SELECTED TOPICS OF COMPANY LAW
EU COMPANY LAW AND CORPORATE MOBILITY IN THE EU
I. EUROPEAN COMPANY LAW: A GENERAL INTRODUCTION
A. INTRODUCTION
Establishment of an internal market is one of the principal tasks of the EU (art. 33. TEU).
è Internal market = “an area without internal frontiers in which the free movement of goods,
persons, services and capital is ensured in accordance with the provisions of the Treaties”
(art. 26.2 TFEU)
Internal market aims at market integration within the EU
è therefore, all national rules and practices impeding this market integration must be “eliminated”
as much as possible (subject to the Treaty rules)
è The cornerstones of the internal market are the Treaty provisions on the free movement of
goods, persons, services, and capital (= the four freedoms)
!!!
The right to establish yourself, in pursuit of an economic activity, in another MS.
- Part of the free movement of persons
- In order to be protected under the right of establishment, the pursuit of such an economic
activity in another MS must include a fixed establishment for an indefinite period.
- Freedom of establishment is the legal cornerstone of European company law.
è This is because of:
(i) The protection, with direct effect, of the freedom by the Treaty itself, and
(ii) The fact that it forms the legal basis for most EU secondary legislation in the
area of company law.
⚠ Has a direct effect à every citizen of the EU has it and can go to the ICJ
B. FREEDOM OF ESTABLISHMENT IN THE TREATY
Article 49 TFEU
“Restrictions on the freedom of establishment of nationals of a Member State in the territory of another
Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of
agencies, branches or subsidiaries by nationals of any Member State established in the territory of any
Member State”
è This gives rights to nationals of MS’s
è Not only natural persons, but also companies enjoy the right of establishment.
Article 54 TFEU
“Companies or firms formed in accordance with the law of a Member State and having their
registered office, central administration or principal place of business within the Union, shall for
the purposes of this Chapter, be treated in the same way as natural persons who are nationals of
Member States”
!!!
More limited than legal persons (in the economic sense): originally, it was about pursuing
economic freedom à EU had an economic goal.
1
, To enjoy freedom of establishment, companies must fulfil two conditions:
(1) Be formed in accordance with the law of a MS
(2) Have their registered office, central administration, or principal place of business within
the union.
FIRST CONDITION : BE FORMED IN ACCORDANCE WITH THE LAW OF MS
Unlike natural persons à companies are ‘creatures of national law’
A company only enters on the European scene of free establishment, if, according to its lex
societas, it is validly formed/created and has come into existence.
à This lex societas is, by definition, the law of a MS
SECOND CONDITION : HAVE THEIR REGISTERED OFFICE, CENTRAL ADMINISTRATION OR
PRINCIPAL PLACE OF BUSINESS WITHIN THE EU
Hints at the crux of a problem that has haunted the law of intra-European establishment for companies
for decades
è MS use two different and often conflicting connection factors for determining the lex societas of
a company:
1. The incorporation theory
- Company governed by the laws of the state where the company was first incorporated
(created)
à This place is as such included in the original incorporation deed documents
- Law of the State in which the seat chosen in the companies’ incorporation deed, is
located, is applicable
- Legalistic, formalistic criterium à so more legal certainty
- E.g., UK, Ireland, Netherlands, Denmark, also Belgium since 2019
2. The real seat theory
- Company governed by the laws of the state from where the company is effectively
directed (= central administration) or where its economic activities are principally
focused (= principal place of business).
- The law of the State in which the “actual seat” is located, is applicable.
- Economic, factual criterium – less certainty.
- E.g., France, Germany, Spain
Historically most states are real seat countries. Belgium switched to incorporation due to the
ICJ case law.
Incorporation theory seems more conductive to free movement of companies, at least in the economic
sense à it allows you to sit somewhere in the EU and look which law in EU is best for your company.
BUT the TFEU has not chosen:
Article 54
§ Registered office Incorporation theory
§ Central administration Refer to same criteria à real seat
§ Principal place of business
There is no choice: it recognizes both theories.
The law of MS’s are all worded a bit differently so to keep this in mind.
è This creates inherent tensions with the idea of free movement.
Ø You have a company and transfer your principal place of business to another MS (but you
want to keep your same company under your same laws).
Ø You want to create a company according to the national law of another MS because they
suit you better (irrespective of where you principally want to do business).
2
,Unwritten exception: the rule of reason/Gebhard-test
è Obstacles to free movement may be created if they are:
(1) Justified by imperative requirements in the general interest.
(2) Applied without distinction as to nationality (i.e., non-discriminatory), and
(3) Proportionate, i.e.
(i) Appropriate (suitable) to attain the objective of general interest pursued, and
(ii) Indispensable (not exceed what is necessary) to achieve that objective.
Direct application of the Treaty protection of freedom of establishment has been the legal basis
for the case law developments (1999-present) in the jurisprudence of the ECJ.
C. SECUNDARY LEGISLATION: THE EUROPEAN COMPANY LAW HARMONISATION
PROGRAM
1. LEGAL BASIS
Article 50 TFEU (former article 44):
“1. In order to attain freedom of establishment as regards a particular activity, the European
Parliament and the Council, acting in accordance with the ordinary legislative procedure and after
consulting the Economic and Social Committee, shall act by means of directives.
2. The European Parliament, the Council and the Commission shall carry out the duties devolving upon
them under the preceding provisions, in particular.
[…]
(g) by coordinating to the necessary extent, the safeguard which, for the protection of the interests of
members and others, are required by Member States of companies or firms within the meaning of the
second paragraph of Article 54 with a view to making such safeguards equivalent throughout the
Union;
[…]”
è Empowers the legislative bodies of the EU to enact European legislation for the purpose of
attaining, of giving effect to FoE à harmonize EU law to a certain extent
Article 50 TFEU is the legal basis most used for secondary EU company law legislation, i.e., most
of the directives that form part of the “company law harmonization program”
- Even if the link with FoE stricto sensu was often, at best, tenuous.
- For example: the so-called “prokura” rules in the First Directive of 1968 on representation.
- It was, however, accepted by the ECJ that this provision could serve as a basis as long as
the proposed rules have beneficial effect on cross-border activity and thus facilitate
market integration, even if they do not concern establishment as such.
- Only directives
Right of establishment doesn’t automatically apply on other legal domains (labour law,
environmental law, etc). It won’t give a harmonized tax regime e.g.
It does give legal certainty and security. It might help when companies know the same
rules apply everywhere.
Ratione personae: only about companies from within the EU. NOT companies from
outside the EU à they don’t fall under this legislation.
Other legal grounds in the Treaty that have been used to establish secondary EU legislation in the
broad area of company law are.
è Article 114 TFEU (formerly art. 95),
allows for directives and regulations to be adopted for the “approximation of the provisions”
of national law with respect to the establishment and functioning of the internal market,
and with a view of achieving the Treaty objectives on the internal market.
- More complex procedures of co-decision
3
, - Mainly used for capital markets law
- Also regulations
è Article 352 TFE (formerly art. 308)
Provides for a general “catch-all” for “appropriate” measures (i.e., also Regulations)
“necessary” to attain one of the objectives of the Treaty, but where the powers were not
provided for elsewhere.
à Used for the SE
As result, a very substantial body of secondary “harmonizing” EU law has developed, which
fundamentally impacts national company law.
2. WHY HARMONIZATION?
The so-called “Berkenhouwer report” of 1966 identified three reasons:
(1) First reason:
To facilitate freedom of establishment in the host country
(2) Second reason:
To avoid abuse of freedom of establishment
(3) Third reason:
To improve legal security in intra-community relations.
è The real fear in the early days of the EU, and therefore the rationale behind (current) Article 50.2
(g) was probably the second one.
- Five of the six original MS’s feared competition from the relatively “liberal” company law
regime (including use of the incorporation theory) of the sixth one, i.e., the Netherlands.
- They feared the so-called “Delaware effect” that could be created if the right to free
establishment led to unbridled “corporate mobility”, i.e., free mobility of companies
within the MS’s.
Companies are, legally speaking, persons (they enjoy, in principle, the same legal subjectivity as natural
persons).
è BUT there is, in terms of freedom of establishment, a fundamental difference between “natural”
(physical) persons and legal persons:
= corporate persons are already in and of themselves ‘creatures of the law’.
- Hence the debate about corporate mobility across jurisdiction is not only about the
economic choice of doing business in other jurisdictions (even though that was the
starting point)
- It is about the legal choice of which company law applies to your company, and almost
as importantly, which company law does not apply to your company. It is about the
freedom to choose your company law.
The respective domains of choice on the one hand, and of mandatory rules on the other, is
probably the most fundamental fault line for any system of company law (both as a matter of
black letter law and as a matter of policy).
- A liberal regime of choice of applicable company law itself, can be very subversive for the
trade-offs that national legal systems make with respect to this fault line.
- Especially in continental Europe, company law itself has traditionally encompassed
mandatory rules for the protection of certain “stakeholders”, such as third parties who
contract with the company in general (and creditors in particular) or employees.
- Company law also differs e.g., in the amount of mandatory protection for minority
shareholders.
4
EU COMPANY LAW AND CORPORATE MOBILITY IN THE EU
I. EUROPEAN COMPANY LAW: A GENERAL INTRODUCTION
A. INTRODUCTION
Establishment of an internal market is one of the principal tasks of the EU (art. 33. TEU).
è Internal market = “an area without internal frontiers in which the free movement of goods,
persons, services and capital is ensured in accordance with the provisions of the Treaties”
(art. 26.2 TFEU)
Internal market aims at market integration within the EU
è therefore, all national rules and practices impeding this market integration must be “eliminated”
as much as possible (subject to the Treaty rules)
è The cornerstones of the internal market are the Treaty provisions on the free movement of
goods, persons, services, and capital (= the four freedoms)
!!!
The right to establish yourself, in pursuit of an economic activity, in another MS.
- Part of the free movement of persons
- In order to be protected under the right of establishment, the pursuit of such an economic
activity in another MS must include a fixed establishment for an indefinite period.
- Freedom of establishment is the legal cornerstone of European company law.
è This is because of:
(i) The protection, with direct effect, of the freedom by the Treaty itself, and
(ii) The fact that it forms the legal basis for most EU secondary legislation in the
area of company law.
⚠ Has a direct effect à every citizen of the EU has it and can go to the ICJ
B. FREEDOM OF ESTABLISHMENT IN THE TREATY
Article 49 TFEU
“Restrictions on the freedom of establishment of nationals of a Member State in the territory of another
Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of
agencies, branches or subsidiaries by nationals of any Member State established in the territory of any
Member State”
è This gives rights to nationals of MS’s
è Not only natural persons, but also companies enjoy the right of establishment.
Article 54 TFEU
“Companies or firms formed in accordance with the law of a Member State and having their
registered office, central administration or principal place of business within the Union, shall for
the purposes of this Chapter, be treated in the same way as natural persons who are nationals of
Member States”
!!!
More limited than legal persons (in the economic sense): originally, it was about pursuing
economic freedom à EU had an economic goal.
1
, To enjoy freedom of establishment, companies must fulfil two conditions:
(1) Be formed in accordance with the law of a MS
(2) Have their registered office, central administration, or principal place of business within
the union.
FIRST CONDITION : BE FORMED IN ACCORDANCE WITH THE LAW OF MS
Unlike natural persons à companies are ‘creatures of national law’
A company only enters on the European scene of free establishment, if, according to its lex
societas, it is validly formed/created and has come into existence.
à This lex societas is, by definition, the law of a MS
SECOND CONDITION : HAVE THEIR REGISTERED OFFICE, CENTRAL ADMINISTRATION OR
PRINCIPAL PLACE OF BUSINESS WITHIN THE EU
Hints at the crux of a problem that has haunted the law of intra-European establishment for companies
for decades
è MS use two different and often conflicting connection factors for determining the lex societas of
a company:
1. The incorporation theory
- Company governed by the laws of the state where the company was first incorporated
(created)
à This place is as such included in the original incorporation deed documents
- Law of the State in which the seat chosen in the companies’ incorporation deed, is
located, is applicable
- Legalistic, formalistic criterium à so more legal certainty
- E.g., UK, Ireland, Netherlands, Denmark, also Belgium since 2019
2. The real seat theory
- Company governed by the laws of the state from where the company is effectively
directed (= central administration) or where its economic activities are principally
focused (= principal place of business).
- The law of the State in which the “actual seat” is located, is applicable.
- Economic, factual criterium – less certainty.
- E.g., France, Germany, Spain
Historically most states are real seat countries. Belgium switched to incorporation due to the
ICJ case law.
Incorporation theory seems more conductive to free movement of companies, at least in the economic
sense à it allows you to sit somewhere in the EU and look which law in EU is best for your company.
BUT the TFEU has not chosen:
Article 54
§ Registered office Incorporation theory
§ Central administration Refer to same criteria à real seat
§ Principal place of business
There is no choice: it recognizes both theories.
The law of MS’s are all worded a bit differently so to keep this in mind.
è This creates inherent tensions with the idea of free movement.
Ø You have a company and transfer your principal place of business to another MS (but you
want to keep your same company under your same laws).
Ø You want to create a company according to the national law of another MS because they
suit you better (irrespective of where you principally want to do business).
2
,Unwritten exception: the rule of reason/Gebhard-test
è Obstacles to free movement may be created if they are:
(1) Justified by imperative requirements in the general interest.
(2) Applied without distinction as to nationality (i.e., non-discriminatory), and
(3) Proportionate, i.e.
(i) Appropriate (suitable) to attain the objective of general interest pursued, and
(ii) Indispensable (not exceed what is necessary) to achieve that objective.
Direct application of the Treaty protection of freedom of establishment has been the legal basis
for the case law developments (1999-present) in the jurisprudence of the ECJ.
C. SECUNDARY LEGISLATION: THE EUROPEAN COMPANY LAW HARMONISATION
PROGRAM
1. LEGAL BASIS
Article 50 TFEU (former article 44):
“1. In order to attain freedom of establishment as regards a particular activity, the European
Parliament and the Council, acting in accordance with the ordinary legislative procedure and after
consulting the Economic and Social Committee, shall act by means of directives.
2. The European Parliament, the Council and the Commission shall carry out the duties devolving upon
them under the preceding provisions, in particular.
[…]
(g) by coordinating to the necessary extent, the safeguard which, for the protection of the interests of
members and others, are required by Member States of companies or firms within the meaning of the
second paragraph of Article 54 with a view to making such safeguards equivalent throughout the
Union;
[…]”
è Empowers the legislative bodies of the EU to enact European legislation for the purpose of
attaining, of giving effect to FoE à harmonize EU law to a certain extent
Article 50 TFEU is the legal basis most used for secondary EU company law legislation, i.e., most
of the directives that form part of the “company law harmonization program”
- Even if the link with FoE stricto sensu was often, at best, tenuous.
- For example: the so-called “prokura” rules in the First Directive of 1968 on representation.
- It was, however, accepted by the ECJ that this provision could serve as a basis as long as
the proposed rules have beneficial effect on cross-border activity and thus facilitate
market integration, even if they do not concern establishment as such.
- Only directives
Right of establishment doesn’t automatically apply on other legal domains (labour law,
environmental law, etc). It won’t give a harmonized tax regime e.g.
It does give legal certainty and security. It might help when companies know the same
rules apply everywhere.
Ratione personae: only about companies from within the EU. NOT companies from
outside the EU à they don’t fall under this legislation.
Other legal grounds in the Treaty that have been used to establish secondary EU legislation in the
broad area of company law are.
è Article 114 TFEU (formerly art. 95),
allows for directives and regulations to be adopted for the “approximation of the provisions”
of national law with respect to the establishment and functioning of the internal market,
and with a view of achieving the Treaty objectives on the internal market.
- More complex procedures of co-decision
3
, - Mainly used for capital markets law
- Also regulations
è Article 352 TFE (formerly art. 308)
Provides for a general “catch-all” for “appropriate” measures (i.e., also Regulations)
“necessary” to attain one of the objectives of the Treaty, but where the powers were not
provided for elsewhere.
à Used for the SE
As result, a very substantial body of secondary “harmonizing” EU law has developed, which
fundamentally impacts national company law.
2. WHY HARMONIZATION?
The so-called “Berkenhouwer report” of 1966 identified three reasons:
(1) First reason:
To facilitate freedom of establishment in the host country
(2) Second reason:
To avoid abuse of freedom of establishment
(3) Third reason:
To improve legal security in intra-community relations.
è The real fear in the early days of the EU, and therefore the rationale behind (current) Article 50.2
(g) was probably the second one.
- Five of the six original MS’s feared competition from the relatively “liberal” company law
regime (including use of the incorporation theory) of the sixth one, i.e., the Netherlands.
- They feared the so-called “Delaware effect” that could be created if the right to free
establishment led to unbridled “corporate mobility”, i.e., free mobility of companies
within the MS’s.
Companies are, legally speaking, persons (they enjoy, in principle, the same legal subjectivity as natural
persons).
è BUT there is, in terms of freedom of establishment, a fundamental difference between “natural”
(physical) persons and legal persons:
= corporate persons are already in and of themselves ‘creatures of the law’.
- Hence the debate about corporate mobility across jurisdiction is not only about the
economic choice of doing business in other jurisdictions (even though that was the
starting point)
- It is about the legal choice of which company law applies to your company, and almost
as importantly, which company law does not apply to your company. It is about the
freedom to choose your company law.
The respective domains of choice on the one hand, and of mandatory rules on the other, is
probably the most fundamental fault line for any system of company law (both as a matter of
black letter law and as a matter of policy).
- A liberal regime of choice of applicable company law itself, can be very subversive for the
trade-offs that national legal systems make with respect to this fault line.
- Especially in continental Europe, company law itself has traditionally encompassed
mandatory rules for the protection of certain “stakeholders”, such as third parties who
contract with the company in general (and creditors in particular) or employees.
- Company law also differs e.g., in the amount of mandatory protection for minority
shareholders.
4
