This is why the European Company (SE) is interesting for start-ups

Instead of an AG, German start-ups can also establish an SE. Zalando was a pioneer, others have followed suit. About a trend and its advantages.

Insurtech Clark recently had a run with major acquisitions and a record year in 2021: These were moments that people liked to announce with much fanfare. But this one thing should fly under the radar for now: Clark has established a holding structure.

Officially entered in the commercial register, the new structure serves the purposes: Management of the Clark group of companies and the holding of investments. The German insurtech has not chosen the form of a German stock corporation, i.e. an AG, for this new structure. Instead, behind the holding structure is an SE, a Societas Europaea.

Behind this is a European public limited company, which startups and companies can also use, for example, to issue shares and go public. At Clark, they denied on Startbase inquiry that an IPO is on the agenda in the near future. But why set up an SE at all? And for whom is it an option?

There are over 400 European stock corporations in Germany

The trend toward SEs began in 2004, when the supranational legal form was created by the EU. In Germany, the form quickly gained popularity, especially among young, fast-growing companies, but also among SMEs and companies that have since made it to the stock exchange. Zalando, Windeln.de or Flaschenpost are just a few examples of companies that have the SE behind their name.

The Institute for Co-determination and Corporate Governance of the Hans Böckler Foundation (IMU) issues regular updates on the number of SEs in Germany. According to the report, at the end of December 2020, there were more than 3,000 European Companies in Europe, of which just over 700 were also operationally active. In Germany alone, the researchers registered more than 400 European public limited companies, a significant increase on 2011, when there were not even 100 European public limited companies in this country, according to the institute.

While an AG and an SE are not dissimilar, they certainly differ in practice. Where the SE regulation may leave gaps, national law then takes effect, which is why one can certainly speak of a German or a French SE , where there are also marginal differences.

Advantage of the SE: The governance structure is more flexible

Probably the biggest difference is that the governance structure is regulated completely differently. While a German stock corporation always has a dualistic structure consisting of a management board as the executive body and a supervisory board as the controlling unit, this need not be the case with an SE. It is true that an SE may also opt for the dualistic structure with executive board and supervisory board. However, it may also opt for a monistic structure. Such a structure is common in companies in Great Britain and the USA and means, in simplified terms, that the supervisory board and the management board are combined in one administrative body. In the U.S., this is referred to as a "board" or "board of directors".

This flexible structure of the administrative body is the biggest difference between an SE and an AG and therefore also the most important decision-making factor for a start-up. In addition, an SE also makes it possible to impose a uniform legal structure over diverse foreign holdings. Where start-ups and companies otherwise have to establish individual subsidiaries with different legal forms, the SE simplifies the bundling of foreign subsidiaries under a single framework.

Another difference is the amount of equity required. While a GmbH only requires 25,000 euros and an AG can be had for 50,000 euros, companies must put down 120,000 euros for an SE. For small start-ups in particular, this is a sum that is too high. For larger start-ups, some of which even have a multi-billion valuation, the amount of equity capital should not matter at all.

Establishing an SE is complex

In practice, anyone who has actually decided on an SE as a legal form has four options for bringing it into being, as an essay by the experts at corporate advisory firm Rödl & Partner breaks down. All of them are relatively complex and require a lot of consulting and legal assistance, unlike the formation of a GmbH.

The first way to form an SE is to take at least two existing AGs from two different member countries and merge them. The second is to change the legal form from an AG to an SE, which requires a subsidiary in another European country. The third way is the formation of a holding SE as Clark has done recently, which is possible from an AG as well as from a GmbH. Here at least two founders must be subject to the law of different member states. And then there is the formation of a so-called subsidiary SE by two already existing companies. This does not necessarily have to be an AG.

The SE is not suitable for all start-ups

Which option is best for a start-up depends largely on the circumstances: For example, do foreign branches and subsidiaries already exist? Do they have to be founded first? Or does an AG already exist, which can serve as the basis for a change of legal form, for example? And if not: Can a change of legal form from a GmbH to an AG and then an SE be conclusive? Start-ups must decide this on a case-by-case basis.

Important in all variants is then also the question of co-determination, which is quite complicatedly regulated in an SE. For example, there is an employee participation procedure that decides how employees should participate in decision-making in the future, for example through a works council or a supervisory body. In this process, the SE and the elected representatives of the employees often negotiate for several weeks or even months, which can be a high hurdle for the establishment of an SE.

All of this shows that forming an SE can be an interesting idea for start-ups when they have reached a certain size or are currently growing very quickly and expanding into other countries. For smaller companies, on the other hand, the effort is likely to be too great. However, the exact choice of structure should be well considered and decided on by the management team, as a new name change always involves significantly more effort and costs.