lois No 164, 161 ff; Código de Comercio (30 May 1829), edicion oficial (1829); Código Commercial Portuguez (18 September 1833) (1833); Wetboek van Koophandel: Officiële uitgave (1838); Entwurf eines allgemeinen deutschen Handelsgesetz-Buchs (12 March 1861): Allgemeines Deutsches Handelsgesetzbuch (ADHGB); An Act for the Incorporation, Regulation, and Winding-up of Trading Companies and other Associations (7 August 1862), 25 & 26 Vict ch 89.

Retrieved from Company Law – Max-EuP 2012 on 28 May 2024.

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