Andrew Bibby


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Andrew Bibby is a professional writer and journalist, working as an independent consultant for a number of international and national organisations, and as a regular contributor to British national newspapers and magazines. He is also the author of a number of books.

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The bank that is trying to become a European Company

This article by Andrew Bibby, in a slightly different form, was first published in Financial Times, 2005

Even by European standards, it took a very long time for the "European Company" to become reality. The concept of the single EU-wide model went through more than forty years of argument before emerging towards the end of last year [2004] into European law bearing the Latin name of ‘Societas Europeae'.

Only a small number of European companies have put SE after their name, however. The first significant firm to convert its legal structure was the construction company Bauholding Strabag, originally an Austrian family firm but now a worldwide operation with 32,000 employees. The Finnish-based electronics manufacturer Elcoteq, a major supplier to Nokia and Ericsson, also plans to be an SE by the end of this year. Elcoteq (with operations in six EU and seven other countries) says that its main motivation behind the change is to strengthen its image as a global company.

But the process of converting to an SE is not necessarily completely pain-free. The highest profile candidate for SE status is the major Scandinavian bank Nordea which announced in 2003 that it planned to have re-created itself as an SE by the end of 2005. However, the bank has since encountered snags. “2005 was a bit optimistic,” says Peter Schütze, head of retail banking and responsible for overseeing the SE project.

Nordea is the creation of a series of mergers between banks in Sweden, Finland, Denmark and Norway, making it either the largest or second largest bank in each of the four major Nordic states. The change to an SE was originally announced as a way of simplifying the complex legal legacies of these mergers, as well as of achieving what the company said would be improved operational efficiency, reduced operational risk and enhanced capital efficiency.

Mr Schütze remains convinced of the ultimate benefits of becoming an SE, which he says is a very good legal vehicle for a cross-border group such as Nordea. He admits, though, the last two years have been “an eye-opener” in terms of the practicalities. The European desire for greater business integration within the single market region, he says, comes up against practical problems created by existing national regulatory regimes.

One issue holding things up - the value added tax treatment of transactions within divisions of an SE - now appears to have been resolved. The bank's current non-SE structure means it faces the difficulty that any attempt to create group-wide specialist services (for example, human resources or legal) potentially encounters a non-recoverable VAT liability. Although financial service supply is outside the VAT net, non-financial services supplied by one subsidiary to another may attract VAT. Mr Schütze says that this penalises companies such as Nordea which have their operations in several smaller countries, when compared with competitors serving one single much larger home market:“It's a sort of tax for trying to create a company across borders”. Nordea's plan is that switching to the SE model will ease such VAT issues.

In fact, the difficulty that could be the "show stopper", according to Mr Schütze, relates to banking deposit guarantees. Currently Nordea's bank customers are protected by individual national deposit guarantee schemes operating in each of the four Nordic states. A move to a single Nordea SE would potentially require the bank to increase its financial commitment under the Swedish scheme whilst being unable to retrieve the deposits it has made in Finland and Norway . Some hundreds of millions of euros are at stake. Furthermore, there is the issue of customer confidence to address. Customer protection in banking in, for example, Norway is currently stronger than in Sweden .

Nordea's solution has been to try to persuade the European Commission to adapt the 1994 deposit guarantee directive, effectively to allow the bank to maintain the present arrangements. Mr Schütze says that Brussels now understands that this is a structural issue potentially affecting the whole financial sector in Europe , and not just a difficulty for one company. Nevertheless, Nordea's strategic intention to become an SE is now effectively indefinitely held up, awaiting moves at the Commission. “Hopefully they will find a solution this year,” Mr Schütze says. Thereafter, he adds, Nordea would require a further nine months to a year to complete the conversion.

Although the European Commission has previously suggested that the SE model can potentially save European business €30 bn a year, Nordea's experience demonstrates that pioneers can face problems. One UK survey last year suggested that only 12% of the 170 companies surveyed would even consider adopting the European company model. Martin Mendelssohn, a partner with the legal firm CMS Cameron McKenna which undertook the survey, suggests that companies will make the move only for particular political or commercial reasons. “It is possible that they might want to show off their European credentials,” he says.

US corporates are also becoming aware of the new legal structure available to them for their European operations. “It's certainly a significant issue, but likely to be for the medium to long-term,” says Shawn Carson of US accountancy firm BDO Seidman. The US Internal Revenue Service announced late last year that SEs will be treated in the same way as public limited companies with respect to the so-called ‘check-the-box' regulations under the tax code, meaning that SEs do not have any particular tax benefits when it comes to structuring US-controlled European operations.

Whilst the US tax authorities currently treat each European state independently, Shawn Carson says that, were this to change, it would be time to look again at the potential of an SE. “There has been a lot of discussion over the past couple of years that maybe the US should treat the EU as one country for tax purposes,” he says. “If and when the US does [do this], the European Company may become very useful.”

There are four principal ways to form a European Company

•  Public limited companies from two EU member states form an SE by merger

•  Public or private limited companies from two member states create an SE, as a holding company

•  Legal bodies such as plcs form an SE as a subsidiary

•  A public limited company transforms itself into an SE (requires at least one subsidiary in another member state for at least two years)

European Companies can choose to create a two-tier Board structure, with management board and supervisory board (familiar from, for example, the German model of company law) or a single-tier Board structure. Worker participation and involvement in an SE is subject to a separate European directive, similar (but not identical) to the conditions set out in the European Works Council directive.



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