The New Delaware and its Kirchberg Plateau
The European Court of Justice recently confirmed in its Polbud judgment the extent to which regulatory competition may prevail in the field of corporate law. A review.
Milestone! Groundbreaking! These are some of the qualifications I have recently read in the scholarly response to the Polbud judgment delivered last month by the European Court of Justice (C-106/16, 25 October 2017, ECLI:EU:C:2017:804).
The Polbud case deals with the freedom of establishment, one of the ‘four fundamental freedoms’, the backbone of the EU internal market since the EEC Treaty was signed in Rome sixty years ago. Article 49 of the Treaty on the Functioning of the European Union (TFEU) forbids restrictions on the freedom of establishment of nationals of a Member State. And Article 54 TFEU provides for the national treatment of ‘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’.
For thirty years, the case law on the freedom of establishment has tried to define what (primary) establishment is and precisely what a company can do if it wants to change its establishment. So, how does Polbud fare in that case law?
Although the judgment was delivered by the Grand Chamber and is viewed as being a very important decision by the Court of Justice, it is difficult to see how it departs from the landmark Centros case. This blog argues that the Polbud judgment merely clarifies an important issue, the object of a dozen of cases since 1988.
Since the Daily Mail case in 1988, one principle has remained constant: The Member State where the company is incorporated is competent for laying down the requirements for its establishment. Two kinds of situation arise in the case law. The first situation concerns the company that wants to maintain its ‘real head office’ in state A but wishes to transfer its incorporation to state B (see Centros, Überseering, Inspire Art). Here, the Court of Justice has repeatedly denied the attempts of ‘original’ Member States of registration (state A) to prevent or impede on such a change of incorporation, and thus to restrict the freedom of establishment. A restriction might however be accepted for an overriding reason of general interest if it is proportionate (see Centros, §24-32 of the judgment).
Since then, the case law has focused on a second situation. This concerns the company that is willing to move its ‘real head office’ in state A without changing its legal status of incorporation in state B (see Daily Mail, Cartesio, National Grid Indus). In these cases, the Court of Justice has constantly recognised the ability for the state of incorporation to require the company to maintain its head office in the state of incorporation as long as it is registered there. It may constitute a restriction but, in the absence of harmonisation at Union level, the state of incorporation is sovereign in determining the ‘connection to (its) national legal order’ of a company it requires. The Court of Justice has proven very lenient here (see Cartesio). Foreign companies willing to become incorporated have to be treated in the same manner as national companies (see VALE, by analogy SEVIC). If the state of incorporation does not require such a ‘connection to the national legal order’ but imposes a tax on the exit of a real head office justified to avoid abuse of law or tax evasion, this is a justified restriction on the freedom of establishment as long as it is proportional (see National Grid Indus, Cadbury Schweppes, more recently Trustees of Panayi). The Court of Justice also emphasised in these cases that ‘establishment presupposes actual establishment of the company concerned in that State and the pursuit of genuine economic activity there’ (see Cadburry Schweppes, §54 of the judgment). However, this principle was asserted to support a restriction justified by preventing an abuse of law from a company that would move its real head office to avoid legal constraints from its state of incorporation (see Cadburry Schweppes, VALE, more recently AGET Iraklis). This principle was reasserted by Advocate General Kokott in her opinion on the Polbud case.
This was the state of the case law when the Court of Justice ruled on the Polbud case last month. In this case, a Polish company wanted to change its place of incorporation to Luxembourg while maintaining its real head office in Poland. In its judgment, the Court of Justice clarifies that, in the absence of harmonisation, the state of incorporation is in charge of setting the legal requirements for establishment, by defining what would satisfy the ‘connection to [its] national legal order’ (§33-34 of the judgment). The previous state of incorporation can lay down the procedure for the winding-up of companies, as long as it does not prevent or deter the change of incorporation permitted by the freedom of establishment (§ 43). The previous state of incorporation can restrict this freedom in a way compatible with the Treaty only where the restriction is justified by an overriding reason of general interest, appropriate to this objective and that it does not go beyond what is necessary. Here, the Court recognises that protection of the interests of creditors and workers as well as the prevention of abuse are legitimate objectives, similar to the SEVIC, AGET Iraklis and Centros cases. However, the obligation of liquidation does not constitute a proportionate restriction and amounts to a general presumption of fraud that would adversely affect the exercise of the freedom of establishment (§§ 52-64 of the Polbud judgment).
As a result, the Court of Justice reaffirmed the competence of the state of incorporation. Simultaneously, it denied once more to the state where the real head office is established the same leniency it grants to the state of incorporation. In other words, this judgment from the Grand Chamber reached exactly the same outcome as in Centros, twenty-eight years later. Although the Court of Justice has increasingly recognised restrictions by states of incorporation to prevent abuse, it did not discourage the practice of letterbox companies. Conversely, it has fostered regulatory competition in corporate law in a very similar way to that permitted in the United States. Delaware and Luxembourg pride themselves on being the corporate capitals of the US and the EU. However, while the former enjoys a view of the ocean, the latter tries to compensate with the Kirchberg Plateau.
It is also interesting to note that although the case law of the Court of Justice has been remarkably consistent, EU legislation has departed from this incorporation doctrine. Today, the most economically important European companies, banks and investment firms, are required to apply for a licence in the state their management is established so as to avoid shell companies and prevent financial fraud. The legislation has therefore given priority to a definition of primary establishment consistent with the siège réel doctrine, a doctrine that is preferred in France or Germany and that takes focuses on identifying the real establishment of a company.
In conclusion, it is remarkable that while primary law has not discriminated between the registered office, the central administration or the principal place of business of companies, secondary law has certainly done so these last thirty years.