Unlike in the United States, European firms were for a long time restricted to the company law of their home jurisdiction. With a number of decisions around the turn of the millennium, the European Court of Justice enabled newly established firms to opt out of the national company law of their home jurisdiction and instead to make use of the company law of another EU member state. Existing firms were, however, still restricted to the company law of their home jurisdiction. This changed on October 8, 2004, when Council Regulation (EC) No 2157/2001 on the Statute for a European Company (Societas Europaea – SE) became effective and offered existing firms located in the European Economic Area (EEA) a choice between the national law of the firm’s home state and the law of the supranational SE.
Most importantly, the SE Regulation has offered firms in each member state the opportunity to engage in what has been termed legal arbitrage. Under the SE Regulation, firms located in the EEA member states now have the choice between a one-tier and a two-tier board structure and can negotiate the extent of worker participation, two options that were not available in some of the member states under national company law. Worker participation in the SE is governed by the provisions of Directive 2001/86/EC and the national transposition laws. In particular, companies may use the opportunity to freeze the current level of worker participation, as the level of board-level worker participation cannot only be negotiated ex ante when establishing an SE, but the pre-existing level of worker participation remains unchanged ex post, because the SE is not subject to enhanced worker participation requirements under national law. Besides the benefits due to more legal flexibility in the corporate governance structure, firms can also decide to relocate their registered office to another member state under the SE Regulation. In some jurisdictions that was not permitted before the SE became available and is generally only possible since the Merger Directive was amended in 2005.
In our article, “The Economic Impact of Forming a European Company,” we investigate which impact the SE corporate form has on firm value. We use the event study method based on the market model to calculate abnormal stock returns for 159 firms where some public information about the reincorporation as an SE was released. Unlike a previous study by Eidenmüller, Engert and Hornuf (2010), we assess the drivers of value creation that may manifest themselves in legal arbitrage opportunities and analyse the uncertainty surrounding managers’ decisions regarding the SE incorporation. Since the reincorporation needs to be approved by shareholders, they may reject the plan of the management to incorporate as an SE. Moreover, debt holders or opposing minority shareholders may block the registration, despite the fact that shareholders have (conditionally) approved the reincorporation. Finally, the registration court might block the reincorporation because of procedural errors by the firms planning to reincorporate.
In our study we find firms located in member states where the SE offers additional legal arbitrage opportunities to benefit from the SE corporate form. Our results show that stock market reactions are positive when the firm is located in a country that only allows for a two-tier board structure, such as Germany and Austria. Similarly, investors react positively when the firm is located in a country with high mandatory board-level worker participation. Furthermore, the market reactions are positive when the decision to incorporate as an SE involves moving the firm’s registered office abroad. Since the SE Regulation requires (re)locating the company’s head office in the incorporation state, we examine whether its decision to do so is motivated by a lower corporate tax rate in the new jurisdiction. Corporate taxes in the countries of origin were significantly higher (27.5%) relative to the destination countries (21.8%), and the difference of 5.7% is statistically significant. Finally, we find a second positive and significant stock market reaction at the time of formal registration, but none at the time of the shareholder meeting, where shareholders approve the decision to reincorporate. This additional finding suggests that some uncertainty remains after the first public information about the reincorporation was released to the market, and that this uncertainty is only resolved at the registration date. One explanation for this uncertainty may be that debt holders or opposing minority shareholders could block the registration, as we document in our study.
Lars Hornuf is Associate Professor at Trier University and Affiliated Research Fellow at the Max Planck Institute for Innovation and Competition. Abdul Mohamed is Senior Lecturer at Cranfield School of Management. Armin Schwienbacher is Professor at SKEMA Business School.