October 16, 2018 News

The SMP Investor's Guide to the European Stock Corporation (SE)

The European Stock Corporation (SE, short for: Societas Europaea) is a European legal form which has become increasingly popular among fast growing enterprises and tech companies. While after its inception in the mid-2000s the SE was mainly chosen by large corporates (e.g., Allianz SE, BASF SE or Porsche Automobil Holding SE), more and more growth companies have opted for an SE in recent years. They include Delivery Hero SE, home24 SE or Zalando SE. By mid-2018, more than 300 operationally active SE exist in Germany, which puts Germany in first place among all EU member states.

I. What are the reasons for transforming a company into an SE?

  • European image: The SE as a European legal form has a very positive image and is often used by companies to emphasize their international focus.
  • IPO-readiness: The SE can be listed at a stock exchange. Over the last years, many growth companies were transformed into an SE in preparation of their initial public offering (IPO).
  • Flexible corporate governance structure: The SE Regulation allows to choose between(i) a two-tier board system with a management board (Leitungsorgan) and a supervisory board (Aufsichtsorgan) - this is the setup of a German stock corporation (AG) - and (ii) a one-tier board system with a single administrative board (Verwaltungsorgan). Investors from the UK or US are often not familiar with the German two-tier board structure and therefore sometimes favour a one-tier board system.
  • International joint ventures: The SE can be well used for cross-border joint ventures. Parties coming from different jurisdictions can often agree on the SE as a"neutral"(supranational) legal form as a basis for their joint venture.
  • Cross-border mobility: The SE can be relocated cross-border by transferring the seat of the SE (both the statutory and the administrative seat) to another EU member state. In addition to the SE Regulation, many aspects of the SE are governed by the national laws of the EU member state in which the seat of the SE is located. Therefore, a relocation of the seat always involves a change of the applicable (national) laws.
  • Optimised co-determination: Another reason for incorporating an SE may be employee co-determination.
  • In contrast to other German legal entities, the size of the SE's supervisory board can be adjusted to the needs of the company. Also, the management and the employees can mutually agree on a co-determination regime tailored to the company and the needs of its employees. To come to such an agreement, management and employees conduct a so-called employee involvement procedure in the course of the SE incorporation. Upon completion of the employee involvement procedure, the agreed co-determination regime remains, in principle, in place also if the number of employees falls below or increases above the relevant thresholds under German law (500 or 2,000 employees).

II. How can a company be transformed into an SE?

There are four ways of incorporating an SE (plus an additional option for a so-called "derivative incorporation" (Sekundärgründung), which, however, requires that an SE is already incorporated): The most common ways to transform a company into an SE are the cross-border SE merger and the SE conversion (see below for details), whereas the formation of a holding SE or a subsidiary SE are very rare in practice.

The following requirements apply to all SE transformation alternatives:
The minimum registered share capital of the SE must amount to EUR 120,000.00. If the company's registered share capital is below such threshold, the registered share capital needs to be increased (e.g. from the company's own funds or by way of a
regular capital increase).

  • The statutory seat and the administrative seat of the SE must be within the same EU Member State.
  • Only an AG (or its equivalent from another EU Member State, e.g. a Dutch N.V.) can be transformed into an SE by way of a cross-border SE merger and SE conversion. Hence, in order to transform a German limited liability company (GmbH) into an SE, the GmbH must first be converted into an AG and then into an SE.
  • The shareholders must approve of the SE transformation by way of a shareholders' resolution.
  • The employee involvement procedure must be completed prior to registration of the SE (or the maximum time period of six months must have expired in case no agreement can be reached).

Cross-Border SE Merger (grenzüberschreitende SE Verschmelzung)

  • The cross-border SE merger requires two national stock corporations from different EU Member States.
  • The cross-border SE merger is regularly structured as an upstream merger of a wholly-owned subsidiary into its parent company since such structure allows to waive several requirements and no issuance of shares is needed. As a result of such upstream merger (i) all assets and liabilities of the subsidiary are transferred by way of a universal succession to the parent company, (ii) the parent company transforms into an SE and (iii) the subsidiary ceases to exist.
  • The merger process is two-phased due to the involvement of two (or more) jurisdictions. Prior to registration of the SE with its commercial register, the competent court/register of the transferring company must review the merger documentation and issue a pre-merger certificate.

SE Conversion (Formwechsel)

  • A (national) stock corporation can be converted into an SE provided that the stock corporation has had a subsidiary in another EU Member State for at least two years.
  • In contrast to the cross-border SE merger, no shares or assets are being transferred and the legal entity of the company remains untouched; only the legal form is changed from an AG to an SE.
  • The SE conversion is slightly less complex than the cross-border SE merger as it involves only one jurisdiction. However, the SE conversion provides less flexibility with respect to the employee involvement agreement.

III. What are the peculiarities to be considered in a VC context?

  • Growth companies contemplating to be transformed into an SE are often incorporated as a GmbH. In this case the SE transformation is a two-phased process consisting of a AG conversion and a subsequent SE transformation. Such process is in practice well established and it can be accelerated by initiating both the AG conversion and the SE transformation in parallel.
  • When converting a VC-funded company into an SE, it has to be taken into account that the shareholders' agreement needs to be adjusted in order to meet the SE law requirements – in particular if the company is still organised as a GmbH.
  • Investors from the UK or US should take a close look at the one-tier board structure of the SE. But also for founders and management the one-tier board structure may be a viable option, in particular if a proper CEO position should be created by appointing one key person of the company as executive director (geschäftsführender Direktor) and chairman of the administrative board (Verwaltungsrat).
  • The SE is a suitable legal form mainly for mature growth companies. For example, the potential for optimising the employee co-determination regime is greater for later-stage companies than for companies that have only just started their operations. Also, companies planning an IPO in Germany should consider the SE as a true alternative to the AG. However, initiating the SE transformation at a relatively early stage also has certain advantages as it allows for a less complex transformation process with more structuring options.

Download this Guide (PDF).

IV. Where can I find more information on the SE?

For further information on the SE watch the recording of our SMP webinar with our guest speakers Dr. André Schneider, LL.M. (Durham) (General Counsel at home24 SE), Dr. Martin Bredol (Senior Legal Counsel at home24 SE) and Dr. Tobias Pusch, LL.M. (Harvard) (Partner at Pusch Wahlig Legal) (in German):

Listen to the digital.kompakt podcast (in German).

Watch the recording of our SMP Webinar.