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Comments from ACCA
October 2008

ACCA is pleased to comment on the Commission's published draft on the above.

ACCA is a professional accountancy body which is based in the UK but operates on an international basis. We represent over 122,000 qualified members around the world, 74,000 of whom are based in the UK and other EU countries. Our members work in business, the public sector and public practice, with a large proportion working in the SME sector, either in SMEs themselves or providing business advisory services to them as practising accountants. Because of our close involvement with the SME sector we are taking a particular interest in the development of the SPE.

We consider that the draft Regulation forms a useful basis for legislation. In particular, the draft has clearly been framed in such a way as to make the new entity as attractive as possible to small private companies. This concern to address the real needs of SMEs is likely to maximise the likelihood of the new entity being used, in due course, more widely than the European (Public) Company (the SE) has been used, to date at least. We note in particular the emphasis given in the draft to considerations of flexibility and simplicity. We support many of the specific proposals that are incorporated in the draft, notably to allow the SPE to be formed with only one person (natural or legal), to adopt either the unitary or the two-tier board and to impose only a minimal capital requirement. These provisions are, in our view, a sensible response to the alternative business formats which are already available to new businesses in the EU. The model created by the draft will allow SPEs to grow, within the same format, and will also, conceivably, prove attractive to large private businesses as well as small companies.

Our responses to the specific questions posed by the Department are set out below:

Q1 Do you agree that a European Private Company (SPE) form would be useful to SMEs?

The recent experience of the SE does not inspire great confidence that a concept which appears attractive in theory will actually be adopted and used by real businesses. That particular project has shown a very poor return for the time and effort that was invested in it.

The above notwithstanding, we consider that the SPE project is worth taking forward since there are reasons to be optimistic that the SPE would actually be used a lot more than its public company equivalent, although not necessarily by UK businesses. The first reason for being optimistic on this matter is that the SPE, as envisaged in the proposal, would be subject to a relatively light touch compliance regime, at least as regards the conditions for initial establishment. Currently, many thousands of private businesses from other EU countries choose to incorporate in the UK precisely because it is quicker, easier and cheaper to incorporate and operate here than it is in many other EU states. The SPE in its proposed form would offer an arguably more attractive alternative to the UK limited company to those companies which are concerned about the weight of regulatory burdens in their home states. Secondly, a company format which carries the perceived additional credibility of the EU may well prove more commercially attractive to businesses in many of the newer EU states than the available local formats. Thirdly, private companies, including SMEs, may be more disproportionately affected by the cost of establishing group structures than public companies, and by implication more attracted to a solution which reduces the costs associated with those structures. Fourthly, the draft legislation does not even require a new SPE to have a European ‘character' in terms of its ownership or activity profile, thus making it accessible by companies which have no current plans to operate on a pan-EU level.

It must also be borne in mind that, while the SPE concept has recently been discussed as part of the Small Business Act, the vehicle would be open to any privately-owned company regardless of its size, and would not be restricted to SMEs. It is conceivable that many large private companies which currently operate through EU subsidiaries will be attracted by the opportunities presented by the SPE. The potential of the SPE must therefore be considered in the context of what benefits it could offer to the full range of private companies, not just SMEs.

Q2 Do you think that the proposal would offer savings for SMEs?

We agree that the proposal does offer the prospect of achieving some cost savings on the part of companies that currently operate multi-national group structures. In addition to the direct costs of setting up companies in different member states, a business will currently be faced with initial and ongoing legal costs, as well as the recurring costs of complying with the requirements of national company law regimes. These costs would stand to be saved. But other business-related costs will not be affected by adoption of the new format. Also, because of the hierarchical structure of the proposed legislation, there may well be company law costs which will continue to be imposed on the SPE by the countries in which they are based.

Q3 Do you agree that the SPE should be available to all companies whether or not they have a presence in more than one member state?

Yes. If the SPE is being devised to further the purposes of the Single Market, then logically it should make no difference where companies choose to trade within that integrated marketplace. And imposing as few obstacles as necessary at the outset would facilitate the future growth of SPEs in whatever direction they chose.

Q4 a) Do you agree that a minimum capital of 1 euro is sufficient for an SPE?

The optimum figure for capital must be considered in the light of other provisions in the relevant law which have the object of protecting the interests of shareholders and creditors. If adequate measures exist elsewhere to safeguard the legitimate interests of shareholders and creditors, a substantial level of minimum capital should not in itself be necessary. Adequate measures, in our view, will include reasonable restrictions on the distribution of company funds, standardised financial controls combined with transparent public reporting, and clear disciplines regarding directors' responsibilities combined with personal liability for reckless or criminal stewardship. Where measures of this kind exist, as they currently do in the UK , shareholders and particularly creditors have a reasonable degree of assurance that, irrespective of the amount of the company's capital, their interests are recognised and will be looked after. Where such compensating measures do not exist, the argument for a minimal capital figure becomes, in our view, less supportable and the interests of shareholders and creditors will suggest that a more substantial figure may be called for.

Although the drafting could be improved, the proposal as it stands does address the three issues outlined above. Articles 30 and 31 contain some basic rules on the conduct of directors and makes clear that the liability of directors is to be governed by national law: this would allow provisions of company and insolvency law, including wrongful trading, to be applied to the directors of UK-based SPEs. Articles 21 and 22 address distributions while article 25 deals with accounting and reporting requirements. With regard to the latter, the clause as drafted says that the rules on these issues are to be the requirements of the relevant national law. As things stand, each member state applies more or less the same law to all private companies, viz the EU Fourth Company Law Directive. This means that the delegation to national law under article 25 would, at present, result in virtually no difference as regards the accounting controls that SPEs in different member states would be obliged to operate and the information that those companies would be required to make publicly available to stakeholders. The reforms currently being proposed by the EU to the Fourth Directive would, however, create a quite different situation, in which each member state would be substantially free to decide what, if any, rules should be applied in their country on these matters. The uncertainty that this scenario would create would not only have implications for the standard of financial management of companies and the position of their shareholders and creditors, but must also have implications for the question of whether a very low capital figure can be justified.

b) Do you think that a minimum capital requirement of several thousand euros will be a significant consideration for UK businesses when they consider whether to incorporate as/convert to being an SPE?

We consider that the imposition of a substantial capital figure would be a material disincentive for UK businesses to form SPEs.

Q5 Do you believe that there should be some form of independent valuation of non-cash consideration paid for SPE shares, dealt with in the articles or in the body of the regulation?

This may be dealt with in the articles of an SPE but we do not consider it should be mandatory for a private company.

Q6 Do you believe that the balance sheet test and solvency certificate test, as drafted in article 21, together with the EC's statement on the nature of assets and liabilities as set out in its explanatory memorandum, are sufficiently clear for management bodies to be able to make the calculation of whether the SPE is in a position to pay dividends/purchase own shares/make a capital reduction?

The definitions of assets and liabilities in the Fourth Directive are in our view sufficient for this purpose. We query, however, whether it will be sufficient to rely on the statement made in the explanatory memorandum about the residual application of the Fourth Directive. Should the EU proceed with its current plans on ‘simplification', previously referred to, the majority of private companies in the EU may in future be made exempt from any obligation to comply with that Directive. If that came to pass, it would be necessary for the Regulation either to include definitions or to contain a cross-reference to the definitions contained in the Fourth Directive.

We consider that the inclusion in article 21.2 of the reference to the optional solvency certificate is misguided. The likelihood must be that if companies are invited to produce an additional statement, on a voluntary and non-essential basis, they will not do so and will rely solely on the assets test. In private companies such as the SPE it is unlikely that, in most cases, outside shareholders will be in a position to mandate the directors to comply with an additional responsibility. If the solvency certificate is to be retained as a purely optional measure, we do not consider that it is necessary for the current text in article 21.2 to be retained in that form. It would be sufficient in our view to include only a brief statement to the effect that the articles may provide for the directors to make out a solvency statement.

We believe, however, that there is merit in the idea of the solvency test as an easily understandable measure that may be particularly suited to the circumstances of private companies. We therefore suggest that a solvency certificate should be made out as part of a two-stage test to govern the making of distributions. The assets test would allow longer-term liabilities to be taken into account while the solvency test would concentrate on the SPE's likely capacity to deal with shorter-term solvency issues. The combination of the two tests would provide more protection for shareholders and creditors and would serve to concentrate the minds of directors before committing themselves to distributing funds. It could also contribute to the proper compensation of stakeholders for the absence of a substantial minimum capital figure.

Q7 Do you agree that the current proposal provides enough protection for i) creditors, ii) minority shareholders? If not, what other information should be given to i) creditors and ii) minority shareholders?

We believe the addition of a mandatory solvency test would help to address this concern.

Separately in Chapter IV, we consider that article 22 needs to make clear that shareholders who know or should be aware of irregularities are liable to repay the distributions.

In article 25, if the interests of shareholders and creditors are to be properly protected, then member states will need to have adequate rules regarding the maintenance of internal controls and the publication of information. As already stated, the EU's proposals regarding simplification could have the consequence, in the near future, of allowing member states to exempt all ‘micro' companies from any accounting responsibilities whatsoever and of exempting ‘small' companies from the current requirement to publish their accounts. SPEs with turnover of up to £6.6 million (at present levels) would, under article 25, be entitled to follow whatever rules apply to private companies in their state of registration.

Apart from creating a situation where different member states may come to have significantly different requirements as regards accounting and reporting, which will in itself have consequences for companies' choice of the state of registration, we consider that such a situation would have implications for the level of protection afforded to shareholders and creditors. This would be true with respect to stakeholders in the same state, but would risk being exacerbated with respect to stakeholders of companies in other member states where there were no or minimal domestic requirements for financial controls and publication of information. We suspect that this factor in itself may prove to inhibit the development of cross-border trade.

Q8 Do you agree with the proposal as regards the matters which need to be passed by a two thirds majority and which matters can be decided by a majority as specified in the articles?

Yes.

Q9 Do you think that certain matters which the proposal leaves to the articles (such as the procedure relating to the appointment and removal of directors and their terms of office) should be regulated in the proposal itself, and/or do you think that certain matters currently set out in the proposal should be left for the SPE to regulate itself in its articles?

There are a number of inappropriate matters in Chapter V of Annex 1.

We suggest that the procedures relating to the appointment and removal of directors should be left to national law, as per article 31.5 of the current draft, as should the provision regarding the procedures relating to the appointment removal and resignation of the auditor: this latter issue will come within the scope of the Statutory Audit Directive. Also, we consider that if article 31.5 is retained, this should render unnecessary and inappropriate the reference in Annex 1 to specific duties of directors.

Q10 Do you think that directors' duties should be dealt with in the proposal? If yes, do you think that the duties as drafted in article 31 provide sufficient clarity and certainty for directors and protection for shareholders?

We agree that the Regulation needs to make clear that the affairs of the SPE are to be handled by identifiable persons, viz directors and that they are to be expected to act in accordance with certain standards. This is important for clarity and to enable stakeholders to know who is responsible for the affairs of the SPE and the law to hold persons to account for failings.

Article 31 as drafted is in our view a reasonable and concise basis for achieving the above which leaves scope for the detailed requirements of domestic law to be applied. We would, however, suggest that article 31.1 needs to be changed in one important respect. It says at present that a director of an SPE has a duty to act in the best interests of the SPE. We acknowledge that this passage is followed by a reference to the level of skill and care that directors should follow, but suggest that the first passage might be unreasonable in its expectations and raises the prospect of regular litigation. Mistakes will always be made, and assessments of what courses of action might be in the company's interests may prove misguided with hindsight. Given this, we suggest that the passage should be qualified slightly so as to provide that directors have a duty to act in ‘what they consider, in good faith', to be in the best interests of the SPE. The intention of this amendment would be to ensure that directors do not automatically become liable to their company in respect of honest mistakes.

Q11 Do you agree that the UK should support the employee participation elements of the proposal?

We consider that the adoption of these elements will act as a material disincentive to the transfer of SPEs' registered offices.

Q12 Do you have any other comments on the proposal?

Article 6 needs to address, additionally, the issue of acceptable corporate names. As it stands, there would appear to be nothing to prevent an SPE registered in one member state from having the same name as an SPE registered in another member state. Neither does there appear to be anything to prevent an SPE being formed with a name which is already taken by an existing domestic company either in the same state or another state. This situation could cause considerable confusion for consumers and business partners, lead to costly disputes, and conceivably create the conditions for fraud.

We suggest that the best way to avoid such problems would be to establish one single database of SPE names (both for the purposes of this article and article 46 on public inspection). Individual SPEs could still go through the registration process, and technically be registered, in the state in which they are formed, but they would only be registered once the database had been consulted by the registration authority and the proposed name found not to have been taken already by an existing SPE. It would additionally be sensible, in our view, to provide for the possibility that a particular name did not appear on the database because the registration process had been under way at the time. To cover for such eventualities, there should be provision for national registration authorities to require SPEs to change their names if it was later found that an SPE had already been formed with the same name. A system of registration numbers could be useful for this purpose.

As stated above, we also foresee problems with regard to the adoption of similar names to existing companies formed under national law, either that of the home state or some other state. To address this problem, we suggest that member states should be either entitled (i.e. given the option) or required not to register an SPE with a name that is identical to a corporate name which is already in use by another limited liability entity in any EU state. Such a provision would allow the competent authorities in the different member states to undertake a process of notification, via their web sites, whereby they invited interested parties to object to a proposed new SPE name within a reasonable time period. This would allow, for example, ABC Ltd, incorporated in the UK , to object to the adoption of the name ABC SPE by a company in Italy .

A more general point is that the SPE as envisaged in the proposal would not achieve the drafters' aim of creating a genuinely level playing field. Several matters which will have a material influence on the operation of an SPE will be left to domestic law – accounting, tax, insolvency and directors' duties and liabilities. Thus, the criticism frequently levelled at the Statute on the European Company, namely that it created 27 different version of the SE, may well be targeted in future at the SPE.

We would, however, be in principle happy to see the SPE created and made available for use by businesses as an alternative to existing formats. That being said we do not consider that there will be a substantial take-up of the SPE on the part of UK businesses. The light touch compliance regime which has been adopted in the proposed Regulation is already in operation here and so there is less potential for the SPE to acquire a competitive advantage over domestic alternatives here than may be the case in other member states. It is also the case that, in accordance with the ECJ judgements, UK-registered companies can already conduct their business in any other member state without hindrance.

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