tationprÆsen april 2013 free movement of companies and the vale judgment karsten engsig sørensen,...

TATIONpRÆSEN

April 2013

Free movement of companies and the Vale judgmentKarsten Engsig Sørensen, Professor, Dr. Jur. Department of Law, Aarhus University

Free movement of companies and the Vale judgmentKarsten Engsig Sørensen

Professor, Dr. Jur.

Zagreb , April 2013

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Outline• What is free movement of companies?• Free movement of companies in context

US – and the Delaware effectFree movement and the harmonisation of company law• Free movement and the real seat theory• Setting up branches in other MS• Free movement though mergers, transfer of seat etc.• VALE judgment


Professor, Dr. Jur.

Zagreb , April 2013

What is free movement of companies?• Many cases on free movement of goods, services and capital

where trader/service provider is a companyMost of these do not pose special problemsException: Golden shares cases• Companies may meet many of the same barriers to establishment

as other traders in tax law, labour law, marketing law etc.• Sometimes company law rules (and IP rules) pose special problems

for certain forms of free movement:Setting up branches, including moving the real seat of the company to another MSCross-border mergersTransfer of seat Cross-border divisions and other restructuring

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Professor, Dr. Jur.

Zagreb , April 2013

US – and the Delaware effect• All states apply incorporation theory in their IP law• Allows entrepreneur to incorporate in the state of preference• Reincorporation is also easy• As a result states started to compete for incorporations

Race that Delaware ”won” in the 1920’s Incentive was franchise tax income and a huge service sector (lawyers and

accountants)William L. Cary (1974): Race for the bottomRoberta Romano (1993): Race for the top• Some states introduced regulation of pseudo-foreign corporations

Regulates foreign companies that have for instance more than 50% of their turnover, shareholders or their employees in that state

Only imposes certain provision of the home state on the foreign company4


Professor, Dr. Jur.

Zagreb , April 2013

Harmonisation of company law in the EU• Seems that most MS wanted to avoid a European Delaware

effect• However, wanted to promote integration and thus also some

form of free movement• Harmonisation to ensure the protection of shareholders,

persons and others who get in contact with the companyDisclosure (registration, accounts, branches)Capital Internal mergers and divisionsManagement

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Professor, Dr. Jur.

Zagreb , April 2013

Harmonisation (continued)

• More difficult to achieve ‘proper free movement’Flucht aus der MitbestimmungFear of undermining domestic corporate forms• Status

EEIG, Reg. 2137/85 – not really suitable (ancillary activities, few employees)SE-Company, Reg. 2157/2001– only for cross-border activities and larger

companiesSCE, Reg. 1435/2003 – only for cooperativesTakeover directive 2004/25 – only for listed companies and only limited impactCross-border merger – directive 2005/56Directive on transfer of registered seat – withdrawn in 2008Action Plan from 2012 (COM (2012) 740) • Slow and in no way complete – so let’s turn to the ECJ

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Professor, Dr. Jur.

Zagreb , April 2013

Free movement and the real seat theory• What is the real seat theory?

IP rule pointing to the place where the managements is situatedSanctioning moving the real seat abroad?Applied by many MS In contrast to incorporation theory• Clearly a restriction on the right of establishment, but does it

infringe Article 49?

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Professor, Dr. Jur.

Zagreb , April 2013

Real seat theory (continued)

• Case 81/87, Daily MailMoving real seat from UK to NL denied by tax authorities in the UKClearly motivated by tax planningTax law problem, not company law problemThe Court:

Art. 49 also prohibits restriction imposed by MS of origin Without problems, companies can make secondary establishment and UK only restricts special

form of establishment (moving real seat abroad) MS differ as to what connection they require a company to have with the state of incorporation

when they incorporate and later Art. 54 accepts these differences (and according to old Ar. 293 the MS are encouraged to enter

into international agreements about transfer of registered seat) (para. 21) Therefore, the right of establishment does not solve the problems that occur in some MS when

the seat is moved abroad (para. 23).Consequences?

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Professor, Dr. Jur.

Zagreb , April 2013

Real seat theory (continued)

• Case C-212/97, Centros indicated that the Court did not accept any restriction of moving the real seat of companies• Case C-208/00, Überseering

Dutch company moves its real seat to Germany and is denied the right to appear in court

Daily Mail only addressed how the state of incorporation may restrict their ‘own’ companies from moving their seat

Here another MS is denying to recognise a company formed in another MS and this has not been accepted by Daily Mail

The lack of recognition is clearly restricting the free movement and cannot be justified

• ConsequencesReal seat theory amputated, but not eliminatedSeveral MS have revised the real seat theory

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Professor, Dr. Jur.

Zagreb , April 2013

Setting up branches• Branches a form of establishment

11th Company Law Directive 89/666 regulated disclosure requirementsMany cases on tax discrimination of branchesBut what if branches are used to circumvent national company law?• Case 79/85, Segers

Dutch national chooses to incorporate his business based in NL in a UK Ltd., and is denied the right to health benefits because he is the director of a foreign company

Dutch government raises concern that Ltd.’s are used to circumvent Dutch lawThe Court accepts that some measures may be used to prevent circumvention

of law (abuse of rights), but discriminating rules on health benefits is not the proper remedy for that

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Professor, Dr. Jur.

Zagreb , April 2013

Branches (continued)

• C-212/97, Centros• Danish couple choses to incorporate their DK business in a UK Ltd.• Admits that the Danish minimum capital requirement was a problem• Danish Registrar of Companies denies to register Centros Ltd. as a

branch as they find that there was a circumvention of Danish law• The Court:

Accepted that EU law cannot be invoked in case of abuse, but did not find that the fact that the Danish couple chooses to incorporate in UK because the company law rules there are more favourable is abuse (para. 27)

Furthermore, the fact that the company does not have any activities in the state of incorporation does not make it abuse (para. 29)

• Consequences

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Professor, Dr. Jur.

Zagreb , April 2013

Branches (continued)

• Case C-167/01, Inspire ArtA UK Ltd. was used for doing business in the NL and was forced to comply with

the special rules adopted for ‘formal’ foreign companiesRules required that the company identified itself as a formal foreign company

that has a minimum capital equivalent to the Dutch minimum capital (otherwise the management of the company would be liable for the liabilities of the company)

The disclosure requirements went beyond that exhaustively listed in the 11th Company Law Directive – infringement of the directive

Capital requirement was restriction of right of establishmentCannot be justified since the company identified itself as a UK company and

potential creditors were thus informed that there may not be a minimum capital• Consequences

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Professor, Dr. Jur.

Zagreb , April 2013

Where are we now?• Removing real seat theory (partly) and accepting that the use of

foreign company form is not abuse paves the way for free movement• Will we have regulatory competition as in the US?

Similarities The use of the incorporation theory Differences in law does make it attractive to speculate in these Services providers seem too eager to exploit possibility

Many differences No tax incentive in the EU Language barriers and practical barriers Reincorporations still more difficult in the EU Whereas US law allow regulation of pseudo-foreign companies this does not seem to be the

case in the EU13


Professor, Dr. Jur.

Zagreb , April 2013

Where are we now? (continued)

• Becht, Mayer & Wagner, Journal of Corporate Finance 2008, pp. 241

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Germany Denmark Netherlands Sweden1997 411 53 501 1181998 394 63 506 1601999 495 133 583 1612000 369 70 467 1092001 151 8 521 102002 420 759 637 812003 1.811 1.406 732 1092004 9.038 105 1.571 1132005 12.777 194 2.193 2892006 15.633 178 2.156 413


Professor, Dr. Jur.

Zagreb , April 2013

Where are we now? (continued)

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Professor, Dr. Jur.

Zagreb , April 2013

Where are we now? (continued)• We can see that there has been a number of reforms focussing

on lowering or removing the minimum capital requirement• Seems that the reforms have turned development to some

extent• Thus, regulatory competition does happen, but will the trend

continue? • Seems to be many service providers (agents) who are fuelling

competition

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Professor, Dr. Jur.

Zagreb , April 2013

Free movement though mergers, transfer of seat etc. • Case C-411/03, SEVIC

Merger between German AG and SA from Luxembourg, with the AG as the continuing company

Denied registration in Germany as German law did not allow for cross-border merger

The Court A merger is an establishment covered by Art. 49 As a merger between German companies is possible, the German denial of the cross-

border merger is a restriction of the right of establishment Justified to take steps to protect creditors, minority shareholders and employees, but a

denial to register a merger is not an appropriate step to ensure thatConsequences

Merger should be allowed MS dealt with this by incorporating the10th Company Law Directive

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Professor, Dr. Jur.

Zagreb , April 2013

Mergers, transfer of seat (continued )

• C-210/06, CARTESIOHungarian company ask for the registration of the transfer of the company’s

seat to Italy. Registration denied in Hungary as Hungarian law did not allow for the transfer of seat abroad

The Court: According to Daily Mail the Member States may as state of incorporation decide the

connection which a company must have to that state and may determine the consequences of moving the real seat abroad.

Points out that the situation differs according to whether the seat is moved to another MS without a change of applicable law or whether the seat is moved with a change of applicable law. Whereas MS may restrict the transfer in the first case it would be a restriction of the right of establishment to do so in the last case if the ‘receiving’ MS allows the change of applicable law.

Consequences 18


Professor, Dr. Jur.

Zagreb , April 2013

VALE judgment• Case C-378/10, VALE

An Italian company intends to move its seat to Hungary and be registered in Hungary and thus submit itself to Hungarian law

It is removed from the Register in Rome and adopts articles to comply with Hungarian law

But registration is denied in Hungary since Hungarian law does not allow for a transfer of seat to Hungary, and furthermore does not allow that a foreign company is listed as a predecessor in law in the register

The Court Even though Hungary has the power to define the connecting factor required of a

company, they cannot deny a cross-border conversion Given that there is an actual establishment in the host MS, and given that Hungarian

law allows for conversion of domestic companies, the denial to allow a cross-border conversion is a restriction of the right of establishment

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Professor, Dr. Jur.

Zagreb , April 2013

VALE judgment (continued)• The Court (continued)

It may be justified to take measures to protect the interests of creditors, minority shareholders and employees, but this cannot justify a general denial to allow cross-border conversions

Since there is no harmonisation addressing how conversions should take place, it is for the MS of origin and host MS to govern the process. However, they must comply with Art. 49: If they allow for conversion domestically, they must also allow for these in a

cross-border context The MS must observe the principle of equivalence and the principle of

effectiveness

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Professor, Dr. Jur.

Zagreb , April 2013

VALE judgment (continued)

• The Court (continued)Therefore, OK to force company to comply with Hungarian rules on national

conversions and on the incorporation and functioning of the company (can require the company to draw up a list of assets and liability)

Cannot refuse to register an Italian company as a ‘predecessor in law’ when it is possible to register such a predecessor in domestic conversions

Principle of effectiveness means that the host MS must take due account of the documents issued by the MS of origin

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Professor, Dr. Jur.

Zagreb , April 2013


• ConsequencesMakes it clear that MS should allow cross-border conversions if these are

allowed domestically Introduces the principle of equivalence and the principle of effectiveness

Has been used in other areas of procedural law left to the MS Should use the same rules (unless justified, for instance to safeguard creditors,

shareholder etc.) But sometimes MS must go beyond national rules to allow for cross-border conversions

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Professor, Dr. Jur.

Zagreb , April 2013


• Principles are vague and judgment leaves many questions openWhat kind of conversions (and other restructuring) should be allowed?Which MS can take steps to protect creditors, minority shareholders etc.?How to overcome lack of procedural coordination?Which MS may raise requirements related to the company’s connecting to the

MS?How do we cope with the requirement that there should be an actual

establishment and the pursue of genuine economic activities?• Still a need for a directive on cross-border conversions

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Professor, Dr. Jur.

Zagreb , April 2013

Conclusions• The Court, and to a lesser extent the legislators, have ensured

free movement• The Court will probably need to elaborate on the procedural

aspects and on the MS’ possibility to combat abuse (no genuine activities)• Still need for harmonisation

Thank you for your attention!

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