Europe’s push to close the scale-up gap is increasingly colliding with a harder question: can the EU create a new optional company regime without stretching its treaty powers? The proposal for a European Start-Up and Scale-Up Company (often discussed as a “28th regime”) is designed to remove cross-border friction for fast-growing firms. Yet the most consequential risk may not be commercial – it may be constitutional.
At the centre of the debate sits a deceptively technical choice: which Treaty article should be used as the legal basis. That choice will shape the legislative route (speed, voting thresholds, and political feasibility), but it will also shape the proposal’s legal durability. If the legal basis is wrong, even a politically popular regime can become vulnerable to challenge – creating uncertainty precisely where the initiative is meant to create clarity.
Why the ESSU is being pushed now
The case for a 28th regime is straightforward: Europe has world-class innovation, but many companies still face a patchwork of national corporate rules when they expand across Member States. Differences in capital rules, governance mechanics, convertible instruments, registration processes, and administrative formalities compound over time. For founders and investors, those frictions translate into higher legal costs, slower expansions, and – often – pressure to incorporate outside the EU to simplify scaling.
The ESSU proposal aims to respond with an optional, startup-friendly corporate pathway that can be used across borders. It is not intended to replace national company forms. The intention is to offer a more uniform “scale-up wrapper” that reduces rework as the company grows.
The strategic trap: “market integration” doesn’t automatically mean “harmonisation”
In EU law, the route you take matters. Article 114 TFEU is the workhorse legal basis for internal market legislation because it enables the EU to harmonise national laws to improve market functioning. It is also politically attractive because it typically avoids the unanimity barrier that can slow or block sensitive initiatives.
But Article 114 has a boundary condition: it is designed for harmonisation, not for creating entirely new legal structures that sit alongside national regimes without materially changing them.
That is where the ESSU becomes contentious. If the ESSU is engineered as true harmonisation – meaning national company laws are actually aligned or amended in a meaningful way – Article 114 can be easier to defend. If, however, the ESSU functions as a parallel, optional corporate regime layered on top of national company laws (leaving those laws largely untouched), it starts to resemble other “28th regimes” that historically relied on Article 352 TFEU (the flexibility clause), which comes with a higher political hurdle.
This distinction – harmonisation vs. coexistence – sounds academic, but it is the difference between a regime that is structurally secure and one that risks becoming litigated.
What the proposal appears to do – and why that’s fuelling the legal-basis dispute
The ESSU concept has been discussed as a company form tailored for innovative SMEs that want to expand across the EU. Eligibility criteria discussed in public materials point to features like limited liability, an EU-based registered seat, and conditions around listing status and corporate autonomy.
Some design elements reported in the debate illustrate the broader intent: lowering initial capital barriers (even to very low levels for ESSU onboarding), facilitating digital registration, and improving the usability of equity-like instruments that venture-backed companies use to grow.
Yet those same design choices raise the legal-basis question:
- If Member States must temporarily allow a “startup-style” capital setup for companies opting into the ESSU, is that harmonising national company law, or simply creating a special opt-in lane that leaves the underlying national rules intact?
- If the ESSU is “added” as a layer, while key corporate law features still ultimately rely on the Member State’s baseline company code, is that a genuine internal-market harmonisation measure – or a new regime that coexists with the national system?
In EU constitutional terms, these are not semantics. They are the core test of whether Article 114 is doing the work it is supposed to do.
The warning from precedent: the EU’s courts have drawn lines here before
The EU has been here before with other European legal forms. The basic pattern in prior disputes is that creating a new legal form “in addition to” national forms has been treated as something that does not automatically count as harmonisation. In that logic, the internal market goal may be legitimate, but the legislative tool must match the Treaty competence.
That precedent creates a practical risk for the ESSU debate: if the ESSU is perceived to function like a parallel regime, the legal basis may be challenged. And if a court agrees that it is not harmonisation, Article 114 becomes difficult to defend.
Why this matters for business: legal uncertainty becomes an operating cost
For founders and scale-ups, the headline promise is speed and simplicity. But if the ESSU’s legal foundation is contested, the near-term reality could be the opposite: hesitation, delayed adoption, and “wait-and-see” behaviour from investors, boards, and counterparties.
The risk is not only an abstract annulment scenario. Even before litigation, uncertainty can show up in real-world ways:
- Investor diligence becomes more cautious: fund counsel may treat ESSU-based structures as higher-risk until the framework stabilises.
- Cross-border governance becomes harder to standardise: boards may be reluctant to rely on ESSU-specific mechanics until interpretation converges.
- Contracting and employment questions multiply: counterparties may ask for additional protections if they see potential arbitrage or regulatory back-and-forth.
- Regulatory and tax alignment may lag: where corporate form changes faster than adjacent regimes, you get friction at the seams.
In other words, the legal basis issue is not just about Brussels politics. It is about whether companies can rely on the regime for long-horizon decisions.
A second-order risk: regulatory arbitrage and “race-to-the-bottom” pressure
Any optional corporate form can create incentives to incorporate where rules are lightest and then operate elsewhere – especially when digital setup becomes trivial and capital thresholds are minimal. That can be a feature (efficiency), but it can also undermine protections for employees, creditors, or minority shareholders if safeguards are not designed carefully.
This is why proposals often flag the need for anti-circumvention measures, including preserving labour-law protections and employee participation frameworks. The more “startup-friendly” the regime becomes, the more important it is to manage the perception – and reality – of arbitrage.
What to watch next: the three questions that will determine the ESSU’s viability
1) Is the ESSU drafted as real harmonisation or as a parallel regime?
The closer it is to harmonising core corporate rules across Member States, the stronger the Article 114 case. The closer it is to a standalone, opt-in overlay, the more pressure builds toward Article 352.
2) How are “sensitive edges” handled – labour, insolvency, creditor protection, and governance?
These areas tend to determine whether a regime is seen as a legitimate simplification tool or an arbitrage vehicle.
3) Will political urgency outweigh legal risk – or will the design be adjusted to reduce challenge exposure?
Speed is a political argument. Courts tend to focus on competence, structure, and effects.
What legal teams and scale-ups should do now
Most companies don’t need to “act” on the ESSU today – but they can prepare intelligently, especially if they expect cross-border expansion in the next 12–36 months.
A practical approach is to run a light-touch readiness review:
- Map your likely expansion footprint (where you’ll hire, sell, and contract) and identify where today’s national corporate constraints are most painful.
- Identify the corporate features that matter most (convertibles, share classes, governance flexibility, digital setup, reserve/capital rules).
- Scenario-plan the ESSU as an option rather than a default: treat it as one pathway alongside existing national forms.
- Stress-test for arbitrage sensitivity: if your workforce, creditor exposure, or regulated activities are material, anticipate enhanced scrutiny and design governance accordingly.
- Keep contracts and governance modular: avoid hard-wiring assumptions about a future regime into documents that need to remain robust across legal pathways.
The bottom line
The ESSU initiative reflects a real economic need: Europe wants companies to scale inside the single market with less friction. But in EU law, the “how” can determine the “whether.” If the ESSU is built on a legal basis that does not match its actual effect, it risks becoming a high-profile example of speed undermining certainty.
The best outcome is not simply fast adoption – it is adoption that is stable enough to be relied on by founders, investors, boards, and regulators. That will depend on whether the ESSU ultimately looks like harmonisation in substance, not only in ambition.
