Changes of Lex Societatis: A Quick Comment on the Polbud Case

1. A brief summary of the case

For the purpose of this note, the case (C-106/16) may be summarised as follows. Polbud — Wykonawstwo sp. z o.o. (‘Polbud’) is a private limited liability company incorporated under Polish law and established in Łącko. On 30 September 2011, its shareholders passed a resolution to transfer the ‘company’s seat’ to Luxembourg, in accordance with Article 270(2) of the KSH (Polish Companies Code). 

On 28 May 2013, the meeting of Polbud’s shareholders agreed before a notary in Rambrouch (Luxembourg) to implement the transfer of seat resolution passed in September 2011 and to transfer the company’s seat to Luxembourg with effect from that date, keeping the company’s legal personality. The company would take the legal form of a private limited liability company governed by Luxembourg law, and its name would be changed to Consoil Geotechnik SARL (‘Consoil’). On that basis, Consoil was entered in the Luxembourg Companies Register on 14 June 2013.

On 24 June 2013, Polbud filed an application to be removed from the commercial register with the registry court in Poland. It referred to the transfer of the company’s seat to Luxembourg and the company’s continued existence under the law of that Member State. The registry court refused the application by order of 19 September 2013. The appeals lodged against that order at first and second instance did not succeed.

By means of an appeal in cassation of 4 June 2014, the company finally brought the matter before the Sąd Najwyższy (the Supreme Court of Poland). It claimed that, on the day of the transfer of its seat to Luxembourg, it had lost its status as a Polish corporation and became a company under Luxembourg law.

The Sąd Najwyższy has doubts about whether the refusal to remove the company from the commercial register because it had failed to fulfil the conditions attached to such removal under Polish law is contrary to the freedom of establishment guaranteed by EU law. For that reason, on 22 October 2015, it referred several questions to the Court under Article 267 TFEU. Basically, the Supreme Court of Poland asks whether, first, the freedom of establishment guaranteed by Articles 49 and 54 TFEU is applicable; and second, if so, whether that freedom has been restricted; and third, if there is a restriction, whether it can be justified.

2. AG Kokott’s Opinion

AG Kokott concluded that:

‘1. The freedom of establishment provided for in Articles 49 and 54 TFEU applies to an operation whereby a company incorporated under the law of one Member State transfers its statutory seat to another Member State with the aim of converting itself into a company governed by the law of the latter Member State, insofar as that company actually establishes itself in the other Member State, or intends to do so, for the purpose of pursuing genuine economic activity there […]

2. In the case where a company incorporated under the law of one Member State has actually established itself, or intends to establish itself, in another Member State for the purpose of carrying on genuine economic activity there, and converts itself into a company governed by the law of the latter Member State, the application of national legislation under which the removal of that company from the commercial register of the Member State of origin is subject to the condition that that company must first be wound up after having been liquidated restricts the freedom of establishment.

3. The general obligation to carry out a liquidation procedure does not constitute a proportionate means of protecting the creditors, minority shareholders and employees of a company that performs a cross-border conversion’.

3. Practical consequences

The first conclusion in AG Kokott’s Opinion is very clear: Polbud benefits from the freedom of establishment under the TFEU if, and only if, ‘that company actually establishes itself in the other Member State, or intends to do so, for the purpose of pursuing genuine economic activity there […]’.  Therefore, a mere change of the registered office does not benefit from that freedom.

The practical consequences of this conclusion are, however, difficult to understand.  

Firstly, AG Kokott suggests the possibility of ‘double-nationality companies’. She states that:

‘the fact that, in Luxemburg, a company in the form of Consoil was successfully registered as having the object of carrying on Polbud’s legal personality does not support any other conclusion in this regard […] Figuratively speaking, although Polbud already has one foot in Luxemburg, it still has the other in Poland’.

This seems to suggest that the same ’legal person’ is a Luxemburg company in Luxemburg and a Polish company in Poland. But what happens in other Member States? Let us imagine that that ‘legal entity’ is acting in Spain, how should it be treated? Does it really make sense that the same legal entity is acting under two different laws (‘two legal clothes’) in the internal market?

Secondly, to trigger the application of Articles 49 and 54 TFEU, according to the case law, it is enough that Polbud has ‘the intention to effect such establishment’ (para 36), ie it would be sufficient that Polbud would seek to carry out a genuine economic activity in Luxemburg to benefit from those provisions. How does this work in practise? Would it be enough to give an undertaking to the Polish register in the sense that Polbud will, in the near future, carry out an economic activity in Luxemburg? What happens if Polbud breaches such undertaking?

Thirdly, does it make sense that Polbud cannot convert into a Luxemburg company (if it does not exercise an economic activity in this Member State), but may reach the same result by setting up a subsidiary in Luxemburg and carry out a ‘reverse’ cross-border merger?

Fourthly, and last but not least, any lawyer will also have a hard time explaining to his or her client that, at inception, it is possible to carry out all his or her economic activity in Poland with the ‘clothes’ of a Luxemburg company. That is, initially, they can freely choose Luxemburg as place of incorporation and carry out all the economic activity in Poland, and this benefits from the freedom of establishment (Centros). But if they are already incorporated in Poland, and want to change the applicable law, then the freedom of establishment does not apply. You may select Luxemburg as first choice, but not as a second, unless you ‘set a foot there’.

I am not saying that AG Kokott’s Opinion is wrong.  From a legal perspective, it is formally correct. If the court asks whether Polbud benefits from the freedom of establishment, it is very difficult to conclude otherwise. I am just saying that the practical implications are quite difficult to understand.

4. Turning around the approach: a suggestion on how the ECJ should address the case

However, the way the question has been put forward biases the analysis. The problem should not only be examined from the Polish Company’s standpoint, but also from the Luxemburg Company’s standpoint. The question is not only, as AG Kokott summarises, ‘whether Polbud is to be regarded as a company or firm within the meaning of Article 54 and can as such rely on the freedom of establishment’ (para 28). The question is also whether Consoil can rely on this freedom. In cases of changes of lex societatis, both perspectives are relevant.

According to AG Kokott’s description of the case, Consoil is already a Luxemburg company, successfully registered in this Member State. Therefore, Consoil is a company that benefits from the application of Articles 49 and 54 TFEU and, therefore, can rely on the freedom of establishment. The key question then is whether, because Consoil was formerly incorporated in Poland, Polish law may require that the Polish company (‘predecessor’ of Consoil) be wound up and liquidated to be removed from the commercial register. From this perspective, it is clear that the Polish rule is an obstacle to Consoil’s exercise of the freedom of establishment.

The key paragraph in AG Kokott’s analysis is paragraph 42:

‘The fact that, in Luxembourg, a company, in the form of Consoil, was successfully registered as having the object of carrying on Polbud’s legal personality does not support any other conclusion in this regard. So far as Poland is concerned, this makes no material difference. After all, as the Court has held, cross-border conversions of companies presuppose the consecutive application of two national laws [references omitted]. Figuratively speaking, although Polbud already has one foot in Luxembourg, it still has the other in Poland’.

It is true that the ECJ held in VALE that cross-border conversions of companies presuppose the consecutive application of two national laws (para. 37). The success of such conversions depends in principle on the legal systems of both the Member State of origin and the host Member State. This is correct. But this does not mean that the reference to the law of the Member State of origin is a blank cheque, outside the scope of application of the TFEU. The application of the ‘old law’ affects the exercise of the freedom of establishment by the ‘new company’ and may imply an obstacle to this exercise.

And clearly, where the removal of the ‘old company’ from the commercial register of the Member State of origin, as a condition of completion of a cross-border conversion, is made subject to that company´s prior liquidation and winding up –which, by definition, excludes such conversion –then this is disproportionate. Polish law applies to the change of lex societatis in order to ensure an adequate protection of creditors, dissenting shareholders or employees, ie those who contracted under Polish law.  But the dissolution and liquidation of the company, as a condition for its removal from the register, is a disproportionate measure to protect these interests and therefore incompatible with the Treaty.

Francisco Garcimartín is a Professor of Law at University Autónoma of Madrid and a Consultant at Linklaters SLP.