The EU Court of Justice, ruling since 1988 in litigation related to the consequences of company transfers within the EU27, has built up general rules for freedom of establishment as set out in Articles 49 of the Treaty on Functioning of the EU (TFEU, ex-Article 43 TEC) and 54 TFEU (ex-Article 48 TEC) for its application to companies. In other words, in the absence of EU legislation, it has determined member states’ margin of manoeuvre with regard to companies exercising freedom of movement.

STATES’ POWERS

The court interprets Article 54 TFEU as recognition of the principle that “companies are first and foremost creatures of national law,” explains Pierre-Henri Conac, professor at Luxembourg University and a member of the Commission’s expert group on company law. The treaty imposes respect for freedom of establishment but exercise of this freedom is governed by the law of the country where the company’s registered office, principal establishment or administrative centre is based. The state of registration is entitled to impose conditions on the company’s form, publication of its data and so on. Conflicts between national laws and freedom of establishment are frequent, though, and are further exacerbated by the controversy between ‘real head office’ and ‘incorporation’ states (see separate article). States belonging to the first school impose a “merger” of the company’s registered office and decision making centre (also described as the ‘real head office’), which are not necessarily equivalent; states applying the latter theory acknowledge that a dissociation between the two types of head offices is possible and thus encourage companies to move abroad.

Case law resulting from specific questions submitted to the Luxembourg-based EU court has outlined member states’ powers, while carefully avoiding favouring one theory over the other.

In an initial ruling, handed down in 1988, in the Daily Mail case (81/87), the court held that the state of origin may determine the conditions of transfer of the registered office. Daily Mail Plc, which wished to remain subject to the laws of the United Kingdom while transferring its ‘real head office’ to the Netherlands for tax reasons, failed to obtain the consent of the British Treasury. The court ruled that the UK may, without infringing freedom of establishment, ban such a transfer on the criterion of the company’s connection to the national territory. In a more recent judgement (Cartesio, C-210/06) concerning the transfer of a ‘real head office’ from Hungary to Italy, the court gives nuance to its position by making a distinction between a transfer that involves a change of applicable law, because the company changes nationality by moving its head office, and a transfer that does not result in a change of law because the company keeps its initial nationality. In the first case, the state of departure may not limit the transfer, subject to acceptance by the state of arrival, since its legislation no longer applies; in the second case, it may prohibit the transfer since the company is still subject to its national law.

A trilogy of judgements defines the powers of the state of arrival: it may not refuse to recognise a branch office of a company set up in another member state even if the branch does not exercise an economic activity (Centros, C-212/97). It may not impose constraints other than those applicable to a branch of a company having its head office on national territory (Inspire Art, C-167/01). It is prohibited for the state of arrival not to recognise the mobility of a company and thereby to prohibit it from bringing legal proceedings on its territory on the pretext that its registered office is based in another member state (Überseering, C-208/00).

On mergers of companies having different nationalities, the state of the merged entity may not refuse to register the new firm if it accepts mergers between national companies (Sevic C-411/03).

SOME RESTRICTIONS POSSIBLE

In parallel with these restrictions on states’ margin of manoeuvre, the court recognises that they are entitled, in cases justified by overriding reasons of general interest, to take measures proportional to this objective to prevent abuse of freedom of establishment (Marks & Spencer, C-446/03). The protection of employees, shareholders and creditors, the fairness of commercial transactions and preservation of the effectiveness of tax controls have been identified as grounds justifying such restrictions (Sevic and Überseering).

The EU court nevertheless made it clear that “forum shopping,” in other words the possibility to take advantage of the tax legislation (Barbier, C-364/01 and Cadbury Schweppes, C-196/04) or company law of another member state because it is more advantageous or better suited to the company, does not constitute abuse and is therefore not ground for justifying hindrances (Centros and Inspire Art).

In the absence of EU legislation, this case law, which liberalises the principle of freedom of establishment, is hotly debated. It paves the way to competition between member states. Lacking means of pressure on companies except in the event of fraud, states have to revise their rules to become as attractive as possible to companies. This approach seems to counter the policy of EU integration implemented by the Commission with the aim of harmonising national company law regimes.