REVIEW: EU Law Panel at the International Graduate Legal Research Conference (IGLRC) 2014 at King’s College London, 14-15 April 2014

Florian Nitu

PhD Candidate, King’s College London

 

The European Union Law panel at the 8th edition of the IGLRC addressed the standards of regulation theme showing convincingly that EU norm generation remains as topical as always. It also becomes increasingly sensitive given the global recoup of the pluralist paradigm of law-making.

As Professor Alex Turk chairing the panel has stated at the outset, one way of approaching regulatory activities within the EU, from a standards’ perspective, would be to apply a balancing test to the normative process and its results, measuring comparatively the effects of regulations by reference to norm generation and enforcement. Under the proposed conceptual framework, the next logical step was to choose a number of interconnecting areas of regulation. For the event three typologies were selected.

The first one consisted of standards, which albeit properly enacted by the Member States, are rejected at the European Union level. Still, they are applied in practice given a blatant resistance to compliance. The ‘Golden Shares’ regulations were addressed as category-sample, with Jelena Ganza of King’s College London presenting ‘Resistance to Compliance: Is there a future for ‘Golden Shares’ within the EU’. The second one covered standards set in a collective regulatory process involving a number of different EU actors whose effort to harmonize conflicting interests appears to have yielded mixed results. Regulation of EU financial supervision was assumed to be the proper case study here, handled by Arien Van’t Hof of Erasmus University Rotterdam under the heading of ‘The institutional balance in EU financial supervision’. The third and final one dealt with the category of norms generated outside European Union administrative structures, in a transnational sphere, which are nonetheless embraced by the EU and its Member States. In this vein, Sabrina Wirtz of Maastricht University discussed the ‘EU risk regulation and its global standards: the case of pharmaceuticals’. All three perspectives have been explored insightfully by the speakers putting forward arguments of high interest and practical relevance.

On the resistance to compliance front and the case of ‘Golden Shares’ regulations, Jelena Ganza opened her presentation by defining the golden shares provisions as corporate control devices/special voting rights attached to named shares. They are issued for the benefit of minority shareholders, mainly former state-owned entities or public authorities, in relation to privatization projects. Although it may be argued that a first expression of the ‘Golden Shares’ concept may be found in the UK before, according to the panellist it is during the early-nineties that the idea took off in continental Europe. The ‘Golden Shares’ regulations have been fostered by the EU privatization wave involving mainly the utilities sector and other heavy industries, as well as by numerous public-to-private deals and, in general, by market liberalization programs, concluded in various South-Eastern Europe countries before and as a condition to their accession to the European Union.

According to Jelena Ganza’s research, in spite of their controversial nature and their clear conflict with the fundamental right to free movement of capital, the ‘Golden Shares’ regulations or at least their primary objectives subsist. Indeed, Member States refuse to comply with or try to circumvent the effects of no less than 15 judgments of the European Court of Justice adopted within infringement cases, starting with Commission v. Italy (C-58/99) to the recent Commission v Germany (C-95/12). It was also stressed out that enforcing the said judgments would affect not only the Member States concerned, but also their flagship corporations such as Telecom Italia, Enel, Volkswagen, Telefonica, etc.

She further discounted heavily the effects of the only judgment clearing the golden share-type regulation in Belgium [see Commission v. Belgium (C-503/99)], on the ground that the finding of the CJEU could not be further used as a concept clearance, because of the specifics of this case.

Picking up on audience questions regarding the indirect legality control of the regulations, through the domestic preliminary reference procedure, the panellist informed that to date there is no such judgment, due to lack of interest of the Member States to pursue such proceedings and the limited effects of the regulation over individuals/entities having standing to raise the EU illegality inquiry.

It was claimed that there should be more, since the change in the economic climate appears to be used by Member States as an opportunity to devise new non-compliance defences and to maintain the ’Golden Shares’ system in place or even replicate it. Theoretically, there have been attempts to pre-empt the freedom of capital movement by recourse to employment protection and social security values, Member States public policy stances and other state strategic interests.

Concluding, much remains to be seen on the Golden Shares regulation saga. In spite of the numerous infringement decisions, which Jelena thinks are fully justified as the free movement of capital right is the prevailing value in this tension of local and community interests, the Commission is unlikely, at least in the harsh economic times, to move more aggressively against non-compliant Member States.

It was Arien Van’t Hof of Erasmus University Rotterdam to address the regulation of the local-community tension, but in the systemic risk context. While looking critically at the EU banking regulation and supervision framework, his main aim was to determine which EU, national or other interests would the institutions and authorities involved ultimately serve.

Methodically, Arien used as research guiding tools the powers of EU agencies and institutions, the procedural aspects of rule-adoption and implementation, the institutional checks and balances, by comparing roles and responsibilities between the Commission, the Council and the European Central Bank.

In terms of regulation and supervision, the assessment process was filtered through the lenses of the micro prudential stability and the macro-prudential stability. To do so, it started with a critical presentation of the European System of Financial Supervisors, consisting of European Systemic Risk Board (ESRB), European Supervisory Authorities, including the European Banking Authority (EBA), the National supervisory authorities (NSAs) and the Single Supervisory Mechanism (SSM), as well as of the key instruments of system functioning that include the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CDR) IV.

Further evaluating the microprudential banking supervision system, from EBA and SSM perspectives, the panellist found that, in what regards EBA, one could sense a rigid regulatory approach (when exercising binding powers) and certain discretion (when dispensing non-binding powers), while in relation to the NSAs as SSM agents, it argued that, all in all, their supervisory discretion is diminishing.

Turning to the macro prudential oversight, which was presented as crucial for identifying and prioritising systemic risks, Arien Van’t Hof has emphasized the hybrid nature of the European Systemic Risk Board. ESRB is composed of national central bank governors and 10 representatives of EU bodies or advisory committees. The presenter highlighted its likely inefficient decision-making process, but also the fact that the Council preserves the rights to reject some intended macro prudential measures of NSAs.

In this framework, the key arising question was how to harmonize the potentially different views at the level of various EU institutions and between national and EU bodies. As Professor Alex Turk mentioned in his comment, this further raises policy choices and issues of defining national interests against the systemic financial risk. The case of compatibility of bankers’ bonus regulation (limitation) at the EU level with bonus practices in certain Member States financial markets may well illustrate the national bias and policy choice point.

Concluding, the banking regulation and supervision framework attempts to resolve the local-community tension by diminishing supervisory discretion of the national authorities, despite further balancing this limitation by giving a say to such national authorities in many EU decision-making bodies. Result is that fragmentation of the internal market is reduced, while attention for financial stability is likely to increase.

Sabrina Wirtz of Maastricht University has brought the debate into the transnational sphere, by exploring the EU risk regulation and its global standards with a case study on the pharmaceutical industry and the operation of the International Conference on Harmonization (ICH).

As it was eloquently argued, the rule-making settings vary depending on the globalization context and on the regulative instruments. We are witnessing a shift in the regulatory landscape from ‘government’ of local or national/federal nature to the ‘governance’ of global cooperative networks, using numerous soft law mechanisms and defining standards in an osmotic manner. In this framework, a ‘standard’ was defined as a ‘voluntary and expertise based rule, constituting measurable criteria by which a product or a production process or service can be evaluated on the basis of technical or physical conditions’.

To substantiate the argument, Sabrina went on to discuss the structure of ICH (a truly transnational partnership between regulatory authorities from around the globe and industry associations, with the EU being represented through the European Medicines Agency), its mandate (harmonization of technical requirements on product and processes quality, safety and efficacy), as well as, its modus operandi (illustrating a bottom-up approach in setting standards and guidelines with no formal binding effect, but massively adopted as positive law).

A special attention was given to the process of formal adoption by the EU of the ICH standards, with the EU seen as participant and potential beneficiary of the rule making. In fact, it was pointed out, there are over 60 EMA Guidelines based on ICH similar technical documents, and although they are not legally binding, most of them do enjoy the same status as all other EMA Guidelines. In addition, there is certain evidence that such guidelines do influence further adoption of binding EU legislation. A number of factors may contribute to this result, including the EU Commission relying regularly on the EMA Guidelines and in its turn, the EMA being a member of ICH and applying consistently in its scientific assessment the ICH Guidelines.

While global governance under the promotion of the industry representatives could be an adequate frame for standard setting, issues of accountability and poor legitimacy of decision-makers, insufficient or lack of transparency and incidents of limited or mimicked public consultations in the rule-making process, often arise. The EU stands here in a delicate position, since so far, certain global standards so adopted had a large impact on European regulations.

But finally, according to Sabrina Wirtz the problem and the solution lie in the same place, as the expertise is with the industry and the regulatory powers with the authorities and hence, by putting them together, responsibly and transparently, satisfactory standard setting may be achieved.

The three case studies presented in the EU Law Panel at the IGLRC 2014 have showed that standard setting within the EU regulative process may be convincingly tested by reference to norm generation (using both top-down and bottom-up approaches) and norm compliance (illustrating formal non-compliance of binding law but also voluntary compliance of soft law).

Whether the EU law-making continues its somewhat anti-cyclic constitutionalisation process or, on the contrary, it allows more space for transnational self-creating, self-validating rules of law, it definitely remains a long(er) term debate.

Sword beach is in La Monnaie: King’s College London Centre of European Law celebrates its 40th anniversary with a high profile event in Brussels

Jose Manuel Panero Rivas

MA in Economics for Competition Law, King’s College London, LL.M in European Law, College of Europe, Bruges

 

 

Almost 70 years after the Normandy landings, the Centre of European Law of King’s College London arrived to the heart of Brussels to celebrate its 40th anniversary with the community of distance learners’ alumni. There, some of the most prominent London-based professors of the Centre were celebrating the success of the institution with their Brussels-based colleagues and former students. In attendance were Professors Biondi, Turk, Whish, Flynn, Jones, Wils, Buendía, Stefan amongst many others.

 

After a short introductory speech by Prof. Biondi (director of the CEL), the event was arranged in such a way that two different sessions ran simultaneously, one on EU Law (which was, in turn, divided into two sub-sessions) and another one on EU Competition Law. As the author is not ubiquitous, the EU Competition Law session, bearing the title “The increased use of settlements and commitments in antitrust enforcement: a success or a problem?” is not reviewed or summarised (although sources reported it was excellent, as it is the rule when one thinks of a session lectured by Profs. Whish and Wils). The lectures were followed by a great dinner not summarised here.

 

Free movement of capital with Prof. Flynn

There were two topics within the EU Law session. The first was “Recent developments on free movement of capital in relation to fiscal sovereignty” and was conducted by Prof. Flynn. This consisted in a review of two interesting 2009 CJEU judgments on the application of free movement of capital to issues related to charity. As Prof. Flynn mentioned, there is the general belief that “charity remains at home” but, notwithstanding that, the CJEU has consistently held that fundamental freedoms should equally apply to cases where the State provides a given framework for private entities and individuals donating to certain goals or institutions (not directly, as otherwise State aid rules might be applicable if the beneficiary develops an economic activity).

The first of them is Persche.[1] Mr Persche claimed that his donation of certain goods (Zimmer frames, toys, bed linen and towels) to Centro Popular de Lagoa, in Portugal, should qualify as deductible expenses for the purpose of his tax return in Germany. However, the German authorities refused his request on the grounds that the recipient of the donation was not established in Germany.

 

The Court clarified that the taxable treatment of such goods are within the scope of the rules on capital, irrespectively of their in-kind nature,[2] and that the inability to deduct these donations when the recipient is not established in Germany constitutes a restriction on the free movement of capital.

 

Thereafter, the Court analysed whether the restriction could be justified. Three arguments were put forward : (i) a tax allowance decreases Member State’s tax revenues, and the Member State should have to allow it only if there is a corresponding decrease in its expenses by the taxpayer taking a burden that would otherwise fall on the State; (ii) the tax advantages allow the Member State to discharge it of  some of its duties, which are confined to the territory of the Member State itself; and (iii) tax authorities cannot control that the funds benefiting from tax advantages granted outside the relevant Member States are indeed going to a truly charitable cause.

 

The Court dismissed all three arguments on the basis that: (i) the idea of justifications based on a reduction of fiscal incomes is neither a pure economic reason fitting within Article 65 TFEU nor does it constitute an overriding reason of public interest; (ii) the Member State should be free to choose the charitable goals it might consider appropriate and there is no good reason to consider that only specific institutions within its borders can fulfil such goal; and (iii) concerning the effectiveness of fiscal supervision, there are mechanisms within the EU for mutual assistance between tax administrations.[3]

 

The second judgment is Servatius,[4] where was at stake the eligibility of  a social housing project in Liège (Belgium) promoted by an association established in The Netherlands for the purpose of funding by the Dutch authorities of social housing projects. The system of prior authorisation established by the Dutch authorities was considered by the Court as a restriction of the free movement of capital. However, the Court considered that the financing of public housing could be considered as an overriding reason of public interests, particularly in the specific context of The Netherlands. Ultimately, as it happens often with preliminary rulings, the question on whether the measure was proportionate or not was left for the national court.

 

The paper prepared by Prof. Flynn is available here.

 

Constitutional problems with Prof. Turk

 

The second topic was a presentation by Prof. Turk on the constitutional problems posed by the current architecture of EU regulation of the financial sector under the title of ‘EU Institutional Architecture for Financial Regulation – Constitutional Issues and Solutions’.

 

As the readers of this blog know, there are currently different levels of regulation in the field. On the first level there are EU Directives and Regulations (such as the Capital Requirements Directive (CRD)[5] and the Bank Recovery and Resolution Directive (BRRD)[6]). On a lower level, the Commission adopts subordinate regulations. However, the ever increasing number of agencies (European Securities and Markets Authority – ESMA -, European Banking Authority _- EBA – European Insurance and Occupational Pensions Authority – EIOPA) prepare the drafts of those technical regulations, which specify the relatively broad concepts contained in the Directives or Regulations. Whilst those technical rules are formally approved by the Commission, some observers have pointed out the existence of a certain “rubberstamping” on the action of the Commission (especially because agencies are increasingly well funded while the Commission struggles to have the necessary resources to do a proper job). However, the problem is that, irrespective of the kind of “technical” decisions that are to be adopted, they would almost always have a political content. Therefore, the involvement of the Commission might be necessary after all.

 

This happens in a scenario in which there is a progressive takeover of the agencies by the Member States, whose representatives involved in the decision-making processes within the agencies act in the “general interest of the Union” but, one might wonder whether this “general interest of the Union” is as general as the one genuinely promoted by the Commission.

 

This status quo was reconsidered in the cases of Meroni[7] and ESMA,[8] which should be taken into account if the powers and acts of the agencies or the Commission in the field are challenged in the future.

 

The presentation prepared by Prof. Turk is available here.

 

Both presentations within the EU Law session were extremely interesting, fostering a remarkable debate.

 

Although the dinner is not to be reviewed, Prof. Whish’s speech is worth noting. The highly respected and regarded KCL Competition Law Emeritus Professor expressed his genuine joy for the success of the distance learning programmes, of which he is very proud. Prof Whish is fully committed with the distance learning programmes as he is the Director and Professor in the Programme on Competition Law, as well as co-director of the Economics for Competition Law Programme.

 

Overall, it has been an excellent experience that deserves to be repeated. Besides the interest of the lectures, it has been an excellent occasion for the Centre to consolidate its footprint in Brussels. And it has been extremely successful as it has been perceived as a tour de force and, when testing the audience, certain remembrances with the unforgettable passages in which Oliver Twist says “Please, Sir, I want some more”[9] (even if the Directors of the Centre do not resemble Mr. Bumble in any way) become apparent.

 

And finally, a big thank you to Andrea Cordwell James for her assistance in providing the presentations and obtaining the consent of the authors to share with the readers the materials presented during the lectures.

 

[1] Case C-318/07 Persche [2009] ECR I-359.

[2] Even if the provisions on free movement of goods were to be applied, one might not expect a different result given the facts of the case.  This might, however, be different if the situation would refer to beneficiaries located outside the EU.

[3] Particularly Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation.

[4] Case C-567/07 Winingstichtung Sin Servatius [2009] ECR I-9021.

[5] Capital Requirements Directive. For the documents integrating the CRDIV package see http://ec.europa.eu/internal_market/bank/regcapital/legislation_in_force_en.htm#maincontentSec1

[6] Bank Recovery and Resolution Directive. For an overview of the progress of adoption of the Directive see http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm

[7] Case 9/56 Meroni.

[8] Case C-270/12 UK v Paliament and Council. n.y.r.

[9] C. Dickens, Oliver Twist.

Free movement of capital and Golden Shares in Volkswagen: unexpected twist or foreseeable outcome?

Jelena Ganza, PhD Candidate, Dickson Poon School of Law, KCL

Pursuant to the so-called ‘loyalty to the EU principle’ enshrined in Article 10 EC, Member States are obliged to remove national barriers to free movement of capital (Article 63 TFEU). However there are certain national barriers which the Member States sought to retain in spite of the foresaid obligation. These barriers are the so-called ‘golden shares’[i]  which allow State to retain control over former SOE’s. Typically, the special ‘golden’ share (hereafter: GS) aimed to remain property of State, granting it with special powers and allowing to exercise control over company’s management which could only be exercised by a majority shareholder. In order to be acceptable under the then EC law GS had to be justified on grounds of exceptions laid down in the Treaty[ii], meet legal certainty and proportionality requirement – an imperative that could not be easily satisfied. The EU Commission has long acknowledged that there is no place for unjustified GS and sued erring Member States in the Court of Justice of European Union (CJEU). The CJEU has evaluated the legality of GS in fifteen cases and only in one instance their application has been justified.[iii] These condemning judgments are of declamatory character therefore it is up to the national Government to choose how to comply.

Compliance obligations stem from the CJEU’s judgments – depending on the wording of the operative part and summary the State’s Government could employ different compliance strategies. Firstly, the Member State could repeal GS, thus entirely eliminating the infringement of the Treaty. Compliance by repeal could be seen as acting in line with the sincere co-operation principle as it eliminates the breach of the Treaty in its entirety and therefore effectively complies with the judgment. Secondly, the Member State could attempt to meet the justification criteria so that overruled GS could pass the justification test. Since passing the justifying GS is a challenging task, in practice the Commission was never satisfied with ‘compliance by amendments’. Following such amendments GS retained their dissuasive powers for foreign investors and subsequently impeded capital movements. As a result, any justification attempts of overruled GS inevitably triggers further infringement proceedings on amended GS or even sparks further infringement procedure for non-compliance with the original judgment. Therefore, any ‘compliance by amendment’ could be seen as acting contrary to the sincere co-operation principle under Article 10 EC. The above finding has been tested by analysis of Italian cases[iv] which revealed that GS are of obstinate character and governments could be reluctant to repeal them while tampering with the justification test instead.

Generally GS judgments clearly established which provisions were illegal leaving the Member State with indication as to which GS have to be repealed or amended. However, as the following analysis will show, sometimes the Member States are left with a GS ruling with a seemingly dubious compliance obligations stemming from it. Such was the case with the CJEU’s landmark ruling on C-112/05 Commission v Germany[v] which is one of the most famous and longest-running cases in Community history. In this case the Commission challenged one of the oldest instances of GS, the so-called ‘Volkswagen Law’ (the Law) implemented in 1960’s exclusively for the automobile company Volkswagen. It must be stressed, that the Law differs considerably from other GS in other States in one respect: it did not reserve special powers for the sole benefit of the Member State per se but rather used provisions of national company law to treat State authorities as ordinary private shareholder.

The Law created a legal framework which indirectly benefited the State of Lower Saxony – major shareholder with 20% stake. The Law limited the voting rights for all shareholders to 20% of the total share capital, while at the same time increased the majority required for approval of resolutions by general shareholder meeting from 75% to 80%. The set percentage thresholds were by no means accidental, but rather aimed to correspond with Lower Saxony’s stake in Volkswagen The combination of the ownership ceiling and increased majority provision allowed for Lower Saxony to exercise control over Volkswagen that would normally be available only to a shareholder owning 25% of the shares.   Additionally, the Law allowed for Lower Saxony to appoint two directors to the company’s supervisory board for as long as it retains any shares in the company, thus explicably granting the authorities with special power to assign directors. However, neither increased majority, nor voting right ceiling referred to Lower Saxony as a sole beneficiary of the Law. In the strictest sense any other shareholder owning 20% of Volkswagen’s shares could benefit from these provisions. However, it is clear that the Law was created for the sole benefit of Lower Saxony – the 20% minority stakeholder.

In spite of the fact that the Commission asserted that all three paragraphs of the Law infringe the Treaty individually, both Advocate General and the CJEU analysed the increased majority and the voting right ceiling together in order to assess their combined deterring effect on capital movements.[vi] At the joint examination of cumulative effects of the Law the Court went on to link the effects of the increased majority and the voting right ceiling, stating that provisions supplemented each other, creating a legal framework which enabled Lower Saxony to exercise considerable influence on the basis of its investment.[vii] The Court came to the conclusion that the combination of the foresaid provisions constitutes a restriction on the movement of capital.[viii] The Court ruled that by maintaining in force provision on directors’ appointments, as well as voting right ceiling in conjunction with increased majority provision, Germany has failed to fulfil its obligations under Article 63 TFEU.

Germany had to comply with the judgment by choosing its compliance strategy – to repeal or amend the Law. While choosing the strategy the Government referred to the judgment and proceeded with amending the Law by removing some overruled provisions.[ix] In the Government’s view the judgment anticipated two necessary amendments: to the director’s appointment right and the deterring system. The Government concluded that since the interplay or interaction between the two provisions of the Law infringes the Treaty, by removing only one component of the system the interaction between the two provisions will be eliminated effectively terminating GS so there would be no necessity to repeal the remaining provision. Therefore, the compliance strategy anticipated amendment to the Law by repealing the voting right ceiling (which was also contrary to German law on stock companies) and provision on director’s appointments, yet the increased majority provision remained in force. Subsequently, the Government choose to follow the wording of the ruling without going further than strictly necessary. Effectively, Germany has complied with the judgment while at the same time Lower Saxony’s 20% stake allowed it to continue its influence over Volkswagen.

Commission was not satisfied with such compliance strategy and threatened to sue Germany for non-compliance with the original GS ruling under Article 260 TFEU. Germany defended its compliance strategy emphasising that it had no obligations to amend overruled Law beyond the requirements of the judgment. Germany insisted that the judgment required for abolition of the legal framework and subsequent amendment met that requirement. Commission pushed for removal of increased majority provision, but Germany resisted.

The ambiguity of compliance obligations stemming from Commission v Germany has been further deepened by judgment of District Court of Hannover[x]. The District Court assessed the wording of the CJEU’s judgement and concluded that neither the increased majority provision nor the voting rights ceiling is contrary to the Treaty per ce. [xi]   According to the District Court only the joint effect of the said provisions constitutes the breach of the Treaty.[xii] However, in spite of the District Court’s finding, the EU Commission urged Germany to repeal the remaining provision of the Law in order to fully comply with ruling on C-112/05. Germany, on the other hand, sought to convince the Commission that such interpretation of compliance obligations stemming from the said judgement is erroneous. Germany insisted that repealing one of the two provisions of the Law is sufficient to facilitate full compliance. The government proposed to submit a joint application for interpretation of the CJEU’s judgment in order to resolve the differing views on compliance obligations.  Yet the Commission declined Germany’s offer stating that there are “no doubts as to the meaning or scope of the 2007 Judgment”.[xiii]

The above interpretative challenges led the Commission to refer the matter to the CJEU in 2012 under Article 260 TFEU suing Germany for non-compliance with judgment on C-112/05, stating that it is apparent that each of the three contested provisions of the Law infringed Article 63 TFEU individually. The resulting judgment on C-95/12 Commission v Germany, delivered on 22 October 2013 was the first of its kind in the existing body of GS case law since no other Member State had to such great extent resisted the Commission’s views on necessary compliance obligations. In C-95/12 the CJEU ruled that the Commission’s complaints should be dismissed. Such an outcome of the judicial proceedings could be seen as a surprise for some, yet for others, it would appear to be anything but a surprise.

First, even though the judgment on C-112/05 could be seen as missing the opportunity to outlaw the increased majority provision of the Law, the judgment on C-95/12 merely concerns the alleged non-compliance with the GS ruling and not the potential illegality of the foresaid provision. In C-95/12 the Court has evaluated German compliance strategy and came to a conclusion that it has fully complied by removing one of the two provisions which constituted an illegal system. The outcome of C-95/12 also appears unsurprising once the ruling by the District Court of Hannover is taken into account. The District Court has rightfully observed that the CJEU has evaluated the two provisions of the Law as two pieces of one whole therefore removing one part of the system would result in its ineffectiveness. Lastly, the outcome of the case C-95/12 has been predicted by Advocate General when he concluded that the judgment on C-112/05 is not “particularly ambiguous” and it is “regrettable” that the parties had contrasting views on its interpretation and could not agree on the necessary compliance measures.[xiv] Advocate General’s opinion has predicted doom for the Commission’s claims, confirming that in order to determine the necessary compliance strategy Germany had to refer to the operative part of the judgment and not to the broad interpretation of assumed illegality of all three provisions of the Law as suggested by the Commission.[xv]

Even though the outcome of the judgment C-95/12 could have been predicted, it should be emphasised that the increased majority provision of the Law could once again become subject to further judicial review. The retained provision of the Law has the potential for being in breach of free movement of capital. However, the Commission would have to initiate a separate infringement procedure to prove that. The above analysis of German compliance strategy demonstrates the inherent obstinacy of GS. If, in line with the sincere co-operation principle, Germany would have opted to repeal all the contested provisions, there would not be any interpretational issues of the judgment and the increased majority provision would not retain the potential for being taken to the CJEU on separate proceedings in the future. This analysis once again demonstrates that when it comes to compliance with GS judgments, the best possible compliance scenario would be repealing GS altogether rather than amending them. The controversy of the Court’s judgment on C-112/05 is likely to re-appear in the future if the Commission would choose to refer the matter to the Court. The extent to which Germany’s compliance with the ruling could be seen as acting in line with ‘sincere co-operation’ principle under Article 10 EC could also be questioned, especially if legality of the retained provision would be tested by the Court.

 

Key terms: Golden Shares, Compliance, Free Movement of Capital

Legislation:

Law governing the transfer of share rights of Volkswagenwerk GmbH to private parties (Gesetz über die Überführung der Anteilsrechte an der Volkswagenwerk Gesellschaft mit beschränkter Haftung in private Hand) of 21 July, 1960, BGBI. I 1960, at 585 and BGBI. III at 641, amended 6 September 1965, BGBI. I at 461 and 31 July 1970, BGBI. I at 1149.

Draft law Amending the Law governing the transfer of share rights of Volkswagenwerk GmbH to private parties (Gesetzentwurf der Bundesregierung, Entwurf eines Gesetzes zur Änderung des Gesetzes über die Überführung der Anteilsrechte an der Volkswagenwerk Gesellschaft mit beschränkter Haftung in private Hand)

 

Cases:

C-112/05 Commission v Germany;

C-95/12 Commission v Germany;

Judgment of the first Commercial Chamber of the District Court of Hannover of 27.11.2008 – 21 O 52/08, Judgment of the first Commercial Chamber of the District Court of Hannover of 27.11.2008 – 21 O 61/08.

 

 

 

[i] On the subject see Jelena Ganza for KSLR European Law Blog: ‘A Continuing analysis of the Never-Ending Story: Golden Shares after Italian elections’, (10 June 2013) and ‘Italian Golden Shares – a Never-Ending Story?’, (January 2013).

[ii] public health, policy and security, see Article 55 EC, Article 56 EC, Article 223 (b) EC, Article 65(1)(b) TFEU

[iii] Commission v. Italy, C-58/99, judgment of the CJEU of 23 May 2000; Commission v. France, C-483/99, 4 June 2002; Commission v. Belgium, C-503/99, 4 June 2002 (justified); Commission v. Portugal,  C-367/98, 4 June 2002; Commission v. United Kingdom, C-98/01, 13 May 2003; Commission v. Spain, C-463/00, 13 May 2003; Commission v. Italy C-174/04, 02 June 2005; Joined cases C-282/04 and C-283/04, Commission v. Netherlands, 28 September 2006; Federconsumatori v. Commune di Milano, C-463/04 and C-464/04, referred to the Court for preliminary ruling, 6 December 2007; Commission v. Germany, C-112/05, 23 October 2007; Commission v. Spain, C-274/06, 14 February 2008; Commission v. Spain, C-207/07, 17 July 2008; Commission v. Italy, C-326/07, 26 March 2009; Commission v. Portugal , C-171/06, 8 July 2010; Commission v. Portugal, C-543/08, 11 November 2010

[iv] ibid n (i)

[v] Commission v. Germany note iii above

[vi] Opinion of Advocate General Ruiz-Jarabo Colomer, delivered on 13 February 2007 in Case C-112/05 Commission v Germany [76]-[81]

[vii] Commission v. Germany [51].

[viii] Commission v. Germany [56].

[ix] See Deutscher Bundestag (25 September 2008), Gesetz zur Änderung des Gesetzes über die Überführung der Anteilsrechte an der Volkswagenwerk Gesellschaft mit beschränkter Haftung in private Hand (Law amending the Law governing the transfer of share rights of Volkswagenwerk GmbH to private parties), BGBl. 2008 I No 56, p. 2369

[x] Judgment of the first Commercial Chamber of the District Court of Hannover of 27.11.2008 – 21 O 52/08, Judgment of the first Commercial Chamber of the District Court of Hannover of 27.11.2008 – 21 O 61/08.

[xi] Judgment 21 O 61/08 (n x) at Reasons I 2 (k)

[xii] Judgment 21 O 61/08 (n x) at Reasons I 2 (k)

[xiii] Advocate General (2013), Opinion of Advocate General Wahl, delivered on 29 May 2013, Case C 95/12, European Commission v Federal Republic of Germany, [12].

[xiv] Advocate General (2013) [24]-[25].

[xv] Advocate General (2013) [26].

Case Note on C-466/12 Svensson

Justin Koo, PhD Candidate at King’s College London

 

The much anticipated hyperlinking case of Svensson[1] was delivered by the CJEU on the 13th February 2014. Such was the importance of the impending decision, several cases were stayed pending its outcome – C More Entertainment (Case C-279/13),[2] Bestwater (Case C-348/13)[3] and Paramount v B Sky B.[4] Oddly enough, there was no Advocate General’s Opinion which was surprising given the potential implications of the case including the undermining of the Internet as well as the possibility of changes for use and licensing of copyright works online.

The dispute at hand concerned the provision of clickable hyperlinks to the claimant’s newspaper articles. As such the claimants argued that the provision of clickable links by the defendant made the works available to the public and as a result was a communication to the public under Article 3(1) of the Information Society Directive 2001. In response the defendant argued that providing links to works communicated to the public on other websites does not constitute copyright infringement. Furthermore, the act of hyperlinking was not a transmission of the work as it involved mere indication to their clients of websites containing works of interest. In light of this, the Swedish court referred 4 questions to the CJEU (only the first three will be discussed in this article):

(1) If anyone other than the holder of copyright in a certain work supplies a clickable link to the work on his website, does that constitute communication to the public within the meaning of Article 3(1) of Directive [2001/29]?

(2) Is the assessment under question 1 affected if the work to which the link refers is on a website on the Internet which can be accessed by anyone without restrictions or if access is restricted in some way?

(3) When making the assessment under question 1, should any distinction be drawn between a case where the work, after the user has clicked on the link, is shown on another website and one where the work, after the user has clicked on the link, is shown in such a way as to give the impression that it is appearing on the same website?

(4) Is it possible for a Member State to give wider protection to authors’ exclusive right by enabling communication to the public to cover a greater range of acts than provided for in Article 3(1) of Directive 2001/29?’

The CJEU in delivering its judgment addressed the first three questions together interpreting it to mean whether “the provision on a website of clickable links to protected works available on another website constitutes an act of communication to the public…where on that other site the works concerned are freely accessible.” Thus, the question for the Court in simple form was whether the act of hyperlinking already freely available works on the Internet was a communication to the public requiring authorisation. In order to determine this, the Court followed the established rule that the act must be a ‘communication’ and to a ‘public’.[5] Following this, the CJEU held that the provision of clickable links was an act of communication because it made the works available and moreover, it was to a public because the act of communication was made available to an indeterminate and fairly large number of recipients – Internet users.[6]

However, for the defendant’s act of hyperlinking to require the claimant’s authorisation, the communication must have been made to a new public. That is a public not taken into account by the copyright holders when they authorised the initial communication to the public.[7] But as the works being linked to were already freely accessible on the Internet, the Court held that the defendant’s links were not directed at a new public because the initial communication by the claimant would include all of the defendant’s public because the works were freely available to any Internet user. In other words, there was no new public because the initial communication was aimed to all Internet users in virtue of it being freely accessible. Therefore, it was irrelevant for the Court whether the works were being displayed on the defendant’s page so as to give the impression that the information originated from there rather than from an external source.

Despite the Court’s finding that the defendant’s act was not a communication to the public requiring authorisation, the possibility is left open that an act of hyperlinking can amount to an infringement of Article 3(1) where the provision of the link makes accessible a work which is not ordinarily accessible for example through the circumvention of security procedures on the website being linked to. As a result of this the hypothetical question must be asked whether a hyperlink to a work that was uploaded without permission would amount to an infringement of Article 3(1) (for example links to websites streaming unauthorised content such as films or sports). This is problematic not only because the Svensson case does not give us clear guidance about the answer but also because of the general undesirability of the criteria used in the Svensson case.

In the first place, the new public criteria should not be used given that it was expressly rejected in the preparatory works of the Berne Convention. Instead the concept of the ‘organisation other than the original’ was adopted under Article 11bis(1)(ii) and that is the correct criterion to be used. Secondly, from a normative perspective it is highly questionable whether the act of hyperlinking should attract copyright infringement. This is because the act of hyperlinking is essential to the infrastructure of the Internet and moreover, is more about facilitating access to works than causing actual use and infringement. As such the act of hyperlinking should fall outside the scope of the communication to the public right given its technological and informational purpose. However, if this is ignored, a useful alternative may be to treat hyperlinks in terms of secondary liability akin to authorisation in Australian copyright law or contributory liability in American copyright law.

Although many a copyright lawyer breathed a sigh of relief on hearing that hyperlinking does not amount to a communication to the public on the facts of Svensson, the CJEU’s handling of the case leaves a lot to be desired.

[1] Case C-466/12 Svensson and others v Retrierver Sverige AB

[2] Case C-279/13 C More Entertainment AB v Sandberg

[3] Case C-348/13 Best Water International v Mebes and Potsch

[4] Paramount Home Entertainment International Ltd and others v British Sky Broadcasting Ltd and others [2013] EWHC 3479 (Ch)

[5] See Case C-607-11 ITV Broadcasting Ltd v TV Catchup Ltd

[6] See Case C-306/05 SGAE v Rafael Hoteles SL

[7] See SGAE v Rafael Hoteles and Case C-136/09 Organismos Sillogikis Diacheirisis Dimiourgon Theatrikon kai Optikoakoustikon Ergon

Robin Hood (tax): really an EU outlaw?

Alin Fouladvand, MSc Risk and Finance, London School of Economics

Marco Guerra, LLM University of Milan; LLM Student, King’s College London

 

1. Introduction

On 28 September 2011, the European Commission proposed a harmonised Financial Transaction Tax (FTT) aimed, among other reasons, at the reduction of competitive distortions in the single market[1]. In the absence of an unanimous agreement between all EU Member States, a subgroup of them (the so-called FTT Zone) engaged into a procedure of “enhanced cooperation” for a common FTT[2], authorised by the European Parliament on 12 December 2012 and by the EU Council on 22 January 2013. On 14 February 2013, the European Commission published its detailed proposal, approved by the European Parliament in July 2013 and expected to enter into force on 1 January 2014.

 

The FTT will be levied to financial transactions between financial institutions charging 0.1% for the exchange of shares and bonds and 0.01% for derivative contracts, on the requirement that at least one party to the transaction is established in FTT Zone and that a financial institution established in the FTT Zone is party to the transaction. The United Kingdom, supported by several EU members, challenged this proposal urging the opposition to the tax due to its risk of damaging feeble economic growth and its compatibility with European Union treaties[3].Over all, the United Kingdom criticised the residence principle that forced the financial institutions to be treated as resident in the participating member states and therefore to have to make tax declarations and to pay tax, simply because they enter into transactions with other financial institutions resident in a participating state, establishing there the infrastructures for meeting those tax liabilities[4].

 

2. The EU Council’s opinion

On 6 September 2013 the European Union Council’s legal service published a (not binding) opinion where it is stated that this type of levy “would constitute an obstacle to the free movement of capital as well to the freedom to provide services”[5],[6]. In the following part we would aim at understanding more widely the reasons that could have inspired this position starting from the analysis of the treaties to clear if the FTT contravenes the free movement of capital.

According to the Article 63 of the Treaty on the Functioning of the European Union (hereafter, TFEU), 
”[…], all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited“.

The jurisprudence of the European Court of Justice has developed a three-step approach to verify the compatibility of a provision in the light of the TFEU freedoms[7]. With reference to the FTT, this test involves the following questions:

 

(i)     Does the FTT fall under the scope of the free movement of capital?

(ii)  If so, does the FTT constitute a restriction of the free movement of capital?

(iii)                        If so, is the FTT justified?

 

Considering the first question, we observe that the TFEU does not define the term “movement of capital”. In the case Trummer and Mayer[8] the CJEU has indicated that, “its meaning should be determined by reference to the nomenclature in Annex I to Council Directive 88/361/EEC of 24 June 1988”, that covers “all the operations necessary for the purposes of capital movements: conclusion and performance of the transaction and related transfers”[9]. Given the above we can conclude that the FTT falls under the scope of the Article 63 of TFEU.

With reference to the second, and more critical, question we note that the legal opinion published by the European Union Council’s legal service expresses concerns that the proposed Directive “would render less attractive financial transactions with financial institutions located outside the participating Member States, since these institutions would have to pay the FTT at different rates in different countries and the counterparty may be unwilling to be liable to that tax and to face, on these grounds, legal uncertainty and possible disputes with the authorities of the participating Member State”.

In other words, the FTT would impose a duty on those transacting with entities in the FTT zone and, therefore, restrict the free movement of capital guaranteed by TFEU by producing “an effect equivalent to that of a duty imposed in return of the possibility to enter into a transaction with an institution located in a participating Member State”[10].

Further into the second question, the proposed Directive applies the “counterparty” factor in a discriminatory manner. The question of free movement of capital rises due to the fact that these rules limit issuing of financial instruments by a party from a participating Member State in non-participating Member States. The reason being that these transactions would be subject to taxation with the FTT, in clear contrast to transactions to which the tax does not apply. It results from Sandoz[11] that imposing a barrier to investment in other Member States is a restriction on free movement of capital and Article TFEU 63.

In addition, the FTT is indirectly discriminatory, because it makes more expensive for a company based in a “non-FTT” state to conduct business in a “FTT state” (and vice versa) in comparison to its local competitors.

 

3. The debate on the FTT

Contrary to the Council’s opinion, it has been observed that the FTT does not constitute a discriminatory restriction of the free movement of capital. This is because the levy applies to each financial transaction with determined elements and no distinctions are made between cross-border and domestic capital transactions[12]. As explained by the jurisprudence of the Court of Justice of the EU (CJEU) the discrimination can arise through the application of different rules to comparable situations or through the application of the same rule to different situations[13]. However, this opinion is not universally accepted between scholars. It is believed that the FTT could limit the circulation of the capitals in the common market and, furthermore, it is “considered as a high tax level since in some cases […] it will tax non-existent wealth”[14].

Nevertheless, the European Commission’s own legal advisors refused the Council’s legal opinion, observing that, actually, every single tax levied on a cross-border transaction limits the movement of the capitals[15]. They observed that “[…] the fact that FTT would [not] exist outside [the] FTT area, is merely a disparity which is neutral from the perspective of the Treaty freedoms”.

The last question refers to the two derogations stipulated by Article 65 TFEU, whereby these measures should not be in the form of arbitrary discrimination or disguised restriction on free movement of capital. The first derogation, stipulated in Article 65(1)(a) TFEU is specific to tax and stipulates acceptable tax provisions that existed at the end of 1993 and, thus, it is not applicable on the FTT. The second set of derogations is stipulated in article 65(1)(b) TFEU and consists of three possible general derogations to the free movement of capital: to prevent illegal tax evasion, for the purposes of administrative or statistical information, and on grounds of public policy or public security. Clearly the FTT does not carry the prerequisites for the first two. For the latter to be applicable, the CJEU has determined that it is necessary to identify and prove “a genuine and sufficiently serious threat to a fundamental interest of society”[16]. The FTT aims to curb speculation and this is in the interest of public security, however the latter derogation should be used carefully. In Albore[17] the CJEU stated that a reference to public policy or security was not in itself sufficient to justify restrictive measures. It must be proven that alternative treatments would expose the Member State to real risks that could not be countered by other, less restrictive measures.[18] Although the economic rational behind the FTT is understandable, the threat to national security is not clearly defined and the risk seriousness of not adopting a FTT is not possible to answer at this point. Also, according to Verkoojen[19] a restriction of a fundamental freedom can be only admissible if it justifiable in virtue of the general interest, excluding thus purely economic reason[20]. This makes the derogation in article 65(1)(b) TFEU far from applicable. To conclude, none of the express derogations in article 65(1) TFEU are applicable to the FTT.

 

4. Conclusion

Currently the question of the legitimacy of a FTT is still open also within the European institutions; responding to the question posed by the EU member of Parliament Marc Tarabella on the potential violation of the free movement of capital as observed in the above mentioned legal opinion, the Council answered that “a position has not been reached”[21].

Thus, it clearly appears how the debate on the compatibility of the financial transactions’ taxation with the EU Treaty is not yet solved. We can only observe that if there is not a definitive juridical approach in the academic debate, a consideration can be expressed exclusively based on the tax policy.

As known, since 2013 Italy implemented a tax on financial transactions; accordingly, several Italian operators started to move their business to other countries where the tax was not levied and the expected revenue fell considerably[22]. The same it was already happened in Sweden where, after the introduction of a transaction tax in 1984[23].

In conclusion, the protection of a market (the capitals’ one, in our case) is not only a legal issue but should be faced considering the real effects on the economy. After all, since the Chicago School, economic arguments have been developed to claim that taxes are costs that burden the functioning of the financial markets. However, no legal principle prevents sovereign states from introducing (even stupid) taxes if they democratically decide to[24].

[1]          See IP/11/1085, Financial Transaction Tax: Making the financial sector pay its fair share, European Commission, Press release. For a technycal analysis of the proposal see Adam Blakemore, Proposal for a European Union Financial Transaction tax, Journal of International Banking and Financial              Law (2012) 2 JIBFL 104.

[2]               The subgroup includes Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia,             Slovenia and Spain.

[3]           See Case C-209/13, Action brought on 18 April 2013 by United Kingdom of Great Britain and Northern Ireland v Council of the European Union.

[4]               Thomas Richter, Financial transaction tax will “damage” economy, Financial Times, 8 September 2013.

[5]               Council of the European Union, Opinion of the legal service, 2013/0045 (CNS), § 40.

[6]               Huw Jones, 5-EU lawyers say transaction tax plan is illegal, Reuters, 10 September 2013; Louise               Armistead, EU lawyers say financial transaction taxi s illegal, The Telegraph, 10 September 2013.

[7]              Dennis Weber, Otto Marres,  Taxing the Financial Sector: Financial Taxes, Bank Levies and More, IBFD,  2012, p. 124.

[8]               ECJ, 19 March 1999, Case C-222/97.

[9]               Furthermore, the CJEU has also indicated that transactions not listed in the nomenclature may          nonetheless constitute a capital movement.

[10]             Council of the European Union, Opinion of the legal service, 2013/0045 (CNS), § 40.

[11]             Case C-439/97, Sandoz GmbH v. Finanzlandesdirektion für Wien, Niederösterreich und Burgenland, para. 19. –       ECR 1999, p. I-7041.

[12]             Dennis Weber, Otto Marres,  Taxing the Financial Sector: Financial Taxes, Bank Levies and More, IBFD, 2012,         p. 131.

[13]             Inter alia, see Case C-279/93 (Schumacker) and Case C-148/02 (Garcia Avello).

[14]             Pablo A. Hernandez Gonzalez-Barreda, On the European way to FTT under Enhanced Cooperation: Multi-speed Europe or Shorcut?, Intertax, Vol. 31, Issue 4, 2013.

[15]             Non-paper by the Commission services, Response to the opinion of the legal service of the Council on the legality of the counterparty-based deemed establishment of financial institutions.

[16]             Case C-54/99 Eglise de Scientologie [2000] ECR I-1335, para. 18.

[17]             Case C-423/98 Albore [2000] ECR I-5965.

[18]             Case C-423/98 Albore [2000] ECR I-5965, para. 22.

[19]             Case C-35/98, Staatssecretaris van Financien v. Verkoojen, para. 46. – ECR 2000, p. I-4071.

[20]             Case C-311/97, Royal Bank of Scotland v. Greece, para. 48.

[21]              Question E-010636-13, 11 November 2013.

[22]          http://www.economist.com/blogs/economist-explains/2013/09/economist-explains-1.

[23]         M. Wiberg, We tried a Tobin tax and it didn’t work, Financial Times, 15 Aptil 2013. Contra, B. Ségol, Europe’s Tobin taxi s designed to work, Financial Times, 17 April 2013.

[24]             Federico Fabbrini, The financial transaction tax: legal and political challenges towards a Euro-zone Fiscal    Capacity, Centro studi sul federalismo, October 2013.