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

Research output: Contribution to journalArticlePopular

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.
Original languageEnglish
JournalInternet
Publication statusPublished - 2001

Fingerprint

Regulatory competition
Statute
Limited liability
New business
Small and medium-sized enterprises
Jurisdiction
European Union
Corporate law
Inertia
Harmonization
Business organization
Switching costs
Capital markets
European Court of Justice
Small firms
Start-up firms
Product market
Interest groups
Business activity
Factors

Cite this

@article{9d382fa453c9470196dffb4c3a7111f4,
title = "Regulatory Competition and the Evolution of Closely Held Business Forms in Europe",
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.",
author = "J.A. McCahery and E.P.M. Vermeulen",
year = "2001",
language = "English",
journal = "Internet",

}

TY - JOUR

T1 - Regulatory Competition and the Evolution of Closely Held Business Forms in Europe

AU - McCahery, J.A.

AU - Vermeulen, E.P.M.

PY - 2001

Y1 - 2001

N2 - 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.

AB - 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.

M3 - Article

JO - Internet

JF - Internet

ER -