International business and law in cross-border transactions: a European perspective.

• Author: Hicks, Stephen C.

SATURDAY, JULY 17, 2010

EOTVOS LORAND UNIVERSITY, BUDAPEST, HUNGARY

In July 2010, the International LL.M program in Global Law and Business, held annually at Eotvos Lorand Law Faculty (ELTE), Budapest, Hungary, hosted an innovative academic program on cross-border corporate transactions. The lecture panel featured Professor Menyhard of ELTE, who spoke about "Policy Goals in Harmonizing European Union and Hungarian Company Law" and two other prominent international business lawyers; Richard Thomas of Salans, London, discussed "Mergers and Acquisitions and Emerging Global Norms," and David Dederick, from the local Hungarian office of Weil, Gotshal and Manges, spoke about "Private Equity in Central European Economies."

The event was generously sponsored by LexisNexis[R], Suffolk University Law School's partner in an Intellectual Property Law lecture series every semester held at the Law School in Boston. LexisNexis[R] is a prominent global provider of information and service solutions to the legal and academic markets, and a member of Reed Elsevier, a world leader in online and print publishing in science, technology, medicine and business.

Over 50 international lawyers attended the panel; some of them alumni of the LL.M degree program, and also in attendance were the Ambassador to Hungary for the State of Ecuador and the Public Affairs Counselor from the Embassy of the United States to Hungary, among a number of other dignitaries. A luncheon speaker Peter Rona, a frequent and outspoken Hungarian political commentator, gave a stimulating critique of governmental control of money in the European Union. After the program, the speakers, faculty teaching in the summer degree program, and the participants enjoyed a wine-tasting at a local restaurant, featuring some of the best Hungarian wines, also courtesy of LexisNexis[R].

The event was organized by the Associate Dean for Graduate Law Programs, Professor Stephen Hicks, and the Director of International and Graduate Programs, Bridgett Halay, with the assistance of Professor Joseph Franco, as part of the Office of Graduate and International Programs' global outreach to attorneys, firms, and corporations so as to create opportunities for students through internships and contacts for networking career opportunities generally.

PART I: POLICY GOALS AND BUSINESS RAMIFICATIONS IN HARMONIZING HUNGARIAN AND E.U. BUSINESS LAW

Attila Menyhard, Ph.D *

1. INTRODUCTION

   Harmonizing Hungarian and European Union business law presents certain complexities derived from both competing policy goals and practical business ramifications. In order to provide an overview of the harmonization process, I will briefly discuss the content and development of Hungarian company law regulation.

   In 1988, the Hungarian legislature was tasked with drafting the first company act. (1) The Act incorporated pre-World War II Hungarian business law, including the Hungarian Commercial Code (HCC), which is based on the German Commercial Code known as the Allgemeines deutsches Handelsgestezbuch of 1861. (2) As such, present Hungarian law follows the structural pattern of German companies and regulations.

2. WHY COMPANY LAW SHOULD BE REGULATED AT THE EUROPEAN LEVEL

   The goal of the Regulation Generale, in trying to reduce agency situations in companies, is to align the goal of regulating company law under European legislation to goals of regulating company law in various countries. From a policy standpoint, two justifications support the regulation of company law on a European level:

   1. An explicit provision under the Treaty establishing the European Communities facilitates the freedom of establishment, (3) and 2. The promotion of legal certainty in intercommunity legal relations. (4)

   However, preventing the Netherlands from becoming the European Delaware is the real aim of European legislation. The flexible regulation of company law in the Netherlands provides comfort for investors. (5) This presented a great danger that all investors would establish a company in the Netherlands and then establish branches and agencies in other parts of Europe.

3. COMPANY REGULATION IN THE EUROPEAN CONTEXT

   The structure of company regulation consists of two levels in the European Union. On the first level is European law, which contains eleven directives that harmonize national laws concerning company law, and regulations that provide core rules for supplemental types of companies. The more important second level consists of directives implemented under national laws. On this level, however, national legislatures have discretion to deal with open questions that remain unaddressed under European legislation.

   1. First Level: The Directives Under European Company Law

      The directives under European company law provide rules that regulate four specific areas:

      1. The formation of companies and structural changes in organization,

      2. The capital stock of companies,

      3. The protection of third parties, primarily creditors and employees, and

      4. The capital markets including takeovers. (6)

      The directives and regulations limit their application to particular types of companies.

      Although the directives cover private limited liability companies (LLCs) and partnerships limited by shares (LLPs), the public LLC is the centerpiece of European legislation. (7) It is quite problematic that the directives do not consistently apply to various companies and partnerships. The inconsistencies between regulating various companies and partnerships under European legislation result in a break of the internal logic of regulating different types of companies on the European and national levels.

      For example, assume Hungarian company law may govern public and private LLCs while European company law may only govern public LLCs. If the Hungarian legislature decides to implement European legislation applicable only to public LLCs, an inconsistency would arise because available Hungarian law would apply to both public and private LLCs. Similar scenarios lead to difficulties in understanding the different legal treatment of public and private LLCs, and they reveal a tension between maintaining such internal inconsistencies and extending harmonized rules to other companies.

   2. Second Level: Problematic Implementation of European Directives Under National Law

      Hungarian company law follows the three basic values of European company law. The first basic value is to ensure that investors and other stakeholders of a company find themselves in an informed situation, the second is to protect creditors, and the third is to protect minority shareholders. (8) Harmonization is complete with regard to the protection of minority shareholders under Hungarian company law and European company law. Harmonization has limits, however, where the law prescribes conformity with obligations and requirements but does not address the instances of failure to observe the rules.

      The existence of such rules without a remedy is a great limitation for Hungarian lawyers. Article 17 of the second directive is a practical illustration of this limitation. (9) Article 17 requires management to hold a general meeting of shareholders when the company suffered a serious loss. Article 17 is silent, however, on the obligations of management regarding the process of calling the meeting as well as the consequences of not calling a meeting. (10) Instead, Article 17 defers to national law for such determinations. (11)

4. CONCLUSION

   In Wienard Meilicke v. ADV/ORGA FA Meyer AG, (12) the German Landgericht of Hannover submitted to the European Court of Justice (ECJ) for preliminary ruling no less than thirty-five questions concerning four articles of the second directive on the formation of public limited companies and the maintenance and alteration of capital. The ECJ decided that Landgericht Hannover posed hypothetical questions and cited the limits of the Treaty in refusing to answer any of the questions. (13) The availability of the questions, however, is more important than the ECJ declining to answer them. The fact that a German court raised thirty-five questions relevant to a single directive shows that great uncertainty remains in understanding European legislation in the context of national law.

   Perhaps the confusion begins where European company law falls short of dealing with many issues that manifest under national law. As one example, legal protection is extended to a good faith injured third party under Article 9 of the first directive. European legislation, however, neither provides a broad power of representation nor addresses the abuse of the power of representation. Article 9 lacks a substantive remedy for dealing with an injured party in a conflict of interest situation in which he should have been aware. In Cooperatieve Rabobank "Vecht en Plassengebied" BA v. Minderhoud, (14) the ECJ acknowledged the open question of whether such parties are protected or should be protected under European law. Yet, rather than resolve the issue, the ECJ stated that a lacuna is present in this area of law.

   An interesting development called "indirect convergence" fills in where the directives are silent. (15) This is a trend by which countries that implement the European directives would turn to law from international legal systems for solutions in gray areas. For example, Hungarian investors and lawyers are unclear about how a Hungarian court would deal with a situation where a member of the company makes a cash contribution to the company and subsequently engages in a sales transaction with the company. This is economically similar to a contribution in kind, an issue unaddressed in Hungarian court practice but covered by the German doctrine of hidden contributions in kind. Yet, because the Hungarian commercial code is modeled after the German one, the only solution appears to be to seek the German doctrine for guidance. (16) This is problematic because issues presented in European company law should...