4 DePaul Bus. & Com. L.J. 351
A
single market from Brest to the Bering straights; An entire continent
working in peaceful harmony toward the greater prosperity of all. This
vision of Europe, at once practical in means and sweeping in scope, has
driven the economies of Western Europe forward since 30 years. Now it
is poised to drive the economies of Eastern Europe forward as well. One
can look on this engine of growth and prosperity with hope or fear. But
one cannot ignore it.
The
single market in Europe has grown gradually and pragmatically over
time. The thesis this article presents is just as practical. As others
have also argued, [FN1] a
number of EC Directives, regulations and cases together create a common
European business law. This article surveys and outlines that law. All
of the various efforts at harmonization this law embodies work toward
creating a single integrated European market in order to garner the
benefits of improved competition and synergies. Economic synergy is no
idealist pipe dream. In materialist terms, economies of scale, [FN2] specialization [FN3] at each stage of production, standardization of parts and services [FN4] and trade itself, [FN5] all result in a wholethat *352
is in real terms far wealthier than the sum of its parts. Synergies
resulting from European integration are estimated to bring at least an
additional five billion euros of wealth to the European economy. [FN6]
These
economic facts have political implications. This article uses them to
partially test a much larger hypothesis: The EU does not represent a
misguided effort at neo-mercantilism. ASEAN, MERCOSUR, NAFTA and the EU
are not competing continental empires doomed like the empires of 1914
and 1940 to mutual destruction because they are part of a global
liberal trading regime under the aegis of the WTO. [FN7]
Rather, the economic policies of the European Community (Community),
like those of the other mentioned interstate organizations, are founded
on the presumptions of classical economic liberalism: That individuals should be able to make their own choices, [FN8] that open markets are economically optimal, [FN9] that the state has a limited role as market regulator [FN10] and that trade encourages peace and prosperity [FN11] because it is a positive sum game [FN12] - even in cases where trading parties are asymmetric and one has an absolute advantage in production of all goods. [FN13]
These assumptions propelled America from wilderness to world power and
have preserved peace since 1945. Rather than recreate the failed
imperialist models of the past, the very object of the EU, the WTO, and
the Bretton Woods institutions [FN14] is to sever the link between territorial control and market *353 share which caused two world wars. [FN15] Although the EU seeks to create autarchy in food production, [FN16]
it is constantly imbricated into the liberal world trade regime of the
WTO and the security regime of NATO. Autarchy is unprofitable and the
only security is collective security.
Not
only is the EU no threat to U.S. interests it is in fact an opportunity
for American business. As the late President Kennedy said "[W]e don't
regard a strong, united Europe as a rival, but as a partner." [FN17]
Europe is good for business. Even if the increased productivity of the
EU costs the U.S. relative market share in certain sectors so what? To
put the point extremely: Who cares if you lose half your market share
if at the same time you triple your income? That very roughly is what
has happened to the U.S. since 1945. A massive increase in absolute wealth
coupled with relative decline is the result of trading synergies. In
short, the illusion of failure (relative decline in economic power) is
built in to the reality of success (absolute increase in real wealth
resulting from the above described synergies). In fact, the U.S. has
been in relative economic decline since 1945. It has seen its share of
world production decline from nearly 50% of a planet devastated by
global war to just under 20% in a world of abundance. [FN18] Does anyone seriously think that the U.S. was not in real terms much better in 2005 than it was in 1945? [FN19] A cursory examination of life expectancy proves the point. Prosperity makes war irrelevant.
National
security arguments against complacency in the face of relative decline
ignore the obvious fact that nuclear weapons make war, already
irrelvant [FN20] because it destroys productive capacity, unthinkable: [FN21] "Conventional" war is also irrelevant. Just look at Iraq for themost*354
recent example of the failure of war to advance economic policy.
Moreover, threats to the U.S. and the world today are either from
non-state actors such as insurgents [FN22] or from cross border environmental issues. [FN23] Conventional armies are ill adapted to meet either of these threats. [FN24] From all this follows that the state-centricrealpolitik neoconservative [FN25]
view of the national security state is dangerous and unrealistic
because of the destructive power of nuclear weapons and irrelevant
because military power does not create economic wealth. [FN26] An interdependant global markteplace has made the realist neoconservative view of the statepointless. [FN27] There is a much richer, more interesting and brighter world of commerce to be won.
To
understand the construction of Europe as one pole in a world order
based on liberalism we need to assess the methods of its construction,
ontology, goals, and teleology.
A. The Ontology of the Union--Functionalism [FN28]
The ontology of the EU is pragmatic. The Union was built up gradually on the basis of functionalist theory. [FN29] Functionalism is the idea that economic integration is best achieved not at one fell swoop withgrandiose *355 and impossible ideas. [FN30]
Rather, functionalism takes a pragmatic approach: it seeks to attain
the possible, here and now, rather than the perfect, maybe someday. [FN31]
Functionalist methods obtain political legitimacy after the fact
because of the success of the institution at achieving practical goals.
[FN32] No one complains about success.
Functionalist theory has succesfully [FN33]
drawn Europe from a Community of six nations jointly developing coal
and steel resources into a 25 nation Union constituting the world's
largest free trading area. [FN34] Functionalism has not however created a Federal Europe. [FN35] This is
because its legitimacy is always ex post.
Functionalism may build an economic union, but political union requires
direct democratic input in concert with a clear political will. This is
one more reason even the most defensive minded Americans should not
fear Europe.
B. The Teleology of the Union--Liberalism
The
teleology of the Union is a single market destined to create the
conditions of prosperity necessary to enable people to live what
Aristotle *356 called "the good life" , [FN36]
a life of well being, culture and fullest development and expression of
the human spirt. A certain degree of wealth is a necessary condition to
enjoying the good life, but wealth itself is not the end of the good
life. [FN37]
In practical terms, this teleology expresses itself most recently through efforts toward privatization and deregulation. [FN38]
In the 1980s and 1990s a consensus emerged in the west that private
ownership of the means of production was more efficient than public
ownership. Thus, state owned enterprises such as rails,
telecommunications and post offices throughout Europe have been
privatized and listed on stock exchanges. An immediate practical reason
for this may be due to budget deficits. [FN39]
The
goal of economic integration is attained through harmonization
Directives, regulations and case law of the EU. EU securities
regulation harmonization efforts aim to remove technical barriers that
create transaction costs or prevent entry into markets to create a
single market that clears as efficiently as possible. [FN40]
This is done in order to create an integrated securities market. The
creation of a single European capital market is a major goal of the
European project. [FN41] Thesingle *357 capital market is intended to enhance international economic well being and to avoid economic crises. [FN42] Europe is an agent of stable growth and thus is an opportunity for prosperity even for Europe's trading partners.
With
this understanding of the means and ends of the European Union this
article will now turn to the legal instruments used to attain the
single market in labor, capital, goods and services. The article's
focus will accordingly shift from grand political issues at the macro
level to the practical legal mechanisms people build on the basis of
those beliefs. Specifically, it surveys EU securities law, tax law and
company law as these are at once economically interesting and useful
vectors to examine the process of European integration.
Comparisons
of EC securities law and U.S. Securities law are inevitable and
desirable. The two systems are very similar, though the EC System
appears at once less centralized and to define its basic terms more
completely. Paralells can also be seen in the federal structure. Each
federated state in the U.S. is a sovereign, [FN43] as is true of the Member States of the EU. [FN44] The U.S. federal government [FN45] and the EU both exercise supreme [FN46] yet limited powers. [FN47] At the same time, each has a certain flexibility. [FN48]
*358
Because of these facts of federalism, the implementation and
enforcement of securities law in the European Union is found in the
national law of the Member States. At the same time, the goals and
direction of EU Securities law are found in the Directives, regulations
and decisions of the Union. Member States retain the powers of
regulating their stock markets subject however to their obligations
under the EC and EU treaties. Thus, for example, procedure and practice
to determine whether an instrument is a security subject to regulation
are essentially found in national law [FN49]
though the substantive definitions of securities are now included in
the community Directives themselves. Directives are implemented and
enforced by the national law of the the Member States which to some
extent determine their content, particularly where the Member States
exercise their option to offer greater protections than the minimum
standards determined by the EC. [FN50]
The
policy goals of EC securities law are to protect investors, to assure
the proper functioning of the securities market (capital formation and
allocation) and to attain uniform minimal standards throughout the
communities. [FN51] This implies the necessity of investor confidence in the stability and security
of the market. These goals run throughout European
business law and can be seen just about anywhere in EC law one chooses
to look. U.S. securities lawyers would immediately recognize them: [FN52]
Investor confidence in the integrity of the market is protected in
order to assure adequate capital formation; and Market manipulations
are prohibited in order to assure proper capital allocation. The ends
of EU securities law look similar to those seen in U.S. securities law,
however, the means used to attain those ends are at times different. To
attain the goals of a stable and secure single capital market, the EU
uses Directives, principally, and conventions and regulations
secondarily. These instruments are in turn applied, interpreted or
woven into the judgements of the European Court of Justice (ECJ).
Directives
are proposed by the European Commission and enacted or rejected by the
Council and if accepted become part of Communitylaw. *359 [ FN53] Directives address the Member States and present binding guidelines for legislation to be implemented by the Member States. [FN54]
If a Member State does not introduce legislation to transpose the
Directive into national law then the Commission can force it to do so
using Article 226 (ex article 169). [FN55] Likewise, other Member States can force the non-compliant Member State to act using Article 227 (ex article 170). [FN56]
Further, individuals may also be able to enforce the Directive. As a
general rule, however, Directives do not create rights enforcable by
individuals [FN57] because the
addressee of Directives are the Member States. For
a provision of a Directive, regulation, or a Treaty article to be
directly effective to create directly enforcable rights and duties
inhering in individuals the provision of law must be clear, precise and
unconditional. [FN58]
However, non-implementation of a Directive may also lead to a the
Directive having direct effect, conferring rights and duties on
individuals. [FN59]
The
various Directives build bridges between the Member States on the basis
of their national laws. As can be seen from the above description,
there is no real equivalent to Directives in U.S. legislation. It would
be as if congress ordered states to enact a law, but left the means to
do so up to the states. The closest analogy to Directives in U.S. law
are the enabling acts of administrative law which delegate authority
from congress to an agency to implement policies. But the Directives
are much more specific than enabling acts. The directives do not
address the creation of an agency with delegated powers. Rather the
directives address the Member States who must implement their
provisions by enacting laws. So the analogy is at best partial, but at
least gives some sense of how Directives work to a U.S. jurist.
Regulations are the other tool used by the EU to unify European law. Regulations are binding rules issued by the Commission. [FN60] Theyare *360
self executing and have direct effect in the national legal systems of
the Member States. They are legislation, but legislation made, in essence, by appointed representatives. For this
reason Regulations are very indirectly democratic. They are made by
political appointees who were appointed by elected representatives.
It's democracy - but not as we know it.
In
some ways the EU legislative process is more centralized than in the
U.S. Congress does not order the states to enact legislation, but that
is just what a European Directive does to Member States. But in most
ways the EU is less centralized than the U.S. For example, Directives
generally leave open how Member States are to implement them. Still,
the EU constitutes a confederation of the Member States as there is a
customs union, a common commercial and agricultural policy and a common
currency and border control system, at least as to the core Member
States and finally because the EC and by Extension the EU have
international legal personality.
A. Company Law Directives
The
exact legal basis of EU base securities law is a threshold question.
The very purpose of the Union is to create a single market in labor
capital goods and services. Yet, these goals are subject to the
constraints of subsidiarity: [FN61]
The Union should only act when the end cannot be attained by the Member
States working individually. However, because of the doctrine of
supremacy, wherever the Union has competence it essentially has
exclusive competence. [FN62] Though securities law is currently an area of shared
competence, the doctrine of supremacy could be
used by the EU to justify replacing the business laws of the Member
States with EU law. [FN63] An argument against Community jurisdiction on the basis of subsidiarity [FN64] would likely fail, all the more so because of Art. 308 of the Amsterdam Treaty. [FN65]
*361
The EU's business law Directives seek to create uniform minimum
standards throughout the community. Harmonization of company law
started with modest but generally applicable Directives issued pursuant
to under Article 94 (ex article 100) of the EC Treaty [FN66]
for the harmonization of laws of the Member States directly affecting
the common market. The fields covered by Directives have, consistent
with functionalist method, grown constantly over time. Though
harmonization does not create a truly uniform law it does lay the
groundwork for eventual unification of EU securities law. What do the
existing laws look like?
1. Company Law Directives The First Company law Directive [FN67]
obliges limited liability companies and limited partnerships to
register their constitutive documents and requires them to provide an
annual financial report. [FN68] The Second Company law Directive [FN69]
imposes minimum capitalization requirements and minimal disclosure
requirements for public limited companies (corporations) as well as
limiting corporate restructuring and protects minority shareholders
from abuse; Derogations from the rules are possible where such will encourage employee ownership of the company. [FN70] The Third Company Law Directive [FN71]
harmonizes laws regarding interstate mergers of publicly traded
companies and includes rules for disclosure and to protect employees
and creditors.
The Fourth Company Law Directive [FN72] sets out minimum financial statement and auditing requirements; Smaller companies can provide summary financial statements. [FN73] Acquisitions of companies involving a sale of assets for shares are covered in the Sixth Company Law Directive [FN74]
which requires publication of the fusion plan, shareholder approval for
the sale, and sets out the required information to be published. [FN75] Information which must be published in company financial statements is also addressed in the Seventh Company Law Directive. [FN76] The Eighth Company Law Directive requires financial statements tobe *362 audited by qualified auditors, and sets out minimum educational and professional requirements of auditors. [FN77]
In
2003 the EC issued a new Directive "On the Prospectus to be Published
when Securities are Offered to the Public or Admitted to Trading" which
amended Directive 2001/34/EC. [FN79]
The new prospectus Directive was also accompanied by a regulation
implementing it which specifies exactly the information to be listed in
the prospectus. [FN80] The 2003 Directive grouped together [FN81] the Listing Particulars Directive, [FN82] and the
Public Offer Prospectus Directive [FN83]
and refers to both to define its contours. At the same time, it amended
Directive 2001/34. Directive 2001/34 for its part grouped the Listing
Admission Directive, [FN84] the Interim Reports Directive, [FN85] the Major Shareholdings Directive [FN86] into one Directive and referred to those prior Directives to define its scope. [FN87]
Thus to understand Directives 2003/71 and 2001/34, we must be aware of
the prior Directives. Specifically, 1) references to the provisions of
the repealed Directives are included in the new Directive. [FN88]
The new Directives essentially regroup and refine the earlier
Directives. 2) The original Directives were transposed into national
law and thus may be relevant to understanding national law. 3) The
interpretation of Directive 2003/71 or of 2001/34 may turn on how the
prior Directives were interpreted. The prior Directives may be
persuasiveevidence *363 of the meaning of current Directives, especially where the later Directive refers explicitly to its predecessor. [FN89]
3. Public Offerings of Exchange-Listed Securities
a. The Listing Admission Directive
The
Listing Admissions Directive determined conditions for listing
securities issued by one Member State on the stock exchanges of other
Member States. The goal of the Listing Admissions Directive, like the
new prospectus Directive (2003/71) [FN90], was to protect investors by assuring adequate
capitalization of companies [FN91] and to build the single capital market by integrating securities law. [FN92]
In essence, admission to the stock market of one Member State permits
the admitted security to be traded on the stock market of another
Member State as well. [FN93] To protect investors the Listing Admissions Directive [FN94] required companies to report material information which may affect the price of the security [FN95] as does Directive 2003/71. [FN96] The earlier Directive also required companies to be adequately capitalized as does Directive 2001/34. [FN97] Offered securities must be freely and fully negotiable [FN98] and a market for the securities must in fact exist. [FN99]
Financial
information such as balance statements (annual reports) must be
published and disseminated by widely distributed newspapers both in the
earlier Directive [FN100] and in Directives 2003/71 [FN101] and 2001/34. [FN102]
The
Listing Particulars Directive covered securities which are "the subject
of an application for admission to official listing on a stock exchange
situated or operating within a Member State." [FN103]
The Directive required issuers of a security to issue their securities
on the stock market of their home state (their state of registration)
if they will issue securities in any other state. [FN104] It also required disclosure of information "necessary to
enable investors . . . to make an informed
assessment of the assets and liabilities, financial position, profits
and losses, and prospects of the issuer and of the rights attaching to
such securities." [FN105]
including information about the issuer, the security, capitalization,
activities of the company, and its management team as well as recent
events and current prospects. [FN106] Exactly this language is retained in Directive 2003/71. [FN107] These mandatory disclosures are minima. Member States could require greater disclosure. [FN108] The earlier Directive [FN109]
and its successor 2003/71 do not define what sanction Member States are
to impose, leaving the determination of the exact contours of sanctions
to Member States. [FN110]
Listing particulars serve two functions: They provide initial information to secondary markets [FN111] and are the basis of the prospectus for the public offering. [FN112] The requirements of the prospectus were set out in the Listing Particulars Directive. [FN113] The listing particulars requirements have been taken up in Directive 2001/34.
Though
there are practical limits to how effective harmonization can be in
creating a unified legal system, the Listing Particulars Directive
extended the EC's "philosophy of disclosure" . [FN114]
The EC correctly recognized that "it could not immediately replace the
entire field of securities regulation despite the primacy of EC law
over national law in areas covered by the Treaty of Rome." [FN115] Rather than trying to achieve an impossible ideal, the EC instead opted for what ispossible *365
but imperfect: Gradual but irreversible progress towards the goal of a
single market. The functionalist foundations of the process of economic
integration are once again shown in practice.
c. The Interim Reports Directive
The
Interim Reports Directive obligated companies which issue equities on
Member State stock exchanges to also provide semi-annual balance sheets
[FN116] in order to allow investors to make informed decisions about whether to purchase the security. [FN117] 2001/34 in contrast appears to require only annual reporting. [FN118]
The Interim Reports Directive reqires the company to publish the
information so that the public can obtain it and transmit the
information to the competent authorities in each Member State where the
security is sold. [FN119] Again, the goal of the Directive is an integrated single capital market [FN120]
as is the case of the successor Directives. There is still no common
accounting standard such as GAAP or IAS valid throughout the EU. [FN121] And that fact, along with language barriers, is one of the greater limits on EU business integration. [FN122]
In sum however, the various securities Directives are all aimed at
transparancy and market integration and are rational instruments
developed to further desirable goals.
d.
The Major Shareholdings Directive ("Anti-raiders" Directive) The Major
Shareholdings Directive requires a person who acquires or disposes of a
certain percentage of shares in a company (10%, 20%, 33 1/3%, 50% and
66 2/3%) to give notice to the company and the public authorities
responsable for stock market regulation. [FN123] It was incorporated into Directive 2001/34 as articles 85-97 and also in articles 102-110 of that Directive. [FN124]
This transparency is intended to increase shareholder protection and
assure investor confidence resulting in more efficient markets. [FN125] The Major Shareholdings Directive is similar to SEC disclosure rules. [FN126] SEC Rule 13d-1 [FN127] is triggeredwhen *366 a shareholder, or group of shareholders, acquires more than 5 percent of a company's stock. [FN128] 13d imposes a filing obligation on the shareholders. [FN129] However the primary objective of most other SEC disclosure rules [FN130] is to protect ordinary investors by signaling them of purchases and sales by large shareholders [FN131]
as an indirect check on insider trading whereas the Major Shareholdings
Directive focusses on maintaining a stable market. It is a question
whether trades made by large investors are observed because of inside
information or whether they are observed because of hostile takeovers.
Since disclosure is a low cost remedy, in fact both reasons justify
requiring large shareholders to signal their purchases and sales.
e. Prospectus Directive
The
New Prospectus Directive essentially governs the conditions under which
the securities issued by a company incorporated in one Member State
will be admitted to the stock market and to the stock markets of other
Member States. The ultimate objective of the Directive is to create a
system of mutual recognition to reduce transaction costs associated
with listing shares on other stock markets in the EU in order to attain
an integrated capital market. [FN132]
To obtain that objective, investors have to know that the market is
fair. Thus, a second objective of the Directive is protection of
investors [FN133] via disclosure rules. Full disclosure should thus help improve capital formation and allocation. [FN134]
Protection of investors and the creation of an integrated capital
market are complementary goals the Directive seeks to attain so that
European securities can compete on the global market. [FN135]
*367
Accordingly, the New Prospectus Directive imposes on Member States a
duty to require companies seeking to make public offerings of their
securities to present a prospectus detailing financial and management
information about the company and its shares for any security offered
to the public within the territory of a Member State. [FN136]
The Directive creates minimum uniform disclosure standards throughout
the community for public offerings of securities, irrespective of
whether those securities are listed or unlisted. [FN137] Listing particulars can be used throughout the EC interchangeably
[FN138]
which should help to build the integrated capital market. The earlier
Prospectus Directive was "a first step towards a Community prospectus" [FN139] which the new directive fulfills.
Like
the SEC registration requirements for publicly traded securities, the
prospectus Directive does not apply to certain limited offerings. These
include offerings to a "restricted circle of persons," or to "persons
in the context of their trades, professions or occupations" . Small
offerings are also exempt [FN140] as are offerings arising out of mergers and acquisitions [FN141] and intercompany compensation of employees or management. [FN142] Similar exemptions for small offerings to experienced investors [FN143] and a qualified investor exemption appears in the New Prospectus Directive as well. [FN144]
These are similar to the exceptions to the prospectus requirements of
the U.S. Securities and Exchange Commission, which exempts small
offerings to qualified investors from filing with the SEC. [FN145]
Member States must in principle grant reciprocal recognition to those issuers who have a registered office in that Member State [FN146]
The Member State which must recognize the registration may not
generally require more information than the other Member State requires
[FN147] with the exception of relevant local information, in particular regarding the Member State's tax system. [FN148] The Directive permits Member States to limit the reciprocity requirement to issuers havingtheir *368 registered offices in a Member
State [FN149] as does the successor 2001/34 [FN150]
In
conclusion, the securities Directives "demonstrate the principles of
minimum standards, mutual recognition and home country control that are
basic tenets of the single market in securities." [FN151]
There are however some practical limits on the effectiveness of the
Directives. Understandably, stock exchanges insist on a translation of
listing particulars and often place further requirements on foreign
issuers wishing to list on their exchange. [FN152] Nevertheless, the Directives do move Europe toward the goal of a single integrated market.
4. The Insider Trading Directive
Insider
trading law shows the influence of the EC on the Member States law most
clearly. Prior to the Insider Trading Directive, insider trading was
treated differently in each Member State, being a criminal offense in
some states, yet perfectly legal in others. [FN153] Here, the EC has acted to create a Community standard and today insider trading is regarded as wrongful throughout the EU.
The first community prohibition of insider trading was the 1989 Directive. [FN154] This Directive has since been replaced by a more comprehensive Directive [FN155]
which covers shares and a variety of option contracts as well as
prohibiting market manipulation. Market manipulation is defined as
trading or disseminating information in order to give false or
misleading signals as to price movements. [FN156]
Again, the directive is more specific about defining market
manipulation than Securities Exchange Act (SEA) Section 10b, which
prohibits "any manipulative or deceptive device or contrivance" . [FN157]
This might be because the SEA was enacted in the wake of the greatest
stock market crash in history, whereas the directives were not. The
2003 Directive covers shares, unit trusts, money markets instruments,
futures, swaps, options, derivatives and any other instrument trading
on a regulated *369 market or for which a request to trade has been made. [FN158] Once again the terms are more specific than the 1933 and 1934 acts which defines security very broadly [FN159] - so broadly in fact that even investments in a common ponzi scheme have been held to be a security. [FN160]
The basic premises of the 1989 Directive are retained within the 2003
Directive and the 1989 Directive may be persuasive evidence of the
meaning of the 2003 Directive.
a. Rationale of the Insider Trading Directive
The EC takes the position that insider trading undermines investor confidence, [FN161] which leads to sub-optimal clearing of securities markets. [FN162] These rationales of the 1989 Directive are also found in the 2003 Directive. [FN163] They are essentially the same rationales for the prohibition *370 of insider trading that one sees in U.S. law. [FN164] But, unlike the U.S., at the time of the adoption of the Insider Trading
Directive, insider trading was by no means a criminal offence in all or even a majority of Member States. [FN165] The Directive seeks to improve protection against abuse throughout the community.
The
Directive essentially shifted the focus on insider trading from "pure
company law" which juxtaposed the company's interest against the
insiders based on a rationale that insider trading is a breach of
fiduciary duty to a multilateral approach. Under the modern
multilateral approach, stockholders, employees, managers, and the
general public are seen as having competing interests to be balanced
and the rationale for the prohibition of insider trading is to maintain
market efficiency. [FN166] The basis of the Directive is not in Art. 54 of the Treaty of Rome but in Art. 100a of the Single European Act. [FN167]
b. Insider Defined
The
1989 predecessor Directive clearly defined the term "insider", unlike
U.S. law, where the term is not statutorily defined. An insider is one
who, due to his relationship to the company as manager, director,
employee or major shareholder, posesses inside information (material
non-public facts) and knowingly uses such inside information to acquire
or dispose of securities to which the information relates for his own
account or another. [FN168]
The 2003 Directive not only directs the prohibition to persons who
acquired inside information due to their position as a director,
manager, employee or majority shareholder but includes those who acquired the information illegally. [FN169]
*371
The 1989 Directive prohibited insiders from "tipping" others about
inside information except in the course of ordinary business. [FN170] The prohibition of "tipping" , [FN171] as well as the exception for trades in the ordinary course of business are also found in the Directive 2003/6. [FN172]
"Tipping", a source of controversy and uncertainty in U.S. securities
law, is more clearly defined in E.U. law than in U.S. law [FN173]
as are the instances where "tipping" is permitted. The "safe harbor"
provisions allowing disclosure of inside information in the ordinary
course of employment ("tipping") are, as an exception to a general
rule, to be interpreted strictly. [FN174]
Thus, disclosure of inside information in the course of employment is
also prohibited unless "there is a close link between the disclosure
and the exercise of his employment, profession or duties, and that
disclosure is strictly necessary for the exercise of that employment,
profession or duties." [FN175]
That is, disclosure of inside information in the course of employment
will be seen as rightful "only if it is strictly necessary for the
exercise of an employment, profession or duties and complies with the
principle of proportionality." [FN176]
The court will examine the quality of the disclosed information to
determine whether the disclosure was, given the actual facts of the
case, necessary. [FN177] One could thus
predict a correlation between the impact of
information on prices inversely to the probability that the information
rightfully disclosed. In all events, the judicial interpretations of
the meaning of the earlier Directive very likely apply to the successor
Directive.
The 1989 Directive and its 2003 successor clearly define "inside information" . [FN178] This is not the case in U.S. law: Just as "insider" is not clearly defined in U.S. law [FN179] so also is "inside information" undefined in the relevant SEC legislation and regulations. [FN180]
In U.S. law the concepts, presumptions and rationales for the
prohibition of insider trading are amorphous at best, conflicting at
worst. The theoretical situation is better in Europe because the basic
terms of the law are clearer.
What
is inside information? The 1989 Directive defined inside information as
"information which is unknown to the public of a specific nature and
relating to one or more issuers of transferable securities, or to one
or more transferable securities, which, if it were published, would be
likely to have a material effect on the price of the transferable
security or transferable securities in question." [FN181]
The 2003 Directive similarly provides that: "'Inside information' shall
mean information of a precise nature which has not been made public,
ralating, directly or indirectly, to one or more issuers of financial
instruments or to one or more financial instruments and which, if it were made public, would be likely
to have a significant effect on the prices of those financial
instruments or on the price of related derivative financial
instruments." [FN182]
The
European Directive's definition of insider trading is clearer than the
U.S. definition. However, the same elements arise in both legal
systems: Materiality and Publicity ("material non-public information").
[FN183] However, "[U]nlike
the U.S. insider trading laws, determination of illegal trading is
based not on breach of a fiduciary duty, but rather, on possession of
non-public information." [FN184] That is, both the rationale and definition of prohibited conduct are clearer in the EU than in the U.S.
The
text of the 1989 Directive and the 2003 Directive are similar so we can
expect that interpretations of the 1989 text would be likely to apply
to the 2003 text. The 1989 Directive orders Member States to forbid:
.
. . any person who . . . has access to such information by virtue of
the exercise of his employment, profession or duties, possesses inside
information from taking advantage of that information . . . by
acquiring or disposing of for his own account or for the account of a
third party, either directly or indirectly, transferable securities of
the issue or issuers to which that information relates. [FN185]
Member
States shall prohibit any person referred to in the second subparagraph
who possesses inside information from using that information by
acquiring or disposing of, or by trying to acquire or dispose of, for
his own account or for the account of a third party, either directly or
indirectly, financial instruments to which that information relates. [FN186]
Thus,
rather than seeing the 2003 Directive as displacing case law and
legislation developed under the 1989 Directive we should expect to see
the courts interpreting the 2003 Directive in light of the 1989
Directive and its attendant case law.
e. Prohibition of Market Manipulation
Unlike
the 1989 Directive, the 2003 Directive prohibits market manipulation.
Market manipulation is clearly defined as transactions which give false
or misleading signals to the market as to supply and demand or which
fix the price of a given issue at an abnormal or artificial level. [FN187]
Art. 2(b) of the Market Abuse Directive uses language quite similar to
SEA Section 10, including in market manipulation: "transactions or
orders to trade which employ fictitious devices or any other form of
deception or contrivance;" [FN188]
Subsection 2(c) goes on to list some possible manipulative devices,
such as internet rumor mongering. That list is of course not exhaustive.
f. Sanctions for market abuse
Both the 1989 and 2003 inside trading Directives require Member States to enact
sanctions for insider trading but do not define whatthey *374 may be. [FN189]
Thus a Member State could punish insider trading as a crime or a tort
or both. This shows that Directives permit a flexible and nuanced
response to the problems posed by the construction of the single
market, all the more so when we remember that Directives generally
establish minimum standards which Member States can exceed. [FN190]
5. The Financial Instruments Directive
The
Investment Services Directive (ISD) was adopted in order to foster the
formation of a single continental capital market pursuant to art. 57 of
the Treaty of Rome. [FN191] It has since been modified by the Directive on financial instruments. [FN192] References to the ISD are now construed to refer to the Financial Instruments Directive. [FN193] The Financial Instruments Directive [FN194] establishes minimum standards throughout the community and to provide mutual recognition of Member State business entities. [FN195]
Mutual recognition enables a company registered in one Member State to
do business anywhere in the community without reregistering. [FN196] The obverse of a single market is prevention of protectionism: As seen inCommission v. Italy, [FN197]
the single market for financial services implies an opposition to any
form of intra-community protectionism, whether in goods, services, or
movement of capital and labor.
The Financial Instruments Directive applies to investment firms and regulated
markets generally. [FN198] Insurance companies, "in house" asset managers and certain pension funds are not covered. [FN199] The Directive sets out minimum capital requirements for financial services companies [FN200]
as well as requires the maintenance of an office in the country where
it will do business to assure the expertise and reputability as a
financial services provider. [FN201] Disclosure and transparancy requirements *375 are also a part of the Directive. [FN202] Service providers are obligated to execute trades on terms most favorable to their clients. [FN203]
6. Life Insurance Directives
The Third Life Directives [FN204]
permits cross border life insurance business "but has accomplished
little with regard to liberalizing cross border securities investment."
[FN205] However it too demonstrates the will to create an integrated financial services market.
Undertakings
for the Collective Investment in Transferable Securities (UCITS),
better known in American English as mutual funds, [FN207]
or in Britain as PEPs, are investment companies that makes money buy
purchasing and selling shares in other companies. According to the
UCITS Directive such funds "may be constituted according to the law of
contract (as common funds managed by management companies) or trust law
(as unit trusts) or under statute (as investment companies)." [FN208] The UCITS must be authorized in the Member
State where they do business [FN209] but once authorized may do business anywhere in the Union. [FN210]
UCITS may only invest in securities listed in a Member State or
approved regulated foreign markets. UCITS may not borrow funds and must
be able to redeem units of shareholders when asked to do so. [FN211]
UCITS are regulated by the state of incorporation though the marketing
of UCITS units are subject to the marketing laws of the host state. [FN212]
The
Second Banking Directive establishes a single license applicable
throughout the EU for the provision of banking and other financial
services. Banks operating under the Second Banking Directive may
provide a wide variety of financial services, including investment
services, authorized by the home Member State, without obtaining an
additional license. [FN214]
10. Limits of Directives
There
are practical limits on the use of Directives to achieve legal
harmonization. As mentioned earlier, Directives are not generally
directly applicable. A Directive may however have direct effect if "(i)
the obligations are clear and unambiguous, (ii) they are unconditional
and (iii) their operation is not dependent on further action by the
community" . [FN215]
Because
the Directive must be implemented seperately in each Member State there
is a risk of conflicting interpretations and more seriously of
duplicated effort. Further, Directives are the result of
compromises and thus may be conflicted, yet at the same time are a bit
inflexible and are difficult to amend. [FN216]
However Directives are effective at encouraging creation of community
wide minimum standards. Though imperfect, Directives do work generally
speaking. Moreover, Directives build the consensus necessary for
legitimate market integration. Other mechanisms for harmonization of
law do exist, namely conventions and regulations, which we now examine.
B. Conventions: The Insider Trading Convention
Article
293 (ex art. 220) ECT obliges the Member States to negotiate among
themselves to abolish double taxation in the Community. Unlike
Directives, conventions are not a part of Community law. [FN217]
Community institutions are not necessarily at all involved in the
conclusion of an international convention, even one made pursuant to
Art. 293 ECT.
Directives
are generally not directly applicable and do not create rights
enforcable by individuals. Likewise, though an internationalconvention*377
might be directly applicable, the better view is that international
conventions are presumed not to create directly enforcable individual
rights and duties unless they explicitly otherwise affirm.
There is at least one tax convention made pursuant to Art. 293 ECT: The Transfer Pricing Arbitration Convention. [FN218] The Transfer Pricing
Arbitration Convention provides a mechanism for
Member States to arbitrate their disputes regarding double taxation of
a business which transfers profits from operations in one Member State
to another. There is also a convention addressing insider trading. The
insider trading convention [FN219]
seeks to create mutual assistance mechanisms for the exchange of
information. The insider trading convention defines an insider as a
director, officer, board member or their agent. Inside information is
defined as non-public information obtained from the insider's
employment and which if disclosed would be likely to have a significant
influence on the stock market. [FN220] State parties are obligated to exchange information about suspected inside trading. [FN221]
C. Regulations: The Council Regulation for a European Economic Interest Grouping
Another tool for harmonization of community law is the regulation. Unlike Directives, regulations are immediately effective: [FN222]
They do not require any national legislation to be implemented. Because
regulations are binding law throughout the entire community it is more
difficult to enact regulations than Directives and this limits their
use.
The EEIG Regulation creates the European Economic Interest Group [FN223] (EEIG). The EEIG is essentially an institutional form for joint venture
partnerships between two or more companies,
whether public or private. The contract concluded does not create a
legal person independant of the partners to the EEIG, though the EEIG
can enter into contracts in its own name. [FN224] Though the EEIG must register in the Member State where it is domiciled, it is governed by EUlaw. *378 [ FN225]
Like any joint venture partnership, the parties to an EEIG do not enjoy
limited liability, though this drawback as far as tort liability may
also be an advantage as far as lenders are concerned since either
partner would be responsible for the debts of the partnership. Article
308 ECT (ex art. 235) is the basis of the EEIG. [FN226]
D. Comparison
1. Comparison of EU and U.S. Securities Law
There
are some similiarities but also differences between the regime mandated
by the Directive and U.S. securities law. SEA Section 10 [FN227] and Regulation 10b(5) [FN228] prohibit trading on material non-public information, [FN229]
like the Directive. However it is unclear whether Section 10b is based
on a theory of breach of fiduciary duty, fraud on the market,
misappropriation of information, or any or all of these theories. It is
just as unclear to whom duties are owed. In contrast the Directive is
clear that it is based not on breach of fiduciary duty but on posession
of material non-public information. Courts interpreting SEA Section 10b
and Regulation 10b(5) [FN230] find an implied private right of action. [FN231]
The Directive does not provide for any private right of action. Once
again, there is much less chaos in the European legislation. Unlike the
Directive, which clearly defines both what inside information is and
who is an insider Section 10b does not define or even use those terms,
though courts do.
*379
As seen, there are both important similiarites and divergences between
the Directive and the SEA. U.S. securities law is essentially federal,
though vestigal state anti-fraud provisions in tort such as the tort of
deceit [FN232] do still
exist and supplement the federal provisions. This is just about the
opposite of Europe, where the securities laws of the Member States are
still the starting point. Though, as time passes, the European law will
displace the national laws.
One
key feature of U.S. securities law is that it usually permits both a
criminal action by the state and a private enforcement by individuals.
This "privatization" of the public's authority to punish crime is much
more often available in the U.S. than in Europe. Directives do not
provide for private enforcement because they are meant to establish
goals and guidelines, requiring the Member States to take action, but
leaving to the Member States how to implement them. Further, Directives
only provide for minimum standards - Member States are generally free
to go beyond the minima of the Directives and to propose greater
protections. [FN233] Ironically this flexibility also
explains why a truly uniform European law cannot
not be attained using Directives. Yet, Directives can create the
groundwork necessary if one day creation of a European Code to displace
national laws were desired. In all events, while in fact unlikely, a
Member State could create a private right of action in its own national
law and this would quite likely be found to be consistent with the
Directives' goals and permissible range of action. The EU can attain a
clearer and more coherent law of insider trading than the U.S. Whether
it can do so throughout Europe is the greater challenge.
2. A European Securities and Exchange Commission?
Some authors recommend that the EU establish its own Securities and Exchange Commission. For example, Manning argues that:
[T]he
EU should ... reestablish the European Securities Committee as an
independent administrative agency that would, in addition to its
rule-making authority, help develop and monitor the proposed
centralized clearance and settlement system, maintain the proposed
centralized filing system, collect and disseminate compliance and
enforcement data, coordinate Member State enforcement of EU securities
laws and regulations, monitor the administration of alternative *380
dispute resolution proceedings, and provide consumer education to
retail investors to further develop and protect its unified retail
securities market. [FN234]
His is not the only voice and is essentially correct. The EU should develop a
securities and exchange authority because a
central authority can act more rapidly and decisively, and also because
a central authority will inevitably develop a unitary law reducing
legal uncertainty and transaction costs. [FN235]
Twenty five or more national authorities are inevitably going to be
less efficient and inevitably divided in their approach than one
central authority. Moreover, a central authority can and should look
not just at sectors, which is the current approach, [FN236] but rather at the entire financial services business. [FN237]
"Just as the euro required the establishment of a European Central
Bank, a pan-European equity market will require a European SEC." [FN238]
Opponents of an EU SEC center their arguments around the idea that private market incentives will best protect investors. [FN239]
However, private remedies would do so suboptimally, since there would
be twenty five different national views with attendant uncertainty and
higher transaction costs.
a. Disclosure
Inside
traders in U.S. law are under an obligation to disclose the inside
information or abstain from trading. One author recommends increased
disclosure as a part of EU securities law, noting that: "Investors need
consistency and comparability in financial statement presentations and
timely disclosure of material corporate events." [FN240] For example, there is no equivalent to the shareholder's right to inspection guaranteed by the EU in any of the
Directives. Similarly, the EU needs to either
complete the establishment of international accounting standards (IAS)
or accept the reality that the U.S. standard Generally Accepted
Accounting Principles (GAAP) are the worldstandard. *381 [ FN241] Uniform standards for accounting and languages would result in lower transaction costs and greater market efficiency.
b. The Legal Basis of the EU SEC: Art. 308 and/or Art. 2
If a European Securities Authority were created it would most likely be based on Article 308 ECT (ex art. 235). [FN242] Art. 308 provides that:
If
action by the Community should prove necessary to attain, in the course
of the operation of the Common Market, one of the objectives of the
Community and this Treaty has not provided the necessary powers, the
Council shall, acting unanimously on a proposal from the Commission and
after consulting the European Parliament, take the appropriate measures.
This clause might be compared to the combined effect of the elastic clause [FN243] and the commerce clause [FN244]
in the U.S. constitution in that it theoretically empowers the
Community to do much more than is explicitly stated in other provisions
of the treaty. However, at least to now, Art. 308 is not as liberally
construed as the commerce clause of the U.S. constitution. The action
taken under Art. 308 must be "necessary to attain" an "objective of the
Community", as no other provision addresses a securities and exchange authority. The objective to be obtained, a
single market in securities, is clearly a central task of the Community
as set out in Article 2 of the Treaty:
[T]he
Community shall have as its task, by establishing a common market and
an economic and monetary union and by implementing common policies or
activities referred to in Articles 3 and 4, to promote throughout the
Community a harmonious, balanced and sustainable development of
economic activities and economic and social cohesion and solidarity
among Member States.
Further in Article 3.1(c) and 3.1(g) state that:
1.
For the purposes set out in Article 2, the activities of the Community
shall include, as provided in this Treaty and in accordance with the
timetable set out therein:
(c)
an internal market characterised by the abolition, as between Member
States, of obstacles to the free movement of goods, persons, services
and capital;
(g) a system ensuring that competition in the internal market is not distorted;
Thus,
if the goals of a single capital market cannot be achieved with twenty
five national authorities - that is, if the subsidiarity argumentcan *382
be overcome, which I think is the case - then these provisions of the
the Treaty would be the basis of a Europen Securities Authority. As
there is a European Prospectus Regulation it is likely that Europe will
at some point establish a central securities authority. Like the single
currency, the reduced transaction costs and economies resulting make such a development desirable.
Just
as Europe seeks to harmonize securities law it also seeks to create a
uniform tax law, albeit less succesfully. It uses the same instruments:
Directives, regulations, conventions and case law.
A. Tax Teleology
Adam
Smith long ago set out four principles of taxation: Taxes should be
simple. Taxes should be levied according to ability to pay. Taxes
should be easy to administer. Taxes should be certain and economically
neutral. [FN245] This
idea that taxation should be economically neutral to avoid economic
distortion is a part of the European tax system, however imperfectly
implemented [FN246] and this idea is at the root of several community decisions. [FN247]
This can be seen for example in the fiscal aspects of state aids. State
subsidization of industry normally would be seen by economists as a
distortion of the free market. For this reason, direct and indirect
state aids are problematic under the EC Treaty.
*383 B. State Aids and Taxation
EU Member States cannot grant aid which threatens to distort the single market.
Article 87(1) (ex Article 92(1)) provides:
Save
as otherwise provided in this Treaty, any aid granted by a Member State
or through State resources in any form whatsoever which distorts or
threatens to distort competition by favouring certain undertakings or
the production of certain goods shall, in so far as it affects trade
between Member States, be incompatible with the common market.
State aid is not defined by the EC Treaty, [FN248]
however, favorable tax treatment such as a tax credit can constitute a
state aid. Though, de minimis state aids are permissible, [FN249] Art. 87 is to be construed narrowly. [FN250]
Taxes used to finance state aids which were found permissible under
Art. 87, have been held nevertheless invalid as interfering with the
single market under Art. 90 (ex art. 95) [FN251]
for if the court were to consider a state aid separately from the
financing mechanism used to fund it and attain it would be impossible
to attain the objectives of the EC Treaty. [FN252] For example:
It
may be that aid properly so-called, although not in conformity with
Community law, does not substantially affect trade between states and
may thus be acknowledged as permissible but that the disturbance which
it creates is increased by a method of financing it which would render
the scheme as a whole incompatible with a single market and the common
interest. [FN253]
*384 Unlike Art. 87, which is conditional, [FN254] Art. 90 is
unconditional. [FN255] Article 87, alone, does not have direct effect. [FN256] Article 90 can have direct effect. [FN257]
When a national tax only partly violates article 90- where for example
the basis taxed is valid, but the tax rate discriminates between
domestic and foreign entities taxed - whether the tax will be partly
enforced is for the national legislator to determine. [FN258] Partial enforcement of the tax would not be a contravention of Community law.
The objectives of principled economic liberalism were also upheld inPabst & Richarz KG v. Hauptzollamt Oldenberg. [FN259]
There, a tax scheme was held in violation of the treaty where the tax
was essentially to further an anticompetitive monopoly. As a general
rule, wherever a tax impedes the formation of the single market we
should expect it will not be permitted.
C. Conventions to Avoid Double Taxation
The
principle of avoiding double taxation is another liberal economic view
that finds its expression in the practice of EU law. Double taxation,
whether of income or of income sources, is bad economics because double
taxation just about always distorts market transactions. Taxing a good
increases its price reducing demand for that good, and double taxing a
good makes the good even less likely to be bought.
Tax conventions, whether bilateral or multilateral, are the usual method to
avoid the double taxation that occurs when two
different governments claim to be able to tax the same source of income
or the same taxpayer. [FN260] The OECD proposes model conventions which have been taken up and enacted by numerous states. [FN261]
*385
Discriminatory taxation is sometimes challenged as a violation of the
right to establishment. Art. 43 (ex art. 52) of the EC Treaty (right of
establishment) is one of the basic freedoms of the EC Treaty and as
such has direct effect, creating rights and duties in and enforcable by
individuals. [FN262]
Where
a Member State takes steps to prevent double taxation of dividends the
exoneration from double taxation the Member State must also provide
such exoneration for the branches of companies from other Member States
that are doing business in the Member State in question. [FN263]
Moreover, tax advantages provided to a company of a Member State by
that Member State as part of a double taxation treaty with a non-Member
State must also be provided to permanent establishments in that Member
State of companies of other Member States. [FN264]
However,
the obligations that the ECT imposes on Member States do not normally
affect the obligations of Member States to non-Member States under
treaties to avoid double taxation. [FN265] Two MemberStates *386 can thus have differing policies as to third states. For example, a German and French company
could be taxed differently on their overseas
operations in a non-Member State by the non Member State with no
conflict arising under EC law.
D. Directives Our analysis of tax law Directives looks first at non-binding and then at binding norms.
1. "Soft" Law
a. Code of Good Conduct
Non-binding
codes of conduct are one more instrument that the EU has which it uses
to encourage harmonization of laws. For example, the EU has proposed a
non-binding Code of Conduct which was signed by Finance Ministers at
the ECOFIN Council meeting in 1997. The objective of the Code of
Conduct is to prevent a "race to the bottom" [FN266]
where each Member State lowers its taxation to attract businesses with
an attended reduction in social services and decline in the quality of
life. "[B]y signing the resolution, Member States commit themselves not
to introduce new harmful tax measures and to amend existing harmful tax
measures as soon as possible." [FN267]
The Code is "a political commitment and does not affect the Member
States' rights and obligations or the respective spheres on competence
of the Member States and the Community arising from the Treaty" . [FN268]
That is, the Code is a non-binding resolution. However "if Member
States do not take action to remove the provisions identified as
harmful, the Commission may be prepared to use Article 96 of the Treaty to propose a Directive to the Council, who may then act on a qualified majority." [FN269]
Like the Code of Conduct, the Mutual Assistance Directive [FN270] provides a cadre in which Member States taxing authorities can exchange information in order to combat tax fraud. [FN271] These soft law provisions provide an important context in which law can be interpreted and applied.
2. "Hard" Law
Mergers
and acquisitions of companies almost always raise tax issues because
the sale of stock involved technically is a realization event. The
merger Directive defers taxation of capital gains of property
transferred pursuant to "mergers, divisions, transfers of assets and
exchanges of shares" where the assets are still taxable by that
jurisdiction. Professor Sandra Eden provides an exemplary illustration
of the type of problem the Merger Directive addresses:
company
A, a manufacturing company in the United Kingdom, decides to tranfer
all its operations in Newcastle to company B in Germany in exchange for
shares in B. There will be no charge to tax on the disposal of the
assets to B, because the assets will be attached to a permanent
establishment of B's in the United Kingdom, and so will remain within
the United Kingdom tax charge. The deferred gain will be caught when B disposes of the assets. [FN273]
Essentially,
the taxation of the realized gain or loss in the transaction is
deferred because the taxable basis was not transferred outside the tax
jurisdiction of the Member State and because such corporate
restructurings would be disfavored were the gain or loss immediately
recognized. The basis of the capital good is transferred to its new
owner and will serve as the starting point to determine tax when the
good if finally alienated. This deferral of taxation in order to permit
flexible restructuring is one more example of the principle of economic
neutrality of taxation guiding community tax law.
The Parent Subsidiary Directive [FN274]
is very similar to the merger Directive. The goal of both Directives is
to allow enterprises to flexibly reorganize their operations without
being influenced by tax considerations. The objective of the Parent
Subsidiary Directive is "to exempt dividends and other profit
distributions paid by subsidiary companies to their parent companies
from withholding taxes and to eliminate double taxation of such income
at the level of the parent company" . [FN275]
The Directives exempt cross-border dividend payments from withholding
taxes where such dividends are paid within a corporate group: Member
states can either exempt the dividend or provide an equivalent tax
credit. There must be at least 25% control of the company in question
by the parent and both the company paying and the company receiving the dividend must be fiscal residents of Member States. [FN276]
D. Cases: Futura, Marks and Spencer, and the Principle of Territoriality
Internationally,
it is generally admitted that residents are taxable for their income
regardless of its source, but non-residents are taxable only on income
sourced to the taxing jurisdiction. Thus, in principle residents and
non-residents can be taxed differently under the EC Treaty. [FN277]
However this theoretical starting point does not really decide the
issue. The goal of building a single market, the right to free movement
of persons, and the attendant duty to avoid discriminatory treatment,
whether in terms of taxation or services leads the court to analyze tax
liabilities in terms of the practical facts on a case by case basis. [FN278] One example of this is theFutura Participations SA v. Administration des Contributions [FN279] decision.
1. Futura
The
question presented inFutura was whether a Member State can limit the
right of a permanent establishment (corporate headquarters)to *389 offset gains with losses only for losses which were realized in that Member State. [FN280]
Of course, while "direct taxation falls within the competence of the
Member States, the latter must none the less exercise that competence
consistently with Community law and therefore avoid any overt or covert
discrimination on grounds of nationality" [FN281]
That is, the court looks beyond discriminatory intent and considers
also discriminatory effect as a basis for breach of treaty obligations.
[FN282] Even though
"direct taxation does not as such fall within the purview of the
Community . . ., the powers retained by the Member States must
nevertheless be exercised consistently with Community law" . [FN283]
Thus, a law which has the effect of discrimination on the basis of
nationality is in principle contrary to the EC Treaty. This is
obviously consistent with the goal of the EU (a single market for
labor, capital, and goods) and its teleology (economic liberalism in
the service of peace and prosperity).
Yet,
inFutura the court pointed out the power of the Member States to tax:
"effectiveness of fiscal supervision constitutes an overriding
requirement of general interest capable of justifying a restriction on
the exercise of fundamental freedoms guaranteed by the Treaty" [FN284]
The court did not need to affirm the power of the Member State to
derogate from its treaty obligations to reach the economically neutral
liberal result, yet did so. Moreover, though the court alreadyhad *390
enough reasons to decide the issue in favor of the single
market/economic liberalism, it went on, unnecessarily, to justify its
decision on the basis of the principle of fiscal territoriality. [FN285] This is the interesting part of the decision. First, it was just as much surplusage as the statements on the ability of Member
States to derogate from their treaty obligations
in the interest of orderly taxation. Moreover, the principle of
territoriality presents a counterbalance to the power of the Member
State to derogate from the treaty. Member State taxation may only
derogate from the treaty if such derogation is consistent with the
principle of fiscal territoriality.
The principle of territoriality is a general principle of international law and of community law, [FN286]
if only because the EC and EU treaties are treaties under international
law and subject thereto. The principle of territoriality states that a
taxing jurisdiction may tax income sourced from that jurisdiction, and
that the taxing jurisdiction has an absolute right to tax its
nationals. [FN287] By
establishing these concurring norms - the right of Member States to
derogate from the treaty, but subject to the principle of
territoriality - the court allows itself in future decisions to justify
any outcome it wants to.
2. Steinike
The
court inSteinike was confronted by a state aid offered by Germany to
aid German food processing companies to open new domestic and foreign
markets. [FN288] The Commission had been informed of the aid and had not objected. [FN289] The German food processors received the aid regardless of the origin of the food to be processed. [FN290] The court noted prohibition in ex Art. 92 are not absolute but are conditional [FN291] *391 and then went on to
do a multifactor balancing test. [FN292]
Interestingly, the court did make clear that a state aid cannot at once
be a tax under article 90 (ex article 95) and a charge having
equivalent effect to a customs duty under former articles 9,12 and 13. [FN293]
A
British company, with several subsidiaries also incorporated in Britain
and other Member States, divested itself of its foreign establishments.
[FN295] Britain allowed
tax transparency between British companies, whether doing business in
Britain or overseas, but did not allow tax transparancy between
subsidiaries owned by British companies but incorporated in other
Member States. [FN296]
Essentially, dividend payments from the foreign subsidiary to the
British parent company were not taxed if the subsidiary was
incorporated in Britain but would be taxed if the company were set up
under the laws of another Member State. [FN297]
Losses would also be allowed to offset gains within the corporate
group, but only as to companies incorporated under British law. [FN298]
This presented a case of differential taxation. The question was
whether the tax preference was a violation of the right of
establishment under former articles 43 and 48 (now articles 37 and 39).
[FN299] The court decided
that while in theory such differential tax treatment might under
certain circumstances be permissible, namely (at least) where there is
the opportunity for the foreign subsidiary to offset the double
taxation in the tax system of the other Member State. [FN300]
Where the foreign subsidiary has however exhausted all opportunities to
avoid the double taxation, such differential taxation would be a
violation of the EC Treaty. [FN301]
The court did make clear that not only the tax credit to avoid double
taxation of dividend income but also loss deductions (including carry
forwards) would enter its considerations as to whether the
theoretically permissible differential taxation wouldbe *392
also allowed in the specific case at bar. Though the court does not
expressly invoke the doctrine of fiscal realism in practice it does so
in this case.
4. Synthesis
InFutura,Marks and Spencer, andSteinike, [FN302]
the court clearly takes a realist approach: It is not interested in
legal formalities or whether the black letter law was observed. Rather
it looks to a number of factors [FN303] to reach a balanced decision on a case by case basis. [FN304]
In all these cases the court is leaving itself openings, both in noting
the power of Member States to tax more or less as they see fit, and in
describing the principle of territoriality so that it can justify
whatever result it feels necessary to achieve the single market. The
court gives in to the Member States whenever absolutely necessary, yet
advancing the process of legal integration whenever possible.
A. National Law: Real Seat Theory of Corporate Nationality v. Place of Incorporation Theory of Corporate Nationality
The
citizenship and residence of companies are treated very differently in
common law as opposed to the civil law. This fact marks EU business law
and must be explained if we are to understand EU law.
Most
common law jurisdictions adhere to the "incorporation theory" - a
corporation is deemed to be the creature of the state where it is
incorporated, regardless of where it does business. The internal
affairs of the corporation are governed by the laws of the place of
incorporation, even when it does business outside of that state. The
advantages of the place of incorporation theory is that it allows the
company to move without being obliged to dissolve itself and
reincorporate. The place of incorporation theory also allows management
to forum shop. It is also a rule of easy and certain application, a
type of bright line test.
*393
Though some civilian jurisdictions such as the Netherlands and
Switzerland do take up the place of incorporation theory, France and
Germany among others do not. Most continental civilian jurisdictions
takes a different view from the "incorporation theory" and instead use
the "real seat theory" (Sitztheorie) to determine residency. The "real
seat theory" holds that the corporation is a citizen of the state where it
has its headquarters, i.e. does business. The corporation is obliged to
register or incorporate where it has its headquarters or it will be
denied legal personality. This rule makes it easier for host states to
control foreign corporations but makes it difficult for the corporation
to move since dissolution and reincorporation would be required to do
so. This theory prevents forum shopping.
Both
rules exist in the EU today. A Directive could force Member States to
adopt one or the other theory. However none exists or is proposed. In
fact "the 'place of incorporation' doctrine coexists best with the goal
of a single European market because it recognizes foreign companies and
the laws that govern their internal affairs and it allows companies to
move to a new state. [FN305]
Understanding
the differences between these two regulatory systems is essential for
understanding the conflicts arising out of the right of establishment.
B. The Case Law of the Right of Establishment: Daily Mail, Centros, Überseering and Futura
1. Daily Mail
It
is well settled that any enterprise incorporated in the EU has in
principle the right to do business anywhere in the Union. The right of
establishment is central to the single market and one of the four
basic rights guarantied by the ECT. However, this nearly absolute right
in principle is not without problems in practice.
An early leading case on the right of establishment isDaily Mail. [FN306]
A British company wished to transfer its head office from England to
the Netherlands to take advantage of a more favorable Dutch taxation
system. [FN307] That move required prior approval of the tax authorities. [FN308] The required approval was not forthcoming. [FN309]
*394
One might think that the ECJ could have rejected this move as an
example of tax evasion resulting from manipulation of law -abus de
droit. Or, one could imagine the court saying that such a move would be
illegal by invoking a doctrine of fiscal realism. It is clearly a
general principle of tax law that tax authorities, whether in France or
the United States, look not to the form of a transaction but at its
substance to determine its effects. And general principles of law are a
source of law, both in international law [FN310] and in EU law. [FN311]
Yet, the court did not take these obvious doctrinal moves, neither
inDaily Mail, nor in its progeny (Centros, Überseering,Futura)! Rather,
the court limited itself to an examination of the EC Treaty. But, the
court did not follow the obvious teleology of the treaty. It did not
determine that the right of establishment should permit the British
company to establish its head office in the Netherlands. Rationales for
such a decision could be to encourage integration of
the single market and even to encourage regulatory competition among
the Member States. Instead, the court determined that the right of
establishment did not permit the company incorporated in one Member
State to move its head office to another Member State, [FN312]
at least not where such move was motivated by tax avoidance purposes
(and we must remember, tax avoidance is not per se tax fraud). The
reasoning of the court is that the EC Treaty does not adopt either the
real seat theory or the place of incorporation theory. Thus, the issue
was left for national law to determine, and Articles 43 and 48 of the
Treaty of Rome do not give companies an absolute right to transfer
their head office. [FN313]
AfterDaily
Mail an observer might think that the ECJ would see through attempts to
manipulate the tax system and not allow the EC Treaty to be invoked to
further such schemes, applying a sort of "fiscal realism by other
means" . In fact however that has not proven to be the case as seen
first inCentros Ltd v. Erhvervs og Selskabsstyrelsen. [FN314]
The
facts ofCentros are as follows: Residents of Denmark wished to
incorporate a "shell" company in the UK and to then use that company to
conduct business in Denmark. No business was to be transacted in the
UK. Clearly then this was an example of abusing the legal system to
obtain a pecuniary result. Namely, the avoidance of Danish rules
requiring all companies to have a minimum of capital prior to incorporation. The risk claimed by
Denmark was that such manipulation places creditors at risk. Yet,
despiteDaily Mail, the ECJ held that Denmark was required to recognize
the formally "foreign" company and allow it to do business in Denmark.
Like Netherlands and the UK, Denmark follows the incorporation theory
of corporate residence. [FN315]
The
best justification ofCentros would be a reductio ad absurdam. If
Denmark were allowed not to recognize the formally British company what
about other companies? Would a company owned by French nationals
incorporated in Britain be able to do business in Denmark? A similar
justification would be the idea that each Member State must essentially
give full faith and credit to the legal acts of the other Member
States. But why should those rationales be permitted to justify an
abuse of the law through manipulation to disguise transactions?
The
court does in fact recognize both the possibility of legal manipulation
and the right of Member States to prevent abuse of community law at
least by its own citizens. [FN316]
However, measures which restrict the fundamental freedoms of the Treaty
must be "applied in a non-discriminatory manner; they must be justified
by imperative requirements in the general interest; they must be
suitable for securing the attainment of the objective which they
pursue; and they must notgo *396 beyond what is necessary in order to attain it" . [FN317]
InCentros, this was not the case, since the end, protection of
creditors, would not have been met by the means as to British companies
incorporated by Britons. [FN318] There were less restrictive means to the legitimate end sought by the Danish government. [FN319] To an American lawyer, this looks a lot like means-ends constitutional review. [FN320]
3. Überseering
AfterCentros
andDaily Mail the community law seemed at odds with itself. The
situation was clarified, somewhat, in theÜberseering decision. The
facts ofÜberseering are as follows: A company was incorporated in the
Netherlands. It is owned by German nationals, but not registered as a
German company. Can that company go before German courts? German law
follows the real seat theory (Sitztheorie). Since the ostensibly Dutch
company was not registerered in Germany, which was the place of the
center of its economic interests (the place where it has its
administration or headquarters) Germany considered that the entity was
subject to German law. As it was not properly registered it had no
legal existence under German law. The problem is that this amounts to
non-recognition of a foreign company, and thus might be a breach of the
EC Treaty.
So
the question is, whetherÜberseering is more likeDaily Mail, or more
likeCentros? Or is itsui generis? InÜberseering there was no attempt at
manipulation of law or of tax avoidance. So there may in fact be no
analogy betweenÜberseering on the one hand andDaily Mail orCentros on
the other. Nevertheless, the court and analysts seems to consider the
cases as somehow related: They all concern the rights of foreign
establishments, and legal fictions. But the legal fiction inÜberseering is
invoked by the state (denying the factual existence of the company)
whereas the legal fiction invoked inCentros andDaily Mail is invoked by
the individual. SoÜberseering on the one hand andCentros andDaily Mail
on the other are not in fact analogous.
In
any event, the ECJ inÜberseering required legal fictions to resemble
practical facts. Germany was forced to recognize the existence of the
formally Dutch company under Articles 43 and 48 of the Treaty of Rome.
The German law was not considered a reasonable means tothe *397 permissible end of protecting creditors. [FN321] The German measure was not proportional. [FN322] Moreover, the German ruling denied the company its fundamental right to establishment, [FN323] the right to a fair hearing [FN324] and possibly the right to own property. [FN325] However, the ECJ did not appear to consider the disturbing fact that it attributed fundamental human rights to a non-human!
The
court's decision would support an analogy ofÜberseering toCentros
rather than toDaily Mail becauseCentros, likeÜberseering, addressed the
relation of a host state and a corporation. [FN326]
The ECJ distinguishedDaily Mail fromÜberseering becauseDaily Mail
"concerned relations between a company and the Member State under whose
laws it had been incorporated" while "the present case concerns the
recognition by one Member State of a company incorporated under the law
of another Member State." [FN327] That is,Überseering
involved not the right of a company to move
outside of the state it incorporated in, but rather whether a company
has a right to recognition in a host state. [FN328]
This implies perhaps that a company could compel recognition in a "real
seat theory" Member State by incorporating in an "incorporation theory"
Member State, but only possibly, sinceÜberseering clearly involved no
element of fraud or other abuse of the law. However the facts
ofÜberseering are sufficiently different fromCentros andDaily Mail such
that one can question whether any analogy at all should be found.
Whatever
we think about the fact thatÜberseering tries, unsuccesfully, to defuse
the conflict betweenCentros and Daily mail by forcing an analogy that
is really not there the fact is:Überseering sends a clear message that
ambiguities will be resolved in favor of the Community and the single
market." [FN329]
C. Regulation: The Societas Europa [FN330]
The
Societas Europa (SE) is an attempt to overcome the problem that there
are two differing theories of corporate residency. It is alsoan*398 attempt to create a European company form. How does one form an SE? What are its advantages?
1. Definition of the SE
The SE is business corporation with legal personality. The SE must be
registered in one of the Member States, and its
place of registration must also be the seat of its headquarters. SE's
face a minimum capitalization requirement of 120,000 euros. [FN331] Liability of sharholders is limited to the value of their investment. [FN332]
The SE is subject to the same formalities of registration, reporting,
and internal governance that are found in similar national laws.
2. Formation of the Societas Europa
SE's
are created by merger of national corporations (e.g., SA, GmbH, AG,
PLC), whether as equals, holdings, or subsidiaries, where at least two
of the merged companies are from different Member States; [FN333] The SE cannot be created from scratch, rather only through merger of existing companies from two or more Member States.
3. Advantages and Limits of the SE
The
advantage of the SE is that it is easier for an SE in a real seat
theory state to transfer its registered office from one Member State to
another. [FN334] Transfer of the head office does not require dissolution and reincorporation. [FN335] Thus the SE is adapted to solving the problem of real seat theory states. [FN336]
The SE is intended to reduce administrative and transaction costs to
help build a single efficient market to benefit all Europeans. It
should reduce administrative and transaction costs by an estimated 30
Billion euros. [FN337]
Some do question whether harmonization efforts lead to lower transaction costs. [FN338]
The better answer is a qualified yes. Of course, greater legal
certainty, lower transaction costs, and more transparancy are always
possible. However the question is not whether the efforts at
integration reach the very best result possible in theory. Rather
thequestion *399 is whether they achieve better results than an unharmonized system. And the answer to that question is clearly yes.
Directives,
regulations, case law and conventions together form a body of binding
EU business law. Such laws are inevitable, and inevitably evolving, as
the Community grows into a Union and federation. These laws foster
peace by creating the conditions for liberal trade and attendant
prosperity. These developments are hopeful as they will make the world
more wealthy and thus make conflict less likely. Rather than viewing
the EU with fear, U.S. policy makers should see that the challenge the
EU represents is also an opportunity.
[FNa1]. "New Europe" does
not mean only Eastern Europe, though the greatest potential for growth
in the EU is in Eastern Europe. Rather, it is Europe of 25 doing
business under one common framework established by the Union.
[FNaa1]. Professor of law at the University of Tartu, Estonia.
[FN1]. SeeAndrea J.
Gildea,Uberseering: A European Company Passport, 30Brook. J. Int'l L.
25, 292 (2004). "Presently, a hybrid system of recognition exists in
Europe. It consists of national rules, EC rules, and a somewhat
substantial zone of ambiguity between the two regimes." Id.
[FN2].Economies of Scale,at
http:// www.investopedia.com/terms/e/economiesofscale.asp (last visited
Mar. 30, 2006). "The increase in efficiency of production as the number
of goods being produced increases. Typically, a company that achieves
economies of scale lowers the average cost per unit through increased
production since fixed costs are shared over an increased number of
goods." Id.
[FN3]. 1Adam Smith, An Inquiry
into the Nature and Causes of the Wealth of Nations Ch. 1, para. 3
(University of Chicago Press 1976) (1776) (noting an example of
increased production in a pin factory due to specialization).
[FN4].See, e.g., "Eli Whitney" at http://www.answers.com/topic/eli-whitney (last visited Mar. 30, 2006).
[FN5].See4Adam
Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
Ch. 2, para. 15 (University of Chicago Press 1976) (1776) (discussing
restraints upon importation from foreign countries of goods that can be
produced at home).
[FN6].See Gildea,supranote 1 at 258.
[FN7].See Eric Engle,The Transformation of the International Legal System: The Post-Westphalian Legal Order, 23 QLR 23, 26 (2004).
[FN8]. Eduardo M. Peñalver,Property As Entrance, 91Va. L. Rev. 1889, 1900- 1901 n. 32(2005).
[FN9].See generally
Smith,supranote 3;David Ricardo, On the Principles of Political Economy
and Taxation 7.13-7.16 (John Murray 1817),available at
http://www.econlib.org/library/Ricardo/ricP2a.html#Ch.7,%20On%20Foreign%
20Trade (last visited Mar. 30, 2006).
[FN10].See generally,Smith,supra note 3.
[FN11].SeeEugene Kontorovich,The Arab League Boycott And WTO Accession: Can
Foreign Policy Excuse Discriminatory Sanctions?
4Chi. J. Int'l L. 283, 286 (2003)."[T]he free trade system was designed
to promote not just prosperity but peaceful and amicable relations
between Member States ..." Id.
[FN12].Smith,supranote 3 at Ch. 1, para. 3 (noting an example of increased production in a pin factory due to specialization).
[FN13].Ricardo,supra note 9, at 7.13-7.16.
[FN14].SeeDebra Steger,Peace And Prosperity Through Trade, 20Am. U. Int'l L. Rev. 1133, 1133 (2005).
"'Peace
and prosperity through trade' was the basic objective on which the
General Agreement on Tariffs and Trade ("GATT") was founded almost
sixty years ago and it remains the fundamental raison d'etreof the
World Trade Organization ("WTO") today." Id.
[FN15].SeeEric Allen Engle,
The Transformation of the International Legal System: The
Post-Westphalian Legal Order,23Quinnipiac L. Rev. 23, 26 (2004).
[FN16].See generally
Alastair J. Walling,Early To Bed, Early To Rise, Work Like Hell And
Globalize,13Kan. J.L. & Pub. Pol'y 161, 174 (2003/2004) (discussing whether globalization is a good
thing).See also Michael J. Trebilcock, Critiquing the Critics of
Economic Globalization, 1J. Int'l L. & Int'l Rel. 213, 233-234 (2005)
(noting that if each EU state "aspired to be self-sufficient in food,
this would contradict the entire European economic integreation
process").
[FN17].Timothy Garton Ash,
Free World: Why a Crisis of the West Reveals the Opportunity of Our
Time, 102, 221-22. (Allen Lane ed. Random House 2004).
[FN18].Paul Kennedy, The
Rise and Fall of the Great Powers: Economic Change and Military
Conflict from 1500 to 2000 352-59(Vintage Books 1989).
[FN19].See generally Kennedy, supra note 18.
[FN20]. Paul W.
Kahn,American Hegemony And International Law Speaking Law To Power:
Popular Sovereignty, Human Rights, And The New International Order,
1Chi. J. Int'l L. 1, 6 (2000). "A strand of military analysis asserts
that nuclear weapons are quite useless devices." Id.
[FN21].See Christopher B. Stone, Signaling Behavior, Congressional-Executive Agreements, And The Salt I Interim Agreement, 34 Geo.Wash. Int'l L.
Rev. 305, 305 (2002). In quoting former President R. M. Nixon's memoirs:
It
was clear to me by 1969 that there could never be absolute parity
between the U.S. and the U.S.S.R. in the area of nuclear and
conventional armaments... [A]bsolute parity in every area of armaments
would have been meaningless, because there is a point in arms
development at which each nation has the capacity to destroy the other.
Beyond that point the most important consideration is not continued
escalation of the number of arms but maintenance of the strategic
equilibrium while making it clear to the adversary that a nuclear
attack, even if successful, would be suicidal.
Id. at 339.
[FN22]. Engle,supranote 15, at 34.
[FN23]. Col. Michael
Wansink,Whither Sovereignty?,National Defense University Executive
Research Project S19, at 22,35,available at http://
www.ndu.edu/library/ic6/95-S19.pdf (last visited Mar. 30, 2006).
[FN24].See Engle,supranote 15, at 29-30.
[FN25].See, e.g., Project
for a New American Century,:Rebuilding America's Defenses,Report of the
Project of the New American Century (2000) at http:// www.newamericancentury.org/RebuildingAmericasDefenses.pdf (last visited Mar. 30, 2006).
[FN26].SeeSusan George,The
International Geo-Economic System inHuman Rights in Perspective 275
(Asbjorn Eide, Bernt Hagtvet, ed., Blackwell 1992) (making an incisive
argument that military power is outmoded but has been replaced by
financial power which is more subtle and effective than direct control).
[FN27].See Engle,supra note 15, for an extended discussion of this thesis.
[FN28]. As a theory of
sociology, functionalism is essentially organicist, analogizing society
to an organism, with each member having particular functions, like
organs of a body.See, e.g., Kent McClelland,Theoretical Perspectives in
Sociology, Functionalism, (2000),at http://
web.grinnell.edu/courses/soc/s00/soc111-01/IntroTheories/Functionalism.html
(last visited Mar. 30, 2006).
[FN29].SeeJosé E. Alvarez,
Steve Charnovitz,Triangulating The World Trade Organization, 96Am. J.
Int'l L. 28, 48 (2002). "The core idea of functionalism is that
international governance should be organized according to 'tasks' and
'functional lines."'Id.
[FN30]. Hans J.
Morgenthau,Positivism, Functionalism, and International Law, 34Am. J.
Int'l L 260, 283 (1940). Noting that grandiose legalistic schemes
purporting to solve the ills of the world have replaced the painstaking
search for the actual laws and the facts underlying them).Id.
[FN31].See Antony
Anghie,Time Present and Time Past: Globalization, International
Financial Institutions, and the Third World, 32N.Y.U. J. Int'l L. &
Pol. 243, 264 n. 57 (2000) (quotingBartram S. Brown, The United States
and the Politicization of the World Bank 14-15 (Keegan Paul 1992)).
Functionalism
is a theory of international organization which holds that a world
community can best be achieved not by attempts at the immediate
political union of states, but by the creation of non-political
international agencies dealing with specific economic, social,
technical, or humanitarian functions. Functionalists assume that
economic, social and technical problems can be separated from political
problems and insulated from political pressures.
Id. "Brown's important work has a special relevance to the current operations of the IFIs." Id.
[FN32]. "The
neo-functionalist theory that has driven much of European integration,
for example, posits that supranational institutions formed for fairly narrow purposes will attract political
support over time and will thereby be able to expand their functions."
Ernest A. Young,The Trouble With Global Constitutionalism, 38Tex. Int'l
L.J. 527, 540 n.86 (2003).
[FN33]. "... [F]unctionalism ... has enabled the incremental, progressive development of the European Union."
Sabino Cassese,European Administrative Proceedings, 68Law & Contemp. Prob. 21, 23 (2004).
[FN34]. Laura Dale,The
Economic Impact Of Replacing The Federal Income Tax With A Federal
Consumption Tax: Leveling The International Playing Field, 9Int'l Trade
L.J. 47, 47 (2000).See, e.g, Myrtle D. Bishop, Samuel J. Chandle,
Opportunities And Challenges: The Caribbean Involvement In The Free
Trade Area Of The Americas, 27Fordham Int'l L.J. 909, 913 (2004)
(noting that the FTAA is the world's largest free trade zone). However,
the FTAA is still under construction and only comprises free trade in
goods, not in labor.
[FN35]. This may be because
functionalism and democratic deficit are capable of coexisting.
Secondarily, as the Union expands, political integration becomes more
difficult, despite the insistance that new states accept the acquis
communataire, the attained goals of the Union, such as the single
currency.
[FN36].See1Aristotle,
Politics Part 2 (Benjamin Jowett trans., Adelaide 2004),available at
http:// etext.library.adelaide.edu.au/a/aristotle/a8po/book1.html (last
visited Mar. 30, 2006).
"When
several villages are united in a single complete community, large
enough to be nearly or quite self-sufficing, the state comes into
existence, originating in the bare needs of life, and continuing in
existence for the sake of a good life." Id.
[FN37]. 1Aristotle,
Nicomachean Ethics Ch. 5 (W.D.Ross trans., MIT 1994)available at
http://classics.mit.edu/Aristotle/nicomachaen.mb.txt (last visited Mar.
30, 2006). "The life of money-making is one undertaken under
compulsion, and wealth is evidently not the good we are seeking; for it
is merely useful and for the sake of something else." Id.
[FN38]. Manning Gilbert
Warren,Global Harmonization of Securities Laws: The Achievements Of The
European Communities, 31Harv. Int'l L.J. 185, 194 (1990).
[FN39].See Roberta S. Karmel,The Case for a European Securities Commission, 38Colum. J. Transnat'l L. 9, 12 (1999).
All
over Europe, governments are attempting to foster an equity culture for
both ideological and practical reasons. Government planning and
ownership of industry has fallen out of favor coincident with the
collapse of Communism. In any event, ever increasing budget deficits
are no longer sustainable by governments. One result of this political
shift to a free market ideology coupled with a practical need to reduce
government spending has been massive privatizations of government owned
assets
Id.
[FN40].Id. at 13-14.
[FN41]. Treaty Establishing the European Community, art. 2, Oct. 2, 1997, 37 I.L.M 56 (1998).
The
Community shall have as its task, by establishing a common market and
an economic and monetary union and by implementing common policies or
activities referred to in Articles 3 and 4, to promote throughout the
Community a harmonious, balanced and sustainable development of
economic activities, a high level of employment and of social
protection, equality between men and women, sustainable and
non-inflationary growth, a high degree of competitiveness and
convergence of economic performance, a high level of protection and
improvement of the quality of the environment, the raising of the
standard of living and quality of life, and economic and social cohesion and solidarity among Member States.
Id.
[FN42]. Todd A.
Sulger,Harmonization Of Securities Market Regulations In The European
Union: Is The Price Tag Too High? 29Cal. W. Int'l L.J. 221, 240 (1998).
[FN43]. U.S.Const. amend. X.
[FN44].See Treaty Establishing the European Community,supranote 41, at art. 5.
The
Community shall act within the limits of the powers conferred upon it
by this Treaty and of the objectives assigned to it therein.
In
areas which do not fall within its exclusive competence, the Community
shall take action, in accordance with the principle of subsidiarity,
only if and insofar as the objectives of the proposed action cannot be
sufficiently achieved by the Member States and can therefore, by reason
of the scale or effects of the proposed action, be better achieved by
the Community.
Any action by the Community shall not go beyond what is necessary to achieve the objectives of this Treaty.
Id.
[FN45]. U.S. Const. Art. VI cl. 2.
[FN46]. Case 26/62, NV
Algemene Transporten Expeditie Onderneming van Gend en Loos v.
Nederlandse Administratie der Belastingen, 1963 ECR 1.
[FN47].See Treaty Establishing the European Community,supranote 41, at art. 5 (subsidiarity).
[FN48].See Treaty Establishing the European Community,supranote 41, at art. 308; .S. Const. art I, § 8 cl.18.
[FN49]. Alexander B. St.
John, The Regulation of Cross-Border Public Offerings of Securities In
The European Union: Present And Future, 29Denv. J. Int'l L. & Pol'y
239, 244-245 (2001).
[FN50].See, e.g., Commission Directive 2004/72, art.6(2),7, 2004 O.J.(L 162) 70, 73-74 (Market Abuse Directive).
[FN51]. Warren,supra note 38, at 215.
[FN52]. For a (critical)
examination of the "ends" of U.S. securities laws, see, e.g., Stanislav
Dolgopolo,Insider Trading And The Bid-Ask Spread: A Critical Evaluation
Of Adverse Selection In Market Making, 33Cap. U. L. Rev. 83, 86 (2004).
[FN53].See Treaty Establishing the European Community,supranote 41, at art. 37(2).
[FN54]. Richard
Cole,Authentic Democracy: Endowing Citizens With A Human Right In Their
Genetic Information, 33Hofstra L. Rev. 1241, 1285 n. 186 (2005).
[FN55]. Treaty of Amsterdam
Amending the Treaty on European Union, the Treaties Establishing the
Eurpean Communities and Related Acts, art. 226, Nov. 10, 1997, 37 I.L.M. 56 (1998),
alsoavailable at
http://europa.eu.int/eur-lex/lex/en/treaties/dat/11997D/htm/11997D.html
(last visited Mar. 30, 1996) (ex Art. 169, Treaty of Rome).
[FN56].See Treaty of Amsterdam,supra note 55, at art. 227 (ex Art. 170, Treaty of Rome).
[FN57].See, e.g.,Case C-91/92, Faccini Dori v. Recreb, SRL, 1994 E.C.R I-3325.
[FN58]. Case 26/62, NV
Algemene Transporten Expeditie Onderneming van Gend en Loos v.
Nederlandse Administratie der Belastingen, 1963 ECR 1.See
http://europa.eu.int/comm/employment_social/fundamental_rights/legis/lgenforce_
en.htm (discussing enforcement of directives in employment and racial
discrimination cases).
[FN59]. Derek
Devgun,Multilateral Capital Transfer Tax Treaty Relief Within The
European Community,E.L. Rev. 1995, 20(5), 451-470 (1995).
[FN60].See Treaty of Amsterdam,supra note 55, at art. 110(2).
[FN61].SeeTreaty Establishing the European Community,supranote 41, at art. 5.
[FN62]. Case 26/62, NV
Algemene Transporten Expeditie Onderneming van Gend en Loos v.
Nederlandse Administratie der Belastingen, 1963 ECR 1.
[FN63]. Warren,supra note 38, at 212.
[FN64].SeeTreaty Establishing the European Community,supranote 41, at art. 5.
[FN65].SeeTreaty Establishing the European Community,supranote 41, at art. 308. EC Treaty provides:
If
action by the Community should prove necessary to attain, in the course
of the operation of the common market, one of the objectives of the
Community and this Treaty has not provided the necessary powers, the
Council shall, acting unanimously on a proposal from the Commission and
after consulting the European Parliament, take the appropriate measures.
Id.
[FN66].See Treaty of Amsterdam,supra note 55, at art. 94.
[FN67].Id. at art. 2 (e).
[FN68]. Directive 68/151/EEC, Art. 2 (e).
[FN69]. Council Directive 77/91, preamble., 1977 O.J. (L 26) 1 (EEC).
[FN70].Id.
[FN71]. Council Directive 78/855, 1978 O.J. (L 295) 36 (EEC).
[FN72]. Council Directive 78/660, 1978 O.J. (L 222) 11 (EEC).
[FN73].Id.
[FN74]. Council Directive
82/891, art. 307, 1982 O.J. (L 378) 47-54 (EEC) (discussing divisions
of public limited liability companies).
[FN75].Id.
[FN76]. Council Directive 83/349, art. 7, 1983 O.J. (L 193) 31 (EEC).
[FN77]. Council Directive 84/253, art, 3-6,1984 O.J (L 126) 20-26 (EEC).
[FN78]. Council Directive 2003/71, 2003 O.J. (L.345) 64-89 (EC).
[FN79].Id.
[FN80]. Commission Regulation 809/2004, 2004 O.J. (L 149) 1 (EC).
[FN81]. Council Directive 2003/71, preamble, 2003 O.J. (L 345) 64 (EC).
[FN82]. Council Directive 80/390, 1980 O.J. (L 100) 1-26 (EEC).
[FN83]. Council Directive 89/298, 1989 O.J. (L 124) 8-15 (EEC).
[FN84]. Council Directive 79/279, 1979 O.J. (L 66) 21 (EEC), amended by Council Directive 82/148, 1982 O.J. (L 62) 22 (EEC).
[FN85]. Council Directive 82/121, 1982 O.J. (L 48) 26-29 (EEC).
[FN86]. Council Directive 88/627, 1988 O.J. (L 348) 62-65 (1988) (EEC).
[FN87]. Council Directive
2001/34, para. 1, 2001 O.J. (L 184) 36 (EC) states: "Directives
79/279/EEC, 80/390/EEC, 82/121/EEC and 88/627/EEC, as amended by the
acts listed in Annex II Part A, are hereby repealed ... 2. References
to the repealed Directives shall be construed as references to this
Directive" . Id.
[FN88].
Council Directive 2003/71, para. 3, 2003 O.J. (L 345) 64 (EC). "For
reasons of consistency, however, it is appropriate to regroup the
provisions of Directive 2001/34/EC which stem from Directive 80/390/EEC
together with Directive 89/298/EEC and to amend Directive 2001/34/EC
accordingly." Id.
[FN89].SeeCase C-350/02,
Commission of the European Communities v. Kingdom of the Netherlands,
2004 E.C.R.I-6213. Case C-324/98, Telaustria Verlags GmbH and
Telefonadress GmbH v Post & Telekom Austria AG, 2000 E.C.R. I-10745.
[FN90]. Council Directive 2003/71, preamble, 2003 O.J. (L 345) 64, 65 (EC) (discussing single market and investor protection).
[FN91]. Todd A.
Sulger,Harmonization Of Securities Market Regulations In The European
Union: Is The Price Tag Too High? 29Cal. W. Int'l L.J. 221, 225 (1998).
[FN92].SeeSt. John,supranote 49, at 245.
[FN93]. Council Directive 2003/71, art. 17, 2003 O.J. (L 345) 78 (EC).
[FN94]. Council Directive 79/279, 1979 O.J. (L 66) 21 (EEC), amended by
Council Directive 82/148, 1982 O.J. (L 62) 22 (EEC).
[FN95]. Sulger,supranote 91, at 224-225.
[FN96]. Council Directive 2003/71, art. 7, 2003 O.J. (L 345) 73 (EC).
[FN97]. Directive 2001/34, art. 43, 2001 O.J. (L 184) 22-23 (EC).
[FN98].Id. at 23.
[FN99].Id. at 22.
[FN100]. Warren,supra note 38, at 210.
[FN101]. Council Directive 2003/71, art. 14, 2003 O.J. (L 345) 76 (EC).
[FN102]. Directive 2001/34, art. 98, 2001 O.J. (L 184) 33 (EC).
[FN103].SeeCouncil Directive 80/390, 1980 O.J. (L 100) 1-26(EEC).
[FN104].SeeSt. John,supra note 49, at 248.Id. at art. 8.
[FN105].Id. at art. 4.
[FN106].SeeSt. John,supranote 49, at 248. Council Directive 80/390, art. 8, 1980 O.J. (L 100) 1-26 (EEC).
[FN107]. Council Directive 2003/71, art. 5, 2003 O.J. (L 345) 72073 (EC).
[FN108].See St. John,supranote 49, at 249.
[FN109]. Warren,supra note 3,8 at 212.
[FN110]. Council Directive 2003/71, art. 25, 2003 O.J. (L 345) 81 (EC).
[FN111]. Directive 2001/34, preamble, 2001 O.J. (L 184) 9 (EC).
[FN112]. Warren,supranote 38, at 216
[FN113].Id. at 216.
[FN114].Id. at 212.
[FN115].Id. at 212-213.
[FN116]. St. John,supra note 49, at 246.
[FN117].Id.
[FN118]. 2001/34, art. 25(3), 2001 O.J. (L 184) 18 (EC).
[FN119]. Warren,supranote 38, at 214.
[FN120].Id. at 214. 2001/34, 2001 O.J. (L 184) 7 (EC).
[FN121].Id. at 214.
[FN122]. Sulger,supra note 91, at 230.
[FN123]. 2001/34, Annex III, 2001 O.J. (L 184) 71 (EC).
[FN124]. 2001/34, art. 89(1), 2001 O.J. (L 184) 31 (EC).
[FN125]. Warren,supranote 38, at 202.
[FN126]. For example,
traders who would be otherwise liable for inside trading can immunize
themselves by disclosing inside information.SeeSEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (en banc).
[FN127]. Rule 13d-1, pursuant to beneficial ownership reporting requirements in § 13(d) of the Securities Exchange Act of 1934.
[FN128]. Broc Romanek, Mark S. Britton,Online Shareholder Activism: How to Guard Against its Fallout20 No. 5 ACCA Docket 32, 37 (2002).
[FN129].Id. at 36.
[FN130]. 15 U.S.C.A. § 78n (d)1 (2002).
[FN131]. Shaun
Mulreed,Private Securities Litigation Reform Failure: How Scienter has
Prevented the Private Securities Litigation Reform Act of 1995 From
Achieving Its Goals, 42San Diego L. Rev. 779, 784 n. 14 (2005).
[FN132]. "In accordance with the principle of proportionality, it is
necessary and appropriate for the achievement of
the basic objective of ensuring the completion of a single securities
market to lay down rules on a single passport for issuers." Council
Directive 2003/71, preamble, 2003 O.J. (L 345) 68 (EC).
[FN133]. "One of the objectives of this Directive is to protect investors." Id. at 65.
[FN134]. Warren,supra note 38, at 209-210.
[FN135]. "The aim of this
Directive and its implementing measures is to ensure investor
protection and market efficiency, in accordance with high regulatory
standards adopted in the relevant international fora." Council
Directive 2003/71, preamble, 2003 O.J. (L 345) 65 (EC).
[FN136].Id. at 71. Council Directive 89/298, art. 4, 9, 16, 1989 O.J. (L 124) 8-15 (EEC) (repealed).
[FN137]. Warren, supra note 38 at 215.
[FN138].Id.
[FN139].Id. at 216.
[FN140]. Council Directive 2003/71, art. 3(1), 2003 O.J. (L 345) 71 (EC).
[FN141].Id. at 71-72.
[FN142].Id.
[FN143]. Council Directive 2001/34, art. 17, 2001 O.J. (L 184) 18-19 (EC).
[FN144]. Council Directive 2003/71, preamble, 2003 O.J. (L 345) 8 (EC).
[FN145]. Securities Act of 1933, §§ 3-4, 15 U.S.C. §§ 77(c), 78(d) (2004).
[FN146]. Council Directive 2001/34, art. 37, 2001 O.J. (L 184) 21 (EC).
[FN147].Id.
[FN148].Id.
[FN149].Id. at 14.
[FN150].Id. at 21.
[FN151]. Karmel,supra note 39, at 20.
[FN152].Id.
[FN153]. Insider trading
was legal in Germany until 1994.See, e.g., Anupama J. Naidu,Was its
Bite Worse than its Bark? The Costs Sarbanes-Oxley Imposes on German
Issuers may Translate into Costs to the United States, 18Emory Int'l L.
Rev. 271, 299 (2004).
[FN154]. Council Directive Coordinating Regulations on Insider Trading, 1989 O.J. (C 277) 13 [1 Common Mkt. Rep. (CCH)] P 95,028.
[FN155]. Council Directive 2003/6,2003 O.J. (L 96) 16-26 (EC).
[FN156].Id. at 20.
[FN157]. Securities Exchange Act of 1934, § 10, 15 U.S.C. § 78j (1994) (discussing manipulative and deceptive devices).
[FN158]. Council Directive 2003/6, art. 1(3), 2003 O.J. (L 96) 21 (EC).
[FN159]. The Securities Act of 1933 defines "security" as:
[A]ny
note, stock, treasury stock, bond, debenture, evidence of indebtedness,
certificate of interest or participation in any profit-sharing
agreement, collateral trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust
certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, or, in
general, any interest or instrument commonly known as a 'security', or
any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.
The Securities Exchange Act of 1934 defines "security" as:
[A]ny
note, stock, treasury stock, bond, debenture, certificate of interest
or participation in any profit-sharing agreement or in any oil, gas, or
other mineral royalty or lease, any collateral-trust certificate,
preorganization certificate or subscription, transferable share,
investment contract, voting-
trust certificate, certificate of deposit, for a
security, or in general, any instrument commonly known as a 'security'
or any certificate of interest or participation in, temporary or
interim certificate for, receipt for, or warrant or right to subscribe
to any purchase, any of the foregoing; but shall not include currency
or any note, draft, bill of exchange, or banker's acceptance which has
a maturity at the time of issuance of not exceeding nine months,
exclusive of days of grace, or any renewal thereof the maturity of
which is likewise limited.
[FN160]. Sec. & Exch.Comm'n,v. Glenn W. Turner Enter., Inc., 474 F.2d 476; (9th Cir. 1973).
[FN161].See, e.g., Case
C-384/02, Criminal Proceedings against Knud Gróngaard and Allan Bang,
2005 (C 384) par. 22 (ECR). "Directive 89/592 prohibits insider dealing
with the aim of protecting investor confidence in the secondary market
for transferable securities and, consequently, of ensuring the proper
functioning of that market." Id.
[FN162].Adoption of
Insider Trading Rules Creates Wide Ban on Use of Information, 2 Int'l
Sec. Reg. Rep. (BNA) No. 14, at 1 (June 21, 1989).See also Case C-384/02, Criminal Proceedings against Knud
Gróngaard and Allan Bang, 2005 (C 384) par. 22 (ECR). "Directive 89/592
prohibits insider dealing with the aim of protecting investor
confidence in the secondary market for transferable securities and,
consequently, of ensuring the proper functioning of that market." Id.
[FN163]. Council Directive 2003/6, preamble, 2003 O.J. (L 96) 16,17 (EC).
[FN164]. The Securities
and Exchange Act of 1933 defines itself as "[A]n [Act] [t]o provide
full and fair disclosure of the character of securities sold in
interstate and foreign commerce and through the mails, and to prevent
frauds in the sale thereof, and for other purposes." Securities Act of
1933, Pub. L. No. 22, 48 Stat. 74 (1933). The Securities Exchange Act
of 1934 states that its purposes are "... to protect interstate
commerce, the national credit, the Federal taxing power, to protect and
make more effective the national banking system and Federal Reserve
System, and to insure the maintenance of fair and honest markets in
such transactions." Securities Exchange Act of 1934, §15 U.S.C.A.
§78(b) (2006).
[FN165].E.g.,supra note 153.
[FN166]. Stephen J. Leacock, In Search
Of A Giant Leap: Curtailing Insider Trading In International Securities
Markets By The Reform Of Insider Trading Laws Under European Union
Council Directive89/592, 3 Tulsa J. Comp. & Int'l L. 51, 58 (1995).
[FN167].Id.
[FN168]. Council Directive 89/592, art. 2, 1989 O.J. (L 334) 30-32 (EEC).
[FN169]. Council Directive
2003/6, art. 2(1)(a-d), 2003 O.J. (L 96) 16, 21 (EC) (defining insiders
as members of boards of Directives, key management, large shareholders
and even employees of the company).
[FN170].Id. Case C-384/02,
Criminal Proceedings against Knud Gróngaard and Allan Bang, 2005 (C
384) par. 26 (ECR) (stating that under Article 3(a) of Directive
89/592, the prohibition of disclosing inside information does not apply
to its disclosure by a person in the normal course of the exercise of
his employment, profession or duties).
[FN171]. Council Directive 2003/6, art. 3(a), 2003 O.J. (L 96) 16, 21 (EC).
[FN172].Id.
[FN173]. Tippees are
defined as those to whom fiduciary duty can be imputed based on their
relationship to an insider and/or the character of the information they
received.SeeU.S. v. Chiarella 588 F.2d 1358, 1365-67; (2d. Cir. 1978)rev'd, U.S. v. Chiarella, 445 U.S. 222 (1980). That definition is ambiguous.
[FN174].Gróngaard, 2005
E.C.R. II-0000. "Even if that rule, having regard to the terms used, is
capable of covering very different situations, it must, as an exception
to a general prohibition and in the light of the objective pursued by
Directive 89/592, be interpreted strictly." Id.
[FN175].Id.
[FN176].Id.
[FN177].See id.(stating
that "[i]n order to determine whether a disclosure is justified in a
particular case, it is appropriate to take account also of the
sensitivity of the inside information in question. Particular care is
required when the disclosure is of inside information manifestly
capable of affecting significantly the price of the
transferable securities in question. In that context, it is appropriate
to observe that inside information relating to a merger between two
companies quoted on the stock exchange is in general particularly
sensitive.").
[FN178]. Council Directive 2003/6, art. 1(1), 2003 O.J. (L 96) 16, 20 (EC).
[FN179]. "The term
'insider' is not defined by statute in the context of the U.S.
prohibitions against insider trading." Michael D. Mann & Lise A.
Lustgarten,Internationalization of Insider Trading Enforcement: A Guide
to Regulation and Cooperation, PLI/Corp 7, 14 (1993).
[FN180]. "In fact, section
10(b) and Rule 10b-5 (or any of the federal statutes, rules, or
regulations) do not define 'insider trading' or 'inside information'
(or 'misappropriation,' for that matter)." Micah A. Acoba, Insider
Trading Jurisprudence after United States v. O'Hagan: A Restatement (Second) of Torts § 551(2) Perspective,84Cornell L. Rev. 1356, 1362 (1999).
[FN181]. Warren,supranote 38, at 220.
[FN182]. Council Directive 2003/6, art. 1(1), 2003 O.J. (L 96) 16, 20 (EC).
[FN183].SeeU.S. v. Svoboda, 347 F.3d 471, 475 n. 3 (2d Cir. 2003).
[FN184]. Karmel,supranote 39, at 23.
[FN185]. Council Directive 89/592, 1989 O.J. (L 334) 30, (EEC).
[FN186]. Council Directive 2003/6, art. 2(1), 2003 O.J. (L 96) 16, 26 (EC).
[FN187].Id.
[FN188].Id.
[FN189]. Warren,supra note 38, at 220.
[FN190].See,e.g., Council Directive 2003/6, art. 6(2), 2003 O.J. (L 96) 16, 21 (EC).
[FN191].See generally
Treaty Establishing the European Community, 1992 O.J. (C 224) 1;
Council Directive 93/22, 1993 O.J. (L 141) 27 (EEC).
[FN192]. Council Directive 2004/39, 2004 O.J. (L 145) 1 (EC).
[FN193].Id.at 39.
[FN194].Id. at 1.
[FN195].Id.at 3.
[FN196]. Karen M.
Smith,The Need for Centralized Securities Regulation in the European
Union, 24B.C. Int'l & Comp. L. Rev.205, 210 (2000).
[FN197]. Case C-101/94, E.C. Commission v. Italy, 1996 E.C.R. I-2691, [1996] 3 C.M.L.R. 754 (1996).
[FN198]. Council Directive 2004/39, art. 1, 2004 O.J. (L 145) 1, 8 (EC).
[FN199]. Council Directive 2004/39, art. 2, 2004 O.J. (L 145) 1, 8 (EC).
[FN200]. Council Directive 93/22, art. 3, 1993 O.J. (L 141) 27, 37 (EEC).
[FN201].SeeCouncil Directive 2004/39, art. 5, 2004 O.J. (L 145) 1, 12 (EC).
[FN202].Id. at 18.
[FN203].Id. at 17.
[FN204]. Council Directive
92/49, 1992 O.J. (L 228) 1 (EEC),amended by Council Directive 95/26,
1995 O.J. (L 168) 7 (EC); Council Directive 92/96, 1992 O.J. (L 360) 1
(EEC),amended by Council Directive 95/26, O.J. (L 168) 7 (EC).
[FN205]. Karmel,supranote 39, at 27.
[FN206]. Council Directive 85/611, 1985 O.J. (L 375) 3 (EEC).
[FN207]. Allan S. Mostoff & Olivia P. Adler,Collective Investment Vehicles, C700 A.L.I.-A.B.A. 499, 534 (1991).
[FN208].Harold S.
Bloomenthal & Samuel Wolff, International Capital Markets and
Securities Regulation § 50:29 (2005) (quoting Council Directive
85/611/EEC, art. 1, 1985 O.J. (L 375) 3 (EEC).
[FN209]. Council Directive 85/611, art. 4, 1985 O.J. (L 375) 3 (EEC).
[FN210]. Council Directive 85/611, art 1, 1985 O.J. (L 375) 3 (EEC).
[FN211]. Samuel Wolff,Securities Regulation in the European Community, 20Denv. J. Int'l L. & Pol'y 99, 141 (1991).
[FN212]. Warren,supranote 38, at 218-19.
[FN213]. Council Directive 89/646, 1989 O.J. (L 386) 1 (EEC).
[FN214]. Samuel Wolff,Recent Developments In European Union Securities Law, 30Denv. J. Int'l L. & Pol'y 292, 296 (2002).
[FN215]. Devgun, supranote 59, at 464.
[FN216]. Gilles Thieffry,Towards a European Securities Commission, J.Int'l Fin. Mkts.1999, 1(7), 300, 300 (1999).
[FN217].See, e.g., Case T-67/01, JCB Service v Commission, 2004 E.C.R. II-49.
[FN218]. Convention 90/436, 1990 O.J. (L 225) 10 (EEC).
[FN219]. Convention on
Insider Trading, European Treaty Series No. 130, Strasbourg, 20.IV
(open to both non-member and Member States). The convention essentially
provides for mutual assistance and cooperation by the authorities
regarding investigation of financial frauds.Id.
[FN220].Id. art. 1.
[FN221].Id. art. 2.
[FN222].SeeCase C-499/03,
NahrungsmittelGmbHv. Commission of the European Communities, 2005
E.C.R. I-1751; Case C-253/00,AntonioMuñoz y Cia SA, Superior Fruiticola
SA v Frumar Ltd., Redbridge Produce Mktg. Ltd., 2002 E.C.R. I-7289.
[FN223]. Council Regulation 2137/85, 1985 O.J.(L 199) 1 (EEC).
[FN224]. Hans-Jürgen Zahorka, EEIG European Economic Interest Grouping, 5 (2001)available at www.eito.org/download/EEIG.pdf.
[FN225]. Warren,supranote 38, at 201.
[FN226]. Thieffry,supra note 216, at 301.
[FN227]. 15 U.S.C. § 78j (2000)
(prohibiting "any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce or of the mails, or of
any facility of any national securities exchange ... [t]o use or
employ, in connection with the purchase or sale of any security
registered on a national securities exchange or any security not so
registered...any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for the
protection of investors.").
[FN228]. 17 C.F.R. § 240.10b-5 (2004)
(stating "[i]t shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality of interstate
commerce, or of the mails or of any facility of any national securities
exchange, (a) To employ any device, scheme, or artifice to defraud, (b)
To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading,
or (c) To engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit upon any
person, in connection with the purchase or sale of any security.").
[FN229]. U.S. v. Svoboda 347 F.3d 471, 475 n. 3 (2d Cir. 2003).
[FN230]. SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 (2004).
[FN231].See, e.g., Kardon v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946) (recognizing implied action under Section 10(b) of the 1934 Act).
[FN232]. Bradford Third
Equitable Benefit Building Society v Borders, [1941] 2 All ER 205
(House of Lords 1941) (explaining the tort of deceit).
[FN233].See, e.g., Case
C-28/99, Criminal Proceeding Against Verdonck, 2001 E.C.R. I-3399
(stating that "Article 6 of Directive 89/592 does not preclude the
application of legislative provisions of a Member State which, as
regards the prohibition of use of inside information, are more
stringent than those laid down by the directive").
[FN234]. Warren,supranote 38, at 220.
[FN235]. Smith,supranote 196, at 216.
[FN236].See, e.g., Michael
Gruson,Supervision of Financial Holding Companies in Europe: The EU
Directive on Supplementary Supervision of Financial Conglomerates,
36Int'l Law. 1229, 1235-1236 (2002) (stating "[t]he existing EU legal
framework for the supervision of financial institutions is incomplete
because it only covers the so-called sectoral supervision, that is,
supervision over institutions within a particular sector of the
financial industry. Cross-sectoral supervision of financial groups,
combining institutions from different financial sectors, exists only to
a limited extent.").
[FN237]. Smith,supranote 196, at 217.
[FN238]. Karmel,supranote 39, at 33.
[FN239].Id.
[FN240].Id. at 35.
[FN241].Id.
[FN242].See Thieffry,supra note 216, at 301.
[FN243].U.S. Const., art. I, § 8, cl. 18.
[FN244].Id. art. I, § 8, cl. 3.
[FN245]. 5Adam Smith,An Inquiry into the Nature and Causes of the Wealth of Nations Ch. 2 (University of Chicago Press 1976) (1776).
[FN246]. Sandra Eden,Corporate Tax Harmonisation in the European Community, 6Brit. Tax Rev.624, 624 (2000).
At
an economic level the issue is simple--in order for the single market
to operate smoothly, the aggregate effects of 15 tax systems should
ensure that there are neither disincentives nor incentives for business
to be conducted in one place rather than another. This is actually
rather easily achieved at a technical level. If all Member States
operate the same tax system, using the same tax base and rates, and
exempt all foreign income, there will be perfect neutrality as to
location. The overlay of the real world with its political and social
issues makes matters more difficult. This makes it necessary to unpack
the notion of neutrality in order to understand more clearly the ways
in which the inter-relationship of national tax systems causes problems of distortion, and what can be done about them.
Id.
[FN247].See, e.g., Peter Dreher,European Community Taxation, 4(8) Int'l Co. & Com. L.Rev. 295 (1993).
[FN248]. Eden,supranote 246, at 633.
[FN249]. Case C-156/98, F.R.G. v. Commission, 2000 E.C.R. I-6857.
According
to Commission notice 96/C 68/06 on the de minimis rule for State aid
(OJ 1996 C 68, p. 9, the de minimis notice), which amends the Community
guidelines of 20 May 1992 on State aid for small and medium-sized
enterprises as indicated in Commission notice 92/C 213/02 (OJ 1992 C
213, p. 2), Article 92(1) of the Treaty is to be considered as not
applying to aid the amount of which is below the ceiling of ECU 100 000
over a three-year period beginning when the first de minimis aid is
granted.
Id.
[FN250].Id.
[FN251]. Eden,supranote 246, at 633.
[FN252]. Case 73/79,
Commission v. Italy, 1980 E.C.R. 1533 (stating "the method of financing
an aid cannot be isolated from consideration of the aid properly
so-called.").
[FN253]. Case 47/69, France v. Commission, 1970 E.C.R. 487.
[FN254]. Case 78/76,
Steinike & Weinlig v. Germany, 1977 E.C.R. 595 (stating "the
prohibition in Article 92 (1) is neither absolute nor unconditional
since Article 92 (3) and Article 93 (2) give the Commission a wide
discretion and the Council extensive power to admit aids in derogation
from the general prohibition in Article 92 (1).").
[FN255].SeeCase 27/67, Firma Fink-Frucht GmbH v Hauptzollamt München Landsbergerstrasse, 1968 E.C.R. 327.
[FN256]. Case C-114/91,
Criminal Proceedings Against Gérard Jerôme Claeys, 1992 E.C.R. I-6559
(stating "[i]ndividuals cannot therefore simply, on the basis of
Article 92 alone, challenge the compatibility of an aid with Community
law before the national courts or ask them to decide as the main or a subsidiary issue on any incompatibility ....").
[FN257].Id.
[FN258]. Case 34/67, Firma Gebruder Luck v. Hauptzollamt Koln-Rheinau, 1968 E.C.R. 359.
[FN259]. Case 17/81, 1982 E.C.R. 1331.
[FN260]. Devgun, supranote 59, at 451-470.
[FN261].Id.
[FN262]. Case C-307/97,Compagnie de Saint-Gobain v. Finanzamt Aachen-Innenstadt, 1999 E.C.R. I-6161.
[FN263]. Case 270/83,
Commission v. France, 1986 E.C.R. 273 (stating that "by not granting to
the branches and agencies in France of insurance companies whose
registered office is in another Member State on the same terms as apply
to insurance companies whose registered office is in France the benefit
of shareholders ' tax credits in respect of dividends paid to such branches or agencies by french companies, the French Republic has failed to fulfil its obligations under Article 52.").
[FN264].Compagnie de Saint-Gobain,1999 E.C.R. I-6161.
Article
52 of the EC Treaty (now, after amendment, Article 43 EC) and Article
58 of the EC Treaty (now Article 48 EC) preclude the exclusion of a
permanent establishment in Germany of a company limited by shares
having its seat in another Member State from enjoyment, on the same
conditions as those applicable to companies limited by shares having
their seat in Germany, of tax concessions taking the form of:
--
an exemption from corporation tax for dividends received from companies
established in non-member countries (corporation tax relief for
international groups), provided for by a treaty for the avoidance of
double taxation concluded with a non-member country,
--
the crediting, against German corporation tax, of the corporation tax
levied in a State other than the Federal Republic of Germany on the
profits of a subsidiary established there, provided for by German
legislation, and
--
an exemption from capital tax for shareholdings in companies
established in non-member countries (capital tax relief for
international groups), also provided for by German legislation.
Id.
[FN265].Id.
[T]he
obligations which Community law imposes on the Federal Republic of
Germany do not affect in any way those resulting from its agreements
with the United States of America and the Swiss Confederation. The
balance and the reciprocity of the treaties concluded by the Federal
Republic of Germany with those two countries would not be called into
question by a unilateral extension, on the part of the Federal Republic
of Germany, of the category of recipients in Germany of the tax
advantage provided for by those treaties, in this case corporation tax
relief for international groups, since such an extension would not in
any way affect the rights of the non-member countries which are parties
to the treaties and would not impose any new obligation on them.
Id.
[FN266]. For a good
description of the development of the idea of a race to the bottom due
to regulatory competition in the U.S. as a basis for a comparitive
analysis of EU law,see Catherine Holst,Note,European Company Law After
Centros: Is the EU on the Road to Delaware? 8Colum. J. Eur. L. 323, 332
(2002).
[FN267]. Eden,supranote 246, at 633.
[FN268]. Resolution of the
Council and the Representatives of the Governments of the Member States
On a Code of Conduct for Business Taxation, 1998 O.J. (C 002)
2,available at
http://europa.eu.int/eur-lex/lex/LexUriServ/LexUriServ.do?uriLEX:
41998X0106:EN:NOT.
[FN269]. Eden,supranote 246, at 633.
[FN270]. Council Directive 77/799, 1977 O.J. (L 336) 15 (EEC).
[FN271]. Eden, supranote 246, at 628.
[FN272]. Council Directive 90/434, 1990 O.J. (L 225) 1 (EEC),amended by Council Directive 2005/19/EC, 2005 O.J. (L 058) 19.
[FN273]. Eden, supranote 246, at 630.
[FN274]. Council Directive 90/435, 1990 O.J. (L 225) 6 (EEC),amended by Council Directive 2003/123, 2004 O.J. (L 7) 41 (EC).
[FN275]. Council Directive 2003/123, 2004 O.J. (L 7) 41, 41 (EC).
[FN276]. Eden,supranote 246, at 628.
[FN277].SeeCase 270/83,
Commission v. Fr., 1986 E.C.R. 273; Case C-279/93, Finanzant
Koln-Altstadt v. Schumacker, 1995 E.C.R. I-225; Case C-80/94, Wielockx
v. Inspecteur der Directe Belastingen, 1995 E.C.R. I-2493; Case
C-311/97, Royal Bank of Scot. v. Elliniko Dimosio, 1999 E.C.R. I-2651
[FN278].See generallyEden,supranote 246.
[FN279]. Case C-250/95, 1997 E.C.R. I-2471.
[FN280].Id. The operant portion of the case states very precisely the issue of offsetting gains and losses:
Article
52 of the Treaty does not preclude a Member State from making the
carrying forward of previous losses, requested by a taxpayer which has
a branch in its territory but is not resident there, subject to the
condition that the losses must be economically related to the income
earned by the taxpayer in that State, provided that resident taxpayers
do not receive more favourable treatment. On the other hand, that
article does preclude the carrying forward of losses from being made subject to the
condition that, in the year in which the losses were incurred, the
taxpayer must have kept and held in that State accounts relating to his
activities carried on there which comply with the relevant national
rules. The Member State concerned may, however, require the
non-resident taxpayer to demonstrate clearly and precisely that the
amount of the losses which he claims to have incurred corresponds,
under its domestic rules governing the calculation of income and losses
which were applicable in the financial year concerned, to the amount of
the losses actually incurred in that State by the taxpayer.
Id.
[FN281].Id. (citingSchumacker, 1995 E.C.R. I-225 andWielockx, 1995 E.C.R. I-2493).
[FN282]. Case C-1/93,
Halliburton Servs. BV v. Staatssecretaris van Financien, 1994 E.C.R.
I-1137. "[T]he rules regarding equality of treatment forbid not only
overt discrimination by reason of nationality or, in the case of a
company, its seat, but all covert forms of discrimination which, by the
application of other criteria of differentiation, lead in fact to the
same result." Id.(citing Case C-330/91, The Queen v Inland Revenue
Commissioners, ex parte Commerzbank, 1993 E.C.R. I-4017).
[FN283]. C-55/98, Skatteministeriet v. Bent Vestergaard, 1999 E.C.R. I-7641.
[FN284].Futura Participations SA, 1997 E.C.R. I-2471.
[FN285].Id. "Such a
system, which is in conformity with the fiscal principle of
territoriality, cannot be regarded as entailing any discrimination,
overt or covert, prohibited by the Treaty." Id.
[FN286]. Case C-446/03, Marks & Spencer PLC v. Halsey (Her Majesty's Inspector of Taxes), 2005 E.C.R. 00.
[FN287].Id.
In
accordance with the principle of territoriality applicable both in
international law and in Community law, the Member State in which the
parent company is established has no tax jurisdiction over non-resident
subsidiaries. As regards the latter, tax competence belongs in
principle, in accordance with the usual allocation of competence in
such matters, to the States on whose territory they are established and
carry out commercial activities.
Id.
[FN288]. Case 78/76, Steinike & Weinlig v. F.R.G., 1977 E.C.R. 595.
[FN289].Id.
[FN290].Id.
[FN291].Id.
[FN292].Id. "In judging in
these cases whether state aid is compatible with the common market
complex economic factors subject to rapid change must be taken into
account and assessed. Article 93 of the Treaty therefore provides for a
special procedure whereby the Commission shall keep aid under constant
review." Id.
[FN293].Steinike,1977 E.C.R. 595.
[FN294]. Case C-446/03, Marks & Spencer PLC v. Halsey (Her Majesty's Inspector of Taxes), 2005 E.C.R. 00.
[FN295].Id.
[FN296].Id.
[FN297].Id.
[FN298].Id.
[FN299].Marks & Spencer, 2005 E.C.R. 00.
[FN300].Id.
[FN301].Id.
[FN302]. "[W]hether state
aid is compatible with the common market complex economic factors
subject to rapid change must be taken into account and assessed." Case
78/76, Steinike & Weinlig v. F.R.G., 1977 E.C.R. 595.
[FN303]. "In each specific
situation, it is necessary to consider whether the fact that a tax
advantage is available solely to resident taxpayers is based on
relevant objective elements apt to justify the difference in treatment."
Marks & Spencer, 2005 E.C.R. 00.
[FN304]. "[I]n tax law,
the taxpayers' residence may constitute a factor that might justify
national rules involving different treatment for resident and
non-resident taxpayers. However, residence is not always a proper
factor for distinction." Marks & Spencer, 2005 E.C.R. 00.
[FN305]. Gildea,supranote 1, at 292.
[FN306]. Case 81/87, The
Queen v. H.M. Treasury and Comm'r of Inland Revenue, ex parte Daily
Mail and General Trust plc, 1988 E.C.R. 5483.
[FN307].Id.
[FN308].Id.
[FN309].Id.
[FN310]. Statute of the
International Court of Justice, June 26, 1945, art. 38(1), 59 Stat.
1031, T.S. No. 993. In fact however the foundation of general
principles of law has a source of international law natural law. Aaron
Judson Lodge,Globalization: Panacea For The World or Conquistador Of
International Law and Statehood?, 7Or. Rev. Int'l L. 224, 292
(2005); Jon M. Van Dyke,The Role of Customary International Law in
Federal and State Court Litigation, 26U. Haw. L. Rev. 361, 381 n. 123
(2004) (citing Grotius); Joel Brandon Moore,The Natural Law Basis Of
Legal Obligation: International Antitrust and OPEC in Context, 36Vand.
J. Transnat'l L. 243, 273-275 (2003). This is because: (1) the ICJ is a
creature of treaty, not custom. As such, states may choose not to be
bound by its decisions; (2) its decisions do not have value as
precedent; and (3) general principles of law were a source of law long
before the ICJ was constituted. Thus, general principles of law may be
a source of law due to custom, for they are the customary
interpretations of law done by states.
[FN311].See, e.g., Case
T-83/96, van der Wal v. Commission, 1998 E.C.R. II-545 (stating "[i]t
is settled case-law that fundamental rights form an integral part of
the general principles of law whose observance the Community judicature
ensures ...").
[FN312]. Case C-208/00, Überseering BV v. Nordic Consruction Co. Baumanagement GmbH, 2002 E.C.R. I-9919.
[FN313]. Holst,supranote 266, at 328.
[FN314]. Case C-212/97, 1999 E.C.R. I-1459.
[FN315]. Holst,supranote 266, at 323.
[FN316].Centros Ltd., 1999
E.C.R. I-1459 (stating "[i]t is true that according to the case-law of
the Court a Member State is entitled to take measures designed to
prevent certain of its nationals from attempting, undercover of the
rights created by the Treaty, improperly to circumvent their national
legislation or to prevent individuals from improperly or fraudulently
taking advantage of provisions of Community law ....").
[FN317].Id.
[FN318].Id.
[FN319].Id.
[FN320]. For an
explanation of means-end constitutional review, see Gerard J. Clark,An
Introduction to Constitutional Interpretation, 34Suffolk U. L. Rev.
485, 499-500 (2001).
[FN321]. Case C-208/00, Überseering BV v. Nordic Consruction Co. Baumanagement GmbH, 2002 E.C.R. I-9919.
[FN322].Id.
[FN323].Id.
[FN324].Id.
[FN325].Id.
[FN326]. Gildea,supranote 1, at 278.
[FN327].Überseering BV,2002 E.C.R. I-9919.
[FN328].Id.
[FN329]. Gildea,supranote 1, at 292.
[FN330]. Council Regulation 2157/2001 on the Statute for a European Company (SE), 2001 O.J. (L 294) 1 (establishing the SE).
[FN331].Id. at 4.
[FN332]. Andreas Kellerhals & Dirk Trüten,The Creation of the European Company, 17 TUL. EUR. & CIV. L.F. 71, 76 (2002).
[FN333]. Council Regulation 2157/2001, art. 2(1), 2001 O.J. (L 294) 1, 4 (EC).
[FN334]. Charles de Navacelle,Council
Regulation EC 2157/2001 of October 8, 2001 Establishing The European
Company Statute,, 9 COLUM. J. EUR. L. 199, 200 (2002).
[FN335]. Council Regulation 2157/2001, art. 8, 2001 O.J. (L 294) 1, 4 (EC).
[FN336]. Gildea,supranote 1, at 271.
[FN337]. de Navacelle,supranote 333, at 200.
[FN338]. Holst,supranote 266, at 338-39.
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