European Court of Justice

Since the Treaty of Rome entered in force in 1958, companies were allowed to be formed across the EU benefit from the basic right of the freedom of establishment. The principle of freedom of establishment set out in Article 49 (ex Article 43 TEC) enables an economic company to operate an activity in one or more Member States. At present, there are two different theories as regards to the recognition of foreign legal entities: the “real seat theory” and the “incorporation theory”.

According to the real seat theory, the law of the country where the company has its management and control center is the law, the company has to refer to, whereas in countries, which follow the incorporation theory, companies determine their applicable law by reference to the country they were incorporated. The real seat doctrine is a conflict-of-laws principle that recognizes that only one state should have the authority to regulate a corporation`s internal affairs and that this authority belongs to the state in which the corporation has its real seat, however since 2002 as the European Court of Justice has ruled that it is incompatible with the freedom of establishment guaranteed in Arts 43.

And 48 EC for a member state to reject a company formed in a different member state wanting to move its central place of administration to another member states legal capacity. Against the expectations of many German legal protagonists, the ECJ decided that when a company incorporated in member state A exercises its freedom of establishment in member state B, member state B is required to accept the company's legal capacity that it enjoys under the laws of its state of incorporation. Anyhow, this ruling only considers the immigration of companies, not the emigration.

There are many cases handling this topic. From Daily Mail to the newest Vale judgment, the Court jumps backwards and forwards in trying to fill the divergence created by the vacancy of any harmonization. In this essay, I will use company cases to support my thesis that the real seat theory is dead throughout the Eu considering narrow cases where countries are immigrating to other member states especially since the Uberseering case in 2002, but not in the context of emigrating; hence the host state may not prohibit the entrance of a company into a new Member

State as long as there are no special provisions that the company demands that are not compatible with the national law, but the home state may do that until the company had its dissolution in it. In the Daily Mail case (example of moving out) in 1988, the Court ruled that the freedom of establishment did not honor a right to companies to shift their central management to another Member State, while cherishing its status as incorporated in the home Member State. It was acclaimed that companies, other than real persons, are products of the law and exist only by consideration of the national legislation that states their incorporation and activity.

This decision created the opinion by the superiority that the real seat doctrine and the freedom of establishment may be able to synchronize, leading to a limited understanding of Treaty provisions by turning down the relocation of a company’s head office from one Member State to another. The advancements continue with Centros however with certain distinctions. Centros Ltd. was registered in the UK. A Danish family who wished to create a branch in Denmark, through which they would control all their business activities, held its shares. Danish authorities rejected their wanting’s by the reasoning that Centros Ltd. was, in fact, seeking to establish a primary establishment in Denmark.

The Court took a contrasting path, stating that if a Member State refuses the registration of a branch of a company that was formed in accordance with the law and has its registered office in another Member State then the member state creates an obstacle to the freedom of establishment. This was the start of a fundamental turn. From now on, any barriers by the host Member State against companies incorporated in another state trying setting up a secondary establishment were prohibited.

No matter if the host Member State is the only venue where business activities are taking place. The Uberseering judgment quickly followed and created a glimpse of harmonization. This case was exercised by a private limited company that had the query to transfer its actual center of management from Netherlands, an incorporation state, to Germany, a real seat state, but wanted to still be ruled by Dutch law. Germany blocked legal standing to the company on the fact that it had not followed the required formation formalities under German law. In its decision, the Court noted the right of a corporation generated in an EU Member State to transfer its real seat from its state of incorporation to another EU member state without losing its legal status as a corporate firm by the laws of its elementary state. Since then any interference from a host Member State also now in primary seat transfer (if the home state allows) were forbidden hence the real seat theory (moving in) was dead.

Inspire Art was also a radical cross border transfer seat case. Inspire Art was an entity created in England, but selling their products entirely in their branch in the Netherlands. The Court did not allow the

Netherlands to demand legal commitment on companies that were incorporated in another Member State but handling their business obligations solely in Netherlands. Again the real seat doctrine (moving in) was completely ignored. With the court decisions in the cases: Centros,Uberseering, and Inspire Art every host Member State, despite following the real seat theory, were faced with this new status quo: that they had to let every company operate in their country without any power of restriction. The Cartesio case following all of these individual cases was the chance for the Court to ultimately

clear up the exit situations and to continue this liberalization of EU company law. Cartesio was a Hungarian company that wanted to move its real seat to Italy but wished to prevail by Hungarian law. Anyhow, Hungarian law declared that a company has first to be closed down in Hungary and then reincorporated under Italian law. Although expected the Court did not overrule its Daily Mail adjudication, which allows the national law to prohibit the seat transfer. In fact, the Court reanimated the real seat theory, which was thought to be ‘killed’ by Centros,Uberseering and Inspire Art.

This case clearly shows that the Court distinguishes between moving out and moving in situations, and that it can be argued that the freedom of establishment is only applicable in the latter one, hence the real seat theory is not valid for the host state. Last but not least, the Vale decision was the newest case in this context. Vale, a company created under Italian law wanted to be changed from the Italian register to the Hungarian register, but without losing all the former rights and obligations from the Italian system. Vale wanted those rights to be transferred to the new company.

The Hungarian commercial court, noting that conversions under Hungarian law only applied to domestic situations not cross-border situations rejected this request. Member States have the power to define the connecting factor required of a company to be regarded as a company under its national law, but Vale did not have this connecting factor. The special provisions that interlinked the company with the host state widened up the interpretation of the freedom of establishment, hence the permission of the host state to prohibit. To conclude with, it can be said that the real seat theory cannot be used anymore in its limiting way, if companies are moving in from member state A into member state B, considering member state B`s view point.

The legitimate incorporation of a company in one of the member states of the EU, enables the company to move freely throughout the European Union with no fear of prohibitions by the host states, as it was the case with Centros, Uberseering and Inspire Art. However in the cases of Daily Mail, Cartesio, and Vale, where situations were described, in which companies where transferring out of a member state, there seems to be found validity towards the real seat theory in perspective of the home state.

However this thesis is a rough assessment, as Case law of the CJEU only covers a few scenarios, distinguishing exit and entry cases, leaving too many questions unanswered, so inevitably one can say that for narrow entry (“moving in”) cases with no special incompatible provisions (e. g. Vale had special provisions with Hungary), we can state that there exists a “de-facto” harmonization considering the death of the real seat doctrine, however when countries are “moving out”, and at special provisional situations, the real seat doctrine is very much alive.