Free Movement of Companies - Essay Example

Title Author Institution Right of establishment and free movement of companies Introduction Developments in recent years in Europe have affected international company law almost in an unprecedented manner. This has been very much pronounced in those countries where there is hostility towards companies that have foreign structures operating inside their territories. The European Court of Justice is in a major race. There are directives enacted to control mergers a cross the border and the transfer of corporate addresses [Andenas &Wooldridge, 2009.p98].The right of establishment of free movement of companies is therefore a major issue. The European Court of Justice made its contribution to this topic when it made the land mark decisions in Centros and Uberseering. This essay investigates the extent to which the right of establishment and free movement of companies. The scope of this paper also includes the meaning of the European Court of Justice Decisions; Centros C-212/97, berseering C-208/00 and Catesio C-210/06. The European Union Law has established a number of rights among them the “right of establishment.” The right of establishment basically means the right of a citizen of a particular state to establish a business in a different state. Under article 49, the right of establishment applies to those companies that have been formed based on the law of a member of state and have their center of administration, major place of business or registered office in the European Union. The law states that “…………restrictions on the freedom of establishment of nationals of a Member of State in the territory of another member of state shall be prohibited” [Slorach & Ellis 2012p78]. These prohibitions are also extended to the restrictions of establishing agencies, subsidiaries and branches by citizens of any Member State existing within the boundaries of any Member State. Based on European Union Law, the freedom of establishment comprises the right to establish and manage operations in specific firms. This should happen under specific conditions set fore the nationals of the country where the establishment is located. These legislative provisions mean that national from all the Member States should be given equal treatment when it comes to doing business in any of the Member States. For example, a citizen of France has the freedom to begin a business in the United Kingdom by himself, through a partnership or via a given company. Community Law makes it illegal for such a person to be discriminated upon because of the business. When people form companies in a Member State but these companies are not located in one of the Member States then such companies are not allowed to enjoy this right. This is because this company does not exist as an economic entity in the European Union [Martin Schulz, Oliver Wasmeier, 2012.p8]. Limitations to the right of establishment The basic freedoms discussed above have at times caused friction between national laws and the laws of the union. For instance, a Member State may be given the freedom to allow other Member States to establish companies in its territory. However, a question may arise of what should happen if incorporation requirements are so strict that they tend to hinder such undertakings (Hindelang, 2009). The national law that prohibits the freedoms allowed in Article 49 are justified if applied in a manner that is not discriminatory, achieves means that are justifiable and are in the interest of all and when it is not necessary to attain the means. The meaning of ECJ decisions i) Centros C 212/97 Centros was a case in which 2 Danish nationals incorporated a company from England. They did not intent that the company should start trading in England. The company was meant to trade in Denmark. The Danish authorities denied it an application to establish a branch of the company is Denmark. They refused the application because it could circumvent the Danish Law on minimum share capital. This was a tougher law compared to that of England and Wales. According to the ECJ, the decision taken by authorities in Denmark was not lawful because it contradicted the principle of freedom of establishment. This freedom allows a company the right to operate in one Member State and open branches in other Member States. Centros Limited was established by two Danish Nationals under United Kingdom Company Law. This company was to operate in Denmark alone. The establishment of the company under UK Company Law was to avoid the minimum requirement for capitalization for Denmark’s limited liability companies. Based on the decisions of the court, Centros was unlawfully treated by the Danish authorities. They were supposed to grant permission to the two Danish nationals that were intending to register their company without any restrictions [Andenas &Wooldridge, 2009p90]. Reacting to this case the European Court of Justice made a ruling that wherever a company makes use of the freedom of establishment under the European Community Treaty, Member states have no permission to discriminate against such a company on reasons that its formation was based on the law of a different state where its registered office is located even if its businesses are not there. The court also ruled that any state does not have the authority to deny the freedom of establishment on reasons of preventing fraud or giving protection to creditors if the state can find other means of preventing fraud and giving protection to creditors. Member States are required to adopt European Community harmonizing legislation when it comes to company law. The ECJ was quite liberal as far as company rights are concerned. The court also sees as restrictive the conditions that govern the European Community law [Dahlberg 2005.p87]. Where matters of company law are concerned, Denmark should adopt the EC legislation instead of using its own legislation because in such a matter the legislation of the EC should be given priority. The laws of the European Community should override the laws of any particular Member State. Every Member State should be free to allow companies the freedom of establishment without giving restrictions based on whatever reason. Denmark acted contrary to the laws of the European Community by elevating its own law above that of the EC. In the Centros case Denmark should not have discriminated on the 2 Danish nationals because they had registered there company in the UK. As much as the UK laws applied on the company, the right of establishing a branch in Denmark was protected under the right to freedom of establishment in the laws of the EC [Craig, & Búrca 2011p.90]. ii) Berseering C-208/00 The Berseering case started when in 1990 October, Uberseering obtained land in Dusseldorf in Germany for use for purposes of business. Based on a certain project management contract, the company contacted NCC to help in refurbishing a motel and a garage on the land. There were several issues involved in the contract and the case. As a result many questions were raised to the court on which it made its ruling. When answering the questions brought to the court by Bundesgerichtshof based on the order of 30 March 2000 the court ruled. Where a company is formed based on the law in a particular Member State (A) where it is registered is understood to have shifted its headquarters to another Member State, (B) Articles 48 EC and 43 EC restrict the second Member State (B) from refusing to grant the company legal capacity and as a result, the capacity to take cases in its national courts in order to enforce rights in a contract with another company formed in the second Member State (B). Where the formation of a company takes place based on the laws of a Member State where its registered office is located and it practices the freedom of establishment in a different Member State, Articles 48 EC and 43 EC require that the second Member State should recognize that there is a legal capacity besides the capacity to be part of legal proceedings enjoyed by the company under legislation in the state where it was incorporated, in this case the first Member State. The court was required to investigate if the act of the German court to refuse to accept the legal capacity and the capacity of being part of the legal proceedings of a corporate formed in a valid manner under the legislation of another Member State can be interpreted as a restricting freedom of establishment (Andenas &Wooldridge 2009). The court on this case meant that a company that is incorporated validly in the law and registered in a member state which is not Germany, does not have any alternative under the Law of Germany to reincorporate in Germany if its desire is to enforce its right in German court in a contract it entered with another company whose incorporation was done under the law of Germany. The implication is that since the incorporation of Uberseering was done in the Netherlands and its office was registered there it was free to exercise the right of freedom of establishment in Germany even though its incorporation was done under the law of the Netherlands. It therefore does not matter that after the formation of the company, all the company shares were taken up by German citizens living in Germany and that did not cause the company to stop being a legal entity under the law of the Netherlands [Dahlberg, 2005.p90]. The existence of the company could not be separated from its status because based on the courts decision a company exists because of the national laws that determine the process of its incorporation and operations. Demanding the Uberseering be reincorporated in Germany was totally against the recognition of the freedom of establishment. By Germany refusing to recognize the legal capacity of Uberseering because it was formed based on the laws of the Netherlands where it was registered and has an office and demanding that the company should shift its administrative offices to Germany because all the shares of the company had been taken by nationals of Germany living in Germany, resulting in the inability of the company to bring legal proceedings in Germany to fight for its rights in a certain contract because it is not incorporated under the laws of Germany is in itself a denial of the freedom of establishment which is not compatible with Articles 43 EC and 48 EC (Haberer 2010). iii) Inspire Art C-167/01 The case of Inspire Art C-167/01 involved a Dutchman who started a company known as Inspire Art Limited under England and Wales laws. He then wanted the Dutch subsidiary office of the company registered at Netherland’s commercial registry. The registry wanted specific Dutch rules applying to foreign entities with their registration done in the Netherlands to be applied to this company. As a result, among other things, the company would have been expected to adopt a name that would suggest that it originates from a foreign country and then adhere to the rules of capitalization applying to Dutch companies with limited liability. On this case, the European Court of Justice stood on the side of the right to freedom of establishment. The court maintained that no rule should be followed if it still submits pseudo-foreign companies to a Member State’s company law [Joan, Kapteyn, 2008p. 9].The court stated that respect should be given to foreign companies because they are legal entities with the right to take part in legal proceedings and also because they are foreign companies under company law of their state of incorporation. If the host state makes ay changes to its company law, then these changes do not agree with European Law. In this case, Inspire Art Limited was supposed to be given freedom based on the right of freedom of establishment to establish its branch in Denmark. The company should not have been subjected to the rules at the Netherlands commercial registry governing foreign companies such as using a name that shows that it is a company originating in a foreign company. It was also not supposed to be subjected to laws governing Dutch companies that have limited liability[Haberer 2010p8]. Inspire Art Limited found its protection under the ruling of the European Court of Justice because based on the rules of the European Community the freedom of establishment was contrary to the requirements of the Danish Commercial registry that specific Dutch rules applying to foreign entities with their registration done in the Netherlands be applied to this company. As a result, among other things, it was unlawful based on the freedom of establishment for the company to be compelled to adopt a name that would suggest that it originates from a foreign country and then adhere to the rules of capitalization applying to Dutch companies with limited liability. Even though it was registered and had its main offices in the UK it was not a must for it to bear a name that would identify it as belonging to the UK Catesio C-210/06 From the beginning, the Catesio case had some confusion. The Hungarian court wanted clarity on the issue of whether a company intending to move its registered office to a different Member State was covered by freedom of establishment. Catesio as a limited company was formed under the law of Hungary and registered in the same company (Craig, Búrca, 2011). The company applied to the commercial court to be allowed to register Italy as its new headquarters. This application was turned down in court on claims that the law of Hungary was against companies transferring their headquarters to other member states and at the same time maintaining their legal status as companies under the authority of the law of Hungary. Based on the ruling of the court, Catesio was expected to close its operations in Hungary before moving to Italy. On this case, the ECJ’s Advocate General took the assumption that the law of Hungary was based on the real seat theory. The law of Hungary, the operational headquarters of any company should be in line with the place of incorporation of that company. Therefore this law is against the movement of Hungarian legal persons to different Member States. According to the ECJ advocate, General Maduro this was covered under the right of freedom of establishment. The court however refused to take the path proposed by General Maduro. There was no clarity on whether the court took any particular path. The court supporting its Daily Mail reasoning stated that companies have been created by national law and that they exist because of the national law that dictates their functioning and incorporation (Joan, & Kapteyn 2008). Article 54 TFUE considers that the national laws have wide variations depending on the connecting factor needed for incorporation and the modification of that factor. From this Article the court deemed it possible that a Member State can deny the right of any company to remain with its legal personality under the law of that member state when the administrative headquarters of that company were transferred to a different country. The court also cited Article 54 TFEU as leaving the connecting factor issue and the subsequent changes as not sorted out by the rules governing freedom of establishment. The court meant that the law of member states and in this case the law of Hungary was applicable to Catesio and it could override any law set by the community to govern all the member states. Because there was no uniform law at the community level defining the companies that are allowed to enjoy the right of freedom of establishment based on a particular connecting factor that determines what national law applies to a company, the problem of if a company has a right to the freedom of establishment could only be settled by the national law applicable to the case. This was the position of the court saying that community law did not touch on which company was supposed to get freedom of establishment rights. This meant that the ruling of the court in Hungary to demand that Catesio must dissolve its operations in that country before moving to Italy could not be cancelled by the European Court of Justice (Craig, Búrca 2011). The decision of the ECJ meant that Catesio could no longer transfer its headquarters to Italy and remain as a company constituted under Hungary Law. The Laws of Hungary prohibiting the company from doing this were to apply. Hungary according to the ECJ had the power to define what connecting factor was needed by a company if it was to be seen as having been incorporated under Hungary law. Therefore, freedom of establishment did not apply. The court held the position that since Catesio was formed based on the law of Hungary, it was to be given equal status with natural people of Hungary and the right of freedom of establishment could apply to it. From the company’s point of view, defining the connecting factor which determines the law to apply on its case is an issue under national law and it cannot be interfered with by the freedom of establishment law just as domestic substantive and laws on the formation of the company are. This picture that was originally clear conceptually gets blurred if a person reasons from the point of view of the founders of the company. They have a right o freedom of establishment and this right encompasses the right of setting up companies (Schulz & Wasmeier, 2012). Article 49 TFEU gives this right only under Hungary’s conditions for its own nationals. However, following the Court’s case law about market freedoms at a general level the court widened the freedom of establishment to include national measures that can restrict or make the practice of freedom of establishment not very attractive. If the founders of Catesio were interested in invoking this freedom to oppose the idea of the connecting factor needed for incorporation in Hungary then they could challenge the company formation rules. Freedom of establishment makes no difference between substantive law and the rules on conflicting laws [Koen Geens, Klaus J. Hopt, 2008.p90]. This could mean that the national company law would come to an end. Then the content of extensive parts of substantive laws of companies would be deduced in a direct manner from freedom of establishment. As a result, according to the Keck rationale friction between laws and the rules of substantive company law applicable to all businesses in the Member State and affecting in a common manner both domestic and foreign entrepreneurs should be seen as not falling under the influence of the freedom of establishment. These provisions do not hinder access to market by foreign entrepreneurs more than they hinder the formation of companies by domestic incorporators. Therefore, if it is applied in a way that has no discrimination in it, substantive company law is safe. Pertaining to the requirement of the headquarters being in the Member State where the company was incorporated it can be said that founders from other states can find it hard to physically get established in the Member State of Incorporation. In this way they are treated in a different manner (Schulz &Wasmeier 2012). The court also held that a Member State and in this case Hungary had the power to restrict Catesio since it is governed by Hungary law, to retain its status if it had the plans to shift its administrative headquarters to another Member State’s territory and in the process violate the connecting factor needed under the incorporation laws. This result though, is not logical based on the reasoning of the Daily Mail. Because the company was incorporated as a legal entity, it is hard to understand why freedom of establishment was denied. The company was formed based on the law of Hungary and it would still retain its headquarters within the European Union. Based on the reasoning of the ECJ, there is no restriction on the Member States by the right to freedom of establishment not because of the connecting factor for formation and incorporation but also because of the decisions that companies established according to the law can take to the point that the intention of the company is to remain under incorporation laws. The ECJ differentiates the case of Catesio from that in which a company wants to move to a different Member State to become a company governed by the law of the new Member State (Slorach & Ellis, 2012). Conclusion In Conclusion, this essay has examined the right of establishment and the free movement of companies. Of particular interest as well, is the meaning of the ECJ decisions Centros C-212/97, Berseering C-208/00, Inspire Art C-167/01 and Catesio C-210/06. The right of establishment basically means the right of a citizen of a particular state to establish a business in a different state. Under article 49, the right of establishment applies to those companies that have been formed based on the law of a member of state and have their center of administration, major place of business or registered office in the European Union. The European Court of Justice has a lot of work. There are directives enacted to control mergers a cross the border and the transfer of corporate addresses. The right of establishment of free movement of companies is therefore a major issue and the court deals with cases on this a lot of times. In Centros C 212/97, the two Danish nationals were denied the permission to have their company operate in Denmark because it had been registered in the UK. The Court ruled that based on the right to freedom of establishment, the company was supposed to be given a go a head to operate in Denmark as well The second case, Berseering C-208/00, the decision of the ECJ on this case was that the freedom of establishment should apply. Based on Articles 48 EC and 43 EC, the company moving its headquarters from the Member State where it was registered to another Member State should be given legal status and be allowed to participate in legal proceedings. In Inspire Art C-167/01, the court maintained that no rule should be followed if it still submits pseudo-foreign companies to a Member State’s company law. The court stated that respect should be given to foreign companies because they are legal entities with the right to take part in legal proceedings and also because they are foreign companies under company law of their state of incorporation. It was unlawful based on the freedom of establishment for the company to be compelled to adopt a name that would suggest that it originates from a foreign country and then adhere to the rules of capitalization applying to Dutch companies with limited liability. Finally in the Catesio C-201/06, the court, in support of its Daily Mail reasoning stated that companies have been created by national law and that they exist because of the national law that dictates their functioning and incorporation. In this case it supported the rule of the laws of Member States over the laws of the European Union. References Andenas, Wooldridge, F. European comparative Company Law (Cambridge University Press, 2009.[89]). Craig, Búrca, G. EU Law: Text, Cases and Materials (Oxford University Press, 2011). M. Dahlberg, Direct Taxation in Relation to the Freedom of Establishment and the Free Movement of Companies (Kluwer Law International, 2005). J., Haberer, Freedom of Movement for Companies within the EU(GRIN Verlag, 2010). S. Hindelang, The free movement of Capital and foreign direct investment (John Wiley & Sons, 2009). Joan, Kapteyn, The Law of the European Union and The European Communities (Kluwer Law International, 2008). 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