Regulatory Competition and the Evolution of Closely Held Business Forms in Europe

74 Pages Posted: 4 Dec 2001

See all articles by Joseph A. McCahery

Joseph A. McCahery

Tilburg University - School of Law; European Banking Center (EBC); Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI)

Erik P. M. Vermeulen

Tilburg University - Department of Business Law; Signify (formerly known as Philips Lighting) - Legal Department; Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI); Kyushu University - Graduate School of Law

Abstract

Close corporations have become the preferred vehicle for small and medium-sized enterprises in Europe. While scholars have debated the advantages of close corporation statutes for more than a decade, some who favor reform suggest that lawmakers devise new business organization statutes that are more varied, less complex, and can potentially enhance efficient outcomes. Indeed, since in most jurisdictions close corporations are a mirror image of their publicly held counterpart, small and medium-sized enterprises are burdened by a number of regulatory requirements, which cause them to incur substantial costs in carrying out their normal business activities. In particular, the imposition of many of the European Community's harmonized corporate law provisions on smaller firms is viewed as disproportionate and over-regulatory, and tends to impede the development of an efficient supply of legal rules.

Reform-minded scholars, supported by product and capital market pressures to supply the most competitive business statute for small and medium-sized enterprises, point to the success of the US Limited Liability Company (LLC), a flexible business form that combines the best features of partnership and corporate law. The aim of this article is to consider the possibility of making new business forms available in the European Union based on the US LLC, which arguably leads to an increase in the number of start-up firms while also satisfying the needs of range of closely held firms. It is submitted that the combination of organized interest group pressure and the significant switching costs are an important barrier to the creation of new business statutes. Hence an important question is whether the introduction of competition pressures could limit the difficulties encountered in creating a flexible business form with few mandatory rules. Indeed, the combination of the European Court of Justice's recent judgment in Centros and the legislative inertia in the European Community's corporation law harmonization program has stimulated considerable interest in the role of competition among jurisdictions. This article suggests that, despite a significant pent-up demand across Europe for businesses to incorporate in low-regulation jurisdictions, it is difficult to predict with certitude the circumstances that would lead to the development of regulatory competition in the LLC context. However, we argue that a model statute could be a contributing factor in the introduction of an LLC-type business form within the European Union.

JEL Classification: K20, K22, G38

Suggested Citation

McCahery, Joseph A. and Vermeulen, Erik P.M., Regulatory Competition and the Evolution of Closely Held Business Forms in Europe. Available at SSRN: https://ssrn.com/abstract=292766 or http://dx.doi.org/10.2139/ssrn.292766

Joseph A. McCahery (Contact Author)

Tilburg University - School of Law; European Banking Center (EBC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands
+31-(0)13-466-2306 (Phone)
+31-(0)13-466-2323 (Fax)

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Erik P.M. Vermeulen

Tilburg University - Department of Business Law ( email )

Signify (formerly known as Philips Lighting) - Legal Department ( email )

Amstelplein 2
Amsterdam
Netherlands

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Kyushu University - Graduate School of Law ( email )

6-19-1, Hakozaki, Higashiku
Fukuoka, 812-8581
Japan

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