134	5	Cross-Border Corporate Activities
5.2.2	General Background . . . . . . . .	. . . . . . . . . . . . .	. . . . . .	. . . .	151
5.2.3	Formation of the European Company . . . . . . . . .		. . . . .	. . . .	152
5.2.4	Corporate Governance in the SE . . . . . . . . . . . . .		. . . . .	. . . .	152
5.2.5  Employee Participation in the SE . . . . . . . . . . . .			. . . . .	. . . .	153
5.2.6	Possible Use of the SE . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . .	. . . .	154
5.3  The European Private Company (SPE)					156
5.3.1	The Commission Proposal on the Statute for a SPE				156
5.3.2	Controversial Issues . . . . . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . .	. . . .	157
5.4  The EU Cross-Border Mergers Directive and Its Implementation in Germany					157
5.4.1	Case Study . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . .	. . . .	157
5.4.2	General Background . . . . . . . . .	. . . . . . . . . . . . .	. . . . .	. . . .	158
5.4.3	Implementation in Germany . . .	. . . . . . . . . . . . .	. . . . .	. . . .	158
5.4.4	Essential Steps in a Cross-Border Merger Proceeding				159
5.4.5	The SEVIC Decision of the ECJ . . . . . . . . . . . . .		. . . . .	. . . .	161
5.5  International Joint Ventures—ACheck List for Relevant Issues					161
5.5.1	Commercial Background for Establishing a Joint Venture				161
5.5.2	Outline of Key Issues for Establishing a Joint Venture				163
References					164

5.1  Cross-Border Transfer of Corporate Seat and Applicable Law

5.1.1  Case Study

Case Study

In order to further the expansion of A’s business activities in the German market, B recognizes the need to establish a number of subsidiaries in Germany. Having visited a conference on new business opportunities in Europe, B has heard about a new ‘competition of company forms in Europe’, in which the legal form of the private limited company as provided by Companies Act of England and Wales (hereinafter: Ltd.) plays an important role. Without learning all the details, B has found out, however, that due to a series of decisions of the European Court of Justice, any EU company is now generally allowed to operate in other member states. Being more familiar with the Ltd. than with the German GmbH, B asks C: Is it possible to either establish or buy a Ltd. and operate in the German market using the corporate form of a Ltd.? Which advantages/disadvantages does the Ltd. have compared to the GmbH regarding an operation in the German market?

5.1.2  Introduction

Cross-border activities of companies and entrepreneurs are far from being a new development. Since the Vereenigde Oostindische Compagnie1 sailed the seven seas, making available rare Indian spices to European merchants, companies have often

1  Dutch East-India Company.TheVOC was established in 1602 and is said to be the first company ever to issue tradeable stock certificates.

5.1  Cross-Border Transfer of Corporate Seat and Applicable Law	135

taken the opportunity of cross-border trading in order to maximize their profits. Today, businessmen, company representatives and workers are crossing borders on a daily basis; goods are more or less freely traded within the borders of the EU and beyond; and companies, as well as globally active corporate groups are setting up branches and subsidiaries in other countries.

Cross-border activities are a vital factor of economic integration at the European level, fuelling the establishment of new markets, thus creating innovation, job opportunities and a gain in overall welfare. Nonetheless, the issue of a company crossing borders causes a number of specific legal problems, resulting from the special ‘nature’of a company.

Naturally, a company does not, in itself, have a physical substance, but is a legal fiction, embodying the factors of production, the people, the capital and the sum of assets together forming ‘the company’ as a business unit. From an economic point of view, a company, therefore, represents a nexus of contracts between independent market actors working together to pursue a common goal set on an institutionalized basis.2 Companies in general and corporations in particular, are, therefore, ultimately creatures of the law, i.e. the national law under which they are formed.3

That being said, the problem of a company crossing borders becomes apparent. Because companies are legal constructs, it has to be determined what consequences arise from such a legal construct of State A moving into the jurisdiction of State B. What rules apply to a company doing so, and what consequences does this decision have for the structure and organization of the company?

Although it is one of the fundamental goals of the European Union to provide for a Common Market in which an unrestricted exchange of goods, services and capital shall be possible, this aim has not yet been achieved. EU legislation and other measures to harmonize the national legal systems have only been partially successful and are limited in scope. The subject matter of cross-border migration of companies is one example where EU rules are incomplete and depend on national legislation to fill in the gaps. The cross-border movement of companies is governed by the applicable national corporate laws as determined by the national conflict-of-laws rules.As there are still no unified conflict-of-law rules for cross-border transfers of a company’s seat, the outcome depends on the national rules.

5.1.3  German Conflict-of-Law Rules for Corporations

As already outlined above4, German conflict-of-laws questions are generally codified in the German Introductory Law of the Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuch, EGBGB). However, this act (up until now) contains no provisions for cross-border corporate law questions. Traditionally the German con- flict-of-laws of companies and legal entities is not codified but merely dealt with

2  On this concept see Cheffins 1997, p. 33.

3  ECJ Case C-81/87 Daily Mail and General Trust [1988] ECR 5483, para. 19. 4  See supra, Sect. 1.1.3.3, Relevance of Conflict of Laws.

136	5  Cross-Border Corporate Activities

on a case-law basis.5 Before the relevant ECJ decisions were made, the German courts and legal commentators almost unanimously followed the so-called ‘real seat doctrine’. This doctrine takes as a connecting factor (i.e. the factor relevant for the connection of a cross-border case and the national law to be applied) the factual seat of the administration of the company (siège rèel). The basic assumption of this doctrine is the following: the place where a company’s administrative center is located is, as a general rule, the place where a company also conducts business; and thus, typically, is the place where there will be the most interests affected by the company’s business, such as those of employees or creditors. Hence, the law of the state of the company’s real seat should be authoritative to protect those third-parties.

The real seat doctrine was codified the first time in Belgium in 18736 and has its philosophical roots in the theory of nationalism predominant at that time. Legal entities and commercial companies were—analogous to natural persons—to be governed solely by the rule of the sovereign ruling the country in which they were attending their business. This was in line with the evolving theory regarding the nature of legal entities: Since they were now seen as mere creatures of the national law which granted them their existence, they would naturally need to be recognized when moving into other legal systems. The main intention of the real seat doctrine—at least in its self-perception—was to prevent foreign laxer company law from undermining the well-reflected system of creditor and third party protection provided by the German substantive law, e.g. statutory minimum capital requirements and rules regarding capital maintenance.

In Germany, the real seat doctrine was applied in two different forms. Both forms have in common that they take as the relevant connecting factor the ‘real administrative seat’of the company, which is commonly defined as the “place where the essential decisions of the directors are transferred into specific acts of management”7. Therefore, both forms apply domestic national law to foreign companies relocating all or most of their business into the German jurisdiction. However, both forms of the real seat doctrine differ as to their outcome.

The first and stricter form of the real seat doctrine was introduced by the German Imperial Court (Reichsgericht) and continued by the German Federal Court of Justice (Bundesgerichtshof) up until 2002. Its main consequence was that a foreign company moving into the German jurisdiction was to be judged under domestic law and—not being effectively founded under this law—was considered completely lacking legal capacity.8 This outright denial of legal capacity means that the foreign company could not acquire rights or be a party to legal proceedings in Germany.

5 Although the first draft for the German Civil Code (Bürgerliches Gesetzbuch) contained the proposal “The legal persistency of a legal entity is governed by the law which is authoritative at the place of its seat”, it did not state whether this ‘seat’was meant to be the company’s real seat or rather its place of incorporation.

6  Loi du 18 mai 1873 sur les sociétés commerciales en Belgique.

7  This definition is known as so-called ‘Sandrock formula’; see Sandrock 1979, p. 683.

8  The situation in Austria has been the same; see Secs. 10 and 12 of the Austrian Act on Conflict- of-Laws.