European Community Company and Securities Law: A Canadian Perspective

European Community Company and Securities Law:

A Canadian Perspective

Brian R. Cheffins*

The author suggests that a systematic and con-
textual understanding of European Commu-
nity (“E.C.”) company and securities law is
required if Canadian businesses and investors
are to profit from the rapidly changing social,
economic and political structures of Europe.
Law reformers, as well, can take from the E.C.
many relevant and potentially revealing com-
parisons if the context of the development of
E.C. company and securities law is properly
understood. Accordingly, the author presents a
systematic survey of E.C. law beginning with
the E.C.’s institutional structure. The state of
the E.C.’s company and securities law is the
explored, followed by an analysis of its central
themes and issues of special interest to the
Canadian business, investment and law reform
communities, such as issues of employer par-
ticipation and corporate groups.

L’auteur sugg~re qu’une compr6hension systd-
matique et contextuelle du droit de la Commu-
naut6 6conomique europ~ene (“C.E.E.”) en
mati~re de compagnies et valeurs mobili~res
est n6cessaire si les entreprises et investisseurs
canadiens doivent profiter des structures
sociales, 6conomiques et politiques, en 6volu-
tion rapide, de ‘Europe. Les sp~cialistes de Ia
r6forme du droit peuvent aussi trouvcr dans le
cadre de la C.E.E. plusieurs comparaisons per-
tinentes et potentiellement r6v6latrices, si le
contexte du droit de la C.E.E. en matibre de
compagnies et de valeurs mobilires est cor-
rectement compris. En consequence, l’auteur
pr6sente un aperqu syst6matique du droit de la
C.E.E. h partir de Ta structure institutionelle de
]a C.E.E. Puis, l’6tat du droit de la C.E.E. en
mati&e de compagnies et de valeurs mobi-
lires est explor6 ; ce a quoi fait suite une ana-
lyse de ses themes centraux et des questions
d’int6rt particulier aux mondes canadiens de
l’entreprise, de T’investissement et de Ia
r6forme du droit, telles la participation des
employ~s et les groupes corporatifs.

*Of the Faculty of Law, University of British Columbia.

McGill Law Journal 1991
Revue de droit de McGill

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E.C. COMPANY LAW

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Synopsis

Introduction

I.

Institutional Overview

H. Overview of European Community Company and Securities Law

A. Company Law Measures
B. Securities Law
C. Related Measures

M. Central Themes of European Community Company and Securities

Law
A. How Much Co-Ordination Should There Be Between Member

State Laws?

B. Board Structure
C. Shareholders
D. Capital Structure, Disclosure and Accounts
E. Small Business
F. Corporate Groups and Multinational Enterprises
G. Securities Regulation

IV. Canadians and European Community Company and Securities Law

A. The Business Community
B.
C. Law Reformers

Investors

Conclusion

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Introduction

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[Vol. 36

Developments in the European Community (E.C.) are rapidly changing the
social, economic and political structure of Europe.’ Many argue that because of
this Canadians need to be better informed about the E.C.’ The media have
responded to a certain extent Unfortunately, however, those who want to
investigate E.C. legal issues from a Canadian perspective will discover signif-
icant gaps in the literature.4

E.C. company and securities law is one area which has not been examined
systematically from a Canadian perspective. This gap is unfortunate since Cana-
dian businesses, investors and law reformers all have good reasons to examine
E.C. company and securities law. In terms of Canadian business, government
officials and the financial press have heralded the commercial opportunities a
single E.C. market will afford. The Canadian business community has
responded cautiously thus far, but Canadian companies now appear ready to
increase their involvement in Europe.5 If they attempt to penetrate the European
market by establishing a branch or subsidiary in the E.C., they will have to con-
front and understand the Community’s company law measures.

‘See, e.g., R. Owen & M. Dynes, The 7imes Guide to 1992: Britain in a Europe Without Fron-
tiers-A Comprehensive Handbook (London: Times Books, 1989), especially at 9-21 & 198-250,
and United States International Trade Commission, The Effects of Greater Economic Integration
Within the European Community on the United States: First Follow-Up Report, USITC Publication
2268 (Washington: United States International Trade Commission, 1990) at 1-14.
2G. Pitts, Storming the Fortress: How Canadian Business Can Conquer Europe in 1992
(Toronto: Harper, Collins, 1990) at 2-3, 139, 151-54 & 160-67; “Canadian Companies Slow Off
the Mark to Adjust to European Integration: Gow” The [Toronto] Globe & Mail (8 November
1988) B12 [hereinafter “Canadian Companies”]; “Business Urged to Set Up Base in Europe Before
1992” The Montreal Gazette (5 December 1989) D3 [hereinafter “Business”]; “Canada’s Links to
E.C. Growing Despite Friction” The Financial Post (2 July 1990) 9; R. Ray, “Are Businesses
Ready for Europe 1992?” The National (October 1990) 14; “Canada-Europe Trade Pitched” The
Vancouver Province (16 January 1991) 28 and “Canadian Firms Shun Europe” The [Toronto]
Globe & Mail (11 February 1991) B5 [hereinafter “Canadian Finns”].
3The best example is a book by an associate editor of The Financial Post, G. Pitts, supra, note
2. See also the articles cited in note 2, supra, and “Post-’92 Europe Lures Investors” The Financial
Post (14 November 1988) 35 [hereinafter “Post-’92”]; and “RRSP Fund Looks to Europe for
Growth” The Financial Post (11 May 1990) 16 [hereinafter “RRSP”]. Furthermore, on March 12th
and 13th, 1990 the Canadian Broadcasting Corporation program, The Journal, broadcast a segment
entitled “Europe Unbound.”

4R.D. Wilson, “The European Community –
the Process and Available Remedies” (1990) 4
5See Pitts, supra, note 2 at 156-61 & 168-90; “Canadian Companies,” supra, note 2; “Business,”
supra, note 2; “Canadian Finns,” supra, note 2; G.J. Wasny, ‘”1992’: The Impact on Canadian
Business” (1989) 6 Business & Law 38; “Getting a Foot in 1992’s Door” The Financial Tmes (2
January 1989) 9; “Project 1992: ‘Get Foot in Door Before it Shuts”‘ The Financial Post (25 Sep-
tember 1989) 38; and “Opportunity Knocks in Europe ’92” The Financial Post (2 July 1990) 9.

C.U.B.L.R. 27 at 28.

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Canadian investors are also becoming increasingly aware of the E.C.’s
efforts to create a single market within the Community. Consequently, they are
becoming more interested in buying shares in European companies.6 Since there
is a reasonable prospect that E.C. company and securities law will have an
impact on the share values of E.C. companies, Canadian investors would be
well advised to monitor developments in this area.

Canadian law reformers also have good reason to examine E.C. company
and securities law. There are important similarities between the E.C. and Can-
ada which make comparisons relevant and potentially revealing. This is illus-
trated by the fact that Canadian academics have examined a number of E.C.
company law topics and in so doing have made useful and pertinent observa-
tions about Canadian law. 7

The work which has been done by Canadians on E.C. company and secu-
rities law no doubt is useful to Canadian businesses, investors and law reform-
ers. Still, these groups will find it difficult to gain a complete appreciation of.
the topic on the basis of what Canadians have written. This is because no Cana-
dian commentator has provided an overview of E.C. company and securities
law or has placed the topic in its institutional, economic and social contexts.

This article attempts to provide a systematic survey of E.C. company and
securities law for a Canadian audience. The article is divided into four parts.
The first discusses the E.C.’s institutional structure. The second summarises the
present status of the E.C.’s company and securities law measures. The third
explores the central themes of E.C. company and securities law. The fourth ana-
lyzes issues of particular relevance to Canadian businesses, investors and law
reformers. The article concludes with some observations about how Canadians
should examine European Community legal issues.

I.

Institutional Overview

The E.C.’s institutional and jurisdictional structure has recently been exam-
ined elsewhere from a Canadian perspective! Consequently, no attempt will be
made here to outline this topic in detail. Nevertheless, some basic concepts need

6Interest in the E.C. is reflected by the Europe 1992 Fund, which the Chevron Fund Management
Ltd. formed in 1989 to invest in companies expected to benefit from the single market project. See
Pitts, supra, note 2 at 72; “Post-’92,” supra, note 3, and “RRSP,” supra, note 3.
7C.S. Axworthy, “Corporation Law As If Some People Mattered” (1986) 36 U.T.LJ. 392 at
415-27; N.C. Sargent, “Corporate Groups and the Corporate Veil in Canada: A Penetrating Look
at Parent-Subsidiary Relations in the Modem Corporate Enterprise” (1988) 17 Man. L.J. 156 at
181-82; T. Hadden, R.E. Forbes & R.L. Simmonds, Canadian Business Organizations Law
(Toronto: Butterworths, 1984) at 296-97 & 645-50 and J.P. Boyer, “The Proposal for a ‘European
Company’

(1975) 33 U.T. Fac. L. Rev. 217.

8See supra, note 4.

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to be kept in mind to understand the present status of E.C. company and secu-
rities measures.

The European Community is made up of twelve member states.9 The E.C.
operates as a supranational body, which makes it a unique organisation in inter-
national law.” For example, unlike conventional international organisations, the
E.C. can create rights and duties for individuals without the intervention of
national parliaments. Moreover, E.C. law prevails over the law of its members
in the event of a conffict.

The E.C.’s cornerstone is the Treaty of Rome,” which was signed in 1957.
The Treaty sets out the Community’s essential objectives, which include estab-
lishing a common market and integrating the member states’ economic poli-
cies.’ 2 It also creates an institutional structure to facilitate the achievement of
these objectives.

Three of the institutions created by the Treaty play a key role in the devel-
opment of Community legislation. 3 These are the European Commission,
which is the central bureaucratic component of the Community; the European
Parliament, which is primarily a consultative rather than legislative body; and
the Council of Ministers, which has ultimate legislative authority in the E.C.

The European Commission commences the legislative process by making
a proposal. This is consistent with its formal role under the Treaty of Rome,
which is to initiate the legislative process and to ensure that Treaty provisions
are observed. The Commission also often participates in other stages of the
decision-making process, such as legislative debate and the implementation of
E.C. measures by member states. n

9They are Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Neth-

erlands, Portugal, Spain and the United Kingdom.

‘0 0n the E.C. and international law, see R. Plender, Plender and Usher’s Cases and Materials
on the Law of the European Communities, 2d ed. (London: Butterworths, 1989) at 1-4, and J.
Bridge, “American Analogues in the Law of the European Community” (1982) 11 Anglo-Am. L.
Rev. 130.

“Treaty Establishing the European Economic Community done at Rome, Mar. 25, 1957, 298
U.N.T.S. 15, art. 2, set out in Encyclopedia of European Community Law, vol. B (London: Sweet
& Maxwell, 1974ff.) [hereinafter Encyclopedia], para. B10-001 [hereinafter Treaty of Rome].

12The Treaty says these objectives need to be fulfilled to foster the harmonious development of
economic activities among the E.C.’s member states, to improve economic conditions and to pro-
mote closer relations between E.C. members –

130n the E.C.’s institutional structure, see e.g., Pitts, supra, note 2 at 43-59; Wilson, supra, note
4 at 29-32; A. Winter et. aL, Europe Without Frontiers: A Lawyer’s Guide (Washington: Bureau
of National Affairs Inc., 1989) at 25-39; and M.E. Elling, “The Emerging European Community:
A Framework for Institutional and Legal Analysis” (1990) 13 Hastings Int’l & Comp. L. Rev. 511
at 518-22.

14Owen & Dynes, supra, note 1 at 36. See generally Treaty of Rome, arts 155-63, as amended
by the Treaty Establishing a Single Council and a Single Commission of the European Commit-

supra, art. 2.

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E.C. COMPANY LAW

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The Commission submits its legislative proposals to the Council, which is
composed of member state representatives who are usually ministers in their
respective national governments.’ 5 A proposal will then follow one of two
routes, depending on its legislative basis. 6 Under either route, the Council must
consult with the European Parliament, which consists of representatives directly
elected in the member states.’ 7 The extent of the Parliament’s participation and
the level of support needed for Council approval differs depending on which
route the legislation is following. Ultimately, however, both procedures con-
clude with Council consideration of the measure. If the Council adopts a pro-
posal, it attains legislative force.

The Commission, the Parliament and the Council do not have an open-
ended jurisdiction to enact Community law. The Treaty of Rome allocates spe-
cific legislative and administrative powers to the E.C. measures which exceed
the Community’s jurisdiction may be struck down by the European Court of
Justice. The Court, which has a number of other important adjudicatory func-
tions, has itself played an important role in the development of Community
law.’ E.C. legislative and administrative actions can take a variety of forms.
Two of the most important are directives and regulations. Directives are
addressed to the member states and require their governments to enact legisla-
tion consistent with the relevant E.C. policy. Generally speaking, directives
themselves do not create rights that can be directly enforced by individuals in

nities, done at Brussels, April 8, 1965, set out in Encyclopedia, supra, note 11, para. B8-034 [here-
inafter Merger Treaty] arts 10-19.

15 Treaty of Rome, arts 145-54, as am. arts 4, 5 & 7 of the Merger Treaty and by arts 7, 10 &
18 of the Single European Act, February 17, 1986, O.J. 1987, L169/1 [hereinafter S.E.A.]. Partic-
ipants in Council meetings change according to the subject under discussion, so in practice several
Council meetings can be held at once.

16One of the paths was used for all legislative measures enacted prior to 1987. Under this pro-
cedure, the Parliament’s role is not formally structured and the Council must act unanimously. The
Community adopted the new path in 1987 in order to help achieve the single market goal articu-
lated in Completing the Internal Market: White Paper from the Commission to the European Coun-
cil COM(85) 310 [hereinafter White Paper]. Under this new path, the Parliament has a more formal
role and the Council only has to act by qualified majority. See S.E.A., arts 7 & 18, amending the
Treaty of Rome, arts 11 & 149. On the two paths, see, e.g., Winter, supra, note 13 at 41-46; S.A.
Riesenfeld, “The Single European Act” (1990) 13 Hastings Int’l & Comp. L. Rev. 371 at 376-78,
and R. Gleed et. al., eds, Deloitte’s 1992 Guide (London: Butterworths, 1989) at 12-19.

170n the European Parliament see Treaty of Rome, arts 137-44 & 149, as am. Merger Treaty, art.

27 and the S.E.A., art. 7. On direct elections, see Encyclopedia, paras. B1O-311 – B10-314.

180n the European Court’s power to strike down legislation because it is not supported by the
Treaty of Rome, see art. 173 of the Treaty of Rome, discussed by paras. B10-385-86 of Encyclo-
pedia. On the Court’s role in other matters, see arts 164-88 of the Treaty of Rome, and Winter,
supra, note 13 at 35-39. The Court has played little part in the development of E.C. company law:
see R.M. Buxbaum & K.J. Hopt, Legal Harmonization and the Business Enterprise: Corporate
and Capital Market Law, Harmonization Policy in Europe and the U.S.A. (Berlin: de Gruyter &
Co., 1988) at 268-69.

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national courts. The European Court, however, has created some important
exceptions. 9

The Community generally gives member states a substantial amount of
time to implement directives. Once the grace period expires, member states
which have not complied with a directive can be sanctioned by the European
Court of Justice.20

Regulations, unlike directives, do not need to be implemented by the mem-
ber states. Instead, they have immediate legal effect.2′ Consequently, regulations
may pre-empt national legislative competence in the areas they cover, national
courts must take judicial notice of regulations and individuals can directly
enforce certain provisions in regulations.’

II. Overview of European Community Company and Securities Law

The E.C.’s company and securities law measures are divided into three
basic groups. The first group is made up of measures which deal directly with
company law. The second is composed of securities law measures. The third is
made up of E.C. legislative provisions which are not company and securities
law measures per se, but which have an important impact on these areas.

A. Company Law Measures

There are thirteen E.C. company law directives. Seven of the company law
directives have been approved by Council and presently require the member
states to enact implementing legislation. These are the First, Second, Third,
Fourth, Sixth, Seventh and Eighth Directives.’ The First Directive instructs the
member states to require all companies to file prescribed information with a
public registry. The Second Directive governs the formation of public compa-
nies and regulates share capital. The Third Directive deals with mergers
between companies within the same member state. The Sixth Directive seeks to

EEC, 2d ed. (London: Sweet & Maxwell, 1987) at 42-47.

19See Wilson, supra, note 4 at 35, and D. Wyatt & A. Dashwood, The Substantive Law of the
2Treaty of Rome, art. 169.
21See European Commission, “Internal Market and Industrial Cooperation – Statute for the
European Company” (1988) COM(88) 320 at 11 & 24-25, and D. Carreau & W.L. Lee, “Towards
A European Company Law” (1989) 9 Nw. J. of Int. L. & Bus. 501 at 503-505. On when the E.C.
will use regulations instead of directives, see Wyatt & Dashwood, supra, note 19 at 38-47, and
Buxbaum & Hopt, supra, note 18 at 232-33.

22Wyatt & Dashwood, ibid. at 38-41.
23First Directive, Directive 68/151, O.J. 1968, L65/8; Second Directive, Directive 77191, O.J.
1977, L26/1; Third Directive, Directive 78/855, O.J. 1978, L295/36; Fourth Directive, Directive
78/660, O.J. 1978, L222/11; Sixth Directive, Directive 82/891, O.J. 1982, L378/47; Seventh Direc-
tive, Directive 83/349, O.J. 1983, L193/1; and Eighth Directive, Directive 84/253, O.J. 1984,
L126/20.

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1289

harmonise member state legislation governing transactions in which public
companies are divided up by the sale of their assets. The Fourth, Seventh and
Eighth Directives are interrelated. They regulate accounting standards for indi-
vidual companies and company groups and establish qualification and indepen-
dence standards for auditors.

Two other company law directives have been approved by the Council but
do not yet require member state implementation because the grace period for
doing so has not expired. One is the Eleventh Company Law Directive, which
regulates disclosure by company branches when the company is registered in a
non-E.C. country or a different member state than the branch.’ 4 The second is
the Twelfth Directive, which requires member states to allow the formation of
one-person companies? 5 At present, member states must implement the Twelfth
Directive by January 1992 and the Eleventh Directive by January 1993.26

Three draft company law directives have been submitted by the Commis-
sion but have not yet been formally considered by the Council. These are the
Fifth Directive, which deals with the structure and management of public com-
panies, the Tenth Directive, which applies to mergers between public companies
located in different member states and the Thirteenth Directive, which regulates
the conduct of takeover bids.’

One company law directive has never been formally submitted by the
Commission to other E.C. institutions. This is the Ninth Directive, which deals
with corporate groups. The Commission circulated a draft proposal of this
Directive in the early 1980s, but did not proceed further because of the hostile
reception the draft received.28 Still, the Ninth Directive remains on the Commis-
sion’s agenda.

24Directive 89/666, O.J. 1989, L395/36 [hereinafter Eleventh Directive].
15Directive 89/667, O.J. 1989, L395/40 [hereinafter Twelfth Directive].
261bid., art. 8, and supra, note 24, art. 16.
27Fifth Company Law Directive, O.J. 1983, C240/2 [hereinafter Fifth Directive]; Tenth Company
Law Directive, O.J. 1985, C23/11 [hereinafter Tenth Directive]; and Thirteenth Company Law
Directive, O.J. 1989, C64/8 [hereinafter Thirteenth Directive]. The Commission has made minor
changes to its Fifth Directive proposal (O.J. 1991, C7/4) and made some substantial amendments
to its Thirteenth Directive proposal (O.J. 1990, C240/7). In 1988 the Commission issued a new,
comprehensive draft of the Fifth Directive. It has not been officially submitted to the Council and
consequently has not been published in the Official Journal. It is set out in Department of Trade
and Industry, Amended Proposal for a Fifth Directive on the Harmonisation of Company Law in
the European Community: A Consultative Document (London: Department of Trade and Industry,
1990) [hereinafter Amended Proposal]. Unless otherwise noted, citations of the Fifth Directive in
this article are from the 1988 version.

2 Agaln, because the Commission never submitted the Ninth Directive to the Council, it has not
been published in the Official Journal. On the contents of the draft, see infra, note 115 and accom-
panying text.

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The Commission has also formally proposed to the Council that the Com-
munity enact a European Company Statute. The Statute would provide compa-
nies with internal legal rules that are independent of member state law. The
Commission first proposed a European Company Statute in 1970 and submitted
its latest draft to the Council in 1989.29 The Commission has suggested that the
Statute take the form of a regulation rather than a directive.

B. Securities Law

Four securities law directives are presently binding on the member states.
Three deal with companies listed on the stock exchanges in the various member
states. These are the Admissions Directive, the Listing Particulars Directive and
the Interim Reports Directive.” Together these directives regulate disclosure by
companies to stock exchanges and to the public. They require disclosure to take
place prior to listing and at prescribed instances thereafter. The fourth measure,
the Public Offer Prospectus Directive, extends many of the disclosure require-
ments to all companies making a public offering of securities.3′

One securities law directive has been approved by the Council but does not
yet require implementation. This is the Insider Trading Directive, which

2 90J. 1989, C263/41 [hereinafter European Company Statute], discussed by the British Depart-
ment of Trade and Industry, Proposal for a European Company Statute: A Consultative Document
(London: Department of Trade and Industry, 1989) at 2-9, and J. Dine, “The European Company
Statute” (1990) 11 Co. Lawyer 208. Employee representation issues are dealt with in a separate,
complimentary proposal (Proposal for a Council Directive Complementing the Statute for a Euro-
pean Company with regard to the Involvement of Employees in the European Company, O.J. 1989,
C263/89 [hereinafter Involvement of Employees Proposal]). In April 1991 the Commission submit-
ted a revised version of this proposal (O.J. 1991, C138/8). All of the foregoing are based on a 1988
Memorandum the Commission prepared (European Commission, supra, note 21). On the history
of the statute, see E. Stein, Harmonization of European Company Laws: National Reforn and
Transnational Coordination (Indianapolis: Bobbs-Merrill Inc., 1971) at 424-47; P. Sanders, “Struc-
ture and Progress of the European Company” in C.M. Schmitthoff, ed., The Harionisation of
European Company Law (London: The U.K. National Committee of Comparative Law, 1973) 83
at 89-99; and W. Kolvenbach, “EEC Company Law Harmonization and Worker Participation”
(1990) 11 U. Pa. J. of Int. Bus. L. 709 at 764-82.
3 0Council Directive Coordinating the Conditions for the Admission of Securities to Official Stock
Exchange Listing, Directive 79/279, O.J. 1979, L66/21 [hereinafter Admissions Directive]; Council
Directive Coordinating the Requirements for the Draving Up, Scrutiny and Distribution of the
Listing Particulars to be Published for the Admissions of Securities to Official Stock Exchange
Listing, Directive 80/390, O.J. 1980, LI00/1, as am. Council Directive 90/211, O.J. 1990 L112/24
[hereinafter Listing Particulars Directive]; and Council Directive on Infonnation to be Published
on a Regular Basis by Companies the Shares of Which Have Been Admitted to Official Stock
Exchange Listing, Directive 82/121, O.J. 1982, LA8/26 [hereinafter Interim Reports Directive]. The
Mutual Recognition Directive, Directive 87/345, O.J. 1987, L185/81 [hereinafter Mutual Recogni-
tion Directive], made significant amendments to all of these directives (see infra, note 143 and
accompanying text).

3 1Directive 89/298, O.J. 1989, L124/8 [hereinafter Public Offer Prospectus Directive].

1991]

E.C. COMPANY LAW

instructs member states to pass legislation prohibiting insider dealing. The
member states must implement the Directive by June 1, 1992.32

C. Related Measures

There are some E.C. measures which do not directly deal with company
and securities law but which merit special attention because of the impact they
may have on the operations of Community companies. One was enacted by the
Community in 1985. This is the European Economic Interest Grouping
(E.E.I.G.) Regulation, which allows member state businesses to jointly pursue
certain economic activities.33

Another non-company law measure which merits comment is the Vredeling
Directive,’ which has only been formally proposed by the Commission. This
Directive takes its name from Hank Vredeling, who was the Social Affairs Com-
missioner at the Commission when that body first proposed the measure in
1980. Its essential objective is to ensure that parent companies keep employees
in subsidiary companies informed about group affairs.

Though the Vredeling Directive formally remains a valid Commission pro-
posal to the Council, due to political controversy it has not been debated seri-
ously in the Community since the mid-1980s. The Commission, however, has
not given up on the basic concept. Indeed, the Commission will probably pro-
pose to the Council a similar, though more moderate, measure in the near
future.35

LI. Central Themes of European Community Company and Securities

Law

A. How Much Co-Ordination Should There Be Between Member State

Laws?

The Treaty of Rome’s drafters clearly contemplated that Community insti-
tutions would engage in company law reform because art. 54(3)(g) expressly
gives the Community the jurisdiction to enact company law directives.36 This

C297/3, revised O.J. 1983, C217/3 [hereinafter Vredeling Directive].

32Directive 891952, O.J. 1989, L334/36 [hereinafter Insider Trading Directive]. The implemen-
33Council Regulation 2137/85, O.J. 1985, L199/1 [hereinafter E.E.I.G. Regulation].
34Proposed Directive on Procedures for Informing and Consulting Employees, O.J. 1980,
35The Commission discusses its proposal in COM (90)581 and Commission Information Memo
P-101, 5 December 1990. See CCH International, Common Market Reporter (Bicester, U.K.: CCH
Editions Ltd., 1990), para. 95,681; “Don’t Forget to Tell the Workers” The Economist (1 December
1990) 83 [hereinafter “Don’t Forget”]; and “E.C. to Consider Workers’ Councils” The Financial
Tines [U.K.] (5 December 1990) 3 [hereinafter “E.C.”].

tation date is set out in art. 14.

36Supra, note 11.

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article requires the Council and the Commission to co-ordinate member state
laws to protect shareholders and others dealing with companies. It is the Treaty
provision upon which most company law directives have been based. 7

Community institutions have yet to adopt a consistent, coherent approach
to the co-ordination of company and securities law. The E.C. has never
attempted to develop uniform legal rules in the area. 8 Other than agreeing that
uniformity is not the ultimate objective, however, Community institutions have
never been able to determine definitively what degree of co-ordination there
should be.39

Until the mid-1980s, E.C. officials, especially in the Commission, gener-
ally wanted to use E.C. company and securities law measures to eliminate as
many differences as possible in member state legislation. The terminology
which was most often used to describe this approach was the harmonisation of
company and securities law. Part of the reason Commission officials favoured
harmonisation was political. They assumed that the development of similar
legal rules throughout the E.C. would help to advance the cause of centralisation
and would foster the development of the Community.0

The possibility that E.C. companies might rely on guarantees of freedom
of establishment in the Treaty of Rome to migrate from regulatory to liberal
jurisdictions also contributed to the emphasis on harmonisation. Member states
with strict company laws were concerned that their companies would use Treaty
of Rome principles to reincorporate in member states with less stringent
regimes. The concern was a legitimate one. Anecdotal evidence suggests that
businesses in the E.C. will make efforts to adopt the legal structure which
imposes the least costs on them.4′ For example, many German firms choose

3 7Encyclopedia, supra, note 11, para. B10-127.
3 5M.J.G.C. Raaijmakers, “European Harmonisation: Quo Vadis?” in B. Wachter, et. aL, Harmo-
nization of Company and Securities Law: The European and American Approach (Tilburg, Neth-
erlands: Tilburg University Press, 1989) 64 at 65, and interview with K. van Hulle, DG XV, Euro-
pean Commission, April 1990.
3 9The problems have not been restricted to company law: see H. Wallace, Europe: The Chal-
lenge of Diversity (Boston: Routledge & K. Paul, 1985) at 1-28, and D. Vignes, “The Harmoni-
sation of National Legislation and the EEC” (1990) 15 Eur. L. Rev. 358.
40Buxbaum & Hopt, supra, note 18 at 16-17, and C.M. Schmitthoff, “The Future of the Euro-
pean Company Law Scene” in Schmitthoff, supra, note 29, 3 at 8-9. Again, this pattern was not
restricted to company law: see V. Curzon-Price, “Three Models of European Integration” in R.
Dahrendorf, ed., Whose Europe?: Competing Visions for 1992 (London: Institute of Economic
Affairs, 1989) 23 at 26-29, and A. McGee & S. Weatherill, “The Evolution of the Single Market
– Harmonisation or Liberalisation” (1990) 53 Mod. L. Rev. 578 at 582-83.

41In D.H.M. Segers v. Bestuur Van de Bedriffsvereniging Voor Bank-En Verzekeringswezen
[1987] 2 C.M.L.R. 247 (E. Ct. J.) Segers, a Dutch national, ran a commercial undertaking which
had its registered office in the Netherlands. He chose to incorporate his business under British law
instead of Dutch law because the waiting period for incorporation was shorter and because the des-
ignation “Ltd.” was more attractive than the Dutch equivalent, “BV.”

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their business form to evade German legislative requirements concerning infor-
mation disclosure, minimum share capital and employee representation on
boards.42

The concern about migration has a strong historical tradition in the Com-
munity. In Great Britain, Ireland and the Netherlands, as in Canada, the internal
affairs of companies are governed by the jurisdiction of incorporation.43 This
allows corporate participants substantial choice about the company law rules
that apply to their firm. On the other hand, in the other nine member states,
internal affairs are governed by the law of the country where a company has its
real seat, which essentially is its centre of operations. Courts developed this real
seat doctrine to curtail nationals from obtaining competitive advantages by
incorporating elsewhere under a more liberal company law regime.’ The result
is that in most member states companies which do not incorporate where their
real seat is located risk being treated as non-entities or having their internal
affairs governed by the company law of the real seat’s member state.

Concerns about the migration problem coincided neatly with the Commis-
sion’s favourable view towards centralisation. Commission officials argued that
harmonising member state company legislation would eliminate the possibility
of migration since companies would have no incentive to change jurisdictions. 45

42E.g., some German businesses restructure to avoid the substantial management rights given to
employees under the 1976 Co-Determination Act and choose the less regulated private company
(Gesellschaft mit beschrankter Haftung, or GmbH) form over the public company (Aktiengesells-
chaft, or AG). Other German firms evade the Co-Determination Act and other regulatory require-
ments by forming a company in Britain. They then operate in Germany with a branch or do busi-
ness as a limited partnership (Kommanditgesellschaft, or KG), with the British company as the
only general partner. See Buxbaum & Hopt, supra, note 18 at 171, 185 & 187; W.F. Ebke, “The
Limited Partnership and Transnational Combinations of Business Forms: ‘Delaware Syndrome’
Versus European Community Law” (1988) 22 Int. Lawyer 191 at 194-95; B.A. Streeter Ill,
“Co-Determination in West Germany – Through the Best (and Worst) of Times” (1982) 58 Chi.
Kent L. Rev. 981 at 998-99, and G.H.W. Stratmann, “Partnerships Versus Corporations: Why and
When to Use Partnerships in the Light of Legal Format and Tax Treatment” (1980) 8 Int. Bus.
Lawyer 317.

43See Stein, supra, note 29 at 29-3 1; J.G. Collier, Conflict of Laws (Cambridge: Cambridge Uni-
versity Press, 1986) at 59-60; Peter Buchanan Ltd. v. McVey, [1954] I.R. 89 (Ire. S.C.); and J.-G.
Castel, Canadian Conflict of Laws, 2d ed. (Toronto: Butterworths & Co., 1986) at 507-09. The
same rule applies in the U.S., but it has generated some controversy (see Buxbaum & Hopt, supra,
note 18 at 70-90).

4On the real seat rule and its history, see Buxbaum & Hopt, ibid. at 68-70; Stein, ibid. at 29-32
& 399-401, and J. Dine, “The Harmonisation of Company Law in the EC” 1990 Yearbook of Euro-
pean Law [forthcoming].
45H.C. Ficker, “The EEC Directives on Company Law Harmonisation” in Schmitthoff, supra,
note 29, 66 at 70. Commission officials remain concerned about the problem. See K. van Hulle,
“The Harmonisation of Company Law in the European Community” in Wachter, supra, note 38,
I0 at 12; “Discussion Report” in Wachter, supra, note 38, 105 at 108, and interview with A. Ioa-
kimides, European Commission, DG XV, April 1990.

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A necessary corollary of harmonisation, of course, was substantial E.C. control
over company and securities law.

Eliminating differences between member state company laws required the
E.C. to enact very detailed directives. This is because specific instructions were
needed to address all significant differences between member state company
laws and to ensure that the implementing legislation in each country was similar
in all material respects.46 Commission officials ran into political problems, how-
ever, when they proposed directives prepared along these lines. Many member
states turned out to be concerned about a loss of sovereignty and about protect-
ing favoured company law principles. Consequently, they used their influence
to block some of the Commission’s more ambitious proposals.47

The member state resistance forced E.C. officials to make compromises.
The standard method which the Community used to alleviate member state con-
cerns was to provide them with roughly equivalent options which could be
adopted to comply with a directive. When these options were combined with the
detailed provisions Community officials favoured, a highly complex directive
often resulted. For example, the 62 articles of the Fourth Directive, which reg-
ulates company accounts, contains 41 options open to the member states in
addition to 35 options left to companies.48

The difficulties involved with drafting precise, detailed directives, together
with the need for political compromise, substantially hindered the development
and enactment of E.C. company law measures in the 1970s and early 1980s. 49
Frustrated by the lack of progress, Commission officials adjusted their
approach. In order to speed up negotiations, they became much more willing to
give member states latitude in responding to directives. Concomitantly, they
shifted the emphasis away from harmonising member state company laws to
ensuring that member states shared equivalent standards in important company
and securities law areas.”0 Also, they gave priority to reforms which would pro-
mote cross-border commercial activity, arguing that such activity would foster

46 Buxbaum & Hopt, supra, note 18 at 233-34.
471bid. at 17. This pattern has been repeated in contexts other than company law (see McGee

& Weatherill, supra, note 40 at 582).

48Supra, note 23; and Buxbaum & Hopt, supra, note 18 at 234-35.
49Buxbaum & Hopt, ibid. at 233-36; European Commission, supra, note 21 at 11; van Hulle,
supra, note 45 at 14-15 & 26; and interview with F.J. Broichagen, European Commission, DG XV,
April, 1990.

5White Paper, supra, note 16 at 34-37, Appendix, Part II, s. VI; M.G. Warren, “Global Harmo-
nization of Securities Laws: The Achievements of the European Communities” (1990) 31 Harvard
Int. L.J. 185 at 191-92 & 197-98; and interview with K. van Hulle, European Commission, DG
XV, April 1990. The Community’s change from a harmonisation to an equivalence emphasis was
not restricted to company and securities law. Instead, the shift was part of a general approach
adopted to help create a single market by 1992. See McGee & Weatherill, supra, note 40 at 582.

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the development of the Community and would make the E.C. more competitive
on a global level.”

The Community’s new approach yielded immediate dividends. The shift in
emphasis has re-energised E.C. company and securities law reform and has con-
tributed to a flurry of legislative activity. 2 This does not mean, however, that
drafting and enacting directives has become a simple business.

One reason problems still remain is the continued existence of migration
concerns. For example, such concerns have hampered negotiations on a number
of measures which Community officials hope will foster cross-border activity.
One of these is the Tenth Directive, which would require member states to libe-
ralise existing restrictions on mergers between companies located in different
member states. 3 It gives rise to migration concerns because member states
which mandate employee participation in management decisions suspect that
their companies will use cross-border mergers to escape their regulations. 4

The Commission responded to these concerns by including a provision in
the Tenth Directive which exempted mergers that would hinder employee par-
ticipation rights.5 Thus, German company legislation, which mandates
employee participation in management for many companies, could continue to
impose restrictions on a merger between a German company and a non-German
firm if the resulting company did not provide for employee participation. This
attempt at compromise did not succeed, however, because European industry
and a number of member states which do not have employee participation
requirements felt too many cross-border mergers could be blocked. 6

5

1White Paper, ibid. at 35-36, discussing the proposed European Company Statute and the Tenth
Directive; preamble, E.E.LG. Regulation, supra, note 33; European Commission, supra, note 21
at 5-7 & 25; and D.T. Murphy, “The European Economic Interest Group (E.E.I.G.): A New Euro-
pean Business Entity” (1990) 23 Vand. J. Transnat’l L. 65 at 67-68.
52Legislative enactments and proposals made during 1985 and after include the Eleventh Direc-
tive; the Tivelfth Directive; the 1988 draft of the Fifth Directive; the Tenth Directive proposal, 1985;
the 1989 draft of the European Company Statute; the Mutual Recognition Directive; the Insider
Trading Directive; the E.E.I.G. Regulation; and a Directive amending Fourth and Seventh Direc-
tive, discussed in the Common Market Reporter, supra, note 35, para. 95,659.

53Supra, note 27.
54United States International Trade Commission, The Effects of Greater Economic Integration
Within the European Community on the United States, U.S.I.T.C. Publication 2204 (Washington:
United States International Trade Commission, 1989) at 9-26. Germany and the Netherlands are
the E.C. members with the most rigourous employee participation requirements. On the systems
in the various member states, see Buxbaum & Hopt, supra, note 18 at 260-61; and R.R. Pennington
& F. Woolridge, Company Law in the European Communities, 3d ed. (London: Oyez Longman
Publishing Ltd., 1982) at 13-14, 28-29, 52, 78, 104-10, 135-37, 159, 180-81 & 195.

55Art. 1(3) of the Tenth Directive.
56Kolvenbach, supra, note 29 at 742-43; Raaijmakers, supra, note 38 at 97; van Hulle, supra,
note 45 at 22; and N. Bourne, “EEC Developments in UK Company Law” (1990) 11 Bus. L. Rev.
119 at 119.

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Harmonising employee participation requirements throughout the E.C.
would eliminate the Tenth Directive impasse. This, however, will be difficult to
do. An important objective of the proposed Fifth Directive is to harmonise
employee participation rights in public companies incorporated in the Commu-
nity. The E.C. will probably not enact the Directive in the near future. This is
because a number of member states, led by Great Britain, oppose mandatory
employee participation and are prepared to use their votes in the Council to
block approval of the Fifth Directive, at least in its present form.”

Two other cross-border co-operation measures which have been affected
by migration concerns are the E.E.I.G. Regulation and the European Company
Statute. With these measures, the E.C. wants to provide optional structures
which member state firms can use to co-operate or organise on a supranational
level. Community officials know that the E.E.LG. and the European Company
Statute will only be used if the Community makes them attractive to business.
On the other hand, these officials have appreciated that member states which
have mandatory employee participation will block enactment of these measures
if they think these entities can be used to evade their regulations.

These conflicting considerations have led Community officials to make
some tortured compromise proposals. Their strategy succeeded with the
E.E.LG. The E.C. gained German support for the E.E.IG. Regulation by agree-
ing to limit the number of workers which E.E.I.G.s can employ to 500, the min-
imum threshold at which German companies must provide for employee repre-
sentation on their boards.58

Making compromise proposals has not yielded successful results, however,
with the European Company Statute. The latest draft of the Statute contains an
array of employee participation options. Still, the prospects of the E.C. enacting
the Statute in its present form are slight since the draft has not alleviated Ger-
man concerns about migration or neutralised British opposition to employee
participation.59

57 0n British opposition, see Department of Trade and Industry, supra, note 29 at 2-3; Kolven-
bach, ibid. at 729-31; and B. Montgomery, “The European Community’s Draft Fifth Directive:
British Resistance and Community Procedures” (1989) 10 Comp. Lab. L.J. 429 at 436-37 &
446-51. Italy and Ireland also oppose employee participation on boards (Buxbaum & Hopt, supra,
note 18 at 261; and interview with A. Ioakimides, European Commission, DG XV, April 1990).
Germany also has reservations about the Fifth Directive (Kolvenbach, supra, at 731).

– A Major Step Forward for Community Law” (1988) 9 Co. Lawyer 14 at 15.

58Supra, note 33, art. 3(2)(c), discussed by Kolvenbach, ibid. at 763-64, and S. Israel, “The EEIG
59The provisions are set out in the Involvement of Employees Proposal which is discussed infra,
note 64 and accompanying text. On opposition to the Statute, see Winter, supra, note 13 at xxvi
& 159; Carreau & Lee, supra, note 21 at 507-12; Kolvenbach, ibid. at 782-83; Department of Trade
and Industry, supra, note 29 at 6 & 9; and ‘Threatened by Thatcher” The Economist (3 June 1989)
68. The problem has vexed the E.C. for many years. See, e.g., Sanders, supra, note 29 at 96-99,
and P.M. Storm, “Statute of a Societas Europaea” (1968) 5 C.M.L.R. 265 at 269-70 & 282-84.

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B. Board Structure

Employee participation is one of two issues concerning board structure
which has generated considerable controversy in the E.C. The other is two-tier
boards. Under a two-tier board system, a supervisory board fulfils many of the
monitoring functions attributed to the shareholders and non-executive directors
under Canadian company law. Management of the company is left to a manage-
ment board, which is appointed by the supervisory board.’ This format is man-
datory in Germany for companies with more than 500 employees. The system
is optional for all companies in the Netherlands and for public companies in
Denmark and France.6

When the Commission issued its first Fifth Directive proposal in the early
1970s, it recommended that all public companies incorporated in the member
states should have two-tier boards. At the same time, it recommended that com-
panies established under the European Company Statute have the same struc-
ture. Great Britain, which entered the Community in the mid-1970s, balked at
the Commission’s proposals. This was because in Britain, like Canada, all com-
panies use a one-tier board, and the British government opposed any Commu-
nity tampering with this system.

The Commission responded to Britain’s concerns by altering its proposals
to allow for a single-tier option.62 The significance of this concession is debat-
able. This is illustrated by the most recent drafts of the European Company Stat-
ute and Fifth Directive. Both measures require the one-tier board, referred to as
the administrative board or administrative organ, to select an executive compo-
nent from among its members and to delegate managerial power to that body.
They then regulate the non-executive and executive components in much the
same way as they regulate supervisory and management boards.63

6European Company Statute, arts 62-65, and Amended Proposal (1988 draft), art. 3. On the
two-tier framework and how it compares with the system used in Canada, the U.S. and Great Brit-
ain, see Raaijmakers, supra, note 38 at 87-88; B. Grossfeld & W. Ebke, “Controlling the Modem
Corporation: A Comparative View of Corporate Power in the United States and Europe” (1978)
26 Am. J. Comp. L. 397 at 399-400 & 402-09; and J. Welch, “The Fifth Draft Directive – A False
Dawn?” (1983) 8 Eur. L. Rev. 83 at 88-91 & 98-100.

61Brebner et al., Setting Up a Company in the European Community: A Country by Country

Guide (London: Kogan, 1989) at 60-61, 84, 93, 101, 185-86 & 193-94.

62See arts 61, 66 & 67 of the European Company Statute and arts 2 & 21(a)-(c) of the Fifth
Directive (1988 draft). On the shift by the E.C., see C.M. Schmitthoff, “Company Structure and
the British Attitude” (1976) 25 Int’l & Comp. L.Q. 611; A.
Employee Participation in the EEC –
Turner, “Saga of the Lawyer in the First Elected European Parliament” (1982) 3 Bus. L. Rev. 215;
M. Clough, “Trying to Make the Fifth Directive Palatable” (1982) 3 Co. Lawyer 109; and K.J.
Hopt, “New Ways in Corporate Governance: European Experiments with Labor Representation on
Corporate Boards” (1984) 82 Mich. L. Rev. 1338 at 1344-45.

63Arts 68-80 of the European Company Statute and arts 5-13 & 21(k)-(t) of the Fifth Directive,
(1988 draft). See Welch, supra, note 60 at 92-93, and Hopt, ibid. at 1345. The European Company

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The treatment of employee representation illustrates how closely the one
and two-tier systems resemble each other. The Fifth Directive and the European
Company Statute contain the same four basic employee participation options.6′
The manner in which the four options operate differs only slightly for one and
two-tier board companies.65

Under the first option, which is based on German law, employees in com-
panies with two-tier boards select between one-third and one-half of the super-
visory board. Employees in one-tier companies, on the other hand, select the
same proportion of the administrative board. With the second option, which is
based on Dutch law, employees, together with shareholders, have the right to
veto nominees to the supervisory board in two-tier companies and nominees to
the administrative board in one-tier firms.’

Under the third option companies must establish a separate labour repre-
sentation body. Both the Fifth Directive and the European Company Statute
stipulate that management would have to give this body substantial information
on a regular basis and would have to consult with it prior to specified decisions.
This system operates the same regardless of whether a company has a one-tier
or two-tier board.

The fourth option, which operates identically whether a company has a one
or two-tier board, allows management and employees to agree on the method
of employee participation. This apparently open-ended alternative is signifi-
cantly constrained. The Fifth Directive provides that management and employ-
ees generally must agree on one of the first three employee representation
options. The European Company Statute stipulates that the agreement must give
employees at least the information and consultation rights provided for by the
third option.67

Statute refers to the one-tier board as the “administrative board” and the Fifth Directive uses the
term “administrative organ.”

64Arts 4 & 21(d)-(i) of the Fifth Directive (1988 draft) and arts 4-6 of the Involvement of Employ-
ees Proposal. Member states can limit the options available in some circumstances: Fifth Directive,
art. 4(2), and Involvement of Employees Proposal, art. 3(5).
65The four options are discussed by Carreau & Lee, supra, note 21 at 508-10; Dine, supra, note
29 at 212; Welch, supra, note 60 at 85-88 & 94-97; J. Dine, “Implications for the United Kingdom
of the E.C. Fifth Directive” (1989) 38 Int’l & Comp. L.Q. 547 at 553-54; and D.T. Murphy, “The
Amended Proposal for a Fifth Company Law Directive” (1985) 7 Hous. J. Int’l L. 214 at 222-24.
66Under art. 4 of the European Company Statute and the 1983 draft of the Fifth Directive, the
supervisory board or the administrative organ nominates potential candidates. Under art. 4(c) of
the 1988 version of the Fifth Directive, shareholders and employees can also nominate candidates.
67More precisely, if no agreement is reached, a standard model, provided by the law of the mem-
ber state where the company is registered, shall apply. This model is to be in conformity with the
most advanced national practices and must ensure that employees have at least the information and
consultation rights provided by the third option. See art. 6, paras 6 & 8 of the Involvement of
Employees Proposal.

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One important difference between the European Company Statute and the
Fifth Directive is that the Fifth Directive’s employee representation options do
not apply to all companies it governs. For example, the Fifth Directive only
requires member states to impose the employee representation options on public
companies which have over 1,000 employees.68 Also, it allows member states
to give employees the option of waiving their right to participate in corporate
management. 9 The European Company Statute contains no equivalent limita-
tions on employee representation.

C. Shareholders

Canadian company law focuses almost entirely on shareholder/
management issues, while workers’ rights are left to different legislative
schemes such as collective bargaining and employment standards laws. Because
the E.C.’s company law programme gives an important role to workers, share-
holder issues are less prominent than in Canada.” Still, Community company
law has significant implications for shareholders on a number of levels.

The proposed Fifth Directive is potentially the most important E.C. mea-
sure for shareholders in public companies. One reason is that, if it is enacted,
its employee representation options would restrict shareholder influence over
board appointments in the companies it applies to. Under the first of the four
employee representation options, shareholders would be precluded from choos-
ing more than two-thirds of the members of the administrative board under a
one-tier system and could not select more than two-thirds of the supervisory
board members in companies with a two-tier board.71 With the second option,
Dutch experience suggests that in companies which adopt it, shareholders
would have to negotiate with employees and existing board members about the
appointment of new directors.7″

Shareholders would have greater appointment powers in companies
adopting the third option, which again provides for a separate labour represen-
tation body. Under this system, shareholders would have the sole authority to

68Supra, note 27, arts 4(1), (2) & 21b(2).
691bid., art. 4(2), 21b(2).
70See Axworthy, supra, note 7 at 397-404 & 423-27. The contrast between U.S. and E.C. com-
pany law is similar. See, e.g., Grossfeld & Ebke, supra, note 60; A.F. Conrad, “The Supervision
of Corporate Management: A Comparison of Developments in European Community and United
States Law” (1984) 82 Mich. L. Rev. 1459; and M.P. Dooley, “European Proposals for Worker
Information and Codetermination: An American Comment” in P.E. Herzog, ed., Harmonization of
Laws in the European Communities: Products Liability, Conflict of Laws, and Corporation Law
– Fifth Sokol Colloquium (Charlottesville: University of Virginia Press, 1983) 126.

71Supra, note 27, arts 4(b) & 21(d).
72Jbid., arts 4(c) & 21(d)(a). See T.R. Ottervanger & R.M. Pas, “Employee Participation in Cor-

porate Decision Making: The Dutch Model” (1981) 15 Int. Lawyer 393 at 403-404.

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select the administrative board in a one-tier system and the supervisory board
in a two-tier system. 3

The Fifth Directive also contains provisions regulating shareholder litiga-
tion, general meetings, proxies, voting and the adoption of annual accounts by
the shareholders.74 From a Canadian perspective these are the central compo-
nents of corporate law. The political controversy generated by employee repre-
sentation and board structure, however, has thus far blocked any progress on the
other matters in the Fifth Directive.

Because of the impasse, the Commission is considering separating
employee participation from the other management/shareholder issues in the
Fifth Directive. Commission officials think this might speed up negotiations on
the non-employee participation matters. Whether the issues involved can be
effectively segregated, and whether the member states will accept such a strat-
egy, remains to be seen.75

D. Capital Structure, Disclosure and Accounts

While the lack of progress on the Fifth Directive has limited the impact of
E.C. company law measures on shareholders, the E.C. has enacted a number of
company law directives which have important shareholder ramifications. The
matters involved are also important for creditors, so they merit independent
consideration.

One such matter is capital structure. The assumptions underlying the Com-
munity regulations in this area differ from those in Canada.76 Canadian company
laws reflect the view that solvency concerns are best addressed by negotiations
between companies and creditors and by bankruptcy legislation and related
measures. The E.C.’s company law directives, on the other hand, seek to pro-
vide affirmative protection for creditors by regulating internal corporate finan-
cial structures. For instance, while Canadian corporate legislation does not
require a company to have a prescribed amount of share capital, the Second
Directive, requires public companies to maintain a minimum share capital of
25,000 European Currency Units, or ECUs (approximately $35,000 Canadian as
of May, 1991 exchange rates).77

73Fifth Directive, ibid., arts 4(1), 4d, 21(a)(1) & 21(e).
74 1bid., arts 14-21 & 22-50.
75Interview with A. Ioakimides, European Commission, DG XV, April 1990.
76See generally Hadden, Forbes & Simmonds, supra, note 7 at 131-32 & 141-47; Dine, supra,
note 44; and J.S. Ziegel, “Is Incorporation (With Limited Liability) Too Easily Available?” (1990)
31 C. de D. 1075 at 1086-89.

77Art. 6 of the Second Directive. The European Currency Unit is a component of the European
Monetary System and its value is calculated on the basis of the value of a basket of member state
currencies.

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The different approaches to creditor protection are also illustrated by the
response to the potential financial risk created by a company acquiring its own
shares. Canadian corporate legislation simply prohibits such transactions when
they prevent the company from being able to meet its debt obligations. The Sec-
ond Directive, on the other hand, requires member states which allow public
companies to acquire their own shares to impose a number of detailed and
restrictive limitations on the process.7″

Another topic that E.C. directives regulate which is important for both
shareholders and creditors is disclosure. The First Directive is key here. It
instructs the member states to require all companies to file with a public registry
prescribed information, including the corporate constitution, the amount of cap-
ital subscribed, a list of persons authorised to act on behalf of the company and
the annual accounts.79 While the First Directive mandates the filing of accounts,
it says nothing about the contents. This has been left to other directives. The
Fourth Directive, which the E.C. enacted in 1978, is the most important of
these.”0 The Directive, which applies to all member state companies, regulates
the use of valuation methods and establishes minimum standards for the pres-
entation and content of annual accounts and annual reports. It also prescribes
standards for the auditing and publication of these documents.

The Fourth Directive has helped to harmonise the presentation of annual
reports and has helped to nurture a European approach to corporate accounting
issues. Still, accounting standards are far from uniform in the Community.”1 One
reason is that three E.C. members have not implemented the Directive yet. 2
Another is that there are many important company accounting issues the Fourth
Directive does not deal with, partly because accounting practices have evolved
rapidly since the E.C. enacted it.

78Supra, note 23, arts 19-22; and H. Sutherland, et. al. eds, Fraser’s Handbook on Canadian

Company Law, 7th ed. (Toronto: Carswell, 1985) at 76-93.

79Arts 2 & 3. On the First Directive generally, see Stein, supra, note 29 at 237-312; Ficker,
supra, note 45 at 74-76; and S. Schneebaum, “The Company Law Harmonization Program of the
European Community” (1982) 14 Law & Policy in Int. Bus. 293 at 301-303.

8For a further discussion, see C.W. Nobes, “The Harmonisation of Company Law Relating to
the Published Accounts of Companies” (1980) 5 Eur. L. Rev. 38. Also relevant are the Seventh
Directive (see infra, note 93 and accompanying text), and Eighth Directive (which deals with audi-
tor qualifications).

81See generally Buxbaum & Hopt, supra, note 18 at 235-37, 264-66, 275-78 & 283-88; A.G.
Hopwood, “The Future of Harmonization of Accounting Standards Within the European Commu-
nities” (1990) [unpublished]; Commission of the European Communities, European Economic
Community: The Fourth Company Law Directive: Implementation by member states (Brussels:
Office for Official Publications of the European Communities, 1987).

82 Italy, Portugal and Spain are the member states. The European Court of Justice has held that
their failure to take action does not relieve individuals in the other nine member states from the
obligation of complying with legislation implementing the Fourth Directive. See Ministere Public
v. Blanguernon (1990), case C-38/89 (unreported), summarised in Common Market Reporter,
supra, note 35 at para. 95,571.

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A third reason for the lack of harmonisation of European accounting stand-
ards is that the implementing legislation in the remaining nine member states is
not fully co-ordinated. This is because the member states have made extensive
use of the large number of options which the Directive gives to them. They have
done this because, to a far greater extent than might have been expected with
such a technical subject, accounting practices are shaped and influenced by the
member states’ distinct social and economic environments.

E. Small Business

The Fourth Directive applies to all companies, regardless of how many
shareholders or employees a company has and regardless of how much revenue
a company generates.”‘ If the Fourth Directive applied without qualification to
all companies, smaller businesses would find the regulatory burden to be very
high. Consequently, the Fourth Directive has always made some concessions
for smaller companies. Presently, member states may relax a significant number
of the Fourth Directive’s requirements for companies which do not exceed two
of the following three thresholds: a balance sheet total of 1,550,000 ECUs
(about $2.2 million Canadian), an annual net turnover of 3,200,000 ECUs ($4.5
million Canadian) and an annual average of 50 employees.’

During the latter half of the 1980s, the Commission proposed a number of
amendments which would increase the scope of the Fourth Directive exemp-
tions.’ Most importantly, the Commission recommended that member states be
required to make exemptions for small business rather than simply being author-
ised to do so. In a Directive approved in 1990, the Council declined to adopt the
mandatory approach, but nevertheless did expand the exemptions which mem-
ber states could make.86 The 1990 Directive is part of a general attempt by the
Community to give small businesses a higher profile in E.C. affairs.” The
Twelfth Directive, which the Council approved in 1989, is also part of this trend.
It requires the member states to reverse their present policy and allow single-
member companies.8

Fourth and Seventh Company Law Directives” (1989) 133 Solicitors J. 1118.

83Art. 1.
8hArts 11, 44 & 47(2), as am. Directive 84/569, O.J. 1984, L314/28. Also, member states are
authorised to relax some of the Fourth Directive’s requirements for companies with higher balance
sheet, turnover and employee totals. See art. 27 of Fourth Directive.
850.J. 1986, C144/10 and O.J. 1989, C318/12, discussed by F. Wooldridge, “Amending the
86See supra, note 52.
811n addition, the Commission has created a new Directorate for small and medium sized enter-
prises (Winter, supra, note 13 at 154), and the Council has approved a series of recommendations
to member states which are intended to improve the business environment for small and medium-
sized enterprises (O.J. 1990, L141/55).
880n the member states’ law in the area and on this directive see P. Colle, “The Influence of the
European Convention on Mutual Recognition of Companies and Legal Persons, and of the Direc-

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Despite these attempts to accommodate small businesses, E.C. company
law initiatives historically have been aimed more at larger, public companies
than their smaller counterparts This has been because E.C. officials have felt
that public companies have a more significant impact on member state affairs
and because drafting and negotiating company law measures has been easier
when smaller companies have been excluded. 9 The upshot has been that most
proposed and enacted company law directives apply only to public companies.9″

F. Corporate Groups and Multinational Enterprises

Community officials feel that corporate groups and multinational enter-
prises have an important impact on the E.C.’s economic and social fabric.9 Con-
sequently, the E.C. has enacted three measures dealing with the internal govern-
ance of complex corporate undertakings and is considering a number of others.
In contrast, Canadian treatment of such issues has been confined primarily to
case law.92

One of the three corporate group measures the E.C. has enacted is the Sev-
enth Directive. It requires member states to oblige parent companies to draw up
and publish consolidated accounts of subsidiaries whenever either the parent or
the subsidiary is a public company.93 This stands in contrast to Canadian corpo-

tives on Company Law Upon the Legal Status of the One-Man Company in Belgium” (1982) 19
Common Mkt. L. Rev. 79 at 79-87 & 96-104, and F Wooldridge, “The Draft Twelfth Directive
on Single-Member Companies” (1989) J. Bus. L. 86.

89F. Barbaso, “The Harmonisation of Company Law with Regard to Mergers and Divisions”
(1984) J. Bus. Law 176 at 176-77; W. Dailbler, “The Employee Participation Directive – A Real-
istic Utopia?” (1977) 14 Common Mkt. L. Rev. 457 at 470-71; and P. Sanders, European Stock
Corporation: Text of Draft Statute with Commentary (New York: Commerce Clearing House,
1969) at 13-14.

90Like the Fourth Directive, the First Directive (see art. 1) and the Seventh Directive (see art.
4) apply to all companies with some exemptions for smaller businesses. All other directives apply
only to public companies. The discussion here conceals some classification complexities. The
member states each generally have one corporate form intended for large companies with numer-
ous shareholders and another intended for smaller companies. The former are most accurately
described as public companies and the latter as private companies, and most company law direc-
tives apply only to public companies. The primary difficulty with this classification is that busi-
nesses often do not use the corporate form which seems to suit them best. E.g., in Germany many
large businesses with numerous shareholders use the private company, or GmbH, form (see supra,
note 42). The various classes of corporation in the member states are discussed in Brebner et al.,
supra, note 61.

9 1White Paper at 35-36; preamble, E.E.LG. Regulation; preamble, Vredeling Directive; W. Kol-
venbach, “The European Economic Community and the Transnational Corporation” (1984) 5 N.Y.
L. School J. Int’l & Comp. L. 253 at 262-63; and J.H. Dunning & P. Robson, “Multinational Cor-
porate Integration and Regional Economic Integration” (1987) 24 J. of Comm. Mkt. St. 103 at 109.
92See Sargent, supra, note 7 at 163-79, and Hadden, Forbes & Simmonds, supra, note 7 at

625-28.

93Art. 4(1). On the Seventh Directive, see M. Petite, “The Conditions for Consolidation Under

the 7th Company Law Directive” (1984) 21 Comm. Mkt. L. Rev. 81.

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rate legislation, which imposes no such requirement.94 The Seventh Directive’s
underlying rationale is that group accounts must be analyzed to get a full and
accurate impression of the overall financial status of a corporate group.

The Seventh Directive sets out the valuation principles and the format to
be used for consolidated accounts. It also stipulates the types of linkages which
require companies to prepare such accounts. For example, it mandates compa-
nies to do so if they own a majority of the voting shares of another company
or have control of a majority of shares of another company by way of a share-
holders’ agreement.95 The Seventh Directive also requires companies to prepare
consolidated accounts when one company has appointed the majority of the
board members of another company by voting its shares, and when a company
otherwise has the legal right to appoint the board members of another company.
Moreover, the Seventh Directive gives member states the option to require con-
solidated accounts to be prepared when one company exercises a dominant
influence over another.96

The Eleventh Company Law Directive is the second measure the E.C. has
enacted that is directly relevant to complex corporate undertakings. It deals with
disclosure by company branches. The Directive’s objective is to eliminate dif-
ferences between disclosure requirements for company branches and subsidiary
companies.97

The Eleventh Directive only applies when a company establishes a branch
outside its home jurisdiction. The Directive provides that a branch must disclose
in its host member state most of the information about the company which the
company is obliged to disclose in its own member state pursuant to the First,
Fourth and Seventh Directives.” At the same time the Eleventh Directive pre-
vents the branch’s member state from requiring any additional information
about the branch.

The third measure the E.C. has enacted which is relevant to complex
undertakings is the E.E.LG. Regulation, which can be used by firms which want
to establish co-operative cross-border arrangements. 99 The Regulation’s most

94Hadden, Forbes & Simmonds, supra, note 7 at 627. Canadian corporate legislation does con-
tain some provisions regulating companies which prepare consolidated accounts: see, e.g., Canada
Business Corporations Act, R.S.C. 1985, c. C-44, ss 157 & 160(5).

95Arts l(a) & (d)(aa).
9 6Arts 1(b), d(bb) & 2(b). The Seventh Directive borrows the focus on majority rule from British
company law and the focus on other factors from Germany and France. See Petite, supra, note 93
at 85-88, and J. Pipkorn, “The Draft Directive on Procedures for Informing and Consulting
Employees” (1983) 20 Comm. Mkt. L. Rev. 725 at 750-51.

97Preamble, supra, note 24. On the Eleventh Directive, see R. Nieuwdorp, “EEC Harmonisation
Report” (1988) 16 Int. Bus. Lawyer 39 at 39-41; and J. Dine, “Company Law Directives: A Pro-
tective Proposal” (1989) 133 Solicitors J. 30.

98Arts 1(1), 2-4.
“Arts 5-7. See generally Murphy, supra, note 51, and Israel, supra, note 58.

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distinctive characteristic is that it provides an organisational framework which
is not exclusively wedded to the legal system of any member state. Member
state firms can create an E.E.I.G. by simply entering into a contract in accord-
ance with the Regulation, though the grouping has to be registered in one of the
member states.’0

The contractual nature of E.E.I.G.s gives their members considerable free-
dom in organising grouping affairs, but the freedom is not absolute. E.E.I.G.
members are deemed to be jointly and severally liable for the grouping’s debts
and must appoint natural persons to act as managers.'”‘ E.E.I.G.s cannot invite
investment from the public and, as mentioned, cannot have more than 500
employees.” They can only engage in activities which are connected with their
members’ activities and their activities cannot dominate those of the mem-
bers. ‘ 3 Profits made by an E.E.I.G. cannot be retained by the grouping and
instead must be apportioned among the members. 4 The upshot is that E.E.I.G.s
will generally have to be used for research and development ventures,
co-operative training, marketing and testing programmes and joint bidding on
projects.

E.C. officials hope to provide Members State firms with a number of other
ways to organise on a Community-wide level. They give this priority because
they feel that member state businesses must develop on a European basis to
compete successfully with non-E.C. multinationals.” Mergers between mem-
ber state companies would be a logical way for cross-border reorganisation to
occur, but mergers of this type are difficult to carry out. Member state company
legislation generally requires unanimous shareholder consent for such transac-
tions, which is impossible to obtain in most public companies. Also, member
state tax legislation imposes significant financial obstacles.0 6 The Commission
has recently sought to encourage cross-frontier mergers in two ways. One is by
obtaining Council approval for a number of measures designed to reduce the tax

1ooE.E.I.G.s can generally be used by all types of member state business organisations, but mem-
ber states can restrict the use of the E.E.I.G.s by very small companies. See supra, note 33, art.
4(4), and Israel, ibid. at 15. Also, member state legislation authorising registration can have a sig-
nificant impact on the use of E.E.I.G.s in that member state. See, e.g., A. Burnside, “EEIG –
Implementation in the UK” (1990) 11 Co. Lawyer 164.

0’0 Supra, note 33, arts 16-20 & 24.
l2Ibid., arts 3(2)(c) & 23.
‘031bid., art. 3(1).
‘4Ibid., art. 21.
’05European Commission, supra, note 21 at 5-7, 11; Carreau & Lee, supra, note 21 at 505-506;
Dunning & Robson, supra, note 91 at 109-10; D. Swann, The Economics of the Common Market,
5th ed. (Harmondsworth, U.K.: Penguin Books, 1984) at 289-91; and interview with K. van Hulle,
European Commission, DG XV, April 1990.

16European Commission, ibid. at 7-9 & 13; Carreau & Lee, ibid. at 506-507; Swann, ibid. at
292; and P. Leleu, “Corporation Law in the United States and in the E.E.C.: Some Comments on
the Present Situation and Future Prospects” (1967-68) 5 Common Mkt. L. Rev. 133 at 173-74.

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obstacles.”0 7 The other is by attempting to secure enactment of the Tenth Direc-
tive. If enacted, it would preclude member states from requiring that mergers be
approved by more than two-thirds of the shares voted.”‘ 5 Hence, the barrier to
mergers imposed by unanimous shareholder consent would be removed.

Otherwise, the Tenth Directive would extend many of the Third Directive’s
provisions to cross border transactions.” The Third Directive, which the E.C.
enacted in 1978, applies to mergers of companies from the same member state.
It stipulates that prior to a merger the management of the companies involved
must each prepare a report on the proposed transaction and must each appoint
an independent expert to do the same. Each company must then make the
reports available to the shareholders before they vote on the proposed merger.”‘

As well as fostering mergers, Community officials would like to make the
European Company available as a way for businesses to reorganise on a Euro-
pean level.”‘ This is reflected in the methods of incorporation set out in the most
recent Commission proposal, which was made in 1989. They indicate that the
European Company Statute is much more concerned with fostering relation-
ships between existing member state companies than it is with providing natural
persons with an incorporation device. The three methods are a merger between
E.C. public companies, the establishment of a joint holding corporation by such
companies and the formation of a joint subsidiary by Community undertak-
ings.”

2

The 1989 draft regulates capital structure, share rights and restrictions,
general meetings, accounts and corporate governance. The provisions are bor-
rowed largely from existing and proposed company law directives.” 3 Conse-
quently, as has been discussed, the one and two-tier board structures and the
employee participation options are very similar to their counterparts in the Fifth
Directive.

10 7See Common Market Rep., supra, note 35, paras. 95,594 & 95,678.
108Art. 7. See generally Winter, supra, note 13 at 148-49; United States International Trade Com-
mission, supra, note 54 at 9-26 – 9-28; and E.R. Lewis & M.A. Goldstein, “The Effect of E.C. 1992
on U.S. Companies: A U.S. Government Perspective” (1989) 3 Temp. Int’l & Comp. L.J. 153 at
175-76.

’09On the transactions covered, see art. 3 of the Tenth Directive.
11Arts 5-11.
“European Commission, supra, note 21 at 2-5; Commission Press Release IP(88)354, 8.6.88,
set out in “Infobank: A European Company” (1988) 9 Bus. L. Rev. 232; and Commission Infor-
mation Memo No. P-39, 12.7.89, set out in “Eurobrief: Company Law” (1989) 10 Bus. L. Rev.
269.

112Art. 2. The proposal also stipulates that regardless of how a European Company is formed,
it must have a minimum share capital of 100,000 E.C.U.s (about $140,000 Canadian) (supra, art.
4(1)).
” 3 Department of Trade and Industry, supra, note 29 at 4-6, and interview with A. loakimides,

European Commission, DG XV, April 1990.

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Employee participation concerns, as mentioned, have slowed progress on
both the Tenth Directive and the European Company Statute. Two other pro-
posed directives which are relevant to corporate groups have also encountered
political problems. These are the Ninth Directive and the Vredeling Directive.

In most member states, as in Canada, company law treats subsidiaries as
being largely autonomous from their parent.” 4 This gives parent companies a
significant degree of flexibility, but also creates the possibility that a parent
company, acting in its own interests, will act contrary to the interests of share-
holders, creditors and employees of a subsidiary. The Ninth Directive would
make important changes to these dynamics in Europe if the Community enacts
it.

The Commission drafted the Ninth Directive in the early 1980s, but has yet
to propose it formally to the Council.” 5 Its key concept is the control contract,
which is known only to German law.”6 Under the Ninth Directive’s control con-
tract, a subsidiary company would consent to being controlled by the parent and
the parent would become bound by two significant obligations. One is that the
parent would have to buy out shareholders in the subsidiary who request this at
the time the control contract is entered into. The other is that the parent would
have to compensate a subsidiary’s shareholders, employees and creditors for
losses they suffer as a result of the parent’s influence over the subsidiary.

The responsibilities and liabilities imposed by control contracts would
make them unpopular with most member state parent companies.” 7 The Ninth
Directive responds by creating a procedure which is designed to encourage par-
ent companies to enter into control contracts. The Directive provides that when
a control contract has not been entered into, those managing subsidiary compa-
nies have to prepare a detailed, audited annual report on the parent-subsidiary
relationship. Any shareholder, creditor or employee of the subsidiary who feels,
after reading the report, that the subsidiary’s interests have been prejudiced by
the parent, can apply to a court in the parent’s jurisdiction. If the court finds that

114Hadden, Forbes & Simmonds, supra, note 7 at 620-25.
1150n the present status of the Ninth Directive see Department of Trade and Industry, The Single
Market: Company Law Harmonisation – November 1990 (London: Central Office of Informa-
tion, 1990) at 17. On the Ninth Directive generally, see Schneebaum, supra, note 79 at 317-21; R.
Nieuwdorp, “EEC Company: Law Harmonisation” (1987) 15 Int’l Bus. Law. 177 at 179-80; P.
Farmery, “The E.C. Draft Proposal for a Ninth Company Law Directive on Groups: A Business
Viewpoint” (1986) 7 Bus. L. Rev. 88; W.Z. Carr Jr. & D.M. Kolkey, “U.S. Perspective on the Vre-
deling Proposal and Other Proposals by the EEC on Employment Matters of Concern to Multina-
tional Corporations” (1984) 12 Int. Bus. Law. 57 at 64-65; and K. Hofstetter, “Parent Responsi-
bility for Subsidiary Corporations: Evaluating European Trends” (1990) 39 Int. & Comp. L.Q. 576
at 588-89.

6See Hadden, Forbes & Simmonds, supra, note 7 at 645, and Hofstetter, ibid. at 580-81.
1
“7 ndeed, control contracts are rarely used in Germany (Hadden, Forbes & Simmonds, ibid. at

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the parent’s board of directors has failed to act with due care and in the best
interest of the group, the judge can impose joint and several liability for any
losses on the parent company and the individual members of the parent’s board.
While the Ninth Directive regulates relations between members of a corpo-
rate group, the Vredeling Directive deals with relations between employees and
management. The objective of the Vredeling Directive is to ensure that parent
companies keep employees in subsidiary companies informed about group
affairs.”‘ The most recent draft of the Directive, which the Commission submit-
ted to the Council in 1983, imposes two basic disclosure obligations.” 9 First, it
requires parent companies, referred to as dominant undertakings, to disclose
annually to their subsidiaries enough information to give “a clear picture of the
activities of the dominant undertaking and its subsidiaries taken as a whole” so
this can then be communicated to representatives of the employees.’ Second,
it requires parent companies contemplating decisions which are likely to have
a substantial effect on the interests of the group’s workers to forward informa-
tion to affected subsidiaries prior to the decision. 2′

With decisions which would substantially affect employees’ interests, the
1983 draft mandates not only that employees be informed but also stipulates
that they be consulted. These consultations are to take place with management
of the subsidiary the employees work for. The objective of the process is an
agreement between management and the employees’ representatives about the
effect of the proposed decision on the employees. 22

The political battles which stalled the Ninth Directive and the Vredeling
proposal were different from those involving the Fifth and Tenth Directives and
the European Company Statute. This is because of the involvement of groups
from outside the European Community. U.S. multinationals, which are heavily

“sSupra, note 34. The literature on the Vredeling Directive is extensive. See, e.g., Kolvenbach,
supra, note 29 at 744-57; Pipkorn, supra, note 96; R.D. Fera, “The European Economic Commu-
nity and the Vredeling Proposal: The Debate to Temper Ideology with Realism” (1986) 16 Cal. V.
Int’l L.J. 250; D. Hoffmann & J. Grewe, “The Vredeling Proposal of the European Commission”
(1984) 20 Stan. J. Int’l L. 329; and F Vandamme, “The Proposal for a Directive on Procedures
for Informing and Consulting the Employees of Undertakings with Complex Structures, in Partic-
ular Transnational Undertakings” in J. Vandamme, ed., Employee Consultation Infonnation in Mul-
tinational Corporations (London: Croom Helm, 1986), 149.

” 9The Commission first proposed the Vredeling Directive in 1980 (supra, note 34). Neither the
1980 or the 1983 version applies to all corporate groups. The 1980 version does not apply to sub-
sidiaries with less than 100 employees (art. 4) and the 1983 version only applies to corporate
groups with at least 1,000 employees in the E.C. (art. 2(1)).
120Art. 3(1). The information has to include the group’s economic and financial status, employ-
1’2 Decisions giving rise to this obligation include the closure or transfer of major parts of an
establishment, substantial modifications to the activities of a subsidiary and major organizational
changes. See ibid., art. 4(2).

ment situation and future plans and prospects (art. 3(2)).

’22Arts 4(l) & (3).

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involved in the E.C. market, were distressed when the E.C. proposed the Ninth
Directive and the Vredeling Directive.”2 The multinationals were upset because
these measures made only minor concessions to non-E.C. parent companies and
thus would have imposed unfamiliar and unwanted obligations on U.S. business
in Europe.”2 U.S. business interests responded by heavily lobbying the E.C.
institutions, arguing that investment in Europe would decline if these measures
were enacted. U.S. congressmen also proposed retaliatory legislation.2 5

These strategies succeeded. During the late 1980s, the Community essen-
tially dropped the Ninth Directive and the Vredeling Directive from its agenda,
partly because E.C. officials were concerned about allaying fears that the Com-
munity was evolving into a protectionist “Fortress Europe.”‘ 26

The E.C., however, may now be prepared to confront the issue of inform-
ing group employees again. Commission officials may soon submit a directive
to the Council which would apply to companies if they operate in more than one
member state, employ more than 1,000 people in the E.C. and employ at least
100 people in two or more member states. 7 The intention of the proposed
Directive is to provide information to employees rather than give them mana-
gerial influence. The Directive would require a company to inform its works
council of major strategic decisions the company was planning. The works
council, however, would have no consultative rights.

It is unclear whether, despite its more moderate approach, this new works
council proposal is any more likely to be enacted than the Vredeling Directive.

1

30n U.S. involvement in the E.C., see United States International Trade Commission, supra,

1

note 1 at 3-3 – 3-6.

124The Ninth Directive in fact is more disadvantageous for non-E.C. parent companies than it
is for E.C. parents because it gives them less flexibility than E.C. parents in responding to buyout
requests arising from the creation of control contracts (Carr & Kolkey, supra, note 115 at 65-66).
The 1983 draft of the Vredeling Directive authorises non-E.C. parent companies to appoint an agent
company in the E.C. to discharge its obligations. If no such agent is appointed, each E.C. subsidiary
is responsible for disclosing the relevant information. See supra, note 34, art. 2(2).

“ZOn U.S. opposition generally, see Kolvenbach, supra, note 29 at 753; Schneebaum, supra,
note 79 at 318, 320-21 & 326; Carr & Kolkey, ibid. at 58-63; R.P. Walker, “The Vredeling Pro-
posal: Cooperation Versus Confrontation in European Labor Relations” (1983) 1 Int’l Tax & Bus.
Law. 177 at 185-88; and M. Nelson, “The Vredeling Directive: The EEC’s Failed Attempt to Reg-
ulate Multinational Enterprises and Organize Collective Bargaining” (1988) 20 Int’l L. & Pol. 967
at 972-75.

126Warren, supra, note 50 at 207; Department of Trade and Industry, supra, note 115 at 17 and
Kolvenbach, supra, note 29 at 759-60. On “Fortress Europe” issues see Pitts, supra, note 2 at
119-39; J. Ferry, “Reciprocity: The Status of Foreign Corporations in International Law” (1988)
J. Int’l Bus. L. 222; W. Lee, “1992: Promise or Problems for non-EC Companies?” (1988) 7 Int’l
Fin. L. Rev. 18; and R.M. Jarvis, “American Business and the Single European Act: Scaling the
Walls of ‘Fortress Europe”‘ (1990) 20 Cal. W. Int’l L.J. 227 at 247-60.

’27Conmon Market Reporter, supra, note 35, paras 95 & 681.

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European businesses have already objected to the new proposal and U.S. com-
panies may do likewise since the measure apparently will apply to corporate
groups which have headquarters outside the Community.2′ On the other hand,
many Community officials feel that it is very important for the E.C. to have
social objectives so that workers can enjoy the benefits of integration. 29 Con-
sequently, the E.C. may press ahead despite the opposition. 3

G. Securities Regulation

The corporate securities market is far less developed in most member
states than it is in North America. 3’ Only Great Britain has a stock exchange
and diversified share ownership on a scale comparable with the U.S. and Can-
ada. Other member states generally have small stock exchanges, populations
which are sceptical about investing in securities, and few companies with
widely traded shares. Moreover, takeover activity is significantly constrained by
barriers imposed by company law, securities regulation and institutional factors.
The institutional factors include substantial cross-ownership of shares between
companies and a high level of share ownership by banks.

The securities market in Europe may be changing, however.’32 The 1992
project has motivated business to reorganise on a European basis. As part of this
process, mergers and takeovers have become more common. Also, the E.C. has
been attempting to liberalise member state capital restrictions and if these
efforts are successful, funds may be freed up for investment in corporate secu-

128″Don’t Forget”, supra, note 35 and “E.C.,” supra, note 35.
129pitts,

supra, note 2 at 84-90; “Europe’s Social Insecurity” The Economist (23 June 1990) 13;
and B. Roberts, ‘The Social Dimension of European Labour Markets” in Dahrendorf, supra, note
40, 39.

130The chances of enactment are improved by an E.C. document which did not exist when the
Vredeling Directive was introduced in the early 1980s. See, Commission of the European Commu-
nities, Charter of the Fundamental Social Rights of Workers (Luxembourg: Office of Official Pub-
lications of the European Communities, 1990) [hereinafter Social Charter]. On this document, see
B. Bercusson, “The European Community’s Charter of Fundamental Social Rights of Workers”
(1990) 53 Mod. L. Rev. 624, and B. Hepple, “The Implementation of the Community Charter of
Fundamental Social Rights” (1990) 53 Mod. L. Rev. 643.
131See generally Pitts, supra, note 2 at 65-69; Buxbaum & Hopt, supra, note 18 at 169-73,
189-93; Warren, supra, note 50 at 193-94; O.L. Adelberger, “Financing Corporations in Major
European Markets” in K. Macharzina & W.H. Staehle, eds, European Approaches to International
Management (Berlin: de Gruyter, 1986) 296; N. Basaldua, “Towards the Harmonization of
EC-member states’ Regulations on Takeover Bids: The Proposal for a Thirteenth Council Directive
on Company Law” (1989) 9 Nw. J. of Int’l Law & Bus. 487 at 489-95; S. MacLachlan & W.
Mackesy, “Acquisitions of Companies in Europe – Practicability, Disclosure, and Regulation: An
Overview” (1989) 23 Int. Law. 373; and J. Blum, “The Regulation of Insider Trading in Germany:
Who’s Afraid of Self-Restraint?” (1986) 7 Nw. J. Int’l L. & Bus. 507 at 507-10.
132This is illustrated by the Milan Stock Exchange (“Time for Change” The Economist (9 June

1990) 81).

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E.C. COMPANY LAW

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rities. Finally, the E.C. has been quickly developing a Community-wide securi-
ties regulation framework.

Still, E.C. officials appear to be somewhat ambivalent about the operation
of market forces in the securities area. Takeovers play a key role in the operation
of British, U.S. and Canadian stock exchanges. 3 3 Nevertheless, the Commission
is unsympathetic towards them, arguing that they are an excessive and some-
times abusive method of restructuring. 3

The proposed Thirteenth Directive reflects the Commission’s attitude. The
Thirteenth Directive, if it is enacted, would make only a small dent in existing
takeover barriers.’35 Its primary effect would be to require member states to
increase protection for the target’s shareholders after a bid has been made.’36
The Thirteenth Directive consequently might make it more difficult, if anything,
to make a successful hostile bid.137

Even though the Thirteenth Directive has not yet been enacted, the Com-
munity already has a number of securities measures in place. One example is
the Insider Trading Directive, which the E.C. enacted in 1989 and which
requires E.C. members to pass legislation prohibiting insider trading by June
1992.138

At present, a number of member states do not regulate insider trading at all
and most others do not do so with any rigour.139 Consequently, the Insider Trad-
ing Directive could potentially reverse current Community policy. Certainly, the
Directive is very broad in scope. It defines insider information liberally,

133Hostile take-overs are less common in Canada than they are in the U.S. See P. Dey & R. Yal-
den, “Keeping the Playing Field Level: Poison Pills and Directors’ Fiduciary Duties in Canadian
Take-Over Law” (1990) 17 Can. Bus. L.J. 252 at 254-55 & 262-63. On takeovers in Britain, see
D.M. Keim, “The European Community’s Proposed Directive on Takeover Bids and its Impact on
Shareholders’ Rights” (1990) 16 Brooklyn J. Int’l L. 561 at 563-64.

(1989) 4 Butterworths J. of Int. Ban. & Fin. L. 14 at 16.

134Commission Press Release, sup ra, note 111, discussed by A. Perry, “The European Company”
135Supra, note 33, art. 8, as amended by OJ. 1990, C240f; Basaldua, supra, note 131 at 499,
136Arts 4, 10, 12 & 14. See Keim, supra, note 133 at 571-75. Articles 4 and 10 have been

and interview with A. Ioakimides, European Commission, DG XV, April 1990.

changed slightly by O.J. 1990, C240/7.

137See Basaldua, supra, note 131 at 495-500, and MacLachlan & Mackesy, supra, note 131 at
398-99. The Major Shareholdings Directive, Directive 88/627, O.J. 1988, L348/62, will probably
have a similar effect. It requires shareholders in companies listed on stock exchanges to disclose
the extent of their voting rights upon the acquisition or disposition of shares at 10%, 20%, 33 1/3%,
50% and 66 2/3% of the company’s outstanding voting rights. The disclosures should give boards
of target companies more time to take defensive measures against hostile bidders.

138Supra, note 32.
139C.A. McGuinness, “Toward the Unification of European Capital Markets: The EEC’s Pro-
posed Directive on Insider Trading” (1988) 11 Fordham Int’l L.J. 432 at 438-47, and A.E. Stutz,
“A New Look at the European Economic Community Directive on Insider Trading” (1990) 23
Vand. J. Transnat’l L. 135 at 154-67.

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employs a broad definition of insider and prohibits insiders from engaging in a
wide range of activities. 4 ‘

In practice, however, the Directive may not bring dramatic changes. This
is because of its treatment of enforcement. The Directive only requires member
states to appoint an authority with sufficient powers to regulate insider trading
and to establish sanctions which are sufficient to promote compliance. These
requirements are open ended enough to allow member states which saw little
reason to regulate insider trading in the past to follow much the same pattern
in the future.14 ‘

The E.C. has also enacted a number of measures which are intended to pro-
vide investors with information about companies which make public offers of
their securities. Taken together, the Admissions Directive, the Listing Particu-
lars Directive, the Continuous Disclosure Directive and the Public Offer Pro-
spectus Directive require member states to pass legislation which imposes dis-
closure and publication requirements on companies listed on Members State
stock exchanges and impose similar, though less rigorous, obligations on com-
panies which are not listed but which offer their securities for sale to the pub-
lic. 42

The most notable characteristic of the disclosure directives is that in the
late 1980s they were amended to introduce the concept of mutual recognition.’43
The basic thrust of the mutual recognition principle is that an undertaking, prod-
uct or service which has fulfilled one member state’s requirements should be
accepted by all E.C. members when the member states have essentially equiva-
lent standards.'” As applied to securities disclosure, mutual recognition means
that when a member state’s regulatory authority approves a company’s disclo-
sure documents, this approval must be accepted by the relevant authorities
throughout the Community. Consequently, if a British company has complied
with Great Britain’s legislative framework and wants to make a public offer in
Germany, Germany’s disclosure requirements will not apply, even if they are
stricter than Britain’s.

The mutual recognition principle potentially runs contrary to Europe’s tra-
ditional hostility to the possibility of migration from strict company law rules.

14’Arts 1-4, discussed by Stutz, ibid. at 168-69; and K.J. Hopt, “The European Insider Dealing
Directive” (1990) 27 C.M.L.R. 51 at 57-72 & 80. Dine, supra, note 44, criticises the provisions
for being too open-ended.
‘4’Arts 8 & 13; Buxbaum & Hopt, supra, note 18 at 246-50; Warren, supra, note 50 at 221;
142See supra, notes 30-31. See generally Warren, supra, note 50 at 209-19 & 224-32, and M.G.
Warren III, “Regulatory Harmony in the European Communities: the Common Market Prospectus”
(1990) 16 Brooklyn J. Int’l L. 19.

McGuinness, supra, note 139 at 448-49, 451-52; and Stutz, ibid. at 169-72.

143The relevant changes were made by the Mutual Recognition Directive.
’44White Paper at 6, 18-22, and Curzon-Price, supra, note 40 at 29-30. Again, this was part of

a general trend –

supra, note 50.

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E.C. COMPANY LAW

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The Community-wide effect of approval by one member state will give compa-
nies making a public offering choice about the regulatory scheme under which
they seek approval. This may cause E.C. members to adjust their legal standards
and administrative rules to attract securities offerings. Some think this will lead
to an irresponsible erosion of regulatory standards. The possibility exists, how-
ever, that the relevant regulatory schemes may become more responsive to the
needs of E.C. companies and the investing public.145

Regardless of whether any adjustments which take place are beneficial or
not, the overall process will be constrained in important ways. The minimum
standards established by the various securities disclosure directives will create
a regulatory floor. Also, the directives themselves impose some constraints on
forum shopping.’46 Furthermore, many types of public securities offerings are
not covered by the directives so they will not be affected by the mutual recog-
nition principle.’47 Finally, many companies will not find it cost-effective to
apply outside their home country even though the legal rules may be somewhat
more favourable elsewhere. Consequently, the mutual recognition principle
should not create a regulatory free-for-all in the securities disclosure context.

IV. Canadians and European Community Company and Securities Law

While most E.C. company and securities law measures have aspects which
may interest Canadian businesses, Canadian investors and Canadian law
reformers, some issues merit detailed consideration here. These will now be
examined from the perspective of the three groups.

A. The Business Community

Canadian businesses which pursue the E.C.’s commercial opportunities by
establishing a permanent base in Europe will have to consider E.C. company
and securities law. The two primary ways of establishing such a base are by
forming a branch or a subsidiary company.’48 Using a subsidiary has a number

145Compare Curzon-Price, ibid. at 32-35 with McGee & Weatherill, supra, note 40 at 585; War-
ren, supra, note 50 at 213, 231-32 and Warren, supra, note 142 at 29-30 & 50-51. The arguments
involved here have been canvassed extensively by U.S. corporate law scholars discussing the pros
and cons of allowing corporations to choose between diverse sets of state corporate legislation. For
a Canadian perspective see R.J. Daniels, “Should Provinces Compete? The Case for a Competitive
Corporate Law Market” (1990) 36 McGill L.J. 130. See also infra, notes 162 and 163 and accom-
panying text.
46See, e.g., arts 20-21(1) of the Public Offer Prospectus Directive; and Warren, supra, note 142
1

at 30 & 47.

147Art. 2, discussed by Warren, ibid. at 37-46.
1410n the ways non-E.C. companies can approach the E.C. market and the advantages involved
with having a base there, see Pitts, supra, note 2 at 157-58, 168-90, 212-14 & 218-29; and Winter,
supra, note 13 at 80 & 294-97.

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of legal advantages. Most important, courts and governments will generally
treat a subsidiary company as a distinct legal entity which is based in one of the
member states. They will not do this with branches. This makes a significant
difference, since member state companies are entitled to rely upon most of the
freedoms guaranteed by the Treaty of Rome and the ownership structure of a
company does not affect these rights. Consequently, a Canadian subsidiary,
unlike a branch, generally should be able to fully exploit the benefits of the
E.C.’s single market.’49

The E.E.L G. Regulation and the European Company Statute illustrate why
using a subsidiary is advantageous. Both place restrictions on their use by
non-E.C. undertakings. Undertakings based outside the E.C. cannot be an
E.E.I.G. partner and, under the most recent draft of the Statute, cannot be
involved in the formation of a European Company. 50 These restrictions would
prevent a Canadian branch from using either business form but they would not
be a problem for the European subsidiary of a Canadian company. This is
because it would qualify as an E.C. undertaking, despite being owned by a
non-E.C. firm. 5′

If a Canadian company follows the branch route, the only E.C. company
and securities law provision which should be directly relevant is the Eleventh
Directive. Again, it regulates disclosure by branches in the member states. Of
most significance for Canadian companies, it requires non-E.C. company
branches to file prescribed information about the company.

A Canadian company which acquires or incorporates a subsidiary in the
Community will be subject to E.C. company and securities law via the legisla-
tion of the subsidiary’s member state. Generally speaking, however, Canadian
parent companies should not be directly affected by E.C. measures. This is
because few of these measures require member states to impose obligations
directly on non-E.C. parent companies.’52 Even the Seventh Directive, with its
focus on corporate groups, does not attempt to regulate non-E.C. companies.
The only potential exceptions have not yet been enacted, these being the Ninth
Directive and the directives dealing with disclosure to employees in corporate

149Arts 52, 58 & 59. Not all non-E.C. subsidiaries are assured of equal treatment with companies
which are owned by E.C. interests. At the very least, non-E.C. subsidiaries will have to have a real
and continuous link with the economy of one of the E.C. members. See generally Winter, ibid. at
79-85; Ferry, supra, note 126 at 223; Lee, supra, note 126 at 18-19; and J.D. Dinnage, “Comments
on the ‘Europe 1992′ Symposium” (1989) 3 Temple Int’l & Comp. L.J. 179 at 181-82.
150Supra, note 33, art. 4(a), and supra, note 29, art. 2. On this restriction in the E.E.I.G. see Dine,
supra, note 44 and Israel, supra, note 58 at 16. On the European Company, see Stein, supra, note
29 at 458-60, and Sanders, supra, note 29 at 86-87.

151United States International Trade Commission, supra, note 54 at 9-24.
152Winter, supra, note 13 at 151.

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E.C. COMPANY LAW

1315

groups. If these measures are enacted, they likely would apply to non-E.C. par-
ent companies which have European subsidiaries.’ 53

A Canadian company that decides to use a subsidiary as its European foun-
dation will have to choose which member state to incorporate in. The choice is
made somewhat more difficult because a Canadian parent generally will not be
able to incorporate its subsidiary in one member state and base its operations in
another. This is because the real seat rule, which operates in most member
states, prevents companies which have their business based in one member state
from being incorporated in another.

The real seat rule likely imposes costs on non-E.C. companies. 54 In decid-
ing where to establish operations most companies would consider commercial
and financial considerations to be more important than company law factors.’55
Consequently, if the member state which has the most favourable commercial
environment happens to have an unattractive company law regime, a Canadian
parent will still likely decide to base its operations there. Nevertheless, the
inconveniences imposed by that member state’s company law will impose costs
on the subsidiary and thus on the parent.’56

Canadian companies might assume that because of the E.C.’s harmonisa-
tion programme, the differences between member state company laws will be
minor and the costs imposed by disadvantageous legal rules should be slight.
There is a problem, however, with this line of reasoning, which is that important
differences continue to exist between member state company laws. 57

153See supra, note 124, and E.C., supra, note 35.
”he rule strongly encourages non-E.C. parents to incorporate in the member state where they
want to base their operations rather than in the member state with the most suitable company law.

155Pitts discusses other factors which would be relevant supra, note 2 at 229-33.
156E.g., a Canadian company might decide that commercially Germany would be the best place
to establish a subsidiary. Germany, however, imposes worker participation requirements on its
companies. A Canadian company likely would be unenthusiastic about the prospects of meeting
this requirement, given that employee participation in management rarely occurs in Canada. See
Pitts, ibid. at 241; Axworthy, supra, note 7 at 393-97 & 423-27; Hadden, Forbes & Simmonds,
supra, note 7 at 291-93; and Carr & Kolkey, supra, note 115 at 63-64. Employee participation argu-
ably could be beneficial for business, however. Its impact on the profitability of corporations has
been debated extensively. See, e.g., Hopt, supra, note 62 at 1353-59; Daibler, supra, note 89 at
473-81; M.C. Jensen & W.H. Meckling, “Rights and Production Functions: An Application to
Labor-Managed Firms and Codetermination” (1979) 52 J. Bus. 469 at 472-75 & 503-504; S.M.
Weiss & R.L. Yaffe, “Industrial Democracy: A Study of the Bullock Report and its Applicability
to Canada” (1979) 9 Man. L.J. 445 at 475-77; L.L. Dallas, “Two Models of Corporate Governance:
Beyond Berle and Means” (1988) 22 J. of L. Ref. 19 at 75-80; and O.E. Williamson, The Economic
Institutions of Capitalism: Finns, Markets, Relational Contracting (New York: Free Press, 1985)
at 268-72 & 302-04.
’57Also, there are a number of areas which are closely related to company law where no harmo-
nisation has taken place and probably will not in the near future. These include winding-up and
insolvency. See Encyclopedia, supra, note 11, vol. B at para. B10-487.

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There are a number of reasons for why differences between company law
regimes persist. One is that many topics have not been dealt with by enacted
directives. For instance, the disagreements about employee participation and
two-tier boards have not only prevented harmonisation in these areas, but have
blocked passage of the Fifth Directive, which deals with a number of other key
company law areas. Another reason is that some member states are slow to
implement enacted directives. At present, only two of the seven company law
directives which the member states are currently obliged to comply with have
been implemented in all twelve member states.’58

Furthermore, member state implementation does not always result in
closely equivalent laws. The Fourth Directive experience, discussed above,
illustrates this, but the problem is not an isolated one or one which will be elim-
inated easily.’59 For example, enactment of the Fifth Directive might well do lit-
tle to harmonise regulation of employee participation in management. Given
that social and economic differences have helped to prevent harmonisation in
the accounting area, the prospects for harmonisation in the politically charged
area of employee/management relations seem to be rather bleak. 60

The European Company Statute theoretically could reduce some of the
costs which the real seat rule imposes on Canadian parent companies. This is
because it could provide a Canadian parent with a statutory regime for a sub-
sidiary which was preferable to that in the member state where the parent com-
pany wanted to establish operations. Canadian parent companies should not be
too optimistic, however, about the prospects of such a lower-cost alternative.

One reason, as has been discussed, is that employee participation consid-
erations distinctly reduce the prospects of the Statute being enacted in the near
future. Another is that Canadian businesses will have to endure some costs to
form such a company. Again, under the most recent proposal, European compa-
nies can generally only be formed by the joint action of two or more E.C. firms.
A Canadian parent which wanted to use the European Company form for its
subsidiary would have to take some additional legal steps, such as forming sub-
sidiaries in two member states and having them incorporate as a European
Company.

A third reason the European Company Statute may not be attractive for
Canadian businesses is that European companies will be governed to a signif-
icant extent by the laws of the member state where they are based. The 1989

states” (1990) [unpublished].

158European Commission, “Implementation of the Company Law Directives in the Member
159Buxbaum & Hopt, supra, note 18 at 233-43 & 263-66.
160Buxbaum & Hopt, ibid. at 262, and 0. Kahn-Freund, “Common Law and Civil Law –

Imag-
inary and Real Obstacles to Assimilation” in M. Cappelletti, ed., New Perspectives for a -Common
Law of Europe (Boston: Sijthoff, 1978) 137 at 165-66.

1991]

E.C. COMPANY LAW

1317

draft of the Statute requires a European Company to register in the member state
where it has its central administration.’ 6′ Consequently, a Canadian parent
would have to register the subsidiary in the member state where it was planning
to establish operations. This is significant because the Statute leaves a number
of important company law issues to be governed by the member state where
registration has taken place. 62 The result is that there may be few cost differ-
ences between the member state company law and the European Company
Statute.

B.

Investors

As mentioned in the introduction to this article, Canadian investors are
becoming more interested in the E.C. market and are consequently acquiring
increasing numbers of shares in European companies. If, however, investors are
assuming the Community’s company law and securities regulation initiatives
will enhance the value of shares in E.C. firms, they could be mistaken.

Arguably the centralising impulse inherent in E.C. company and securities
law measures is contrary to shareholders’ interests. There is a strong trend of
opinion in the U.S. that shareholders’ interests are best served when companies
can select between legislative regimes to provide a package which will be
attractive to shareholders. 63 The real seat rule already severely restricts the abil-
ity of E.C. companies to make such choices. To the extent that E.C. company
law directives successfully develop equivalent legal rules through the Commu-
nity, companies will face even more serious constraints on their options.

Many would dispute that the development of uniform or equivalent rules
across jurisdictions is contrary to shareholders’ interests.”6 Still, even accepting

161Supra, note 29, art. 5.
162The European Company Statute expressly stipulates that regulation of corporate groups,
mergers, insolvency and sanctions for breach of the Statute are to be governed by member state
law. See arts 114, 129, 132 & 134. Also, there are important matters which the European Company
Statute makes no reference to and which consequently would be governed by the law of the mem-
ber state (see Department of Trade and Industry, supra, note 29 at 3 & 7-8). Finally, the courts of
the chosen member state would interpret all disputes concerning the company’s internal affairs, and
would probably do so in accordance with the prevailing principles of their legal system. The Stat-
ute provides, however, that matters covered by it but which are not expressly mentioned are to be
interpreted in accordance with the general principles upon which the Statute is based (art. 7(1)).
163TWo commentators who have asserted that the same arguments are valid in the E.C. are L.S.
Sealy, “British and European Company Law” in Dahrendorf, supra, note 40, 89 at 97-101, and
H.N. Butler, “Nineteenth-Century Jurisdictional Competition in the Granting of Corporate Privi-
leges” (1985) 14 J. Legal St. 129 at 166 n. 150.

16’Canadian advocates of uniform rules across jurisdictions include R.C.C. Cuming, “Harmoni-
zation of Law in Canada: An Overview” in Research Papers, The Royal Commission on the Eco-
nomic Union and Development Prospects for Canada, vol. 55, Perspectives on the Harmonization
of Law in Canada (Toronto: University of Toronto Press, 1985) 1 at 17-20; J.S. Ziegel, “Harmo-
nization of Provincial Laws, with Particular Reference to the Commercial, Consumer and Corpo-

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[Vol. 36

that harmonisation of Community company and securities law is generally ben-
eficial to shareholders, particular E.C. measures may adversely affect them.
Some would argue, for example, that if the Community’s attempt to discourage
insider trading succeeds, this will decrease share values. 65 The Fifth Directive
likely would have the same effect if it is enacted. In most member states, it
would shift power away from the shareholders to the employees. The evidence
from Germany suggests that shareholders would be made worse off by such a
shift. 166

This does not mean that investor enthusiasm about the E.C. is misplaced.
The Community, by attempting to create a single market in the E.C. by the end
of 1992, is altering the face of Europe. Admittedly, the E.C.’s single market pro-
ject still faces political and technical obstacles. Nevertheless, the Community
has made significant progress in meeting its 1992 timetable. 67 Probably even
more important, E.C. businesses, as mentioned, are now “thinking European”
and are planning and reorganising on an E.C. level. In addition, the 1992 project
has had a significant psychological impact on member state companies. Conse-
quently, the companies should be more receptive to the European focus of the
Community’s company and securities law initiatives. 6 ‘

No doubt some companies will lose out in the development of the single
market. Still, most expect that the overall economic impact will be strongly ben-
eficial for European business. 69 If this is accurate, the effect should outweigh
any potential negative fallout from E.C. company and securities law. Hence,
Canadian investors who properly diversify their European investment portfolio
likely will benefit by increasing their holdings of European securities.

C. Law Reformers

Canadians interested in corporate law reform may be able to benefit from
increasing their knowledge of the E.C. Canadian corporate law has been drawn

rate Law” in Research Papers, The Royal Commission on the Economic Union and Development
Prospects for Canada, vol. 56, Harmonization of Business Law in Canada (Toronto: University of
Toronto Press, 1986) 1 at 3-5; and W.H. Hurlburt, “Harmonization of Provincial Legislation in
Canada: the Elusive Goal” (1987) 12 C.B.L.J. 387 at 393-95.
165North American commentators have extensively debated whether insider trading regulation
acts in shareholders’ interests. For an overview, see J.S. Ziegel, et. al., Cases and Materials on
Partnerships and Canadian Business Corporations, 2d ed. (Toronto: Carswell, 1989) at 769-81.
166Hopt, supra, note 62 at 1356.
167Pitts, supra, note 2 at 28-39; Elling, supra, note 13 at 524-30; United States International
Trade Commission, supra, note 54 at 1-6 – 1-9; and Commission Background Report No.
ISEC/B15/90, 5.4.90, set out in “1992 Single European Market” (1990) 11 Bus. L. Rev. 151.

6’Pitts, ibid. at 62-66, 69-73, 77, 80-82 & 109-15.
1691bid. at 71-73, 76 & 82; “Post-’92,” supra, note 3; United States International Trade Commis-
sion, supra, note 54 at 2-6 – 2-12; and “Cashing In on European Integration” The New York Tnes
(30 April 1989) s. 3, 10. See, however, M. Porter, “Europe’s Companies After 1992: Don’t Col-
laborate, Compete” The Economist (9 June 1990) 17.

1991]

E.C. COMPANY LAW

1319

substantially from U.S. and British sources.17 Similarly, Canadians have most
often borrowed theoretical perspectives from these jurisdictions. Law and eco-
nomics analysis, which emerged in the U.S., is the latest example.’

The E.C. provides a potential alternative source of corporate law ideas.
There are important similarities between the Community and Canada which
make comparisons relevant and potentially revealing. As mentioned, in the E.C.
cross-ownership of shares is common and only a few companies have widely
traded shares. Though the situation is not as extreme as in the E.C., these char-
acteristics are more prevalent in Canada than they are in the U.S.’72 Also, in both
the E.C. and Canada there is divided legislative responsibility for company law
and securities law matters. Thus, these matters are regulated by provincial or
member state authorities on the one hand or the federal or Community author-
ities on the other.

Several Canadian observers have in fact already drawn on E.C. company
law to enhance and illuminate their work. For example, a number of Canadians
have written about the E.C. approach to employee participation in management,
board structure and corporate groups. 73 There are other matters, however,
which merit consideration.

For example, Canadians who favour increased uniformity in provincial
legislation should find the mandatory, binding directive system an attractive
alternative to the Canadian situation, where there are no mechanisms available
to force the provinces to adopt uniform legislation.’74 On the other hand, the his-
tory of corporate law reform in the E.C. and Canada suggests that institutional
structures are not always key to developing uniform legislation. While the
E.C.’s attempts to harmonise company law have run into significant obstacles,
the absence of an institutional framework has not prevented the emergence of
substantially uniform Canadian corporate legislation in recent years.’75

Canadian observers who support a decentralised approach to legal regula-
tion may also find the E.C. company and securities law to be of interest.’76 The

17Hadden, Forbes & Simmonds, supra, note 7 at 24-33.
171B.R. Cheffins, “An Economic Analysis of the Oppression Remedy: Working Towards a More

Coherent Picture of Corporate Law” (1990) 40 U.T.L.J. 775 at 783.

(1990) [unpublished].

172R.J. Daniels & J.G. MacIntosh, “Toward a Distinctive Canadian Corporate Law Regime”
173Supra, note 7.
174Cuming, supra, note 164 at 11. On the problems with harmonisation mechanisms in Canada,
see supra at 28-47 & 52-55; Ziegel, supra, note 164 at 10-28 & 44-49; and Hurlburt, supra, note
164 at 401-15.

175Cuming, ibid. at 24-25; Ziegel, ibid. at 34; and Hurlburt, ibid. at 399.
176Supporters of the decentralised approach include Daniels, supra, note 145; and T.J. Cour-
chene, Economic Management and the Division of Powers in Research Papers, The Royal Com-
mission on the Economic Union and Development Prospects for Canada, vol. 67 (Toronto: Uni-
versity of Toronto Press, 1986).

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[Vol. 36

mutual recognition principle seems particularly attractive. This is illustrated by
provincial regulation of disclosure by companies issuing securities to the public.
Individual provincial vetting of prospectuses and continuous disclosure
documents imposes compliance costs on corporate issuers. Most often these
costs are needless, since the provincial regulator with whom the documents are
initially filed should detect any serious errors.’77 Provincial securities regulators
have responded to the problem by trying to reduce the filing requirements for
issuers which have had their documentation accepted where it was initially
filed. 7′ This is useful, but the underlying assumption still is that each province’s
regulatory requirements must be met. Consequently, a shift in emphasis might
be appropriate. The E.C.’s principle of mutual recognition could provide the
inspiration for such a shift. If this principle were applied in Canada, documents
accepted by one provincial securities regulator would be acceptable in every
other province. If this were felt to be too liberal, provincial legislatures and
securities regulators could create specified exceptions to protect against poten-
tial irresponsible abandonment of regulatory standards. The result would still
likely be reduced costs for corporate issuers and a smaller regulatory bureauc-
racy in most provinces.

Conclusion

The European Community is one of the world’s most important economic
and political institutions, and recent events suggest its importance will continue
to grow. Because of these factors, Canadians have a strong incentive to become
and remain informed about Community topics. For example, Canadian busi-
nesses, investors and law reformers have good reasons to examine E.C. com-
pany and securities law.

Canadians who decide to analyze Community developments must ensure
that they have some understanding of the context in which the developments are
taking place. For example, the most striking E.C. company law measures prob-
ably are the Fifth Directive, the Ninth Directive, the European Company Statute
and the directives dealing with disclosure to employees in corporate groups.
This is because these measures are socially and politically controversial as well
as legally significant. Consequently, it should not be surprising that Canadians

177provincial regulation of prospectuses and continuous disclosure is discussed by P. Anisman,
“The Regulation of the Securities Market and the Harmonization of Provincial Laws” in Research
Papers, vol. 56, supra, note 164, 77 at 87-96 & 128. For a helpful discussion of harmonisation and
mutual recognition dynamics in Canadian securities regulation see J. McIntosh, “Perspectives on
Canadian Corporate and Securities Law” (1991) Proceedings of the Osgoode-Monash Conference
on Law in the 21st Century [forthcoming].

178See, e.g., National Policy No. 1, Clearance of National Issues, set out in Ontario Securities
1990

Act and Regulations With Policy Statements, Blanket Orders, Rulings and Notices –
(Toronto: De Boo, 1990) at 3-7.

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who have examined E.C. company and securities law have focused on issues
dealt with in these measures, including, as mentioned, employee representation
in management, board structure and corporate groups.

Analyzing these topics in isolation, however, gives a misleading impres-
sion about E.C. company and securities law. Only by considering the E.C.’s
institutional mechanisms and political dynamics can one appreciate that the
Fifth Directive, the Ninth Directive, the European Company Statute and the
directives dealing with disclosure to employees in corporate groups are sur-
rounded by political controversy and may not be enacted in the near future. Sim-
ilarly, only by examining other E.C. company and securities law measures can
one appreciate that the Community has already enacted a significant number of
provisions which are potentially important to a Canadian audience.

This lesson is not an isolated one. Each Community topic which might be
of interest to Canadians, whether it is E.C. trade policy, competition law, finan-
cial services regulation or another matter, will have aspects which cannot be
properly understood without some appreciation of the institutional and political
context. Canadians who are interested in the E.C., and those writing about the
Community for a Canadian audience, should remain aware of such considera-
tions. If this admonition is kept in mind, interested Canadians should be able to
develop a well-balanced and thorough understanding of a very important legal,
economic and social institution.