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VOLUME 06 ISSUE11
79
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PUBLISHED DATE: - 19-11-2024
DOI: -
https://doi.org/10.37547/tajpslc/Volume06Issue11-11
PAGE NO.: - 79-84
FREE MOVEMENT OF TRANSNATIONAL
CORPORATIONS WITHIN EUROPEAN UNION
Axtamova Yulduz Axtamovna
Tashkent State University of Law, Lecturer of Private International Law,
Uzbekistan
INTRODUCTION
Freedom of establishment concerning corporate
mobility is embodied in Articles 49 (Ex Art.43 TEC)
and 54 (Ex Art.48 TEC) of the TFEU. In particular,
Article 49 states that ‘…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…’ while Article 54
provides that lawfully incorporated companies in a
Member State shall be treated in the same way as
nationals of Member States. However, unlike
natural persons who gain their nationality by
default at birth, companies must comply with
relevant national laws so as to acquire their legal
identity (nationality) and qualify for cross-border
establishment rights. Thus, Article 54 makes
companies subject to national company laws of
Member States, which vary from State to State and
impose different conditions on companies for
gaining and retaining their nationality.
Sin
ce the incorporation of companies’ means is
regulated by Member States, they are free to decide
on the connecting factor between companies and
their national territory. Specifically, Member
States are unrestricted to require the presence of a
particular type of seat within their territories for
the incorporation of the companies and
determination of the applicable law. There are two
types of doctrines applied by Member States to
deciding the connecting factor: the real seat theory
and incorporation theory. States (nine Members)
following the real seat theory require the existence
of central administration while those (six
Members) following the incorporation theory
require the presence of registered office. Thus,
when companies are involved in cross-border
operations, these two conflicting theories may
RESEARCH ARTICLE
Open Access
Abstract
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result in disputes with regard to the status of
companies and applicable laws, thereby causing
restrictions on free movement rights. In such cases,
the burden of reconciling conflicting interests falls
on the European Court of Justice (ECJ), which is
supposed to decide the scope of freedom of
establishment and define the “restrictions” made
on it by national regulations. Therefore, it is
essential to strike a right balance between national
regulatory autonomy and free movement.
Economic globalization and regional integration
made it common for companies to locate their
central administration or economic activities (
“real
seat”)
in a State which differs from the State of their
registration/incorporation
(“registered seat”).
Under EU law, companies are entitled to transfer
their registered office or real seat by the right of
freedom of establishment. However, the transfer of
particular type of company’s seat is influenced by
the role that the seat in question plays in
international private law and national company
law of the home and host state. Specifically,
company law of Member States may require
liquidation of a company, which intends to transfer
its real seat or registered office. In this case,
question arises whether a company can invoke its
right of establishment to carry out such transfers
without loss of its nationality. This issue is
addressed by the ECJ in Daily Mail, Cartesio and
Vale cases.
Daily Mail and General Trust (DMGT) was a
company incorporated in the UK, which sought to
transfer its central administration to Netherlands.
According to UK company law, although connecting
factor for incorporation was a registered office,
companies were evaluated for tax based on the
place of their “central management and control”
.
Accordingly, transfer of central management and
control was allowed only with the consent of the
Treasury. DMGT claimed that such a “consent”
prerequisite was a restriction on its right of
freedom of establishment. The ECJ decided that
such transfer does not fall within the ambit of Art.
49 protection. It justified this decision by asserting
that ‘companies are creatures of national law and
exist by virtue of the varying national legislation
which determines their incorporation and
functioning’. Moreover, it was clarified that due to
the lack of harmonization of incorporation
conditions, the issue concerning transfer of a real
seat or registered office without losing nationality
is not resolved by the freedom of establishment.
Later, this decision was developed in Cartesio case.
Cartesio was a limited partnership incorporated in
Hungary that applied for transferring its
operational headquarters to Italy. However, the
Hungarian Court rejected the application based on
the Hungarian law which did not allow companies
to move their operational headquarters to another
Member State while maintaining their status as a
Hungarian company. Cartesio claimed that it
constituted a restriction on the right of
establishment.
It was assumed by Advocates General that
Hungarian law follows the real seat doctrine, as it
requires the place of registration to coincide with
the
place
of
operational
administration.
Accordingly, AG Maduro noted that the Hungarian
company law restricts ‘the “export” of a Hungarian
legal person to the territory of another Member
State’ and this falls within the remit of the freedom
of establishment. AG Maduro argued that although
Member States were entitled to create their
national company laws in the light of incorporation
or the real seat theories, ‘freedom of establishment
required a minimum degree of mutual recognition
and coordination of these various systems of rules
so that neither could be applied to its fullest extent’.
However, the ECJ held that should a company break
off the connecting factor, the right of establishment
could not be invoked against the loss of its legal
identity. It relied on the reasoning in Daily Mail and
noted that company’s entitlement to the freedom of
establishment can only be determined by
applicable national law and a Member State has a
power not to allow a company governed under its
law to maintain its legal status if company intends
to transfer its connecting factor to another Member
State. Nevertheless, the ECJ complemented this
statement by giving an example of a different
situation in which this power is restricted. In
particular, when a company intends to move to
another Member State “with an attendant change
as regards the national law applicable”, Home State
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is prohibited to require the liquidation of the
company based on its national law. It found that
this type of actual conversion of the company
would fall within the ambit of freedom of
establishment to the extent that the law of Host
State allows such conversion.
The judgment made in Cartesio case resulted in
controversial discussions among legal scholars, as
it subjected the transfer of company’s real seat to
international private law (incorporation or real
seat theories) of Member States, which differs from
each other and consequently, brings about various
outcomes with regard to the right of establishment.
According to Gerner-Beuerle and Schilling, the
criteria employed by the ECJ to determine the remit
of articles 49 and 54 of the TFEU cause “arbitrary
resul
ts and lack of intrinsic justification”. They
have made an analysis of the transfer of company’s
real seat or registered seat cases in the light of
incorporation and real seat theories of Home and
Host States. The results of this case-by-case
analysis revealed that: a) If a company intends to
transfer its real seat from incorporation theory
Home State, dissolution is not required, but if it
transfers from the real seat theory Home State, it is
subject to dissolution; b) If a company wishes to
transfer its registered seat only with the change of
its applicable law, Home State is not entitled to
restrict
such
conversion
by
dissolution
requirement, but what matters is the law of Host
State. If Host State follows the incorporation
theory, it may require reincorporation of the
company depending on its law, which does not
infringe the Articles 49, 54. However, transfer of
registered seat to the real seat theory State leads to
a vague result. Since the issue of whether the
transfer of seat and conversion without liquidation
is allowed is an area addressed by substantive law,
the applicable law is determined by private
international law. The real seat theory State
determines applicable law based on the location of
company’s real seat, which is the State of
incorporation that releases company from
dissolution by referring to the law of Host State.
Thus, rules created by the ECJ result in “circular
argument”.
Later, the situation of company’s conversion into a
legal form of another Member State was considered
in Vale case, the judgment of which shifted the case
law concerning the corporate mobility in favour of
companies. Vale Costruzioni Srl. (VS) was an Italian
company, which applied to transfer its real seat as
well as registered seat with an attendant change in
its applicable law to Hungary as a legal successor of
VS. Although this application was approved by
Italian authorities, the Hungarian Court rejected to
register the new Hungarian company VALE Építési
as “the successor in law”
of Italain company VS
based on its national company law which did not
allow such conversion. Consequently, the
Hungarian Supreme Court asked the ECJ for the
preliminary ruling regarding the question whether
this type of conversion falls within the ambit of
freedom of establishment, if so, to what extent
Hungarian company law can be applied in
adjudicating on the application for registration.
The ECJ held that Hungarian law was in breach of
company’s right of establishment. However, if the
judgment in Cartesio was followed, a different
outcome could be expected. It was stated in an
obiter dictum of the judgment that conversion
with an attendant change was subject to the
legislation of Host State where the company was
supposed to re-incorporate. Nevertheless, the
Court inferred from the hypothetical case in
Cartesio, which authorized companies for cross-
border conversions within the ambit of the
freedom of establishment and refined its judgment
by imposing non-discrimination requirement on
Host States and concluded that ‘nationa
l 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.’ Moreover,
a company is obliged to comply with the conditions
of incorporation under the law of Host State before
acquiring its nationality. Thus, the judgment in
Vale granted a greater freedom to companies to
choose a company law under which they wish to
operate.
The judgment in SEVIC Systems case added a new
element to EU case law concerning the protection
of cross-border mergers under the freedom of
establishment. Security Vision Concept (SVC) was a
company established in Luxemburg, which
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intended to merge into a German company, SEVIC
Systems AG (SEVIC), by method of acquisition.
German law required mergers to be registered in
the commercial register at the relevant place of
incorporation of both absorbing and absorbed
company. Since only one of the companies was
located in Germany, SEVIC sought to register it at
its place of incorporation. However, local court
rejected the application for registration based on
German law on transformations, which was
designed only for domestic mergers. SEVIC
appealed to German High Court, which asked for
preliminary ruling about the question whether
cross-border mergers can be considered as an
“establishment” within the meaning of Articles 43
,48 (TEC) and if so, does the lack of provisions of
German law allowing cross-border mergers
constitute a restriction on the freedom of
establishment. As regards the right of
establishment, the ECJ stated that ‘the right of
establishment covers all measures which permit or
merely facilitate access to another Member State
[…] by allowing the persons to participate in the
economic life of the country effectively and under
the same conditions as national operators’ and
noted that since cross-border merger projects
satisfy the needs for collaboration and
consolidation between corporations incorporated
in different Member State, they are important for
effective operation of internal market and
therefore, constitute a particular type of
“establishment”. With respect to German law, it
found that when a merger with a foreign company
participation is treated differently compared to
that of domestic one, it constitutes a restriction on
the right of establishment regardless of whether
this treatment comes from the Member State of the
acquiring company or the Member State of the
acquired company. Thus, the freedom of
establishment was supposed to cover both inward
and outward mergers.
The ECJ stressed the freedom to choose the most
suitable organizational structure in the Saint-
Gobain Case by confirming that companies can
freely choose an appropriate legal form for their
economic activities in another Member State under
the
freedom
of
establishment
principle.
Previously, the ECJ addressed the freedom of
choice concerning legal forms of transnational
establishments in the avoir fiscal judgement. This
case involved French tax law which provided
shareholders of domestic companies (with a
French subsidiary) with tax credits on distributed
dividends while leaving foreign companies with
French subsidiary subject to the full company tax.
The Commission argued that tax provisions in
question amounted to
“an indirect restriction” on
the choice of corporations relating to the form of
establishment (branch or subsidiary). The ECJ held
that this provision was a discriminatory treatment
that violated the principles of the freedom of
establishment.
The freedom of establishment relating to choice of
organizational structure was developed by the
judgments of subsequent cases. In Centros case,
Centros Ltd was established by two Danish
nationals under UK law, in order to take advantage
of UK’s company law and to
avoid minimum capital
requirement imposed by Danish law. It sought to
conduct all its business operations in Denmark by
setting up a branch there but registration of the
branch was refused by Danish authorities based on
the reasoning that it was an abuse of freedom of
establishment and unlawful way of national law
evasion. However, AG La Pergola highlighted the
right of Centros Ltd to choose legal form of its
establishment by setting a branch or a subsidiary
and argued that since a subsidiary would be an
independent entity separate from its parent
company, it would be subject to national law
(including minimum capital requirement) and
therefore rejection of the registration amounted to
a restriction on the freedom of choice concerning
form of establishment. The ECJ held that since the
incorporation of a company in a State ‘whose rules
of company law seem the least restrictive and to set
up branches in other Member States’ is considered
to be inherent right in the TFEU, the action of
Centros Ltd could not be an abuse of law. Although
this judgment extended the scope of freedom of
establishment,
it severely restricted the
competence of States over overseas corporations
especially those following the real seat theory.
In conclusion, despite particular uncertainties and
incoherencies of EU case law on the freedom of
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establishment and incorporation theories, it
extended the scope of the freedom of
establishment principle to a great extent, thereby
enabling MNEs to realize various cross-border
objectives. Firs
tly, it facilitates “shopping” for
corporate law by authorizing MNEs to choose their
place of incorporation and nationality; secondly, it
provides protection for both inbound and
outbound transnational mergers; and lastly, it
entitles them to choose the most appropriate
organizational structure for their cross-border
establishments.
As regards, the transfer of a registered seat and real
seat, there are still uncertainties for certain cases
due to the application of international private law
such as incorporation and real seat theories. For
example, a company like in Polybud case could be
rejected by the real seat theory Host State. Thus,
these areas of EU case law could be resolved by
future cases or a Uniform Community Law.
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