Former European Central Bank president Mario Draghi published in September 2024 his longawaited report, “The future of European competitiveness”. It sets out its already widely discussed competitiveness strategy for Europe. Draghi, who became known as the saviour of the Euro during the Euro crisis, has proposed the creation of an Innovative European Company, the status of which would provide companies with access to harmonised legislation across member states concerning corporate law and insolvency
procedures.
The report is voluminous, at 400 pages, and politically sensitive. At its core, the long-awaited
report is about improving Europe’s industrial competitiveness. European industry is falling
further and further behind that of the United States and China. The fear is that without
structural and powerful government intervention, the final blow for the EU will soon follow.
That would not only mean job losses for Europe, but also increasing dependence on other
countries in a world full of geopolitical tensions.
The report looks for European rather than national solutions in ten areas to prevent
fragmentation in the EU internal market. But Draghi’s report is not just yet another text, it is
far more strategic and ambitious. It addresses three key challenges for the European Union:
closing the innovation gap with the United States, harmonising decarbonisation with
competitiveness, and enhancing economic security by reducing dependencies.
Browsing through the report with my insolvency glasses on, Proposal 6c immediately caught
my eye. It aims to “Introduce a new EU-wide legal statute for innovative start-ups (an
‘Innovative European Company’).”
The report is impatient and harsh, and provides a serious failing grade for the Commission
and member states for the work done so far: “The freedom of establishment and mobility
enshrined in the Treaties is not yet a reality for EU companies. Significant differences in laws
and regulations across Member States affect the functioning of consumer, labour, and capital
markets, limiting firms’ ability to seamlessly operate across EU Member States and
preventing EU businesses from fully exploiting the benefits of the Single Market.”
Draghi’s solution: “Innovative start-ups should be given the opportunity to adopt a new EU-
wide legal statute called the ‘Innovative European Company’ (IEC). Adoption of the IEC status
would provide companies with access to harmonised legislation across Member States
concerning corporate law, insolvency procedure, as well as a few key aspects of labour law
and taxation, to be made progressively more ambitious. Innovative European Companies
could operate in all Member States through subsidiaries without needing to incorporate
separately in each one.” This is a vision that certainly is not limited by national obstacles and oddities of
corporate law.
In EU legal politics, such autonomous optional EU legal frameworks as suggested for the IEC
are named “28th regimes”, i.e. legal frameworks of EU rules that do not replace national
rules but are an optional alternative to them. A well-known example is the European
Company Statute. The Commission has always believed that a 28th regime has an important
role to play in developing a competitive, open and effective market. But in day-to-day reality,
there are only a few successes to be found, not ending up in “hard law”, rather in “soft law”
principles.
Draghi’s judgment continues unhindered: “As a result, cross-border transactions are more
complex and costlier than domestic transactions, hindering multimarket trading. Third,
despite the recent progress made on withholding tax, tax and insolvency regimes across
Member States remain substantially unaligned”. And, a bull’s eye for someone who has been
around for a while: “Significant differences also exist across countries in thresholds for
insolvency, rules for proceedings, priorities of claims, and restructuring mechanisms.”
Of course, Draghi is realistic enough to make proposals at the European level “to overcome
likely opposition”. The most important of these is to reduce regulatory fragmentation to
deepen the capital markets union by harmonising the insolvency framework. Investors
cannot be expected to invest across borders if there is no cross-border certainty about what
happens if a company goes bankrupt. Therefore, the report continues, further steps have to
be taken towards a common, harmonised insolvency framework. That’s not surprising, but is
not very concrete: topics are avoided, any planning lacks and the capital markets union (CMU
for connoisseurs) has been an ongoing drama for almost a decade without any significant
progress. How will the European Commission deal with the Draghi proposals?
In the last week of November all proposed EU Commissioners passed their tests in hearings
with the European Parliament (EP). The new commissioner to lead the Directorate-General
on Democracy, Justice and Rule of Law is Michael McGrath from Ireland. He certainly has
ideas regarding insolvency. In his written responses to the questions posed by the EP, he
responded – inter alia – the following: “A first contribution … will be in helping to conclude
the ongoing pending interinstitutional negotiations on the proposals concerning … the
assignment of claims and insolvency, the latter being key for investment decisions.”
McGrath has done his homework: “The recently published Draghi Report on ‘The Future of
European Competitiveness’ proposes establishing a new EU-wide legal statute for innovative
start-ups, the ‘Innovative European Company’ (IEC), which would have a single digital identity
valid in the EU. Such companies would benefit from a number of legal arrangements,
including harmonized rules on corporate law and insolvency. It would appear that the IEC is
reflected in your mission letter by the announcement of the so-called 28th Regime for
innovative companies leading to the creation of an additional, optional legal framework that
companies across the EU could choose to adopt and that would allow for overcoming the
current fragmentation between the 27 domestic systems.”
The new EU Commissioner is positive, by committing to paper, among other things: “Such a
28th regime would offer companies a choice to carry out their activities across the Single
Market through an EU-wide legal status instead of having to adopt national legal forms in
Member States where they would like to do business. … Measures attached to such 28th
regime, going beyond the company legal form, could cover, for example, access to markets,
to finance, to skills, to insurance coverage, rules on contracts, taxation, insolvency, in order to
address all the most essential aspects of corporate activity for such companies”. From the
rest of his mission brief, it is clear that McGrath fully supports the course set by the
Commission for 2024.
The idea of a 28th regime is some two decades old. There are few appealing results to
report. But let’s first examine the advantages and disadvantages of such a regime, especially
in relation to insolvency. Optimism is good, reality is better.
References
https://ec.europa.eu/regional_policy/whats-new/newsroom/23-10-2024-draghi-s-report-on-
the-future-of-european-competitiveness-a-blueprint-for-europe-s-demographic-and-regional-
cohesion_en
https://bobwessels.nl/blog/2021-11-doc3-capital-markets-union-cmu-insolvency-the-odd-
couple/
https://commission.europa.eu/document/download/907fd6b6-0474-47d7-99da-
47007ca30d02_en?filename=Mission%20letter%20-%20McGRATH.pd
This is a slightly adapted version of a regular column Bob Wessels is writing for Global Restructuring Review (GRR) on the topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication and the column appeared in GRR in the second week of December 2024. See www.globalrestructuringreview.com.