Tilting the Balance between Capital and Labor? The Effects of Regulatory Arbitrage in European Corporate Law on Employees

Abstract:     
This Article examines the consequences of regulatory arbitrage in European corporate law on the position of employees. Two innovations of secondary EU law, namely the possibility to create a European Company (“SE”) out of existing firms and the Directive on Cross-Border Mergers, have made regulatory arbitrage with respect to employee involvement in existing firms possible. While these instruments require the merging firms to negotiate with employees about their representation rights as a precondition to the merger, a closer analysis of the law and recent experience show that the protection accorded to existing employee participation systems is incomplete. There can be little doubt about some potential advantages of regulatory arbitrage, such as the possibility to avoid excessive regulation. However, the possibility of an “erosion” of employee participation systems (such as codetermination) undermines their economic function, which is to foster long-term commitment. This Article takes a broad view on the role of labor in corporate governance and also addresses other mechanisms affected by regulatory arbitrage opportunities that are potentially relevant for the position of employees, such as the degree to which management is directly or indirectly influenced by shareholders, and directors’ duties in general and in takeovers in particular. It suggests that controlling shareholders, whose presence characterizes corporate governance structures in much of Europe, are in a good position to exploit arbitrage opportunities to the disadvantage of other groups, including labor.

Number of Pages in PDF File: 73

Keywords: regulatory competition, codetermination, Centros, EU company law

JEL Classification: G34, K22, K31, L23

Accepted Paper Series