Real Seat Jurisdictions and Corporate Mobility in the Internal Market: EU Law Concerns

1. The lex societatis and corporate mobility in the internal market: what room for the concerns from real seat jurisdictions under EU law? Prof. Dr. Johan Meeusen, LL.M. University of Antwerp

2. Overview 1. A view from a real seat jurisdiction: the devil’s advocate? 2. Belgium: a real seat jurisdiction, more or less… 3. Policy concerns associated with the real seat and incorporation theories 4. Legality of the real seat theory 5. Legitimacy of the real seat theory 6. How to address the real seat concerns in EU law? 7. Article 81 TFEU 8. Article 50 TFEU

3. A view from a real seat jurisdiction: the devil’s advocate? The incorporation theory in the internal market: quite attractive, ideally combined with far-reaching substantive harmonization… GEDIP draft rules on the law applicable to companies and other bodies (2016) Real seat vs incorporation theory, but in ‘real life’: 28 Member States - 28 choice-of-law systems Increasing favor for the incorporation theory in the Member States, but also worries about an excessively liberal approach. Quid post-Brexit? What room for the concerns from real seat jurisdictions: the devil’s advocate… or an appropriate caveat?

4. Belgium: a real seat jurisdiction, more or less… Belgium: a real seat-country? Yes, but… Tradition: lex societatis= real seat, but flexibility towardsseat transfers (‘Lamot’ and ‘Vanneste’ judgments) Confirmation in the Private International Law Code (2004) Mixed feelings, but priority tocombatting ’shopping’/’fraud’ Modern formulation of thelex societatis Opennessto corporate mobility (seat transfer) Whatabout EU law? Art.2 PIL: General referencetothesupremacy of EU law

5. Belgium: a real seat jurisdiction, more or less… Art.110 PIL: Multilateral choice-of-law rule determining the lex societatis (“main establishment”) -> Art.4§3 PIL: “Main establishment” = determined by taking into account primarily the place of administration, as well as the center of its business and activities, and in subsidiary order the statutory seat. Art.112 PIL: The transfer of the main establishment (…) from one State to another can only take place without interruption of its legal personality, if done with due regard for the conditions under which the law of these States permits it. If a body with separate legal personality transfers its main establishment to the territory of another State, the law of that other State will apply as of the transfer.

6. Belgium: a real seat jurisdiction, more or less… In process, at theinitiative of the Minister of Justice: reform of Belgian company law (substantivelawand conflict of laws): -> modernization, simplification, more flexibility -> competitionfor corporate charters: exportingBelgian company law, enhancingBelgianlegal services market, level playing field in Belgium (“no discrimination of ‘Belgian’ companies in Belgium”) -> introduction of theincorporationtheory -> lex societatis= statutoryseat -> legislative procedure for cross-border seat transfer -> 2018??

7. Policy concerns associated with the real seat and incorporation theories Key issues: How to approach a company – a contractual or a contextual actor perspective? (e.g. GEDIP) How strong a link between a company andone State caneffectivelybeenforced in today’sglobaleconomy? Whatbalancebetween party autonomyand market regulation? Towhatextent are corporate lawsconsideredinterchangeable?

8. Policy concerns associated with the real seat and incorporation theories Closest connection, regulatory competition… Protection, uniform treatment, supervision and control vs freedom and party autonomy, public vs private interests Real seat policy concerns are not outdated, but to be conciliated with the general evolution of private international law and internal market requirements: autonomy and cross-border mobility Disadvantages of the real seat theory hurt in particular the companies that have a close link with that MS: weaker flexibility, legal uncertainty…. To be balanced with ‘quality label’? Legality and legitimacy of the real seat theory?

9. Legality of the real seat theory under EU law? Yes : no condemnation by the ECJ, quite the contrary (cf. “creatures of national law”) No legal basis in the EU Treaties for incompatibility But caveat for the effect of the real seat theory’s application on corporate mobility in the internal market -> From a multilateral to a unilateral rule (mutual recognition model) -> real seat theory under pressure Commercial pressure: regulatory competition (cf. Centros) Academic pressure: Deutscher Rat für Internationales Privatrecht, GEDIP, European Commission Study on the Law Applicable to Companies, … Legislative modernization or renewed interpretations of existing legislation in the MS

10. Legitimacy of the real seat theory? Yes: political discretion of the MS, pros and cons but valuable interests that must be weighed Don’t ignore the facts: Today (more than 30 years after Segers!): some MS still prefer the real seat theory All MS desire incorporation of companies (and related services…) as well as some control over companies effectively connected to their jurisdiction (see also USA) Prominent position of the real seat, or similar references, in EU legislation (e.g. SE, SCE, …) References to real seat as a default rule or with respect to overriding mandatory provisions (e.g. Art.4 and 10 GEDIP) ECJ cases relate to incorporation MS (Daily Mail, Centros, Inspire Art…)

11. How to address the real seat concerns in the EU? EU debate must not focus on the real seat theory’s pros and cons, but on its impact on the achievement of the EU’s objectives Key issue: can the MS that wish to maintain the real seat theory do so without endangering the objectives of EU law? Room for diversity or uniformity required? Starting points: EU law, not conflict of laws Interests and objectives of EU law, based upon the Treaties EU institutional law Area of freedom, security and justice; internal market Right of establishment, but Treaty exceptions and rule of reason

12. How to address the real seat concerns in the EU? Issues and paradoxes in the debate: be careful! Unconvincing interpretation by the ECJ of the delimitation factors of art.54 TFEU as choice-of-law connecting factors Unclear definitions of real seat and incorporation theories Restrictive incorporation MS and pro-mobility real seat MS Close link between conflict of laws and substantive company law: quid with the ‘reserved area’? Interaction between lex societatis and scope definition: internal/external affairs, torts and contractual obligations, labour relations, insolvency, tax… Two legal bases for harmonization: Art.81 and 50 TFEU (objectives, scope, instruments…)

13. Article 81 TFEU AFSJ (Art.67,4°TFEU), Judicial cooperation in civil matters having cross-border implications and its link with the internal market Art.81,2°(c) TFEU: “ensuring the compatibility of the rules applicable in the MS concerning conflict of laws” Art.5 TEU: principles of conferral, subsidiarity and proportionality (comp. earlier Rome Regulations -> very disappointing from an EU legal perspective!) Alternative models for full harmonization: -> Interstate conflict of laws in the USA -> ECJ’s “harmonization model”: coordination of diversity, starting from a substantive EU perspective (Grunkin-Paul and the company law cases)

14. Article 81 TFEU Preliminary question: should the determination of the lex societatis really be unified? Arguments for a new Rome Regulation? Divergence of choice-of-law rules leads to legal uncertainty and risk of conflicting legislation. True, but think first (cf. subsidiarity and proportionality): Objectives and requirements of Art.81 TFEU Adequate level of substantive harmonization? Traditional choice-of-law problem solvers (renvoi; default rules; …)? Key problem = ensuring corporate mobility in the internal market = right of establishment Overall response: yes! (Regulation)

15. Article 81 TFEU No Treaty restriction on the determination of a uniform connecting factor -> Wide variety of alternatives and nuances for the incorporation theory to be considered: Generalization of the real seat theory? Combined statutory/real seat connecting factors? Distributive statutory seat/real seat connecting factors? Presumptive real seat/statutory seat factor (cf. Belgium)? Restricted party autonomy? Incorporation theory, but only intra-EU instead of universal application? Incorporation theory with a precisely defined abuse exception? Incorporation theory, with real seat factor for overriding mandatory provisions (cf. Art.10 GEDIP)? .....

16. Article 81 TFEU It is not black or white: many nuances and differentiations are feasible Minimal standard: to ensure the consistency, predictability and efficiency of the applicable law in a way that is compatible with EU (institutional and internal market) law? A possible compromise between real seat and incorporation MS: to replace the ‘real seat theory’ by the ‘real seat criterion’ as an indispensable, but carefully (cf. rule of reason) formulated element of a unified and universally applicable EU incorporation theory Challenge: great variety in the MS as to the laws, interests and territorial connections used -> how to make harmonization sufficiently precise? General clause for overriding mandatory provisions and specific rules that heed real seat concerns (Art10 GEDIP)?

17. Article 50 TFEU Art.50 TFEU, in particular Art.50,2°(g): harmonization through directives to attain freedom of establishment Not necessarily tied to the harmonization of the connecting factor, though one package is commendable (caveat: opt outs for Art.81/scope of application of Art.50/cross-border mergers directive) Cross-border corporate mobility as establishment in the internal market Detailed rules on seat transfer, including reincorporation, covering e.g. procedural issues and its effects for shareholders and investors, employees and creditors (see e.g. Art.8,3°GEDIP) Codification and systematization of the ECJ’s case law; in case of uniform connecting factor -> focus on substantive and procedural rules and room for restrictions

18. Article 50 TFEU Key issue for the real seat jurisdictions: a right granted by EU law to reincorporation through the sole transfer of a company’s statutory seat/registered office? Polbud (case C-106/16): opinion of AG Kokott: “A cross-border conversion is not caught by the freedom of establishment where it is an end in itself, but only where it is accompanied by actual establishment” Conditional Treaty protection, i.e. if such transfer can be considered to benefit the pursuit of genuine economic activity through a fixed establishment in the host MS (e.g. joint and reunification transfers of registered office and real seat) Policy of “safe regulatory competition” within the internal market matches with concerns underlying real seat theory