1. TATIONpRÆSEN April 2013 Free movement of companies and the Vale judgment Karsten Engsig Sørensen, Professor, Dr. Jur. Department of Law, Aarhus University

2. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 2 Outline What is free movement of companies? Free movement of companies in context  US – and the Delaware effect  Free movement and the harmonisation of company law Free movement and the real seat theory Setting up branches in other MS Free movement though mergers, transfer of seat etc. VALE judgment

3. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 What is free movement of companies? Many cases on free movement of goods, services and capital where trader/service provider is a company  Most of these do not pose special problems  Exception: Golden shares cases Companies may meet many of the same barriers to establishment as other traders in tax law, labour law, marketing law etc. Sometimes company law rules (and IP rules) pose special problems for certain forms of free movement:  Setting up branches, including moving the real seat of the company to another MS  Cross-border mergers  Transfer of seat  Cross-border divisions and other restructuring 3

4. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 US – and the Delaware effect All states apply incorporation theory in their IP law Allows entrepreneur to incorporate in the state of preference Reincorporation is also easy As a result states started to compete for incorporations  Race that Delaware ”won” in the 1920’s  Incentive was franchise tax income and a huge service sector (lawyers and accountants)  William L. Cary (1974): Race for the bottom  Roberta Romano (1993): Race for the top Some states introduced regulation of pseudo-foreign corporations  Regulates foreign companies that have for instance more than 50% of their turnover, shareholders or their employees in that state  Only imposes certain provision of the home state on the foreign company 4

5. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Harmonisation of company law in the EU Seems that most MS wanted to avoid a European Delaware effect However, wanted to promote integration and thus also some form of free movement Harmonisation to ensure the protection of shareholders, persons and others who get in contact with the company  Disclosure (registration, accounts, branches)  Capital  Internal mergers and divisions  Management 5

6. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Harmonisation (continued) More difficult to achieve ‘proper free movement’  Flucht aus der Mitbestimmung  Fear of undermining domestic corporate forms Status  EEIG, Reg. 2137/85 – not really suitable (ancillary activities, few employees)  SE-Company, Reg. 2157/2001– only for cross-border activities and larger companies  SCE, Reg. 1435/2003 – only for cooperatives  Takeover directive 2004/25 – only for listed companies and only limited impact  Cross-border merger – directive 2005/56  Directive on transfer of registered seat – withdrawn in 2008  Action Plan from 2012 (COM (2012) 740) Slow and in no way complete – so let’s turn to the ECJ 6

7. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Free movement and the real seat theory What is the real seat theory?  IP rule pointing to the place where the managements is situated  Sanctioning moving the real seat abroad?  Applied by many MS  In contrast to incorporation theory Clearly a restriction on the right of establishment, but does it infringe Article 49? 7

8. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Real seat theory (continued) Case 81/87, Daily Mail  Moving real seat from UK to NL denied by tax authorities in the UK  Clearly motivated by tax planning  Tax law problem, not company law problem  The Court:  Art. 49 also prohibits restriction imposed by MS of origin  Without problems, companies can make secondary establishment and UK only restricts special form of establishment (moving real seat abroad)  MS differ as to what connection they require a company to have with the state of incorporation when they incorporate and later  Art. 54 accepts these differences (and according to old Ar. 293 the MS are encouraged to enter into international agreements about transfer of registered seat) (para. 21)  Therefore, the right of establishment does not solve the problems that occur in some MS when the seat is moved abroad (para. 23).  Consequences? 8

9. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Real seat theory (continued) Case C-212/97, Centros indicated that the Court did not accept any restriction of moving the real seat of companies Case C-208/00, Überseering  Dutch company moves its real seat to Germany and is denied the right to appear in court  Daily Mail only addressed how the state of incorporation may restrict their ‘own’ companies from moving their seat  Here another MS is denying to recognise a company formed in another MS and this has not been accepted by Daily Mail  The lack of recognition is clearly restricting the free movement and cannot be justified Consequences  Real seat theory amputated, but not eliminated  Several MS have revised the real seat theory 9

10. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Setting up branches Branches a form of establishment  11th Company Law Directive 89/666 regulated disclosure requirements  Many cases on tax discrimination of branches  But what if branches are used to circumvent national company law? Case 79/85, Segers  Dutch national chooses to incorporate his business based in NL in a UK Ltd., and is denied the right to health benefits because he is the director of a foreign company  Dutch government raises concern that Ltd.’s are used to circumvent Dutch law  The Court accepts that some measures may be used to prevent circumvention of law (abuse of rights), but discriminating rules on health benefits is not the proper remedy for that 10

11. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Branches (continued) C-212/97, Centros Danish couple choses to incorporate their DK business in a UK Ltd. Admits that the Danish minimum capital requirement was a problem Danish Registrar of Companies denies to register Centros Ltd. as a branch as they find that there was a circumvention of Danish law The Court:  Accepted that EU law cannot be invoked in case of abuse, but did not find that the fact that the Danish couple chooses to incorporate in UK because the company law rules there are more favourable is abuse (para. 27)  Furthermore, the fact that the company does not have any activities in the state of incorporation does not make it abuse (para. 29) Consequences 11

12. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Branches (continued) Case C-167/01, Inspire Art  A UK Ltd. was used for doing business in the NL and was forced to comply with the special rules adopted for ‘formal’ foreign companies  Rules required that the company identified itself as a formal foreign company that has a minimum capital equivalent to the Dutch minimum capital (otherwise the management of the company would be liable for the liabilities of the company)  The disclosure requirements went beyond that exhaustively listed in the 11th Company Law Directive – infringement of the directive  Capital requirement was restriction of right of establishment  Cannot be justified since the company identified itself as a UK company and potential creditors were thus informed that there may not be a minimum capital Consequences 12

13. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Where are we now? Removing real seat theory (partly) and accepting that the use of foreign company form is not abuse paves the way for free movement Will we have regulatory competition as in the US?  Similarities  The use of the incorporation theory  Differences in law does make it attractive to speculate in these  Services providers seem too eager to exploit possibility  Many differences  No tax incentive in the EU  Language barriers and practical barriers  Reincorporations still more difficult in the EU  Whereas US law allow regulation of pseudo-foreign companies this does not seem to be the case in the EU 13

14. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Where are we now? (continued) Becht, Mayer & Wagner, Journal of Corporate Finance 2008, pp. 241 14 GermanyDenmarkNetherlandsSweden 199741153501118 199839463506160 1999495133583161 200036970467109 2001151852110 200242075963781 20031.8111.406732109 20049.0381051.571113 200512.7771942.193289 200615.6331782.156413

15. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Where are we now? (continued) 15

16. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Where are we now? (continued) We can see that there has been a number of reforms focussing on lowering or removing the minimum capital requirement Seems that the reforms have turned development to some extent Thus, regulatory competition does happen, but will the trend continue? Seems to be many service providers (agents) who are fuelling competition 16

17. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Free movement though mergers, transfer of seat etc. Case C-411/03, SEVIC  Merger between German AG and SA from Luxembourg, with the AG as the continuing company  Denied registration in Germany as German law did not allow for cross-border merger  The Court  A merger is an establishment covered by Art. 49  As a merger between German companies is possible, the German denial of the cross-border merger is a restriction of the right of establishment  Justified to take steps to protect creditors, minority shareholders and employees, but a denial to register a merger is not an appropriate step to ensure that  Consequences  Merger should be allowed  MS dealt with this by incorporating the10th Company Law Directive 17

18. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Mergers, transfer of seat (continued ) C-210/06, CARTESIO  Hungarian company ask for the registration of the transfer of the company’s seat to Italy. Registration denied in Hungary as Hungarian law did not allow for the transfer of seat abroad  The Court:  According to Daily Mail the Member States may as state of incorporation decide the connection which a company must have to that state and may determine the consequences of moving the real seat abroad.  Points out that the situation differs according to whether the seat is moved to another MS without a change of applicable law or whether the seat is moved with a change of applicable law. Whereas MS may restrict the transfer in the first case it would be a restriction of the right of establishment to do so in the last case if the ‘receiving’ MS allows the change of applicable law.  Consequences 18

19. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 VALE judgment Case C-378/10, VALE  An Italian company intends to move its seat to Hungary and be registered in Hungary and thus submit itself to Hungarian law  It is removed from the Register in Rome and adopts articles to comply with Hungarian law  But registration is denied in Hungary since Hungarian law does not allow for a transfer of seat to Hungary, and furthermore does not allow that a foreign company is listed as a predecessor in law in the register  The Court  Even though Hungary has the power to define the connecting factor required of a company, they cannot deny a cross-border conversion  Given that there is an actual establishment in the host MS, and given that Hungarian law allows for conversion of domestic companies, the denial to allow a cross-border conversion is a restriction of the right of establishment 19

20. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 VALE judgment (continued) The Court (continued)  It may be justified to take measures to protect the interests of creditors, minority shareholders and employees, but this cannot justify a general denial to allow cross-border conversions  Since there is no harmonisation addressing how conversions should take place, it is for the MS of origin and host MS to govern the process. However, they must comply with Art. 49:  If they allow for conversion domestically, they must also allow for these in a cross- border context  The MS must observe the principle of equivalence and the principle of effectiveness 20

21. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 VALE judgment (continued) The Court (continued)  Therefore, OK to force company to comply with Hungarian rules on national conversions and on the incorporation and functioning of the company (can require the company to draw up a list of assets and liability)  Cannot refuse to register an Italian company as a ‘predecessor in law’ when it is possible to register such a predecessor in domestic conversions  Principle of effectiveness means that the host MS must take due account of the documents issued by the MS of origin 21

22. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 VALE judgment (continued) Consequences  Makes it clear that MS should allow cross-border conversions if these are allowed domestically  Introduces the principle of equivalence and the principle of effectiveness  Has been used in other areas of procedural law left to the MS  Should use the same rules (unless justified, for instance to safeguard creditors, shareholder etc.)  But sometimes MS must go beyond national rules to allow for cross-border conversions 22

23. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 VALE judgment (continued) Principles are vague and judgment leaves many questions open  What kind of conversions (and other restructuring) should be allowed?  Which MS can take steps to protect creditors, minority shareholders etc.?  How to overcome lack of procedural coordination?  Which MS may raise requirements related to the company’s connecting to the MS?  How do we cope with the requirement that there should be an actual establishment and the pursue of genuine economic activities? Still a need for a directive on cross-border conversions 23

24. Free movement of companies and the Vale judgment Karsten Engsig Sørensen Professor, Dr. Jur. Zagreb, April 2013 Conclusions The Court, and to a lesser extent the legislators, have ensured free movement The Court will probably need to elaborate on the procedural aspects and on the MS’ possibility to combat abuse (no genuine activities) Still need for harmonisation Thank you for your attention! 24