As of today, Europe creates more start-ups than the United States. However, most of these companies fail to develop or scale within the continent itself. One day before the meeting of the heads of government of the Twenty-Seven, in which the aim is to give the final push to the continent's competitiveness, the College of Commissioners is going to greenlight one of its most anticipated measures for this quarter.
The Regime 28 aims to end twenty-seven legal systems for European start-ups through a harmonized jurisdiction, which will only feature digital procedures and which introduces flexible financing options.
The latest drafts that Demócrata has been able to consult before this Wednesday's announcement seek to attract global venture capital and to facilitate the cross-border expansion of small innovative companies. In addition, the legislative file stipulates safeguards that directly affect employee protection, as well as creditors thanks to modernized solvency requirements.
The main novelty introduced by the regulation is the creation of a single legal form for all Member States. In this way, companies must add the label “Eu Inc.” to their name to increase transparency and trust for commercial partners. How will it work? Once the company is incorporated in a Member State, its legal capacity must be recognized by the rest of the countries in the bloc.
For the European Commission, another of the obstacles that until now was preventing companies from scaling was the set of bureaucratic obstacles they have to face. For this reason, the regime will clearly stipulate that all administrative procedures throughout the company's life cycle must be exclusively digital. This means the end of paper alternatives.
Through a Digital Business Wallet, companies will be allowed to authenticate, store, and securely share documents, such as the EU Company Certificate and digital powers of attorney. Along with this, all procedural payments can be made through widely available cross-border payment services.
To centralize each of the procedures, a central European Union interface will be developed that will be connected to the system of interconnection of business registers. If standard community templates are used, the registration and preventive control will be completed in a maximum of 48 hours, with a maximum cost of one hundred euros. Even so, the statutes must be available both in the national language and in English, with the aim of facilitating access to international investors.
In line with the simplification of procedures, the information submitted to the commercial registry will be exchanged immediately with other authorities. This process will work in such a way that the data will be sent to the tax authorities —to obtain the NIF and the VAT number—, to the Social Security and to the register of beneficial ownership, without the company needing to repeat the process.
The financial framework designed by the European Commission is intended to facilitate the growth of companies. This explains the fact that no mandatory minimum capital will be required: it may be zero euros throughout the life of the company. By default, shares will not have a fixed nominal value, which will allow for a dynamic equity valuation.
Now, in the absence of this minimum capital, the protection of creditors will be based on solvency and balance sheet tests that directors will have to sign before making distributions. The consulted draft also introduces an employee share ownership plan designed to “attract talent”.
Through harmonized warrants, it will be allowed to issue rights over shares that are subject to a vesting period of at least 24 months. The income from these plans will only be taxed once, at the moment the shares are sold, avoiding taxes at the moment of the grant or exercise of the right.
The Regime 28 will open the door to faster procedures for efficiently closing companies, which will reduce the cost of failure. For example, for companies without assets or outstanding debts, the deregistration process can be completed in about three months. For those micro-enterprises that declare insolvency, simplified liquidation processes are established that should conclude in a maximum of six months.
Regarding the governance of these companies, at least one of its directors must be resident in the European Union, their general meetings may be held remotely and minority shareholders will have the right for the company to buy their shares in cases of serious harm.
However, it is not a measure that takes community institutions by surprise. It was announced along with the Competitiveness Compass, which now completes its first year. The sources consulted by Demócrata confirm that this optional regime will allow companies to scale rapidly in the single market without the inherent barriers of each of the Member States.
Community services estimate that this regime would help to meet the Commission's objective of reducing recurring administrative costs by approximately 37.5 billion euros. By eliminating the need to replicate legal compliance in each Member State, legal advisory and administrative procedure costs are drastically reduced.
Currently, many European companies are moving to United States to grow due to the fragmentation of the community market. Regime 28 would allow start-ups to expand horizontally across Europe, fostering the creation of the so-called “European unicorns”.
Investors, including those of venture capital, would benefit from clearer, standardized, and digital procedures. A uniform legal framework would increase legal certainty and trust, making it easier for capital to flow towards innovative companies regardless of their location.
During a debate in the plenary of the European Parliament in January in Strasbourg, MEPs pointed out that the new regime could not become a way to circumvent labor rights. In statements to Demócrata, the popular Adrián Vázquez states that this is an opportunity to revolutionize the single market:
“Access to capital continues to be the great Achilles' heel of European start-ups and entrepreneurs. If we do not facilitate investment and do not seriously commit to advancing the Capital Markets Union, European talent will find it very difficult to reach its true potential”, states.
For the popular delegation, the “cotton test” will be that companies launch themselves to use this new regime. For Vázquez, the design must guarantee that companies perceive a clear advantage when opting for the new framework instead of remaining under the existing national regimes.
“Entrepreneurs are the future of European prosperity and that future must be shared or it will not be”, concludes.
For his part, the socialist Jonás Fernández maintains:
“The proposal, present in the Draghi and Letta report, opens a suggestive path to accelerate the consolidation of the single market beyond harmonizations that are proving slow and difficult in key sectors”.
Unlike the Executive, the co-legislators proposed that this new legal form be named “Societas Europaea Unificata (S.EU)” or Unified European Company. It is not conceived as a completely new legal figure independent of national law.
Instead, it is proposed as a national corporate form present in the 27 Member States, but based on a set of basic rules harmonized at the highest European level. That is, each company would still have “legal nationality”, but would operate under a common framework.
During the debates in Strasbourg, MEPs put the focus on the need to protect European companies from the so-called “predatory acquisitions”. These are operations in which large foreign companies buy start-ups innovative before they reach sufficient maturity.
To avoid it, the Parliament proposes to allow loyalty shares, dual-class shares or even shares with veto rights, so that founders can maintain strategic control of their companies while attracting investment. Likewise, it is proposed that the minimum paid-up capital to create an S.EU be merely symbolic: one euro, in order to eliminate unnecessary entry barriers.
The Parliament is emphatic on a key point: the Regime 28 must not be used to circumvent workers' participation rights. When the thresholds established by the national legislation of the country of employment are reached, the rights of representation on the boards of directors must be fully respected.
At the same time, the European Parliament defends the harmonization of rules on employee financial participation, especially through stock option plans that are fiscally attractive and easy to apply cross-border.
In order to guarantee speed and legal certainty, the Parliament proposes creating a specific alternative dispute resolution mechanism for SEs. Furthermore, it encourages Member States to establish specialized judicial panels, which can even process proceedings in English, provided that the parties agree.