3.01  The Treaty on the Functioning of the European Union¹ (hereinafter ‘TFEU’) provides for the creation of a Single Market which shall be based primarily on four fundamental freedoms, among which is the freedom of establishment. Article 54 TFEU (ex Article 48 EC) provides for the right of establishment of corporations, other partnerships of civil and commercial law, and other legal persons established under private or public law, so long as they are not non-profit making, and confers upon them the same rights that natural persons enjoy under Article 49 TFEU (ex Article 43 EC). The privileges of the freedom in question are accorded to corporations which are ‘nationals’ of a Member State.

3.02  Due to the diverse rules of conflict adopted by the various jurisdictions of the Member States for defining the nationality of corporations, Article 54 TFEU adopts all three rules used in the EU. The registered office is the essence of the law of the place of incorporation adopted mainly by the common law jurisdictions, the central administration is the connecting factor of the majority of civilian traditions, and the principal place of business (oggetto principale dell’impresa) is part of the Italian choice of law for corporate affairs.²

3.03  In this context, a series of ECJ rulings has affected the dynamics of the interaction between private international law, corporate and insolvency law, and cross-border corporate mobility. The first set of cases that reached the ECJ concerned unlawful restrictions of a fiscal nature on the establishment of agencies, branches, or subsidiaries.³

3.04  In Commission v France the ECJ ruled that France could not deny tax benefits to branches and agencies established in France by insurance companies incorporated in another Member State.⁴ It has been argued that the finding (p. 35) of the ECJ in Commission v France that the nationality of a company is dependent upon the location of the registered office paved the way for the full endorsement of the incorporation theory in the Segers case.⁵ In the latter case the ECJ held that social benefits available to the directors of companies incorporated in the Netherlands should also be available to the directors of companies registered in another Member State.⁶

3.05  Against this background of cases the ECJ delivered seven additional cases, starting with the Daily Mail case, having a close link with private international law and which can be considered to be leading cases in this field. The jurisprudence of ECJ on freedom of establishment is rich. The focus in this book is on cases demonstrating a degree of connection with private international law.

3.06  The Daily Mail case concerned the application of the Daily Mail and General Trust plc to the UK Treasury for leave to transfer its central management to the Netherlands.⁷ It wished to move to the Netherlands in order to sell a significant part of its non-permanent assets and use the profits derived from the sale to purchase its own shares without paying the UK tax that would normally be due thereon. It would also cease to be liable for UK corporation tax but only for tax on income arising in the UK. The Treasury did not consent to the transfer of seat insisting that it should at least sell part of its non-permanent assets before moving to the Netherlands.⁸

3.07  Daily Mail filed a lawsuit before the English courts that stayed proceedings and submitted a reference for a preliminary ruling to the ECJ. The Court rejected the claim of the company that the Treasury’s refusal amounted to an unlawful restriction on their freedom of establishment. Rather, it held that companies are ‘creatures of the law’ of the Member State of origin, which can determine ‘their incorporation and functioning’.⁹ The ECJ consequently ruled that a company does not have a right to transfer (p. 36) its real seat from its State of incorporation to another Member State and at the same time retain the nationality of the former.¹⁰

3.08  The Daily Mail case provoked rather diverse reactions among authors. Cath—following Timmermans—argued that the right of freedom of primary establishment thereby ceased to exist, at least in relation to the exit of companies from the Member State of incorporation.¹¹

3.09  Many commentators perceived the Daily Mail case as the guarantee of the real seat theory in EU company law, despite the fact that neither of the countries involved adhered to it.¹² In their eyes, it came as a relief after the Segers case, which was perceived to have endorsed the incorporation theory.¹³ However, one of the most eminent German authors openly disagreed with this conclusion and argued that Member States are at liberty to choose either of the two rules of conflict,¹⁴ although he had previously argued that the real seat rule clearly violated the EEC Treaty as discriminatory and unjustifiably restrictive in both cases of companies wishing to transfer their central administration both in and out of Germany.¹⁵

3.10  Loussouarn did not follow Behrens to this position. Instead he argued that the Daily Mail case marked the end of the predominance of the real seat theory.¹⁶ In his view, the ruling in the Daily Mail case was justified on grounds of equal treatment. The ECJ was making sure that EU law provisions would not be used to succeed in tax avoidance.¹⁷ He tried to explain the case by drawing a distinction between the right of establishment and the freedom of establishment.¹⁸ No such undeniable right existed, whereas the freedom of establishment could be restricted in order to attain equality in establishment.

(p. 37) 3.11  Rammeloo also reacted to the German appraisal of the Daily Mail case by arguing that it is ‘an exercise in futility’ to contest the validity of the incorporation theory as it is ‘far more appropriate’ to promote the Single Market than the real seat theory.¹⁹ However, it has been argued that this latter point does not justify a claim that that the real seat theory is contrary to EU law.²⁰

3.12  Viewing the debate ex post facto it is easy to conclude that neither the Segers nor the Daily Mail case opted for one of the two rules of conflict, as in both cases the countries involved adhered to the incorporation theory. What is different in the two cases is the perspective of the Court. The Segers case was examined from the host Member State’s point of view, whereas the Daily Mail case was examined from the point of view of the Member State of origin—the ‘home’ Member State.²¹ This reading of the ruling in the Daily Mail case was subsequently confirmed by the ECJ in the Überseering case.²²

3.13  It is of interest to note however that there has always been something puzzling about the ruling in the Daily Mail case. The case is often remembered by the following statement of the Court: ‘unlike natural persons, companies are . . . creatures of national law. They exist only by virtue of the varying national legislation which determines their incorporation and functioning.’²³ It is often thought that it is hard to see why it was necessary to give an answer of international company law to a question of international tax law.²⁴ As Timmermans has noted, ‘a question of international company law, of a conflict rule regarding the company’s status, did not really arise in the Daily Mail case’.²⁵

3.14  Whilst the Daily Mail case did not concern a company that wished to change its governing corporate law, it is often forgotten that central management, as enshrined in Article 54 TFEU, is not too far from the test for tax residence as accepted in UK tax law.²⁶ In this way, the Court had to (p. 38) decide whether the Daily Mail had a right to move its central management (and by consequence, tax residence) to the Netherlands, and whether the UK tax authorities had a right to interfere with this choice.

3.15  Even if the aforementioned statement of the Court seems confusing to some as it looks sufficiently corporate law-oriented, it has to be understood as a very contractual approach taken by the Court. By incorporating in a Member State a company makes a conscious choice to subject itself to the rules of this Member State, including the tax procedures for the transfer of the tax residence—in the form of the central management—to another Member State.

3.16  The second leading case came almost a decade after the Daily Mail case. The Centros case concerned two Danish nationals who had set up a limited company in the UK and sought to exercise the management and control of the company through a branch that they wished to establish in Denmark.²⁷ Nordic scholars disagreed on whether a doctrine of abuse or circumvention existed in Nordic law, but the Danish Trade and Companies Board had established a practice of refusing to register companies incorporated abroad for the purpose of evading the Danish minimum capital requirements.²⁸ In refusing to register the company’s branch, it argued that the EU law provisions cannot be used to circumvent national legislation which is in conformity with EU law.

3.17  The ECJ ruled, first, that it is irrelevant that a company has been created in one Member State with a view to establishing itself in another Member State,²⁹ and second, that the creation of a corporation under the less restrictive company law of another Member State cannot amount per se to an abuse of the right of establishment, even if the sole aim is to set up a branch in another Member State for the purpose of doing business in another Member State, because this would be incompatible with the establishment of a single market.³⁰

(p. 39) 3.18  Finally, the ECJ examined whether the Danish measure could be justified by public interest³¹ under the so-called Gebhard test.³² Under this test a measure restricting the freedom of establishment may nevertheless be upheld if it applies in a non-discriminatory manner, it is justified by imperative requirements of public interest and is proportionate. The Danish restriction failed as disproportionate. In the Court’s opinion, it was not a suitable measure to ensure the protection of creditors and, in any event, less onerous measures could have been adopted to attain this goal.³³

3.19  The judgment in the Centros case provoked volumes of literature particularly among German authors and divided them in various camps. Ebke classified them into four main groups.³⁴

3.20  The first group argued that the ECJ in Centros effectively banned the real seat theory.³⁵ This view was adopted by the Austrian Court of Cassation (Oberster Gerichtshof), which ruled that ‘the real seat theory . . . conflicts with the secondary freedom of establishment’.³⁶ Although the Austrian judgment has been based on a false assumption, namely that ‘Denmark, like Austria, follows the [real] seat theory’,³⁷ and the judgment was heavily criticized for assuming that the ECJ had ruled on choice of law rules,³⁸ the case was correctly decided as the refusal to register the branch of a company established in another Member State is an unlawful restriction of the freedom of establishment, probably even if the company were a pseudo-foreign one.³⁹

(p. 40) 3.21  This stance provoked a reaction in the opposite direction. It was argued that the Centros case dealt with a matter of substantive law whereas the German real seat theory is a conflicts rule and as such would escape review under the right of establishment.⁴⁰ Others tried to isolate the impact of the Centros ruling by arguing that both England and Denmark adhered to some version of the incorporation theory, and thus, the real seat theory had not been touched upon.⁴¹ The German lower courts were untroubled by doubts about the status of the real seat theory and continued applying it.⁴² The Danish reaction was to circumvent the Centros ruling by enacting legislation that required foreign and Danish corporations wishing to register in Denmark either to have a minimum capital requirement of DKK 125,000 or to deposit this amount to the Danish Tax Authorities.⁴³ It has been argued though that such provisions would have no chance of being upheld by the ECJ.⁴⁴

3.22  The second school of thought was formed by authors who thought that the real seat theory could not be used to obstruct the transfer of central management from one Member State to another.⁴⁵ The third group considered that the Court in the Centros case enunciated the law of the place of incorporation as the European choice of law rule for corporations, subject however to the ordre public rules of the forum.⁴⁶ The last group took the view that the whole impact of the Centros case could be restricted to freedom of secondary establishment and did not affect the choice of law for corporations or the freedom of primary establishment.⁴⁷

3.23  Although it is thought that the Centros case had little impact in English law,⁴⁸ it was also commented upon in the English literature. With few exceptions,⁴⁹ (p. 41) commentators were not concerned with the survival of the real seat theory but with the relation between the Centros and Daily Mail cases, the doctrine of abuse, and with the prospect of a regulatory competition⁵⁰ or a Delaware effect in the EU.⁵¹ Despite the ECJ’s silence as to its Daily Mail ruling, it was generally agreed that the latter was still good law.⁵²

3.24  The Centros case has also been considered to be a significant contribution to the doctrine of abuse of EU law. The concept of abuse would apply exceptionally only on an ad hoc basis.⁵³ The ECJ did not provide any particular guidance other than a comparison between the objective pursued by the individual and the objective pursued by the EC Treaty provision in question.⁵⁴ The concept of abuse had been stated rather broadly in the Van Binsbergen case:⁵⁵ circumvention of national law constituting abuse could exist in cases where a person established in a Member State moved to another Member State thereby avoiding the law of the former Member State. In a later case, the ECJ abandoned the requirement of moving the establishment from one Member State to another.⁵⁶

3.25  This doctrine was narrowed subsequently by the Centros ruling where setting up a company in another Member State in order to benefit from its corporate legislation⁵⁷ or lower taxation⁵⁸ did not constitute in and of itself (p. 42) an abuse.⁵⁹ Centros was carrying on the activity which was the primary aim of the right of establishment and this was not likely to be viewed as circumvention.⁶⁰ The fact that Centros was not avoiding rules ‘concerning the carrying on of certain trades, professions or businesses’ also counted against the finding of an abuse.⁶¹ On the other hand, it would have been more likely for an abuse to be found where incorporation in a specific Member State is performed with the intention of defrauding the company itself or its members.⁶² Case law also appeared to suggest that it is likely for an abuse to be found in cases of artificial arrangements and pro-forma transactions.⁶³ Such transactions are performed for a purpose other than the exercise of the freedom of establishment in good faith.⁶⁴

3.26  Two cases helped to clarify two criteria, one objective and one subjective, that can be used to establish an abuse.⁶⁵ The ECJ will first examine whether the purpose of the EU law provision has not been achieved, and second, whether there was an intention to obtain an advantage by artificially creating the requirements of application of the provision in question. In the context of freedom of establishment for companies, it is difficult to see the kind of cases where the first criterion will be satisfied. Incorporation in a Member State so as to benefit from its less restrictive legislation is consistent with freedom of establishment.⁶⁶ Nonetheless, the doctrine of abuse has been expanded to any right provided by EU law other than the freedoms but at the same time is narrowed by the requirement of an artificial arrangement.⁶⁷

3.27  After the delivery of the Centros case there was still doubt about the compatibility of the real seat theory with the freedom of establishment,⁶⁸ although it had been suggested, even before the pronouncement of the Centros ruling, that it was only a matter of time before the ECJ would declare that the consequences of the German real seat theory constituted an unlawful restriction of the freedom of establishment.⁶⁹

3.28  German nationals acquired the shares of Überseering BV, a company incorporated in the Netherlands, and became its sole directors. At all relevant times, they resided in Germany and exercised the central management and control from there. Überseering brought a contractual claim against a German company and the German courts held that the former lacked the right to appear before courts.⁷⁰ The German courts applying the real seat theory concluded that Überseering was a German company, which had failed to abide by the incorporation and registration process imposed by German company law and thus had not acquired legal personality.

3.29  The case was brought before the Bundesgerichtshof (hereinafter ‘BGH’) which submitted a reference for a preliminary ruling. The BGH must have realized the imminent ‘danger’ for the real seat and analyzed the advantages of and the public policy behind the real seat theory.⁷¹ It acknowledged that some German authors had argued against the real seat theory,⁷² but it deemed it ‘preferable’ to uphold it, despite its consequences for three main reasons. First, there should be one governing law for corporations in order to avoid legal uncertainty.⁷³ Second, the incorporation theory fails to provide for the interest of third parties and of the State where the company has its central management.⁷⁴ Third, that the real seat theory tends to safeguard ‘certain vital interests, from being circumvented’, namely the interests of creditors, minority shareholders, and employees.⁷⁵

(p. 44) 3.30  It then went on to state that the reference for a preliminary ruling was submitted because ECJ case law on the matter was not clear.⁷⁶ There was confusion about the exact meaning and relation of the rulings in the Daily Mail and Centros cases.⁷⁷ The BGH concluded the reference by asking, first, whether the consequence of denying legal personality to Überseering as a result of applying the real seat theory amounted to a restriction of the freedom of establishment and, second, whether the legal capacity and the standing before courts of Überseering had to be decided according to the law of the Member State of incorporation.

3.31  The ECJ overruled the arguments of the German, Italian, and Spanish Governments that due to the lack of a multilateral convention envisaged by the then Article 293 EC, the real seat theory could not be reviewed in relation to freedom of establishment.⁷⁸ It held that it is not possible to condition the effectiveness of freedom of establishment on the failure of negotiations among Member States for the adoption of a treaty regulating the transfer of seat under Article 293 EC.⁷⁹

3.32  The ECJ also dismissed the arguments presented by the German, Italian, and Spanish Government based on the Daily Mail case;⁸⁰ namely that the genuine link that existed between England and the Daily Mail had shifted in the case at hand from the State of incorporation to the State of central management and that in any event, the choice of law rules fell squarely within the domain of national law. According to the ECJ’s reasoning, the Daily Mail case could apply only to the relations between the company and the State of incorporation.⁸¹ The ECJ also seized the opportunity to clarify that the term ‘connecting factor’ in the Daily Mail case had not been used as a term of private international law, as had been assumed and relied upon by the German Government,⁸² but as an exclusive reference to the law of incorporation.⁸³

(p. 45) 3.33  The great contribution of the Centros ruling was the implementation of the Gebhard test in the freedom of establishment of companies.⁸⁴ Despite its affirmation by the Court, it was suggested that the Daily Mail case was irreconcilable with the Überseering ruling because first, it created logical problems by distinguishing between ingoing and outgoing corporations; second, its interpretation of Article 293 EC⁸⁵ did not match with the one provided by the ECJ in its ruling in the Überseering case; and third, the Überseering case, unlike Daily Mail, allowed for reverse discrimination in the sense that foreign corporations receive better treatment than their counterparts who are nationals of the host Member State.⁸⁶

3.34  Advocate General Colomer had also extrapolated on Daily Mail and its relation with Centros and he identified three possible interpretations.

3.35  One possible way would be to say that the Centros case concerned the establishment of a branch whereas the Daily Mail case concerned the transfer of seat.⁸⁷ He rejected this, noting that it creates a false impression about the distinction between the establishment of a branch and the transfer of seat.⁸⁸ The second explanation he suggested was that the Centros case referred to the relations between corporations and the host State (inbound cases) whereas the Daily Mail case concerned their relations with the State of origin (outbound cases), which he also rejected as ‘artificial’.⁸⁹ The ECJ however adopted this approach.⁹⁰ His third alternative explanation was that the Centros ruling superseded ‘the practical legal consequences’ of the Daily Mail case by allowing a transfer of seat to take place in the form of establishing a branch.⁹¹ His personal view was that the Centros ruling supplemented the one in the Daily Mail case, in the sense that the choice of law for corporations remains within the sphere of national law which must ‘comply with substantive Community law’.⁹²

3.36  Having ruled on the interpretation of Daily Mail, the ECJ drew the line between the free movement of capital and the freedom of establishment. The former applies to cases where natural persons residing in a Member State acquire shares of a company incorporated in another Member State, so long as they do not acquire effective control of the company, whereas the latter applied in cases where such a control has been achieved.⁹³ The ECJ went on to find that the denial of standing before courts to a company properly incorporated in another Member State and having its registered office there, as a consequence of applying the real seat theory, amounted to a restriction of the freedom of establishment.⁹⁴

3.37  The final issue to be decided was whether such a restriction was unlawful or could be justified by overriding mandatory and proportionate requirements. Had the German rule applied distinctly to nationals and non-nationals, the ECJ would have examined the restriction under the higher threshold of Article 52 TFEU, namely the grounds of public policy, health, and security. Although the ECJ acknowledged the reasons forwarded by the German Government, namely the protection of creditors, minority shareholders, and employees, as overriding mandatory requirements, it concluded that the measure in question was ‘tantamount to an outright negation of the freedom of establishment’.⁹⁵ The application of the real seat theory had been perceived by the ECJ as a violation of the very core of freedom of establishment.

3.38  It thus seems the ECJ thought that the measure in question had satisfied the three limbs of the proportionality test and failed under the post-proportionality requirement concerning the inviolability of the core of the right. On that basis the ECJ ruled that it is an unlawful restriction of the freedom of establishment for a Member State to deny the legal capacity accorded to the company by the Member State of incorporation.⁹⁶

3.39  The judgment in the Überseering case stimulated academic debate over the status of the real seat theory. Some authors characterized the judgment as (p. 47) a blow to the real seat theory,⁹⁷ whereas others in fact argued that the ‘obsequies for Sitztheorie are imminent’,⁹⁸ or that the company law cases involving choice of law issues will be resolved in favour of the Community and the Single Market.⁹⁹ The view that this judgment marked the end or inefficiency of the real seat theory gained support both in Germany¹⁰⁰ and abroad.¹⁰¹

3.40  However, other authors took a different view. Schanze and Jüttner argued that one should be reluctant to read more into the ruling in the Überseering case than was necessary to decide the case;¹⁰² namely that the ECJ just ruled out the possibility of applying the real seat theory in order to decide whether the company has legal personality.¹⁰³

3.42  The ECJ in this passage did not choose the law of the place of incorporation over the law of the real seat. It did not consider it its task to decide on the conformity of rules of conflict. In any event, it is hard to see how a rule (p. 48) of conflict constitutes a breach of freedom of establishment. It must be the applicable substantive law that actually causes the breach. Not willing to state a preference over one or the other rule of conflict, all the ECJ did was to pronounce on the intensity of the restriction imposed on Überseering by German company law contrary to freedom of establishment.

3.43  The BGH was alarmed by the possibility of a company being governed by various national laws.¹⁰⁷ Such segregation would be contrary to the Einheitslehre principle, according to which one national law should govern the corporation in a uniform manner.¹⁰⁸ The ECJ, however, adopted a different stance. Overriding public interest could justify the restriction of the freedom of establishment which results from the non-absolute nature of the rights of companies to exercise freedom of establishment.¹⁰⁹ This dictum has been interpreted to justify, under specific circumstances, the application of the rules—in that case, of the law of the real seat—that negate these rights so that it was only the scope of this exception that remained to be seen.¹¹⁰

3.44  This is an inaccurate reflection of the ECJ’s ruling though. The terms in which the German Government’s submission was cast, namely that the ‘application of the company seat principle is also justified by employee protection’,¹¹¹ was not adopted by the ECJ, which broadly held that ‘overriding requirements relating to the general interest . . . could justify restrictions on freedom of establishment’.¹¹² The ECJ did not use the term real seat or any of its equivalents in its own findings at all.¹¹³

3.45  This could suggest that the ECJ actually accepted that the freedom of establishment could be justifiably restricted by mandatory rules of the forum and not of the State where the central management is located. Of course these two will usually coincide, but if the forum is not a court of the State of the real seat, it cannot be seen why the national court seized of the matter should restrict the freedom of establishment for the protection of interests of other Member States.¹¹⁴

(p. 49) 3.46  It must be remembered that the Überseering case should be confined to the case where the state of incorporation adheres to the incorporation theory and the state where the central management is located adheres to the real seat theory. If one were to generalize the Überseering rule, one should bear in mind the fact that time is the crucial element. No matter what the rule of conflict may be, all jurisdictions require some act of incorporation in their territory which precedes time-wise the establishment of a real seat and a principal place of business. The direct consequence of incorporation is the acquisition of legal personality which has to be recognized in all Member States. Thus the precedence of incorporation as a matter of time also limits the consecration of the real seat theory and the principal place of business in Article 54 TFEU. Therefore, once legal personality is granted by the Member State of incorporation, in principle all other Member States have to recognize it and respect it.

3.47  The innovation of the Überseering case lies in the fact that it recognized that certain mandatory rules may lead to the application of the law of the forum. There has been a suggestion that mandatory requirements play exactly the same role that the so-called lois de police play in a national context.¹¹⁵ However, there is a difference between these two terms. The first one has been frequently used by the ECJ ever since its ruling in the Cassis de Dijon case in order to justify restrictive measures which apply indistinctly,¹¹⁶ whereas the second has been used only once and has been given an autonomous meaning by the ECJ as ‘national provisions compliance with which has been deemed to be so crucial for the protection of the political, social or economic order in the Member State concerned’.¹¹⁷

3.48  The Überseering case has not clarified the requirements that need to be satisfied for a national provision to qualify as a mandatory rule. Provisions from which parties cannot derogate by contract and those set for the protection of weaker parties will probably amount to mandatory rules.¹¹⁸ For some authors it appears that any rule justified by some kind of competing public interest will qualify as a mandatory requirement.¹¹⁹ Be that as it (p. 50) may, it will probably be easier to have the ECJ recognize new grounds of public interest as mandatory requirements rather than uphold restrictions based on the protection of creditors and the participation rights of employees as proportionate.¹²⁰

3.49  The Überseering case also left certain questions unanswered. For instance, is it possible for the Member State of incorporation to prevent a company from placing its central management outside its territory from the moment of incorporation (dissociation ab initio)?¹²¹ In principle, the host Member State will have to accept the location of the real seat in its territory.

3.50  However, the prohibition of dissociation may originate from the law of the Member State of incorporation, in which case Cartesio appears to allow for Member States to impose such requirements.¹²² However, the alleged restriction might not always appear in clear and rigid terms. In other words, it could be a mere disincentive to dissociate central management and registered office. For instance, Member States may require companies incorporated in their territory to maintain their central management and control within the jurisdiction in order to invoke the benefits of the double taxation agreements concluded by the Member State of incorporation. Such a requirement could not constitute a breach of freedom of establishment. It is very reasonable that a Member State would require a close connection with its legal system and economy before it allows a company to qualify for the benefits of the double taxation agreements it has concluded.

3.51  Furthermore, the Überseering case has also raised some thoughts on the issue of standing before courts. If AG Colomer in Überseering was right to state that Article 6(1) of the European Convention on Human Rights deemed the German rule depriving Überseering of its right to appear before courts to be unlawful,¹²³ then perhaps this rule should also apply to companies incorporated outside the EU.¹²⁴ Rammeloo went further in suggesting that it is absurd to apply the incorporation theory to US companies but not to other European companies.¹²⁵ It has also been argued (p. 51) that the Überseering case has created inconsistencies between the freedom of establishment¹²⁶ and the rest of the fundamental freedoms which have to be similarly construed.¹²⁷ Persons wishing to make use of the freedom of goods or services can rely on the Treaty provisions not only against their State of origin but also against the host State.¹²⁸

3.52  There is little doubt that the Überseering ruling has had significant impact on the field of private international law. It has been very persuasively argued that the subject of incompatibility is substantive company law and not private international law,¹²⁹ but Member States took divergent views. National courts have taken a different view ranging from a total negation of the real seat theory in intra-Community relations¹³⁰ to the so-called new real seat theory (Neue Sitztheorie).¹³¹

3.53  While the Überseering case was still pending before the ECJ, another chamber of the BGH delivered a judgment in a case involving a company incorporated in Jersey but having its real seat either in Germany or in Portugal.¹³² The BGH sensing the outcome of the ruling in Überseering and in an effort to preserve the real seat theory extended its recent jurisprudence¹³³ on the legal personality of civil law partnerships (hereinafter ‘GbR’) or general commercial partnerships (hereinafter ‘OHG’). It held that the Jersey company should be treated as a German GbR or OHG which may stand before courts, but whose partners are personally liable for the partnership’s debts. This conclusion had been reached under the erroneous belief that Jersey is part of the United Kingdom and thus part of the EU and that freedom of establishment would mandate favourable treatment of the Jersey companies.¹³⁴ This decision was heavily criticized¹³⁵ and was subsequently abandoned by the BGH.¹³⁶ It is now impermissible under German (p. 52) law for a company incorporated abroad but having its real seat in Germany to be treated as a German GbR or OHG with all the severe consequences that this conversion entails so long as the State of incorporation is a member of the European Economic Area.¹³⁷

3.54  By contrast, Belgium sought to devise a way of preserving the real seat theory in its new Code de Droit International Privé.¹³⁸ Belgian courts will in principle apply the law of the real seat under article 110(1) CDIP. However, if the company has its real seat abroad and the law of that country applies the law of the place of incorporation a renvoi to that latter law will be made.¹³⁹

3.55  In the period following the delivery of the judgment in the Überseering case, it had been argued that the real seat theory should be abandoned as it is contrary to EU law and should be replaced by the Dutch doctrine of pseudo-foreign companies,¹⁴⁰ which was thought to be suitable and proportionate for safeguarding the interests which the real seat theory was supposed to promote.¹⁴¹ However, the ECJ took exactly the opposite view when it examined the compatibility of the Wet op de Formeel Buitenlandse Vennootschappen (Law on Formally Foreign Companies) of 17 December 1997 (hereinafter ‘the WFBV’) with the Treaty.¹⁴²

3.56  The WFBV defined a formally foreign company as a capital company formed under laws other than those of the Netherlands, which carried on its activities entirely or almost entirely in the Netherlands without having any real connection with its State of incorporation.¹⁴³ It provided for the (p. 53) company’s registration in the Dutch commercial register, an indication of that status in all the documents produced by it, the minimum share capital and the drawing-up, production, and publication of the annual documents. The penalty for non-compliance with these provisions was the joint and several liability of directors.¹⁴⁴ It must be clarified though that the WFBV applied only to corporations that had not taken the form of a public limited company.¹⁴⁵

3.57  Inspire Art Ltd was incorporated in England. However, its sole director was domiciled in The Hague and conducted his business in art dealing through the Amsterdam branch of the company.¹⁴⁶ The dispute arose due to the decision of the local chamber of commerce to apply to the Dutch courts for a declaration that Inspire Art was a formally foreign company to the company’s registration. This would have as a consequence the application of the aforementioned rules.¹⁴⁷ The Dutch court was confronted with the compatibility of the WFBV provisions in question with Community law and submitted a reference for a preliminary ruling to the ECJ.

3.58  The ECJ took the view that all the aforementioned WFBV provisions were contrary to EU law and, in particular, to the Eleventh Directive.¹⁴⁸¹⁴⁹ The issue of breach of freedom of establishment arose only in relation to the issue of joint and several liability of directors. Thus it was only articles 4(1) and 4(2) WFBV that were examined under the spectrum of Articles 49 and 54 TFEU.

3.59  The Dutch Government was joined by the Austrian Government and surprisingly by its former opponents in the Überseering case, the German and Italian Governments. All four submitted that the WFBV did not constitute a restriction of freedom of establishment since it did not prohibit the establishment of a branch, as was the case in Centros, but that it imposed certain ‘additional obligations relating to the exercise of their business activities and the running of the company, with a view of ensuring that others are (p. 54) clearly informed that companies such as Inspire Art are formally foreign companies’.¹⁵⁰ They concluded this line of argumentation by referring to the Daily Mail case as authority for the proposition that it is within the authority of the Member States to decide the connecting factor and enact their own private international law rules, such as the WFBV.¹⁵¹

3.60  The Commission and the UK Government opposed this submission. They argued that the connecting factor of the WFBV, namely the place of actual activity, fell short of the factors recognized in Article 54 TFEU.¹⁵² In its oral argument the Commission went as far as suggesting that applying the ‘de facto company seat principle’ is contrary to freedom of establishment as propounded in the Centros case and that, in any event, the WFBV does not introduce such a principle but a rule of immediate application (règle d’application immédiate).¹⁵³

3.61  Against the former argument, the German, Austrian, and Italian Governments submitted that the branches of pseudo-foreign corporations should not be considered as principal establishments and should not be entitled to freedom of establishment.¹⁵⁴ The case at hand was viewed by these three Governments as an opportunity to request the ECJ to revisit the question decided in its Centros ruling. The German and the Austrian Governments complained that the ruling in the Centros case was unsatisfactory since it prevented the taking of any effective measure against letter-box companies.¹⁵⁵ For this purpose, they submitted that host Member States should be allowed to retain legislation which does not prevent the registration of branches but enacts ‘a few limited preventive measures and penalties’.¹⁵⁶

3.62  The ECJ was not sympathetic to this argument. It solemnly reaffirmed its ruling in the Centros case.¹⁵⁷ It ruled that the WFBV provisions in question constitute a restriction of freedom of establishment because they subject the establishment of a branch to rules imposed by the host Member State with regard to the formation of limited liability companies.¹⁵⁸

(p. 55) 3.63  The Daily Mail case was the last line of defence the said Governments sought recourse to. They argued that as a consequence of the Daily Mail case, each Member State was free to choose its rules of private international law, including rules such as the ones in question.¹⁵⁹ The ECJ reaffirmed that its Daily Mail ruling concerned only the relations between the Member State of origin and the company making use of freedom of establishment.¹⁶⁰ On this basis the Daily Mail case was distinguished from Inspire Art, which concerned a company and the State where it carries out business.¹⁶¹ The ECJ once again avoided addressing the relation between private international law and freedom of establishment. AG Alber though clarified that the Überseering case did not concern the real seat theory, but one of its consequences, merely the need that ‘a company which moves its de facto seat has to reincorporate in order to maintain its legal personality’.¹⁶²

3.64  Having established that the WFBV provisions constituted a restriction of freedom of establishment,¹⁶³ the ECJ went on to examine whether such a restriction could be justified.¹⁶⁴ The Netherlands, German, and Austrian Governments submitted that the WFBV provisions are justified both by Article 52 TFEU and by overriding public interest, namely the prevention of fraud, the protection of creditors, the effectiveness of tax inspections, and the fairness of business dealings.¹⁶⁵ The Governments conducted a comparative analysis of national corporate legislation and submitted that joint and several liability of directors is a penalty recognized by EU law,¹⁶⁶ and that minimum capital requirements exist in all European legal orders, except for Ireland and the UK.¹⁶⁷ In the view of the Amsterdam Chamber of Commerce the national measure was necessary to attain the objectives pursued without denying the right of establishing a branch in the Netherlands.¹⁶⁸

(p. 56) 3.65  The ECJ held that the measures could not be justified under Article 52 TFEU.¹⁶⁹ Reference to Article 52 TFEU was necessary as it was not clear whether the nature of the measure was discriminatory or not.¹⁷⁰ Indeed, on the one hand, the measure applied only to companies incorporated outside the Netherlands and was discriminatory in this sense, but on the other, it merely extended to them the rules applying to Dutch companies and was not discriminatory from this angle. The ECJ once again examined the legality of restriction through the Gebhard test.¹⁷¹ Protection of creditors was held not to justify the restriction because when dealing with Inspire Art Ltd, creditors were or ought to be aware, through its unusual suffix (Ltd), of its foreign nationality and thus its subjection to different rules of minimum capital requirements and directors’ liability.¹⁷²

3.66  The ECJ recognized the combating of improper recourse to freedom of establishment as an imperative requirement.¹⁷³ Although the Chamber of Commerce and the Dutch Government failed on the facts, the ECJ addressed the doctrine of abuse twice: first, independently and then as an imperative requirement. This approach cannot be explained from a doctrinal point of view as the abuse doctrine and public interest are two distinct grounds of justification.¹⁷⁴

3.67  Failing to distinguish between them, the ECJ ended up in discussing the same issues and providing the same reasoning: incorporation in one Member State in order to benefit from its corporate laws cannot per se amount to an abuse.¹⁷⁵ Neither does the fact that the corporation has no substantial connection with the country of incorporation but conducts its activities only or mainly through the branch established in the host Member State.¹⁷⁶

3.68  The ECJ also recognized the protection of fairness in business dealings and the efficiency of tax inspections as imperative requirements but the Amsterdam Chamber of Commerce and the Dutch Government failed to bring evidence that would satisfy the Gebhard test.¹⁷⁷

3.69  While the Überseering ruling was the trigger for German scholars to declare the incompatibility of the real seat theory with the Treaty, it took Inspire Art for some of the French to reach the same conclusion. The response of the academic world was far from uniform. On the one hand, Inspire Art in discarding easily the arguments based on the interests justifying the application of the lois de police was viewed as ‘excessive’ and encouraging ‘law shopping’.¹⁷⁸ This criticism was reinforced by the narrowing of the abuse doctrine enunciated in the Centros case.¹⁷⁹ At the other end, Muir Watt characterized the consequence of the judgment in the Inspire Art case in effectively ruling out the real seat theory from the recognition of foreign corporations as ‘an excellent thing’.¹⁸⁰

3.70  The common ground of these lines of argument was that the field of application of the real seat theory was perhaps narrowed but not abolished. It was correctly argued that Article 54 TFEU guarantees the real seat theory.¹⁸¹ A distinction based on the Daily Mail ruling was drawn between the State of origin and the host State. The former can use the real seat theory to impose its lois de police on companies incorporated in its territory, whereas the freedom of the host State to act in a similar manner is severely limited,¹⁸² if it has any freedom at all.¹⁸³ In French private international law the Inspire Art ruling was not thought to require the abolition of the real seat theory, but its reinterpretation. This implies that article 1837 CC can no longer apply in favour of French law, unless this would be justified under the abuse doctrine.¹⁸⁴

3.71  The failure of the Dutch and German Governments to persuade the ECJ of the justification of restrictions of freedom of establishment has led scholars to argue that Member States need to reconsider their traditional approach to creditor protection.¹⁸⁵ In fact it is hard to imagine a priori any case where an abuse could be established or the requirements of the Gebhard test would be satisfied. The German Government actually asked the ECJ ‘how Member States could combat the formation of brass-plate companies (p. 58) suspected of being an abuse of freedom of establishment’.¹⁸⁶ The ECJ did not even bother to answer it, but AG Alber replied that ‘such a request to the Court is surprising: it ought rather to be addressed to the Member States’ adding that it is not the Court’s business to indicate the lawful measures that Member States should take to prevent abuse.¹⁸⁷

3.72  This probably demonstrates that neither the Member States nor the ECJ could envisage an example that would qualify as abuse or justified restriction of freedom of establishment. It has been rightfully suggested that creditor protection in civilian systems has to be re-orientated from corporate rules on minimum capital requirements to rules of information and financial disclosure.¹⁸⁸ Cases like Innoventif seem to support this proposition.¹⁸⁹ In that case, the German requirements concerning the detailed disclosure of the objects of a company incorporated in England before authorizing the establishment of a branch in Germany were held to be in conformity with freedom of establishment.

3.73  This is also the case in the UK where, under Part 34 of the Companies Act 2006, companies incorporated abroad are required to have a specified or identifiable place in the UK at which they carry on business and which has more than a fleeting character, and that there is some visible sign or physical indication that they have a connection with particular premises.¹⁹⁰ Such provisions cannot even be considered to constitute a breach of freedom of establishment.

3.74  Consequently, the Inspire Art case has severely restricted, if not extinguished, the freedom of Member States to enact outreach statutes on pseudo-foreign corporations.¹⁹¹ The only justification for an alleged restriction of freedom of establishment that might have some chances of success could possibly be the rights of employees¹⁹² which are of constitutional value in many countries,¹⁹³ since the ECJ has indicated its willingness to afford (p. 59) protection to fundamental rights even when the application of the fundamental freedoms seems to lead to opposite conclusions.¹⁹⁴

3.75  The balancing of the freedom of establishment with co-determination rights that employees enjoy under the German two-tier board management regulations might justify a restriction on freedom of establishment.¹⁹⁵ However, it will be extremely difficult to apply the co-determination rules in foreign companies with a single-tier board.¹⁹⁶ Other scholars have taken the opposite view¹⁹⁷ arguing that the co-determination provisions in Articles 42 and 45 of the SE Regulation and in SE Statute Directive 2001/86¹⁹⁸ do not per se lead to the qualification of German co-determination provisions as part of European public policy.¹⁹⁹

3.76  At the same time, it has been argued that the consequence of the Centros, Überseering, and Inspire Art cases is that German companies would be able to avoid the rules in question by being established as subsidiaries of companies seated outside Germany.²⁰⁰ One way out could be for Germany to re-enact its employee participation provisions by a change of the connecting factor. Such legislation could be applied collectively to all companies, both domestic and foreign, activating in Germany.²⁰¹ The ECJ might be more reluctant to discard national employment legislation which would cause unrest in the Member State and possibly damage the image of the ECJ itself.

3.77  In any event, the ECJ has not proven to be very receptive to arguments based on employee protection, in cases where there is no reference to constitutional values. The Payroll case concerned Italian legislation which allowed recourse to data processing centres by undertakings with less than 250 employees provided that they were established and staffed exclusively (p. 60) by persons registered with the professional associations of employment consultants or persons with equivalent status.²⁰²

3.78  The ECJ held without any specific justification that the said legislation constitutes a restriction to freedom of establishment.²⁰³ It then declined to justify the restriction on the basis of protection of employees because, regardless of whether the task of the data processing centres requires any special professional qualities, the tasks in question cannot be any less complex when the number of salaried staff concerned increases.²⁰⁴ The disputed provision was thus deemed unnecessary. Things however might be different if the rights of employees of the pseudo-foreign company were at stake, which was not the case in Payroll.

3.79  Despite the fact that the Daily Mail case has been reaffirmed recently in both the Überseering and Inspire Art rulings, there had been a growing opinion that its existence is undesirable. This belief has survived even the delivery of the Cartesio case. The Sevic ruling concerned the refusal of a German court to register the merger of a German and a Luxembourgian company. Although the Daily Mail case was not explicitly discussed therein, its validity and underlying rationale was preserved.

3.80  AG Tizzano seized the opportunity in the Sevic case to characterize all measures which prohibit, impede, or render less attractive the exercise of the freedom of establishment as restrictions to the latter.²⁰⁵ Without disregarding the Daily Mail ruling explicitly, AG Tizzano took the view that restrictions ‘on entering’ or ‘on leaving’ national territory which are likely to discourage an operator from availing him or herself of the right of establishment are prohibited.²⁰⁶

3.81  If such a statement were adopted by the Court, it would hardly leave any room for the Daily Mail case to apply. The national measure in question concerned article 1(1) of the German law on the transformation of companies (Umwandlungsgesetz) which allowed a merger only between corporations (p. 61) having their real seat in Germany. Although AG Tizzano did not refer to the ruling in the Daily Mail case, he concluded that upholding the German legislation had an impermissible consequence, namely the loss of ‘a possibility of considerable and manifest importance in a common market such as the European market’.²⁰⁷ The alternative provided under German law, namely requiring the transformation of the foreign company into a German one before merging it with the already existing German corporation, had already been precluded by the ECJ in the Überseering case.²⁰⁸

3.82  However, the ECJ did not adopt the same terms as AG Tizzano. It took the view that precluding in toto the possibility of a merger between companies established in different Member States prevents them from using one single act to perform a complex financial activity and amounts to a restriction of freedom of establishment.²⁰⁹

3.83  The German and Dutch Governments allied to defend the measure as a justifiable restriction to freedom of establishment albeit unsuccessfully. The ECJ recognized the grounds forwarded by the said Governments; namely the interests of creditors, minority shareholders, and employees, the effectiveness of fiscal supervision and fairness of commercial transactions as mandatory requirements.²¹⁰ Nonetheless, it held that the measure was both unsuitable and unnecessary to protect the aforementioned interests.²¹¹

3.84  It is significant that the ECJ did not even refer to the Daily Mail case, according to which Germany would have a right to determine the functioning of companies incorporated in its territory. It rather tacitly relied on its dictum that freedom of establishment prohibits ‘the Member State of origin from hindering the establishment in another Member State of one of its nationals or of a company incorporated under its legislation’.²¹² The uncontested outcome of the Sevic case is that it guarantees the protection of Article 49 TFEU to mergers.²¹³

3.85  The Daily Mail principle that Member States enjoy discretion in enacting measures that might prevent a company incorporated in its territory to (p. 62) migrate to another Member State and at the same time preserve the nationality of the Member State of origin was not overruled. The ECJ in the Sevic case explicitly referred to the discrimination that the Umwandlungsgesetz had introduced against corporations established in other Member States before holding the measure to be a restriction.²¹⁴ While for AG Tizzano the focus was on the fact that German companies would not be able to merge with other European companies (exit type of case),²¹⁵ the ECJ emphasised the consequence of the Umwandlungsgesetz on other European companies that would not be able to merge with German corporations (entry type of case).²¹⁶

3.86  Consequently, the dividing line between the Daily Mail and Sevic cases lies in the existence or not of consequences affecting foreign corporations and stemming from national legislation which prima facie concerns only domestic corporations. The first case will lead to the implementation of the Sevic case,²¹⁷ whereas the second will lead to the application of the Daily Mail case.

3.87  The significance of the Grunkin & Paul case lies in the fact that it confronted the ECJ directly with a national rule of private international law. Both the judgment of the Grand Chamber of the Court and the Opinion of AG Sharpston settled the question concerning the relationship between primary EU law and national private international law rules.

3.88  It is this precise question that has become particularly significant in the line of cases that have been examined so far. The Überseering case left unclear the validity of the real seat theory vis-à-vis freedom of establishment. Many national courts thought that the ECJ had abolished the real seat theory and so did many scholars.²¹⁸ It will be demonstrated that these courts and commentators were too hasty and erroneous in drawing their conclusions.

3.89  Leonard Matthias Grunkin-Paul (hereinafter ‘Leonard’) was a German national born in Denmark in 1998. His parents, Mr Grunkin and Dr Paul, were also German nationals who were no longer married. Leonard was given the surname Grunkin-Paul pursuant to Danish law. His parents sought to register him with the Registry Office of Niebüll under the surname Grunkin-Paul. The application was refused on the basis that under article 10 BGBEG the name of a person is governed by the law of its nationality and under §1617 of the German BGB a child can have only one surname from one of its parents. The case was brought before the District Court of Flensburg which submitted a reference for a preliminary ruling to the ECJ asking whether article 10 BGBEG is contrary to Articles 18 and 21 TFEU.

3.90  The Opinion of AG Sharpston is the only occasion where a Court official has actually addressed a matter that has caused much debate among scholars. It can be summarized in one question: what is the relationship between national private international law rules and primary EU law? In addressing this question, AG Sharpston makes a series of salient points.

3.91  First, unlike the Court, she makes it explicit that the case did not concern article 10 BGBEG per se.²¹⁹ Rather it concerned the validity of the effect of the said provision in light of the facts of the case.²²⁰ Second, in addressing the question asked by the referring court, the ECJ need not adjudicate between the two rules that Member States have adopted regarding personal status; ie law of the nationality or law of the domicile.²²¹ It is for the EU legislature to decide which choice of law rule is better. The Court should intervene only to guarantee that the principle of equal treatment and free movement of persons are respected.²²²

3.92  In this context, AG Sharpston thought that the way article 10 BGBEG had been applied by the Registry Office was incompatible with primary EU law. In particular, she thought that the Registry Office had violated the principle of equal treatment embodied in Article 18 TFEU. She was convinced that to hold otherwise would actually require the Court to decide (p. 64) which of the two choice of law rules is better.²²³ In her view, equal treatment requires equal weight to be placed on the Danish choice of law—law of the domicile, and the German choice of law—law of the nationality.²²⁴

3.93  With regard to free movement of persons, she thought the application of article 10 BGBEG in this manner to constitute an unjustified breach.²²⁵ AG Sharpston first examined whether there has been a restriction. Several Member States intervened in favour of Germany and argued that ‘there is nothing in the German choice of law rule in issue or its application in this case which is inherently liable to hamper or to render less attractive the exercise of the right to freedom of movement or residence’.²²⁶ However, the likely discrepancies in official documents could be enough trouble to Leonard whenever he would be required to prove his identity. Such discrepancies were perceived to be enough of a problem to amount to a restriction.²²⁷

3.95  It is no surprise that AG Sharpston found these reasons wholly unconvincing. She had already taken the view that the Court was not required to choose between the two possible choice of law rules.²²⁹ Additionally, German law did not preclude compound surnames in an absolute manner. For instance, children with a foreign parent could have a compound surname if that foreign law would so command. Nor does German law preclude the use of the law of the nationality for persons born in Germany where neither parent has German nationality but at least one of them is habitually resident in Germany.²³⁰

3.97  This point is reminiscent of the view taken by various authors that all that the Court ruled in the Überseering case was to require Member States to recognize companies formed under the laws of another Member State without pronouncing on the compatibility of the real seat theory with EU law.²³²

3.98  The Grand Chamber of the Court did not take a very different stance to that of AG Sharpston. Contrary to AG Sharpston, the Court found no violation of the principle of equal treatment of Article 18 TFEU. The determination of surnames in Germany in accordance with German law cannot constitute discrimination on grounds of nationality when the parties have only German nationality.²³³ It then moved on to find a restriction to free movement of persons, accepting the difficulties that discrepancies in public documents may create for Leonard during the exercise of the right conferred to him by Article 21 TFEU.²³⁴

3.99  In examining whether the restriction to freedom of establishment is justified, the Court found that none of the justifications put forward by the German Government could be upheld. It noted that the German Government did not advocate that the restriction is justified by some reason of public policy.²³⁵ On the contrary, the German Government relied solely on the objectivity and legal certainty that flow from the implementation of the law of the nationality. The Court, however, thought that such considerations do not warrant the refusal to recognize the giving of a surname according to the law of another Member State.²³⁶ Arguments based (p. 66) on the practical benefits of prohibiting double-barrelled names did not have a better chance of success.²³⁷

3.100  In light of these considerations, the ECJ ruled that in circumstances such as those of the case in the main proceedings, Article 21 TFEU precludes the authorities of a Member State, in applying national law, from refusing to recognize a child’s surname, as determined and registered in a second Member State in which the child—who, like his or her parents, has only the nationality of the first Member State—was born and has been resident since birth.²³⁸

3.101  Despite the urge from AG Sharpston, the Court missed the chance to address in explicit terms the relationship between primary EU law and national rules of private international law. This would have helped clarify the fate of a national private international law rule once its application in a specific case is considered to be incompatible with the Treaty. However, the Court’s ruling in the Grunkin & Paul case is consistent with the view that national private international law rules are per se incapable of being incompatible with the Treaty.²³⁹ Rather it is the content of the applicable substantive law, whose application is triggered by the rule in question, in combination with the facts of the specific case that give rise to incompatibility. This interpretation of the Grunkin & Paul case is in stark contrast with that which treats the case as one in which the ECJ found an incompatibility between the German choice of law rules and the Treaty.²⁴⁰

3.102  The Grunkin & Paul case has to be read in conjunction with the ruling in the Überseering case. In the latter case the ECJ was confronted with the German choice of law for companies. German courts had refused to recognize the legal personality of a company incorporated in the Netherlands, but having its real seat in Germany. To the eyes of German courts Überseering was a company that had failed to abide by the requirements of incorporation under German law and thus had never acquired legal personality. (p. 67) It can be seen that the violation of freedom of establishment did not actually come from the choice of law rule, but from the substantive provisions of company law.²⁴¹

3.103  Both in the Grunkin & Paul and Überseering cases, the ECJ followed the same pattern of thought. There is no holding as to the choice of law rule itself. In fact, in the Grunkin & Paul case the ECJ held that: ‘Article 18 EC precludes the authorities of a Member State, in applying national law, from refusing to recognise a child’s surname, as determined and registered in a second Member State’.²⁴² It is evident that the ECJ does not think the identification of German law as the applicable law itself a restriction to Article 21 TFEU. It is rather the normative content of the applicable substantive law that creates the problem and not the choice of law rule. AG Sharpston, therefore, has rightfully observed that it is not the validity of the choice of law rule that comes into question, but the validity of its effect.²⁴³

3.104  The rulings of the ECJ in the Grunkin & Paul and Überseering cases allow the following conclusion to be drawn with regard to the relationship between primary EU law and national private international law rules. First, the private international law rule itself is not under scrutiny. Second, the Court is concerned with the compatibility of the applicable substantive law with EU law. Third, the Court takes into consideration three factors: national choice of law, the normative content of the applicable substantive law, and the facts of the specific case. As pointed out by AG Sharpston, the Court must interpret EU law ‘with regard to the specific situation which has arisen in the main proceedings. It should beware of encroaching to any unnecessary extent on Member States’ competence in matters of private international law’.²⁴⁴

3.105  If and only if in light of these observations, a restriction is found, the Court will review the restriction under the Gebhard test, which requires restrictions to be applied in a non-discriminatory manner, be justified by imperative requirements of public interest, and be proportionate.²⁴⁵

3.106  In case the outcome of the review is negative for the compatibility of national law with EU law, the Member State need not abrogate the private international law rule.²⁴⁶ Choice of law rules, at least as they are known today, are so neutral and abstract in themselves that it is not possible for (p. 68) their content to be considered contrary to the Treaty. There is nothing contrary to the Treaty in applying German law to Leonard or Überseering. In both cases, incompatibility did not arise from the application of the German choice of law rule. Nor did it arise from the mere identification of German law as the applicable substantive law. It arose from the normative content of the applicable substantive law and the result it led to in the light of the facts of the specific case.

3.107  Therefore, as far as legal status or capacity is concerned there is nothing in the ruling of the Court to preclude the application of German law to German nationals, or even to foreign nationals, provided that the outcome is not contrary to the rights that the Treaty confers to individuals. Similarly, in the context of company law, there is nothing in the ruling of the Court in the Überseering case to preclude the application of German corporate law to a company formed under the laws of another Member State. It is only required that the outcome of the application of German law does not discourage companies from exercising their rights under the Treaty in a way that violates freedom of establishment.

3.108  The Grunkin & Paul and Überseering cases constitute the two sides of the same coin. They both concern personality. The former requires Member States to shape their substantive law in a way to provide for the recognition of names and surnames as they have already been given in other Member States, even when the natural person concerned is their national. The latter requires Member States to recognise the legal personality that other Member States grant to companies incorporated under their laws.

3.109  The issue of dual nationality has arisen so far only with regard to natural persons. The ECJ has already had the chance to rule on this matter when the natural person in question holds the nationality of two Member States. In the Garcia Avello case it ruled that administrative authorities of one Member State are precluded from refusing to grant an application for a change of surname made on behalf of minor children resident in that State and having the nationalities of that State and of another Member State, in the case where the purpose of that application is to enable those children to bear the surname to which they are entitled, according to the law and tradition of the second Member State.²⁴⁷

3.110  This ruling of the Court put an end to the long-standing rule of private international law that, from the point of view of a State, whenever choice of law (p. 69) in favour of the law of nationality leads to the application of its law, the State owes no regard to the laws of other States, even if the person in question holds their nationality as well.²⁴⁸ In applying their law as the law of nationality, Member States are now required to take into account the consequences that this application might have on the individual with regard to his or her other laws of nationality. In so far as possible, Member States are required to accommodate solutions that are compatible with both legal systems.

3.111  Some might think that the Überseering case can be viewed as a case of dual nationality. Both Germany and the Netherlands thought it to be their ‘national’, if this term can be employed in this context.

3.112  As a matter of public international law and for the purposes of diplomatic protection, a company has the nationality of the State in which it is incorporated, unless it is controlled by nationals of other States, it has no substantial business activities in the State of incorporation, and the seat of management and financial control of the company are both located in another State. In this latter case, that other State has the right to exercise diplomatic protection.²⁴⁹

3.113  There is though nothing to require private international law to adopt the same approach as public international law. Private international law is not concerned with the question of which State should have an interest in exercising protection over a company. It is rather concerned with identifying the law that has the closest connection with a particular matter.²⁵⁰ In principle, there is nothing that requires that only one national company law be applied to a corporation, in the same way that nothing would require the application of one and only applicable law to a contract if it were not for the Rome I regulation.²⁵¹

3.114  There are two ways in which one can look at the interplay between private international law and freedom of establishment. The first requires a court to juxtapose the law of the real seat to the law of the place of incorporation, as potential applicable substantive laws, vis-à-vis freedom of (p. 70) establishment (binary approach), whereas the second juxtaposes the applicable substantive law, whichever that may be, with freedom of establishment (unitary approach).

3.115  An example that involves company law provisions that deal with conflicts of interest (or ‘agency problems’) between shareholders and managers will help illustrate best the point that is being made here. Let it be supposed that Y BV is incorporated in Utopia, but its real seat is in Ruritania, both EU Member States. Let it be also supposed that Utopian law requires a higher percentage of ownership of shares for a derivative action to be brought than Ruritanian law and that Utopia adheres to the incorporation theory while Ruritania to the real seat theory. Would the application of Ruritanian law as the law of the real seat constitute a restriction to freedom of establishment?

3.116  At that point one is faced with two potentially applicable laws: the law of the place of incorporation and the law of the real seat. If the claim is brought in Utopia, it cannot be seen how the minority shareholders can argue that the application of the relevant Utopian company law provision to a company incorporated in Utopia constitutes a breach of freedom of establishment.

3.117  If, however, the claim is brought by the minority shareholders in Ruritania, it will be for the Ruritanian court to decide whether the application of Ruritanian company law is contrary to freedom of establishment. The argument the managers would be making would actually target the application of Ruritanian law. They would be requesting that Ruritanian law not be applied, because this would constitute a breach of freedom of establishment. The breach, they would argue, is substantiated by imposing a liability on them and the company, which would not be imposed had Utopian law been applied. The application of Ruritanian law in this particular instance would discourage Y BV from exercising its freedom of establishment. This approach is called binary, because the managers are trying to substantiate the breach to freedom of establishment by fleshing out the discrepancy between the law of the real seat and that of the place of incorporation.

3.118  The Ruritanian court may well reply that the decision on whether there is a breach or not depends on whether the application of Ruritanian company law is detrimental to the company. The application of Ruritanian law does not per se amount to a breach. This requires the Ruritanian court to decide whether allowing the derivative action to proceed is detrimental to the company or not, without having identified the applicable substantive law yet; ie without having conclusively decided whether Utopian or Ruritanian law should govern this particular issue.

3.119  The problem that the binary approach creates is that at this stage the court has not yet concluded on the applicable substantive (p. 71) law. As a consequence, it is impossible to decide whether the measure is detrimental or not. In the eyes of managers, the application of Ruritanian law is detrimental to the company, whereas in the eyes of the minority shareholders the application of Utopian law is detrimental to the company. There is no reason why a court should prefer the interests of one group over the other. At the same time, it is hard to imagine that a court could decide this point through an objective approach without having first decided on the applicable substantive law; ie the national law that will be applied to decide whether there is a detriment or not.

3.120  Undoubtedly, freedom of establishment is granted to the company and not to its managers and shareholders. While the binary approach juxtaposes the two potentially applicable laws, the unitary approach does not. It merely contrasts the applicable substantive law, in this case Ruritanian law, with freedom of establishment. This comparison should take place in a ‘vacuum’; ie the court should only consider the applicable substantive law, the facts, and the Treaty. Although the content of law of the place of incorporation is at the background of the case, it should not directly influence the decision of compatibility with EU law.²⁵²

3.121  Ruritanian private international law leads to the application of Ruritanian company law. Once the application of Ruritanian law is contested, one should draw a crucial distinction between arguing that the application of Ruritanian law, as opposed to Dutch law, is contrary to freedom of establishment and that the relevant Ruritanian corporate provisions are contrary to freedom of establishment.

3.122  On the basis of the Grunkin & Paul case it can now be argued that the former is no longer plausible. The question is not whether Ruritanian law is in conformity with Utopian law, but with the Treaty. As it has been shown, to the eyes of Ruritanian courts, Ruritanian law has the closest connection with the dispute in question. There is no point in suggesting that Utopian law should apply instead. Freedom of establishment is not concerned with this. All the managers can argue is that the percentage of shares that minority shareholders are required to hold in order to bring a derivative action constitutes a restriction to freedom of establishment.

3.123  This brings forward the next question; ie what constitutes a restriction to freedom of establishment? It might be helpful to draw an analogy from the case law on free movement of goods. The ECJ (p. 72) in the Dassonville case held that any measure which is ‘capable of hindering, directly or indirectly, actually or potentially, intra-Community trade’ was to be considered as a breach to free movement of goods.²⁵³ However, some years later it reversed its jurisprudence so as to exempt measures that ‘apply to all relevant traders operating within the national territory and so long as they affect in the same manner, in law and in fact, the marketing of domestic products and of those from other Member States’.²⁵⁴

3.124  Likewise, it can be argued in the context of freedom of establishment that in cases similar to the one contemplated in the earlier example, the rule in question must be of a nature that causes a serious and real detriment to the company; ie seriously discouraging it from exercising its rights under the Treaty. The statement of the ECJ that ‘[a]ll measures which prohibit, impede or render less attractive the exercise of that freedom must be regarded as such restrictions’²⁵⁵ should be viewed through the prism of the previous considerations.

3.125  In the aforementioned example, the relevant question would be whether the lower percentage of share ownership required by Ruritanian law in order for a claim to be amenable would have deterred the company from placing its real seat in Ruritania. One possibility is to view this question as one of fact. This can develop into an ex post facto inquiry by the court as to whether the company, and not one its composite groups of interests, would have still engaged in a cross-border activity had it known that the provision in question would be applicable.

3.126  The alternative option is to view it as a question of law, in which case the inquiry will inevitably develop into a cost–benefit analysis. There will be some cases for sure, such as the Überseering case, where it will be relatively easy to say that the cost–benefit analysis goes one or the other way. It may well turn out to be the case that in most instances, the company in question would have engaged in a cross-border activity. In order to establish a breach of freedom of establishment it will be thus necessary to positively demonstrate that at the time of the transfer, the mere possibility that another law might apply to its internal affairs outweighed any other consideration, economic or other, which would underlie the transfer of the company’s real seat to another Member State. In most cases it will be hard to see why a company would abandon its plan to transfer its real seat to another Member State in order to obtain some kind of commercial or other benefit for the possibility that the law of that country might also apply to its internal corporate disputes.

(p. 73) 3.127  There is also an important conclusion to be drawn in relation to nationality, given that the ECJ has used the term in relation to companies.²⁵⁶ This brings back to the stage a very old debate concerning the possibility of ascribing a nationality to company. Some argued that nationality is a political link with a State and can only ascribed to natural persons, since nationality presupposed personality and legal personality is just a fiction.²⁵⁷ The view that prevailed in the end was that the nationality does not have precisely the same meaning when used for legal persons as it does for natural persons. It has been generally accepted that nationality in this context implies the existence of a link between a company and a State, without any reference to the nature of this link. In other words, it is a reference to the applicable substantive law.²⁵⁸

3.128  It is perhaps time to look at the minority view afresh. Although it is not now submitted as it once was that one should look at the nationality of shareholders,²⁵⁹ there might have been some merit in refusing to think of choice of law for companies in terms of nationality.

3.129  Thus, in cases where the qualification for the benefits of freedom of establishment is not in doubt, ie in cases where the company is thought to exist under all potentially applicable laws, but the problem arises from a positive conflict of applicable laws; ie there is more than one law that could apply to a particular issue, nationality is not a useful term. It means nothing and it adds nothing.

3.130  At that stage, any analogy with natural persons is not useful.²⁶⁰ Issues relating to which law should govern the rights of minority shareholders, the extent of the directors’ fiduciary duties, and the liability for breach thereof etc., cannot be resolved by mere reference to nationality. Unlike natural persons, companies are further divided into different groups with different interests. Managers and shareholders may have different interests. Equally, majority and minority shareholders may have different interests. Then, of course, there are institutional investors who, as shareholders, can exercise a great deal of influence on managers and keep them under some sort of control.

3.131  Therefore, as far as internal disputes are concerned, it appears more appropriate to preclude reliance on freedom of establishment. The reason is that (p. 74) the rights that are invoked by these parties often are not rights of the company in reality. Of course, the company is affected by these disputes, but the truth of the matter is that the company is not the beneficiary of the rights that are accorded to managers or shareholders. If one takes this view, it becomes clear that the application of a law other than the law of the place of incorporation to an internal dispute is not a restriction to freedom of establishment. It does not deter the company from moving. It might deter the managers, but they are not covered by freedom of establishment in their own right.

3.132  Conversely, the analogy with natural persons is drawn much more meaningfully in relation to the cross-border move of a company. It has been persuasively argued, even before the ruling in the Cartesio case, that the compulsory liquidation of a company that wishes to emigrate is contrary to freedom of establishment, in the same way that natural persons cannot be killed by their Member State of origin when migrating to another Member State.²⁶¹ Based on the same analogy, it has been argued that a company should not have a right against its Member State of origin to cease to be governed by its law while preserving its legal identity, in the same way that a Greek national cannot lose his or her nationality by the mere fact that, at some stage, he or she acquires French nationality.²⁶²

3.133  This begs the question of the merit of speaking of corporate freedom of establishment in terms of nationality. Unlike companies, for natural persons loss of nationality does not affect their existence. This shows how inappropriate a comparison with natural persons can be. Companies should not have nationality for the purposes of private international law, in the same way that contracts do not have nationality either.

3.134  Therefore, it might be helpful to say that an analogy to natural persons can be drawn perhaps only as far as the existence or nullity of companies is concerned. In relation to other issues that come under freedom of establishment, it is probably better to think of a company as a nexus of contracts among different classes of patrons (shareholders, creditors, employees, et al.),²⁶³ despite the fact that Article 54 TFEU puts legal and natural persons on the same footing. The fact that different laws could be applied to it by different courts should not engage freedom of establishment, in the (p. 75) same way that the application of a different law on a contract of sale of goods cannot engage the free movement of goods.

3.135  Therefore, both the aforementioned approaches to the interplay of private international law and freedom of establishment (binary and unitary approaches) are unsuitable for claims that are concerned with the existence of the company and other claims of the sort that are contemplated in Article 22(2) of the Brussels I regulation. The reason is best illustrated by the case where a judgment obtained in the Member State of the real seat declaring the nullity of the corporation is brought for recognition and enforcement to the Member State of incorporation. Setting aside the fact that the Brussels I regulation mandates that the judgment be recognized provided that certain conditions are met, it would be otherwise futile for the courts of the Member State of the real seat to insist that the company in question is null and void, if the courts of the Member State of incorporation are willing to keep the company in the register.

3.136  Ideally it should be only for the courts of the Member State of incorporation to declare the nullity of a company. With regard to the applicable law, there is an argument to be made in favour of the law of the place of incorporation. If a company is incorporated under the laws of a Member State and has its registered office there, it would be a breach of freedom of establishment to declare it null by applying another national law, especially if it would be considered valid under the law of its place of incorporation. Überseering demonstrates that the courts of a Member State cannot discard the legal personality that a company has been vested with by the courts of another Member State.

3.137  The reaction to the Überseering case was that courts in civil law jurisdictions abandoned the real seat theory.²⁶⁴ The reaction to the Grunkin & Paul case remains to be seen. It should be made explicit though that whenever the Court hands down a ruling in a case involving a private international law rule and finds a violation of the Treaty, it is not necessary for the Member State to change the choice of law rule. This course of action is of course open to the Member State, but it should not feel bound to do so.

3.138  AG Sharpston has rightfully pointed out that Germany was not required to alter its choice of law rule with regard to names and surnames.²⁶⁵ After all, the incompatibility did not arise from the choice of law rule, but rather (p. 76) from substantive German family law. This means that in so far as possible, Member States are required to shape and apply their substantive national law in a way to recognize and accommodate for the solutions that other Member States have given or will give to the same matter. This stance is inspired by the new general principle that the ECJ is evolving; ie the principle of mutual trust and confidence.²⁶⁶

3.139  It may be the case though that harmonization of private international law in the domain of company law would be convenient. What would not be desirable though is a complete harmonization of company law. The possibility of having different corporate law regimes adds to the diversity of legal systems of Europe. It allows businessmen and companies to choose the legal order that suits their purposes best. Differences in corporate law regimes are a necessary requirement for regulatory competition that can potentially improve the quality of European company law as it did in the United States.²⁶⁷

3.140  Concluding this section, it should be borne in mind that the Grunkin & Paul case clearly shows that in cases involving national private international law rules, where the ECJ has found a violation of the Treaty, the declaration of incompatibility does not concern the choice of law rule itself but its effect. This means that it has been erroneous to suggest that the ECJ in the Überseering case abolished the real seat theory or made it untenable.²⁶⁸

3.141  The ruling of the ECJ in the Cartesio case was expected as the ‘Messiah’ who would ‘save’ European company law from the Daily Mail case. Indeed, the Cartesio case concerned the relationship amongst the real seat theory, the Daily Mail and Überseering cases, and freedom of establishment. Despite these expectations, the Court in the Cartesio case reaffirmed the Daily Mail case and declared that the application of the real seat theory does not constitute per se a restriction to freedom of establishment.

3.142  Cartesio was a company established in Hungary in 2004. In 2005, it sought to transfer its székhely, ie its statutory and real seat,²⁶⁹ to Italy while retaining its status as a company governed by Hungarian law.²⁷⁰ Its relevant application to the Regional Court of Bács-Kiskun was rejected on the basis that such transfers are not possible under Hungarian law without the prior dissolution and winding-up of the Hungarian company.²⁷¹ On appeal, the Szeged Court of Appeal submitted a reference for a preliminary ruling, asking three questions concerning its capacity to submit such a reference under Article 267 TFEU and one question on freedom of establishment. In particular, it asked whether Articles 49 and 54 TFEU are to be interpreted as to preclude such transfers.

3.143  The ECJ held that at the current state of EU law, Articles 49 and 54 TFEU are to be interpreted as not precluding Hungarian legislation under which Cartesio was incorporated from prohibiting the transfer of its seat to Italy whilst retaining its status as a company governed by Hungarian law.²⁷² In reaching this conclusion, the Court reaffirmed its ruling in the Daily Mail case and, in particular, the famous dictum according to which corporations are creatures of national law and exist only by virtue of the national legislation which determines their incorporation and functioning. The Überseering case was confined to its facts. It only requires Member States to recognize that legal personality is governed by the law of the place of incorporation and any restrictions imposed on it will have to satisfy the Gebhard test.²⁷³

3.144  The Court held that in this type of case there is a preliminary question to be asked; namely whether the corporation in question may be entitled (p. 78) to rely on Article 49 TFEU.²⁷⁴ It then ruled that Member States are free to select the connecting factor according to which a company will be considered as incorporated in its jurisdiction and that such quality is retained.²⁷⁵ The Court recognized the capacity of Member States ‘not to permit a company governed by its law to retain that status if it intends to reorganise itself in another Member State by moving its seat to the territory of the latter’.²⁷⁶

3.145  As one might have expected, the Court then articulated the limits of this open-ended statement. The current case, in which a company seeks to retain its governing law despite the relocation of its real seat, is different from the case in which a company seeks to transfer its statutory and real seat and convert to a corporate form governed by the law of the host Member State.²⁷⁷ In this latter case, any requirement of prior winding-up and liquidation imposed by the Member State of origin will be considered a restriction to freedom of establishment that will have to be justified under the Gebhard test.²⁷⁸

3.146  With regard to this particular point, the Commission pointed out that the absence of a convention between Member States on this matter has now been remedied by EU legislation that allows for cross-border corporate formations bypassing any national requirement of prior winding-up and liquidation.²⁷⁹ It is the same kind of argument that was relied upon by Commissioner McCreevy to halt legislative process on the 14th Directive concerning the cross-border transfers of registered offices.²⁸⁰ The Court referred only to Regulation 2137/85 on the European Economic Interest Grouping, the SE Regulation and Regulation 1435/03 on the European Cooperative Society as examples of Community measures that provide the means for cross-border corporate formations.

3.147  No matter how convenient these measures may be to those who wish to create cross-border corporate formations and relocations, the truth remains, the Court pointed out, that it still remains impossible to transfer the statutory and real seat of a company to another Member State, as (p. 79) Cartesio wanted to do, and also have its corporate affairs governed by the law of the place of incorporation.²⁸¹ All these EU measures, with the exception of the Cross-border Mergers Directive, abide by the fundamental civilian idea that statutory and real seat should coincide at the same location.

3.148  Finally, the Court dealt with the proposition advanced by Cartesio, namely that Hungary should be precluded from objecting to the transfer of its real seat to Italy without prior winding-up and liquidation in the same way that in the Sevic case Germany was precluded from objecting to the merger between a German and a Luxembourgian company. The ECJ distinguished the Sevic case from the case at hand stating that cross-border mergers are ‘fundamentally different’. It appears that the Court thought that Sevic was a case in which the Member State of origin-incorporation was required to recognize an ‘establishment operation’ performed by Sevic in another Member State.²⁸²

3.149  There is a significant taxonomic aspect of the Cartesio case which deserves heightened attention. In its Überseering and Inspire Art rulings the Court delineated the boundaries of the Daily Mail case as a case that concerns outbound corporate mobility. In the Sevic case AG Tizzano cast doubt on the rationale and survival of the Daily Mail case. These considerations were echoed both in legal scholarship²⁸³ as well as in judicial opinion.²⁸⁴ The Grand Chamber of the Court was not convinced by the proposition that the Daily Mail case is inconsistent with freedom of establishment, insofar as it allows Member States to block cross-border mobility of companies that have been incorporated under their laws.

3.150  Instead, the Court in the Cartesio ruling clarified that two types of case need to be distinguished; namely the Sevic type of case and the Cartesio type of case. Under the first category, the relevant question is whether the corporation in question—which is governed by the law of a Member State—is faced with a restriction to its freedom of establishment.²⁸⁵ Under the second category, the pertinent question is whether the company in question is a national of the Member State under whose legislation it has been incorporated, and is thus entitled to invoke the benefits of freedom of establishment.²⁸⁶

3.151 Cartesio is a landmark case. It concerns three fundamental aspects of freedom of establishment for corporations. First, the distinction between inbound and outbound cases is preserved. Second, the ability of Member States to apply the real seat theory is explicitly confirmed. Third, it narrows the principle in the Daily Mail case to outbound cases which result in the assumption of legal personality in the Member State of destination.²⁸⁷ It is worth noting that, rather surprisingly, the Hungarian Government was joined by the Polish, Slovenian, UK, and Irish Governments.²⁸⁸

3.152  One might have expected that the Irish and the UK Governments would be on the side of Cartesio. As far as the UK is concerned, it was the defence of the Daily Mail case that prompted this reaction. The UK Government argued that there are no good reasons to overrule the Daily Mail case, whereas there are good reasons not to do so.²⁸⁹ The fact that the seat of a company must be situated within the jurisdiction is a requirement that needs to be fulfilled for a company to be established under Hungarian law and is in no way prohibiting Cartesio from carrying on business in Italy.²⁹⁰ Both Ireland and the UK submitted that there are other effective means to transfer of a company’s seat and the Court should let the matter to be decided by the Commission and the Member States.²⁹¹

3.153  Cartesio was joined only by the Commission and the Dutch Government. It is important to note that the Commission first noted the increasing amount of complaints it has been receiving from companies over the past few years with regard to the length of proceedings that were necessary for the seat to be moved.²⁹² It then urged the Court to acknowledge that 20 years had passed since the delivery of its judgment in the Daily Mail case and that since then EU law had moved on.²⁹³ The Commission argued that in the recent years the Court had examined issues of corporate mobility only from the host Member State’s aspect and that it was time to extend the principles developed in the Centros line of cases to the ‘exit’ type of cases.²⁹⁴

3.154  The Cartesio case begs the question as to where the Grand Chamber of the ECJ has left the status of the law in the field of freedom of establishment in December 2008. There is a fundamental dichotomy to be made between inbound and outbound cases. The Centros, Überseering, Inspire Art, and Sevic cases deal with the former, whereas the Daily Mail and Cartesio cases concern the latter. Member States are largely free to select the private international law rule they see fit to govern corporations in both types of cases.

3.155  It is worth noting though that AG Maduro was unconvinced on the merit of this distinction. He concluded that neither the Centros nor Überseering or Inspire Art rulings have been convincing as to their rationale.²⁹⁵ In fact, he found that in these cases the Court had actually departed from the Daily Mail case, where the Court had held that ‘the Member State of origin is prohibited from hindering the establishment in another Member State of one of its nationals or a company incorporated under its legislation’. AG Maduro agreed with AG Tizzano in the Sevic case that Article 49 TFEU prohibits any type of restriction regardless of whether the case is an inbound or outbound one.²⁹⁶ The Court though has not been sympathetic to this view.

3.156  As Timmermans, the judge rapporteur in the Cartesio case, has rightly remarked in his extra-judicial writing, the fact that Daily Mail was affirmed by the Court

can hardly astonish in view of the fact that the validity of Daily Mail as to outbound cases was confirmed so explicitly as recently as in 2002 by the judgment in Überseering and still less given that the basic conditions for that interpretation as set out in the Daily Mail judgment were still unchanged, that is that no Community legislation or international agreement between Member States has been adopted on the issue.²⁹⁷

3.157  According to the Court’s rulings, in inbound cases, the effects that the applicable substantive law will have on a corporation will be scrutinized under the Gebhard test, if its application is thought to constitute a restriction on freedom of establishment. With regard to outbound cases, the Cartesio ruling has qualified the principle in Daily Mail so as to address the common perception that the latter recognized an unlimited authority of Member States over companies incorporated under their laws.

(p. 82) 3.158  If the company wishes to be subjected to the company law regime of the host Member State and convert to one of the latter’s corporate forms, it will be a restriction to freedom of establishment for the Member State of origin to require the winding-up and liquidation of the company in question before the transfer is performed.

3.159  The Cartesio ruling has thus expanded the normative content of the Überseering case with regard to the justification of restrictions into the field of outbound cases. However, this distinction that the Court has drawn between cases where the transfer leads to the assumption of new legal personality and cases where it does not has been characterized as unconvincing. For several authors, once a company has satisfied the requirements of Article 54 TFEU, it should qualify for the benefits of freedom of establishment until its dissolution, regardless of where it positions its registered office, central management, or principal place of business.²⁹⁸

3.160  In discarding both the Opinion of AG Maduro and the relevant scholarship on this point, the Court appears to abide by a contractual approach to incorporations, as it did in the Daily Mail case. If a company has chosen to incorporate in a jurisdiction that applies the real seat theory and its company law forbids the transfer of the real seat abroad without the prior dissolution and liquidation of the company, so be it. The Court will only interfere to thwart the jurisdiction of the State of incorporation if the latter is using its power to prevent a transfer that will lead to the assumption of legal personality under the laws of the host Member State.

3.161  A closer examination though reveals that the conclusion reached by the Court is not so different to the result advocated by AG Maduro.²⁹⁹ The latter had recognized that a Member State which loses effective control over a company as a result of the transfer should have the possibility to request the company ‘amends its constitution and ceases to be governed by the full measure of the company law under which it was constituted.’³⁰⁰ This is not substantially different to the Court’s requirement that the Member State of origin does not block transfers that lead to assumption of legal personality in the host Member State.

3.162  Simultaneously, the Cartesio case is distinguished from the Überseering case in the sense that it concerns the capacity of the State of incorporation to regulate the exit of companies incorporated under its law. By contrast, the Überseering case dealt with a case in which the company has been (p. 83) incorporated in another Member State, namely the Netherlands. It is thus evident that the real distinction is not between inbound and outbound cases, but between cases in which the company in question has been incorporated in the Member State against which the breach of freedom of establishment is alleged (Cartesio type of case), and cases in which it has been incorporated in a Member State other than the one in which it seeks to create an establishment (Überseering type of case).

3.163  The Cartesio case signifies an important conceptual innovation for the jurisprudence of the Court. Although in the Daily Mail case the Court had distinguished companies from natural persons and had referred to them as creatures of national company law and it repeated that statement in the Cartesio case,³⁰¹ in the latter case the Court has also used the term nationality for the first time in relation to companies.³⁰²

3.164  One can only wonder what exactly the meaning of this term can be in this particular context. Reference to French private international law doctrine demonstrates that nationality in this context is a reference to the national law which governs a corporation. If this analogy with natural persons is taken to its logical end, one can contemplate the possibility of a company having two or more nationalities. The details of this analogy as well as its reduced utility have been described earlier.³⁰³

3.166  Although it is clear that the Court is willing to make use of the private international law tool of an incidental question,³⁰⁵ it does not make it clear, however, which State’s private international law rules will be called into (p. 84) application. If one were to compare the Überseering case with paragraph 109 of the judgment in the Cartesio case, one can very easily wonder about the reasons that led the ECJ in that case to look at the issue of whether Überseering qualified for the benefits of freedom of establishment through the eyes of Dutch law. Why is it that the fact that under German law, Überseering did not have legal personality, suffice to place it outside the scope ratione personae of freedom of establishment?

3.167  It appears though that in both the Überseering and the Cartesio cases the Court looked into the private international law rules of the Member State under whose law the company has been incorporated. There can be only one logical explanation to this puzzle. Article 54 TFEU states clearly that for a company to enjoy the benefits of freedom of establishment, two requirements need to be satisfied. First, the registered office, the real seat or the principal place of business should be located in a Member State. Second, the company must be incorporated under the laws of a Member State.

3.168  Therefore, whenever nationality or legal personality becomes an issue, the Court will look into the private international law rules of the Member State that satisfies both requirements. In the Cartesio case, Italian legal personality could not be established by reference to any connecting factor. The company was established under Hungarian law and had both its registered office and its real seat in Hungary. Despite the fact that in the Überseering case the company had its real seat in Germany, it had not been incorporated under German law. Überseering had been established under Dutch law and had its registered office in the Netherlands. This, however, did not preclude the application of German law. It only meant that the case for the finding of a restriction would be stronger. It is clear from the Daily Mail and Cartesio cases that the Member State of incorporation has a greater degree of discretion in the way it treats its corporations. Thus, States enjoy different degrees of discretion in inbound and outbound cases.

3.169  Finally, the Cartesio ruling is also significant in another respect. It makes exit charges appear clearly incompatible with freedom of establishment. In the Daily Mail and Cartesio cases, both outbound cases, the Court clarified that a Member State cannot hinder the establishment in another Member State of a company incorporated under its legislation. Exit charges are not a negation of establishment. A company is allowed to move its central management and control out of the jurisdiction. However, it is deemed to have sold its business and is taxed according to the market value of its assets lying within the jurisdiction.

3.170  In the case of the UK, since it is not a requirement of UK tax law that companies incorporated in the UK have their central management and control in the UK, exit charges clearly lie outside the scope of the Cartesio ruling. (p. 85) Exit charges constitute a disproportionate restriction to freedom of establishment. There is no reason as to why the prohibition of exit charges on natural persons should not be extended as a matter of principle to corporations as well.³⁰⁶

3.171  The case of Commission v Portugal concerning the compatibility of Portugal’s exit charges with EU law might shed more light into this problem.³⁰⁷ It will be interesting to see whether Portugal will be able to rely on the need to ensure a certain level of fiscal revenue in the context of its sovereign debt crisis as a means to justify its exit charges.

3.173  There is nothing to preclude a Member State from applying the real seat theory to both questions addressed in this extract. Hence insofar as the application of the real seat theory does not lead to the negation of the legal personality that another Member State has granted to a corporation by virtue of the fact that it has incorporated under the laws of the latter, the law of the real seat can be applied on an equal footing with the law of the place of incorporation. Indeed, one can easily imagine cases where the application of a law other than the law of the place of incorporation would not be objectionable, exactly because the law of the real seat provisions are more enabling or less detrimental than those of the law of the place of incorporation.

3.174  There is, of course, an argument to be made that since the Cartesio case concerned an outbound type of case, the revival of the real seat theory is confined in these limits. However, the ECJ has made the relevant statement in a very general way which, taken together with the ruling in the Grunkin & Paul case, can be reasonably interpreted to cover both inbound and outbound cases. Alternatively, if one adheres to the view that the distinction between inbound and outbound cases is artificial, it is clear that (p. 86) the judicial pronouncement on the real seat theory covers both types of cases.

3.175  Therefore, the Cartesio case proves wrong all those who alleged that the real seat theory is contrary to freedom of establishment. The question whether the ECJ in the Cartesio case took the right decision from a policy perspective is a different one. In a very interesting Opinion, which merits individual attention, AG Maduro recommended a significant change in the law.³⁰⁹

3.176  Despite the fact that the Cartesio case has significantly qualified the Daily Mail ruling, it has been criticized by scholars who have found its reasoning inconsistent and contradictory with regard to the Court’s previous case law.³¹⁰ This criticism is targeted against two features of the ruling: the relationship of the connecting factors vis-à-vis freedom of establishment and the distinction between the rulings in the Sevic and Daily Mail cases.

3.177  One of the grounds of criticism was that the Court in the Cartesio case followed the reasoning it had adopted in the Daily Mail case rather than the Centros and Überseering cases.³¹¹ This criticism is based on the fact that the holding in the Daily Mail case, namely that the right to transfer a company’s seat was subject to the adoption of future legislation under the then Article 293 EC rather than a free-standing right provided by the Treaty, was not followed in the Centros and Überseering cases. Rather, the argument goes, the Court in the Centros case paid no regard to Article 293 EC and in the Überseering case it explicitly rejected that Article 293 EC constitutes a ‘reserve of legislative competence of the Member States’.³¹² Article 293 EC has not survived in the TFEU and all arguments based on it will not reappear again.

(p. 87) 3.178  This criticism is ill-premised as it is based on the assumption that the Court in the Centros and Überseering cases departed from its ruling in the Daily Mail case. This is not the case, at least in the Court’s view, which distinguished Daily Mail as a case concerning the outbound movement of companies. Aside from this, the facts of the case in Cartesio were not analogous with those in the Centros and Überseering cases so as to require the application of the relevant principles. Cartesio wanted to remain listed in the Hungarian commercial registry and simultaneously have its registered office in Italy.³¹³

3.179  By contrast, Centros was not seeking to divorce incorporation and registered office. It was merely seeking to avoid the imposition of the Danish minimum capital requirements. Centros was not seeking to break the tie between the registered office and incorporation. Similarly, Überseering was not seeking to transfer its seat. All it was seeking was the right to appear in court as a Dutch company, which it was denied by the German courts.

3.180  It may be argued that all Cartesio was trying to do was to move its real seat abroad. As under Hungarian law at the time, the real seat had to be at the registered office, in order to move its real seat to Italy it had no other option but to seek to move its registered office to Italy. This argument is also ill-premised. First of all, it is condemned to failure because it inevitably shifts focus from the move of the real seat to the move of the registered office. The request that a company should remain in the Hungarian commercial register and have its registered office abroad has no apparent rationale or justification, other perhaps than testing the validity of the Daily Mail case.³¹⁴

3.181  Second, if all Cartesio was trying to achieve was to move its real seat to Italy it should have done so without asking for the authorization of the Hungarian court. After all, the location of the real seat is not a piece of information that the Hungarian commercial register follows.³¹⁵ If this ever became an issue, eg if all of its board of directors meetings were declared invalid because they had not taken place at the registered office, Cartesio could then seek to challenge the Hungarian corporate (and not private international law) rule that required the real seat to be located at the registered office.

(p. 88) 3.182  In such a scenario, it would have a better chance of arguing that the Hungarian restriction was contrary to freedom of establishment. This would be so because in such a case it would not be challenging the compatibility of the real seat theory with freedom of establishment. The real seat theory as a private international law rule requires a court to apply to a corporate matter the law of the place where the real seat is located. It is not a rule that requires the real seat of a company to coincide with its registered office. This is the real seat theory in corporate law and the two should not be confused.³¹⁶

3.183  The conclusion that has to drawn from the Überseering and Cartesio cases is that the application of the real seat theory in private international law is not contrary to freedom of establishment. In the post-Überseering state of affairs, national courts that are bound by the law of the real seat as a choice of law rule have to accept that a company that has acquired legal personality within their jurisdiction may choose to subject its internal affairs to the law of another country by moving its real seat there. In other words, the law that governs the acquisition of legal personality does not automatically have to be the applicable substantive law in an internal corporate dispute.

3.184  The consequence of this result in combination with the prohibition on Member States to block the exit of a company which wishes to assume legal personality in another Member State is significant. In the absence of harmonization of private international law rules for corporations, the law seems to be moving in the direction that requires a company to place its real seat at its registered office, if it wishes to minimize the risk of a law other than the law of the place of incorporation becoming the applicable substantive law with regard to its internal corporate matters.

3.185  The extra cost of moving the real seat together with any adequate protection for the stakeholders—primarily creditors and employees—located in the Member State of origin before authorizing a reincorporation would in all probability limit the market for reincorporations.³¹⁷

3.186  Be that as it may, the law as it currently stands allows for the possibility that the applicable substantive law in corporate disputes could be different to the law governing the legal personality of a company. This will strengthen the race for seizing a court before one’s opponent. Thus the claimant may in effect get to choose the choice of law rule or in other words, whether to litigate under the law of the place of incorporation of (p. 89) the law of the real seat, by establishing the jurisdiction of the court that applies the choice of law he or she prefers. Indeed the combination of Article 60(1) with either Article 2 and 22(2) of the Brussels I regulation, depending on the circumstances of the case, offers this possibility.

3.187  One may call this an opportunity for forum shopping, but this is not the case. If the company has chosen to separate its registered office from its real seat it has opened itself to the possibility of being sued at its two domiciles. Undoubtedly, bringing an action against a natural or legal person before the courts of its domicile cannot be considered as opportunistic or forum shopping. Under the Brussels I regulation, Article 22(2) establishes an exclusive jurisdiction which is compulsory and Article 2 establishes a general basis for jurisdiction.

3.188  The Cartesio ruling has also been criticized for marking a departure from the Court’s earlier holding in the Sevic case.³¹⁸ The Court in Sevic had found the German prohibition on the merger of a German company with a Luxembourgian company was a breach of freedom of establishment.

3.189  In the Cartesio case the Court held that in the Sevic case the Member State of incorporation of a company had refused to recognize an establishment operation carried out by that company in another Member State by means of a cross-border merger.³¹⁹ The Court distinguished this case from the facts of the Cartesio case. It held that in cases like the Sevic case the issue which must first be decided is whether or not the company, which is a company governed by the law of a Member State, is faced with a restriction in the exercise of its right of establishment in another Member State.³²⁰ By contrast, in cases like Cartesio the issue which must first be decided is whether the company concerned ‘may be regarded as a company which possesses the nationality of the Member State under whose legislation it was incorporated’.³²¹ For these purposes, it should be considered a foregone conclusion that a company will undoubtedly enjoy the nationality of the Member State where it has been incorporated.

3.190  The critics of the ruling in the Cartesio case find this distinction unpersuasive. It has been argued that the Court allowed for a distinction between cases of immigration and emigration, which ‘is reminiscent of the revisionist (p. 90) approach to the judgment in Daily Mail, a sinister approach to judicial law-making that does little of legal certainty’.³²² According to this criticism:

This approach is flawed not only because the legal principle espoused therein discriminates between like situations and as such continues to be at odds with the general body of jurisprudence dealing with fundamental freedoms. It is also flawed because the facts in Sevic Systems deal with the relationship between the German court and the German acquiring company, rather than the German court and the Luxembourgish company that was absorbed through the merger.³²³

3.191  Another scholar has argued that the Sevic and Cartesio cases are sufficiently similar cases. It was argued that a cross-border transfer of the seat is a cross-border activity just like a cross-border merger and should be treated similarly.³²⁴ Thus both cases should be subject to the same principles. To the extent that, despite the transfer, all connecting factors (registered office, central administration, and principal place of business) remained within the EU, the principle in the Sevic case should applied and the Hungarian restriction should be declared discriminatory.³²⁵

3.192  The equation of the Sevic and Cartesio cases is also ill-premised. The critics of the Cartesio case place the discussion in the context of Article 49 TFEU and freedom of establishment, where as the Court has placed it in the context of Article 54 TFEU. In the words of the judge-rapporteur:

[A] company that does not satisfy the conditions for incorporation, including the connecting factor, required and continued to be required, once it has been validly set up, by the Member State of incorporation, cannot be considered as a company within the meaning of Article [54 TFEU] and, therefore, does not enjoy the right of establishment. According to this interpretation, what is to be regarded a constitutional deficiency in the existence of a company under the law governing that constitution cannot be repaired by invoking the right of establishment.³²⁶

3.193  Furthermore, the facts of the cases and in particular the requests of each company were substantially different. Sevic’s intention was abandon its original legal form so that there was no question of applying a connecting factor with regard to the form.³²⁷ Instead, a new single connection was sought with another Member State and for this reason an operation of cross-border conversion was regarded as a form of cross-border establishment falling within the scope of Article 54 TFEU.³²⁸

(p. 91) 3.194  Thus, while Sevic made a request which was entirely justifiable and was faced with a blanket prohibition, Cartesio made an unusual and apparently irrational request. Whatever it may have wanted to do, it actually asked to move its registered office to Italy while remaining a company listed in the Hungarian commercial register and governed by Hungarian law.

3.195  In addition to this, the Court in the Cartesio case clarified that had Cartesio wished to assume Italian legal personality, which was possible under Italian law, Hungary would not have been able to restrict its exit from the jurisdiction without going through the Gebhard test. Cartesio though did not choose this path.

3.196  On 28 July 2010 a new preliminary reference was submitted to the ECJ by the Hungarian courts, this time seeking to challenge the Hungarian rules that prohibit a foreign company from converting into a Hungarian company. In this new case, a company is seeking to acquire Hungarian legal personality under the name ‘VALE Építési Kft’.³²⁹

3.197  The exact facts are not revealed in the text of the reference, but it appears that a company which was validly incorporated in a Member State deleted the entry regarding it from the commercial register in the Member State of origin and its shareholders adopted a new instrument of constitution under the laws of the host Member State, in this case Hungary, and applied for registration in the commercial register of Hungary.

3.198  The primary question in VALE is whether it is compatible with freedom of establishment for Hungary which does not allow international conversions; ie does not allow foreign companies to convert to a domestic corporate entity, to refuse outright the conversion of VALE to a Hungarian company.

3.199 VALE is in this sense the reverse scenario from the one in the Cartesio case, save for the fact that VALE has ceased to exist as it deleted itself from the Italian register of companies. VALE has lodged a claim against the host Member State, which will call into application the obiter dictum made by the Court in its Cartesio ruling with regard to companies that wish to assume legal personality in another Member State. It should be recalled that in the Cartesio case the Court had ruled that the Member State of origin (p. 92) cannot require the winding-up or liquidation of the company, in the case of a company that wishes to convert itself into a company governed by the law of the host Member State, ‘to the extent that it is permitted under that law to do so’.³³⁰

3.200  On the face of it seems that the Court in the Cartesio case was prepared not to find a breach of freedom of establishment in cases where the law of the host Member State did not allow conversions. At least this is the plain meaning of the words of the Court in paragraph 112 of its ruling. Whether this is the right interpretation can be debated. As Timmermans noted:

[I]t would be difficult to accept a reading of that sentence as granting a discretionary power to the host Member State as to whether or not to allow the conversion. Indeed, the Court having qualified the operation as benefiting from the freedom of establishment, a flat prohibition by the host Member State would constitute a manifest violation of that freedom.³³¹

3.201  With this in mind, the position taken by the French Cour de cassation to recognize the conversion of an Italian company into a French one and to make the latter liable for all the liabilities of the former avoids the difficult question.³³² By contrast, seeking to justify a blanket prohibition of conversions will be a difficult task in the same way that in the Sevic case it was difficult to justify a blanket prohibition of mergers with foreign companies by virtue of which the company in question is merged into the foreign company. Sevic though was an outbound case, whereas VALE is an inbound case. One would think this characterization would make the task for Hungary even harder given that it will not be able to rely on cases like Cartesio and Daily Mail.

3.202  However, Hungary will have one good argument to make. In moving out of Italy, VALE has applied for delisting from the Italian commercial register. Just as Cortes burnt his ships upon arrival to the coast of Mexico to make the point that there would be no turning back, VALE delisted itself from the Italian commercial register perhaps in a move to make the violation of freedom of establishment by Hungary all the more flagrant. However, the fact is that the company has ceased to exist and the Court might think that by consequence there is no issue for it to decide. Be that as it may, depending on the facts, a Member State in the position of (p. 93) Hungary may also argue that VALE chose not to avail itself of the rights given to it by the Cross-border Mergers Directive.³³³ In other words, it refused to incorporate a new company in the host Member State and merge the old company into the new company.

3.203  The rationale behind this argument is that by granting a request such as VALE’s, the host Member State may be exonerating an act of forum shopping.³³⁴ VALE might have been seeking to transform itself to a Hungarian company in this fashion to avoid the objections of creditors, minority shareholders, or employees, which these constituencies, if they exist, could have raised under the procedures established by the Cross-border Mergers Directive. In other words, the ban on reincorporations is to a certain extent explained by the need ‘to protect creditors from redistributive reincorporations’.³³⁵ Thus a transfer that seeks to bypass the creditors will heighten the case for a refusal of reincorporation.

3.204  In order to definitely block the transfer, the host Member State will have to point to specific facts rather than make vague allegations of forum shopping or abuse of EU law. At all times, it may subject reincorporations to other proportionate restrictions. For instance, the host Member State may require evidence that the decision of transfer has been approved by the shareholders and that the decision has been duly disclosed to other stakeholders such as the creditors or the minority.

3.205  Given that in the present instance the proposed transfer of seat and assumption of Hungarian legal personality constitutes a transfer of VALE’s presumed centre of main interests (COMI) under Article 3(1) of the Insolvency Regulation,³³⁶ with all the consequences that this move would entail for VALE’s stakeholders with regard to jurisdiction and the applicable law for the opening of insolvency proceedings, Hungary may have had good reason to subject this transfer to certain requirements. By contrast, it will have a hard time in justifying a blanket prohibition on conversions.