The Last Word on Cross-border Reincorporations? EU Freedom of Establishment after the CJEU’s Judgment in Polbud

Companies founded under the law of a given EU Member State might decide to re-incorporate under the law of another jurisdiction. It has been debated whether EU freedom of establishment also covers the freedom to directly relocate a registered office from one Member State to another. As a recent Study on the Law Applicable to Companies has shown, several Member States still prohibit or make it impossible for domestic companies to relocate their registered office abroad. This post discusses whether such uncertainties have been settled by the new decision of the CJEU in case C‑106/16 (Polbud).

The Polish company Polbud decided to relocate its statutory seat to Luxembourg and to convert into a Luxembourg entity whose new name would be Consoil Geotechnik S.à.r.l. Polish law in this regard is quite ambiguous. On the one hand, Polish companies can relocate their statutory seat to other EU Member States without losing their legal personality (article 19(1) Private International Law Act); on the other, shareholder resolutions to relocate a company’s statutory seat trigger the liquidation of the company’s assets and the need to satisfy all creditors (articles 270(2) and 459(2) Commercial Company Act). Hence, Polbud entered into a liquidation procedure in order to implement the relocation of its statutory seat to Luxembourg and in 2013 it lodged an application to a Polish court to be removed from the Polish register. The Polish court refused the application on the basis that the company had not sufficiently proven that it had completed the liquidation procedure. Polbud challenged this decision all the way to the Polish Supreme Court, which referred three preliminary interpretative questions to the CJEU.

The Court in particular was asked to clarify the following issues:

(a) whether articles 49 and 54 TFEU preclude the Member State of origin from making removal from the register conditional on the liquidation of a company that has been reincorporated in another Member State ‘pursuant to a shareholders’ decision to continue the legal personality acquired in the State of initial incorporation’;

 (b) if the first question is answered in the negative, whether such a liquidation procedure — including the conclusion of current business, recovery of debts, performance of obligations and sale of company assets, satisfaction or securing of creditors, submission of a financial statement on the conduct of that process, and indication of the person to whom the books and documents are to be entrusted — are justified restrictions aimed at safeguarding ‘creditors, minority shareholders, and employees of the migrant company’;

(c)  whether Articles 49 and 54 TFEU should ‘be interpreted as meaning that restrictions on freedom of establishment cover a situation in which […] a company transfers its registered office to that other Member State without changing its main head office, which remains in the State of initial incorporation’.

Previous decisions of the CJEU had already addressed the issue of whether, and to what extent, EU freedom of establishment covers cross-border reincorporations in the decisions C-210/06 (Cartesio) and C-378/10 (Vale).

Regarding limits on inbound reincorporations, the Vale decision clarified that the freedom of establishment fully applies; additionally, it was also maintained that, if the country of arrival allows equivalent domestic restructurings, stricter rules for inbound reincorporations are only allowed when they are appropriate to attain overriding goals in the public interest and when they are proportionate to achieve those goals, and that the equivalence and effectivity test applies.

Limits placed by the country of origin towards outbound reincorporations were addressed in the Cartesio decision. The Court, in particular, stressed that Member States cannot impede their own companies from converting into companies governed by the law of other Member States, unless such restrictions are justified by overriding decisions in the public interest. Such a statement, however, was not necessary to address the specific case, and, as a consequence, it is likely to be a non-binding obiter dictum.

It is useful to briefly summarise the Opinion of AG Kokott in the Polbud case (here). The AG decided to address in the first place the third question. Polbud had stated in its request for preliminary ruling that it aimed at relocating its registered office to Luxembourg, while its head office was left behind in Poland. In this regard, the AG argued that a mere cross-border reincorporation, without any ‘genuine economic activity’ in the country of arrival, is not covered by the freedom of establishment. A consequence is that the country of origin could block such a decision (Opinion AG Kokott at 38). Regarding the first and second questions, AG Kokott maintained that Member States’ rules that require companies to liquidate when they decide to relocate their registered office abroad are restrictions on freedom of establishment and that such restrictions are neither necessary nor proportionate to the interests of other stakeholders (Opinion AG Kokott at 66).

The Court addressed the questions in the same order suggested by the AG, starting with the question of whether a relocation of the head office is necessary to trigger the application of the freedom of establishment. In this regard, before the Court Polbud claimed that, contrary to what it stated in the request for preliminary ruling, ‘its intention was to transfer to Luxembourg both its registered office and its real head office’ (Polbud decision at 20). Nevertheless, the CJEU decided not reopen the oral part of the procedure.

Regarding the merit of the third question, the Court concluded that EU freedom of establishment applies to companies’ cross-border reincorporations even though the ‘emigrating’ company does not relocate any ‘establishment’. The CJEU, therefore, rebutted the arguments put forward by the Austrian and the Polish governments; interestingly, the Court also rejected the arguments developed by AG Kokott, without however mentioning this. The most important argument used by the Court is that, under the Centros line of cases, companies can be incorporated in any Member State even if their sole establishment is in another Member State; therefore, a cross-border conversion also falls within freedom of establishment, provided that the relevant company respects the ‘test applied by [the country of arrival] in order to determine the connection of a company to its national order’ (Polbud at 38). From a policy standpoint, this solution is in line with the logic of previous case law and, in particular, with the Cartesio decision. However, the Court did not engage with the arguments put forward by AG Kokott in its Opinion, in particular where the AG mentioned the decisions in Vale (at 34) and Cadbury Schweppes (at 54, C-196/04 here) whereby an establishment ‘involves the actual pursuit of an economic activity through a fixed establishment in the host Member State for an indefinite period’.

Regarding the second and third questions, the Court held that a duty to liquidate all assets in order to reincorporate under the law of another Member State is a restriction on freedom of establishment. Any such restriction must be justified by the aim of attaining overwhelming goals in the public interest, provided that it is proportionate to attain such goals. In particular, any restriction on outbound reincorporations will normally be aimed at protecting ‘weak’ stakeholders, such as creditors or minority shareholders, who might be jeopardized by the change of lex societatis. The Court went on to hold that a duty to liquidate the company is never justified, as less restrictive measures always exist to attain the same goals.

The Polbud decision is a milestone in European case law, since it clarifies that the freedom of establishment also covers a right to reincorporate abroad. Nevertheless, it is also necessary to underline that the Court of Justice cannot fill loopholes and contradictions in domestic legislation. Member States’ national rules and procedures to implement cross-border reincorporations will continue to be diverse. The Polbud decision, in other words, has made even more urgent the need to approve uniform standards at the EU level, in order to avoid loopholes and constrain opportunistic behaviour at the expense of weak stakeholders, as a recent paper has also suggested (here the early-view version).

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.