EC Freedom of Establishment, Employee Participation in Corporate Governance and the Limits of Regulatory Competition

Andrew Johnston

Jesus College, University of Cambridge

jcls Vol 6 Issue 1 (April 2006)

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Abstract

This article examines the extent to which EC rules on freedom of establishment for companies create a system of regulatory competition between the Member States in the field of corporate governance. It discusses the theories of regulatory competition, then examines the extent to which it currently operates in the EC, both as regards incorporations under the ECJ’s jurisprudence, and reincorporations under various pieces of actual and proposed legislation. After a brief discussion of German codetermination, the article considers whether the mandatory imposition of co-determination by German law on companies that have their central administration in Germany, but are formally incorporated elsewhere could be justified under the case law. It is suggested that, for a variety of economic and political reasons, the ECJ would be likely to rule that co-determination is a permissible restriction of freedom of establishment. As regards the legislation dealing with reincorporations, there are safeguards to ensure that the rights to reincorporate in another Member State are not used simply to evade mandatory codetermination. The article concludes that this approach makes sense because legally mandated co-determination represents a regulatory solution to market failure. Employees are in a different situation from creditors because transaction costs prevent them from protecting their interests by legally binding contract. In addition, the diversity of corporate governance systems in Europe provides support for different productive equilibria and stakeholder expectations. If this diversity is undermined, this would threaten the comparative advantage of the EC as a whole.

Keywords

Corporate governance; codetermination; freedom of establishment; regulatory competition; paradigms of company law