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The EU constitution and its impact on business

In 2003, over 8,000 European businesses benefited from private equity and venture capital funding, creating many thousands of jobs across Europe. The private equity and venture capital industry is therefore keen to ensure that the growth of such companies is not adversely affected by legislation – at both the national and European level, says SJ Berwin.

In 2003, over 8,000 European businesses benefited from private equity and venture capital funding, creating many thousands of jobs across Europe. The private equity and venture capital industry is therefore keen to ensure that the growth of such companies is not adversely affected by legislation - at both the national and European level. Inevitably, some are worried about the impact of the European constitution on business.

The problem is that the issues surrounding the constitution are not widely understood, and the debate has raised concerns as to its impact on the administrative environment for companies; in particular, its potential to decrease flexibility in labour markets and to increase the administrative burden on companies.

The question is, does the constitution, finally agreed by heads of government in June after more than two years of intense negotiation, respond to these concerns or compound them?

Extending social and employment rights

It had been feared that the constitution could have significant implications by expanding existing social and employment rights and protection, as it allows for the Charter of Fundamental Rights ("the Charter") to become legally binding. Many fear that this could restrict the flexibility of labour markets and impose greater administrative burdens on the very type of companies that the private equity industry seeks to fund and develop. Critics of the constitution feared that it will fail to provide businesses with the sense of clarity and certainty they require.

As the rights in the Charter are loosely worded, such as simply the right to work, or a worker's right to information and consultation - there is the fear that they could be interpreted by the courts to impose costly obligations on employers. The UK's employer's federation, the CBI, throughout the run up to negotiations, campaigned vigorously for guidance to be included in the constitution which would prevent the European Court of Justice from reinterpreting UK employment law through the Charter.

Encouragingly, the final text has been cautiously welcomed by Digby Jones, director general of the CBI, as, according to the Government, it includes a reference that ensures that the Charter does not create any new employment rights. Also welcomed by UK companies and industry is that the final text maintains the veto in relation to tax, social security, foreign policy, defence and decisions affecting budget contributions. Transferring power to Europe? The constitution attempts to clarify the powers of the European Union vis-à-vis the powers of the Member States.

In certain areas, only the European Union will be able to legislate (it will enjoy exclusive competence); in other areas, there will be shared competence where the European Union will "bring added value" to action already taken by the Member States. The areas of "shared" competence are of particular concern as these relate to issues of key business interest; such as, consumer protection, social policy, energy, environment and transport, which potentially could lead to significant additional burdens on businesses.

Any additional administrative burdens on business will impact more heavily on SMEs and start-ups, which is of particular concern to the private equity and venture capital industry. The fear is also that these areas will be legislated at the European level and that any concerns will not be adequately represented and heard as legislative power moves away from the national level to the European level.

However, such concerns are countered, in part at least, by the explicit provision stating that powers not explicitly conferred upon the Union remain with member states and the fact that, for the first time, the constitution gives national parliaments a power to scrutinise and send back proposals from the Commission at draft stage, if Parliaments are not satisfied that the EU needs to act.

Enhanced co-operation between the European Union and the Member States should also bring more transparency to the legislative process. The rationale for the adoption of a constitution is to create a more efficient Europe. It is to be hoped that the constitution will promote rather than hinder the creation of an entrepreneurial environment within which companies operate.

Tracey Poole

SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on its services to the private equity industry please contact Simon Witney in its London office +44 (0)20 7533 2222 or visit their website at www.sjberwin.com