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CASE C-167/01. KAMER VAN KOOPHANDEL EN FABRIEKEN VOOR

AMSTERDAM V. INSPIRE ART LTD.

(E.C.J. SEPTEMBER 23, 2003)

C

OLUMBIA

J

OURNAL OF

E

UROPEAN

L

AW

, V

OL

11:2,

P

. 187 (W

INTER

2004/2005)

P

ATRICK

S. R

YAN

PSR Law Firm, LLC

600 Grant Street, Suite 300

Denver, CO 80203

http://www.psrlawfirm.net

Note: Attached are the final proof sheets for this Case Note and Commentary, which has been printed in the above-referenced journal. The reader should consult the print version (or Lexis/Westlaw versions) for any slight variation in page numbering that may exist.

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CASE C-167/01. KAMER VAN KOOPHANDEL EN FABRIEKEN

VOOR AMSTERDAM v. INSPIRE ART LTD.

(E.C.J. SEPTEMBER 23, 2003)

*

I. INTRODUCTION

The European Union (EU) does not yet have the U.S. equivalent of Delaware; that is, the EU does not yet have a place where it is fairly common to incorporate, regardless of where business is done. Recently, there has been much debate among European states (and legal scholars) in the corporate law field regarding the possible emergence of a “Delaware of Europe.”1 Some European countries have overtly fought a trend towards this possibility by passing local laws that make it difficult to establish a branch or subsidiary company in a location outside the country of origin. In response, the European Court of Justice (ECJ) has heard several cases that have progressively limited the ability of individual countries to restrict the establishment of companies, agencies, branches, and subsidiaries in other European countries. On September 30, 2003, the ECJ delivered its latest blow to countries that have put in place prohibitive regulations regarding incorporation with its decision in the case Inspire Art.2 This judgment is consistent with the ECJ’s jurisprudence on the matter of corporate headquarters and subsidiaries, beginning with Daily Mail,3 continuing with Centros,4 and peaking with Überseering.5 Daily Mail pertained to a so-called “outbound” case,6 and Überseering and Centros dealt with so-called “inbound” cases.7 All

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Authored by Patrick S. Ryan, Denver, Colorado. 1

It is unclear who first coined this expression; however, Alfred Conard describes the phenomenon as follows:

Beyond the interests of shareholders, customers, suppliers, money-lenders, and employees, a significant source of pressure for conformity in corporation laws was probably the interest of each state in retaining as its “nationals” those corporations whose operations are centered in the state. The founders of the Community had no intention of letting one of the member states become the “Delaware of Europe.”

Alfred F. Conard, The European Alternative to Uniformity in Corporation Laws, 89 Mich. L. Rev. 2150, 2161 (1991). See also Jens C. Dammann, Freedom of Choice in European Corporate Law, 29 Yale J. Int’l. L. 477, 510 (2004) (analogizing Delaware corporate law to the emerging European legal structure); George A. Bermann, Regulatory Federalism: A Reprise and Introduction, 2 Colum. J. Eur. L.395, 400 (1996) (discussing the “Delaware Effect”).

2

Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd., Case C-167/01, 2003 E.C.R. I-10155.

3

The Queen and HM Treasury and Commissioners of Inland Revenue ex parte Daily Mail and General Trust PLC on the interpretation of Articles 52 and 58 of the EEC Treaty and the provisions of Council Directive 73/148 of 21 May 1973 on the abolition of restrictions on movement and residence within the Community for nationals of Member States with regard to establishment and the provision of services, Case 81/87, (OJ 1973, L 172, page 14).

4

Centros Ltd. v Erhvervs- og Selskabsstyrelsen, Case C-212/97, 1999 E.C.R. I-1459. 5

Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC), Case C-208/00, 2002 E.C.R. I-9919.

6

An “outbound” case is a case where a given law in one country (the “home country”) restricts a company that chooses to move its headquarters from its primary location in the home country to a location in another country (the “target country”). The company is “outbound” because it plans to move away from its established location in the home country.

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three cases were decided in the context of “freedom of establishment” from Article 43, paragraph 1, of the European Community Treaty (hereinafter EC), which, read together with Articles 46 and 48 EC, grants great leeway to European corporations that want to move about within the Community.8

Inspire Art, like Centros, expanded upon the interpretation of Article 43 EC’s freedom-of-establishment clause with regard to an inbound case, although it differs from the facts of Centros on one fundamental point: in Centros, the registration of a branch of a U.K. company in another European country — in this case Denmark — was unjustly refused by the Danish government, whereas in Inspire Art, the registration of a branch of a U.K. company in the business register of another European country — here, Holland — was not refused. What was the difference? In Inspire Art, the company was separately identified under Dutch law as a so-called “pseudo-foreign company”; as such, certain legal requirements and capital expenditures were linked to the registration. Consequently, the ECJ was called in to decide if this distinction (i.e., linking registration with the fulfillment of additional conditions and additional capital outlay) conflicts with the European principle of freedom of establishment. In the end, the ECJ determined that a conflict did, in fact, exist. In this Case Note, we will analyze the development of the ECJ case law as it led to Inspire Art. In so doing, we shall review the underlying theories and principles that govern the different legal treatments of European companies when they choose to establish subsidiaries or branches in other European countries.

A. Sitztheorie and Gründungstheorie

Under the theory of domicile (Sitztheorie), a legal dispute involving a corporation is governed by the law of the state in which the company has established its actual headquarters. If, however, the theory of foundation (Gründungstheorie) is applied, legal disputes are governed by the law of the company’s place of incorporation. We will review the distinctions shortly. Most of the heated discussion on the distinction between these two theories has taken place in Germany, and, invariably, the terms Sitztheorie and Gründungstheorie can be translated in numerous ways.9 Accordingly, for purposes of simplification, we shall use the German terms in this Note.

7

An “inbound” case is a case where a company has a headquarters in one country (the “home country”) and where restrictions are placed on the country at the “inbound” location (the “target country”) that limit what the company can do.

8

The first paragraph of Article 43 EC states the following:

Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.

Article 48 EC extends a corporation’s right to this freedom of establishment, subject to the same conditions as those laid down for individuals who are nationals of the Member States, by further clarifying that “companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community.” Finally, Article 46 EC permits the Member States to restrict the freedom of establishment of foreign nationals by adopting “provisions laid down by law, regulation or administrative action,” in so far as such provisions are justified “on grounds of public policy, public security or public health.”

9

In fact, some English-language scholars have chosen the French term “siège réel” rather than either the English or the German term, even though the French term has since become more popular in Germany than in France. Eddy Wymeersch, The Transfer of the Company’s Seat in European Company Law, 40 Common Market L.Rev. 661, 667-78 (2003) (“The “siege réel” [Sitztheorie] criterion was first introduced in France after

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As we have seen, under Sitztheorie, when a lawsuit arises among corporate parties with different nationalities, conflicts of law are decided by the company’s domicile, or Sitz. However, there is a twist: the Sitz is the place considered by law as the official headquarters, not necessarily the company’s place of incorporation. Per German law, a “headquarters” is designated, according to the Bundesgerichtshof (German Supreme Court), by determining the place “where fundamental management decisions are transformed into ongoing management acts.”10 Thus, under Sitztheorie, if the company in question is not incorporated in the state where a legal conflict arises, it does not enjoy either a so-called “legal personality” or the limited liability associated with a “corporate personality.” Not surprisingly, the raison d’être for many corporations is their ability to create a legal personality—that is, to have a corporate protective “shell”—and to enjoy the limited liability that this shell provides. As a consequence, if a given country has incorporated Sitztheorie into its laws governing corporations (as Germany has),11 companies are encouraged (and often required) to separately incorporate in the state where Sitztheorie exists. Neglecting to do so can severely limit the advantages associated with incorporation.12

B. Gründungstheorie

According to Gründungstheorie, the place of incorporation governs whether or not a corporation may (a) take part in a lawsuit and (b) enjoy the shell protections and limited liabilities that incorporation grants. Accordingly, this is a much broader, much less restrictive regime than Sitztheorie, and it does not matter where a corporation’s administrative offices are located. Rather, a headquarters is selected (for tax, convenience, or other reasons) and business operations can take place in any other country. Conceptually, Gründungstheorie, in its application, is not unlike a U.S. firm incorporating

discussions about French companies emigrating to the legally more clement climate in Belgium in the 19th century”).

10

Bundesgerichtshof (German Supreme Court) Judgment of March 21, 1986, V ZR 10/85, BGHZ 97, 269 (272).

11

BGHZ 78, 318 (334). See also the discussion in Julius von Staudinger and Bernhard Grossfeld, Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Internationales Gesellschaftsrecht, 40-76 (1998).

12

Arguments in favor of Sitztheorie include the following:

(a) Sitztheorie offers superior protections for creditors because the creditors have direct access to the company in question and to local courts for debt repayment.

(b) Sitztheorie offers additional protections for minority shareholders. In the case of a merger or purchase, minority shareholders continue to enjoy a role as voting shareholders rather than as passive investors.

(c) Sitztheorie offers additional protections for employees. This aspect is particularly important in countries that support employee co-determination (i.e., employee representation in the management of corporations that exceed a certain size, say, 300 employees).

Arguments against Sitztheorie include the following:

(a) Sitztheorie allows owners and officers of a corporation with a foreign headquarters but with a local administrative office to be held personally liable by the local courts. (b) Sitztheorie effectively prevents companies from moving out of the given country. If

the company moves, it would lose all legal protections, including its ability to collect debts in court and to make claims for breach of contract.

(c) Sitztheorie severely restricts companies’ ability to forum shop in order to select the best location in member states for their incorporation.

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in Delaware and operating in Colorado. Companies under Gründungstheorie are generally free to relocate their headquarters without losing their original legal status, just as a Delaware corporation may move from state to state in the United States without losing the protections of Delaware corporate law. Accordingly, perhaps the most notable characteristic of Gründungstheorie is that it encourages “forum shopping”; in other words, companies are thus encouraged to incorporate in the countries that have the most favorable laws of incorporation (e.g., regarding taxation).13 Corporations and corporate movements under Gründungstheorie are sometimes referred to as “pseudo-foreign companies,” a term used to classify companies that set up their headquarters in one European country (e.g., the United Kingdom) while also establishing legal operations in another (e.g., Spain).

II. DAILY MAIL: AN “OUTBOUND” CASE

In Daily Mail,14 a company challenged the statutory U.K. requirement that companies first obtain permission from the U.K. treasury before transferring their headquarters to another country. In this case, the company, Daily Mail, believed this requirement presented an obstacle to its European right to freedom of establishment.15 The U.K. statutory provision also enabled the treasury to ask the company to liquidate some of its assets, thus making the company liable to pay capital gains tax. Interestingly, companies that resided abroad did not have this same tax liability. In its judgment, the ECJ pointed out that Article 43 of the Treaty provides for the institution of “agencies, branches or subsidiaries by nationals of any Member State,”16 but the ECJ also noted that interpretation of Community law varied greatly at the time. Therefore, the Treaty could not confer upon a company the right to transfer its headquarters to another member state while also allowing the company to retain its incorporation status under the legislation of the first Member State. Daily Mail is noteworthy because (1) it involved a company’s attempt to move its headquarters due to the tax advantages of doing so and (2) because the host country tried to prevent the move by imposing harsh requirements and restrictions upon the company. As will be seen later, Daily Mail is important as a stepping stone to other freedom-of-establishment cases, although it did not deal specifically with the protection of corporate shells’ limited liability, thus differentiating it from these other cases.

III. CENTROS: SITZTHEORIE TAKES A HIT

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Gründungstheorie is not unlike the U.S. system, where certain states (particularly Delaware, but also Nevada) have established an advantageous forum for incorporation. Advantages of incorporation in Delaware include the fact that it has one of the most experienced court systems in the United States for the resolution of corporate disputes and that it has a competitive tax structure for corporations as a result of the economies of scale that have been achieved there over the years. Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 Colum. L. Rev. 1908, 1910-11 (1998). The author explains the advantages of Delaware incorporation in the following way:

Commentators generally agree that Delaware possesses several competitive advantages that account for its dominance in the market for corporate chartering. These advantages include network benefits emanating from Delaware's longstanding status as the leading incorporation jurisdiction; Delaware's proficient judiciary; and Delaware's unique commitment to corporate needs.

14

Daily Mail, supra note 3. 15

Article 43 EC, supra note 8. 16

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In Centros,17 the ECJ made perhaps its first fundamental ruling on freedom of establishment. Here, the founders of a Danish company, after undergoing a process of forum shopping, chose to incorporate in the United Kingdom because the United Kingdom had a very simple and inexpensive incorporation procedure, unlike the procedure used in Denmark, which was expensive and time-consuming. The company’s founders, then, established a limited liability company in the United Kingdom and later set up a subsidiary in Denmark. However, the newly established U.K. company had never conducted business in the United Kingdom, in spite of the fact that it had legally incorporated there. While this idea may seem quite normal in the United States (i.e., establishing a company in Delaware and operating its actual business in Colorado), this was quite new and untested in Europe.

The Danish government, as yet relatively unaccustomed to such corporate maneuvers, refused to allow the creation of the U.K. subsidiary in Denmark. When the company’s founders sued, the case went before the ECJ to test if the Danish blocking of the subsidiary conflicted with the freedom-of-establishment clause. The ECJ found that the Danish government’s refusal indeed violated the law. Consequently, the Centros decision supports the proposition that companies within the European Community may freely forum shop and choose the most advantageous location in which to incorporate. This decision embraced Gründungstheorie and provided a formal announcement to European entrepreneurs that they can gain benefits in Europe similar to those that American companies can gain in the United States.

Interestingly, Centros makes no specific mention of Sitztheorie, and, just as importantly, Centros does not specifically address whether or not European law mandates that a company has a right to move its headquarters within the European Community. As a result, some states, like Germany (a staunch Sitztheorie proponent), simply did not change their laws to accommodate the freedom-of-establishment principles that the ECJ set forth in Centros. The Centros decision thus created a conflict for those member states that continued to maintain Sitztheorie, and it underscored the complexity of the Sitztheorie vs. Gründungstheorie debate: what happens if a company organizes a headquarters in a Gründungstheorie country (Country A) and then sets up a subsidiary in a Sitztheorie country (Country B)? Can Country B require the company to also set up a headquarters-like entity in its home country so that the company can enjoy the protections of limited liability?

The German government thought so. Under German law (ZPO § 50), a company that has not specifically set up a business in Germany is not legally recognized. While the company in question can operate its business, it cannot avail itself of the benefits of limited liability, nor does it enjoy a “legal personality.” Because the company is not legally recognized, it is not capable of being a party in a legal proceeding, which means that it may not initiate legal proceedings of any kind or protect its legal interests. Clearly, stripping a company of its ability to function as a company in Germany is not a desirable situation. Against this backdrop the Überseering case emerged. Überseering is noteworthy because, unlike Centros, it dealt a direct blow to Sitztheorie in the country where it was so fervently defended.

IV. ÜBERSEERING – GRÜNDUNGSTHEORIE PREVAILS

The Überseering dispute began with a 1992 construction contract entered into by a purchaser, Überseering BV, a Dutch limited liability company,18 and a contractor, NCC

17

Centros, supra note 4. 18

“BV,” a Dutch abbreviation for “Besloten Vennootschap,” and GmbH, a German abbreviation for Gesellschaft mit beschränkter Haftung, each provide corporate liability protections similar to an English “Ltd.” or

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GmbH, a German limited liability company. The contract involved work on German real property. Specifically, Überseering BV claimed that the paint work completed by NCC GmbH was defective, resulting in alleged damages of DEM 1.163.657 (roughly $500,000).

In December 1994, Überseering BV was purchased by two German residents who then managed the company from Germany. After an unsuccessful attempt to resolve the disagreement with NCC GmbH, Überseering BV — now under German management — filed a lawsuit against NCC GmbH for damages. In response, NCC GmbH made the strategic decision to avoid dealing with the underlying contract claim in court, instead attacking the lawsuit on procedural grounds. Essentially, NCC GmbH argued that, under Sitztheorie (i.e., under German law), Überseering was a ghost company, meaning that, for practical legal purposes, it did not actually exist in Germany. NCC GmbH conceded that Überseering BV’s place of administration had shifted from the Netherlands to Germany; however, since Überseering BV had not properly incorporated separately in Germany, NCC GmbH maintained that Überseering BV was not legally capable of bringing suit.

The lower German courts, relying upon the country’s domestic tradition of Sitztheorie, accepted NCC GmbH’s argument that Überseering BV was not capable of being a party in the dispute. Consequently, the courts found that Überseering BV’s shareholders should have formed, but did not attempt to form, a German-based limited liability company, either through re-incorporation or through other options, such as a “conversion” of the BV into a German GmbH under §§ 362 – 393 of the German Business Reorganization Act. By ruling in favor of NCC GmbH, the courts dismissed Überseering BV’s lawsuit at the procedural threshold without ever reaching the breach of contract claim. This would have left Überseering BV without legal recourse, and accordingly, Überseering BV appealed the case to the German Supreme Court (the Bundesgerichtshof), which suspended proceedings pending the certification and clarification of two questions that it sent to the ECJ. The questions, quoted verbatim, are as follow:

1. Are Articles 43 EC and 48 EC to be interpreted as meaning that the freedom of establishment of companies precludes the legal capacity, and capacity to be a party to legal proceedings, of a company validly incorporated under the law of one Member State from being determined according to the law of another State to which the company has moved its actual centre of administration, where, under the law of that second State, the company may no longer bring legal proceedings there in respect of claims under a contract?

2. If the Court’s answer to that question is affirmative:

Does the freedom of establishment of companies (Articles 43 EC and 48 EC) require that a company’s legal capacity to be a party to legal proceedings is to be determined according to the law of the State where the company is incorporated?19

The Bundesgerichtshof further stated that it would uphold the lower court decisions and dismiss the case unless the ECJ answered the first question in the affirmative.

“PLC” (public limited company). A BV is similar to a GmbH, although, to be precise, in Dutch a BV would actually be known as a “BVBA” (Besloten Vennootschap met Beperkte Aansprakelijkheid).

19

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A. The Bundesgerichtshof Defends Sitztheorie

In its written submission to the ECJ, the Bundesgerichtshof went to great lengths to provide policy arguments that favor Sitztheorie, contending that Sitztheorie protects creditors, minority shareholders, and employees who are based in Germany. The Court expressed concerns about a corporate law “race to the bottom” among the member states of the EU if the protections of domestic law could be circumvented through the establishment of a company in a foreign jurisdiction. In sum, the Bundesgerichtshof’s decision favored protectionism rather than the broader treatment afforded to Gründungstheorie cases, as well as cited arguments in its favor found in dicta in the ECJ case Daily Mail.20 These arguments will be discussed in section C, below.

B. Opinion of the Advocate General

The Advocate General’s opinion,21 delivered eleven months before the ECJ decision, provided significant guidance to the court well in advance of its ruling; accordingly, this decision deserves separate analysis. The Advocate General concluded that the German choice to follow Sitztheorie rather than Gründungstheorie restrains the freedom of corporate establishment and can be justified only by overriding public interests. He reached this conclusion after a detailed analysis of the relevant provisions of the EC Treaty, particularly Articles 43 and 48 when read in conjunction with Article 293 EC. Except as noted in section C. below, the Advocate General’s opinion on these matters is quite consistent with the later ECJ ruling.

The Advocate General also discussed at length the relevance of ECJ decisions Daily Mail and Centros to Überseering. Although the Advocate General supported the legitimacy of objectives of Sitztheorie presented by the Bundesgerichtshof,22 he nonetheless argued that the means employed to reach those objectives were improper. Specifically, the Advocate General stated that the loss of the ability to bring suit and to thereby enforce rights in court imposed undue burdens on Überseering BV and placed upon it “a massive restriction on freedom of establishment.”23 The Advocate General based his Opinion on the assumption that the contractual rights in question were forfeited under the German choice-of-law rule. He further disregarded some arguments as vague, particularly the German government’s paradoxical claim that Überseering BV’s rights were not lost, but instead could simply no longer be exercised.

One noteworthy aspect of the Advocate General’s opinion is the conclusion that the policy goals behind Sitztheorie carry no weight in Überseering since those goals do not apply in this specific case. Specifically, the Advocate General referred to the enforcement of the employee co-determination regime for companies with more than 2,000 employees and to provisions protecting minority shareholders,24 circumstances that do not apply to Überseering BV because of the company’s small size. Finally, the Advocate General declined to address the second question posed by the Bundesgerichtshof on the grounds

20

Daily Mail, supra note 3. 21

Schlussanträge des Advocate Generals Dámaso Ruiz-Jarabo Colomer, Rechtssache C-208/00, 2001 E.C.R. I-09919.

22

Id. As previously noted, these objectives include the protection of creditors, minority shareholders, employees, etc., who are based in Germany.

23

Id., at para. 56. 24

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that the question concerned a matter of national legislation within the discretion of the governments of the EU member states.25

C. The ECJ Decision

The ECJ based its decision in Überseering upon the precedent of Centros, stating simply that the companies or firms mentioned in Article 48 were entitled to carry on their business in another member state. The ECJ determined that a necessary pre-condition for the exercise of freedom of establishment is that companies enjoy recognition by any member state in which they wish to establish themselves. It reviewed Germany’s written submission — which relied heavily on Daily Mail — and it emphasized the distinction between Daily Mail and Überseering. Indeed, Daily Mail dealt with a company that hoped to transfer its administration to another state, and the ECJ found the motivation in this “outbound” case to be relevant: The company in Daily Mail sought to avoid taxation in the original member state. In Überseering, however, the company did not wish to transfer its administration; instead, the company simply wanted to be recognized as a legal party and to enjoy associated protections as a corporation.

Thus, the ECJ rejected the arguments of the Bundesgerichtshof, noting that if a company incorporated in another Member State could be denied the right to file lawsuits under Sitztheorie, then Sitztheorie would essentially undermine the principles of freedom of establishment.26 This line of reasoning notwithstanding, the ECJ left a door open for Germany’s policy arguments, stating that,

[i]t is not inconceivable that overriding requirements relating to the general interest, such as the protection of the interests of creditors, minority shareholders, employees and even the taxation authorities, may, in certain circumstances and subject to certain conditions, justify restrictions on freedom of establishment.27

On these grounds, the ECJ concluded that Sitztheorie, as applied to Überseering, contravened the freedom-of-establishment clause that companies enjoy under Articles 43 and 48 EC. In answering the first question posed by the Bundesgerichtshof, the ECJ extrapolated its previous statements and applied the test in the abstract. It indicated that the principles of freedom of establishment in Articles 43 and 48 EC preclude a member state (“state B”) from denying a legal personality (and with it, the right to be a party in a lawsuit) to a company that is validly incorporated in another member state (“state A”) in cases where that company has subsequently transferred — or is deemed to have transferred — its place of administration to member state B.28

1. Consequences and Commentary

The ECJ judgment indicates the end of Sitztheorie, at least to the extent that Sitztheorie applies to the recognition of the legal personality of companies incorporated in other EU states. Member states are now clearly required to recognize the legal personality that a company enjoys under the laws of its state of incorporation.

25

Id., at para. 64. 26

Überseering, supra note 5, at para. 81. 27

Id. at para. 92. 28

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2. Legal Coherence

A company’s articles of incorporation include the details regarding the company’s internal organization, its limitations of shareholder liability, its legal personality, and the like. Under Sitztheorie, other legal systems rarely contradicted the validity of these details, making legal certainty more-or-less secure. As a result of Überseering, however, courts in countries that apply Sitztheorie will have to reconcile the ECJ’s decision with stricter laws in their countries regarding creditor protection, minority shareholder rights, and other public policy objectives. This reconciliation process will likely result in a review and in subsequent new lawmaking and/or jurisprudence with respect to principles of legal coherence and legal certainty.

D. The German “GbR” Example

After the Advocate General wrote his opinion, and before the ECJ made its ruling (remember, there was an eleven-month lapse between the two), the Bundesgerichtshof considered a similar question in another case,29 thereby emphasizing how deeply Germany’s corporate law system relied on Sitztheorie. The case concerned the question as to whether a Jersey Island company, with a headquarters in Portugal, could enforce its claims under a guarantee before the German courts. The Munich District Court had dismissed the matter on the grounds that the plaintiff did not have a legal personality and thus could not be a party in the proceeding. Following the approach outlined in the Advocate General’s opinion in Überseering, the Bundesgerichtshof held that the foreign company was in fact capable of being a party in the suit. However, the Bundesgerichtshof recognized the standing in the form of a civil law “partnership,” a so-called GbR, or a general commercial partnership (also referred to as an OHG). Without overruling Sitztheorie, the Bundesgerichtshof considered the treatment of a foreign company seated in Germany—the GbR form—as an alternative to these theories.

V. INSPIRE ART

With an understanding of the legal precedent to Übersering, let us return, then, to the original objective of this Case Note, which is to analyze the findings and implications of the Inspire Art case. We have already seen in the preceding examples that the ECJ has consistently held for freedom of establishment, in spite of efforts by certain European countries to restrict the activities of foreign and pseudo-foreign companies. In fact, Inspire Art offers an important — but not fundamental — change to this jurisprudence. In Inspire Art, the ECJ had to determine the compatibility of the Dutch law on “formally foreign” companies (“Wet op de Formeel Buitenlandse Vennootschappen,” hereinafter “WFBV”) with the provisions concerning the freedom of establishment, Article 43 et seq. EC, as well as with the relevant provisions of the Eleventh Directive.30 Inspire Art Ltd. was formed in 2000 under English law, and it was designated a pseudo-foreign company under the WFBV because it maintained its statutory seat in the United Kingdom and because it intended to conduct its business activities through a branch in the Netherlands. However, Inspire Art

29

Bundesgerichtshof, Judgment of July 2002, II ZR 380/00. BGHZ 151, 204. 30

Eleventh Council Directive of 21 December 1989 concerning disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State (89/666/EEC).

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Ltd. did not register with the Netherlands as a pseudo-foreign company, as was required by the WFBV.

For this type of company, an “inbound” company, the WFBV mandated certain disclosure requirements contained in the list set forth in Article 2 of the Eleventh Directive, as well as additional requirements not set forth in the list. Moreover, such a company had to maintain minimum capital in an amount corresponding to that required by Dutch companies. Indeed, a company’s failure to comply with these obligations would not—in contrast to the facts of Centros—preclude the company’s registration in the commercial register, but instead would result in a sanction: the company’s directors would have joint and several personal liability, along with the company.

On February 5, 2001, the Amsterdam District Court found that Inspire Art Ltd. was a pseudo-foreign company pursuant to the WFBV. Prior to delivering its judgment, however, the court sent the following questions to the ECJ for a preliminary ruling:

1. Are Articles 43 EC and 48 EC to be interpreted as precluding the Netherlands, pursuant to the Wet op de formeel buitenlandse vennootschappen of 17 December 1997, from attaching additional conditions, such as those laid down in Articles 2 to 5 of that law, to the establishment in the Netherlands of a branch of a company which has been set up in the United Kingdom with the sole aim of securing the advantages which that offers compared to incorporation under Netherlands law, given that Netherlands law imposes stricter rules than those applying in the United Kingdom with regard to the setting-up of companies and payment for shares, and given that the Netherlands law infers that aim from the fact that the company carries on its activities entirely or almost entirely in the Netherlands and, furthermore, does not have any real connection with the State in which the law under which it was formed applies?

2. If, on a proper construction of those articles, it is held that the provisions of the Wet op de formeel buitenlandse vennootschappen are incompatible with them, must Article 46 EC be interpreted as meaning that the said Articles 43 EC and 48 EC do not affect the applicability of the Netherlands rules laid down in that law, on the ground that the provisions in question are justified for the reasons stated by the Netherlands legislature?31

In answering these questions, the ECJ clarified the standard for examining the freedom of establishment of Article 43 EC and declared that the WFBV (or any similar law) must breach neither the principles of Article 43 nor the Eleventh Directive. In sum, the ECJ found that the WFBV had overstepped its bounds.32 For example, the ECJ determined that the WFBV had established excessively restrictive regulations concerning minimum capital and that it had allowed additional sanctions to be attached in cases of failure to comply with such regulations (i.e., the joint and several liability of the company’s directors with the company).33 The ECJ reiterated the well-established principles from Centros and expanded upon them somewhat:

The Court has held [in Centros] that it is immaterial, having regard to the application of the rules on freedom of establishment, that the company was formed in one Member State only for the purpose of establishing itself in a

31

Inspire Art, supra note 2, at para. 39. 32

Id., at para. 71-72 (stating that “the various disclosure measures provided for by the WFBV and referred to [above] are contrary to the Eleventh Directive”).

33

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second Member State, where its main, or indeed entire, business is to be conducted. … The reasons for which a company chooses to be formed in a particular Member State are, save in the case of fraud, irrelevant with regard to application of the rules on freedom of establishment … The Court has also held that the fact that the company was formed in a particular Member State for the sole purpose of enjoying the benefit of more favourable legislation does not constitute abuse even if that company conducts its activities entirely or mainly in that second State.34

Accordingly, the ECJ deemed as irrelevant the question as to whether or not a company is established in a Member State for the sole purpose of setting up business in a second member state.

Thus, a company that is established in one state is a company of that state, and it enjoys the right to exercise freedom of secondary establishment wherever it may choose to relocate within the EU. As a result, the establishment of the company arises from its state of establishment and with that comes its subjective right to fundamental freedoms with regard to the host state in accordance with Article 48 EC, but only if it is established pursuant to the law of a member state and if it maintains its statutory seat, its head office or its main branch within the Community.

Because Inspire Art Ltd. was established under English law andbecause it also has its statutory headquarters in England, in compliance with local law, the company is therefore entitled to fundamental freedoms as an English limited liability company. For that reason, Inspire Art also has the right to carry out its activities in another member state through a branch in the Netherlands.35 As a result, the WFBV, which obligates the branch of a limited liability company established under English law to observe provisions of the Dutch company law, was deemed to have placed an illegal restriction upon the English company’s freedom of secondary establishment. The ECJ provided a firm reminder that tests of legal justification for the restrictions in the WFBV (or presumably for any other similar law) must square with the terms stipulated in both Centros36 and Überseering.37

As can be seen from the Inspire Art decision, the scope of “special regimes” such as the WFBV has become increasingly narrow. In other words, European law has tied the hands of the national legislatures and forced them to comply with the letter and spirit of the freedom-of-establishment clause. For example, with regard to the grounds for sanctions relating to the protection of creditors (purportedly better with a higher capital requirement), the ECJ raises the market transparency argument with reference to Centros. Specifically, because pseudo-foreign companies in fact appear foreign (their origin is made clear from their designation), potential creditors receive sufficient notification of their status. Thus, creditors are effectively on notice: if they choose to loan money or to do business with a company of a capitalization different than that to which they are accustomed, they take on that risk knowingly. The market transparency argument also applies to the protection of minority shareholders and employees, who should know, or who at least can easily find out, when they are dealing with foreign companies to which domestic protection standards may not apply.

And what about the so-called “outbound” cases? Here, the story is as yet unresolved. The relevant case on French exit taxation for natural persons, C-9/02 – de Lasteyrie Du

34 Id., at paras. 95-96. 35 Id., at paras. 97-98, 101. 36 Id. 37

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Saillant,38 will soon provide definitive clarification and decide the fate of similar taxes elsewhere (e.g., the German exit tax, §§ 11 and 12 Körperschaftsteuergesetz [German Corporate Tax Act]). In the end, it is likely that the “outbound” cases will come to the same result as the “inbound” ones. After all, one of the purposes of the freedom of establishment clause is to encourage movement of companies within the European Union, and as such, it is not necessarily relevant whether it is the original country that restricts movement (“outbound”) or the receiving one (“inbound”).

Indeed, it appears doubtful that “special regimes” of any kind will be permissible to pseudo-foreign companies. Given that the Community-wide competition among national legal systems is already well underway39 and that the judgment described herein has established a very firm legal basis that will correspondingly intensify that competition even more, the only sensible approach is to decide this competition through deregulation and to offer attractive liability corporate “products” in the form of limited liability companies that are good for their particular location.40

VI. CONCLUSIONS A. Tax Consequences

A full review of the various tax consequences of the end of Sitztheorie is beyond the scope of this Note, as the discussion is inevitably country-specific and very complicated. It is important to mention, however, that the following areas, among others, are likely to be affected by the Inspire Art decision and thus will need to be revisited in the near future:

• Capital gains tax exemptions

• Tax consequences of holding companies vs. consolidated companies • Dividends and applicable exemptions

• Tax consequences arising from establishment or abandonment of residency • Treatment of dual-resident corporations

• Impact on taxes related to mergers and acquisitions • Reorganizational matters

38

See the final proposal of Advocate General Mischo that was accepted with a restriction in the March 13, 2003 Hughes de Lasteyrie du Saillant v. Ministère de l’Economie, des Finances et de l’Industrie, Case C-9/02. See also Dirk Richter, Die französische Wegzugsbesteuerung auf dem EuGH-Prüfstand, 2003 Internationales Steuerrcht 157 (2003) and Otmar Thömmes, Verlegung des steuerlichen Wohnsitzes, 7 Internationale Wirtschafts-Briefe 657 (2003). See also X and Y v. Riksskatteverket, Case 436/00, 2002 E.C.R. I-10829 and Weiland Meilicke, Die Niederlassungsfreiheit nach Überseering: Rückblick und Ausblick nach Handelsrecht und Steuerrecht, 14 GmbH Rundschau (GmbHR) 793 (2003).

39

The number of English limited liability companies established in the two weeks following Überseering increased from ca. 5,500 new establishments to ca. 7,000. See Jens Kleinert and Peter Probst, Endgültiges Aus für Sonderanknüpfungen bei (Schein-) Auslandgesellschaften, 41 Der Betrieb 2218 (2003).

40

See also Jens Kleinert and Hans-Harald von Xylander, Das Geschäftsjahr als notwendiger Gesellschaftsbestandteil? Ein exemplarischer Gestaltungsvorschlag, 9 GmbH Rundschau (GmbHR) 506 (2003).

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B. Differences in Place of Headquarters and Place of Administration

With respect to dual-resident corporations, certain constellations may arise where the headquarters is located in one country, while the administration remains at the location of the registered office, or vice versa. The headquarters is deemed to be the place from which the person or persons charged with overall management responsibility exercise their functions, whereas the administration is commonly defined as the place at which fundamental management decisions are effectively translated into externally recognizable actions, generally the place at which the management body and its members are located. Such corporate infrastructures are, in effect, attempts to split the baby in two. Said another way, such infrastructures allow a company to achieve tax objectives with one corporate structure in country A and legal and/or liability objectives in country B. These complex corporate arrangements are likely to continue in the future, just as they have in the past. In fact, now that Sitztheorie is dead and buried, such tax strategies will take on greater importance because strategic tax and choice-of-law planning of this nature will no longer be hindered by local restrictions.

C. The Struggle Between Corporate Law and Labor Law

As we have seen, one of the fundamental justifications for Sitztheorie is the protection of company workers. Here, questions of labor and employment law arise, for it is assumed that a domestic company will provide more protections than a pseudo-foreign one. This ostensible lack of understanding (or, conversely, a knowledge of the relative inadequacy) of foreign protections will undoubtedly continue, for the contours between corporate law and labor law have not yet been totally clarified. Before Überseering, Sitztheorie states were able to conveniently build labor law regulations into corporate law. This was the case of the employee representation in management. If other corporate structures based on simpler systems are allowed, conflicts between Member State labor laws and freedom of establishment clause may occur.

D. A Delaware of Europe?

As mentioned earlier, it is not uncommon to analogize the development of the ECJ case law in this area to the present-day operation of company law in the United States. Here, the states Delaware (primarily) and Nevada (secondarily) are each home to an overwhelming number of U.S. corporations, mainly as the result of free market competition among the U.S. states to offer companies the best corporate “package.” Initially, some states offered companies low tax rates. Other states offered low start-up fees, and still others offered favorable shareholder rights. Ultimately, Delaware became the U.S. market leader because it offered the best combination of benefits for all interested parties: in Delaware, the tax situation is reasonable, the start-up process and fee structure are logical, and, perhaps most importantly, legal certainty is guaranteed because shareholders know what to expect from the Delaware courts. This latter aspect is perhaps the most important. Put simply, the statutes and the court system in Delaware are ideal for settling disputes. The judges are trained in corporate law matters, and ample attorneys are available to deal with nearly every type of corporate legal issue.

As a result, after Inspire Art (when read with its ancestor cases), a Delaware-like opportunity to specialize has arisen, and forum shopping is a natural consequence. It is however, at this stage, impossible to predict which EU country is likely to win the race to become the “Delaware of Europe,” assuming, of course, that this seemingly inevitable race will, in fact, take place. Assuredly, though, many years will pass before the forum shopping

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process takes off, especially since the public policy aspects (e.g., labor and employment law) that have been previously discussed are much more important to the more socially democratic Europeans than they are to Americans, and arriving at a common ground in this area will not be easy. Nonetheless, decisions made by “special regimes” such as the WFBV will still carry weight under very narrow circumstances. The implications of the Inspire Art decision are relevant, not because the decision itself is new, its principles have been articulated previously in the Daily Mail, Centros, and Überseering cases, but because of the consistency with which the ECJ has used the decision as a basis for striking down member country legislation that restricts freedom of establishment. Furthermore, this landmark corporate decision promises to remain a source of debate long into the future, for it seems all but certain that the ECJ will continue to staunchly protect its provisions, thus affording European companies the rights and protections of incorporation regardless of where in the Community they choose to do business.

References

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