The European Single-Member Company: Opportunities and Risks

On 9 April 2014, the European Commission presented a Proposal for a Directive of the European Parliament and of the Council on single-member private limited liability companies (COM(2014) 212 final). The directive aims at facilitating the incorporation of subsidiaries by companies in all European Member States. Despite harsh criticism, especially from Germany, it is expected that the directive will be adopted, although individual provisions may still be / will still have to be amended before this happens.

History

After the establishment of the public European company (Societas Europaea, abbreviated “SE”) in 2004, the European Commission in 2008 suggested that a private European company (Societas Privata Europaea, abbreviated “SPE”) should be introduced. The introduction of such a SPE failed, not least due to Germany's objections with regard to issues concerning the matters of share capital maintenance and employee participation.

The Single-Member Company

The European Commission has now made a second attempt at introducing a simplified SPE in the form of a single-member company (Societas Unius Personae, abbreviated “SUP”).  This time around, the basis for same is not an EU-wide, directly applicable regulation, but rather a directive. Unlike in the case of a regulation, a directive does not need to be adopted unanimously, and can therefore be adopted even contrary to a Member State’s vote (read: Germany's vote). The disadvantage, however, is that a directive is only binding after having been implemented into national legislation. 

The key points of the SUP may be summarised as follows:

• Simple online incorporation process without necessity of involvement of notaries;  choice of registered office and administrative headquarters;

• availability of model / precedent articles of association for purpose of preparation of articles of association;

• replacement of capital maintenance rules by way of case-related balance sheet / insolvency test; 

• employee participation in accordance with national legislation; and

• right of instruction (Weisungsrecht) of sole shareholder.

While the possibility to incorporate a company online raises questions with regard to the prevention of money laundering, the simple incorporation procedures and the presence of model / precedent articles of association are definitely commendable. In the long term, it is to be expected in any event that the monopoly of notaries to notarise articles of association will waver. Thus Switzerland abolished this formal requirement several years ago already.

A point that is being heavily discussed in relation to SPUs is the abolition of what has in German law to date been the sacrosanct point of capital maintenance, i.e. the obligation to pay in a minimum capital amount and to maintain it for the duration of the existence of the company. These capital maintenance rules are proposed to be replaced by a balance sheet / insolvency test. Pursuant to the latter, profit distributions would be subject to a confirmation of whether the assets of the company exceed its liabilities after a distribution has been effected. In jurisdictions other than Germany (where this would not be possible in terms of the provisions of the German Commercial Code (Handelsgesetzbuch; HGB)), a (recklessly) high valuation of assets could – improperly - result in the apparent permissibility of the making of distributions. Margins in the annual accounts of companies could thus be exploited to the detriment of creditors.

Further questions that remain unanswered to date relate to the name of the proposed company form, as well as to obligations in connection with the filing of insolvency proceedings, and formal and audit requirements for purposes of registration of the company with the relevant commercial register.

Although the SUP is primarily aimed at small and medium enterprises (SMEs), corporations would in all likelihood benefit the most from this new business form. This is given that corporations could organize their national companies throughout Europe in the form of SUPs, thus streamlining same. In addition, the abolition of the capital maintenance rules would significantly simplify the transfer of funds within corporate groups. 

A SUP that no longer meets applicable requirements (e.g. if it should no longer have a single member only) would, pursuant to the proposal, have to either be converted / transformed into a national entity, or dissolved. Provisions dealing with deadlines, responsibilities and sanctions in such cases have not yet been prepared.

Comment and Outlook

Compared to the SPE, the SUP is clearly a much less desirable option. It remains to be seen whether the issues of the different and inconsistent national structuring possibilities and limited scope of application for single-member companies, as well as the questions of capital maintenance, integrity and naming of same in terms of the directive can be resolved prior to its adoption. 
The European Commission has a great political interest in the SUP. This form of company also offers companies a simple way of incorporating and managing their European subsidiaries. The SUP is therefore definitely a step in the right direction - although the ultimate objective should be and remain the establishment of an SPE, and not of a SUP as an (inadequate) alternative to the SPE.