A. Introduction
The European Court of Justice (ECJ) recently delivered another landmark judgment concerning the compatibility of the real seat theoryFootnote 1 with freedom of establishment.Footnote 2 The judgment in Cartesio Footnote 3 addresses the question of whether Community law allows a Member State to stipulate that a company incorporated under its law must retain its operational headquarters within its territory.
The factual context of the judgment was an attempt by Cartesio, a limited partnership constituted under Hungarian law, to transfer its registered office from Hungary to Italy. It was prevented from doing so because the application of the real seat theory required that companies established under Hungarian law retain their operational headquarters in Hungarian territory. Cartesio felt that its freedom of establishment had been unlawfully restricted and a Hungarian court of appeal referred the matter to the ECJ for interpretative guidance. The Court of Justice found that there had been no breach of Community law since the relationship between a company and the State in which it is incorporated is not subject to the right to freedom of establishment. The conclusions and the reasoning of the Court are neither uncontroversial nor completely persuasive, particularly when considered in the light of the ECJ's own jurisprudence. Moreover, the judgment adds new inconsistencies to an already inconsistent body of case-law and, as such, may be harmful to legal certainty.
B. Community Legislation
Prior to turning to the case law, it is pertinent to consider the legislative context. One will note that unclear case law is often rooted in equally unclear written law. The provisions of the Treaty that are of direct relevance are Articles 43 and 48 which govern freedom of establishment, and article 293 which empowers the Member States to enter into negotiations to conclude agreements on the private international law of companies. article 293 will be repealed if the Treaty of Lisbon comes into force, but to date it remains central to questions concerning corporate freedom of establishment.
article 43 prohibits obstacles to the establishment of citizens of the Community in the Member States. Article 48 extends freedom of establishment to certain companies and firms:
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 Community shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States.Footnote 4
In addition to the requirement of formation under the laws of a Member State, Article 48 refers to three connecting factors that could trigger freedom of establishment in respect of companies, namely the situation within the Community of (i) the registered office, (ii) the central administration, or (iii) the principal place of business. The connecting factors are placed on equal footing but it is unclear whether the word ‘or’ provides an option for secondary legislation to adopt one of the connecting factors in preference to the others, or if it simply means that the existence of one of the connecting factors should suffice to endow a corporation with freedom of establishment. The latter seems the more logical reading when Article 48 is read in abstract, but article 293 may shed a different light on the matter.
Article 293 provides what is arguably a reserve of legislative competence in the Member States to regulate mutual recognition of companies and the conditions under which a company may transfer its seat from one Member State to another while retaining its legal personality:
Member States shall, so far as is necessary, enter into negotiations with each other with a view to securing for the benefit of their nationals:
… the mutual recognition of companies or firms within the meaning of the second paragraph of Article 48, the retention of legal personality in the event of transfer of their seat from one country to another, and the possibility of mergers between companies or firms governed by the laws of different countriesFootnote 5
The relationship between articles 43 and 48 on the one hand, and article 293 is unclear. There is no cross-referencing between the articles and no provision is rendered subject to another. Moreover, the inclusion of the term ‘so far as is necessary’ that qualifies the obligation of Member States to adopt legislation under Article 293 prompts several questions, such as who is to determine whether legislation is necessary, and what criteria are to be employed in making that determination?Footnote 6 It has been left to the ECJ to provide instruction on whether articles 43 and 48 should be directly applicable, or if article 293 reserves their applicability, and the manner of their applicability, to future legislation.
C. A Brief History of the Case Law
Much has already been written about the ECJ's pre-Cartesio case law.Footnote 7 This paper will avoid revisiting familiar themes, but a brief overview is helpful to glean a better understanding of Cartesio in its context.
The ECJ was initially reluctant to consider conflicts of corporate laws in the light of articles 43 and 48 of the Treaty. In Daily Mail Footnote 8 the Court concluded that article 293 did indeed reserve legislative competence to the Member States. In the absence of any legislation adopted under the authority of article 293, it was found that the Member States retained the residual right to govern the conditions under which companies could transfer their seat from one Member State to another, or indeed to deny any such possibility altogether.Footnote 9
The Court soon revisited the matter. In Centros,Footnote 10 despite there existing no legislation concerning the mutual recognition of companies, the ECJ found that articles 43 and 48 obliged Member States to recognise companies incorporated in other Member States even if their own conflict rules might dictate that a company should be established under their own laws. The Court reached its conclusions without so much as a mention of its earlier judgment in Daily Mail. Subsequent judgments in Überseering Footnote 11 and Inspire Art Footnote 12 built upon the Centros doctrine, the latter adding that Member States may not adopt outreach clauses that impose obligations upon pseudo-foreign corporationsFootnote 13 or their officers in addition to those imposed by the law of the Member State of incorporation.
Überseering also distinguished the conflicting precedents in Daily Mail and Centros. The reasoning in Daily Mail was entirely based upon the absence of a Community instrument promulgated under the authority of article 293, reasoning that was explicitly overturned in Centros. However, Überseering retained the result while revisiting but not overturning the ratio in Daily Mail. The judgment in Daily Mail was deemed to have addressed the relationship between a company and the Member State of its incorporation, whereas Centros was held to have dealt with a company and its relationship with a Member State other than that in which it was established. The relationship between a company and its Member State of incorporation is outwith the scope of the Treaty, but Member States are bound to recognize companies incorporated in other Member States.Footnote 14
In Sevic Systems Footnote 15 the Court appeared to have paved the way for the definitive overturning of Daily Mail. The litigation concerned the legality of the refusal by a German court to register a cross-border merger between a German acquiring company and a Luxembourgish company.Footnote 16 If an approach based on the reasoning in Daily Mail had been adopted, article 293 would have dictated that the matter was to be regulated by the Member States. This approach was not adopted. Nor was the revised Daily Mail ratio applied – notwithstanding the fact that the case concerned the relationship between a company and its State of incorporation, the Court found that the refusal to register a cross-border merger constituted an unjustified restriction of the company's freedom of establishment. Having found that mergers were an effective means of company consolidation, particularly when compared to the option of liquidation and reincorporation, the Court found that discrimination between domestic and international mergers constituted an unjustified restriction of freedom of establishment. Thus, through an emphasis on discrimination, the judgment appeared to restrict the scope of the dictum that the relationship between a company and the Member State in which it is established is outwith the scope of the Treaty.
D. Cartesio: AG Maduro's Opinion
The Opinion of Advocate General Maduro in Cartesio sought to rationalise the earlier case-law. Maduro correctly pointed out that efforts to consolidate the precedents in Daily Mail and Centros ‘were never entirely convincing’, particularly given that a distinction between the restriction of the immigration and emigration of companies ‘never fitted the Court's general analytical framework for articles 43 and 48 EC’.Footnote 17 The AG proposed that, when considered in the light of the Centros doctrine as elaborated in later judgments, Daily Mail, and indeed the revised Daily Mail ratio, were no longer good law. Maduro observed that laws which allowed the transfer of operational headquarters within a Member State's territory but not across borders constituted discrimination against the exercise of free movement.Footnote 18 He therefore found that the Hungarian law at issue was incompatible with the Treaty. The Opinion in Cartesio, had it been endorsed by the Court, would have signalled the way for a more coherent body of law.
E. Cartesio: The Court's Judgment
Despite the seemingly inexorable momentum of the Centros doctrine, the ECJ chose to re-examine its case law in quite a different manner to what one might have expected. The Court concluded that a Member State may indeed require that a company incorporated under its laws retain its operational headquarters within its territory. The judgment relies heavily on the dicta in Daily Mail, which, notwithstanding the similarity of the facts in the two cases, is somewhat surprising given the judgment in Sevic Systems. The judgment in Cartesio is also surprising because it engages in reasoning that contradicts much of the case law that appeared to be settled.
1. The status of the connecting factors in Article 48, and the relationship between article 293 and the fundamental freedoms
When considering the equivalence of the connecting factors in article 48, the Court relied on its reasoning in Daily Mail rather than contradictory reasoning in the later Centros judgment. In Centros the Court had concluded that ‘[t]he location of [a company's] registered office, central administration or principal place of business serves as the connecting factor with the legal system of a particular State in the same way as does nationality in the case of a natural person’.Footnote 19 Consequently, the Court was of the view that the existence of any of the connecting factors would suffice to trigger the application of freedom of establishment. In Cartesio the equivalence of the connecting factors was seen in a very different light.Footnote 20 In relying on dicta in Daily Mail,Footnote 21 the Court concluded that the equivalence of the connecting factors indicated that there was no preference for any of the connecting factors, and the applicable connecting factor was to be determined by future legislation.Footnote 22 The implication of equivalence is therefore viewed in diametrically opposed fashions. Centros viewed that equivalence as permissive of the fundamental freedoms in the event of the existence of any of the connecting factors; Daily Mail and Cartesio deemed the equivalence to be a denial of direct effects.Footnote 23
The Court observed that the right to transfer a company's seat was subject to the adoption of future legislation under article 293, as stated in Daily Mail, rather than a directly effective right emanating from the Treaty. The qualifying effects of article 293 had been omitted from the considerations in Centros Footnote 24 and explicitly contradicted in Überseering where the Court had held that article 293 did not constitute a reserve of legislative competence in the Member States, but only empowered them to adopt legislation to facilitate the attainment of the ends of the Treaty.Footnote 25 Further, such legislation could only be adopted so far as might be necessary to resolve discrepancies in national laws that had not been resolved directly by the Treaty.Footnote 26Cartesio returned to the earlier position enunciated in Daily Mail. Having found that the existence of freedom of establishment could not be inferred directly from the Treaty in the event of the existence of any one of the three connecting factors, the Court concluded that Member States retained the power to decide the connecting factor that was required for a company to be established and to continue to exist under their laws. However, the judgment failed to refer to the relevant tracts of the contradictory judgments—there was no explicit overturning of the earlier case-law that could lead one to the incontrovertible conclusion that a new precedent had been set. One is therefore left at a loss as to whether articles 43 and 48 are directly applicable, or, if they are subject to implementing legislation under Article 293.
2. A distinction between emigration and immigration: The internal affairs doctrine by another name
The limitation of the direct effects of Article 48 in relation to emigration begs the question as to why the Centros doctrine remains valid at all. If article 293 qualifies the effects of articles 43 and 48 in relation to emigration, why then is a Member State not to also retain the power to determine the extent to which companies incorporated abroad should be recognised?
The Court's answer is, of course, to be found in the Daily Mail ratio as revised in Überseering—companies incorporated in a Member State must be recognized throughout the Community, but the relationship between a company and its State of incorporation is outwith the scope of the Treaty.Footnote 27 Thus the emphasis of the Court has moved towards the power of Member States to grant legal personality to companies and to regulate them thereafter. The Member States' powers are enforced through the concomitant obligation to recognize companies incorporated under, and governed by, foreign law. Freedom of corporate establishment therefore becomes a matter of comity among Member States, rather than a matter of rights of legal persons. This is redolent of the internal affairs doctrine that permeates American choice of law,Footnote 28 a doctrine that has no authority in the Treaty.
The focus on the rights and obligations of States renders the net effect of the Court's judgments all the more questionable. Freedom of establishment is intended to benefit individuals and legal persons. Nowhere in the relevant articles of the Treaty is there any mention of administrative comity among States. It is therefore surprising that comity should become the only pervasive principle in the Court's jurisprudence. Mutual recognition is only mentioned in article 293 as a matter that is subject to future legislation. In addition, given the declared equivalence of the connecting factors in Article 48, if States rather than persons are at the core of the Court's reasoning it would perhaps be more logical to regulate immigration of pseudo-foreign companies than emigration since the State interest in the former is far stronger than the latter.
The insistence on emphasizing an internal affairs doctrine that finds no authority in the Treaty compels the Court to flawed reasoning. In order to maintain the internal affairs doctrine without reversing any earlier judgments, the Court had to distinguish Cartesio from Sevic Systems. It found that Sevic Systems related to the relationship between a Member State and a company connected to another jurisdiction. The Court returned to reliance on the facts of a case, arguably skewing them in the process, rather than relying on the reasoning itself:
SEVIC Systems concerned the recognition, in the Member State of incorporation of a company, of an establishment operation carried out by that company in another Member State by means of a cross-border merger, which is a situation fundamentally different from the circumstances at issue in the case which gave rise to Daily Mail and General Trust, but similar to the situations considered in [Centros, Überseering and Inspire Art]Footnote 29
Had the court relied on the reasoning in Sevic Systems, its point of departure would have been a question of discrimination.Footnote 30Sevic Systems adopted a classic fundamental freedoms analysis that explores whether there is a restriction to the fundamental freedoms and, if so, whether that restriction is justified.Footnote 31 The existence of a restriction of the freedom of establishment was found by the Court with reference to the fact of discrimination between domestic and cross-border mergers.Footnote 32 By the same measure, discrimination as between the transfer of a company's seat within a jurisdiction and cross-border seat-transfers is prima facie an unjustified restriction of freedom of establishment.Footnote 33 However, in Cartesio reliance on the facts of Sevic Systems allowed an approach that essentially distinguishes between immigration and emigration. This is reminiscent of the revisionist approach to the judgment in Daily Mail, a sinister approach to judicial law-making that does little for legal certainty.
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 the 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. Surely the Court's error will be noted by practitioners seeking to instigate further revision of the case-law.
3. Reincorporation: Cartesio's Unprompted Innovation
Cartesio introduces one major innovation that may appease proponents of liberalisation who might have been disappointed by the general thrust of the judgment. In an obiter statement the Court contrasts the facts of the case with a situation where the company wishes to change its governing law in the process of transferring its headquarters. In the latter case, the Court found that a Member State may not restrict a company's emigration from its territory by requiring the winding up of the company.Footnote 34 The logic of this distinction lies in the fact that, by electing to change its governing law in the process of emigrating, the company frees itself of its dependence on its governing law and the connecting factors prescribed therein.Footnote 35 Perhaps in a vain attempt to settle all potential future questions, the Court here answered a question that was not asked of it, namely that of reincorporation under a different national law without the need for winding up.
F. Conclusions: A Need for Legislation
The present state of Community law is convoluted in some ways, yet deceptively simple in others. It is convoluted because the reasoning of the Court is inconsistent and contradictory. In order to create a semblance of coherence, the Court has engaged in creative readings of its own precedents. This can offer little confidence as to the meaning of the law and will almost certainly lead to more litigation. Yet the law appears to be paradoxically clear in other ways. Without ever having declared that it was doing so, the ECJ has introduced the American internal affairs doctrine into European private international law of companies. The attraction of the internal affairs doctrine is intuitive in that it provides a simple system for the determination of a company's governing law and the effects of that determination.Footnote 36
However, the certainty comes at a cost. The law is severely flawed because the internal affairs doctrine is at odds with the Treaty provisions whether one reads them conservatively or liberally— it is a middle ground that enjoys no authority in primary legislation and is therefore open to criticism and further testing in litigious fora. When combined with contradictory judgments that broadcast the message that the Court is unsettled in its approach, the argument for abandoning negative harmonisation in favour of reengagement with positive harmonization as a means to unify the private international law of companies becomes irresistible in its cogency.
Regretfully, however, the Commission has suspended the legislative process that would have led to the adoption of the fourteenth company law directive which would have governed the conditions under which a company may transfer its seat while retaining its juridical personality. The Commission stated that the economic case for the adoption of a directive was not clear-cut,Footnote 37 an unconvincing argument on its own merits and more so when, in a judicial forum, the Commission itself cited the inefficiencies of winding up and re-incorporating a company as grounds for allowing Cartesio to transfer its registered office.Footnote 38 It would therefore appear that the route of least resistance was being sought out. Unless the Commission's left hand was unaware of the actions of its right hand, there can be little doubt that a judicial route to harmonisation was deemed preferable to positive harmonization which would require the consent of the Member States in Council. As such, the Commission which attempted to situate legislative and political authority in the judicial branch because this appeared to be the more expedient route.
The Commission's approach was not unreasonable when viewed in the context of the chequered history of the harmonization of company law and private international law of companies.Footnote 39 However, comprehensive legislation is required to compensate for the internal contradictions resulting from convoluted case law and a piecemeal approach to harmonisation. It is also the only route that can adequately account for the genuine socio-economic concerns of States in the governance of companies.Footnote 40 One must concede that transnational corporate law is a complex discipline that is perhaps less capable of easy resolution than other areas of law. Unlike disciplines such as contract and tort, there are several fundamental differences in the treatment of companies within the European juridical space that are reflected in diverging approaches to liberalism or protectionism in the conflicts camp.Footnote 41 However, the present state of community law only adds to the complexity of the discipline and stultifies legal certainty. The Comission's post-Cartesio amenability to the introduction of legislation on the governing law of companiesFootnote 42 is therefore to be welcomed.
