EMU: legal implications and potential problems
PPPPPP - the British Army reminder that "proper preparation
and planning prevents poor performance" is appropriate for businesses in
the run up to EMU. The implications are immensely wide politically, economically
and legally. Planning, foresight and methodical analysis are now the order
of the day. It is suicidal for a company of any size, anywhere in the EU,
or indeed, even just trading with the EU, to ignore the issues. For lawyers
assisting in businesses’ preparation for EMU another P is important - perspective.
The legal implications arise, not only from the legislation,
but also from the political and economic developments which will be brought
about by EMU and the introduction of the single currency. It is inappropriate
and artificial to draw a line between economic, social, accounting, taxation
and legal issues.
Business reviews and subsequent reorientation must take
into account existing and anticipated legal relationships with:
The EU level legislation is appealingly brief and substantially
contained in two regulations.
tax authorities and regulators
The articles most affecting contractual relationships are:
Council Regulation (EC) No 1103/97 on certain provisions
relating to the introduction of the Euro
Council Regulation (EC) No 974/98 on the introduction of
Article 2(1) (1103/97)
"Every reference in a legal instrument to the ECU, as
referred to in Article 109g of the Treaty and as defined in Council Regulation
(EC) No 3320/94, shall be replaced by a reference to the euro at a rate
of one euro to one ECU. References in a legal instrument to the ECU without
such a definition shall be presumed, such presumption being rebuttable
taking into account the intentions of the parties, to be references to
the ECU as referred to in Article 109 g EC and as defined in Council Regulation
(EC) No 3320/94."
Article 3 (1103/97)
"The introduction of the euro shall not have the effect
of altering any term of a legal instrument or of discharging or excusing
performance under any legal instrument, nor give a party the right unilaterally
to alter or terminate such an instrument. This provision is subject to
anything which parties may have agreed."
Article 8 (974/98)
"(1) Acts to be performed under legal instruments stipulating
the use of or denominated in a national currency unit shall be performed
in that national currency unit. Acts to be performed under legal instruments
stipulating the use of or denominated in the euro unit shall be performed
in this unit.
(2) The provisions of paragraph 1 are subject to anything
which parties may have agreed."
Article 14 (974/98)
"Where in legal instruments existing at the end of the
transitional period reference is made to the national currency units, these
references shall be read as references to the euro unit according to the
respective conversion rates, The rounding rules laid down in Regulation
(EC) No 97 shall apply."
A contract is included in the definition of legal instrument
and those provisions will cover the vast majority of existing contracts
without doubt. In a limited number of cases there may be significant issues
as to continuity of contract but what this article tries to address are
the issues the lawyer as part of a business’ EMU planning team, should
bear in mind in advising on new contracts or negotiating changes to existing
It would be a brave person who claimed certainty as to
the development of Europe as it embraces EMU. One has to accept that it
is largely uncharted territory. The uncertainties and complexities have
to be kept constantly in mind and call for flexibility and mental agility.
An important aspect of EMU is that it will inevitably
lead to a deepening of the single market within the European Union. Eleven
of the fifteen Member States will have the same currency and the likelihood
is that most trade between the four outside the single currency and the
eleven within and with each other will be in Euro. Thus, there will be
substantial price transparency, reducing opportunities for market segregation
and differential pricing.
The whole process of trading in the EU is in the course
of being changed by EMU. Buying and selling arrangements are being critically
analysed and substantial changes are most likely as market fragmentation
To anticipate problems which may arise from existing contractual
arrangements and to assess what changes are needed or may be needed, the
first step is an EMU implication audit. Central collation of information
on all the business legal relationships is necessary for analysis from
the perspective of the eleven "in" member states and the four "outs" (each
of which have different reasons for being out as well as different prospects
of coming "in"). A company may, for example, have factories in UK (out)
and Portugal (in); sales subsidiaries in Greece (out) and Spain (in); distributors
in Sweden (out) and Finland (in) and strategic selling alliances in the
other European countries; it purchases components from companies in Belgium
(in), Switzerland (non-EU) and Korea (non-EU).
The company has a multiplicity of contractual relationships
involving purchasing, selling, distribution and employment. EMU and the
deepening of the single market will mean change, opportunities and dangers.
It is not possible to list exhaustively or precisely how the company should
cater for the legal implications but the management and lawyers must approach
the issues with foresight and flexibility. They must be prepared to negotiate
arrangements which provide opportunities for taking advantages of the opportunities
whilst building in safeguards against the threats.
Each company will establish its own priority list but
will need to address issues involving:-
notwithstanding opt outs and the "no compulsion/no prohibition"
provision, is not the reality that most trade will be in Euro?
relative bargaining positions will dictate the reality. A
small supplier cannot ignore the request of a large multi-national customer.
if the currency issue is settled for principal sale and purchase
contracts, the company needs to be able to bring other contracts into line
to limit exposure.
Sales and Purchase Contracts
do they anticipate the Euro?
has full discussion and negotiation taken place with customers
do the arrangements for supplies dovetail appropriately with
deals agreed or anticipated for sales in the new EMU environment?
do the contracts provide reasonable safeguards and flexibility?
do they cover the anticipated strategic changes in the business?
are their indexation provisions appropriate?
do the penalty provisions fit, what interest is to be charged
on overdue debt?
is the payment days provision right ( a recent report indicate
differences in average payment days ranging between 19-71 within the EU).
In the light of the changes envisaged because of EMU
is the group structure appropriate?
does the holding company’s residence need to be changed?
are subsidiaries in other EU Member States still necessary
or were they established because of the market fragmentation and different
does the need to redenominate share capital in Euro encourage
or justify a major corporate overhaul throughout Europe?
what communication and discussion has there been with shareholders?
should existing options for share acquisitions be exercised
sooner rather than later?
Joint Ventures, Strategic Alliances and Long-Term
what of these arrangements currently exist?
does EMU affect their validity or purpose?
do they cater for the envisaged consolidation?
do they contain put and/or call options? If so should action
has development of the arrangements been considered with
the other parties and are their views consistent or is early divorce the
what exit penalties exist?
should more safeguards and exit routes be built in to accommodate
potential difficulties, dangers or opportunities created by EMU?
do all new such arrangements anticipate EMU adequately?
what novel clauses are required by the onset of EMU?
What is the future need for a network of distributors in
each Member State of the EU?
A framework for post-EMU consolidation should be considered.
Currently most distribution agreements for EU Member States
prohibit soliciting customers outside the specified territory but, as a
matter of competition law, cannot prevent parallel trading (where a customer
in territory A requests supply from distributor in territory B because,
for example, the prices are lower). When all prices are in Euro, fragmentation
of the EU market will be difficult to maintain and price uniformity is
Will it be appropriate to reduce the number of distributors?
Will distributors be necessary as currency complications
Existing agreements should be reviewed, particularly as to
Should only short-term agreements be entered into?
Should options to acquire the distributor’s business be exercised?
Should distributors be encouraged to merge their operations?
Review existing loan, leasing and investment arrangements,
particularly derivatives contracts.
Do the arrangements cater for possible exposure outside Euroland?
Is it possible to build in flexibility (for example as to
the term of finance arrangements)?
What co-operation will the company need with the workforce
in dealing with EMU?
Will it be possible to agree payment in Euro throughout Europe?
Will consolidation in the EU market need more flexibility
in terms of travel for work?
What changes may be possible or necessary in expatriate packages?
What review of collective agreement and consultation with
workers’ councils will be necessary?
EMU and other developments are likely to cause a major shake
up in relation to pensions. Do the company’s current pension arrangements
Let the preparation and planning proceed!!
IT to deal with EMU changes will, of course, be critically
Systems must be Euro compliant able to deal with dual trading,
triangulation (conversion from one national currency to another via the
Euro) and incorporate protocols for dealing with rounding and currency
Adequate warranties providing redress for failure should
be built in as well as ensuring the IT suppliers’ financial status to pay
damages or to rectify in case of failure.
* Dibb Lupton Alsop - Brussels. firstname.lastname@example.org