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Promoting Entrepreneurship — The New Company Law Agenda

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Abstract

Promoting entrepreneurship is high on the agenda at both European and national level. This is, e.g., reflected in a number of company law initiatives, which have mainly focused on creating easier and cheaper access to limited liability, for example, by introducing sub-types of the private limited company. The main questions addressed here are whether it is possible to promote entrepreneurship through company law reforms and what the content of such frameworks should be in order to meet the needs of entrepreneurs. The analysis takes its point of departure in a new Danish survey of what the content of company legislation should be in order to meet the needs of entrepreneurs. In line with existing empirical studies, the importance of the capital requirement and formation procedures and costs is analysed, and further insight is given into, for example, what level of minimum capital and cost is regarded as acceptable. Besides this insight, the Danish survey adds to the existing studies and literature by also shedding light on whether company laws can be further optimised, for instance, by introducing more flexible rules for company management, etc. The results of the survey are compared with the reforms which, in recent years, have been adopted in several EU Member States, with the aim of evaluating whether these have met the needs indicated in the survey. The overall conclusion is that this is not the case on all points and that there is thus room for improvement. It is also briefly discussed whether the different reform methods used in the recent national reforms are well-suited for further optimising the legislation and it is shown that the method of introducing sub-types of private limited companies has its limitations.

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  45. In Norway, the reform was implemented in 2011 and already in the first half of 2012, registrations of private companies increased by 76.5% in comparison with the preceding year. What is interesting is that, at the same time, the number of new Norwegian foreign-registered undertakings fell by 60%. It has been stated that this was due to the reduced capital requirements for Norwegian private limited companies, see <http://www.brreg.no/presse/pressemeldinger/2012/07/fr-statistikk-1-ha.html>.

  46. This may be in connection with an entrepreneurial company’s re-registration as a private limited company, whereby the reserve will be transferred to the private company’s capital, or it may be the case if the shareholders want to increase the company’s capital by transferring the tied reserve prior to re-registration.

  47. The German provision states the following: ‘(3) The balance sheet in the annual accounts to be prepared in accordance with §§ 242 and 264 of the Commercial Code must include statutory reserves comprising one quarter of the annual surplus minus any losses carried forward from the previous year. The reserves may be used only (1) for the purposes set out in § 57c; (2) to compensate for an annual deficit, in so far as it is not covered by profits carried forward from the previous year; (3) to compensate for losses carried forward from the previous year, in so far as they are not covered by an annual surplus.’

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  53. ,Article 18(5) of the Commission’s proposal for a single-member private limited liability company states that ‘[a]ny director shall be personally liable for recommending or ordering a distribution if that director knew, or, in view of the circumstances, ought to have known that the distribution would be contrary to para. 2 or 3. The same applies to the single-member with regard to any decision to make a distribution referred to in Article 21.

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  61. It must be assumed that many entrepreneurs will find it difficult to get an overview of the kinds of problems that can arise, and thus of which issues need to be regulated. Günter H. Roth, ‘Das System der Kapitalgesellschaften im Umbruch — ein internationaler Vergleich’, 60 Rechtsfragen der Handelsgesellschaften (1990) p. 18, warned against regarding Satzungsautonomie as a way to protect oneself through ‘corporate planning’. He stated that neither the average shareholder nor a lawyer who is not specialised in the area will be able to have a perspective on all possible problems, let alone regulate such issues properly. On ‘incomplete contracting’ in SMEs, see Joseph A. McCahery and Erik P.M. Vermeulen ‘Conflict Resolution and the Role of Courts: An Empirical Study’, in Mette Neville and Karsten Engsig Sørensen, eds., Company Law and SMEs (Thomson Reuters 2010) p. 207.

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  68. This will only happen if the gains from using a contractual provision exceed: (1) the parties’ transaction costs; (2) the value to the parties of withholding relevant information; and (3) the parties’ joint preference for the status quo. On the ‘status quo bias effect’, see William Samuelson and Richard Zechhauser, ‘Status quo in Decision Making’, 1 Journal of Risk and Uncertainty (1988) p. 7.

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  69. Legislators’ drafting of declaratory rules has been the subject of much attention in economic theory, and according to mainstream economic theory, legislation ought to function as a standard contract so as to minimise the parties’ transaction costs. The content of declaratory rules should reflect the agreement that rational fully informed parties would have entered into if they did not have to take into account the transaction costs of negotiating and drafting the agreement. Thus, a Hypothetical Bargaining Model should be used; see William J. Carney, ‘The Political Economy of Competition for Corporate Charters’, 26 Journal of Legal Studies (1997) p. 305; Easterbrook and Fischel, supra n. 68, and Easterbrook and Fischel ‘The Corporate Contract’, in Roberta Romano, ed., Foundations of Corporate Law (Foundation Press/Thomson 1993) p. 101; and Brian Cheffins, Company Law — Theory, Structure and Operation (Clarendon Press 1997), at p. 264.

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  70. See Mette Neville, ‘Konfliktløsning’, in Mette Neville and Karsten Engsig Sørensen, eds., Den nye selskabslov (Djoef Publishing 2009), at p. 209; and Morten Bennedsen and Kasper Nielsen, ‘Ejerstrukturer og kontrolallokering i unoterede danske virksomheder’, 139 Nationaløkonomisk Tidsskrift (2001) p. 237.

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  71. See Mette Neville, ‘Moderniseringsudvalgets udspil til ny selskabslov — ikke en lov i superliga for iværksættere og smÅ selskaber’, Nordisk Tidsskrift for selskabsret (2008) p. 94.

  72. The fact that small companies have a structure as described above has led many countries to introduce legislative provisions for private limited companies and their like according to which shares are not, in principle, freely transferrable. This applies, for example, to Norwegian private companies where, according to § 4–15, the agreement of the board is required for the transfer of shares and the other shareholders have pre-emption rights.

  73. See Martin Christian Kruhl, Ejeraftaler (Karnov Group 2008), at p. 57 et seq.

  74. See Dennis P. Coates, ‘Share Transfer and Transmission Restrictions in the Close Corporation’, 3 U.B.C. Law Review (1968) p. 98. Another risk is that the majority will identify the company’s interests with its own interests and will refuse to allow a transfer to a buyer who could disagree with them about the running of the company, whether or not the company is operated optimally; see the statement by the Norwegian Finansanalytikerforening in Ot.prp. No 19 1974–75, p. 44. See also Mette Neville, ‘Samtykkeklausuler i aktie- og anpartsselskaber’, in Torsten Iversen, Lars Hedegaard Kristensen and Erik Werlauff, eds., Hyldestskrift til Jørgen Nørgaard (Djoef Publishing 2003) p. 942.

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  77. Cf. Gerner-Beuerle, Paech and Philipp, infra n. 93.

  78. If a company is required to choose or chooses to have a board, the majority of Member States follow the one-tier system, but some Member States (for example, the Czech Republic Denmark, Germany, Latvia, and Poland) allow private companies to set up a supervisory board. In some countries, a board is mandatory in some circumstances, and in some Member States the two-tier system is mandatory in certain circumstances, e.g., relating to the number of employees (employee representation) or shareholders.

  79. Neville/Nykredit, Ejerlederanalyse 2010. The study, a collaboration between Nykredit, a major Danish bank and mortgage lender, and the author, focuses on Danish owner-managed SMEs. It is based on telephone interviews with 1,040 owner-managers on the basis of a questionnaire. In 2010, the focus was on growth and professionalisation. All respondents were defined as being both owners and managers of their business. The study included all forms of company and all trade sectors except the primary industries of agriculture and fisheries. The study is close to being a representative sample, though, for a variety of reasons, the sample does not include firms with less than 4 employees.

  80. Studies show that the board, and in particular the use of external members, ensures greater focus on key management tasks; see Mette Neville, ‘The Role of Boards in Small and Medium Sized Firms’, 11 Corporate Governance (2011) p. 527. Studies also show that external board members help implement strategic changes; see Olof Brunninge, Mattias Nordqvist, Johan Wiklund, ‘Corporate Governance and Strategic Change in SMEs: The Effects of Ownership, Board Composition and Top Management Teams’, 29 Small Business Economics (2007) p. 295. On this basis, the Danish Business Authority (Erhvervsstyrelsen) published Den kompetente bestyrelse with a view to motivating owner-managers to use boards and external board members. This publication can be downloaded from: <http://www.ebst.dk/file/187801/den_kompetente_bestyrelse.pdf>.

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  82. See Mette Neville, ‘The Many Roles of Boards in SMEs’, in Birkmose, Neville and Sørensen, supra n. 62, Chapter 8.

  83. See for a new study mapping directors’ duties and liabilities in the Member States, Carsten Gerner-Beuerle, Philipp Paech and Edmund Philipp Schuster, Study on Directors’ Duties and Liability, prepared for the European Commission DG Markt (April 2013).

  84. See Mette Neville, supra n. 92.

  85. Gerner-Beuerle, Paech and Schuster, supra n. 93.

  86. Ibid., at p. 63 et seq.

  87. Model Articles for Public and Limited Companies, Regulations 2008 No 3229, Article 4(1).

  88. Except in a limited range of matters where the statute requires the participation of large shareholders; see Paul Davies and Sarah Worthington, eds., Gower & Davies, Principles of Company Law, 9th edn. (Sweet & Maxwell 2012). In the UK, the division of powers between boards and shareholders is a matter for the company’s articles of association, and in SMEs it is quite possible for shareholders to play a larger role in decision making than in listed companies. Gower & Davies give the example of quasi-partnership companies, where shareholders want the system of governance that would apply if the entity were a partnership rather than a company.

  89. See Gerner-Beuerle, Paech and Schuster, supra n. 93, at pp. 64 and 21.

  90. Alfred Hueck and Christine Windbichler, Gesellschaftsrecht, 21st edn. (Verlag C.H. Beck München 2008), at p. 224.

  91. Only where following such instructions would entail breaching the national law of the Member State in which the company is registered, should the management body not follow them; see Article 23(2).

  92. On conflicts within SMEs, see Neville, supra n. 76, at p. 209 ff.; and Michael Harvey and Rodney Evans, ‘Family Business and Multiple Levels of Conflict’, 7 Family Business Review (1994) p. 331.

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  93. On the possible consequences of conflicts, see Neville, supra n. 76, and idem, ‘Conflicts in SMEs’, in Paul Krüger Andersen, Nis Jul Clausen and Rolf Skog, Shareholder Conflicts (Djoef Publishing 2006) p. 87.

  94. Conflicts need not be destructive. If handled properly, they can contribute to better decisions being made. This applies especially to conflicts about processes where people agree about what is to be done but disagree about how it is to be done. This distinction was made in K. E. Jehn, ‘A Qualitative Analysis of Conflict Types and Dimensions in Organizational Groups’, 42 Administrative Science Quarterly (1997) p. 252. See also Richard A. Cosier and Michael Harvey, ‘The Hidden Strengths in Family Business: Functional Conflict’, 11 Family Business Review (1998) p. 75, with further references there. There are also task-related conflicts, about the tasks and divisions of responsibilities between owner-managers. These can be prevented by job descriptions, etc.

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  95. Troels Mogensen and Janus Rosted Gjesager, ‘Deadlock i joint ventures’, Masters Dissertation (2008), Aarhus School of Business. The research included an investigation of owner-managed undertakings, involving 1,423 respondents.

  96. For the reasons for the lack of such provisions, see Neville, supra n. 76, which contains a report on questionnaire research that showed, among other things, that many respondents had omitted such provisions because they relied on the legislation containing an appropriate solution.

  97. Harald Bartl, Angela Bartl, Helmar Fichtelmann, Detlef Koch and Michaela C. Schmitt, GmbH-Recht (Hüthig Jehle Rehm 2013), at p. 229.

  98. BVs are governed chiefly by Title 5 of Book II of the Civil Code. See new Act 299 Staatsblad van het Koninkrijk der Nederlanden (Official Gazette of the Kingdom of the Netherlands (5 July 2012)).

  99. Levinus Timmerman and Alexander Doorman, ‘Rights of Minority Shareholders in the Netherlands’, a report written for the XVIth World Congress of the International Academy of Comparative Law.

  100. Len Sealy and Sarah Worthington, Cases and Materials in Company Law, 8th edn. (OUP 2008), at p. 552, and Andrew Hicks and S.H. Goo, Cases and Materials on Company Law, 6th edn. (OUP 2008), at p. 440.

  101. Sealy and Worthington, ibid., at p. 560.

  102. See Scottish Co-operative Wholesale Society Ltd v. Meyer (1959) AC 324; Re City Branch Group Ltd (1985) 1 WLR 3505 (Court ofAppeal); and O’Neill v. Phillips (1999) 1 WLR 1092 (House of Lords).

  103. Gower & Davies, Principles of Modern Company Law, 8th edn. (Sweet & Maxwell 2008), at p. 705.

  104. Neville, supra n. 76.

  105. COM(2008) 396/3. However, in a compromise proposal put forward by the Presidency for Competitiveness Council (3/4.12.2009) Inter-institutional File: 2008/0130 (CNS), the provision on conflict resolution was removed so that it is now to be found in national laws. See Mette Neville, ‘Conflicts in the European Private Company (SPE)’, in Heribert Hirte and Christoph Teichmann, The European Private Company — Societas Privata Europaea (SPE), European Company and Financial Law Review, Special Volume 3 (2012)p. 193.

  106. § 4–24(1)(2) and (3), which states that a court, upon the request of a shareholder, shall order the redemption of the shareholder’s shares if there are important reasons for giving the shareholder the right to exit the company because: (1) a company organ or some other representative of the company has acted contrary to §§ 5–21 and 6–28; (2) some other shareholder in the company has abused his influence in the company; or (3) a serious and enduring conflict has arisen between the shareholder and another shareholder or shareholders concerning the running of the company.

  107. Neville, supra n. 76.

  108. This means that the majority uses its powers to deprive a shareholder of influence. Under the law, it is the majority that can appoint and dismiss the board and the chief executive officer. The CEO is responsible for hiring and firing employees, as well as, together with the shareholders in the general meeting, for declaring a dividend. As stated, SMEs are characterised by the fact that the shareholders participate in the management of the company and are employed in it. The company’s revenues are typically distributed in the form of salaries rather than dividends. By removing shareholders from the management, dismissing them from employment and perhaps following a conservative policy with regard to the distribution of dividends, their expectation of participating in the company will be disappointed and their income will be seriously affected, and they will often lose returns on their investment. Since their shares are de facto non-transferrable, their investment will be locked in the company and thus form part of the basis for the income which the majority draws from the company.

  109. For a comparative analysis of the duty of loyalty of SMEs, see Karsten Engsig Sørensen, ‘Duty of Loyalty for Shareholders — A Possible Remedy for Conflicts in SMEs’, in Neville and Sørensen, eds., supra n. 66, p. 127.

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  1. Department of Law, Aarhus University, Denmark

    Mette Neville (Professor) & Karsten Engsig Sørensen (Professor)

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Neville, M., Sørensen, K.E. Promoting Entrepreneurship — The New Company Law Agenda. Eur Bus Org Law Rev 15, 545–584 (2014). https://doi.org/10.1017/S156675291400127X

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