CROSS-BORDER REINCORPORATION IN THE EUROPEAN UNION: THE IMPACT OF POLBUD DECISION OF THE EUROPAN COURT OF JUSTICE

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1 CROSS-BORDER REINCORPORATION IN THE EUROPEAN UNION: THE IMPACT OF POLBUD DECISION OF THE EUROPAN COURT OF JUSTICE FEDERICO M. MUCCIARELLI - -

2 Companies reincorporations Companies are creatures of the law and, in the present state of Community law, creatures of national law CJEU Daily Mail [1988] Companies may seek to convert into a company type governed by another jurisdiction what changes after a reincorporation is the Member State having lawmaking power for company law issues headquarter or other physical elements are not necessarily shifted onto the new jurisdiction

3 Companies reincorporations The possibility to change company law regime might lead companies to select the country that offers the best tailored rules Usual questions: Race to the top or race to the bottom? Do Member States have incentives to compete for attracting incorporations (and midstream re-incorporations)?

4 Companies reincorporations A successful reincorporation requires that the company be registered in the company or commercial register of the jurisdiction of arrival as a continuation of the formerly existing company (not as a new company) the company is cancelled from the register of the original jurisdiction without going through a liquidation or winding-up procedure

5 Companies reincorporations Prerequisite of a shift of registration (and of reincorporations ): This shift is normally triggered by a decision taken by the company to alter the clause in its articles of association indicating its registered office or statutory seat (if allowed) The jurisdiction of origin or of arrival might require companies to shift physical elements (such as their headquarter or a real establishment)

6 European Companies (SE) Regulation of the Council 2157/2001/EC SEs can relocate their registered office (article 8) A SE s registered office can only be relocated along with its head office (article 7) A shift of registered office leads to a change of the applicable company regime (article 9(1)(c)(iii))

7 Cross-border mergers as vehicles for reincorporations Cross-border mergers Sevic [2005]: freedom of establishment covers the right to merge into companies of other Member States German prohibitions against cross-border mergers Directive 2005/56/CE on cross-border mergers

8 Cross-border mergers as vehicles for reincorporations Cross-border mergers offer a solution for companies who wish to change the law-making jurisdiction regarding company law issues An example: FIAT Fiat merged with Chrisler and formed FCA in 2014 The resulting company was ultimately incorporated in the Netherlands The aim was to be governed by Dutch company regime, which allows loyalty shares and multiple voting shares

9 Cross-border mergers as vehicles for reincorporations A company incorporated in Member State A incorporate a new shell company in another Member State (a wholly-owned subsidiary) The holding company merges into the subsidiary In practice, the outcome is that the company reincorporates as a company of the jurisdiction of arrival Physical assets might not be removed at all

10 Voluntary reincorporations Voluntary reincorporation : a company incorporated under the law of one Member State seeks to subject itself to another Member State s law Normal requirements (if allowed): transfer of the statutory seat or registered office : are these words really synonyms? registration in the company register of the new country as a domestic company. The company has to be cancelled from the original register

11 Voluntary reincorporation Member states that allow domestic companies to reincorporate abroad although domestic legislation does not regulate the procedural details of this transaction: Belgium, France, Greece, Luxembourg and Portugal. Member States that allow and regulate voluntary outbound and inbound reincorporations through detailed rules: Cyprus, Denmark, Czech Republic, Greece, Malta, Spain. Thorough regulation of the procedure Creditor protection mechanisms Shareholder protection: withdrawal right in Denmark and Spain

12 Voluntary reincorporation Member States that as a matter of fact prohibit reincorporations or make these transactions impossible: Croatia, Hungary (inbound reincorporations are allowed), Ireland, Lithuania, Poland, Romania and the United Kingdom Unclear cases: Bulgaria, Estonia, Finland, Latvia, Slovenia and Sweden

13 Voluntary reincorporation Member State without an explicit regulation (legislative formants) and that in practice (law in action, judiciary formants) allow these operations Austria (scholarly opinions only) Germany (scholarly opinions, one decision published in 2017) Netherland (scholarly opinions and practice) Italy (quite confused, yet the practice registers and notaries is moving in this direction)

14 Voluntary reincorporation Member States without explicit regulation of the proceeding for outbound reincorporations: no legal certainty as to whether domestic companies can reincorporate abroad even if the answer is in the positive, no legal certainty as to the proceeding to implement such transaction.

15 Voluntary outbound reincorporation Moment when the register of origin should cancel the company should it wait until the company is re-registered in the company register of the State of arrival as a local company? See the Interedil case: a company incorporated in Bari (Italy) decided to relocate its statutory seat to London and was immediately cancelled from the local register without being entered into the British company house (which was not possible as the UK does not accept reincorporations) When this issue is not regulated The general meeting of shareholders decides to transfer statutory seat abroad The register might cancel that company it is registered in the register of the country of arrival

16 Focus: creditor protection Stakeholder-oriented nature of corporate law in many Member States of the E.U. In the European Union, the regulation of the agency problem between shareholders and creditors is, at least in part, bundled with the other agency relations i.e. between shareholders and the board and between majority and minority shareholder.

17 Focus: creditor protection Reincorporations (like cross-border mergers) might damage creditors that have relied upon the application of a certain corporate law, even if such transactions increase shareholders value. This is the reason why E.U. cross-border merger directive requires member states to protect creditors against opportunistic crossborder mergers, while minority shareholders protection is only optional

18 Focus: creditor protection A widely used mechanism for creditor protection is requiring the merging company to provide a security or to pay in advance credits that are not yet fall due Creditors are often required to file a petition against the merger, in order to receive advance payment or a security In these cases, a court should assess whether the reincorporation is detrimental for creditors or not UK regime for cross-border mergers: any creditor of a UK merging company may apply to the court to summon a meeting of creditors, which should approve the merger with a majority in number and 75% in value of creditors represented at the meeting (SI 2007/2974 art. 13)

19 Reincorporations and EU law The question is whether EU freedom of establishment covers a right to reincorporate according to the law of another Member State Daily Mail [1988]: freedom of establishment does not cover the freedom to emigrate However, it was just obiter dictum in a case related to tax law; Cartesio [2008]: freedom of establishment covers outbound reincorporations Obiter dictum in a case related to limits against outbound reincorporations (from Hungary to Italy) Nevertheless Hungarian law still does not allow outbound reincorporations

20 Reincorporations and EU law Vale [2012]: freedom of establishment covers inbound re-incorporations an Italian company sought to reincorporate under Hungarian law restrictions should be justified by reasons in the public interest, appropriate and proportionate. A complete ban on reincorporations goes beyond what is necessary to protect those interests. principles of equivalence and effectiveness (the recording of the designation predecessor in law could not be denied to the company VALE Costruzioni if it was granted in domestic conversions). concept of establishment : it involves the actual pursuit of an economic activity through a fixed establishment in the host Member State for an indefinite period. traditional concept developed in Factortame [1991] and Cadbury [2006] potential anomaly as compared to Centros [1999]

21 Polbud: the final word? The Polish company Polbud decided to relocate its statutory seat to Luxembourg and to convert into a Luxembourg entity whose new name should be Consoil Geotechnik S.à.r.l. Polish rules: Polish companies can relocate their statutory seat to other EU Member States without losing their legal personality (article 19(1) Private International Law Act); shareholder resolutions to relocate a company s statutory seat triggers the liquidation of company s assets Hence Polbud entered into a liquidation procedure The Polish court refused to cancel Polbud, under the assumption that it has 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.

22 Polbud: the final word? The Court in particular is asked to clarify the following issues: (a) Whether articles 49 and 54 TFEU preclude the Member State of origin to make removal from the commercial 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 restriction 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 (ie the notion of establishment ).

23 Polbud: the final word? Opinion of the Advocate General Kokott Question 3: 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). Question 1: Member States rules that impose domestic to liquidate when they decide to relocate their registered office abroad are to be deemed restrictions to the EU freedom of establishment Question 2: such restriction is neither necessary nor proportionate to the interests of other stakeholders.

24 Polbud: the final word? CJEU decision: Question 3: 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 AG Kokott, without however mentioning it 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 crossborder conversion also falls within the freedom of establishment, provided that such company respect the test applied by [the country of arrival] in order to determine of a company to its national order (Polbud at 38) CJEU does not engage with its previous statements entailed in the decisions Vale and Cadbury Schweppes on the notion of establishment

25 Polbud: the final word? Questions 2 and 3: same solutions given by AG Kokott: a duty to liquidate all companies assets in order to reincorporate under the law of another Member State is a restriction to the freedom of establishment. such a restriction should be justified by the aim of attaining overwhelming goals in the public interests, provided that it is proportionate to attain such goals. any restriction to outbound reincorporations is normally aimed at protecting weak stakeholders, such as creditors or minority shareholders, who might be jeopardized by the change of lex societatis. a duty to liquidate the company is never justified, as less restrictive measures always exist to attain the same goals

26 Polbud: the final word? Member States national rules and procedures to implement crossborder reincorporations will continue to be diverse despite Polbud. At most, domestic scholars and courts (the scholarly and judiciary formant) are likely to consider reincorporations feasible despite the lack of rules (see above Germany or Italy) It is urgent approving uniform standards at the EU level, in order to avoid loopholes and opportunistic behaviours at the expenses of weak stakeholders

27 Thanks!