Recent developments in cross-border mobility of European corporations

In the past decade, conflict of laws rules relating to corporations have undergone a dramatic change in Europe. At the outset of this development, many European countries, such as Germany, France or Austria followed the real seat doctrine. This doctrine makes applicable to a pseudo-foreign corporation the law of the real seat and thus imposes on the corporation a different law than the one under which it had been founded. The results can be dramatic and mostly lead to the loss of the shareholders’ limited liability. From 1999 onwards, the European Court of Justice was faced with three landmark cases on cross-border mobility of corporations (all of them concerning inbound mobility, i.e. from the perspective of the country of arrival), the “Centros” case of 1999 (Case C-212/97, ECR 1999 I-1459), the “Überseering” case of 2002 (Case C-208/00, ECR 2002 I-9919) and the “Inspire Art” case of 2003 (Case C-167/01, ECR 2003 I-10155). The essence of these cases is that, at least for intra-European fact patterns, the application of the real seat doctrine or substantive laws for pseudo-foreign corporations that impose minimal capital requirementsviolate the corporation’s freedom of establishment, Art. 43, 48 (now: 49, 54) of the Treaty and cannot be applied any more to corporations arriving at the borders of the new host state. Instead, the relevant conflict of laws rule for inbound mobility within Europe has to be the theory of incorporation. Yet, one unclarity remained: In 1988, in the “Daily Mail” case (Case C-81/87, ECR 1988 I-05483), the ECJ had decided that the freedom of establishment does not, in the present state of European law, confer to a corporation founded under the laws of a member State the right to relocate its real seat to another member State. This decision concerned the perspective of the country of departure, and the ECJ essentially argued that the country of departure, i.e. the country of incorporation, had given life to a corporation and thus was allowed to take it away again when the corporation intended to relocate to another country. The three above-mentioned cases (Centros, Überseering and Inspire Art) did not overturn Daily Mail as they explicitly referred to inbound fact-patterns.

Nevertheless, most commentators criticized the distinction between outbound mobility and inbound mobility. In particular, a corporation’s freedom of establishment and the changes brought by Überseering and Inspire Art depend on the interplay of the laws of both countries, and this interplay can effectively block outbound mobility, thus making the right to inbound mobility in the new host state virtually useless. Let us illustrate this with a short example: A corporation is incorporated in country A, a real seat country, and shifts its real seat to country B, a country that follows the theory of incorporation. On the conflict of laws level, the real seat theory refers us to the law of country B, but the conflict rule of country B (theory of incorporation) refers us back to country A, whose substantive corporate rules then apply. However, many real seat countries consider, on the substantive level, a corporation’s decision to relocate to another country as a decision to liquidate. Thus, country B cannot welcome the corporation; instead the corporation has to liquidate and be created anew in country B. In 2008, in the “Cartesio” case (Case C-210/06, ECR 2008 I-9641), the ECJ was faced with the very same fact pattern: A Hungarian partnership wanted to relocate its real seat – not its place of incorporation – to Italy yet remain incorporated in the Hungarian commercial register. This was not possible according to Hungarian substantive corporate law. The Hungarian appellate court, tough not being entirely clear whether it meant the real seat or the place of incorporation, referred the case to the ECJ. Contrary to what the final remarks of the General Advocate Poiares Maduro had suggested, the ECJ confirmed its solution of Daily Mail, yet also added another layer of distinction between two different constellations of outbound mobility: On the one hand, a corporation, such as in Cartesio, might wish to preserve its legal identity and remain organized under the laws of its country of origin. In this respect, the ECJ essentially repeated the reasons mentioned in “Daily Mail” (items 104 et seq.). On the other hand, an outbound corporation might wish to relocate and adopt one of the legal forms of the new host state. In this case, according to the ECJ, national substantive law or conflict of laws are not “immune” against the corporation’s freedom of establishment. In such a situation, the requirement of a prior winding up falls within the scope of Art. 43, 48 (now 49, 54) of the Treaty and could only be justified by compelling general interests (items 110 et seq.). In the meantime, the European Commission had thought about a new directive that would allow a corporation to shift its place of incorporation – not its real seat – to another European country. Yet, prior to Cartesio, these plans were abandoned because the directive on cross-border mergers was considered as a viable alternative.

In the aftermath of Überseering and Inspire Art, many authors suggested a situation of competition between the different national legislators in Europe and alluded to the situation in the United States, whose corporate law is dominated by the law of Delaware. Given the massive rise in numbers of British Limited companies in the German territory, the German legislator decided to reform the German law on limited liability companies. Essentially, the traditionally strict capital requirements of German law have been eased and a new, “slim” form of limited corporation (Unternehmergesellschaft) has been created for start-ups and small business founders. This new forms seems to be very successful among its target group and is about to outnumber the pseudo-foreign British Limited companies in Germany. Moreover, the German legislator, in an attempt to make the “export” of German law possible, abolished substantive limitations similar to the Hungarian ones of the “Cartesio” case and now – although not being required to do so by European law – allows corporations founded under German law to move to another country and take their German legal form with them, see § 4a GmbHG (German law on limited liability companies).

Gunnar Groh

Gunnar Groh, an Arthur T. Vanderbilt Scholar and LL.M. candidate in Corporate Law of New York University School of Law, graduated from Ludwig-Maximilians-University of Munich. Mr. Groh also holds a licence and maîtrise en droit from Université Panthéon-Assas (Paris II), with distinction. From 2007 to 2010, he worked as a research assistant and lecturer at Ludwig-Maximilians-University of Munich, Institute of Comparative Law.