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EU’s regulatory competition in the field of limited liability companies and the effects thereof

Johnsson, Love LU (2017) JURM02 20171
Department of Law
Faculty of Law
Abstract
Regulatory competition is a competitive process through which the jurisdictionss within a decentralized area develops and adapts to the market demands of that area. EU’s Single market is such decentralized area in the field of company legislation. Any EU citizen may establish a company in any Member State and as a consequence a race between the different national jurisdictions in the EU can emerge, as the entrepreneurs in the EU are prone to choose the most attractive jurisdiction to incorporate in.
A regulatory competition in the field of limited liability companies does also take place in the US, and has done so since the early 19th century. Some academic legal writers claim that this regulatory competition has caused a sub-optimal... (More)
Regulatory competition is a competitive process through which the jurisdictionss within a decentralized area develops and adapts to the market demands of that area. EU’s Single market is such decentralized area in the field of company legislation. Any EU citizen may establish a company in any Member State and as a consequence a race between the different national jurisdictions in the EU can emerge, as the entrepreneurs in the EU are prone to choose the most attractive jurisdiction to incorporate in.
A regulatory competition in the field of limited liability companies does also take place in the US, and has done so since the early 19th century. Some academic legal writers claim that this regulatory competition has caused a sub-optimal development, while others claim that it resulted in a very efficient market. However, there are few lessons for the EU to learn from the US as the unique historical circumstances and substantially different market of the US makes the regulatory competition in US too different from the one in the EU for the two to really be comparable.
Until the mid-2000s, the UK was the most attractive jurisdiction and attracted a lot of incorporations, in both relative and absolute amounts, from all over the EU. However, in the mid-2000s it became apparent that the hidden costs and issues of being incorporated in a foreign jurisdiction were bigger than most entrepreneurs expected. A majority of all the migrating entrepreneurs dissolved their companies soon after the incorporation, and the migration started to decline until the point, in the 2010s, when it became almost negligible. The barriers of incorporating abroad were simply higher than the benefits, as there are big differences of language, legal traditions and other administrative duties in the various Member States and the benefits were only small and initial.
Nonetheless, several Member States did reform their company legislations due to the perceived pressure of regulatory competition and the reforms caused a minor, but not insignificant, increase in incorporations. However, the Member States that did not reform their legislations to become more attractive did not do noticeably worse than the Member States that did reform, something that indicates that the de facto pressure from regulatory competition is quite low. Even though the de facto pressure is low, the possibility in itself for the entrepreneurs to migrate forces the national legislators to stay up to date. Because if a national company law becomes obsolete and unattractive to the point that the barriers of incorporating abroad are less burdensome than to stay, then the entrepreneurs in that jurisdiction will start to migrate.
Today a form of balanced, low intensive and defensive regulatory competition has been reached in the EU. Some writers are worried that the exit of UK from the EU (“Brexit”) will cause an intensification of the regulatory competition. That is however unlikely to happen in the opinion of this writer. A mass-exodus of the companies incorporated in UK by EU entrepreneurs is likely to take place, as these entrepreneurs want to keep their business within the Single market. However, this is most likely only a temporary effect on the migratory flows, there is no reason for entrepreneurs in the other Member States to start to migrate because of Brexit, as it will not substantially change the competitive situation since there are several attractive alternatives to the UK jurisdiction nowadays. (Less)
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author
Johnsson, Love LU
supervisor
organization
course
JURM02 20171
year
type
H3 - Professional qualifications (4 Years - )
subject
keywords
Regulatory competition company law EU
language
English
id
8922307
date added to LUP
2017-08-29 14:04:40
date last changed
2017-08-29 14:04:40
@misc{8922307,
  abstract     = {Regulatory competition is a competitive process through which the jurisdictionss within a decentralized area develops and adapts to the market demands of that area. EU’s Single market is such decentralized area in the field of company legislation. Any EU citizen may establish a company in any Member State and as a consequence a race between the different national jurisdictions in the EU can emerge, as the entrepreneurs in the EU are prone to choose the most attractive jurisdiction to incorporate in. 
A regulatory competition in the field of limited liability companies does also take place in the US, and has done so since the early 19th century. Some academic legal writers claim that this regulatory competition has caused a sub-optimal development, while others claim that it resulted in a very efficient market. However, there are few lessons for the EU to learn from the US as the unique historical circumstances and substantially different market of the US makes the regulatory competition in US too different from the one in the EU for the two to really be comparable. 
Until the mid-2000s, the UK was the most attractive jurisdiction and attracted a lot of incorporations, in both relative and absolute amounts, from all over the EU. However, in the mid-2000s it became apparent that the hidden costs and issues of being incorporated in a foreign jurisdiction were bigger than most entrepreneurs expected. A majority of all the migrating entrepreneurs dissolved their companies soon after the incorporation, and the migration started to decline until the point, in the 2010s, when it became almost negligible. The barriers of incorporating abroad were simply higher than the benefits, as there are big differences of language, legal traditions and other administrative duties in the various Member States and the benefits were only small and initial. 
Nonetheless, several Member States did reform their company legislations due to the perceived pressure of regulatory competition and the reforms caused a minor, but not insignificant, increase in incorporations. However, the Member States that did not reform their legislations to become more attractive did not do noticeably worse than the Member States that did reform, something that indicates that the de facto pressure from regulatory competition is quite low. Even though the de facto pressure is low, the possibility in itself for the entrepreneurs to migrate forces the national legislators to stay up to date. Because if a national company law becomes obsolete and unattractive to the point that the barriers of incorporating abroad are less burdensome than to stay, then the entrepreneurs in that jurisdiction will start to migrate. 
Today a form of balanced, low intensive and defensive regulatory competition has been reached in the EU. Some writers are worried that the exit of UK from the EU (“Brexit”) will cause an intensification of the regulatory competition. That is however unlikely to happen in the opinion of this writer. A mass-exodus of the companies incorporated in UK by EU entrepreneurs is likely to take place, as these entrepreneurs want to keep their business within the Single market. However, this is most likely only a temporary effect on the migratory flows, there is no reason for entrepreneurs in the other Member States to start to migrate because of Brexit, as it will not substantially change the competitive situation since there are several attractive alternatives to the UK jurisdiction nowadays.},
  author       = {Johnsson, Love},
  keyword      = {Regulatory competition company law EU},
  language     = {eng},
  note         = {Student Paper},
  title        = {EU’s regulatory competition in the field of limited liability companies and the effects thereof},
  year         = {2017},
}