Introduction
On 30 April 2025, a rapporteur of the Committee on Legal Affairs (JURI) of the European Parliament published a Draft Report containing recommendations on the introduction of a new 28th regime: the ‘European Start-Up and Scale-Up’ company (ESSU). The Draft Report is a first step in the realisation of the Competitiveness Compass, which aims to enhance the EU’s competitiveness in the world’s market for innovative companies.
The legal basis that the JURI Committee proposed for the 28th regime is Article 114 TFEU, the competence that allows the EU legislature to harmonise laws in order to advance the establishment and functioning of the internal market. The choice for this legal basis is not surprising: its open-ended and flexible nature make it particularly suitable to adopt relatively easily legislative measures. This appears to be particularly important for the proposed 28th regime, which clearly shows a sense of urgency given the threat of losing out on new and vital technologies to competing economies. Nevertheless, the speed of the Draft Report risks conceding on a non-negotiable: the constitutional limits of the TFEU. Concretely, this post argues that the European Parliament’s JURI Committee’s use of Article 114 TFEU is erroneous and cannot serve as a valid legal basis for a 28th regime, like the ESSU. The ESSU-regime fails to harmonise national laws and creates a new independent EU corporate form, and it is clear from the case law that such measures cannot be validly adopted under Article 114 TFEU. Rather, if the EU legislature seeks to introduce this regime, Article 352(1) TFEU is the appropriate legal basis.
Against this background, this blogpost shall first delve into the background of the ESSU’s proposal. The blog shall then set out why Article 114 TFEU is unsuitable as a legal basis for the creation of the ESSU. This is in part done by making an analogy with the Societas Europaea (SE) and with Case C-436/03 European Cooperative Society, from which it can be extrapolated that Article 114 TFEU cannot be utilised for the creation of the ESSU.
Off to a new 28th regime: the European Start-up and Scale-Up Economy Draft Proposal
The idea of introducing a 28th regime for startups and scaleups stems from the Letta and Draghi reports. According to these reports, the regime is a vital step in allowing innovative companies to function and grow within the EU internal market. Although different critical remarks have been made on the method and data supporting the recommendations of Letta and Draghi, see for example Hans Vedder’s blogpost, the European Commission and Parliament were quick to follow-up on the recommendations with a Competitiveness Compass and a Startup and Scaleup Strategy. This resulted in the JURI Committee’s Draft Report containing the first proposal on the possible implementation strategy of a new 28th regime.
The proposal for the ESSU aims to introduce a European private limited liability company tailored, but not limited, to innovative and fast-growing SMEs that seek expansion within the EU internal market. An SME would be eligible for registration as an ESSU provided that the following conditions are met. To begin with, SMEs must be incorporated as a legal entity and possess over legal personality within an EU Member State. Furthermore, the legal entity must have limited liability for its shareholders and must not be listed on a stock exchange. It, moreover, must be established by a natural or legal person of a Member State and operate autonomously, or alternatively as a subsidiary of an ESSU parent company. Finally, its registered seat must lie within a Member State (see Draft Report, p. 7-8).
There appear to be multiple impracticalities surrounding this proposal. These are in part addressed within the proposal: it calls for preventive measures on the possible circumvention of domestic protection of weaker parties, such as labour law provisions on employee representation (p. 5-6). Although it is applaudable that the Committee signalled this threat beforehand, we expect more of them to arise during the assessment of the Draft Report. The warning of Eidenmüller, Engert and Hornuf (p. 31-33) based on empirical evidence of legal arbitrage found within Societas Europaeas (SE) – European public companies – could very well pose a greater threat within a private form of SE, like the proposed Societas Privata Europaea (SPE) or the ESSU, is exemplary. It is a warning we would like to reiterate, given that it is much easier and cheaper to set up a privately held company for the sake of legal arbitrage than it is to set up a public one. This is complemented by the fact that public companies are, by default, subject to more public scrutiny than is usually the case for privately held companies. More in-depth research on the prevention of the usage of ESSUs as vehicles for legal arbitrage is thus necessary before introducing a new corporate form, in our view at least.
The unsuitability of Article 114 TFEU as legal basis
Apart from these issues, the proposal for an ESSU faces a more fundamental constitutional problem: it lacks an appropriate legal basis. The EU legislature seeks to adopt the ESSU on the basis of Articles 50 and 114 TFEU. Article 114(1) TFEU allows the EU legislature to adopt legislation that advances the functioning and establishment of the internal market. Although Article 114 TFEU is notoriously broad in terms of scope, it does have limits: the EU legislature must adopt legislation that harmonises. As will be shown, settled case law establishes that the EU legislature cannot create ‘new’ legal and independent structures (see Weatherill’s analysis for an elaboration on this case law (para. 3.3.2)).
The proposed ESSU-regime in the Draft Report does not appear to harmonise national laws in this respect but rather sets up a new regime. Although the Draft mentions its intention to pursue maximum harmonisation, it is doubtful whether the Draft Proposal in practice actually provides harmonisation in the first place. This is because the proposed harmonisation of equity-like debt instruments and minimum paid-in capital are specifically tailored for the ESSU. This follows from the fact that – in the current Draft Proposal – the company, in order to become an ESSU, must start out as a national limited liability company with legal capacity automatically recognised in all Member States (p. 8). Accordingly, the company must at least at some point in its lifecycle meet the minimum requirements set by the national law of the Member State of incorporation, including its minimum capital requirements and debt-equity structures, to fulfil its legal obligations under the ESSU-regime. As far as we can assess, this leaves existing national company codes untouched and relevant for companies adhering to the ESSU-regime. Hence, these provisions do not appear to create harmonisation of Member States’ existing national company law codes.
A comparison to the SE-regime might make this argument more insightful. An SE is a public limited liability company that adheres to the 28th regime, mainly introduced by Regulation 2157/2001 and Council Directive 2001/86/EC, allowing (European) public limited liability companies to merge into or incorporate as an SE to gain easier access to the internal market. The SE, and other 28th regimes, are based on Article 352(1) TFEU, which makes the plan to use Article 114 TFEU as a legal basis for the ESSU clearly stand out.
Admittedly, at first glance the SE-regime appears to provide for less harmonisation than the ESSU proposal stipulates. For example, the SE-regime leaves room for the laws of Member States to require a greater subscribed capital than the EUR 120,000 required by Article 4 Regulation 2157/2001. Thus, allowing Member States to set a higher minimum paid-in capital for SEs than the Regulation requires. The proposed ESSU-regime appears to leave Member States less room for deviation of ESSU-provisions. For example, the Draft Report (p. 8) mentions that Member States should allow companies eligible to register as an ESSU, namely privately held limited liability companies, to establish as a national company with a minimum paid-in capital of EUR 1 in order to register – immediately – as an ESSU. Thus, in the current Draft Proposal, Member States are not allowed to enforce a higher minimum paid-in capital for national private limited liability companies that express the intention to convert into an ESSU. Prima facie, this might appear to be a form of harmonisation of the national company codes of the Member States. However, the ESSU, which has its seat in the Member State with a higher minimum paid-in capital, then has to allocate at least 25% of its annual profits in a reserve until the reserve reaches the amount required under national company law. De facto, this then does not require harmonisation of minimum paid-in capital between Member States, it requires temporary allowance of a lower paid-in capital by Member States. This is perhaps a subtle, but nonetheless crucial difference, that provides an addition to current national laws but not necessarily an alteration of those laws.
Moving on, similarities can be drawn between the ESSU and the European Cooperative Society (ECS). More specifically, the previous judgment in European Cooperative Society concerning the intention to introduce the ECS on the basis of Article 114 TFEU, is of interest. The ECS is a European legal form for cooperative societies that was established in addition to national regimes and left the latter unchanged. In other words, the ECS is another legal form adhering to a 28th regime, reminiscent of the SE and the proposed ESSU. In European Cooperative Society (para. 18-22), the European Parliament put forward that a 28th regime, like the ECS, could be validly adopted under Article 114 TFEU. The CJEU, however, held that Article 114 TFEU could not be used for the creation of the ECS, because the regime would be created in addition to national regimes, hence failing to achieve harmonisation. Specifically, the CJEU noted (para. 40-44) that the introduction of the ECS did not require harmonisation, because (i) the ECS was a new legal form in addition to national forms of cooperative societies and was first and foremost governed by Regulation 1435/2003, (ii) the ECS had specific formation conditions, and (iii) Member States would need to treat the ECS as if it were a cooperation constituted in accordance with domestic laws, which indicates that it coexists alongside national cooperative societies. Consequently, the CJEU considered that due to the lack of harmonisation of national laws, Article 352 TFEU formed the correct legal basis, rather than Article 114 TFEU.
The principles from that case are equally applicable in the present case: the ESSU would create a separate regime, rather than harmonising national regimes. In this respect, the Draft Proposal states that the 28th regime should comprise a set of EU rules that must be incorporated into existing or new national corporate forms. As we would like to recall, the allowance of a lower minimum paid-in capital does, at least in our view, not constitute true harmonization of national company codes. The Draft Report (p. 6) also reiterates that companies voluntarily opting into the 28th regime should be bound by the rules of the Member State in which it chose to incorporate or in which its real seat lies, presumably dependent on the applicable rules of international private law and the field of law at hand. This indicates that it forms an addition to, rather than a harmonisation of, national legal regimes. Finally, the Draft Report considers that the ESSU is to operate as an autonomous single company, or as a subsidiary of an autonomous ESSU. This is also indicative of the functioning as a separate corporate form rather than harmonisation of existing national legal entities and corporate codes (Draft Report, p. 5).
Conclusion
To end with, the ESSU Draft Report firmly rejects the use of Article 352(1) TFEU as a legal basis, because the required unanimity for that proposal would ‘delay the adoption’ of the 28th regime (p. 2). Mere arguments of practical convenience or speediness are, however, no valid constitutional considerations, and it is most likely not the type of argument that the CJEU would hold up with if the ESSU – as currently proposed – would ever reach the Court.
Eva ten Hoor is MJur Candidate at the University of Oxford. Meriëlle de Zwart is a PhD Candidate in company law at the Erasmus University of Rotterdam.