Cross-Border Reincorporations in the European Union: The Case for Comprehensive Harmonisation

Federico M. Mucciarelli is Reader in Financial Law at the University of London and Associate Professor at the University of Modena & Reggio Emilia. This post is based on a recent paper by Professor Mucciarelli; Carsten Gerner-Beuerle, Associate Professor of Law at the London School of Economics; Edmund‐Philipp Schuster, Associate Professor of Law at the London School of Economics; and Mathias Siems, Professor of Commercial Law at Durham University.

Can companies, incorporated under the law of an EU Member State, subject themselves to another Member State’s law without going through the process of liquidation in their original jurisdiction? Such operations are usually labelled “cross-border reincorporations”, or just “reincorporations”. Cross-border reincorporations and regulatory competition in EU company law has long been a focus of scholarly work in EU company law. The present work adds to previous studies a comparative analysis of all Member States of the European Union regarding rules on transfer of a company’s registered office and cross-border reincorporations. In particular, the question arises whether the freedom of establishment under the Treaty on the Functioning of the EU also covers the right to reincorporate in other Member States and, consequently, whether Member States should grant domestically incorporated companies the possibility of reincorporating under the law of a different jurisdiction and foreign companies the possibility of converting into domestic entities without liquidation. The answer is still unclear, despite recent decisions of the Court of Justice of the European Union.

In its Cartesio decision, the European Court of Justice (CJEU) explained that companies have the right to reincorporate abroad under the Treaty, and that Member states thus must not restrict these reorganisations. Strictly speaking, however, this statement was just obiter dictum, which probably explains why many Member States have not felt it necessary to explicitly endorse these rights. Regarding restrictions on inbound reincorporations, the VALE decision of 2012 maintained that any restriction placed by the country of arrival should be proportionate and reasonable. The issue of whether and to what extent the freedom of establishment also covers cross-border reincorporations, therefore, is still partially uncertain and, as a matter of fact, several Member States still effectively restrict such transactions or even prohibit them outright. Our analysis shows that, while some Member States have thoroughly regulated cross-border reincorporations, most Member States either have not regulated this issue at all, or only provide for partial and incomplete rules.

In those Member States without any explicit rules on reincorporations, or with partial and incomplete rules, the “law on the books” needs to be supplemented by scholarly interpretations, judicial decisions or opinions of notary authorities. For instance, both Austrian and German lawyers argue that EU law, after the Cartesio and VALE decisions, mandates Member States to allow cross-border reincorporations and that, as a consequence, domestic law should be interpreted and applied accordingly, even though no explicit provision exists for implementing midstream changes of company law. By contrast, in other Member States that likewise have no explicit rules on reincorporations, scholars and practitioners either argue that a domestic legislation is necessary to make reincorporations possible, or simply ignore this issue. As a consequence, from the standpoint of several Member States, outbound and inbound reincorporations are, as a matter of fact, not feasible, despite the Cartesio and VALE rulings. This situation will probably not change even if the Court of Justice explicitly decided that voluntary outbound reincorporations were covered by the freedom of establishment. This confused situation could give rise to opportunistic reincorporations at the expenses of creditors or other stakeholders.

Based on this comparative analysis, we argue in favor of EU harmonization of rules and proceedings on reincorporations. At the same time, we argue that any future directive on this matter should not harmonize private international law and should leave Member States free to require domestically incorporated companies to keep some kind of “physical” connection to their territory. Thus, a new directive should concern the procedural requirements that domestic companies should meet when they decide to reincorporate under a different jurisdiction or when foreign companies aim at converting into a domestic entity. Additionally, since outbound reincorporations might jeopardize creditors, minority shareholders and other stakeholders (such as workers when the country of origin follows some form of codetermination), a new directive should provide for a minimum harmonization of mechanisms aimed at protecting these stakeholders. In this respect, although it is reasonable that harmonization efforts would only set minimum requirements, we also argue that Member States should not be entirely free to decide on the content of these protection mechanisms.

The full paper is available for download here.

This paper is part of wider project: see also the report Study on the Law Applicable to Companies drafted by the authors for the European Commission, an ECGI Working Paper on “Why Do Businesses Incorporate in Other EU Member States? An Empirical Analysis of the Role of Conflict of Laws Rules”, and a forthcoming book on The Private International Law of Companies in Europe.

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