European Company Statute:
this article, the author seeks to analyse the basic differences in
the two criteria used to determine a company’s nationality. Also the general
principle of freedom of establishment of companies envisaged by the Treaty of
Rome is presented and the case-law dealing with freedom to change one’s
primary establishment is discussed. More specifically, the Societas Europaea
(European Company) is tackled as a solution to the problem of the relocation of
a company’s primary establishment.
movement of the Societas Europaea
May 2001 Dr Maria Chetcuti Cauchi. All Rights Reserved.
of laws problems between different States
By setting up as
a European Company a business can restructure fast and easily, to take the
best possible advantage of the trading opportunities offered by the Internal
Market. European Companies with commercial interests in more than one MS
will be able to move across borders easily, as the need arises, in response
to the changing needs of their business.
promoters of the ECS envisaged a corporate vehicle which would:
guarantee the Freedom of Establishment laid down in the Treaty, eliminate
the possibility of conflict of company rules between two MSs of the
Community and is ideal for a proper working of the European Capital Market.
As yet, complete
freedom of establishment of companies has not been achieved by the European
Community and it is hoped that the ECS will remedy the situation.
Freedom of establishment is vital in the elimination of barriers that
national frontiers set to the entrepreneurial and organisational skills of
the nationals and companies of each MS. In a broader context, a more
effective utilisation of available resources in the enlarged market is the
Change of the
primary establishment of a natural person is possible within the EU
and this is regulated by the Treaty of Rome. On the contrary, it is still
national legislation that determines whether a legal person may
change its registered office from one MS to another.
It is amazing that at the present stage of European company law
harmonisation, we still find a basic division within the EC on the manner in
which a company’s nationality and its connection are established. Two
conflicting criteria are used to determine nationality and each of them
points to the company’s valid law, i.e., the basic legislation
governing the company’s affairs.
On the whole,
the division lies between those jurisdictions which embrace the incorporation
theory and those which opt for the siège réel (real seat) or
the head office theory. The tension amongst these two different legal
theories has been prevailing for long. The result is that the connecting
factor used to determine which system of law is to govern the activities
(especially the internal affairs) of the company differs from one MS to
within the EU, such as the UK and Denmark, espouse what has been described
as the incorporation doctrine. This theory affirms that the law
governing the activities of a company is the law of the State in which the
company has been incorporated
and the latter is the best system to determine matters such as validity of
formation of the company and recognition of foreign companies.
Thus, if the company conforms to the requisites under the law of the State
of incorporation, it will be attributed with a legal personality, with all
the rights and liabilities of a corporate existence, including limited
make use of a different criterion to establish which law is to govern the
company. The real seat theory (siège réel) takes the line that the
law most suitable to govern the affairs of the company is the law of the
place in which the company has its head office
or central management and control.
In order the
clarify the manner in which these theories work, it would be appropriate to
explain by means of practical examples. The following are situations in
which the above theories are applied and the manner in which the validity of
formation of a company is determined by different MSs which adopt different
Let us assume
that there is a State called Nomos and a State called Emporio.
Now, company ABC Limited was properly incorporated under the laws of
Nomos but it has its head office in the State of Emporio.
Study 1: UK – Place of incorporation theory
UK Court would base its decision on the validity of formation of ABC Ltd.,
by looking at the matter from the perspective of a Nomodian Court. Thus, if
the law of Nomos recognizes ABC Ltd as a valid legal entity, then UK Courts
would deem it to be such, whilst if on the contrary Nomodian law deems the
company to be invalidly incorporated, then UK Courts would not recognize ABC
Nomodian law embraces the place of incorporation theory,
and Nomos, as its place of registration, deems the company to be validly
constituted under its laws, then the company would be deemed to be validly
constituted in the eyes of an English Court.
Nomodian law embraces the real seat theory, one should look at the law in
which the company has its de facto headquarters. Now, when looking at
the law of Emporio (place of de facto head office), Nomos will
conclude that the company is not validly incorporated under the laws of
Emporio, then an English Court which is looking through the eyes of an
Nomodian Court, can only reach the conclusion reached by the Nomodian Court.
Study 2: Germany – Real Seat theory
the other hand, a German Court would approach the matter in a different
manner. It would base its decision by looking at the law of Emporio as the
law of the real seat of ABC Ltd., and ask whether the company is deemed to
be validly constituted under the laws of Emporio.
Emporian law embraces the place of incorporation theory,
Emporian Courts would look at the law of Nomos (place of incorporation) and
conclude that the company is validly incorporated under Nomodian law. Then,
in turn, German Courts would recognise ABC Ltd.
law embraces the real seat theory, then
Emporio would look at its own laws of incorporation and conclude that the
company is not validly registered. Thus, German Courts would not be able to
recognise ABC Ltd. In two similar German judgements, the German Court did
not recognise the companies as validly incorporated and treated them as
private companies in the process of incorporation.
of Establishment within the European Union
The Treaty of Rome
The Treaty of
Rome addresses the question of freedom of establishment under Article 43.
Within the framework of the provisions set out below,
restrictions on the freedom of establishment of nationals of a MS in
the territory of another MS shall be prohibited. Such prohibition shall also
apply to restrictions on the setting up of agencies, branches or
subsidiaries by nationals of any MS established in the territory of any MS.
of establishment shall include the right to take up and pursue activities as
self employed persons and to set up and manage
undertakings, in particular companies or firms within the meaning of
the second paragraph of Article 48, under the conditions laid down for
its own nationals by the law of the country where such establishment is
effected, subject to the provisions of the Chapter relating to capital.
The first part
of Article 43 provides for the establishment of a company through a
branch or subsidiary. This is referred to as secondary establishment,
as the legal person establishing such branch remains where it is. The second
part of the Article presents the right of an individual to set up and
manage an undertaking in any MS, as long as such individual abides by the
conditions laid down for nationals in the country of establishment.
This freedom is given full effect when MSs recognise the existence and
validity of foreign companies carrying out business on their territory.
Freedom of establishment seems to presuppose mutual recognition of companies
and the two principles go hand in hand.
Specific negotiations to resolve this problem of conflict of laws
of the Treaty of Rome provides that MSs shall enter into negotiations with
each other with a view to securing for the benefit of their nationals, inter
alia, the mutual recognition of companies or firms, the retention of
legal personality in the event of transfer of their seat from one country to
another (change in a company’s primary establishment) and the possibility
of mergers between companies or firms governed by the laws of different
It is quite
paradoxical that several EU countries have resolved the division between the
main seat and the registration criteria, by entering into Treaties with
while they did not resolve the matter internally, within the EU. In fact,
this question of recognition of a legal person from one State to the next
has been left quite unresolved, except for the European Company Statute and
the Fourteenth Directive.
Cross-border transfers of the registered office: Daily Mail case
The issue under
discussion in the context of the ECS is the primary establishment of
a company. It is a fact that by means of Article 43, the Treaty of Rome
gives companies the right to establish a branch or a subsidiary in another
MS, but can a company transfer its domicile, its primary
establishment, from one MS to another?
of the Treaty of Rome gives companies the possibility of entering into
conventions among themselves on, a list of possible questions, including,
‘retention of legal personality in the event of transfer of their seat
from one country to another’.
However, in the absence of such agreement between MSs, can a company,
similar to natural persons,
‘uproot’ and move to another EU State? Transfer of the registered office
has always been considered desirable, yet it also implies a large number of
difficulties. This is because after a relocation, the original national law
regulating the company ceases to apply, thus leading to the disappearance of
the company’s legal personality.
Daily Mail case
discloses a great deal about the complications caused by an operation of
this kind. The company concerned decided to change its registered office
from Britain to Holland. Thus, the transfer was between two countries which
uphold the incorporation/registration theory. The company admitted
that it had decided to carry out such transfer purely because it was moved
by tax considerations as a substantial amount of capital gains tax had
accumulated on the company’s fixed assets. Under section 482 (1) (a) of
the Taxes Act 1970, the Treasury had the power to give or withhold its
consent to such transfer. The UK Treasury prevented the company from
affecting a change in its registered office and refused to grant its
taxpayer claimed that the freedom to leave one’s own State is a corollary
of the right to establish oneself in another MS. By simply saying that a
company could set up a branch in another MS, without giving that same
company the full right of leaving its own country of domicile is tantamount
to a restriction to the full freedom of establishment envisaged by Articles
43 or 48.
the other hand, the British Revenue argued that Article 43 was intended
to eliminate discrimination against nationals of another MS who wished to
establish themselves in order to perform economic activities in their chosen
country but it does not give a right to companies to establish central
management and residence abroad.
matter was referred to the ECJ under section 234 of the Treaty of Rome and
the ECJ was requested to decide whether the authorisation needed under
section 482 (1) (a) of the Taxes Act 1970 constituted a barrier to the
movement of businesses. On revealing his own point of view on the matter,
the judge referring the case claimed that:
inclination has been to doubt whether section 482 should be allowed to
prevent or to fetter the voluntary movement of residence of a corporation
which wishes to take advantage of a better fiscal climate in another MS
within the EEC… the object of the Treaty being the removal of barriers and
the creation of an Economic Community without protective barriers of any
kind either for persons or for corporations or for trade generally. The
creation in other words of a true Common Market.
The question of
change of a company’s primary establishment, cannot be answered
unambiguously and this is further reflected in the ambiguous conclusion
reached by the ECJ. The pro-integration European Court, whilst laying out
the principle that firms could transfer their registered office, still had
to conclude that the Treaty, per se, does not give companies the
right to a change their primary establishment.
It also stated that the authorisation needed under the Taxes Act
was compatible with Article 43 of the Treaty of Rome as the
relevant provision of Community law did not resolve the matter.
The Court added that since both Britain and Holland are ‘registration
States’, i.e. States which uphold the place of incorporation
theory, then a company exists only in consequence of the legislation of
the State of incorporation. Since no Convention, under Article 293 had
been concluded between Britain and Holland, then no right can be derived
from Articles 43 or 48 to move the legal person’s genuine domicile to
another State. The only solution which could be given to the Daily Mail was
that British law did not impede a dissolution of the company, payment of the
tax and re-establishment in another EU State.
SE: A Solution to Lack of Freedom of Movement of Companies
of the proposed Regulation for a European Company provides that:
The registered office of an SE may be
transferred to another Member State in accordance with paragraphs 2 to 13.
Such a transfer shall not result in the winding up of the SE or in
the creation of a new legal person.
of the SE will result in the creation of a flexible scope within which
companies would be able to transfer their registered office from one MS to
another without having to undergo liquidation.
It is important
to note that the introduction of the proposed Regulation will not obstruct
the right which MSs have to tax any profits linked with the
place of business in the State of taxation, but no such taxation will
be incurred if the company retains the original State of registration as a
If one keeps in
mind the fact that a company may now be transformed into an SE, then it
follows that now any share capital may be transferred into another MS
without having to undergo liquidation and winding up as private companies
have the possibility of changing into public companies and thereafter they
could be changed into SEs. Moreover,
the obligation of having a subsidiary or a place of business in another MS
will surely not be a burden. This paves the way into a new era in which all
companies will be given the opportunity to change nationality within the
geographic area of the EU.
Issues arising from a change in the registered office
the competent authority issues the certificate mentioned in paragraph 5, the
SE shall satisfy it that, in respect of any liabilities arising prior to the
publication of the transfer proposal, the interests of creditors and holders
of other rights in respect of the SE (including those of public bodies) have
been adequately protected in accordance with requirements laid down by the
MS where the SE has its registered office prior to the transfer.
Member State may extend the application of the first subparagraph to
liabilities that arise (or may arise) prior to the transfer.
attributed to creditors under company law vary from one jurisdiction to
another. These rights range from forms of security and associated
publicity/registration requisites to preferential
rights and insolvency rules.
(7) gives quite a free hand to MSs in creditor protection mechanisms. The
first mode of protection could be classified as a solvency reference which
is to accompany the transfer proposal. This is further enhanced by the right
attributed to creditors to apply to the Court on the grounds that the
transfer proposal does not offer them
sufficient security. Additionally, Article 8 (16), provides that in
case of claims arising before the transfer has taken place, the SE shall be
considered as still having its registered office in the MS where it was
registered prior to the transfer, even if the SE was sued after the transfer
took place. The transfer of registered office of an SE is also barred by
winding up, liquidation, insolvency or suspension of payments proceedings
which have been brought against it.
As in the
proposed Fourteenth Directive,
the proposed Regulation does not define what “adequate” security means.
This adequate security which is provided to creditors seems to give such
creditors some sort of ranking over others, but what if the company, after
moving to another MS, creates other new secure creditors? Will the ‘new’
creditors destroy the rights of the previous ones? The proposed Regulation
is silent on the matter.
is nothing in the proposed Regulation which deals with the eventual
insertion of a jurisdiction clause into such a ‘security’, nor a clause
which impedes the company from entering into ‘new’ securities in the new
place of registration. Will such clause be valid? If such clause is
considered to be valid, what law is to govern such validity?
The ECS provides
that MSs are free to adopt provisions to protect dissenting minority
It seems that shareholders are given the right to request the Court that
they are bought out at a fair price, however, it is held that one cannot
really envisage a case where shareholders are given the power to block the
transfer of the SE from one MS to another.
Upon drawing up
a transfer proposal, the management/administrative organ of the SE shall
include, inter alia, the rights which are provided for protection of
both shareholders and creditors.
Besides, the management/administrative organ is also obliged to draw up a
report, whereby the implications of the transfer for shareholders, creditors
and employees are delineated.
Regulation does not provide for either creditors or employees to have a say
in the actual decision to transfer. Article 8 (5) permits MSs to adopt
measures to safeguard the rights of minority shareholders, but other classes
of shareholders or other interested groups are not mentioned.
Apart from the
case where workers have a right to vote at the general meeting ( e.g.
the workers are also shareholders), the Statute offers no rights to
employees, in the case where an SE changes jurisdictions. Article 8 (4)
does not even mention employees when it refers to the right which
shareholders and creditors are given to examine the report issued by the
management team. On the contrary, the proposed Fourteenth Directive does
deal with the matter, even though in a limited manner. The latter provides
that in the case where employees formed part of the management board of the
company prior to the proposed transfer, then examination of the report
issued by the management team will be possible.
One should also
address the question of whether the participation rights which employees
enjoyed prior to the transfer, would subsist. Are the participation rights
which the workers enjoyed deemed to be company law rights which will change
as soon as the law of the registration of the company is changed, or will
such rights subsist even under the new law of registration? One could argue
that, since existing employment contracts do not change with the transfer,
then if such participation rights are embedded in this contract, they also
However, the proposed Regulation is silent on this matter too.
Change of effective headquarters: implications
Due to the
linkage imposed by the proposed Regulation between movement of the
registered office and the head office of the SE,
it is argued that freedom of movement of the head office could also be
inhibited. A change in the registered office of a company corresponds to a
change in the law applicable to the company, thus movement of headquarters
could result in being too costly and uncertain. On moving headquarters, the
company will have to adjust its mode of action and the rules governing its
manner of conducting business to comply with the laws presented by the new
place of registration, thus resulting in pricey and doubtful arrangements.
SE: a limited solution to freedom of establishment of companies?
The registered office of an SE shall be located within the Community,
in the same MS as its head office. A
MS may in addition impose on SEs registered in its territory the obligation
of locating their head office and their registered office in the same place.
Regulation provides that location of an SE’s registered office must be in
the same MS as its head office and it must be located within the Community,
thus ensuring effective monitoring of an SE by that same MS.
The latter may also impose, on SEs
registered within its territory, the obligation of setting up their head
office and their registered office in the same location.
of the proposed Regulation seems to provide a compromise between the place
of incorporation rule and the siège réel theory as it appears
to provide a solution both for those States that advocate the State of incorporation
theory and also for those that uphold the siège réel theory.
The solution was to link both requisites together and provide that the
registered office cannot be transferred unless there is also a transfer of
the head office. However, this solution has somewhat limited the flexibility
of the ECS.
The fact that
the registered office and the siège réel must be in the same MS presents a
variety of problems. First of all, it is potentially problematic to try to
decipher where the head office is located.
Many times such location is quite unclear as a variety of processes in the
administration of the company may be taking place in a variety of locations.
Article 7 was the one which Netherlands, a place of incorporation jurisdiction,
refused to consent to in 1998 at the Internal Market Council meeting.
In addition, Article 7 seems to be paradoxical when compared to the
freedom of establishment opportunity presented by Article 8. On the one
hand, the SE is a company which has the advantage of transferring its
registered office without the need to go through the process of winding up
and creating a new legal person and on the other hand, its registered office
can only move to another MS if and when the head office is also moved to
that same MS.
of changing the registered office and the head office simultaneously is in
step with legislation governing public companies in a large number of MSs
which uphold the siège réel theory. However, it is still at odds
with the practice of other MSs, such as the UK, Denmark, Ireland and the
Netherlands, as the latter acknowledge only the place of incorporation
rule as the determining factor in establishing which law is to govern
The latter require nationally registered companies to have their registered
office in the MS concerned but they are left free to choose the location for
their head office. This is because the governing law of the company would
still remain the law of the place of registration, irrespective of the
location of the head office. Such requirement of having companies maintain
their head office in the MS of registration could unduly restrict the
flexibility of movement of the SE, thus leaving it quite incapable of
responding to changing commercial needs.
Regulation, on the one hand, emphasises the freedom to transfer an SE’s
registered office throughout the EU while maintaining its legal
personality, whilst on the other hand, the authorities of the MS in which
the SE had its registered office could order the SE to be wound up or
liquidated if its registered office and head office are located in different
MSs. This paradoxical situation has been explained by some as a necessary
evil, in that, it is the only system that allows effective supervision of
the whole SE, so as to avoid the SE being used for suspicious practice such
as tax fraud or money laundering.
The problem is
that the corporate form could be manipulated and used for fraudulent or
abusive purposes. Now, in various cases, a solution to this problem has been
found by national courts where the latter have ignored the corporate form
when they deemed it appropriate to do so and lifted the veil in order
to reveal abusive practices.
Thus, by analogy, the precedents, created in relation to the lifting of the
veil of incorporation in other cases, could be resorted to in order to
nullify the effects of the transfer of the SE, if such transfer is deemed to
have been carried out for fraudulent purposes. Thus, provisions enabling an
SE to transfer its registered office and seek registration in another MS,
would co-exist with provisions which regulate and check abuse of this right
of movement, thus ensuring that this right is not employed abusively.
of registered office: possible Delaware effect?
presumably low level of protection afforded by the proposed Regulation to
employees, shareholders and creditors, in case of transfer of registered
may produce two different results. MSs may either decide to make use of all
sorts of measures, such as tax incentives, to prevent companies from leaving
their jurisdiction or else, companies will start to ‘forum shop’ to find
the least regulated environment. This has occurred in Delaware where
corporate law in an industry.
The characteristics of Delaware corporate law have been outlined by
Professor Cary as including, inter alia , low standards, ease of
access to courts; less restrictions upon selling assets, mortgaging, leasing
and merging; permission to have staggered boards and public policy of
registered office is the location which determines what national law is to
be applied to the SE each time the proposed Regulation refers to national
law. This could result in a situation where the SE transfers its seat from
one MS to another on choosing jurisdictions with less stringent rules. Thus,
if there is a MS with lenient rules on a particular aspect of the SE, a
company would have much more interest in having that MS’s law governing
it, rather then the law of a MS which offers a more disadvantageous
position. The same situation has occurred in the US where various American
States were coerced into succumbing to the temptation of excessive
liberality. Competitiveness was the primary factor which induced them in
The race was one
not of diligence, but of laxity. Incorporation under such laws was possible;
and the great industrial States yielded in order not to lose wholly the
prospect of revenue and the control incident to domestic corporations.
problem is further emphasised by the lack of harmonisation in the EU of
particular company law areas, such as insolvency law and liquidation
procedures. Thus, until such time that European minimum standards are
agreed, MSs would only have one choice: either start running in the race or
admit defeat and try to support the national economy in the
loss it suffers due to emigrating business.
This concern of
a possible European ‘race to laxity’ has arisen after the delivery of a
recent decision by the ECJ, the Centros decision.
In this case, Centros Ltd. was registered in England and Wales (an
‘incorporation’ jurisdiction) and its share capital was of £100, which
was neither paid up nor made available to the company. In 1992, Mrs Bryde,
one of the two shareholders, sought to exercise the right of establishment
under Chapter 2 of the Treaty of Rome, by registering a branch of the
company, in Denmark (also an incorporation jurisdiction).
authorities refused to register such branch as they claimed that, in
reality, the branch was going to be used as the main establishment. The
Danish Department of Trade insisted that the tactic which the two
shareholders of the company were using, was intended to circumvent the
paying-up of the minimum capital required under Danish law, DKK 200, 000.
The Court reached the conclusion that the company was properly incorporated
according to the law of England, the law of incorporation but it did not
analyse whether the company was properly incorporated under the law of
Denmark, the law of its real headquarters. Had the Court applied the real
seat theory, most probably it would not have recognised the company as the
company did not satisfy the requirements of the systems of the law of the
State in which its central management and control was situated. The case
seems to bear witness to an implicit sanctioning of the incorporation
principle. However, in view of the admittance by the Brydes that the tactic
was used to circumvent the Danish minimum capital requirement, one starts to
appreciate more the rationale behind the real seat theory.
reached by the ECJ echoed the sentiments previously expressed in the Segers
case of 1986.
The court reached the conclusion that it was wholly:
the company was formed in the first Member State only for the purpose of
establishing itself in the second, where its main, or indeed entire,
business is to be conducted.
liberal decision has been interpreted in many ways. Some have claimed that
it is a cloaked disregard for the real seat theory and a marked preference
of the incorporation theory.
However, others have affirmed that it is just a clear indication of great
emphasis which the ECJ is placing on freedom of establishment of companies,
because even though the Court did not address the question of mutual
recognition of companies directly, yet implicitly it still highlighted the
fact that a more liberal approach is necessary and freedom of establishment
should be given precedence over other principles.
fact that companies operating in the European Market still have to shop
around in pursuit of a
more advantageous system demonstrates that the European harmonisation
programme is yet not fully effective.
Progress on the
harmonisation of company laws has to date been somewhat disappointing. The
challenges of the Europeanisation of businesses and some of the challenges
facing company law in general have been abandoned, or at least not pursued
with any vigour. Instead the company law harmonisation has been dominated in
its early years by addressing technical matters, and technical obstructions
to the freedom of establishment.
ECS would potentially diminish the possibility of companies drifting from
one jurisdiction to another in search for the system which best suits their
criteria as all SEs would be governed by a law which is, to a large extent
universal. This coupled with a more harmonised Company law programme would
surely minimise the risk of a possible ‘Delaware’ effect.
May 2001 Dr Maria Chetcuti Cauchi. All Rights Reserved.