Study on the Law Applicable to Companies

Can firms freely choose their place of incorporation and thus the applicable company law? And is it also possible that a firm can subsequently reincorporate in another country, with the effect of a change of the applicable company law?

In the US, in practice, both questions can be answered in the affirmative, with Delaware having established itself as the main domicile of choice for large corporations. Elsewhere in the world, the answer to both questions depends to a large extent on whether a jurisdiction applies the ‘incorporation theory’ or the ‘real seat theory’: the countries following the former theory recognise any company that is properly constituted according to the law of another country, while the countries following the latter theory seek to prevent the evasion of domestic law by requiring that a company, in order to be recognised, has to be incorporated in the country of its headquarters.

As far as the EU is concerned, it is also necessary to consider the impact of the freedom of establishment and the corresponding jurisprudence of the CJEU, starting with the conservative position in Daily Mail and then developed through a more liberal line of judgments in Centros, Überseering, Inspire Art, SEVIC, Cartesio, National Grid Indus and VALE. By and large, the decisions in the latter cases have shifted most Member States in the direction of the incorporation theory. However, many uncertainties still remain. Moreover, in a recent opinion concerning restrictions on outbound re-incorporations (Case C-106/16 Polbud), Advocate General Kokott argued that freedom of establishment covered the transfer of the statutory seat – importantly, in relation to restrictions imposed by both the home and the host state – only if the relocating company pursued ‘genuine economic activity’ in the Member State of arrival. If confirmed by the Court of Justice, a strict application of this legal position would qualify the scope of an EU-wide incorporation theory.

The question about the law applicable to companies in Europe is therefore both complex and topical. Thus, we are happy to report that, in response to a tender by the European Commission, the authors of this blog post have produced a comprehensive Study on the Law Applicable to Companies. The main report of this study has just been made available online. It consists of four parts, and its main findings can be summarised as follows:

• first, the statistical analysis of companies established in all Member States revealed that corporate mobility is only a partial reality in the EU;
• second, an empirical survey of lawyers from all Member States found, inter alia, that there is considerable legal uncertainty regarding the subject matter of this report in many of the Member States and that respondents support a possible harmonisation of conflict of laws rules;
• third, the comparative part of the report provides a thorough analysis of the conflict of laws rules applicable to companies in all 28 Member States, based upon reports drafted by national correspondents from each Member State;
• fourth, in the normative analysis, we recommend harmonisation of the relevant conflict of laws rules in a new ‘Rome V Regulation’. This should generally be based on the incorporation theory, but it should also provide tools to protect the public interests of host Member States. The study also provides suggestions for a possible directive on reincorporations.

Further publications based on this report (including the country reports) are forthcoming. It also remains to be seen whether EU legislation on these matters will follow. The Commission just started a consultation which includes the topics of cross-border mobility of companies and conflict of laws rules for companies, and these topics will also be addressed at a conference of the forthcoming Estonian Presidency of the Council. We therefore hope that our report will be of interest to academics but also practitioners and policy makers.

Carsten Gerner-Beuerle is an Associate Professor of Law at LSE.

Federico M. Mucciarelli (and here) is an Associate Professor of Business Law at the University of Modena and Reggio Emilia and a Reader in Financial Law at the SOAS University of London.

Edmund Schuster is an Assistant Professor of Law at LSE.

Mathias Siems is a Professor of Commercial Law at Durham University.