Company Law (International)
by Jan von Hein
Throughout history, international company law has been confronted with the question of whether the legal existence of a corporation is determined by the place of its incorporation (incorporation theory) or of its actual administrative office (real seat theory). While the legal systems of common law countries traditionally follow the incorporation theory, the majority of the continental European countries prefer the connection to the real seat (Germany, France, Italy; but not Switzerland, Denmark or the Netherlands). Under the pressure of the case law of the European Court of Justice (ECJ), continental European Member States of the European Union (EU) and the EEA Agreement felt compelled to switch to the incorporation theory, at least with regard to companies incorporated in the EU or the EEA. Despite the growing Europeanization of private international law (PIL), a general legal act concerning the law applicable to matters of company law is so far missing. Scattered provisions concerning particular questions can be found in sectorally limited directives (Merger Directive, Dir 2005/56) as well as in the regulations about supranational companies (eg Reg 2157/2001).
2. Real seat theory
The dispute between the incorporation and the real seat theories reflects the general doctrinal conflict between party autonomy, which leads to the free choice of the place of incorporation, on the one hand, and the protection of third parties, which the real seat theory emphasizes, on the other. The connection to the actual seat of the head office allows the application of domestic company law to so-called pseudo-foreign companies. Thus, corporations immigrating into a country by transferring their real seat without registering there have traditionally been punished by the loss of their legal capacity. Under the influence of the ECJ case law (see 3. below) the German jurisprudence tried to soften this harsh legal consequence, while nevertheless maintaining the real seat theory, with the result that a foreign corporation which transferred its real seat into Germany was re-characterized as a partnership with the capacity to sue and be sued (BGH 1 July 2002, BGHZ 151, 204). However, this modification does not remedy the loss of the limited liability privilege at the time of the transfer of seat, and therefore still significantly restricts the freedom of establishment of legal persons. Apart from issues of conflict of laws, in the event of emigration the respective substantive company law, which may interpret the transfer of the registered office as a ground for dissolution, must also be considered.
At the same time, the conflict mirrors the differing preferences in substantive law between a liberal company law shaped by a wide autonomy in drafting company charters and a company law characterized by mandatory provisions. In comparative law, a complementarity appears between a liberal approach to international (or interlocal) company law, on the one hand, and a supplemental control of the companies by a liquid capital market and the accompanying regulation by supervisory and stock exchange law on the other. While, for example, the United States and England have traditionally been liberal concerning questions of organizational law, in Germany and France a basically mandatory protection of shareholders, creditors (minimum capital) and employees has been favoured, which has been secured, in terms of conflict of laws, against the dangers of emigration and circumvention by the real seat theory.
3. Incorporation theory
From 1999, the jurisdiction of the ECJ forced a transition to the incorporation theory (ECJ Case C-212/97 – Centros  ECR I-1459; ECJ Case C-208/00 –Überseering  ECR I-9919; ECJ Case C-167/01 – Inspire Art  ECR I-10159). The ECJ has classified the circumvention of minimum capital provisions of the country of residence not as an abuse of rights, but as a realization of the freedom of establishment guaranteed by Arts 49, 54 TFEU/43, 48 EC (Centros). In cases of a transfer of seat, a corporation has to be recognized in the legal form chosen according to the law of its incorporation; a re-characterization of the company as a mere partnership without limited liability is not allowed (Überseering). Indeed, a special connection of mandatory provisions in order to protect the minority shareholders, creditors and stakeholders (employees) is not absolutely excluded by the ECJ in the individual case; however, comprehensive defence laws against ‘pseudo-foreign’ companies are not compatible with the freedom of establishment (Inspire Art).
Because these judgments merely concern the immigration of companies, the transfer of the real seat or the registered office to foreign countries has to be distinguished from the circumstances that have been dealt with up to now. The jurisdiction of the ECJ does not consider restric- *tions on departure as an infringement of the freedom of establishment per se. Instead, it shall be left to the incorporation countries themselves to determine the link required for establishing and maintaining the legal capacity of a company within the respective country (ECJ Case C-210/06 – Cartesio  ECR I-09641; ECJ Case C-81/87 – Daily Mail  ECR 5483). In the Cartesio decision, the ECJ essentially reaffirms—contrary to the opinion of the Advocate General and expectations of practitioners and academics—the decision in re Daily Mail, which was delivered 20 years before (freedom of establishment).
Influenced by the Union law guidelines, the German Federal Supreme Court (BGH) has—at least concerning companies established in the EU and the EEA—given up the real seat theory in favour of the incorporation theory (BGH 14 March 2005, (2005) ZIP 805). A similar approach was taken by the Austrian Supreme Court of Justice (OGH 15 July 1999, GesRZ 1999, 248). It still remains to be seen whether this theory will be codified in the sense of the German draft bill on international company law (Art 10(1) EGBGB in its amended version) submitted by the Federal Ministry of Justice. Since Cartesio, there is further uncertainty as to whether the incorporation theory is applicable to the departure of companies as well. The ECJ could clarify the issue in a judgment expected in a pending case concerning an Italian company which immigrated to Hungary under modification of its legal form (ECJ Case 378/10 – VALE). At least since the Act to Modernize the Law Governing Private Limited Companies and to Combat Abuses of 23 May 2008 (MoMiG), the previous barriers in substantive German law have been removed. Since the decision to transfer the registered office to another country no longer entails the winding up of the company, the deletion of the former provisions helps domestic companies to gain mobility by free choice of their registered office.
Spanish law also arguably treats cross-border issues according to the incorporation theory; in Italy and France this is endorsed by some authors. However, the Belgian international company law codified in 2004 is still based on the real seat theory (Art 110 Belgian Act on Private International Law); nevertheless, the law shall be interpreted consistently with the Treaty on the Functioning of the European Union (TFEU). In the face of the still existing differences and uncertainties, the German Council for Private International Law has developed a proposal for a uniform introduction of the incorporation theory at the European level.
4. Effects on third countries
The transition to the incorporation theory also affects companies of contracting states of the EEA, which have to be treated in the same way as companies of Member States of the EU (BGH 19 September 2005, BGHZ 164, 148 concerning Liechtenstein). Likewise, the incorporation theory applies by virtue of bilateral conventions concluded with important trade partners, particularly the United States (BGH 29 January 2003, BGHZ 153, 353 regarding Art XXV(5) of the German-American Treaty of Friendship). However, at least in Germany, with regard to third countries such as Switzerland, the real seat theory is still applied (BGH 27 October 2008, BGHZ 178, 192, ‘Horse Racing Track’). In contrast, the draft bill on international company law submitted by the Federal Ministry of Justice provides a comprehensive codification of the incorporation theory also in relation to third countries (see the proposal for an amended version of Art 10(1) EGBGB).
5. Scope of the law governing company matters
The transition to the incorporation theory raises the question as to whether provisions protecting the interests of third parties are subject to the disposition of the founders of the company as well, or whether in this respect other conflict of law rules determine the applicable law. According to the prevailing opinion, the entrepreneurial co-determination of employees (which is, according to the established law, related to legal form) constitutes a part of the company statute; from a dissenting point of view, it involves internationally mandatory law or should be characterized as a part of public policy. At present, the question of the characterization of creditor protecting norms is, in particular, controversial. For example, while the BGH has by way of an analogy to § 11(2) GmbHG characterized the personal liability of the acting persons as belonging to company law (BGH 14 March 2005, NZG 2005, 508), a characterization in the sense of insolvency law has also been endorsed with regard to liability for a delay in filing for insolvency (§ 64(2) GmbHG). With respect to liability for the destruction of the existence of a limited liability company as developed on the basis of § 826 Bürgerliches Gesetzbuch (BGB) (BGH 16 July 2007, BGHZ 173, 246, ‘Trihotel’), proposals leading to a characterization as company, tort or insolvency law are advocated. It remains to be seen whether a non-exhaustive list defining the scope of conflicts rules on company law, like that included in the German draft bill, will help to solve such problems of classification.
6. Cross-border transformations
The transfer of the real seat all over Europe facilitates freedom of choice of the country of main activity for a company. Furthermore, mobility of companies should extend to the choice of transferring or assuming legal entity or the changing of legal form in the frame of restructuring measures. These aims can be realized efficiently by cross-border transformations, where dissolution, re-establishment and individual transmissions can be legally avoided by the principle of universal succession and a preservation of the identity of legal entities.
With regard to cross-border mergers, the so-called cumulation doctrine applies, ie each of the involved legal systems has to allow the transformation, and the individual substantive provisions are determined by the statute of every company involved (cf Art 4(1) Merger Directive; Art 10(2) of the German draft bill; Art 113 Belgian Act on Private International Law). While in France, Arts L 236-1 ff Code de commerce have recognized this for quite some time and while the Austrian Supreme Court of Justice began to allow such mergers in 2003 (OGH 20 March 2003, GesRZ 2003, 161), in Germany it was not permitted for a long time. Now the Merger Directive, which has been implemented in Germany into §§ 122a–122l UmwG (company transformations, corporate divisions, mergers), regulates the technical details across Europe. However, because of the Sevic decision (ECJ Case C-411/03  ECR I-10805), where the scope of protection of the freedom of establishment has also been extended to mergers, this directive has, with regard to its restricted scope, already become outdated before the expiry of its deadline for transposition.
In contrast to the law on mergers, Union law on the transfer of the registered office is missing and, since the Commission has discontinued its work on the 14th Company Law Directive on the basis of an official impact assessment at the end of 2007, it remains to be seen whether there will be legislation dealing with this matter. In 2009, the European Parliament asked the European Commission to re-evaluate this decision in light of Cartesio, as the EJC has held that ‘preventing a company from converting itself into a company governed by the law of another Member State to the extent that it is permitted under that law to do so is prohibited under Art 49 TFEU/43 EC, unless it serves overriding requirements in the public interest’.
In the face of the transition to the incorporation theory—at least in cases of immigration—which has been induced by primary EU law, it would be advantageous if the basic connection of international company law as well as the subsequent problems relating to the determination of the scope of the law applicable could be regulated by secondary EU law. The urge to regulate these as well as corporate governance issues has grown due to the financial crisis of 2008. In its Action Plan implementing the Stockholm Programme (COM 171 final), the Commission has announced its will to present a green paper on private international law aspects relating to companies, associations and other legal persons before the end of 2014.
Christian Kersting, ‘Corporate Choice of Law’ (2002) 28 Brooklyn Journal of International Law 1; Daniel Zimmer, ‘Ein Internationales Gesellschaftsrecht für Europa’ (2003) 67 RabelsZ 298; Eva-Maria Kieninger, ‘Internationales Gesellschaftsrecht nach “Centros”, “Überseering” und “Inspire Art”’ (2004) 12 ZEuP 685; Robert Drury, ‘The “Delaware syndrome”’  Journal of Business Law 709; Christoph Teichmann, Binnenmarktkonformes Gesellschaftsrecht (2006); Wolfgang Schön, ‘The Mobility of Companies in Europe and the Organizational Freedom of Company Founders’  ECFR 122; Hans Jürgen Sonnenberger (ed), Vorschläge und Berichte zur Reform des europäischen und deutschen internationalen Gesellschaftsrechts (2007); Peter Kindler, ‘Internationales Gesellschaftsrecht 2009: MoMiG, Trabrennbahn, Cartesio und die Folgen’  IPRax 189; Marc-Philippe Weller, ‘Die Rechtsquellendogmatik des Gesellschaftskollisionsrechts’  IPRax 202; Richard M Buxbaum, ‘Is there a Place for a European Delaware in the Corporate Conflict of Laws?’ (2010) 74 RabelsZ 1; Marek Szydło, ‘The Right of Companies to Cross-Border Conversion under the TFEU Rules on Freedom of Establishment’  ECFR 414.