1
The Societas Europaea
A study on the sustainability of the Real Seat Doctrine
University of Amsterdam
Master Thesis
Frank Bouwman
Master European Private Law Student name: Study: Studentnumber: Supervisor: Date: 6165168 Dr. M. Schouten December, 2014
Table of Contents
1. The Societas Europaea: Introduction p. 3
2. The Societas Europaea: Historical Background p. 4 2.1 Content of the Societas Europaea: Formation p. 6
2.1.1 The SE in practice p. 9
3. Applicable law p. 10
3.1 Hierarchy of applicable law p. 11
4. Freedom of Establishment: Introduction p. 12
4.1 Connection between SE and freedom of establishment p. 14 4.2 Real seat theory vs. Incorporation theory: Introduction p. 15
4.2.1 Real seat theory p.16
4.2.2 Incorporation Theory p. 17
4.3 Positive And Negative Factors p. 18
5.Jurisprudence:Introduction p. 19
5.1 Daily Mail Case p. 19
5.2 Centros case p. 21
5.3 Überseering case p. 22
5.4 Inspire Art Case p. 22
5.5 Cartesio p. 23
5.5.1 Conclusion of the ECJ in Cartesio p. 25
5.6 VALE Costruzioni p. 24
5.6.1 Conclusion of the ECJ in VALE p. 25
5.7 Conclusion p. 26
6. Sustainability of the real seat doctrince p. 26
3 1. The Societas Europaea: Introduction
One of the main goals of the European Union is sustainable development of Europe, inter alia through balanced economic growth. Both on supranational and national level, lawmakers attempt to achieve the best outcomes in order to give effect to this goal. A jurisdiction which is closely related to this development is company law. Long before the European Union was even established, within company law the first steps towards a company which could operate independent from national law were already taken. More than a century went by before the idea got in practice but today it contributes to the purpose of the European Union; the European company known as The Societas Europaea. (hereafter abbreviated as ‘SE’).
The SE can be seen as a truly European company form, benefiting both companies and stakeholders. Even though I speak of a truly European company form, this does not leave out an important role for national law, which controls many facets. In the light of this essay, the most important factor is related to the establishment of a company and the possibilities of moving a company throughout Europe. This subject is connected by two doctrines which will be extensively discussed in this thesis; The incorporation doctrine and the real seat doctrine. In particular the real seat doctrine will be brought to attention, since developments throughout Europe have led to believe that this theory might lose its value. In order to find out whether this is a tenable statement and to which extent it might be correct, the core of this thesis will be linked to the following question:
To what extent is the real seat doctrine contrary to the jurisprudence on the freedom of establishment?
In order to answer this question the best possible way, I have written this thesis in a structure that provides an overall view of the main facets that embrace the SE. The real seat always has a prominent place throughout this thesis which starts with a disquisition of the historical background of the SE and the underlying ideas. Following I will discuss the different
structures of the SE, the freedom of establishment and leading jurisprudence before handling the core of this thesis.
2. The Societas Europaea: Historical Background
The idea of European partnerships is one that has kept jurists busy many years before actual steps in this direction were taken. In 1897 already, Italian jurist Fedozzi thought of a European company form which could operate independent of national laws.1 Even though his
ideas never entered into force in practice, they are seen as the basis of the European company forms as we know them today. However, it took more than 50 years after Fedozzi first launched his idea before the idea of a European company got defined attention on a European level. It was not until 1952, when the Council of Europe and the International Chamber of Commerce were looking into the possibilities of creating a European State which would include a European Company. Since the emphasis of this project was unification of Europe, the European company was neglected.2 This is not to say there never was a basis for such a
company.3 With the establishment of the EEC Treaty an obligation for Member States was
created to ensure
‘the mutual recognition of companies or firms (…), the retention of legal personality in the event of transfer of their seat from one country to another, and the possibility of mergers between companies or firms governed by the laws of different countries.’4
The person who brought the importance of a true European corporate form back to attention was prof. mr. P. Sanders who, in spirit of Fedozzi, again initiated the idea of a true European company form.5 In today’s literature we refer to this by its Latin name; The Societas
Europaea. Following the ideas of Fedozzi, prof. mr. P. Sanders was appointed by the European Commission to make a preliminary draft, in the literature known as the ‘Sanders
1 Mr. M.E. Koppenol-Laforce, ‘De Europese vennootschap in de praktijk’, Kluwer, 2005, p. 4. 2
The unification of Europe has led to a great number of treaties. Treaties that were established since 1952 are, amongst others, the European Community for coal and steel which goal was supplying unlimited coal and steel after the Second World War. Another leading treaty that has led to the Treaty of the European Union was the European Economic Community (EEC), which goal was economic expansion through cross-border trading.
3 In 1951 the European Council was already discussing the possibilities of a European Company. An early basis
for this European Company can be found in article 220 EEC-treaty. The goal of this article was to set up a convention for Member States on the mutual recognition of companies; P. Fokantis - “Critically assess the main
issues raised by the EU Regulation and Directive on the Creation of a European Company (SE)”, p. 2.
4 Article 220 Treaty establishing the European Economic Community
5 P. Sanders – Europees ondernemingsrecht: 50 jaar na Sanders’ Europese NV, Uitgave vanwege het Instituut
5 Draft’.6 After many years of lively debate, the Council Regulation on the Statute for a
European Company (hereafter abbreviated as ‘Council Regulation’) finally saw the light of day on the 8 of October 2001.7 The large time span between the initial draft by Sanders and
Council Regulation as drafted by the Commission can be explained by what initially seemed insurmountable social differences.
Furthermore, they did not want the regulation to be subjected to domestic law.8 These
differences were mainly in the field of tax, stakeholder protection and employee participation. The first two are governed in the Council Regulation. The problems underlying employee participation are dealt with in the Employee Involvement Directive which complemented the Council regulation. The value of this regulation lies in the fact that it offers employees the possibility to influence the strategic decisions and participate in the supervisions of a company.9
The final version of the Council Regulation entered into force on the 8 of October 2004, on which date the first SE was immediately established. This was an SE which consisted of four group companies of Mees Pierson which together formed the MPIT Financial Services SE.10
The Employee Involvement Directive entered into force on the 10th of November 2001, with a deadline for transposition in the EU Member States on the 8th of October 2004.
6 P. Sanders – Europees ondernemingsrecht: 50 jaar na Sanders’ Europese NV, Uitgave vanwege het Instituut
voor Ondernemingsrecht, Vol. 71. Kluwer, 2010, p. 25.
7
Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European Company (SE) [2001] Official Journal of the European Communities (OJ) L 294/1.
8 Not only were there problems with large theme's like taxation, also conditions about for instance board
structure are different throughout Europe; ; P. Fokantis - “Critically assess the main issues raised by the EU
Regulation and Directive on the Creation of a European Company (SE)”, p. 1.
9
J..Kirton-Darling, Employee Participation in European Companies (SEs) Checklist and Information for Employee Representatives and their Trade Unions, UNI-Europa / ETUI, p. 3.
2.1. Content of the Societas Europaea: Formation
We know the SE is a European company form. However, this does not give us much guidance on the content of the SE. Though there are multiple forms of SE’s, they all have one thing in common; they are meant as a way for public listed companies to have a choice between competing company laws.11 This means that they have a choice between the national
law of the home state of the company on one side, and the supranational law of the SE on the other.12
From the foregoing, one might come to the conclusion that every entrepreneur who resides in one of the EU Member States has the possibility to start a new company in the form of an SE. However, this is a misconception. There are strict establishing requirements that have to be met before one can set up an SE. One of the most important requirements can be found in Article 2 of the Council Regulation. Briefly, this article determines that an SE can only be established between two companies which are formed under the law of a EU Member State. Furthermore, they must have their registered- and head office within an EU Member State. Important to notice here is it has to be two different Member States. This means that two companies from the same Member State cannot merge into an SE.
As often in law, there is an exception to this rule that a company has to be formed under the law of a EU Member State. This one can be found in section 5, which stipulates that;
‘a EU Member State may allow the formation of a SE when the head office is not in a EU Member State when that company is formed under the law of a EU Member State, has its registered office in that EU Member State and has a real and continuous link with a EU Member State’s economy.’
The scope of Article 2 section 5 is that the requirement of a head office in a EU Member State is no hard requirement for setting up an SE. However, for an SE to be established, there always has to be a very close connection to a EU Member State. Without this close connection the European component which underlies the SE would be omitted. In addition to
11
A public traded company is a company that has shares which are traded through at least one stock exchange. These are not to be confused with publicly owned companies who are owned by the state and are sometimes referred to as public owned companies.
12 H. Eidenmüller, A. Engert and L. Hornuf, ‘The Societas Europaea: Good News for European Firms’,
7 the requirements mentioned above, there also is a minimum capital requirement stated in Article 4. This article states that every SE must have minimal capital of €120.000,-. This is no hard and fast rule. EU Member States have the possibility to require a higher minimal capital for SE’s. This can only be done when national companies exercising certain types of activities are subjected to this rule and the SE exercises similar activities.13
When these requirements are met, an SE can be established. There are multiple ways, four in total, for companies to do so. The first possibility for a company to establish an SE is by the merger of two or more public limited companies.14 An additional requirement is that these
companies have to be located in different EU Member States. When an SE is established through a merger, there is an obligation for the management or administrative organ of the merging companies to draw up a draft with the terms of the merger.15
When looking at the first two requirements one might come under the impression that companies who do not meet them are stuck in the country of incorporation. This is not the case. The possibility for incorporating in another EU Member State exists for companies falling under article 1 of the Public Merger Directive.16 In order to do so, a company must set
up a subsidiary in another EU Member State. When entering into a ‘downstream’ merger a company is created with its registered office in another EU Member State than in which it was originally incorporated.
The second way for a company to establish an SE is by the formation of a holding company. Two or more public or private limited companies from at least two different EU Member States have the possibility to set up a holding company. A holding company in this context is a company which holds the outstanding stock for other companies, e.g. the stock of the companies setting up the holding. The reason for a company to set up an SE in the form of a
13 A. Johnston, 'EC Regulation of Corporate Governance', Cambridge University Press 2009, p. 257
14 Article 2 European Company Regulation, In order for an SE to be established through a merger, at least two
companies have to be involved. The companies mentioned here have to be companies that are governed by the law of at least two different Member States.
15
Article 20 European Company Regulation, In this draft of merger different particulars have to be included. These include, amongst others, the names and the location of the registered office of the merging companies and the share-exchange ratio and the amount of any compensation.
16 Article 1 Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty
concerning mergers of public limited liability companies list the scope of the Member and the types of companies in these Member States that are governed by this article.
holding company is done to protect their assets. By making the holding company the owner of the stock of the subsidiaries, the possibility for creditors to recover on all of the subsidiaries is eliminated. Contrary to the SE that is formed by a merger, the company promoting the formation of the holding continues to exist.17
The third way to set up an SE is by the formation of a subsidiary of companies. This possibility only exists for companies who already are an active SE. The original SE may be the only shareholder in the subsidiary SE. Once again, these have to be companies which are registered in two or more different EU Member States and are governed by the law of different EU Member States. Another possibility is that they for at least two years have had a subsidiary which was governed by the law of another EU Member State or had a branch in another EU Member State.18
The final way for a company to establish an SE is through the conversion of a public limited-liability company. This company must have its registered- and head office within the Community, Furthermore, this company must for at least two years have had a subsidiary in another EU Member State.19 In my opinion the reason for this '2 year minimum' is that if this
was not a requirement, SE's could set up a subsidiary and immediately form a new SE. By mandating this rule, this loophole is shielded.
Even though all of the ways of establishing an SE as described above, have different characteristics, there are similarities which run through the formation like a red wire. First of all, there is the obligation for the management or the administrative organ to draw up the draft terms of the formation. This draft has to be approved by the general meeting, otherwise the SE cannot be formed. Before the formation of the SE has effect, there is an obligation for the EU Member State where the SE will have its registered office to scrutinize the formation.
17 Article 32 section 1 European Company Regulation, The possibility for two or more public companies with
registered offices and head offices within the Community stems from article 2(2).
18 Article 2 Section 3 European Company Regulation; This means that to form an SE, it is not necessary for
both companies to be governed by the law of a Member State. This opens up the possibility for companies to form an SE when one of them is for instance an Indian company, just as long as the other company is governed by the law or has a subsidiary company that has been governed by the law of a Member State.
19 Article 2 section 4 se regulation; This provisions provides the possibility to set up an SE through a company
9 Furthermore, before the SE can be registered, the following conditions have to be fulfilled; first of all there must be an agreement about the way employees can participate in the company and can influence company decisions. Second, the EU Member State where the SE has employees has to have special rules for employee involvement. The special negotiating body has to express that they will rely on these rules. Finally, if the period set for the negotiations is expired and the parties involved did not reach an agreement, the SE will not be registered and therefore not be brought into existence. The same goes when one of the other requirements is not fulfilled.
2.1.1 The SE in practice
The above gives a good overview of the structure which underlies the SE. However, this does not give us any idea of how the SE works in practice. To find out whether the SE became what was expected of it or not and the reasons for this, first of all we need to look at the numbers. When looking at the number of SE’s, one might be under the impression that the SE lives up to its expectation, since the numbers grow almost exponential every year. However, the majority of SE’s are not ‘normal’ SE’s in the sense that they have specific business purposes or employees. Four types of SE’s need to be distinguished. First of all there is the ‘normal’ SE. This is known to be an SE with operations and at least six employees.
Roughly a quarter of all SE’s established today are said to be normal SE’s.20 The second type
of SE is the UFO SE. This is an SE which pursues activities but where no further information about this activities or the employees of the SE is known. Empty SE’s are similar to UFO SE’s, with the exception that there are no employees. They do however have operations. The last type of SE to be distinguished is the Shelf SE. This is a type of SE with no operations and no employees. Shelf SE’s have as a purpose to be sold.21 In most Member States around
twenty-five percent of the SE’s are known to be ‘normal’ SE’s. There is one Member State though, that is clearly an exception to the rule; the Czech Republic.22 Almost every SE is the
Czech Republic is either a shelf SE or an UFO SE.
20
Michael Stollt, '500 active European Companies (SE)',
http://www.worker-participation.eu/Europa-AG-SE/Latest-developments/500-active-European-Companies-SE
21 H. Eidenmüller and J. Lasák – 'The Czech Societas Europaea Puzzle', Journal of Corporate Law Studies 12.2
(2012), p. 3
22
H. Eidenmüller and J. Lasák – 'The Czech Societas Europaea Puzzle;, Journal of Corporate Law Studies 12.2 (2012), p. 238.
3. Applicable law and its hierarchy
It is impossible to test the sustainability of the SE Regulation in the light of the freedom of establishment without taking thorough notice of the of the most prominent provisions relating thereto. The sources where law applicable to the SE can be found are numerous. The most important source is the before mentioned SE Regulation. Furthermore it is important to look into the EC treaty, which forms the basis of the SE Regulation and take notice of national law. The goal of the EC in treaty is
“to promote economic and social progress and a high level of employment and to achieve balanced and sustainable development”.23
It can be said that through providing the possibility of establishing an SE, this demand is satisfied. The basis for the SE regulation can be found at a general starting point, article 3 EC treaty, which states that ‘the Union shall establish an internal market’, and elaborates in which fields the Union shall undertake action. Since article 3 knows a defined area, it is important to look further into the EC treaty, to an article that forms the basis of the SE Regulation as we know of today; article 308. The scope of this article is to cover all purposes of the EC Treaty, therefore providing a broader scope than the goals laid down in article 3 EC Treaty. It is said that this article can provide a gap filling role, since it allows the Community to take measures in areas where there is a specific legal basis for the Community’s objectives.
As said, the EC treaty forms the basis for the SE regulation. This regulation focuses on the main characteristics and formalities of the SE. The main focus of the SE Regulation is on the establishment of the SE and the structure of the board. Another prominent subject is the general meeting. When fully reading the Council Regulation one might become under the impression that most of the subjects concerning the SE are fully covered. This is, however, a misconception. Even though the SE Regulation covers the basis, a lot of subjects are not fully covered. It is said that the SE Regulation forms the top of the SE-law pyramid.
11 One of the provisions of the SE Regulation I explicitly want to mention is article 7. This article states that
‘the registered office of an SE shall be located within the Community, in the same Member State as its head office’.
The reason for explicitly mentioning this article is that, as we will see later on in in this thesis, this article forms the basis for the question whether the real seat is sustainable or not. Article 7 includes a restriction, since head office and registered office are to be in the same Member State. Whether this restriction is sustainable remains to be seen in the following chapters.
3.1 Hierarchy of applicable law
Where the Council Regulation fully covers a subject other sources are not addressed. This includes a situation where the Council Regulation explicitly allows a statutory provision.24
If this is not the case, article 9 Council Regulation comes on the scene. This article determines what rules and in which order apply when the Council Regulation and statutory provisions do not fully cover a subject. The applicable sources are, in order of hierarchy, the following:
1. Special national SE-legislation 2. National company law
3. SE Statutes
Whether or not the above legislation is used in addition to the Council Regulation, depends on the scope of article 9. It is believed that a subject is not easily fully covered by the Council Regulation. Since this is a fairly vague description, there are guidelines. First of all, where the Council Regulation refers to national company law, logically a subject is not fully covered by the Council Regulation. This is the case where the Council Regulation provides Member States input-commands and options. There are various situations where this is the case, for instance where the national rules on one-tier and two-tier systems are not in line with the Council Regulation. The same goes for the situation where a subject is not regulated exhaustively in the Council Regulation. The final situation is where the Council Regulation knows an enumeration like, for instance, in article 20 concerning the requirements for a merger proposal. Here too, national company law can provide extra requirements. The reason
for this can be found in the facilitating purpose of the Council Regulation. The foregoing means that Member States, through their national law still, partly, control the law concerning SE’s. However, when a Member State adopts law specifically for the SE, they always have to be in accordance with the law of the company-forms included in annex 1 of the Council Regulation.
Where neither the Council Regulation, nor the national company law provides a solution to a given problem, the last source to turn to are the statutes of the present SE. The statutes lay down the ground rules of the SE. When both the Council Regulation and the national company law do not fully cover a subject, one can turn to the statutes. These cover general information about the SE, as well as activities and target definition. This is not to say that by enclosing certain clauses into the statute, they will have effect. They can serve as additional information but can never be contrary to the national law and the Council Regulation.
4. Freedom of Establishment: Introduction
As we know, one of the main goals of the European Union is to establish an internal market.25 This is done through the removal of barriers and the establishment of fundamental rights. One of these fundamental rights is the freedom of establishment.26 The basis of the freedom of
establishment
‘includes the right to take up and pursue activities as self-employed persons and to set up and manage undertakings’27
This means that a person who is self-employed, an independent professional or a legal person has (i) the right to carry out sustainable economic activities in another Member State than their own,28 or (ii) provide services in another Member State than their own while they
remain in their own Member State.29 There are no limitations for a company to establish
24 M.E. Koppenol-Laforce e.a. – De Europese vennootschap (SE) in de praktijk, Kluwer, Deventer, 2005, p. 13. 25 Article 26 Provisions of the Treaty on the functioning of the European Union (TFEU), "the internal market
shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured…"
26
Article 49 t/m 55 (estblishment) en 56 t/m 62 (services) Provisions of the Treaty on the functioning of the European Union (TFEU)
27 Article 49 Provisions of the Treaty on the functioning of the European Union (TFEU) 28 Article 49 Provisions of the Treaty on the functioning of the European Union (TFEU) 29 Article 56 Provisions of the Treaty on the functioning of the European Union (TFEU)
13 itself in another Member State solely for the purpose of being subjected to more favorable legislation. The freedom of establishment is not applicable to paid employment. The before mentioned provisions bring about certain obligations for Member States. The first obligation is that any form of discrimination in the field of establishment should be abolished. Furthermore, there is an obligation for Member States to take measures that ensure that the freedom of establishment is facilitated, including harmonization or mutual recognition of national rules. In practice this means that the establishment and management of enterprises from other Member States are subjected to the same legislation as a Member State sets for its nationals.
When reading the above, one might come to the conclusion that the freedom of establishment is an absolute right which cannot be limited by a Member State. This, however, is a wrong assumption. There are several motives on which the freedom of establishment can be limited. The first exception to be made is in the field of exercise of public authority. Activities in the field of exercise of public authority are excluded from the right of freedom of establishment. However, only specific functions and activities can be excluded on this ground. To exclude a complete profession, the profession should be inseparable from the exercise of public authority.30 The second exception to be made is when in the light of public order, public
safety and/or public health limitations have to be made.31
4.1 Connection between the Societas Europaea and freedom of establishment
The Societas Europaea provides companies with the possibility to move its seat to another Member State without having to re-register,32 where, as seen before, the freedom of
establishment provides the possibility to take up and pursue activities as self-employed persons and to set up and manage undertakings in other Member States.33 In the following I
will look into the question what the connection between the Societas Europaea and the freedom establishment is.
It is clear that the ECJ will subject provisions of the EC Treaty to thorough investigation. This is said to be the goal of fundamental freedoms; breaking down the possible barriers set
30
Article 51 Provisions of the Treaty on the functioning of the European Union (TFEU)
31
Article 52 Provisions of the Treaty on the functioning of the European Union (TFEU)
32 W.G Ringe – The European Company Statute in the Context of Freedom of Establishment, Journal of
Corporate Law Studies 185 (2007).
up by Member States in their national law.34 The question here however, is whether the fundamental rights do not only apply to national laws but also to secondary EU-legislation. In the light of this thesis, the secondary EU legislation I am speaking of here being the SE-regulation.35 The problem which arises here follows from article 48 EC Treaty.
According to this provision only companies that are formed under the law of a Member State fall under the scope of the freedom of establishment. However, I would like to address this issue from another angle. Since it is the goal of the European Union to establish a single market, a company that makes such a contribution to this goal should also enjoy the same freedom as companies formed under the law of a Member State.
To see whether the SE regulation falls under the scope of the freedom of establishment we should take a further look into the EC treaty. The EC treaty only allows for actions that promote the improvement of the internal market.36 This means that one has to take note of
article 3 in order to see what are permitted actions in line of the EC treaty. When looking at this articles it becomes clear that ‘removal of obstacles’ is one of the objectives. Since there is no explicit mentioning of obstacles raised by Member States it is said that article 3 also refers to obstacles created by the EC itself.37 Furthermore, it can be said that there is an
obligation for the community legislator. The ECJ can review every act of European legislation, where no exception is made for fundamental freedoms. In practice this means that the fundamental freedoms also address the community. Therefore, in the literature it is argued that article 48 also applies to companies under Community law.
4.2 Real seat theory vs. Incorporation theory: Introduction
Now that we have an overall idea of the facets that embrace the SE and how this ‘European company’ can be established, we come to the core of this thesis and one of the most highlighted topics within the SE-literature; the real seat doctrine and the incorporation theory. These theories link the law applicable to a company to the place where the company has its actual seat (real seat theory) or to law of the Member State where the company is
34 W.G Ringe – The European Company Statute in the Context of Freedom of Establishment, Journal of
Corporate Law Studies 185 (2007.
35
W.G Ringe – The European Company Statute in the Context of Freedom of Establishment, Journal of Corporate Law Studies 185 (2007.
36 W.G Ringe – The European Company Statute in the Context of Freedom of Establishment, Journal of
Corporate Law Studies 185 (2007), p. 192
15 established.38 It depends on which theory a Member State adheres, which problems occur
when moving its seat through the European Union.39 In the following I will elaborate on the
characteristics of both theories, and in light of the subject of this thesis extensively discuss what underlying motives a Member State might have to adhere the real seat theory be it the incorporation theory.
4.2.1 Real seat theory
When one would summarize the scope of the real seat theory in a single sentence this would read ‘a theory which bases its legal order on a social and economic reality, thereby refusing to recognize companies that are not effectively controlled from the Member State where the real seat is established.’40 In practice this means that when the real seat doctrine is applied to
determine the law applicable to a company, one has to look to the country where the company is registered and has its home office. This theory, which is developed in Belgium and France throughout the 19th century knows as a starting point that any conflict that may arise has to be settled in accordance with the law of the EU Member State in which the central administration of the company is located. The rationale of this is that it is most likely that the majority of stakeholders is located where the corporate center of gravity is located. Stakeholders in this context are all persons closely connected to the company, e.g. shareholders, employees etc.
38 J.A. Kok - 'Vestigingsplaats en de SPE; Een nieuw voor alternatief voor de grensoverschrijdende
verplaatsing, Verhandeling in het kader van de Post-Master Directe Belastingen (2009), p. 14.
39 A company established under the law of Member State that adheres the Real seat doctrine cannot move its
actual management. The real seat doctrine states that a company is subjected to the law where its central administration be it actual management is located. It is therefore not possible for these two the be located in different Member States from one another. If this were to be the case the company is to be liquidated by law.
40
E. Wymeersch - The Transfer of the Company's Seat in European Company Law, Ghent University - Financial Law Institute; 2003, p. 3. This means the real seat theory does not recognize companies who claim to belong to another jurisdiction than the jurisdiction where the real seat is established. This is contrary to the incorporation theory, which recognizes all companies according to the state of origin of the company.
Therefore the real seat doctrine knows a highly protective character.41 The real seat doctrine
is said to function like a double-edged sword.42 The reason for this is the applicability of the
doctrine on companies incorporated under foreign law who have their real seat on domestic territory. On the other side are companies incorporated under domestic law, having the management and control office abroad. Since in both situations the state of incorporation and the state where the management and control office are located do not correspond, it is said that these companies have failed the formation requirements. Since it was thought to be too stiff to state that formation requirements would lead to non-existence of the company, a solution to this problem can be found in the Renvoi-technique; EU Member States have the possibility to fill gaps left open by the Council Regulation.43 This leads to a situation where
even if the State of incorporation and management and control do not match, a company is formed, if the company where the real seat is situated adheres the incorporation theory (see 2.3.1).
Supporters of the real seat doctrine state that social interests are better served when there is a situation in which the company is subjected to the law of the country where it has its central administration. This conception however, can be seen as being outdated. Due to technological developments and globalization as a whole, management, as well as creditors can be located all over the world. Furthermore, companies who operate in the form of an SE most likely conduct cross-border activities, since they are the outcome of a merger between companies coming from different Member States.
4.2.2 Incorporation Theory
The counterpart of the real seat doctrine is the incorporation theory. As the name of this theory suggests, this theory determines the applicable law by reference to the country in which the company was incorporated. Contrary to the real seat theory this is not a widely used theory. It is only used in the United Kingdom, The Netherlands and Scandinavia. The
41 K. Geens, J.K. Hopt - The European Company Law Action Plan Revisited; Reassessment of the 2003
priorities of the European Commission, Leuven University Press 2003, p. 319.
42 S. Rammeloo, Corporations in Private International Law; A European Perspective, Oxford Private
International Law Series, 2001, p. 12.
43
S. Lombardo and P. Pasotti - The Societas Europaea: a Network Economics Approach, European Company and Financial Law Review 1.2 (2004), p. 18; Since Member States still have the option to fill gaps that are left open, it is said that the intervenes with the idea of a true European Company. If Member States can still mould certain parts of the law to their liking, there still is no uniform law.
17 core of this theory is that a company which is established in a Member State that adheres the incorporation theory, will always be subjected to the national law of this Member State. The registered office of the company cannot simply be moved to another Member State while maintaining legal personality. If for instance a Dutch company (incorporation theory) moves its seat to Spain (real seat doctrine) the company will stay subjected to Dutch law. According to Spain, the company would now be Spanish but it would be improper incorporated.
In order to (partially) avoid the problem of not being able to move the seat of a company falling under the incorporation theory, legal arrangements have to be made. On a European level this is done through two supranational legal forms which exist next to the SE. These are the Economic Cooperative Bond (hereafter abbreviated as: 'ESV') and the European Economic Cooperative Bond (hereafter abbreviated as: 'EESV'). Arrangements can also be made on a national level, where it is up to the Member State adhering the incorporation theory to provide these rules.
The ESV is a legal form which provides a possibility for companies to expand their economic and social activities. Underlying this legal form are some key values which need to be taken into account at all time. The most important ones are that the activities of the ESV should aim at the providing of mutual benefits of the members of the ESV. Furthermore, these members should be involved in the ESV. This involvement can occur in multiple forms, for instance as an employee or customer. The second supranational form which can be used to avoid the problems that companies face in light of moving the real seat when subject to the incorporation theory is the EESV. This is a form of collaboration between European companies where economic activities of the concerning companies are expanded or improved.
4.3 Positive And Negative Factors
As seen above, the real seat doctrine and incorporation theory are both used throughout Europe. EU Member States have the competence to decide for themselves which of these theories they adhere. To make a choice between the two theories EU Member States will weigh the pros and cons to decide which theory fits their system the best. So which considerations do EU Member States take into account when making a decision for either one of these theories?
The main advantage of the real seat doctrine lies in the fact that there is always a link between the facts and the applied system of law. This prevents establishment of pseudo foreign companies. By this I mean companies that are incorporated in another Member State due to their more favourable legislation. The activities of a company are said to have the most influence on the economy and the social conditions of the Member State where the company has its central management. The reasoning is that it is likely that stakeholders are located near the centre of gravity. By adhering the real seat theory, a Member State tries to ensure the application of specific legislation, for instance legislation which provides creditor and employee protection. This leads to a situation where abuse of law by using foreign systems by managers of the company is excluded. As said before, this is an outdated conception due to technological developments. Stakeholders can be spread all over the world. This globalisation diminishes the main benefit of the real seat doctrine, which is said to be the protective function underlying it.
In the light of the globalisation described above, one of the major flaws of the real seat doctrine comes forward. This is that companies which are incorporated as an SE, will most of the time focus on globalized business. It is therefore often hard to determine where the real seat of the company is located. This is closely connected to another complicating factor: different Member States have different terms and concepts, such as ‘head office’ and ‘real seat’ These linguistic differences do not contribute to a clear view of how the different facets of the real seat theory should be interpreted.
Contrary to the real seat doctrine, the main advantage of the incorporation theory is that it is clear which jurisdiction a company is subjected to, therefore providing certainty. The law of the Member State where the company was first incorporated is the applicable law.This gives the company private autonomy, meaning that it can transfer its seat across border without losing its legal status. Opposed to the real seat doctrine it is not necessary to calendar all the activities of a company in order to find the centre of gravity and therefore where the real seat is established.
However, the incorporation theory also knows some major disadvantages. The first can occur when a company is established in a Member States but expands most of its activities in another state. A Member States might not have enough insight into the companies affairs and activities. This can lead to a lack of control which is said not to be the case if the real seat doctrine is adhered. Furthermore, Member States might completely lack interest in companies
19 who do not conduct any business in the state of registration. Again, this leads to a situation where there is no insight in the activities of the company. This is closely connected to a situation where the founders of a company can choose law with the least amount of protection for stakeholders. Since they can incorporate a company in every Member State, they can ‘shop’ for the most convenient law, which can detract the protection of stakeholders. It is said that this circumvention of national law can lead to a race to the bottom. Whether this is the case is a question which is heavily debated in various literature.
5. Jurisprudence: Introduction
The last decades a new light has been shone on some prominent features of the SE. In a few groundbreaking cases from more than a decade ago the European Court of Justice brought about fundamental changes in the way SE’s can be used. These cases, the Daily Mail Case, (hereafter abbreviated as: ‘Daily Mail’), the Centros case (hereafter abbreviated as: ‘Centros’), the Überseering case (hereafter abbreviated as: ‘Überseering’) and Inspire Art Case (hereafter abbreviated as 'Inspire Art' both in their own way, have influenced the possibilities companies have when establishing a company. Some by setting a whole new standard within company law, others by confirming and conforming and elaborating these cases. All in their own way, these cases have outcomes that benefit companies: be it financially, be it in the granting of rights. More recently the ECJ has made two leading rulings when it comes to the freedom of establishment in the Cartesio Case and the VALE Case. In order to get a full understanding of decisions of the ECJ when it comes to the freedom of establishment, I will discuss the cases mentioned above in chronological order. The cases Cartesio and VALE will be discussed intensively, after which I will explain their consequence for the application of the real seat theory.
5.1 Daily Mail Case
Daily Mail is a leading case in company law when it comes to an example of how the SE and the relocation of the administrative headquarters can be used for tax-benefits.44 In this case,
the applicant wanted to move the tax office to The Netherlands. The underlying idea was that they wanted to sell a large amount of shares which were a part of their non-fixed assets. The proceedings of this transaction were to be used to buy their own shares. Under UK-law, where the company was located, this would be a taxable transaction. By moving the board
44 C-81/87, The Queen v Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General
seat to The Netherlands, these transactions would fall under the Dutch tax regime. For the company this led to a major benefit; under Dutch law no taxes needed to be paid over the capital gains of the initial transaction. The English Ministry of Finances did not agree with this construction. Consequential, applicant invoked article 43 and 48 EC-treaty.
According to applicant these articles provide a legal entity with a possibility to move the board seat to another Member State, or to obtain this right, without any conditions attached. This reasoning led to two prejudicial questions. The first being whether pre-mentioned articles could stand in the way of a legal entity moving its seat to another Member State without prior consent. The second question was whether the moving of the seat can lead to a situation where the company can avoid paying taxes which should be paid when the move of the companies seat was not realized. Regarding the first question, it is said that the freedom of establishment is one of the fundamental principles of the European Community. This right is not only granted to citizens of the European Community, this also applies to companies.45
The right of establishment is normally used by companies through the foundation of companies. British law does not know any limitations to this law. Furthermore, British law does require a limitation on transferring activities to a company established in another Member State. However, authorization is required when a company wants to move its seat retaining its legal entity under British law. The underlying idea here is that, contrary to natural persons, companies derive their existence from national law and are therefore subjected to it.
In the EC-treaty these differences in national law are taken into account. The outcome of this, is that the treaty considers differences in national legislation regarding transferring of the main office not as issues that the right of establishment applies to. These are to be regulated in future legislation or agreements. This leads to a conclusion where the pre-mentioned articles cannot be interpreted as giving companies a right to move their central administration and headquarter to another Member State and maintaining their right as a company in the first Member State. The conclusion of Daily mail therefore is that the articles 43 and 48 EEC-treaty did not provide a possibility for companies established under the law of a Member State and which has its registered office in that Member State, to transfer its seat to another Member State.
21 I agree with the ECJ in this case. The reason for this lies in the fact that a company, just as a natural person, is seen as a legal person. This is somewhat difficult to understand, since a natural person is ‘real’, where a company is not something which can be touched or seen. However, it is real since we acknowledge it to be real. When a company is established in a Member State it acknowledges this Member States law and is subjected to it.
5.2 Centros case
The importance of Centros lies in the fact that this case establishes a possibility for a company to establish a branch in one EU Member State and set up the headquarters in another EU Member State.46 This might seem a bit vague at first, but it becomes clearer when
one looks at the facts of this case. In short, the case is about a Danish couple, the Brydes, who wanted to expand their business in their home country. When establishing a company in Denmark, a start-up capital of DKK 80.000,- is required.47 To get around this minimal capital
requirement the Brydes came up with a solution which entailed setting up a business in the United Kingdom, where there is no minimum capital requirements. No business activity would be undertaken in the United Kingdom, this would all take place in Denmark, where the Brydes tried to register a branch of their company. The registration of their company was refused on the ground that they tried to avoid the minimal capital requirements, therefore not trying to set up a branch but a headquarter in Denmark. This led to the question whether companies can be denied registration on these grounds.
The ruling of the ECJ was clear; bypassing the rules of national company law on capital and funding obligation is no abuse of community law. The treaty provisions provide for a situation where it is possible for companies to set up a branch in another EU Member State. When denying the possibility of registration this would lead to a breach of before mentioned treaty provisions. Thus, when establishing a company, parties are given the option of ‘shopping’ for the law which they find to suit best. Side note to be made here is that this does not exclude the EU Member State where the branch is set up (i.c. Denmark) of the authority to action against companies who are fraudulent. This can lead to a situation where the first mentioned state does this individually or in co-operation with the State where the company is established. The scope of Centros does not limit itself to the possibilities mentioned above. It furthermore provides new companies with the option of what is known as forum shopping.
46 C-212/97, Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECR I- 1459.
This leads to a situation where companies can choose what law is and what law is not applicable to their company.
5.3 Überseering case
Where Centros made it very clear that parties have extensive opportunities to establish a company, Überseering expresses the legal capacity of a company. Furthermore, it expresses the capacity of a company to be a party in legal proceedings.48 The facts of this case were the
following; Überseering was a private company under Dutch law. In time, all shares in Überseering were owned by two citizens of Germany. When Überseering wanted to act as a party in a liability case, the German court ruled that since there were only German shareholders the company’s principles office was said to be in Germany. Therefore, German corporate law applies to the case, dismissing the Dutch corporate entity from court proceedings in Germany.
However, when this case finally made it to the European Court of Justice, a different ruling was given. It was said that denying a company formed under the law of a EU Member State legal capacity,49 is incompatible with the freedom of establishment laid down in article 43
and 48 EC Treaty. This does not only include the right to set up branches in different EU Member States. It furthermore includes the possibility to be a party to legal proceedings, therefore granting a company as a legal entity comparable to that of natural persons. The importance of this case therefore lies in the fact that it expands the scope of freedom of establishment. Furthermore, it prohibits EU Member States from refusing companies who want to move their headquarters from one EU Member State to another.50
5.4 Inspire Art Case
Inspire art is a case which is said to confirm the outcome of Centros.51 In this case the subject
of discussion is a company which is established as a private company limited by shares and has its seat in Folkestone in the United Kingdom. The company has a branch in The Netherlands, through which it condones activities. As is required under Dutch law, this branch is registered at the Dutch Chamber of Commerce. The registration does not take
48
C-208/00, Uberseering BV v Nordic Construction Company Baumanagement GmbH [2002] ECR I-9919.
49 Since natural persons have a right to sue and be sued this also goes for companies. They are granted legal
capacity, therefore they are largely given a parallel status to natural persons in court.
50 J.A. Gildea - 'Uberseering: A European Company Passport', J. Int'l L. 257 (2004-2005)
23 notice of the fact that this is a company which is formally a foreign company, which was a requirement under Dutch law for a company like this. Companies that were not established under Dutch law, and who had no actual bond with the state in which they are established in were said to be formally foreign companies.
This led to a situation where, inter alia, additional requirements could be made with regard to Financial Statements and minimal capital requirements. The foregoing led to the question whether it can be enforced to mention that a company is formally a foreign legal company. The answer to this question is in line with what is established in Centros. A state cannot be refused the right of freedom of establishment, except where abuse of law can be proved. This is to be viewed from case to case. Furthermore, this case establishes that it is not allowed to treat foreign companies different from national companies when it comes to mandatory notifications and minimal capital requirements. These cases have formed the basis for the freedom of establishment. However, in order to see what situation we are currently facing, in the following I will discuss the facts and conclusion of two leading cases. These cases are Cartesio and Vale. After discussing the facts and judgement of the ECJ I will give a legal comparison of the two.
5.5 Cartesio case
In the Cartesio case two prejudicial questions were submitted to the ECJ.52 The first question
was whether articles 45 and 48 EC-treaty opposed a national rule that prevents a company established under the law of a Member State to move its real seat to another Member State while retaining legal personality in the original Member State of establishment. Furthermore, the ECJ looked into the question whether a Member State can prevent a company from moving its seat to another Member State and changing the law applicable to the company. The facts in Cartesio were as follows; Cartesio was a company established under Hungarian law. Hungarian law states that the real seat of the company is in the same state as where it has its operations. Cartesio moved its operations to Italy, after which it wanted to record this in the trade register. This was refused, since Hungary would not allow for a company to move its seat to another state while keeping its legal personality under Hungarian law. The advice of the Advocate General was to judge that the meaning of articles 43 and 48 was that no national rules can limit the possibility of a company to move its real seat to another state, unless this is necessary in general interest. I agree with the Advocate General on this matter.
If this is not allowed by a Member State, a company that wants to move its seat to another Member State can find itself in a time consuming process of terminating the business and having to re-establish it again in another Member State, while in the meantime not being able to conduct business.
5.5.1 Conclusion of the ECJ:
The decision of the ECJ in Cartesio does not match the judgment of the Advocate General. The ECJ states that, in line with Daily Mail, a company only exists according to national law, which determines incorporation- and operating conditions. Furthermore, the ECJ states that national law differs considerably when it comes to connecting factors. The first difference is the link with the national territory required for the formation of a company. The second example of the ECJ is the possibility that a Member State offers to change that connecting factor later on. In the EC-treaty these differences in national law are taken into account in article 48. The freedom Member States enjoy in their choice of connecting factor is known as the free choice of connecting factors. The ECJ states, with a reference to Überseering, that the possibilities for a company to move to another Member State are determined by national law. This means that a Member State can put restrictions on the movement of the real seat of a company that is incorporated under its law to another Member State, if the company wants to retain legal personality under the law of the Member State of establishment. Herein lies the core of Cartesio; it is possible for a Member State to set limitations on the basis of the free choice of connecting factors. However, this can only be done when a company wants to retain legal personality under the law of the state of incorporation. If a company wants to move its real seat without retaining legal personality, a Member State cannot set limitations. Denying a company to convert from to the law of another Member State without prior liquidation of the company is seen as an unauthorized limitation of the freedom of establishment.
5.6 VALE Costruzioni Srl
In the VALE Costruzioni Srl (hereafter abbreviated as VALE) the Hungarian Court submitted 4 prejudicial questions to the ECJ, the main question being whether a receiving state may hinder a cross-border transfer in the light of Articles 49 and 54 TFEU.53 The facts leading to
this question were as follows. VALE is a company incorporated in 2000 under Italian law. VALE decided, 6 years after its incorporation, to move its seat and activities to Hungary. To
25 achieve this, VALE files a request at the Italian Chamber of Commerce to be removed from the Trade Register, citing the move to Hungary. When VALE wanted to register the company in the Hungarian Trade Register this was refused. The reason for this was that under Hungarian law it is not possible to have a non-Hungarian company as a predecessor. The Advocate General rules that refusing to register VALE in the Trade Register is a limitation of the right of freedom of establishment within the meaning of articles 49 and 54 TFEU. He does, however, state that a Member State (i.c. Hungary) can set national demands for incorporation of a new company or even special demands in case of cross-border situations. These demands may not be discriminating and have to be proportional. I find it hard to agree with the Advocate General on this matter, since I think this would not contribute to a unification of the European Union. This way Member States can still set their own rules, the outcome being a patchy set of rules across the European Union.
5.6.1 Conclusion of the ECJ in VALE
As seen in Cartesio, a Member State has to allow for a company to move its seat to another Member State without any limitations if, after the movement, the company is subjected to the law of the new Member State. This was seen as an outbound cross-border conversion of a company. The cross-border conversion we are facing in VALE is an inbound conversion. Before VALE the leading idea was that Member States which adhere the incorporation-theory did not have to allow for an inbound cross-border conversion. However, the ECJ rules different in VALE. If a Member State has a national rule which allows for conversion, but this rule is not open for companies from another Member State this is a non-permitted limitation of the freedom of establishment. The ECJ acknowledges that there are problems when it comes to inbound cross-border conversion since European law, and often national law, do not have any formal procedure for a cross-border conversion. In order to achieve a cross-border conversion one has to look at the national rules of conversion. This means that in case of a cross-border conversion one has to find a connection between the rules of both the state of the ‘original’ state of incorporation and the new state of incorporation. A side note to be made here is whether this provides stakeholders such as minority shareholders and employees with a sufficient amount of protection.
5.7 Conclusion
In both cases the ECJ tries to balance the freedom of the right of establishment with the right of Member States to determine what connects a company to its jurisdiction. The cases correspond where it comes to the acceptance of the transfer of the registered office; a transfer of a registered office, both inbound and outbound, has to be accepted by a Member State. However, the cases differ where it comes to connecting factors. A Member State that adheres the real seat theory has the possibility to stop the outbound transfer of the real seat. However, the outbound transfer of the registered office cannot be stopped since this would be a unjustified limitation of the freedom of establishment.
6. Sustainability of the real seat doctrine
As seen before the real seat doctrine knows certain limitations. These obstacles can form an obstacle to the goal of the SE. The biggest limitation in light of this thesis is the requirement that the head office and the registered office are to be located in the same Member State. This requirement follows from article 7. The question arises, whether in light of the freedom of establishment this limitation is tenable. As stated by the ECJ it is incompatible with the freedom of establishment to deny a company legal capacity when it moves its seat to another Member State. This means a company can be established under the law of a Member State, can contest a Member State when it denies the company legal personality.54 In more recent jurisprudence it was stated that a company should be able to register in another Member State than the one of registration if, after the movement, the company is subjected to the law of the new Member State (outbound). Furthermore, it was said that if a national rule which allows for conversion is not open for companies from another Member State this is a non-permitted limitation of the freedom of establishment.
Furthermore, it is said that every Member State, also Member states which adhere the real seat theory, have to allow for a company to develop its activities in that Member State, while maintaining to be subjected to the lex societas. In this case there is no movement of the seat of the company. In here lies the end of the real seat theory and final step towards the incorporation theory. Indeed, with the right of freedom of establishment a company can choose in which Member State it wants to incorporate itself. The freedom of establishment cannot be limited by disproportionate and unnecessary rules or restrictive regulations.
54
27 In the light of the above the real seat theory is losing so much ground that it is clear that it is not sustainable in its current form. The consequence of this will be a shift towards the incorporation theory, which complies with the freedom of establishment. This however, is not without side-effects. As seen the incorporation theory can lead to a situation where the protection of stakeholders can be pressurized. In my opinion the move towards the incorporation theory is a positive development. It contributes to the unification of Europe and provides companies with additional possibilities of expanding business. However, Member States should be aware of the problems the incorporation theory entails. I therefore plead for a situation of additional legislation that meets the interests of stakeholders.
Furthermore, it is said that a shift towards the incorporation theory can lead to a competition of legal orders. I do not think this will happen. One might think that companies will start to ‘shop’ for the most convenient law. However, investors tend to choose for domestic companies. Cultural aspects will always be a barrier where it comes to free competition. With this fact in mind companies will have to consider all the benefits as well as the cons before they choose to incorporate their system under foreign law. Important to keep in mind is that investors will always be attracted by systems who know a flexible method of problem-solving.
Member States might completely lack interest in companies who do not conduct any business in the state of registration. Again, this leads to a situation where there is no insight in the activities of the company. This is closely connected to a situation where the founders of a company can choose law with as little protection for shareholders. Since they can incorporate a company in every Member State, they can ‘shop’ for the most convenient law, which can detract the protection of stakeholders.
7. Conclusion
With the SE, companies from different Member States are offered a possibility to merge into a new company. This was groundbreaking, since before the SE it was only possible for companies from the same Member State to merge. This new situation led to numerous questions. The one that has been addressed in this thesis was about the sustainability of the real seat doctrine in light of the jurisprudence of the ECJ.
As shown, in the light of the this thesis, a lot of the limitations that the real theory brings about, are not compatible with the freedom of establishment. In early jurisprudence it was said that denying legal capacity is an unadmittable limitation. Furthermore it was said that a company that moves its headquarters solely for the purpose of being subjected to a more favorable legal system or for avoiding minimal capital requirements is not abusing community law.
The ECJ elaborated on this in two more recent cases. In these cases it was said that it is contrary to community law to refuse a company registration in the new Member State if after the movement the company is subjected to the law of the new Member State. Furthermore the ECJ states that if a Member State has a national rule which allows for conversion, but this rule is not open for companies from another Member State this is a non-permitted limitation of the freedom of establishment. If we add to this the fact that a company has the possibility to expand business in other Member States while maintaining to be subjected to the lex societas it is clear that the real seat theory is losing much ground.
It is because of the foregoing that is say that the real seat doctrine is no longer tenable in the light of the jurisprudence of the ECJ. This is not to say that the real seat doctrine should be abandoned immediately. Member States still have the opportunity to choose and adhere the real seat doctrine. However, a lot of aspects of the real seat doctrine are not compatible with the freedom of establishment. Therefore it will be hard to take full advantage of the benefits and we will see a shift towards incorporation theory. One should not think that this shift will have drastic effect on the investors behavior. Cultural aspects play a big role for investors, although when investing in company subjected to non-domestic law they tend to choose for companies that know a flexible method of problem solving. It is therefore that I say that a shift towards the incorporation theory is desirable, though with a side-note. Additional legislation be drafted so all stakeholders are provided with as much benefits as possible. This way the free market can evolve the best way possible for everyone involved.
