Company Law Package - new EU directive provides for online company formation

Digital company formation processes are currently only available in a few member states of the EU. The new directive, which was published in the Official Journal of the EU on 11 July 2019, forms part of the Commission's 'Company Law Package' and will create a single formal legal framework allowing companies to register, set up new branches and file documents fully online.

Member states now have two years to transpose the directive into national law, and it is expected that implementation will be swift.

The new legal framework will be welcomed as a further step towards the digitalisation of the EU's internal market and economic area, while at the same time preserving the company law traditions of the individual member states. Although the directive suffers from some structural weaknesses, it makes an important contribution and strengthens the EU's fundamental freedoms, in particular freedom of establishment. It will now be up to individual member states to transpose the European idea of a unified, common economic area into national law while taking account of the digitalisation project.

The new directive

The EU intends to establish a legal and administrative environment through online company registration that will create jobs, stimulate economic growth and attract investment - in short, to become part of a digitalised economic environment and take advantage of the resulting efficiencies.

The European Commission has therefore implemented the projects set out in its joint eGovernment Action Plan. This included the new Business Registers Interconnection System (BRIS), which is already available online to everyone and provides access to all deposited company information in every member states' register in a single place.

The new directive will not become a separate set of rules, but rather inserts new rules into the existing company law directive of 2017. It does not replace the previous company registration processes, but instead offers an additional method of forming and registering limited liability companies.

Once the new directive has been transposed into national law, it should be possible to establish a company cost effectively through online procedures and within a maximum of five to 10 working days. The directive also aims to ensure that certain company information will be available in principle free of charge. Founders should be provided with sufficiently detailed information, forms and digital tools to enable them to carry out the company registration procedure independently, and the information should be offered in an official language of the EU which is widely understood by as many cross-border users as possible. The same should apply to procedures for modifying company information on the register; submitting documents throughout the life cycle of the company; and establishing and registering branches.

The EU foresees that online registration will be possible for the types of limited liability company listed in Annex II of the directive. Member states may exempt types of companies not listed in Annex IIa, in whole or in part, from the online procedure, where the complexity of the legal form so requires. In Germany, for example, online registration is mandatory for Gesellschaft mit beschränker Haftung (GmbH), but Aktiengesellschaft (AG) und Kommanditgesellschaft auf Aktie (KGaA) may be exempt. In the UK, online registration is mandatory for private companies limited by shares or guarantee.

The company may be incorporated and registered by one or more persons, whether natural persons or legal persons such as companies or partnerships. Member states have an obligation to ensure that "the origin and integrity of the documents filed online may be verified electronically".

Legal persons as applicants

It may be difficult for member states to verify the existence of and representative powers of a legal person – particularly if that legal person was established outside the EU.

In Germany, a foreign legal person wishing to establish a GmbH company must prove its power of representation by means of a notarial certificate, a legal opinion or an extract from the company register of its registered seat, accompanied by an 'apostille' under the 1961 Hague Convention. In some cases, depending on the registered seat, notary inspection of the respective register without separate proof of authenticity will be sufficient.

A potential difficulty here is that these authentication procedures simply do not exist in electronic form. The European legislators have yet to come up with a solution.

When a company is formed by an authorised person such as an attorney-at-law granted with power of attorney, foreign shareholders face a double problem: establishing that the lawyer has a power of attorney in original to form the company, which has not been revoked in the interim, then proof of the existence and identity of the person on whose behalf the lawyer is forming the company.

Cash incorporation or contribution?

The directive gives member states the option of allowing online registration for companies offering shares for either cash or assets other than cash. It remains to be seen how many states will offer the online procedure for non-cash incorporation. Some member states impose additional formal requirements for contributions, which may not be compatible with the relatively short registration period provided for in the directive.

Safeguards

The EU wants to ensure that member states introduce appropriate measures to prevent fraud or abuse of the online company registration process. These include safeguards around the identification of shareholders and verification of the suitability of representative bodies. Member states may therefore continue to require that registration be carried out by a notary who verifies, certifies and transmits the necessary documents.

Branches

Where a branch exists in a member state other than that in which the company is resident, information is now exchanged between the member states concerned on change of ownership, closure or cancellation of the branch. The new directive will lead to more transparency in cross-border situations.