Introduction
One of the major principles that have underlain the drive towards the formation of the European Community (EC) is the need for the creation of a framework that would allow the integration of member state economies. For the idea of a free market to be realized within the members of the EU, there is a need for the free movement of corporations among members that are part of the union. However, since corporations are normally considered as creations of a set of laws that define their activities and capacities, several issues on the free movement of corporations within the EU have emerged. As a legal entity that has been defined by the corporate law of a state where it has been formed, a corporation would be required to redefine itself in the terms of the corporate law of the new state where it intends it shift base. In spite of this, and with the right of establishment in mind, the European Court of Justice has made rulings that have allowed companies to shift operations from the one state to another. Considering that in many ways, the ECJ is a powerful tool that defines corporate law in the EU, an array of repercussions followed the ECJ judgments on Inspire Arts, Centros, Uberseering and Cartesio.
Background of the EU Corporate Law: Freedom of Establishment
A consultation program that was geared towards finding coherent legislation that would allow the movement of corporations from one member state to another in the EU was held in 1997, and then again in 2002. A strong idea that was developed during the 2002 consultation program was a necessity of allowing companies that were operating within the provisions of the European Community treaty to move their operations from one member country to another; without the burden of closing operations at home. Currently, EU departments have been endeavoring to develop a dual set of laws that can enable the transfer of corporations from one member state of the EU to another. The first among the set of laws that have been recommended have focused on the creation of a framework that would give companies the freedom of selecting a legal system separate from their home state legal systems; which would best meet their needs. The intention of the second set of laws on the other hand is to allow a company that is moving operations from one member state to another an opportunity of adjusting its organizational structure without impacting the laws that define it. With no explicit law within the EU that can allow a registered office to move from one state to another, such a movement can occur through an ECJ settlement. In making its judgments, the ECJ has shown to lean on the freedom of establishment (as it happened in the Arts’ case).
As it is understood by the EU, the freedom of establishment (which is defined in Article 43 of the EU treaty) gives some rights to members of EU states. All citizens within the EU can benefit from the provision (in article 43 of the EU treaty) that they can move permanently from their home state to another state within the EU for the purpose of self-employment. Moreover, persons within the EU have also been provided with a right of opening up centers within EU member states for the purposes of exploiting entrepreneurship opportunities within the EU without moving away from their countries.
The rights presented by the freedom of establishment that has been described above have been accorded to corporate organizations in article 48 of the EU treaty. Provided that a company has been formed within a set of laws in the EU, then, such a corporation is recognized in the same way as an ordinary person that resides in the EU. Therefore, corporations that have been established in conformity with the laws present in EU member states are considered as, and treated as ordinary persons that are self-employed. A problem that is presented by such an arrangement is that, unlike human beings, companies cannot really be equated to ordinary persons since they are entities that have been created by established laws that are present in the state where they have been formed.
Cases on the Right of Establishment that have been Presented to the ECJ
Compared to other states in the European Union, Britain has a set of corporate laws that are more liberal and therefore, more attractive to investors. In Britain, the requirements on minimal shares, as well as requirements on the incorporation of employees in company ownership are non-existent. Besides, when it is compared to other states in the EU, the process of forming a company in Britain is much faster.] In view of the above advantages, Inspire Art went ahead and registered itself in Britain as a private limited company. As soon as the company had registered, it went ahead and started operating in Netherlands, where its sole owner was based. Just like Inspire Arts, Centros Company had also moved to register its corporate entity in Britain with the sole intention of escaping the requirements for capital in Denmark. In most cases, many European countries including Netherlands apply the real seat theory in corporate law. According to the real seat theory, the headquarters of a given corporation is assumed to be based where the corporation is operating from; therefore, where a company transacts its business and coordinates its functions from. In contrast to the real seat theory, the incorporation theory determines the headquarters of a corporation on the merit of the place where a corporation has been incorporated. Since corporate laws in Netherlands recognized Arts Company as an entity that needed to conform to its provisions (in order to operate in the Netherlands), a number of issues and conflicts emerged. Although Arts limited had registered a branch outlet in Netherlands, the company (Arts) had not followed the provisions of Dutch laws on pseudo-foreign companies (WFBV); which, among other conditions, required Arts Limited to state clearly that it was a pseudo-foreign company. As a pseudo-foreign company, Inspire Arts would have been obliged to meet certain demands including the requirement for minimum capital. The Amsterdam Chamber of Commerce was therefore compelled to file an order in the competent court of Justice seeking to oblige the Company of Inspire Arts to state that it was a pseudo-foreign company. On 5th February, 2001, the District Court of Amsterdam made a ruling that Inspire Arts was a pseudo-foreign company in accordance with the provisions of Article 1 of the WFDV. The case of inspiring arts, just like that of Centros, was directed to the European Court of Justice for a final decision on the matter.
In making its judgments, the ECJ leaned more towards the freedom establishment; hence, making a ruling that was in favor of Inspire Arts Company, Centros Company, and Uberseeing among others. For example, in the matter concerning the requirement by Article 1 of WFBV that any branches of Inspire Arts in the Netherlands needed to indicate that they were pseudo-foreign companies before registration, the ECJ made a judgment that such a requirement trudged against the 11th Directive of the EU treaty. Since companies are not required to disclose more than what they are required to state under the 11th directive, and since the 11th directive has given freedom to members of the EU to incorporate extra disclosure requirements apart from those in the 11th directive in their corporate laws, there is an infinite possibility of extra requirements separate form those in the 11th directive. And since the requirements for disclosure that was contained in the corporate law of Netherlands was not available in the 11th directive in any form, the WFBV requirements for disclosure were null.
The ECJ also made a ruling concerning the other matter that had been taken to the ECJ by the Amsterdam district court on whether Articles 43 and 48 of the EU treaty conflicted with the corporate law of Netherlands. Here, the ECJ made a judgment that except in circumstances where a company has shown open intent to engage in activities like fraud, It is not logical to make a conclusion that a company has been set up in one country with a sole intention of carrying out activities in another country (when the freedom of establishment is considered). The ECJ also argued that a company had the freedom of selecting a friendly legal environment from where it can seek registration and that such an action did not in any way trudge on existing community laws of the EC. It was, therefore, another matter altogether on whether states in the EU had a capacity of prohibiting a company from implicitly abusing the provisions of the EU community law. Besides, the requirement by the Netherlands corporate law that pseudo-foreign companies should be compelled to raise a threshold capital equivalent to an amount that has been recommended by WFDV for the purposes of eliminating the personal liability of managers was, in the view of the ECJ, incompatible with the freedom of establishment anyway. When Article 46 of the European community or any other law that has been gauged in the EC to guard the rights of lenders is considered, it is not possible to deduce the necessity for minimal capital. Since inspire Arts had presented itself as a foreign corporation, its lenders must have been well aware that the company was a legal entity under the provisions of the British corporate law; therefore, its creditors must have known that Inspire Arts was not a legal entity that had been designed by the Corporate law of Netherlands. Moreover, the European Court of justice made a judgment that since the necessity for minimum capital by WFDV is in opposition with the right of establishment principle; thus, the necessity for minimum capital is also in opposition with the community laws of the European Union. Consequently, it was pointless for the court to ever reconsider its judgment on Inspire Arts’ case.
Meaning and Effects of the Rulings
By evaluating the judgment of the ECJ on Inspire Arts, Uberseering and Centeros, one can see that in situations whereby a company moves to a different country; where it has not been incorporated (when the state is within the EU), the real seat theory is in opposition to the community law of the European Union. When the Interpretation of the EU community law by the ECJ is considered, the real seat theory cannot therefore hold in all member states of the European Union for cases where a corporation is seeking to operate in a country where it has not been incorporated. However, in situations where a corporation may be seeking to transfer its headquarters from a state where it has been registered, the real seat theory holds, so, Inspire Arts has not made any difference here. As it was decided by the ECJ’s jury during the Cartesio case, the corporate system of a state where a corporation has been registered supersedes the corporate law of the EU for matters that touch on the concerned company. Despite the right of establishment, it was considered illegal for Cartesio to shift its headquarters from Hungary since the corporate laws of Hungary prevented such a move. In such a situation, the corporate law of the state where a company has been registered is the legal entity of that company; therefore, the state from where a company has been registered can prohibit a company from transferring its headquarters of operation to a different state. Essentially, this means that a state where a company has been incorporated has a capacity to limit a company from moving operations and headquarters to another state. In situations where a state has permitted a company to move its headquarters and operations to a different member state of the EU, then, that host state where that company has moved is compelled to acknowledge that company as a legal entity of the corporate law where it was registered. A condition that therefore needs to be met for a company to be able to move its operations from one country to another is the availability of a legal system that is liberal enough to allow the movement. The only other benefit that can be accrued from the EU community law by a company that is seeking to move operations from one country to another is the statute of the European company. According to this statute of the European company, it is possible for a corporation to move its office headquarters to a different country while retaining the legal entity of the state where it has been registered.
Another Impact that has arisen from the ruling of the ECJ on the case of Inspire Arts relates to the application of the laws of the country from where a pseudo-foreign company is operating to a pseudo-foreign company. How can corporate laws of a state be applied to a pseudo-foreign company when a pseudo foreign company is not a party to her corporate laws? Thus, a pseudo-foreign company may not even be able to qualify for legal proceedings in a sate where it operates from. When the ECJ made a judgment on the Uberseering case, it stated that in exceptional circumstances where the interests of the public (such as the protection of lenders and shareholders) were threatened, it is possible to make limitations to the principle of the right of establishment. Such a direction led some legal professionals to deduce that it is possible to compel pseudo-foreign companies to comply with the corporate laws of the state from where they operate from. However, for the Inspire Arts Case, the ECJ made a statement that an effort to protect the rights of lenders was not significant enough to allow for the limitation of the freedom of establishment. What is required in such a case is for a pseudo-foreign company to tell its lenders that it is a legal entity of foreign corporate laws. Also, the gap between minimal requirements in a number of EU states is very wide. For example, although the minimal capital requirement is around 35000 Euros in Austria, the minimal capital amounts to just about 25000 Euros in Germany.
Lenders of pseudo foreign companies have been assumed to be aware of the fact that pseudo-foreign companies are bound by the corporate laws of foreign states, which are different from the corporate laws of the states where their operations are based. A challenge that is therefore presented to creditors by such an arrangement is that; neither the managers of a pseudo-foreign company nor the pseudo-foreign company itself guarantee their money; in form of capital or the liability of its managers to admit to liability in the case of a default. It may also be difficult for non-contractual lenders to know that a company is a pseudo-foreign type when the same has not been indicted by the company. One way of looking at the main reason that led the ECJ jurisdiction to have the perspective that has been described here is that; it is illogical to treat pseudo-foreign companies on a stricter threshold; yet, genuine foreign companies present the same challenges that are presented by pseudo-foreign companies. Moreover, it would be illogical to allow rules that contrast the freedom of establishment to operate in the EU. All members of the European Community have agreed to and; therefore, subjected themselves to the principle of the right of establishment.
Apart from the protection of lenders, other issues that have emerged from the judgment on Inspire Arts by the ECJ include the protection of small shareholders, the protection and rights of workers, and the protection of tax regimes. In considering the issue of rights for the parties that have been named above, the ECJ made an argument that the government of Netherlands had not shown clearly that it had taken measures that would help in the protection of the rights of the parties and; therefore, enhance the interests of the parties. In view of the ECJ, the measures that had been taken by the government of Netherlands were not enough to guard the interests of lenders, workers, and other concerned parties that are associated with pseudo-foreign companies. And therefore, it was doubtful that the measures taken by the government of the Netherlands in the guise of protecting the interest of some parties were none overboard. As a result, such measures could not be preferred to the principle of the right of establishment. Generally, In view of the ECJ, the measures that had been ingrained in the corporate law of Netherlands to guard the interests of lenders and other parties that are associated with pseudo-foreign companies were both unsatisfactory and disproportionate (were going overboard in an effort of achieving a task-protection of lenders and other parties).
Since the ECJ has qualified the protection of lenders as an important aspect that is of public interest, the important issue here remains disproportional concerns. Measures that focus primarily on the formation of companies such as measures on minimal capital instead of focusing on the organization and operation of companies will continue to be considered by the ECJ as disproportionate. Hence, unless there is strong evidence that the rights of lenders and other interested parties will be (have been) abused by a corporation, trying to control corporations that have been incorporated in a foreign state will always be overruled by the ECJ. Therefore, attacking the corporate entities that have been designed by corporate systems of other states cannot succeed. The corporate law that has been preferred by a corporation cannot be therefore abased by any other corporate law. For example, if the corporate law of Britain has seen that it is not necessary to have minimal capital, the corporate law of another state (such as Germany) cannot judge a corporate legal entity that has been created in Britain to have broken provisions, by not adjusting to its requirement for minimal capital.
One may then wonder if it is possible for a pseudo-foreign corporation to ever commit abuse. It would be remembered that a corporation can only be judged from the perspective of the set of corporate laws that formed it. Since it is possible for a corporation to liberally select the set of corporate laws that suit it best, it can move operations to another state: where corporate laws that are in opposition with its legal entity operate. Therefore, for abuse to occur, the identified abuse must not be related in any way to the legal entity of a corporation. An example of such abuse is fraud. In such a situation, the state that is hosting a corporation that has engaged in abuse is liberal to use its set of criminal laws to deal with the crime. Here, it is not possible for those individuals that have been implicated in the crime to argue their case on the grounds of EU provisions such as the right of establishment. Such a direction would definitely be interpreted as an abuse of the EU provisions.
Following the Inspire Arts, Centros, Uberseering and Cartesio rulings by the ECJ, Corporate laws in the EU are set to undergo a lot of restructuring. The restructuring of corporate laws in the EU is expected to head in a direction that will result in competition for corporations among EU states. In view of corporate laws in rival states, all the states in the EU will be designing legal systems that will be more attractive to corporations. Moreover, all the members of the European Union will have to look at their corporate laws and focus on the extent to which their legal systems can apply to pseudo-foreign companies. In making a judgment on the Uberseeing case, the ECJ made an observation that the legal entity of a corporation deserves respect from all the member states of the EU. Following the Inspire Arts case, the ECJ went further by making a judgment that the corporate law of the state where a corporation has been incorporated must also respect a corporation that has been defined by its legal system as a legal entity that has a capacity to participate in legal proceedings. Considering that a range of concerns have been presented by pseudo-foreign companies, and that pseudo-foreign companies may keep increasing in the European market, the potential of trudging on the rights of lenders among other parties will become more real. It is therefore necessary to design laws and measures that will keep at bay the dangerous potentials of pseudo-foreign companies. In order to make an impact, such measures must be designed to operate within the EU. Moreover, there is a necessity to unite corporate laws of EU member states with the corporate law of the EU to minimize chances of conflict between the two.
As it has been observed, the ECJ has shown an element of consistency in making its judgments. With no clear laws in place for the control of pseudo-foreign companies, consistency in the interpretation of the community law by the ECJ is essential. Such a direction has made it possible for corporations to make moves that are within the laws of the European Community. In most cases, the ECJ has emphasized the application of the right of establishment in corporate matters: as corporate companies that have been established as legal entities in Europe access their rights from the right of establishment. Therefore, the ECJ has especially focused on the need for respecting the right of establishment (as in the Inspire, Uberseering, and Centros cases). However, as it was noted in the Cartesio and Uberseering cases, the corporate laws of a state where a company has registered can restrict the movement of a corporation (which is a legal entity of its corporate laws.
Conclusion
The dream of creating integrated economies and a free market in the EU led to the development of the freedom of establishment. Such a direction has implicitly given corporations in the EU a capacity to roam among EU member states. However, as legal entities that have been defined and formed by corporate laws of different states from where they operate, pseudo-foreign companies have presented conflicts; thus, necessitating the need for the ECJ to clarify some issues. As it has been seen, the ECJ has leaned towards the rights of pseudo-foreign companies as entities that deserve respect from the legal systems of the states where they have been birthed, and, all over the EU as well. As a result, a host of concerns on the possibility of pseudo-foreign companies playing around with the European Union corporate law to trudge on the rights of concerned parties such as lenders have emerged. Considering that the ECJ is an important catalyst in determining the system of corporate law in the EU, a number of Impacts have been expected from the judgment of the ECJ on cases that have been touching on the right of establishment. Among these impacts is the creation of a competitive environment in the corporate world of the EU. States will be striving to design corporate laws that are favorable to corporations. However, because a number of concerns on pseudo-foreign companies remain, there is a need to precisely design safety measures operative within the EU that will protect the interests of lenders, tax officers, employees among other interested parties in order to guard against the precarious possibility of abuse from pseudo-foreign companies.
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