LEGAL RESEARCH PAPER SERIES Paper No 34/2013 This version: June 2013 Corporate Mobility in the European Union – a Flash in the Pan? An empirical study on the success of lawmaking and regulatory competition WOLF-GEORG RINGE This paper can be downloaded without charge from the Social Science Research Network electronic library at: <http://ssrn.com/abstract=2247323> An index to the working papers in the University of Oxford Legal Research Paper Series is located at: <http://www.ssrn.com/link/oxford-legal-studies.html> Electronic copy available at: http://ssrn.com/abstract=2247323 University of Oslo University of Oslo Faculty of Law Legal Studies Research Paper Series No. 2013-19 Wolf-Georg Ringe Corporate Mobility in the European Union – A Flash in the Pan? An Empirical Study on the Success of Lawmaking and Regulatory Competition Electronic copy available at: http://ssrn.com/abstract=2247323 * WOLF-GEORG RINGE Corporate Mobility in the European Union – a Flash in the Pan? An empirical study on the success of lawmaking and regulatory competition ABSTRACT This paper discusses new data on regulatory competition in European company law and the impact of national law reforms, using the example of English company law forms being used by German start-ups. Since 1999, entrepreneurs in the EU have been allowed to select foreign legal forms to govern their affairs. The data show that English limited companies were very popular with German entrepreneurs in the first few years of the last decade but have experienced a sharp decline since early 2006. This decline casts doubt over the claim that the German company law reform from November 2008 ‘successfully fought off’ the use of foreign company forms. Moreover, by contrasting the German data with the corresponding developments in Austria, the paper further demonstrates that the latter jurisdiction is also seeing a similar decline, and without having reformed its company law. Instead of exclusively seeing law reform responsible for the declining number of foreign incorporations, this paper offers a number of alternative or complementary explanations for the striking developments. These findings are important for our understanding of (defensive) regulatory competition and successful lawmaking. Keywords: regulatory competition, company law, Centros, minimum capital. * Professor of International Commercial Law, Copenhagen Business School, and University of Oxford. I am grateful to John Armour, Sonja Bydlinski, Manfred Grünanger, Heribert Hirte, Peter Hubalek, Colin Mayer, Andrea Polo, Jonathan Rickford, Edmund Schuster, Beate Sjåfjell, Oren Sussman, Christoph Teichmann, Thomas Traar, as well as the participants at the Law & Finance Law Faculty seminar at the University of Oxford, a workshop at the Chamber of Commerce in Vienna, an empirical law studies workshop at the University of Oslo, and the 7th ECFR symposium in Luxembourg. Electronic copy available at: http://ssrn.com/abstract=2247323 I. INTRODUCTION Corporate mobility has reached a certain level of maturity in Europe. The EU legal framework is established and well understood, and it rests largely on case-law from the European Court of Justice. Beginning with the seminal Centros decision, the Court has effectively opened the borders between EU Member States little by little, and entrepreneurs now de facto have the right to select the foreign corporate law that governs the legal form of their company, at least at the company formation stage. Moreover, researchers have begun to empirically study how the case-law has impacted the market and how the market has reacted. While much effort has been spent evaluating the early market reactions, following the partial market opening made possible by Centros, relatively little attention has been devoted to subsequent developments. This is surprising because the various lawmakers’ responses to the wave of entrepreneurial migration offer a rare glimpse at the effects of regulatory competition and subsequent business’ reaction, as well as providing insights into the relevance and effects of lawmaking and regulatory responses to market pressure. This paper explores the responses by European businesses to the (limited) occurrences of regulatory competition flowing out of Centros and subsequent case- law. It uses new empirical data on Germany, the most prominent example of a country that was under pressure from regulatory competition. The paper confirms earlier findings that entrepreneurs in continental Europe, at first, increasingly used English letterbox companies to govern their affairs, without doing any business in the UK. The present analysis goes further, however, and shows that incorporation numbers have dropped considerably since 2006, falling to remarkably low numbers today. I then go on to evaluate the role that regulatory reform may have played in this development. Many lawmakers in continental European jurisdictions claim ‘success’ in the sense that the legal reforms of domestic company laws have caused foreign (English) corporations to fall out of vogue with their respective entrepreneurs as these entrepreneurs have begun to increasingly use domestic company types. The data evaluated in this study seem to weaken this claim: first, I show that the number of foreign incorporations in Germany has dropped even before the law reform came into force. Secondly, I go on to compare the German data with the situation in Austria, a natural comparison to make as these two systems share many similarities – with the exception that Austria did not reform its legal system as a consequence of EU regulatory competition. Surprisingly, however, the drop in the number of foreign incorporations in Austria coincided with the development of the reform in Germany; in other words, the rate began to drop at about the same time as in Germany. This may lead to the conclusion that reasons other than legal reform must have played a role in shaping businesses’ preferences. This paper is the first part of a larger research 2 initiative to explore the merits of corporate mobility and regulatory competition in Europe. The paper is organised as follows. Part II provides the legal and empirical background on developments that have led to the current (limited) scope of regulatory competition for incorporations within the EU. Part III evaluates these developments and offers an assessment of the academic work done so far. Parts IV and V introduce new empirical data for Germany and Austria, shedding light on the implications of the German 2008 law reform and questioning traditional assumptions of its effects on foreign incorporations. Part VI seeks to find explanations for the results and advances a number of possible conjectures. Part VII concludes. II. LEGAL AND EMPIRICAL BACKGROUND Free mobility for companies across borders has been a long-standing dream for European businesses. One would imagine that the creation of the European Union – or its predecessors, the European Economic and the European Communities – with its concept of an ‘Internal Market’ and the instrument of ‘freedom of establishment’ for corporations would help this dream come true. Yet it took over forty years from the inception of the EEC for the European Court of Justice, in its famous Centros judgment, to allow for a certain – and limited – freedom in this field. The Centros saga has been discussed in sufficient detail elsewhere.1 In summary, Centros effectively allows for choice of incorporation: entrepreneurs are free to form a company registered in Member State A while doing business exclusively in Member State B (the latter usually being their entrepreneur’s home state).2 This means that for instance German entrepreneurs are no longer exclusively reliant on German company forms. They can form a company in any of the other EU (or EEA) Member States as a ‘letterbox’ company, which keeps nothing more than a registered office in that Member State, and does its business exclusively in Germany. To the extent that company laws diverge between Member States, there may accordingly be an incentive to choose any foreign company law for domestic purposes. The Centros case created a sudden awareness of the possibilities offered by the Internal Market, provoking a storm of academic literature3 and corresponding business behaviour that quickly adapted to the situation. 1 WG Ringe, ‘Sparking Regulatory Competition in European Company Law: The Impact of the Centros Line of Case Law and its Concept of ‘Abuse of Law’’ in R de la Feria and S Vogenauer (eds), Prohibition of Abuse of Law: A New Principle of EU Law? (Hart Publishing, Oxford 2011) 107-125; J Armour and WG Ringe, ‘European Corporate Law 1999-2010: Renaissance and Crisis’ (2011) 48 Common Market Law Review 125. 2 Case C-212/97 Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECR I-1459. 3 See for example WH Roth, ‘From Centros to Ueberseering: Free Movement of Companies, Private International Law, and Community Law’ (2003) 52 International and Comparative Law Quarterly 177; J Rickford, ‘Current Developments in European Law on the Restructuring of Companies: An Introduction’ (2004) 15 European Business Law Review 1225; J Armour, ‘Who Should Make Corporate Law? EC Legislation Versus Regulatory Competition’ (2005) 58 Current Legal Problems 3 The concept first articulated in Centros was later expanded and clarified. Subsequent case-law – cases like Überseering4 (2002) and Inspire Art5 (2003) – supported and reinforced the liberal interpretation of the European treaty framework, whereas cases like Cadbury Schweppes6