Legal Capital, Creditor Protection & Efficiency? An analysis of the European Legal Capital Regime in the Light of Recent Developments & Debates

Abstract

This thesis examines the rules of European company law which regulate the interest conflict between shareholders and creditors, i.e. legal capital rules. Legal capital rules, as an instrument of protecting creditors from shareholder misconduct of a company's capital, emerged in Europe already in the second half of the nineteenth century. Ever since, rules consisting of capital formation requirements and shareholder distribution limitations have been characteristic elements of continental European legislation.

Today, this area of company law is at present highly relevant and frequently discussed as a result of recent developments. Primarily, the rules on capital have come to be questioned, and even undermined, as a consequence of the European Court of Justice Centros case, permitting national rules on capital to be circumvented. Although it has been over six years since the ruling of the case the enquiry of legal capital rules is most significant today. Criticism of the rules is constantly being put forward based on arguments of both the Centros case, EU goals of a Common Market and the fact that the current regime is held not to accomplish the objectives set out for it. In recent years, the debate has also flared up even more as a consequence of the content of company law and legal capital currently being under review.

As a result of the current European development and debate, this paper asks whether legal capital rules can be understood as an efficient instrument to balance the shareholder-creditor conflict. Moreover, it asks whether such rules can be objectively justified in the light of the freedom of establishment and the realization of the Common Market. The thesis argues that the current regime is unlikely to provide the protection which it has the objective to do, and moreover that the current regime do not enhance the efficiency of the economic markets. In accordance with the recommendations made by the Winter Group to the European Commission, which is discussed in the paper, the thesis furthermore argues that a new regime is needed if Europe will be able to provide sufficient protection of company creditors and sustain the development of the Common EU Market, however, not without acknowledging the difficulties that to such changes would imply.