Right of establishment

Doc dr Tatjana Jevremović Petrović

Introduction

 Free movement of goods, capital, services and persons  Cross-border or inter-State element  All national elements – exclusive competence of national law

Right of establishment

 Art. 43 (now art. 49) “...restrictions on the freedom of establishment of a national of a MS in the territory of another MS shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any MS established in the territory of any MS. Freedom of establishment shall include the right ... to set up and manage undertakings, in particular companies or firms ... under the conditions laid down for its own nationals by the law of the country where such establishment is effected ...”

Content of the right of establishment

  Economicaly described by ECJ: “...concept of establishment involves the actual pursuit of an economic activity through a fixed establishment in another MS for an indefinite period” For companies right of establishment means non discrimination in another country (treatment in the same way as domestic company), right for the company to do business in another country.

Content and scope of the the right of establishment

   Discriminate-based reading of the Treaty provisions (non discrimination)  Non discrimination of the foreign company in other MS compared to domestic companies Restriction-based reading of the Treaty  restrictions for domestic companies in connection to another MS – usually connected to situation of home country when company wants to leave Direct effect of the right of establishment?

Right of establishment

  Four factors test (Gebhard Case) – restrictions to the right of establishment: 

National measures liable to hinder or make less attractive the exercise of fundamental freedoms

guaranteed by the Treaty must fulfill four conditions:  Must be applied in a non-discriminatory manner    Must be justified by imperative requirements in the general interest Must be suitable for securing the attainment of the objective which they pursue Must not go beyond what is necessary in order to attain it.

Right to apply national provisions when

discriminatory measures

of public policy, public security or public health (special

provisions for foreign companies)

are allowed, on the grounds

Right of establishment

  Right of primary establishment    right to set up and manage undertakings Change of primary establishment   Cross-border transfer of company’s real seat (not registered seat) Cross-border merger from the point of view of acquired company, different forms of concentration Problem of direct effect of this right (exist only from the host State point of view) Right of secondary establishment    Setting up branches, subsidiaries or agencies in another MS Cross-border merger from the point of view of the acquiring company Practical irrelevance of place of secondary establishment after Centros

Primary/secondary establishment

  After Centros based on legal (not factual) character of relationship between place of primary - secondary establishment: holding/governing company – controlled company in external relations Place of primary/secondary establishment ≠ right of primary/secondary establishment

Segers Case C-79/85

   Mr. Segers, national of Netherlands took over UK company, registered in the UK. Later founded subsidiary in Netherlands and there performed all activities of the primary establishment Primary concern: the fact that company didn’t perform any of its activities in the place of the registered seat, and performed all activities trough a branch in Netherlands.

Questions for the ECJ

Daily Mail Case 81/87

 UK company Daily Mail, registered in this country, wanted to change its residence (real seat) to the Netherlands for tax purpose. This right was denied, or tax had to be payed. Residence in the UK relevant for tax payments.

 Relevant First question to the ECJ

Centros Case C-212/97

  Danish couple founded a company in the UK, with a registed office in the UK. Share capital was 100 GBP (unpaid) Danish couple were residents of Denmark and wanted to register a branch in Denmark in order to perform all its buisiness through this branch. Registration was refused on the grounds that it is factualy primary establishment – therefore minimum capital has to be paid.

Uberseering Case C-208/00

  Company formed in Netherlands, afterward acquired by two German nationals, residing in Germany.

Uberseering wanted to sue other company for not fulfilling some contractual obligations, but was denied on the ground that it doesn’t have a legal capacity, because it moved its real seat to Germany, and under German law it cannot be considered as being a legal person, if not reincorporated again.

Insipire Art Case C-167/01

 Company formed under UK law, having sole director with a domicile in the Hague, and also a branch in the Netherlands.  Netherland’s Law on the Formally Foreign companies with provisions introducing responsibility of directors, specification in the register that a company is formally foreign, and certain minimum capital requirements.

Sevic Case C-411/03

 Established in Germany, wanted to acquire a company from Luxembourg as a way of cross border merger.

 Operation was denied by preventing registration on the grounds as not beeing possible under German law, which regulates only domestic mergers.

Cartesio Case C-210/06

 Hungarian company, formed under Hungarian law with its real seat there, and having Hungarian nationals for its owners and managers wanted to move its real seat out of Hungary, to Italy, but still to be regulated by Hungarian law. Transfer was denied.

Vale Case C-378/10

   Cross-border transfer of a company’s seat governed by Italian law to Hungary  Removed from Italian register 13 Feb 2006 Change in the applicable law and its reincorporation as a company governed by Hungarian law which claims to be the universal successor to the Italian company  Application for Hungarian registration 19 Jan 2007 Ruling on the extent of a host Member State’s obligations in the case of the cross-border reincorporation (conversion) of a limited company – under the scope of the right of establishment

Problems

        Direct effect of the right of establishment Inbound/outbound establishment Future application of real seat doctrine Company law issues (creditor protection, employee participation) Competition and efficiency vs. Protection of interest of certain persons (ECJ in fact gives primacy to efficiency) Regulatory competition or “Delaware effect”    Race to the top/race to the bottom Competition vs. Harmonization Regulatory competition after Centros case Circumvention of laws (fraus legis) – pro forma foreign companies  What instruments are possible to prevent circumvention of laws?

Application of the provisions of one legal system unconsistent (different lex societatis – lex concursus)

Reading materials

  Obligatory reading  Dorresteijn/Monteiro/Teichmann/Werlauff “European Corporate Law” Further reading  Catherine Barnard “The Substantive Law of the EU: The Four Freedoms”, OUP, 2010.

        F. Burrows, Free movement in European Community Law, Clarendon Press, Oxford, 1987.

Anne Looijestijn-Clearie, „Centros Ltd — A complete U-turn in the right of establishment for companies", International and Comparative Law Quarterly, vol. 49, July 2000.

Luca Cerioni, „The Barriers to the International Mobility of Companies within the European Community: A Re-reading of the Case Law", The Journal of Business Law, January 1999.

Veronika Korom, Peter Metzinger, „Freedom of Establishment for Companies: the European Court of Justice confirms and refines its Daily Mail Decision in the Cartesio Case C-210/06“, European Company and Financial Law Review, nr. 1, 2009.

Manuel Garcia-Riestra, „The Transfer of Seat of the European Company v Free Establishment Case-Law”, European Business Law Review, nr. 6, 2004.

Werner Ebke, „The European Conflict-of-Corporate-Laws Revolution: Überseering, Inspire Art and Beyond“, European Business Law Review, nr. 1, 2005.

Justin Borg-Barthet, „European private international law of companies after Cartesio“, International and Comparative Law Quarterly, vol. 58, nr. 4, 2009.

Robert Drury, „The ‘Delaware Syndrome’: European Fears and Reactions”, Journal of Business Law, November, 2005.