U.S. Corporation going European? The one-tier societas Europaea (SE) in Germany.

• Author: Wilk, Cornelius
• Position: I. Introduction through III. The One-Tier Governance Model of a German SE Compared to the U.S. Corporation A. Administrative Organ [Verwaltungsrat] vs. Board of Directors 1. Rights, Duties, Competences f. Exposure to Liability i. The Business Judgment Rule, p. 1-35

1. INTRODUCTION

   Among the most cited differences between German and U.S. models of corporate governance is the structure of the corporation's board of directors. While German stock corporation law traditionally provides for a division of power between two boards--an executive board [Vorstand] and a supervisory board [Aufsichtsrat]--U.S. directors serve on only one, namely, the board of directors. Since 2004, however, Germany has moved closer to the one-tier model. While the German stock corporation [Aktiengesellschaft] (AG) will continue to operate under a two-tier structure, (1) the adoption of Council Regulation No. 2157/2001 of 8 October 20012 (SE-Reg) and the subsequently-enacted German SE Implementation Act [SE-Ausfuhrungsgesetz] (3) (SEAG) opened up a one-tier alternative for larger stock corporations. These changes made it possible for a stock corporation to be formally incorporated in Germany and at the same time be governed by one single administrative organ [Verwaltungsrat] that elects managing directors [geschaftsfuhrende Direktoren] (4)

   Through the implementation of the new one-tier model in the SEAG, the German legislature plugged into the long-standing tradition of one-tier structures in the United States, the United Kingdom, Switzerland, and France (5) without declaring, however, an explicit preference for one or more of the existing models. (6) As a result, the one-tier structure of the German SE is governed by a unique set of corporate governance rules that resemble many aspects of the traditional German two-tier system and a number of other concepts that are particularly well-known to American corporate lawyers. And while the harmonization intentions of the European legislator did not reach beyond the borders of the European Community, the actual harmonization effects, as this article demonstrates, reach across the Atlantic.

   Has the German system actually been brought in line with foreign governance models? The SEAG and its legislative history leave this question open by avoiding references to existing one-tier models. (7) This makes it unnecessarily difficult, on one hand, for foreign lawyers to navigate in the text of the German act(s), and, on the other, for the German legislature to profit from foreign experiences and developments in order to improve the youngest member of the one-tier corporate governance family.

   The intention of this article is not to determine whether the aforementioned development has led or will lead to actual positive or negative results for the various stakeholders, or whether corporationor SE-like structures should be extended to the AG or vice versa, but rather to foster understanding of the status quo and the extent to which, and the areas in which, the two systems could converge.

   Structural similarities, such as the respective roles of officers and managing directors, and differences, such as the directors' and administrative organ members' exposure to liability, will be examined from a nonpartisan perspective in order to build a solid legal basis for the important political choices to be made.

   This article compares the German one-tier SE with the governance models offered by the Model Business Corporation Act (2002) and Delaware corporate law in order to help both audiences understand this issue. The article argues that the implementation of the SEAG one-tier model represents a significant step towards the American system. The two governance structures provide similar central management authority to the board of directors and to its German counterpart, the administrative organ. Both bodies dominate the internal affairs of the entity, elect and remove the officers (in the German SE, the managing directors), negotiate structural transactions with third parties, and may delegate important functions to committees. The main differences relate to the relatively broad competences of the board of directors to act as an agent of the corporation and to influence the legal and financial constitution of the company. Also, the American board of directors is less exposed to personal liability and takes on less responsibility with regard to the oversight of the ongoing business activities. On the other hand, regulations regarding director independence, the installation of mandatory committees, and committee composition are more advanced in the United States than in Germany.

   While both the owners of a U.S. corporation and of a German SE enjoy broad leeway as to the number and personal qualifications of their directors as well as to the election mechanisms leading to their appointment, only a German SE may be subject to a codetermination regime reserving a part of the administrative organ seats for employee representatives. However, the SE codetermination regime is considerably more flexible when compared to the traditional rules of German codetermination: management and employees have the option to abrogate any statutory regulation by agreeing on an individual, customized set of codetermination rules or even by completely abolishing codetermination in their company.

   The rights and duties of American officers and the role of the managing directors, who take on the executive function in an SE, differ only marginally from each other. Both are in charge of the day-to-day management and regularly act as agents of the company. They monitor the activities of their subordinates and report to the management organ, which is responsible for their election and removal. Compared to the board of directors, officers of a U.S. corporation are generally exposed to a higher risk of personal liability and thereby move closer to the level of risk faced by SE managing directors. Furthermore, corporate boards and SE administrative organs are similarly free to decide which and how many individuals they would like to appoint as executives because codetermination rules do not apply to managing directors.

   Part II of this article introduces the general features of the German SE as a corporate entity and the SE's position within the German corporate and business landscape while Part III discusses the aforementioned differences and similarities in detail. Part IV concludes with remarks as to the potential for future convergence of the two models.

2. GENERAL FEATURES AND PRESENCE OF THE SE IN GERMANY

   1. The Legal Basis

      The SE is the first--and so far the only--European corporate form. (8) Its legal personality is not derived from a Member State's corporation law but directly from an EC Regulation. At the same time, the SE-Reg is an incomplete act. It frequently refers to the laws applicable to public limited liability companies in the Member State in which the SE has its registered office, (9) and mandates SE-specific legislative activity of the respective Member State. (10) Moreover, it outsources the entire field of codetermination to an EC Directive. (11) The latter is not directly applicable but rather directs the individual Member States to shape the codetermination regime of "their" SEs via national legislative acts such as the SE Involvement Act [SE-Beteiligungsgesetz] (SEBG) in Germany. (12)

      The legal basis of an SE, therefore, is split into a European part (SE-Reg) and a national part (SE-specific and general corporate laws), both of which are supplemented by the individual SE's statute. The primary sources of law are the directly applicable provisions of the SE-Reg, including the provisions that refer to the individual SE's statute. (13) When the SE-Reg is silent, even when explicitly so, these areas are governed primarily by SE-specific national implementation laws, (14) in Germany particularly the SEAG. (15) Other gaps that are not covered by the SE-Reg, regulated by SE-specific national law, or delegated by the SE-Reg to the SE's individual statute, are filled with "the provisions of Member States' laws which would apply to a public limited liability company formed in accordance with the law of the Member State in which the SE has its registered office", (16) i.e., the general national corporate law--in Germany the Stock Corporation Act [Aktiengesetz] (17) (AktG). This, once again, includes the (here, national) provisions that refer to the individual corporation's statute. (18) The unofficial term "German SE" indicates that an SE's registered office is located in Germany, and that German national laws are therefore applicable in addition to the SE-Reg.

   2. Basic Characteristics

      Because of its hybrid legal basis, the German SE's general features are partially in line with those of the AG, while other aspects differ significantly. (19) The latter include--besides the issue of codetermination and the availability of a one-tier governance model--the formation process, the mobility of the entity, and the capitalization requirements. (20)

      An SE cannot be founded by natural persons. Rather, only one or more existing corporate entities, which may themselves be SEs or public limited liability corporations formed under the laws of a Member State and registered and headquartered within the Community, can set up an SE by way of only five different corporate transactions, namely: (21) a merger, (22) the formation of a holding SE, (23) the formation of a subsidiary SE, (22 23 24) a transformation into an SE, (25) or a so-called "secondary formation," namely, the setting up of a subsidiary SE by an existing SE. (26)

      Except for the secondary formation, an additional transnational element is required. In a merger, at least two of the merging entities must be governed by the laws of different Member States. (27) In the formation of a holding or a subsidiary SE, at least two of the participating entities must either be governed by the laws of different Member States or have had for at least two years a subsidiary or branch office in another Member State. (28) Finally, for a transformation into an SE, the transforming entity must have had a subsidiary governed by the laws of another Member State for...