German business returning home

By Claus Rosenkrantz Hansen, CBS Library

They were never truly gone – the companies. They were still run from Germany and still paid taxes in Germany. But, just like other companies from all over the Union, German businesses in their thousands, prompted by the possibilities of the EU single market, have registered in the UK in particular. Why? Because the conditions for running a business in the UK were far more attractive that back home, especially for start-up companies that were struggling under the weight of local capital requirements.

From 1999 through 2006 as many as 45,000 German businesses crossed the Channel to register for one pound sterling. The corresponding minimum capital to start a business in Germany at the time was EUR 25,000 – in Denmark you had to raise DKK 125,000 to start a business.

Then something happens. The mass exodus of German companies ceases. The German government claims credit because of the successful introduction of legislative changes improving the trade climate as called for by German business. For all practical purposes the solution introduced by the German government mimics the UK model in, among other things, relaxing the capital requirements. These initiatives, according to the German government, have helped curb the corporate flight out of the country.

Pointless amendments
However, not all agree with this reading. Georg Ringe, professor with the Law Department at CBS and a scholar in the field, questions in his paper ”Corporate Mobility in the European Union – a Flash in the Pan?” the conclusions drawn by the German government.

“It is true that the number of German companies registering in the UK is decreasing dramatically. However, there are indications that this drop is not caused by the legal changes of the German government. My research shows that 2006 sees the zenith of German companies registering in the UK and that the number drops from then on. The legislative changes adopted by the German government, however, do not take effect until 2008”, Ringe explains.

In his paper Georg Ringe draws comparisons with corresponding figures from Austria and the situation is the same; the number of companies registering abroad drops after 2006. And this is interesting, because the two countries differ in one essential point: Unlike Germany, the Austrian government has not introduced comparable legal improvements for business operations – something that weakens the conclusions of the German government.    

Georg Ringe has no doubt that in the long term the German adjustments have helped reduce the number of companies registering in the UK rather than Germany. He is, however, equally certain that other factors also weigh in when German companies decide against the UK. In the final analysis, this raises the question whether the amendments were at all necessary!

Is the grass always greener across the Channel?
What, then, does influence the significant drop? There is no proof, but Georg Ringe does not consider it without consequences, both in terms of corporate image and value assessment, to suddenly uproot a local business and move it abroad; no longer accepting the rules and regulations that product purchasers operate under raises suspicions. 

Besides, the grass is not always greener across the Channel. The minimum capital may amount to a mere one GBP but apart from this UK company law is rather strict and imposes among other things much tougher annual reporting requirements on companies than most continental systems. These facts may initially have escaped continental companies busy enthusing over the relaxed capital requirements – but not for long.

Race to the bottom or the top?
Germany is not the only country to react by modeling existing laws after UK. This same process has taken place in most of the EU countries that have witnessed a similar haemorrhage of companies. One of the main reasons for this reaction is loss of control of the companies.  

“The individual member states are not keen on local businesses registering abroad as this means loss of influence on company operations. Legislators hoping to influence the way local businesses are structured and organized need to ensure that these same businesses adhere to the laws of the country in which they operate. And this influence will disappear once a company registers in a foreign country”, Ringe explains.

As a result, since 1999 EU member states have been competing to offer the best business climate – a situation very similar, although on a smaller scale, to a former US inter-state contest for company charters, a contest won by Delaware. Most EU states have by now adjusted their legislation to such an extent that business conditions are becoming more similar across the Union.

Some have labeled this process a `race to the bottom´ to describe the unintended effects of relaxing corporate requirements on other segments in society. For instance, if an act of health and safety at work is relaxed this could adversely affect the number of people taken ill from working in a company. 

“Others call this state of competition a `race for the top´ because it produces the best and most efficient legislation – simply as a result of legislators reacting to company requests. Whether this is a good thing or a bad all depends on how you look at it and if you believe in the self-regulatory power of the market”, says Ringe.

The US development is a case in point. A lot of research has been conducted on the consequences of the inter-state race to create the best possible conditions for local business, but the results of this research are inconclusive.

More info on The Centros ruling
Centros Ltd was a Danish wine import and export company. Even if the company was located in Denmark, the management decided to register the company in the UK because of unwillingness to meet the 200.000 DKK capital requirement stipulated by Danish law.

The Danish Business Authority refused to recognize the company for which reason the case went before the European Court of Justice. The ruling turned out to the advantage of Centros citing those provisions of the EU Treaty that deal with the right of companies to move freely. This ruling came in 1999.

George Ringe is a professor at Law Department at CBS. "Corporate Mobility in the European Union – A Flash in the Pan?" is available for download.