This article is part of our special report EU law goes digital.
EU member states have adopted contrasting approaches to the cross-border mobility of companies, with some insisting on “real” economic activity and others happy to consider the legally-registered office instead. How the EU eventually decides could have important implications, writes Corrado Malberti.
Corrado Malberti is Professor of Commercial Law at the University of Trento. A notary in Turin, Milan and Como, he has been Chair of the Company Law working group of the Council of the Notariats of the European Union since 2011.
The European Commission is planning an initiative to address the problems raised by the cross-border mobility of companies. Apparently, this legislation will review the cross-border merger directive and introduce a set of rules on cross-border divisions and cross-border conversions. In addition, it seems that this initiative could also harmonise the private international law principles concerning the law applicable to companies across the European Union.
Even if all these measures pursue the goal of facilitating the cross-border operations of legal entities, they pose different challenges for their enactment, given the implications they might have on national company law, and since they will concern fields that today have not been yet harmonised at EU level. These topics are also important for practitioners, and, for that reason, the Notaries of Europe Congress will be devoted to the cross-border mobility of legal entities.
Probably the most contentious measures are those aiming at harmonising the law applicable to companies, since EU Member States have adopted different approaches in this respect.
These approaches fall under two different theories – the “real seat” theory and the “incorporation” theory. The real seat theory determines the legislation which governs a company based on the place where the fundamental management decisions of the company are implemented, while the incorporation theory simply relies on a formal element, which is that of the place where the registered office is located or where the incorporation procedure was completed.
The adoption of either criterion at European level will have important implications for the countries that will have to adopt the other approach.
In reality, in the perspective of enhancing the cross-border mobility of companies, the debate on these criteria is more theoretical than practical. Certainly, some real seat countries, especially in the past, limited the cross-border mobility of legal entities by invoking this theory.
However, also countries that adopt the incorporation theory, such as the UK, do not allow their companies to be converted into foreign legal forms. On the contrary, some real seat countries, like Luxembourg, widely recognise the possibility of carrying out cross-border conversions, at least as some other countries that adopt the incorporation theory do.
From a practical perspective, both approaches are legitimate, at least as long as they do not facilitate abuses or legal, tax, and employee protection arbitrages, by creating letterbox companies, a problem which, it should be conceded, is more likely to occur in countries that adopt the incorporation theory.
With regard to cross-border mergers, the European Commission will not be writing on a blank slate: Since 2005, the European Union has a successful directive that allows these transactions across all Member States. In this field, the main goal pursued seems to be that of improving the existing legislation.
This laudable goal, however, should not result in disruption of the general principles that were enacted in 2005. In this perspective, the controls regarding the legality of cross-border mergers should be preserved. Maybe further harmonisation could be pursued with regard to the scope of the transactions concerned, the protection of creditors and that of minority shareholders.
Yet, a deeper unification in this field should be closely coordinated with national company law, since a European intervention only in the field of cross-border mergers could result, at least in some Member States, in granting the stakeholders involved in these transactions fewer safeguards than they would have in national mergers.
The harmonisation of cross-border divisions could be another valuable means to enhance the cross-border mobility of companies. This legislation should closely follow the approach adopted for cross-border mergers. Therefore, also for cross-border divisions it will be necessary to ensure the control of the legality of divisions in all Member States involved.
Certainly, the stakeholders that participate in the cross-border divisions should be protected by adopting safeguards that should be at least comparable to those provided for cross-border mergers. However, the harmonisation of cross-border divisions should take into account some distinctive features of these transactions: for example, currently European company law does not require Member States to have legislation on divisions, and therefore it seems peculiar to impose on Member States to allow these transactions only if carried out at cross-border level.
Finally, the possibility of carrying out cross-border conversions is the most delicate of the initiatives under consideration. In the past, these transactions have been labelled in many ways: Cross-border transfers of seat, transfers of registered office or changes in the applicable law. At present, it seems that the idea would be to allow companies incorporated in a Member State to change their legal form and adopt that of another Member State. This transaction combines some of the challenges raised by the harmonisation of cross-border mergers and the private international law applicable to companies.
In truth, to achieve the mobility goals pursued by the Commission, it is not necessary to harmonise the law applicable to companies, and legislation may be drafted on cross-border conversions compatible with all the private international law criteria existing in the Member States. With regard to the procedural aspects, deference should – again – be given to the positive experience of the system of controls devised by the cross-border merger directive. Also with regard to the protection of the stakeholders involved in this transaction, inspiration should be taken by the rule on cross-border mergers, yet, it should also be highlighted that, where interests of stakeholders are not involved, it would be conceivable to provide more speedy and simplified procedures.
The Notaries of Europe Congress will address the problems raised by cross-border conversions and will provide useful indications to the European institutions on the principal aspects of a legislation that will meet the needs of practitioners. The works of the Congress will also provide guidance on how, in this field, it is possible to strike the right balance between practice and theory and national and EU legislation.