Optimism on 28th Regime deal during presidency

There are three reasons that the 28th Regime will succeed where previous attempts to create a European private-company law have largely failed, an Irish Centre for European Law (ICEL) webinar has heard.

ICEL’s webinar series, Ireland at the Heart of Europe, was introduced by ICEL deputy president Ciarán Toland SC.

The first event, One Europe, One Market (5 June) was chaired by Lucinda Creighton, chief executive of Vulcan Consulting.

The 28th Regime is an optional, EU-wide harmonised legal framework proposed by the European Commission and designed to allow companies operate under a single, unified set of rules, rather than navigating individual member-state variations.

Creighton, a former Minister of State for European Affairs, expressed confidence that, although challenging, a final agreed text on the 28th Regime could be achieved under the Irish EU presidency.

Kevin Barrett, cabinet expert to Commissioner Michael McGrath, drew a distinction between the terms EU Inc, which is the company-law proposal, and the 28th Regime, which aims “to provide a single set of rules to allow companies to grow and trade and expand seamlessly across borders”.

That suite already includes the Business Wallet, and will shortly encompass a Taxation Omnibus, a Quality Jobs Initiative and a Fair Labour Mobility Package.

The former special advisor to the Minister of Finance outlined three reasons the 28th Regime would succeed where previous attempts had not.

“The first is a very strong economic imperative,” he said, citing how US growth had exceeded EU growth by approximately one percentage point a year over the past quarter-century.

This accumulated to “a very significant gap in GDP” and “in the quality of lifestyles which the economies can support,” he said.

Barrett said that the second distinguishing feature was political will, with the proposal gaining a level of backing absent from previous attempts

“One of the stumbling blocks that we encountered previously was in relation to national member-state concerns on protection of labour law,” Barrett said.

However, the new proposal contains an explicit guarantee that EU Inc cannot be used to circumvent established employment law in member states.

He added that employment would be governed by the place of employment of the individual and that the Cross Border Mobility Directive provided very specific protections for employees.

Tighter AML regulation

Kevin Barrett also noted much tighter anti-money-laundering regulation and much greater transparency via the once-only principle, under which information provided on registration flows automatically to tax authorities and the beneficial ownership register.

In addition, there are improved safeguarding measures against forum shopping, letter-box companies, and abusive practices.

However, the special advisor suggested that "the one distinguishing feature, above all else, which gives us grounds for optimism" is that it is a fully digital model. 

“It's a modern, flexible, investor-friendly model of company form, and on that basis. we think it will be very attractive,” he commented.

The commission's estimate is that approximately 10% of all new companies formed in the EU over the next decade will use the ‘EU Inc’ model – up to 65,000 a year.

Genuine milestone

Barrett concluded that, in the negotiations ahead, “ensuring that the usability of this is preserved in the outcome is something that we should place great value on".

European company-law and capital-markets law specialist Professor Jessica Schmidt described EU Inc as not perfect, but "an impressive achievement and a genuine milestone".

The University of Bayreuth chair of Civil Law, German, European and International Corporate and Capital Market Law gave an overview of the proposal:

• A company can be established entirely online within 48 hours, using model articles of association,
• Shares exist only in digital form, held in a digital share register and transferred digitally, with no notarisation required,
• The minimum structure requires only a board of directors – which may consist of a single individual – and a general meeting, both of which may be conducted fully online,
• There is no minimum capital requirement; no-par-value shares are the default,
• Share classes are flexible, with provision for convertible bonds and redeemable shares,
• Creditor protection is maintained through a dual distribution test, comprising both a balance-sheet test and a solvency test,
• Shares may be admitted to trading on a multilateral trading facility, and on a regulated market where the equivalent national form permits,
• An EU Employee Stock Option Plan addresses the practical problem of dry income taxation, facilitating employee share participation in early-stage companies,
• Parent companies may issue instructions to directors, supporting group management in cross-border structures.

“Taken together”, Prof Schmidt said, “these features make the EU Inc particularly attractive for venture capital and early-stage financing, while also enabling all companies to develop tailored financing solutions”.

She noted that “additional rules on group interest and cash pooling would be highly desirable in order to provide clearer guidance in cross-border contexts”.

Thresholds

On the “major political issue” of co-determination, Schmit said that most EU Inc entities would operate well below the relevant thresholds.

And, on fears that potential abuse and inadequate oversight could undermine the reliability of public registers, she said the regulation went beyond the existing EU acquis in several respects.

In his keynote speech, Minister Thomas Byrne, who will chair the General Affairs Council, said that competitiveness lay at the heart of Ireland's presidency agenda.

The former practising solicitor noted that the 28th Regime “could have a big impact on business and on legal-advice providers and legal-service providers here in Ireland”.

Minister Byrne situated EU Inc within a roadmap of approximately 40 significant legislative files, 20 of which are targeted for delivery under the Irish presidency, spanning five strategic pillars:

• Simplification of rules,
• Deeper single market integration,
• Trade,
• Energy and decarbonisation (which make up a third of the proposals),
• Digital and AI transformation.

Key files

“There are a number of key files that we have an expectation to deliver on,” the Minister said. 

These are:

• Grids Package, designed to improve energy interconnectivity across the EU and bring down energy prices,
• EU Inc proposal,
• Industrial Accelerator Act which aims “to support industrial renewal across the EU through the acceleration of industrial capacity and decarbonising in strategic sectors”,
• Cloud and AI Development Act, “which aims to boost EU data-centre capacity,”
• Savings and Investment Union.

Progress, he acknowledged, would also depend on the speed at which member states and parliament could agree their positions, the willingness to compromise on long-standing red lines, and the reality that some commission proposals had not yet been published, even as deadlines applied.

“We certainly won’t be found wanting in trying to drive things forward.”