A. Introduction
Contrary to what one might expect of a liberalized internal market, autonomy in choice of corporate law in the European Union has been slow in coming. The Treaty of Rome provided that the conditions governing the recognition of companies and their cross-border mobility could be determined through secondary legislation but the 1968 Convention on the Mutual Recognition of Companies and Bodies CorporateFootnote 1 was not ratified by all of the Member States and so failed to enter into force.Footnote 2 The failure of this Convention resulted in a long hiatus in the development of corporate mobility.Footnote 3 Until the end of the twentieth century, there was no secondary legislation concerning the governing law of companies and their cross-border mobility, and the Court of Justice of the European Union (CJEU) exercised uncharacteristic judicial caution in its Daily Mail judgment in which a UK company was denied permission to relocate to the Netherlands.Footnote 4 This state of affairs allowed the Member States to retain their traditional private international law rules concerning companies, including provisions that restricted choice of corporate law.Footnote 5
In view of the lack of harmonization, prior to the seminal 1999 judgment in Centros, several Member States applied the ‘real seat’ theory. This recognition theory requires companies having their operational headquarters within a given Member State to be established under the laws of that State. Default from this rule often resulted in the Member States' refusal to recognize the existence of the company. The rationale for this approach stems from the view that companies are concessions of the State and that the State with which they are most intimately connected should be able to prescribe their governance arrangements. It is an acknowledgment of the public function of companies. The ‘real seat’ theory is to be contrasted with the contractual incorporation theory, which has long been adopted by the United Kingdom, among others. In keeping with contractarian theory, the incorporation theory favours party autonomy in choice of corporate law; it prescribes that a company should be governed by the law of the State in which it is incorporated. There is no need for the company to have its centre of administration in that territory, or indeed to operate in that territory at all.Footnote 6
In his Opinion preceding Centros, AG La Pergola suggested that freedom of choice in corporate law was necessary for the establishment of the internal market. He was of the view that the purpose of the Treaty provisions on freedom of establishment ‘is to guarantee to all Community citizens alike the freedom to engage in business activities through the instruments provided by national law.’Footnote 7 It followed that ‘it is the opportunity to exercise business activities that is protected, and with it the contractual freedom to make use of the instruments provided for that purpose in the legal systems of the Member States.’Footnote 8 The CJEU endorsed the Advocate General's Opinion in its judgment, albeit without explicitly restating his remarks on the place of party autonomy in EU private international law of companies. This marked the beginnings of a market for incorporations in the European Union.Footnote 9
Nevertheless, 13 years after Centros, the fullest freedom for corporate decision-makers to choose the governing law of companies has not been forthcoming. While companies that are lawfully established under any Member State's law must be recognized throughout the Union,Footnote 10 Member States retain the ability to restrict the movement of companies established under their own laws.Footnote 11 Indeed, subsequent judgments were far more nuanced than Centros, and the path to liberalization has not been linear. Nor has it been especially clearly demarcated.Footnote 12 In particular, the judgment in Cartesio drew the line at requiring Member States to allow existing companies to relocate to other Member States. It was held in this judgment that the Treaty provisions on freedom of establishment did not preclude national legislation that required companies to retain their operational headquarters in the territory of the Member State under whose laws they were established.Footnote 13
The more recent judgment in VALE,Footnote 14 which was delivered in July 2012, suggests that the Court is again on the road to liberalization. However, it appears that completely unbridled freedom of establishment will be sacrificed in order for the Court to salvage a semblance of consistency from a number of contradictory judgments. In particular, it is unlikely that the CJEU will develop the case law to its fullest logical conclusions—which would be to do away with the real seat theory in its entirety—as this would contradict case law that has been confirmed repeatedly by the Court.
This article considers the possible implications of the judgment and finds that, while aspects of the judgment are to be commended, the remaining contradictions in the case law need to be removed through the adoption of legislation. The article begins with a brief overview of the problematic nature of party autonomy in European private international law of companies with reference to the judgment in VALE. This is followed by an analysis of a selection of issues arising from the judgment, including the treatment of the nationality of companies in EU law and the question of the repeal of Article 293 EC. It is argued that VALE provides greater consistency but that there remains a need for clarity concerning the normative underpinnings of choice of corporate law in the EU.
B. The Problem of Autonomy in European Private International Law of Companies
The CJEU has recognized repeatedly the fact that companies are creatures of the laws of the Member States.Footnote 15 It follows that it is for the Member States to determine the conditions under which companies are established and remain in good stead.Footnote 16 This faculty of the Member States includes the ability to prescribe the connecting factors that are required of a company that is established under the laws of the relevant state.Footnote 17 However, it does not follow that Member States retain authority to prescribe all of the conditions under which companies are established and operate in the European Union.Footnote 18 The rights of Member States are tempered by the ability of individuals to benefit from the opportunities offered by a liberalized internal market. Thus, a balance is to be struck between the rights of States to regulate companies and individual economic freedoms.
The balance between State rights and individual autonomy is especially problematic in the private international law of companies because, unlike many other areas of civil and commercial law, the role of States and individuals in the regulation of companies remains particularly controversial. The difficulty that the Court faces, and which, it is submitted, the Court has yet to resolve, stems in part from the lack of harmonization of company law, as well as the underlying reasons for lack of harmonization.Footnote 19 In particular, the Member States have failed to establish a common understanding of the structure of company law due to different views concerning the interests to be safeguarded by corporate law.Footnote 20 Indeed, the very nature of companies is unsettled in corporate legal theory,Footnote 21 as are the implications of different understandings of the company for corporate lawFootnote 22 and the private international law of companies.Footnote 23 By way of example, some Member States, including the United Kingdom, view corporate law principally as a discipline that is concerned with the relationship between shareholders and directors, whereas other States include other constituencies such as employees in their corporate governance arrangements.Footnote 24 Germany is the paradigmatic example of the latter group. The distance between the Member States' legislation and underlying corporate legal theories rendered impossible the task of minimizing differences through harmonization of the core features of company law. As a result of these fundamental disagreements, contractual freedom in EU choice of corporate law remains contentious.
While the Court has recognized this difficulty, the normative influence of European integration tends to outweigh considerations concerning divergent approaches to company law. The tool through which integration is achieved is economic liberalization. Consequently, the Court adopts an economically liberal understanding of the private international law of companies. However, given that the normative underpinnings are systemically distant from company law, it does not appear that the Court is fully engaged with the implications of the policy choices that are made through its judgments.Footnote 25
C. The Facts and Issues
The question referred to the CJEU in VALE concerned VALE Costruzioni Srl's application to be removed from the Italian register of companies in order to reincorporate under Hungarian law. The Italian authorities accepted this application, but the Hungarian court refused the subsequent application for the new Hungarian company to be registered as the ‘successor in law’ of VALE Costruzioni Srl. In other words, the Hungarian court refused to allow the successor company seamlessly to inherit all of the rights and obligations of the defunct Italian company. The matter was eventually appealed to the Hungarian Supreme Court, which in turn asked the CJEU for a preliminary ruling concerning the compatibility of Hungarian legislation with Articles 49Footnote 26 and 54 TFEU.Footnote 27 The CJEU found that the Hungarian legislation infringed the company's right to freedom of establishment.
Following the CJEU's judgment in Cartesio, one might have expected the Court to reach a different conclusion. It was suggested in an obiter dictum in that judgment that it is for the laws of the Member State in which the company wishes to reincorporate to determine whether the company may be recorded as the successor in law of the defunct foreign company:
where a company governed by the law of one Member State moves to another Member State with an attendant change as regards the national law applicable … the power referred to in paragraph 110 above, far from implying that national legislation on the incorporation and winding-up of companies enjoys any form of immunity from the rules of the EC Treaty on freedom of establishment, cannot, in particular, justify the Member State of incorporation, by requiring the winding-up or liquidation of the company, in preventing that company from converting itself into a company governed by the law of the other Member State, to the extent that it is permitted under that law to do so [emphasis added].Footnote 28
In VALE the CJEU was directly engaged with facts pertaining to the question that it had addressed in passing in its earlier judgment. The obiter dictum in Cartesio was refined by requiring the destination State to apply its laws in accordance with the principle of non-discrimination:
It is thus apparent that the expression ‘to the extent that it is permitted under that law to do so’, in paragraph 112 of Cartesio, cannot be understood as seeking to remove, from the outset, the legislation of the host Member State on company conversions from the scope of the provisions of the Treaty on the Functioning of the European Union governing the freedom of establishment, but as reflecting the mere consideration that a company established in accordance with national law exists only on the basis of the national legislation which ‘permits’ the incorporation of the company, provided the conditions laid down to that effect are satisfied.
In the light of the foregoing, the Court concludes that national legislation which enables national companies to convert, but does not allow companies governed by the law of another Member State to do so, falls within the scope of Articles 49 TFEU and 54 TFEU.Footnote 29
While the Court's reading of Cartesio is, arguably, creative, the logic of the result in VALE is unassailable from an economic perspective. Indeed, it is certainly cogent to suggest that limiting opportunities to reincorporate constitutes a restriction of freedom of establishment. Provided that the company conforms to the substantive and private international law rules of the State whose laws it wishes to adopt,Footnote 30 it does not appear that there are policy reasons that would militate in favour of a blanket prohibition of cross-border transformations. Systemic problems do arise from the lack of a European legal framework for the protection of creditors and other stakeholders whose rights are affected by a change in the governing law,Footnote 31 and this would most certainly be of concern to the State under whose laws the company was previously established, but it is unclear how this would affect the public interests of the host State.Footnote 32 Accordingly, it would be unsound for that State to deny a foreign company the opportunities that are made available to domestic companies, under the same conditions as are incumbent on domestic companies.Footnote 33
As a result of the judgment in VALE, corporate decision-makers now enjoy even greater freedom to determine the conditions under which companies operate. Centros and Überseering allowed promoters of new companies to choose the law under which the company would be established, regardless of the connecting factors required in the State in which the company would operate principally.Footnote 34 In Inspire Art it was held that Member States may not require pseudo-foreign companies to comply with their laws, thereby consolidating a nascent market for incorporations.Footnote 35SEVIC Systems allowed companies to engage in cross-border mergers,Footnote 36 thereby also allowing companies to change their governing law by establishing foreign subsidiaries and then engaging in reverse vertical mergers.Footnote 37 Following VALE, it is now clear that companies may convert to a new governing law in a single step through cross-border transformation.Footnote 38
The result of these judgments is that party autonomy in corporate choice of law is now firmly established. The corollary of this is that Member States have only limited powers to determine the conditions under which companies operate since their laws may be bypassed with relative ease. The only remaining power that Member States exercise over the autonomy of corporate decision-makers concerns the situation of the operational headquarters of companies established under their laws. Effectively, Member States may prescribe the connecting factors required of companies established under their laws and may require companies to retain those connections.Footnote 39 This means that party autonomy is restricted in that the laws of States that employ the real seat theory are only available to companies that wish to establish their operational headquarters in said States. However, in practice this is of little consequence since States that have restrictive private international law rules in respect of companies tend also to have less accommodating substantive corporate laws.Footnote 40 This is, of course, a direct consequence of the fact that the real seat theory emerged as a defensive mechanism against the encroachment of accommodating foreign laws.Footnote 41 The logic of restricting party autonomy in respect of the establishment of companies is therefore especially questionable but the CJEU persists in upholding this key feature of its case law, notwithstanding the fact that it does not bear scrutiny from the perspective of corporate law policy.
D. The Nationality of Companies
In addition to the conceptual problems highlighted above, the Court is faced with the difficulty of assimilating companies with natural persons. This is a consequence of the wording of 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 [emphasis added].
The construction of Article 54 does not suggest that EU law should prescribe the manner in which companies are established by national law. It is patent that Article 54 is concerned with the recognition of existing companies, rather than the creation of legal persons. Indeed, the CJEU has affirmed the distinction between the creation and recognition of companies on several occasions, including in the judgment in VALE.Footnote 42
A literal reading of Article 54 read in conjunction with Article 49 does not suggest that a pre-existing company may convert to a legal person governed by the law of another Member State. The nature of conversion is to change the nationality of a company. The logic of the judgment in VALE might therefore suggest that Member States are bound to allow nationals of any other Member State to become nationals of their own State. Clearly, this is not the intention since nationality is a matter for State law. While analogies with the nationality of natural persons are not necessarily helpful, given the obvious differences between natural and legal persons, the fact remains that the nationality of persons is the chosen comparator in Article 54 TFEU. In the absence of legislation, freedom of establishment for companies is to be understood in that light.
Nevertheless, as noted above, the logic of the development in VALE is, to some extent, commendable from a policy perspective. The previous state of affairs was anomalous in that it rendered the fundamental freedoms a matter for states to recognise the acts of other states, as opposed to a faculty of persons to benefit from market freedoms.Footnote 43 Freedom of establishment operated principally as a conflicts rule as opposed to a ‘constitutional’ liberty, which is itself imbued with other constitutional values such as the right to be free from discrimination on the basis of nationality. Accordingly, notwithstanding the difficulty in reconciling the Court's interpretation of Article 54 with the textual reference to the nationality of natural persons, there remains merit in the bare logic of the Court's approach.
E. The Curious Burial of Article 293 EC
The amendments to the EU's constitutional order in the Treaty of Lisbon included a tidying up exercise intended to streamline the treaties. One of the articles that was removed, Article 293 EC, provided that the Member States should adopt an agreement on the private international law of companies in order to enable corporate mobility:
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 [Article 54 TFEU], 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 countries.
The removal of Article 293 EC does not eliminate competence to regulate the mobility of companies. A legal basis remains in Article 50 TFEU (Article 44 EC) on the harmonization of company law and Article 81 TFEU (Article 65 EC) on judicial cooperation in civil matters. Nor does the removal of the article have an unequivocal, direct bearing on the reading of Articles 49 and 54 TFEU. At face value, there is therefore no major change in the Treaty provisions on the recognition of companies.
However, in many ways, the inclusion of Article 293 EC in the original scheme of the Treaty shaped the case law prior to Lisbon. It was argued on several occasions that Article 293 EC was intended to accord a special position to the private international law of companies in a manner that would limit the effects of the fundamental freedoms until legislation was adopted.Footnote 44 In Daily Mail the Court held that Article 293 EC implied that differences between the legislation of Member States concerning the connecting factors that Member States may require of companies established under their laws were to be resolved by future legislation.Footnote 45 This approach was refined in Überseering, where the Court held that Article 293 EC only enabled Member States to adopt legislation to the extent that the Treaty provisions did not of themselves achieve the aims of corporate mobility.Footnote 46 Yet in Cartesio the CJEU again cited the absence of agreements adopted under Article 293 EC in support of the view that the Member States retained some competence to regulate the private international law of companies.Footnote 47 It was held that a Member State retained the ability to prescribe the connecting factors that were required for a company to be established, and to remain so established, under its law.Footnote 48
Following Cartesio it was not clear whether the repeal of Article 293 EC would have any effect on the law. The Court's judgments could stand in the absence of this enabling article, and it is clear from VALE that aspects such as the Member States' ability to prescribe connecting factors required of companies established under their laws have survived the Treaty changes.Footnote 49 However, the reference to Article 293 EC in Cartesio and previous judgments meant that restrictions to freedom of establishment that were justified on the basis of that article were open to challenge following the coming into force of the Treaty of Lisbon. Indeed, the pivotal role played by Article 293 EC is confirmed in extra-curial writing of Christian Timmermans, formerly a judge of the CJEU and the juge rapporteur in Cartesio, which was the last judgment of the Court concerning corporate mobility prior to the coming into force of the Treaty of Lisbon.Footnote 50
Advocate General Jääskinen noted the repeal of Article 293 in his Opinion in VALE. However, the AG's views concerning the implications of the repeal are somewhat surprising. It is simply noted that there is no longer authority in EU primary law for Member States to conclude agreements concerning the mutual recognition of companies.Footnote 51 Given the authority to adopt directives and regulations under Articles 50 and 81, the pertinence of the AG's observation is not entirely clear. What follows from this observation is an assertion that it has always fallen to the Court to develop the law on the free movement of companies, and an acceptance that the case law should provide the foundation for further development.Footnote 52 In sum, the AG concludes that nothing has changed. Of course, this conclusion does not sit comfortably with the earlier case law or with Judge Timmermans' extra-curial suggestion that Article 293 EC had shaped judicial imagination.Footnote 53
The CJEU did not consider the repeal of Article 293 EC in its judgment but proceeded as though nothing had changed in the Union's constitutional order. It therefore appears that, for the moment, the case law will continue to develop in much the same manner as it had previously. However, it is worth recalling that there remains an argument that the repeal of Article 293 should call into question those judgments that include in their reasoning reference to the effects of that article. In particular, the Member States' ability to restrict access to their laws by prescribing the connecting factors required of domestic companies is no longer unassailable.
F. Conclusions
For proponents of the liberalization of the private international law of companies, the judgment in VALE will represent a welcome development. The Court has confirmed that, in addition to the ability to choose the governing law of a new company and to change that law through a cross-border merger, companies are now able to change their governing law in a single step. This development is also to be commended in that it renders the case law more consistent in some respects.
Yet, there remain a number of conceptual difficulties. In particular, Member States have failed to reach a common understanding of the aims of corporate law and the treatment of the cross-border mobility of companies. As a consequence, the laws of the Union do not provide a clear framework for the transnational regulation of companies. That has resulted in excessive reliance on the CJEU. As a consequence of its constitutional function, the Court is unable to create the legal and administrative framework to support the economic freedoms which its judgments confer. In addition, its case law is not entirely coherent and fails to engage with the Member States' policy concerns in a principled fashion—hence the anomalous retention of limitations to party autonomy which are of little benefit to corporate stakeholders and the development of freedoms without due regard to the need for a legislative framework. The Court of Justice's reluctance to clarify remaining contradictions in the case law confirms that negative harmonization remains a blunt instrument for the regulation of corporate law and that comprehensive and systematic legislation is needed to resolve remaining questions.
