Free Trade Agreements: Corporate Law Powers of the EU and Member States, and a Way Forward

Trade relationships have gained abundant political momentum and media coverage in the last decade. The enduring Brexit saga is a case in point. However, this blogpost intends to adopt a broader, indeed global view. The EU has been executing on a rather active strategy when it comes to negotiating Free Trade Agreements (FTAs). Focusing on corporate law issues, a recent chapter of ours highlights a gap between the expectations and the actual capabilities of EU trade policy, and suggests possible remedies.

A complex web of competences

Since its inception, the EU has acted with a single external voice in international trade negotiations. The limited scope of the matters initially covered justified this approach. In time, however, the scope of the negotiations has expanded so much that Member States have started to question the resulting transfer of sovereignty. 

To address this expansionary tendency and its potential conflicts of competence with Member States, the European Court of Justice (ECJ) delivered a preliminary ruling. In December 2016, Advocate General (AG) Sharpston concluded that the EU-Singapore FTA was a ‘mixed agreement’, which could only be concluded by the EU and the Member States acting jointly. The ECJ later upheld the view of the AG.

However, as the remainder of our piece shows, the EU’s leading role in trade policy and the conclusion of FTAs has had significant effects at intra-EU level as well.

The right of establishment for corporations under FTA law

The two examples corroborating our story are the right of establishment for corporations and cross-border M&A. Even though the ‘anatomical elements’ of corporate forms are to a large extent uniform, a considerable degree of heterogeneity still exists, often to cater to national socio-economic preferences. In order to invoke the right of establishment under the FTA, a corporation shall validly be incorporated as well as administered in one of the Party States. 

Importantly, recent FTAs often state expressly that the right of establishment should be applied substantively (not: formally). However, FTAs generally lack direct effect. This appears to be problematic. Investors cannot set aside conflicting provisions of national law merely by invoking the FTA. It seems that Party States (and Member States in particular, as these are familiar with the concept of equal treatment) are implicitly encouraged, if not to say competitively pressured, to go further than what is strictly required by a grammatical interpretation of the FTA. This would push national legislators to adapt their corporate law if they wish to attract foreign companies. All this means a de facto harmonisation. It is crucial to note that the EU is not in the legal position to dictate Member States such changes. 

Cross-border M&A

Cross-border M&A transactions have long been a delicate issue in the harmonisation of corporate law within the EU, as shown by the 40-years long negotiations for the 10th Company Law Directive on cross-border. Further-reaching cross-border conversions in the EU only became possible in 2012 (ECJ, cases Cartesio and Vale). Yet, in the absence of enabling national law, it currently does not seem possible to conclude a cross-border merger or conversion from or to a third country (non-EU) Party State, solely based on an FTA. The result is that Member States are not legally mandated by EU Directives nor by the FTA to allow for non-EU cross-border M&A. However, the requirement of substantial instead of formal equal treatment, set down by the FTA, cannot be guaranteed without enabling non-EU cross-border M&A. Additionally, the ability to execute cross-border conversions in relation to third countries differs between Member States. Luxembourg, for instance, has embraced a highly flexible approach with the aim of structuring a ‘competitive’ corporate law and attracting foreign companies. Thus, the status quo puts pressure on governments to facilitate cross-border mergers and conversions, and to go further than strictly required by the FTA.

Mind the gap: EU expectations versus capabilities

The two previous examples provided a clearer picture. The newly concluded FTAs are not only more ambitious than the bilateral trade agreements (BITs) concluded previously but also more ambitious than their texts seem to suggest. Member States have not provided the EU with enough legislative competences to achieve its goals. This leads to a lack of coherence between internal and external action. The outcome is inevitable: the EU’s functioning worsens, so does its reputation. In this vein, one might argue for the existence of a gap between EU expectations and capabilities generated by the FTA provisions.

Action seems needed. The EU finds itself at crossroads. Long term, one option could be to reinforce its institutional framework and adding supplementary competences, provided that internal political consensus is reachable. Short term, the EU should curb the far-reaching scope of pending FTAs. In either case, the coming years will be pivotal in shaping the European future in trade relations.

Alberto Quintavalla is a PhD Researcher at Erasmus School of Law.

Edoardo Martino is a PhD Researcher at Erasmus School of Law and a Research Associate at Amsterdam Center for Law & Economics (ACLE).

Titiaan Keijzer is a PhD Researcher at Erasmus School of Law.