Free Movement of Companies within the EU – The Never-Ending Saga

Jorge Miguel Ribeiro

Trainee Lawyer and Collaborating Member of  Centre of Studies in European Union Law of  University of Minho

 

1. Introduction

The creation of an area with no internal borders where free movement is guaranteed is one of the greatest objectives of the European Union. Nowadays, a number of obstacles still persist regarding companies’ cross-border mobility.

The movement of companies within the European Union is safeguarded under freedom of establishment. Articles 49 and 54 of the Treaty on the Functioning of the European Union (TFEU) explicitly recognises freedom of establishment for companies, however they still do not fully enjoy this freedom. The scope of the TFEU rules still awaits true implementation. This article will give an overlook to the current panorama, presenting the different theories and the existing barriers in light of the most recent Court of Justice of the European Union (CJEU) decisions.

 

2. Controversial Theories

The problem is related to the lack of a single transfer regime across the Member States. Therefore, throughout Europe, to determine which company law is applicable to a particular company, we have two existing theories: the real seat theory and the incorporation theory.

On the one hand, the real seat theory[1] provides that the place where the company has its ‘real seat’ (its principal place of business) will determine which company law system is applicable to company relationships. On the other hand, for the incorporation theory[2] the company and its relationships are subjected to the law of the country where they have their registered office, and in which they have been incorporated.

The greatest difference between the two theories is their effect on the cross-border transfer of the company seat, both from the home and host state perspective. The real seat theory brings some draconian limitations to the cross-border transfer of the real seat by making the company subject to different national legal order each time its real seat moves to another state.[3] The incorporation theory allows it by accepting in its legal order companies that are formed in other states without requiring a reincorporation. For the latter, it does not matter where the company’s real seat is located: once a company fulfils the formation requirements in its state of incorporation, it is recognised everywhere, but always subject to the rules of the incorporating state.[4]

As noted, the possibility of a cross-border transfer depends on Member States company’s private rules. Member States are free to decide on the appropriate conflict of law rule, and it is clear that if the incorporation theory dominated in the EU, there would be more freely moving companies.

 

3. The CJEU case law

This issue is also naturally influenced by last decade’s CJEU decisions. From Daily Mail to the most recent Vale decision, the Court moves back and forth in trying to fill the gap created by the absence of any harmonisation.

In Daily Mail[5] case, the Court ruled that the freedom of establishment did not confer to companies a right to transfer their central management and control to a Member State while retaining its status as incorporated in the home Member State. It was noted that companies, unlike natural persons, are creatures of the law and exist only by virtue of the national legislation that determines their incorporation and functioning. This decision was considered by a majority that the real seat doctrine and the Treaty rules in freedom of establishment may coexist, leading to a restrictive understanding of Treaty provisions by denying the transfer of a company’s head office from one Member State to another.

The developments continue with Centros[6] however with certain nuances. Centros Ltd. was registered in the UK. Its shares were owned by a Danish couple who wanted to establish a branch in Denmark, through which they would conduct all their business activities. Danish authorities denied their application on the grounds that Centros Ltd. was, in fact, seeking to establish a principal establishment in Denmark. The Court took a different approach though, providing that the practice of a Member State refusing the registration of a branch of a company formed in accordance with the law and having its registered office in another Member State created an obstacle to the freedom of establishment. This was the beginning of an important turn. Henceforth, any barriers by the host Member State against companies incorporated in another requiring setting up a secondary establishment there are prohibited. This is even if the host Member State is the place where the company runs all its business activities.

Centros was followed by Überseering[7] judgment. This case concerned a private limited company pretending to transfer its actual centre of administration from Netherlands, an incorporation state, to Germany, a real seat state, but continuing to be ruled by Dutch law. Germany had refused legal standing to the company based on the fact that it had not followed the required formation formalities under German law. In its decision, the Court recognised the right of a corporation formed in an EU Member State to move its real seat from its state of incorporation to another EU member state without losing its legal status as a corporate entity under the law of its origin state. Since then any obstacles from a host Member State in such a transfer (if the home state allows) are forbidden.

Inspire Art[8] was also a revolutionary cross border transfer seat case. Inspire Art was a company established in the UK, but doing business solely in its Dutch branch. The Court did not allow the Netherlands to impose legal obligations on companies that were incorporated in another Member State but conducts their business activities only in Netherlands. In this case, more comparable to Centros, the CJEU decided, once again, in favour of the freedom of establishment.

With the Centros/Uberseering/Inspire Art trilogy, regulatory competition has emerged.[9] The decision where to incorporate could henceforth be grounded on suitability considerations concerning each Member State company law standards. Every host Member State, despite following the real seat theory, were faced with this new status quo and challenged to make their company law more competitive.

After the trilogy and revisiting Daily Mail, comes Cartesio[10] judgment. Cartesio was the opportunity for the Court to finally elucidate the exit situations by deciding the possibility of Member States of origin to obstacle a cross-border transfer of seat and to continue this liberalisation of EU company law. Cartesio was a Hungarian company that intended to transfer its real seat to Italy but wished to remain ruled by Hungarian law. However, Hungarian law stated that a company has first to be dissolved in Hungary and then reincorporated under Italian law. Surprisingly, the Court did not overrule its Daily Mail decision, which allows the national law to restrict the seat transfer. In fact, the Court resuscitated the real seat theory, apparently ‘killed’ by the Centros/Uberseering/Inspire Art trilogy.

The Court clearly distinguishes exit and entry situations, and we should argue that freedom of establishment is only applicable in this latter case.

The Vale judgement was the latest case in this regard. The case, following the footsteps of Cartesio, concerned a company, Vale, established under Italian law. It wanted to be removed from the Italian register and later incorporated under Hungarian law, although recognizing its Italian predecessor as its legal predecessor, meaning all the former rights and obligations would be transferred to the new company. The Hungarian commercial court, pointing out that conversions under Hungarian law only applied to domestic situations, rejected this. The Court found Hungarian rules unacceptable because they treated companies differently whether the conversion was domestic or of a cross-border nature.[11] The Court, though, didn’t go further and reaffirm that companies exist only by virtue of the national law. Member States have the power to define the connecting factor required of a company to be regarded as a company under its national law. Once more the door was opened to change the scope of the right of establishment, and once again the door was closed with no impact.

 

4. Conclusion

Both the Cartesio and Vale cases did not bring the awaited positive outcome of stating clear rules on cross-border-transfer of the seat. Their decisions call attention for the inevitability of a “de-facto” harmonisation.[12] Case law of the CJEU only covers a few scenarios, distinguishing exit and entry cases, leaving too many questions unanswered. Furthermore, it seems that the Court accepts incorporation theory but it still respects the real seat theory.

It is tempting to say that it would be naive to continue believing in this ongoing process of shaping rules from Court decisions. The inertia of the European legislator is creating barriers to doing business across Europe, leading to legal uncertainty.[13] Such problems might be solved by implementing secondary law, namely through the coming into force of the 14^th Company Law Directive on companies cross-border seat transfer.[14]

A future Directive should clarify the ambit of the scope of freedom of establishment in the internal market, assessing clearly what conditions free movement of companies should be facilitated.

 

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