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Legal Companies European

Legal Regulations of International Business

“Little further work is required in the light of judicial and legislative developments to make freedom of establishment for companies within European Union reality”

1. Introduction

Harmonization of European company law has been a key point of discussion for the last 35 years in order to provide bigger understanding and support among members countries of European Union in relation to movement of goods, workers and freedom of establishment (Griffin 2000). Establishment of a company within EU is a fundamental right guarantied by European Community Treaty and it is prime factor in lowering barriers in free movements of capital and consolidation of European company law and national regulations of member states of EU( Frost 2005).

Furthermore the harmonization has been pursuit by Council Directives which are binding on all members states, however harmonization of EU company law causes still some controversy, particularly among some countries which as a effect of harmonization see abolition of domestic legal principles.

The aim of this paper is to critically discuss some issues and disagreement surrounding harmonization of company law in EU, looking at some progress of this process as well as trying to answer the question if there is really just few steps to absolute freedom of establishing a company within EU. The analysis will focus on the scope of some articles of European Community Treaty in order to establish differences used in classifying company’s parentage.

Additionally, the research will focus on an entity called Societas Europea (European Company) created in order to harmonize and simplify registration and transfer of a company within EU. Furthermore transfer of company’ seats will be discussed as a example of EU company law controversy in synchronization of establishing and transferring freely within member states. The research will be supported by number of cases law from European Court of Justice related to free establishment and briefly it will be analyzed some Council Directives as a way to harmonize company law in EU.

2. Article 43 and 48 of European Community Law Treaty.

Above articles are fundamental ones in relation to free establishment of a company within EU, however, analyzing deeper Art 43 it can be noticed that two kinds of freedom has been defined there. Firstly primary one which prohibits any restrictions raised by member states in relation to establishment in another Member State. It states clearly that every citizen of a European Union community can freely move its domicile or residency to another Member state including working and living without being discriminated in any form and secondly citizen of a member state cannot be a subject to any restrictions in establishing branches or agencies within EU.

The same prohibition of restrictions apply in case of companies, Art 48 , therefore the freedom establishment of company is not clear because legal entities do not live and exist as it take place of natural person (Mucciarelli 2007). This has been asked by Mucciarelli 2007 if “… the question arises as to whether Article 48 TEC provides for a hidden conflict rule referring to the country of incorporation.” The distinction between legal and natural person has been made in case of Daily Mail where it was claimed that legal capacity of a company and functioning is based on domestic law.

3. Transfer of company’s seats.

For several years transfer of company seat caused many controversy in European company law . Reasons for it can be found in two theories of EU law: Incorporation theory and Real seat theory. The first one relates the jurisdiction of a company in which it was incorporated, allowing the company develop any activities in any of the member states with holding its status while the Real seat theory applies legal order to all companies directed from within its territory. It causes a ‘disagreement’ between them when the first theory recognizes all foreign entities according to the rules of its state of origin (Wymerrsch 2003) while Real seat theory specify the state of the law where the company actually has head office or real seat .

It can cause some difficulties in establishing the real seat of a company e.g. when the company does not have active business at the time of relocation. In reality applying this theory means that in case of relocating the new seat of a company to another country would lead the new company seat a subject to the law of a state the company moves out(Frost 2005). This form of establishing a company is more expensive due to taxes which are incurred in the moment of establishing new company because of need to set up a completely new company in other state and later acquiring shares of the old one.

As alternative assets of the old company can be transferred to the new one, however in both cases there would me necessity to pay tax on profit gained from transfer of shares or assets (Frost 2005). Supporters of the Incorporation theory underline that it provides legal certainty and encourage companies to operate internationally (Siems 2002). However even if a member state applies this theory, it is limited by shareholders protection and regulations under administrative regulations in the UK or a special rules of pseudo-foreign companies in the USA as it was seen in case of Western Airlines Inc v Sobieski .

As a conclusion it could be said that Incorporation theory allow the founders to choose the legal system which is the most efficient and carry on activities in other states without loosing a legal status of an origin state. The company in other jurisdictions is recognized according to its legal status back in home state. Opposite works Real seat theory which allows national authorities to protect their markets from pseudo- companies by refusing their legal status.

4. Case law of the European Court of Justice and its influence on companies’ freedom of establishment.

It seems that ECJ has had many occasions to question the importance of Community secondary legislation related to freedom of establishment and mobility of company within EU.

a) Centros Ltd v Erhvervs- og Selskabsstyrelsen

The Centros case considered Danish couple which wanted to establish a company in Denmark to run a business, however they denied to meet the minimum capital requirement for the new business in their home state. As a result they decided to set up a private liability company in London with a one pound capital and carry on all activities in Denmark as a branch. Danish authorities refused registration of a branch as illegal way of omitting Danish minimum capital requirements for new businesses.

Due to lack of trading in the UK ,Danish authorities argued that according to real seat theory the head office (seat) would be in Denmark and law of this state should apply in this case. The ECJ as a result denied the Danish authority to refuse to register a branch of a fully incorporated company in the UK in accordance with the law of a Member State could not itself represent the breach of right of establishment (Frost 2005, Pelle 2008, Lawry 2004).

The most concerning in that case was not the ECJ verdict but the result it brought on incorporation in Europe. According to research carried by Marco Becht et al. the yearly number of incorporations in the UK increased from 147 before Centros case to 671 per country year afterwards. Only firms not performing any activity in the UK were taken into consideration. It can be seen from Centros case created a new tendency within Europe for countries with high requirements of formatting a new company in other member states with less strict requirement and operate later via branch or subsidiary in their home countries.

b) Überseering BV v Nordic Construction Company Baumanagement GmbH

In case of Überseering has ruled again that it is against the freedom of Establishment for a Member State to deny a company formed in another state. Überseering BV was a limited company incorporated in Netherlands under Dutch law and registered in the companies register in Amsterdam and Überseering. The company transferred its centre of administration to Germany where later on tried to bring legal proceeding to defend rights under contract. It was argued by Germans authorities that according to real seat theory a company incorporated in Netherlands with centre of administration in Germany does not have legal capacity to bring legal proceedings in Germany.

ECJ confirmed again, following Centros case that companies established in on of the Member State can carry on operational activities in another. (Specht 2004, Frost 2004, Rothe 2004).

c) Kamer van Koophandel en Fabrieken voor Amsterdam vs Inspire Art

The case of Inspire Art is another example of ruling in favor of freedom of establishment within EU.

Inspire Art Ltd was a limited company incorporated in the UK with a branch in Netherlands where the sole Director lived. There was not any activity performed in the UK and shareholders did it clearly to take advantage of less strict British company law. The company was registered in Amsterdam where according to WFBV should have been indicated the status in the register which according to Dutch authorities was “formal foreign company” and it was not registered as such. As a result the Chamber of Commerce applied to court to obtain an order for Inspire Art to do so. As a conclusion ECJ stated that forming a company in order to omit national requirements in relation to minimum capital necessary to establish a company is not enough finding to prove an attempt of abuse or fraud (Frost 2004, Specht 2004).

5. Consequences of ECJ cases on freedom of establishment.

Analyzing above cases it is easy to notice that ruling of ECJ have an enormous impact on real seat theory and it could be said that it is the beginning of the end of this theory at least if it the legal capacity of the companies incorporated in other Member States is taken into consideration.

According to ECJ judgments newly incorporated companies have to be subject to the law of a Member State they were incorporated in. Recent cases show that ECJ weakened some national law doctrines , moving Europe to level where all companies should be recognized mutually(Baez and Baldwin 2002, Pele 2008).

6. Societas Europaea- The European Company.

The idea of establishing European company-SE has been a subject of discussion for more than forty years to in order to provide an opportunity to European companies to run their business more efficiently and cheaper between different states. A company which would be independent from national laws , giving a possibility for bigger mobility across Member States.

The legal status of SE is a mixture of European and nationals laws based on Art. 308 of ECT and came into force on 8^th of October 2004 ( Pelle 2004), stating that European company should provide an opportunity to do an active operations in the whole single market with a ‘supra-national company’ being able to do business Europe wide based on united and simplified law structure ( Lombardo and Pasotti 2004).

The SE status allow company to merge its subsidiaries across the Europe with SE. The transition of subsidiaries into branches is less expensive than running and managing them in different states. There are no any requirements for new board of directors, auditors or even accountants as all branches under SE will follow the same legal doctrine.

As it can be seen the SE structure provide many advantages to potential incorporates, however that form of company has not become common in Europe where we can find approximately 90 of them actively running(Pelle 2004). Unpopularity is due to many factors such as minimum capital requirement which is 120,000 EUR, seems to be difficult to reach by small and medium size companies. Additionally, a private limited company cannot receive a status of SE due to governing structure.

The process of establishment is consider by some lawyers as very complex and long, moreover the SE cannot be created directly by individuals and in case of mergers , one of the companies must be based in Member State. What is more the transformation has certain limitation as well, such as company involved in this process has to hold a subsidiary for at least two years before the process can be initiated(Lenoir 2008). Moreover very complex rights regarding employees of new established SE can last even up to a year( Frost 2004).

Lastly the formation of SE is based on real seat theory and according to Art. 7 of SE-Reg. registered office has to be located in the same state as its head office. However Art.8 states that regarding to registered office principle the transfer of registered office to another state does not lead to wind up of a company neither creation of new legal person ( Lenoir 2008, Lombardo and Pasotti 2004).

7. Company Law Directives.

Directives within EU are a source of secondary legislation and are addressed to Member States and have to be implemented by domestic legislation in usually specified scope of time ( Dine 2001). Number of directives have been already adopted concerning different areas listed bellow:

• First Council Directive – Disclosure (68/151/EEC)

• Second Council Directive – Capital (77/91/EEC)

• Third Council Directive – Domestic Mergers (78/855/EEC)

• Fourth Council Directive – Annual Accounts (78/660/EEC)

• Sixt Council Directive – Divison (82/891/EEC)

• Seventh Council Directive – Consolidated Accounts (83/349/EEC)

• Eighth Council Directive – Qualifications of Auditors (84/253/EEC)

• Tenth Directive – Cross border mergers (2005/56/EC)

• Eleventh Council Directive – Branches (89/666/EEC)

• Twelfth Council Directive – Single Member Limited Liability Companies (89/667/EEC)

• Directive on worker involvement in the European Company (SE) (2001/86/EC)

• Thirteenth Council Directive – Takeover Bids (2004/25/EC)

All of these directives are binding on the Member States of EU however 10^th and 14^th directive have a direct impact on freedom and mobility of establishment of a company, therefore deeper analysis of them can be found below:

a) Cross-border mergers (10^th Directive)

This particular directive has been a riposte to a drawbacks taking place in relation to European Company (SE), criticized for the expensiveness, amount of time involved, issues related to level of protection provided for employees and impossible in some Member States to occur (seeurope-network)

Main aims of this directive are:

• establishment of legal framework to enable the companies within EEA to free cross-border mergers

• remove any administrative and legislative difficulties in Member States which could be suffered by limited liability companies within EEA

• establishment of a efficient process for employees affected by cross –border merge. As a consequence of cross-border mergers Directive in the future employees’ representatives on company boards will be from different Member States( seeurope-network and BERR-see reference)

b) Cross-border transfer of the registered office (14^th Directive).

14th Directive has not been yet implemented, it is just proposal aiming to :

Additionally, after the transfer of registered office it will be a subject to the law of a Member state the company moves in. However looking at ECJ case law mentioned earlier in this paper regarding freedom of establishment, that proposal seems to be unneeded as judgments of ECJ go much deeper that proposed regulations. Moreover the proposal does not mention any taxation issues which the former State could be affected by and only companies with share capital could benefit from this Directive as the only ones which have recognizable legal status in all Member States.

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