Minimum Capital and Cross-Border Firm Formation in Europe
Company laws in many European countries have traditionally adhered to a legal capital system, and most countries have required founders to contribute a minimum amount of capital to form a private limited company. During the past 20 years, scholars, policymakers, and international organizations such as the World Bank have increasingly criticized these requirements as inefficient. […]
Martin Gelter is Professor of Law at Fordham University School of Law. This post is based on his article forthcoming in the Journal of Law, Finance, and Accounting. Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards (discussed on the Forum here) by Lucian A. Bebchuk and Assaf Hamdani.
Company laws in many European countries have traditionally adhered to a legal capital system, and most countries have required founders to contribute a minimum amount of capital to form a private limited company. During the past 20 years, scholars, policymakers, and international organizations such as the World Bank have increasingly criticized these requirements as inefficient. Many countries have begun to modify or abolish minimum capital requirements in private limited companies or have created capital-less forms of limited liability business entities for new firm formations. A contributing factor to this development has been that, at least in theory, since the early 2000s, business founders in EU and European Economic Area (EEA) countries have been able to choose in which EU or EEA Member State to incorporate. Many prospective founders in Continental European countries initially selected the UK, which has no minimum capital requirement. During the mid-2000s, scholars in some countries observed an increasing number of UK companies controlled by non-UK citizens or residents.
This paper empirically looks at the impact of minimum capital on cross-border firm formation, specifically the pre-Brexit phenomenon of setting up UK-based private limited companies for the purpose of business elsewhere in Europe. The analysis is based on a panel of minimum capital and minimum pay-in requirements from 1995 to 2020 for 31 countries, including all EU and EEA member states, and Switzerland.
