United Kingdom considers the introduction of cross-border corporate mobility: testing the waters for a free choice of foreign company law after incorporation?

On 27 October 2021, the UK Department for Business, Energy & Industrial Strategy, HM Treasury, and HM Revenue & Customs launched a public consultation to seek views on the introduction of a UK re-domiciliation regime for companies. This new piece of legislation would enable a foreign-incorporated company to change its registered office to the UK, without losing its legal personality as it transfers its registered office across national borders. Conversely, the UK government also considers allowing the outbound re-domiciliation of a UK company under certain conditions. These new policy initiatives are meant to replace the current prohibition of both inbound and outbound transfers of a UK company’s registered office by a highly liberal regime for the cross-border movement of companies. The UK truly aims to break from its traditional ‘locked’ system of corporate citizenship. Remarkably, the domestic re-domiciliation between Scotland, Northern Ireland and England & Wales will remain prohibited, as the government does not wish to change the division between three separate UK registrars. Also, with this liberal cross-border regime, the UK seems to pursue the exact same goal as the EU Directive on cross-border conversions, a directive the UK refused to implement before Brexit became final.

As stated in the public consultation call, enabling some sort of cross-border corporate mobility would align the UK with its international peers (such as Canada, New Zealand, Australia and Singapore). The consultation document does not specifically mention the European Union, but of course such a liberal regime already exists within the EU. Nonetheless, as the UK aims to allow the outbound cross-border re-domiciliation, the question arises whether this initiative will be accompanied by the right for UK companies to freely choose foreign company law and consequently escape UK corporate rules through solely moving its registered office abroad.

Obviously, the main goal of the consultation document is to allow the free choice of English company law for companies of which the registered office was located outside the UK before immigration. In case of inward re-domiciliation, the immigrating company will of course have to abide by the same corporate governance rules and standards as any other UK incorporated company, which—according to the consultation call—would result in ‘better investor protections’. Interestingly, the UK government appears to tolerate the use of shell companies as a means of choosing English company law, because it deems a so-called ‘economic substance test’ unnecessary. In other words, foreign companies with economic activities outside the UK will have the ability to choose English company law by only moving their registered office to the UK, while keeping their economic substance abroad. According to the consultation call, this opens up the UK corporate system to a ‘wider range of companies that the Government is seeking to attract, such as operating companies, holding companies or intellectual property firms’. The incoming company will still have to meet certain eligibility criteria, like the requirement of a UK-comparable corporate form and directors of good standing. Overall, however, one may deduce from this open regime that the UK tries to put itself on the map as an attractive offshore system for EU companies.

On the other hand, it remains unclear whether the same freedom will be granted in case of an outbound cross-border transfer. To this end, the UK government should clarify its intentions with regard to a free choice of foreign company law, and—in analogy to inward re-domiciliation—the possibility of using shell companies to accomplish this. If a UK company decides to move its registered office to another country, but keep its economic substance or head office in the UK, will the UK then unequivocally allow the company law of the immigration country to govern such an emigrated (shell) company? The consultation call seems to answer this question in the affirmative, although it prudently specifies that an outward re-domiciliation regime would come with ‘carefully considered conditions attached, to protect against unintended consequences and risks to the UK’s economic interests’, such as an exit fee, high requirements for shareholder approval and a minimum length of operation in the UK. Whereas exit taxes are also common in the EU (this was to a large extent allowed by the ECJ in its key National Grid decision), the consultation call does not reflect upon a withdrawal (redemption) right for minority shareholders who opposed the emigration of the company. As a result of the EU Directive on cross-border conversions, EU member states will have to implement such a withdrawal right for minority shareholders. In spite of these possible accompanying measures (like exit taxes), by allowing the free choice of foreign company law, the UK would open up its doors to regulatory competition, as UK companies will be able to opt for other—more flexible—corporate systems by only ‘formally’ moving their registered office abroad.

The latter statement should be nuanced, because it presupposes that the immigration country grants some sort of freedom of establishment to the UK company, ie it accepts that a UK company enters its domestic legal order without interruption in legal personality. In this respect, while the European Union may be an interesting region to re-domicile to, it does not grant such freedoms to UK companies since the conclusion of Brexit on 31 December 2020. The Trade Agreement between the EU and UK does not contain stipulations on the freedom of establishment. Moreover, in a key ruling, the German Supreme Court refused to allow the registration of the German branch of a UK shell company, by reiterating that articles 49 and 54 of the TFEU grant freedom of establishment only to EU incorporated companies (Bundesgerichtshof (DE) ruling of 16 February 2021, No. II ZB 25/17). The UK shell company, founded by a German citizen, was denied registration because it did not fulfil certain local registration requirements. Its attempts to invoke freedom of establishment as a counter mechanism were unsuccessful. This ruling implies a fortiori that EU member states are not obliged to allow cross-border seat transfers from the UK. The inbound re-domiciliation from the EU to the UK is deemed to be equally problematic, as the member state on whose territory economic activities are still located may impose anti-abuse provisions or even the whole of its company law on the UK (shell) company. For example, the Dutch law on formally foreign companies now also applies to UK incorporated shell companies, which brings far-reaching obligations for shell companies conducting most of their economic activities in the Netherlands.

One may conclude that the introduction of corporate mobility from a UK perspective leaves us with some uncertainties that need further clarification and fleshing out, like its impact on the applicable company law. It is also clear that a re-domiciliation to and from the EU will not go without any troubles, as a result of Brexit. Nonetheless, the fact that the UK government is willing to open up its corporate system to outsiders must be acknowledged as a welcome evolution in English private international law.

Floris Mertens is a PhD student at Ghent University, Belgium.

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