Corporate Group Law
1. Coverage and background
Corporate group law covers issues of protection and organization, 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 takeover law as well as insolvency law (insolvency (corporate)). 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 organization is usually based on endeavours for improved organizational flexibility, rationalization, 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 other Member States nor the European Community have a codified, much less a harmonized 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 World War II 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 harmonization, but without success. The original constitution of the European Company (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 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. In the UK in particular, 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 is thus the 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 2497-2497-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 towards implementing a European corporate group law on the basis of a twofold harmonization was ineffective. Thus, the regulations of the European Company (Societas Europaea) 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 characterized 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 harmonization could arguably face a period of future decline. This could be due to an increasing competition between legal systems in light of the case law of the European Court of Justice (ECJ) ECJ Case C-221/97 – Centros Ltd v Erhvervs- og Selskabsstyrelsen  ECR I-1459; ECJ Case C-208/00 – Überseering BV v Nordic Construction Co Baumanagement GmbH (NCC)  ECR I-9919; ECJ Case C-167/01 – Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd  ECR I-10155) as well as to the systematic differences and convergences of company law. Harmonization 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 fundamental freedoms. These decisions deal with cross-border changes of the corporate form (ECJ Case C-411/03 – SEVIC Systems AG  ECR I-10805), with golden shares as controlling interests in a corporate group often being held by a government organization (ECJ Case C-483/99 – Commission v France ECR I-4781; ECJ Case C-503/99 – Commission v Belgium  ECR I-4809; ECJ Case C-463/00 – Commission v Spain  ECR I-4581; ECJ Case C-98/01 – Commission v United Kingdom  ECR I-4641; ECJ Case C-112/05 – Commission v Germany  ECR I-8995; ECJ Case C-171/08 – Commission v Portugal ; ECJ Case 543/08 – Commission v Portugal ) as well as with the taxation of corporate groups (first guiding decision in ECJ Case C-446/03, Marks & Spencer v David Halsey (Her Majesty’s Inspector of Taxes)  ECR I-10837). As has become clear in the subsequent decision of the ECJ in CARTESIO Oktató és Szolgáltató bt (ECJ Case C-210/06  ECR I-9641), 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. If the Commission’s plan for realizing the free relocation of companies’ places of management is to be implemented, the work on the Proposal for a 14th 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 characterized by harmonization in some core areas of law and for the rest by a competition between legal systems. The latter particularly will 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 characterized 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 organizational structures but can sometimes add up to a dominating influence thanks to further circumstances, such as a continuously low presence of other organizational 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 organizational legal 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 group’s 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 Commission’s 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 case liability results from the parent company’s conduct. A universal structural liability which ultimately would come close to the concept of the corporate group as an organizational 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 Union 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 Arts 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 of the Council Regulation on Insolvency Proceedings; insolvency, cross-border).
Further instruments for the protection of minority shareholders in the process of group consolidation such as the parent company’s 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 (takeover law).
4. Harmonization projects
a) Approaches towards a fully-fledged harmonization
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 harmonize corporate group law which continued through the 1980s. In the beginning the directive proposal for the European Company (Societas Europaea) of 1970 provided for the constitution of a corporate group along organizational lines. It failed just as did the 1989 directive proposal for the European Company (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 organizational constitution of the corporate group. In view of the failure of a fully-fledged harmonization, the following regulations are marked by their merely fragmentary, field- and sector-specific character. The law of the European Company (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 (SE-Council 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 cross-border 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 harmonized 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 harmonization 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 (internal market (insurance)). To this end, in the field of banking the Banking Law Directive of 20 March 2000 (Dir 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).
Paola Balzarini, Giuseppe Carcano and Guido Mucciarelli (eds), I Gruppi di Società, 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 EBOR 165; Josè Engrácia Antunes, Os Grupos de Sociedades (2nd edn, 2002); Klaus J Hopt, Christa Jessel-Holst and Katharina Pistor (eds), Unternehmensgruppen in mittel- und osteuropäischen Ländern (2003); José Miguel Embid Irujo, Introducciòn al Derecho de los Grupos de Sociedades (2003); Susanne Kalss and Friedrich Rüffler (eds), GmbH-Konzernrecht im österreichischen, 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, 4 November 2002 (Report II)’ in Guido Ferrarini, Klaus J Hopt, Jaap Winter and Eddy Wymeersch (eds), Reforming Company and Takeover Law in Europe (2004) Annex 3, 925; Klaus J Hopt, ‘Konzernrecht: Die europäische Perspektive’ (2007) 171 ZHR 199; Paola Fasciani, ‘Groups of Companies: The Italian Approach’ (2007) 4 ECFR 195; Maggie Pariente, ‘The Evolution of the Concept of “Corporate Group” in France’ (2007) 4 ECFR 317.