Cross Border Mobility of Companies in the EU – ‚Vale‘ and more …
By Hermann J. Knott, LL.M. (University of Pennsylvania), Attorney-at-law (New York), Partner,
Luther, Cologne, Germany
1.
INTRODUCTION
Companies in the EU and the EEA find themselves in an integrated economic zone, which enables them to exercise their business activities with few limitations under local laws1. The European Court of Justice’s (ECJ) decision VALE2 discussed in this outline is the latest in a string of
cases regarding cross-border mobility of companies in the EU. For corporate entities this mobility
is achieved by transferring their headquarters or registered seats from one Member State of the
EU to another. Cross-border reorganizations according to the various domestic transformation
acts may also be used to move a company abroad. Differences in taxation, company law or employee participation between the Member States of the EU and changes in a company’s business
or marketing strategy are the drivers for such change. European Union law recognizes such mobility of companies and acknowledges their freedom of establishment according to Articles 49
and 54 of the Treaty on the Functioning of the European Union (TFEU)3. At the same time companies are ‘creatures of national law’, they ‘exist only by virtue of the varying national legislation
which determines their incorporation and operations’4. The attachment to the Member State of
origin on the one hand and the freedom of establishment enhancing mobility of companies within
the EU on the other hand create a relationship of legal tension. This is the context of the jurisdiction of the ECJ over two decades culminating in the VALE decision.
2.
FROM HEADQUARTERS TO INCORPORATION RULE
Before the ECJ’s ruling in the Centros case in 19995, the law applicable to a company was that of
its headquarters in many countries of the EU, especially on the continent. Thus, a company was
only recognized as existing if it had its headquarters in the country where it was incorporated. If it
moved its headquarters to another country and was not incorporated under that country’s laws, it
was not considered as existing in that country. For example, if a US bank had a subsidiary in
Frankfurt and afterwards gradually transferred its headquarters to London because of the greater
volume of business, the German company would no longer be recognized as existing in Germany
as its headquarters had moved to England where in turn it was not validly established.
1
The following remarks regarding EU law also apply to the Member States of the EEA, Art. 31 and 34 of
the Agreement on the European Economic Area, dated May 2, 1992.
2
ECJ Case C-378/10 VALE Epitesi kft [2012].
3
EU Off. Journal May 9, 2008, C-115/47
4
ECJ Case 81/87 Daily Mail [1988].
5
ECJ Case C-212/97 Centros Ltd. [1999]
The first decisions of the ECJ regarding the transfer of headquarters related to the recognition of
a company transferring its headquarters by the host Member State. In these decisions the ECJ
held that the afore-mentioned headquarters rule violated the freedom of establishment provisions
of the TFEU. For transfers of headquarters within the EU the Court favored the incorporation rule
(cf. the decisions ‚Centros‘, ‚Überseering‘, ‚Inspire Art‘, ‚Cartesio‘)6. According to that rule a company does validly exist irrespective of where its headquarters are located as long as it has been
validly incorporated in its state of origin. It is obvious that this principle favors corporate mobility
as the company is free to move its headquarters anywhere without losing its legal identity. In
case of the US bank with a subsidiary in Frankfurt, a transfer of its headquarters to London would
not affect its status as being duly incorporated in Germany.
However, the ECJ’s jurisdiction does not reach beyond the borders of the EU. In relation to nonEU countries the headquarters rule still prevails in conflict rules of many jurisdictions. Thus, in a
recent case the German Federal Supreme Court confirmed this result with regard to Switzerland
stating that a stock corporation validly incorporated in Switzerland with headquarters in Germany
is not recognized in Germany as a corporate entity, but considered as a partnership with personal
liability of the participating individuals 7.
3.
RESTRICTIONS ON MOBILITY IN THE CARTESIO DECISION
In the Cartesio case heard by the ECJ in 2008, the Court acknowledges restrictions on the freedom of establishment. According to the ECJ, Member States are free to enact provisions in their
national laws preventing companies from transferring their headquarters to a foreign country.
This aspect is part of every Member States’ national autonomy to decide on the requirements of
a valid incorporation of a company under its national laws. The host Member State, for its part,
however, may not place such restrictions on companies which want to move into its territory
Applied to the example of the US bank’s European subsidiary in Frankfurt the consequences are
as follows: If under German company law a German company was not allowed to have its headquarters abroad (which is actually no longer the case since 2008), the subsidiary would not be
able to transfer its headquarters to London without winding-up the German entity. As German law
now allows German companies to have their headquarters abroad, such a move would still be
possible. If the US bank’s subsidiary were in Hungary, it could not transfer its headquarters to
London, as Hungarian law does not allow Hungarian companies to transfer its headquarters
abroad.
6
ECJ Case C-212/97 Centros Ltd. [1999]; Case C-208/00 Überseering BV [2002]; Case C-167/01 Inspire
Art Ltd. [2003]; Case C-210/06 Cartesio [2008].
7
German Federal Supreme Court, Case II ZR 158/06 Trabrennbahn [2008].
4.
MOVE OF REGISTERED SEAT – PROGNOSIS IN CARTESIO
In an obiter dictum in the Cartesio ruling, the ECJ indicated that the restrictions on the freedom of
establishment provisions accepted by the court would not apply to mere transfers of headquarters if the company was prepared to submit itself to the corporate law of the host Member State,
i.e. by converting into a form of company which is governed by the law of the Member State to
which it had moved (transfer of registered seat). This alternative would allow the US bank having
a subsidiary in Hungary to move to London, thus ensuring legal continuity.
5.
THE PROGNOSIS COMING TRUE – THE VALE DECISION
In VALE, an Italian limited liability company wanted to transfer its registered seat from Italy to
Hungary presumably to do business at lower cost than in Italy and in light of the fact that it already enjoyed a large customer base in the host country. The situation is parallel to the US
bank’s German subsidiary moving from Frankfurt to London. In doing so, the company applied to
the commercial register in Italy to delete its entry in the register, making reference to the consecutive incorporation in Hungary. In Hungary, VALE applied for the entry of a newly founded Hungarian limited liability company as the successor of the Italian company. The Hungarian officials,
however, denied the registration of the Hungarian company making reference to the “predecessor in law” in Italy. They took the position that Hungarian law does not provide for a cross-border
conversion into a Hungarian company.
Such cross-border conversions, according to the ECJ, should be accepted if the host Member
State recognizes conversions at the level of its own domestic law. Thus, while the Member State
of origin will enter the transfer of the registered seat of the company to the host Member State
into its commercial register, the commercial register of the host Member State will make reference to the fact that the company originated in the Member State of origin, as the predecessor of
the converted entity.
For the US bank with its registered seat in Frankfurt, this means it may transfer its domicile to
London thereby converting to an English company while still retaining the option to only transfer
its headquarters to London and simultaneously maintain the status as a German company.
6.
CROSS-BORDER MERGERS AND ESTABLISHING AN EUROPEAN CORPORATION
(‘SE’) AS ALTERNATIVE STRUCTURES
Another option for the US bank would be to merge the German company with a newly established English company according to the relevant provisions of English law implementing the EU
Merger Directive8. In practice the conversion - though not (yet) regulated by European law should be less expensive and easier to implement under regular circumstances. As opposed to a
merger, no assets are transferred in a conversion, thus no transfer taxes, e.g. for real estate, will
be triggered. Furthermore, the Merger Directive provides for employee participation9 which is not
the case for conversions. On the other hand, the scope of application for cross-border conversions is wider than the scope of the Merger Directive which only applies to companies limited by
shares.
A further alternative for the US bank would be to convert into an SE (‘Societas Europaea’), a European stock corporation recognized in all EU Member States. Therefore, it is not necessary to
initiate any of the legal transactions described above in order to move the company to another
EU country. A minimum stated capital for the SE is EUR 120,000. The SE can only be established in a cross-border context with e.g. a conversion requiring the converting stock corporation
to have a subsidiary in at least one other Member State which has been operating for at least two
years.
7.
HOW TO REALIZE A CROSS-BORDER CONVERSION
As we have seen, the alternative structures described above are not the ideal options in every
context. Therefore, cross-border conversions are an interesting alternative if a company has the
intention to move from one EU Member State to another. Such conversions are, however, not
suited for companies expanding their business activities into the EU or into other EU Member
States. Transferring the registered seat to another Member State and thereby converting into another legal form has so far not yet been regulated by European law. In the wake of the VALE decision the need for a harmonized legal regime has increased, since the national laws on conversions do not address the specific issues affecting cross-border conversions. Against this background the ECJ postulates a “consecutive application of the two national laws”10
As a result of VALE the commercial register of the Member State of origin is now obligated to enter the cancellation of the registration of the transferring company with a reference to legal succession in the host Member State. The host Member State is allowed to determine which legal
provisions apply to cross-border conversions as long as the principles of equivalence and effectiveness are observed. To indicate the cross-border nature of the conversion, the commercial
register of the host Member State has to refer to such company as its "predecessor in law" in the
entry for the converting company if such mention is also made for domestic conversions. It may
also not refuse to take account of documents obtained from the authorities of the Member State
8
Directive 2005/56/EC of October 26, 2005 on cross-border mergers, EU Off. Journal November 25, 2005,
L310/1 (“EU Merger Directive”).
9
Cf. Art. 16 Merger Directive
10
ECJ Case C-378/10 Vale [2012], paragraphs 37 and 44.
of origin, if the host Member State’s law has such provisions for domestic conversions11. At the
same time the host Member State has to insure that the requirements for an incorporation of the
converting company in its jurisdiction can be met in a legal form which is equivalent to the form
the company had in its Member State of origin.
If our US bank is organized as a German stock corporation, it could convert to an English plc and
move its registered seat to London. It would have to follow the rules for establishing a plc under
English law and file in Germany for the deletion of its entry due to the transfer of its registered
seat to London.
8.
NEW CONDITION FOR APPLICATION OF FREEDOM OF ESTABLISHMENT REGIME
In Vale the ECJ established a new condition for the parties to be able to benefit from the
freedom of establishment regime under EU law. According to the decision ‘the freedom
of establishment involves the actual pursuit of an economic activity through a fixed establishment in the host Member State for an indefinite period.12’
In its preceding decisions regarding the freedom of establishment the ECJ used to follow a broad
understanding of what it considered an ‚establishment‘13. This resulted in letterbox companies
being incorporated to circumvent more restrictive requirements of incorporations in other Member
States. From a German legal point of view English limited companies with their headquarters situated in Germany will fall outside the scope of the freedom of establishment. English companies
limited by shares are favored because the rules for contributing and maintaining capital as well as
the rules governing the personal liability of shareholders and managing directors are more generous than in Germany For most of the English limited companies founded by German nationals,
however, the separation of headquarter and registered seat was artificial since they are governed
from Germany. The ECJ on the other hand used to explicitly approve of the incorporation of letterbox companies as part of the competition within the single European Market. In cases in which
the transfer of the registered seat has a business background (as in our example of the US bank
moving its activities from Frankfurt to London), this new requirement will always be fulfilled.
9.
THE SIGNIFICANCE OF VALE
The importance of VALE lies in establishing more substantive requirements if the parties want to
rely on the freedom of establishment regime under EU law: Firstly, the protection of this freedom
is concentrated on cases in which the moving company submits itself to the laws of the host
Member State to which it moves. Thus, transfers of registered seats enjoy stronger protection
than merely moving the headquarters. Secondly, and this requirement corresponds with the first
11
ECJ Case C-378/10 Vale [2012], paragraph 56.
ECJ Case C-378/10 Vale [2012], paragraph 34.
13
ECJ Case C-212/97 Centros [1999], paragraph 30.
12
one, there must be a permanent activity in the host Member State. Of all available alternatives for
companies to move from one Member State to another, conversion appears to be the most practicable one, although it has not yet been regulated on at EU-wide level. Therefore, for the time
being, it remains the task of creative and versatile lawyers to skillfully handle cross-border conversions together with colleagues from the other jurisdiction(s) involved. A particular challenge
will be to convince the commercial registers to record the respective entries together with the
supplements regarding the predecessor and the successor status, respectively.