The Law Applicable to Companies in the EU: Status quaestionis Prof. Francisco Garcimartin University Autónoma of Madrid

Two approaches: Incorporation Theory vs Real-Seat Theory Three main issues that any future instrument should address: The determination of the lex societatis, ie the law governing a company, The scope of application of such law The change of lex societatis The ECJ case law (Centros et al)

Company Law in the EU: an Outline EU Companies: SE or SCE Harmonised rules for national companies: Directive 2017/1132 But, no EU instrument of the law applicable to a company

Company Law from a PIL Perspective: historical problems LEX SOCIETATIS (=Law governing a company) Connecting factor Incorporation Theory Real-Seat Theory Recognition of foreign companies

Real Seat Theory vs Incorporation Theory: Example MS A MS B State of Incorporation Real Seat If RS Theory, No MS C If Inc Theory, Yes

Company Law from a PIL Perspective: historical problems LEX SOCIETATIS (=Law governing a company): Three main issues Determination of the lex societatis Scope of application Change of lex societatis (=transfer of seat) Connecting factor: Real seat theory vs Incorporation theory Recognition of foreign companies problem Example Internal aspects of the company External aspects of the company Capacity + Liability Transfer of the real seat/statutory seat Whether and under what conditions

ECJ case law LEX SOCIETATIS (=Law governing a company): Three main issues Determination of the lex societatis Scope of application Change of lex societatis (=transfer of seat) Centros Uberseering Inspire Art Centros et al. Daily mail Cartesio National Grid Vale Polbud

CASE LAW: STATUS QUAESTIONIS Existence and Recognition A company is a creature of national law, which exists only by virtue of the national legislation which determines its incorporation and functioning (Daily Mail and many others). Home MS: each MS determines whether and under what conditions a company can be incorporated under its own laws; and in particular, whether not merely the registered office but also the real seat must be situated in its territory. Ie the Home MS defines the connecting factor. Example Host MS: The non-recognition of a company formed in accordance with the law of another Member State is a obstacle to the exercise of the basic freedom of the TFEU and, in particular, of the FoE (Centros, Uberseering, Inspire Art) or in a positive formulation, “a necessary precondition for the exercise of the FoE is the recognition of companies incorporated in other Member States” (Überseering). Example Therefore, the Treaty protects the right to form a company in accordance with the law of a MS and to pursue activities in other MM SS (Centros at al).

CASE LAW: STATUS QUAESTIONIS Scope The foreign company must be recognized as such, i.e. with the legal capacity it has under the law of its State of incorporation or Home MS (Uberseering, Inspire Art) Example But exceptions subject to the proportionality test: non-discriminatory, aimed at the protection of general interests (eg creditors of the company, workers, tax authorities, minority shareholders), suitable for securing the attainment of the objective they pursue and they must not go beyond what is necessary in order to attain it (Centros et al). Issues such as disclosure obligations, minimum capital, director´s liability. “First, the practice in question is not such as to attain the objective of protecting creditors which it purports to pursue since, if the company concerned had conducted business in the United Kingdom, its branch would have been registered in Denmark, even though Danish creditors might have been equally exposed to risk” “Since the company concerned in the main proceedings holds itself out as a company governed by the law of England and Wales and not as a company governed by Danish Law [where the real seat was located], its creditors are on notice that it is covered by laws different from those which govern the formation of private limited companies in Denmark…” (Centros, para. 35; see also Inspire Art, para. 135) [Volenti non fit injuria]

CASE LAW: STATUS QUAESTIONIS Change of lex societatis A change of lex societatis due to a transfer of the registered/real seat keeping the legal personality is possible (=cross-border conversion), Cartesio, Vale But: (i) the Home MS determines whether a transfer abroad of the real seat implies a change of lex societatis (i.e. the rules relating to transfer are determined by the Home MS and, therefore, the Home MS may subject the company´s right to retain its lex societatis to restrictions on the transfer of the real seat abroad, Cartesio); (ii) if the Home MS allows for a change, the host MS determines the connecting factor required to be incorporated under the new law; (iii) and, no harmonized rules regarding eg the rights of dissenting shareholders, creditors, employees or registration aspects (but the principles of effectiveness and equivalence apply) Examples

By way of conclusion The ECJ’s case law has clarified to some extent the situation under EU law: “A home Member State approach”: The relevant connecting factor is determined by the state of incorporation, but other Member States are forced to accept the result of applying the law of that State under the principle of mutual recognition. Accordingly, once a company has been validly incorporated under the law of a Member State, it must be recognised by the other Member States even by that where the real seat is located (“unilateral approach + mutual recognition” scheme) Though such case law, its drawbacks are evident: The conflict-of-law regime is not really harmonized, The determination of the scope of the lex societatis calls for a case by case analysis, Cross-border transfers are complicated in practise, and The recognition of companies incorporated in third countries remains entirely in the hands of Member States. This situation argues in favour of establishing a harmonized framework, i.e. a EU Regulation on the law applicable to companies