Centros, The Freedom Of Establishment For Companies, And The Court’s Accidental Vision For Corporate Law

Martin Gelter

Fordham University School of Law; European Corporate Governance Institute (ECGI)

February 13, 2015

Forthcoming in: Fernanda Nicola & Bill Davies, EU Law Stories (Cambridge University Press 2015)

Fordham Law Legal Studies Research Paper No. 2564765

ECGI – Law Working Paper No. 287/2015

Abstract:

In consequence of the three ECJ cases in Centros (1999), Überseering (2002), and Inspire Art (2003), EU member states can no longer effectively apply the real seat theory to companies from other Member States or take other measures to avoid the circumvention of their own laws by foreign incorporation. Founders of companies can – in principle – “pick and choose” the best legal form from all Member States, a result that many policymakers and legal scholars had sought to avoid for decades. This chapter attempts to tell a short intellectual history of the debate. In the early years of the EEC, it was thought that company law would be harmonized to such a strong degree that the free movement of corporations would no longer raise any concern. When the harmonization program stalled, Member States felt justified in maintaining protectionist measures impeding free choice of corporate law. Many saw dicta in the Daily Mail case of 1988 as providing a justification for the real seat theory, whereas few observers paid attention to the Segers case of 1986, which seemed to be saying the opposite. The triad of Centros, Überseering and Inspire Art thus was a particularly disruptive surprise. The ECJ, was seen as opening the door to regulatory competition in European corporate law, and in particular to English Private Limited Companies flooding the continent. In the end, there was little “offensive” regulatory competition, since no Member State had the incentive to capture a large part of the market for incorporation. Member States did, however, engage in “defensive” regulatory competition by eliminating requirements in their laws that seemed to drive founders to the UK (even if it does not appear to be the reason why the popularity of the English Private Limited Company on the Continent ended after a few years). In consequence, the ECJ thus unwittingly nudged Member States toward a certain vision of corporate law that had never been intended by policymakers.

Centros, The Freedom Of Establishment For Companies, And The Court’s Accidental Vision For Corporate Law – Introduction

Around the year 2000, three ECJ cases shook the foundations of European corporate law: Centros (1999)1, Überseering (2002)2, and Inspire Art (2003)3. Applying the freedom of establishment to corporations, these cases heralded a new era, as in combination they permit free choice in incorporation, thus permitting an individual seeking to incorporate in principle to choose the law of any country in the European Economic Area.

In contrast to the US, free choice of incorporation had previously not been possible in Europe. Traditionally, conflict of law rules regarding legal persons were divided between the incorporation theory and the real seat theory. Under the incorporation theory, which is analogous to the internal affairs doctrine in the US, a corporation is governed by the law where it was incorporated.4 Under the real seat theory, it is governed by the law of the country where its head office (the center of its actual commercial and financial operations) is located. Consequently, if a firm is incorporated in state A, but actually based in state B, B as a real seat state might deny the firm’s legal capacity since it was not incorporated following B’s laws. Alternatively, it might treat it as a partnership or a corporation governed by B law. If state B follows the incorporation theory, it might still find other reasons to refuse the recognition of the company (e.g. circumvention of B’s law) or it might decide to apply some of its own laws to the corporation. In the three cases, a Member State refused the recognition of a firm set up in another Member State, or attempted to apply some of its laws to it. In each case, the ECJ found the host State to be in violation of the freedom of establishment. Consequently, the real seat theory can no longer be applied to companies from other Member States, and States cannot use special laws to protect their own corporate law policies from circumvention by foreign incorporation. Founders of companies can in principle “pick and choose” the best legal form from all Member States.

This result is one that policymakers, lawyers, and legal scholars had sought to avoid for many decades, given its potential to undermine national corporate law policies, which is why the real seat theory and other protectionist tools were used to stop pseudoforeign corporations at the border. This chapter attempts to tell a short intellectual history of the debate, and how it is linked to the freedom of establishment for corporations. In the early years of the EEC, it was thought that company law would be harmonized to such a strong degree that the free movement of corporations would no longer raise any concern. When the harmonization program stalled, Member States felt justified in maintaining protectionist measures impeding free choice of corporate law. Many saw dicta in the Daily Mail case of 19885 as providing a justification for the real seat theory, whereas few observers paid attention to the Segers case of 19866, which seemed to be saying the opposite. The triad of Centros, Überseering and Inspire Art thus was a particularly disruptive surprise.

The ECJ, which took a more cautious approach only in the Cartesio case of 2008, was seen as opening the door to regulatory competition in European corporate law, and in particular to English Private Limited Companies flooding the continent. In the end, there was little “offensive” regulatory competition, since no Member State had the incentive to capture a large part of the market for incorporation. Member States did, however, engage in “defensive” regulatory competition by eliminating requirements in their laws that seemed to drive founders to the UK. In consequence, the ECJ thus unwittingly nudged Member States toward a certain vision of corporate law that had never been intended by policymakers.

Freedom Of Establishment For Companies, Vision Of Corporate Law

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