5.1  Cross-Border Transfer of Corporate Seat and Applicable Law	137

Additionally, the shareholders’limitation on liability was disregarded and the shareholders could potentially be held personally liable.

Under the impression of the ECJ’s ruling in the Centros case and the pending case of Überseering, the Bundesgerichtshof in 2002 reconsidered this harsh consequence.9 The BGH modified the original real seat doctrine and decided that the foreign company would not be a limited liability company, but that since it would still be a cooperation of individuals to achieve a common goal under a common contractual framework, it could be considered as a general partnership (Gesellschaft bürgerlichen Rechts, GbR) or—depending on size, complexity and objective—a general commercial partnership (offene Handelsgesellschaft, oHG) under German law (this may be called the ‘second form’of the real seat doctrine as applied by the German courts).As a result, the foreign company lost its privilege of limited liability but kept its legal existence, its identity and its legal capacity. Thus, the foreign company remained able to sue or be sued in a German court and remained capable of conducting court proceedings in its own name. This modified interpretation of the real seat doctrine was meant to allay concerns regarding the fact that the stricter first alternative of the real seat doctrine, although initially meant to protect the company’s creditors, achieved the exact opposite in its effect: by neglecting the company’s legal capacity it had become impossible for the creditors to sue the company.

5.1.4  The Decisions of the European Court of Justice

Although—as mentioned above—so far no uniform, harmonized rules on the crossborder transfer of a company’s seat exist in Europe, the EU Treaties provide for a number of fundamental freedoms in order to further the development of a Common Market. As one of these freedoms, the TFEU stipulates in its Art. 49–55 the socalled ‘Freedom of Establishment’. This freedom includes the right of EU citizens to take up and pursue activities as self-employed persons and to set up and manage entrepreneurial undertakings, in particular companies and firms, in other Member States.

As regards the cross-border migration of companies, the ECJ has rendered a number of important decisions in recent decades, which have clarified the meaning and scope of application of Art. 49–55 TFEU in this context. These decisions have led to a controversy in German academia, in the course of which the prevailing opinion in Germany has radically shifted from supporting the ‘real seat doctrine’to a general approval of the so-called ‘theory of incorporation’ (Gründungstheorie), which is often considered its counterpart.

5.1.4.1  The Segers Decision (1986)

In June 1981 Mr. Segers, a Dutch citizen, took over the ‘Slenderose Limited Company’, a limited liability company formed in accordance with the Companies Act

9  BGH, Judgment of 1 July 2002, II ZR 380/00.

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of England and Wales10 in April 1981. He incorporated into this company as a subsidiary his one-man-business, the ‘Free Promotion International’, whose registered office was located in the Netherlands. Afterwards, all of Slenderose’s business has been conducted solely by its subsidiary in the Netherlands.

In July 1981, in order to obtain certain sickness insurance benefits, Mr. Segers registeredas being ill with the Bedrijfsvereniging voor Banken Verzekeringswesen, Groothandel en vrije Beroepen (Banking, Insurance, Wholesale Trade and Professions’Association), because the Ziektewet (Dutch law establishing a general sickness insurance) provides that any person who is working in a subordinate position in relation to another person is insured by law. TheAssociation, however, refused to grant Mr. Segers the desired benefits of health insurance arguing, inter alia, that he might not be considered as a subordinate to his own company, as the relevant rules only applied to companies whose registered office was in the Netherlands and not to a company incorporated under foreign law.

The ECJ decided that the Freedom of Establishment

must be seen as prohibiting the competent authorities of a member state from excluding a director of a company from national sickness insurance benefit scheme solely on the ground that the company in question was formed in accordance with the law of another member state, where it also has its registered office, even though it does not conduct any business there.11

Perhaps the most noteworthy fact of this judgment is that the ECJ stated the fact that Slenderose Ltd. conducted its business solely through its subsidiary and was, therefore, a so-called ‘U-Turn construction’12 which did not hinder the application of the Freedom of Establishment. Its application required only that the company

be formed in accordance with the law of a member state and have their registered office, central administration or principal place of business within the Community. Provided that those requirements are satisfied, the fact that the company conducts its business [solely; addition by the authors] through an agency, branch or subsidiary in another member state is immaterial.13

The question of whether a so-called ‘U-Turn construction’would prevent an application of the Freedom of Establishment was also a crucial issue in the case Centros more than one decade later.

5.1.4.2  The Daily Mail Decision (1988)

The Daily Mail and General Trust plc., a public limited company incorporated in accordance with the English Companies Act, planned to transfer its central management to the Netherlands in order to avoid tax payments in the UK. These taxes would arise from the company’s selling a significant part of its non-permanent as-

10  Hereinafter—for the sake of readability—referred to as ‘UK Ltd.’. 11  ECJ, case 79/85, Segers [1986] ECR 2375, para. 19.

12  Term according to Kjellgren 2000, p. 179.

13  ECJ, case 79/85 Segers [1986] ECR 2375, para. 16.

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sets and, in particular, the substantial capital gains on the assets which the company proposed to sell. Section 482 (1) (a) of the UK Income and Corporation Taxes Act 1970 prohibited companies which were resident only for tax purposes in the UK from ceasing to be resident without the consent of the Royal Treasury. This authority refused its consent if Daily Mail plc. would not be prepared to sell at least part of its assets before transferring its residence for tax purposes to the Netherlands.

The ECJ answered the question whether such attitude violated the Freedom of Establishment referred to it by the High Court of Justice, Queen’s Bench Division, for a preliminary ruling as follows:

Articles 52 and 58 of the Treaty [now Art. 49 and 54 TFEU] cannot be interpreted as conferring on companies incorporated under the law of a Member State a right to transfer their central management and control and their central administration to another Member State while retaining their status as companies incorporated under the legislation of the first Member State.14

It reasoned that

unlike natural persons, companies are creatures of the law and, in the present state of Community law, creatures of national law. They exist only by virtue of the varying national legislation which determines their incorporation and functioning.15

The prevailing opinion in Germany deducted from this decision a general obiter dictum16 by the ECJ confirming that the real seat doctrine did not violate the Freedom of Establishment since, if companies were creatures of national law and existed only by virtue of national legislation, then it could be concluded that a company ceased to exist whenever leaving the territory of this national jurisdiction. However, a famous line of ECJ decisions, starting in 1999, has shown that this conclusion proved to be invalid.

5.1.4.3  The Centros Decision (1999)

The Centros decision involved a Danish couple, Marianne and Tonny Bryde, being the sole shareholders of the Centros Ltd., a private limited company incorporated in accordance with English Company Law. The address of Centros Ltd’s. registered office was that of a friend of Mr. Bryde, the company’s share capital, (amounting to GBP 100), had not actually been paid in and was kept in a cash-box at Mr. Bryde’s home.

Mr. and Mrs. Bryde did not intend to conduct any business in the UK but wanted to carry out their business solely by a branch located in Denmark. The obvious

14  ECJ, case C-81/87 Daily Mail and General Trust [1988] ECR 5483, para. 23. 15  ECJ, case C-81/87 Daily Mail and General Trust [1988] ECR 5483, para. 19.

16 An obiter dictum (lat.: said in passing) is a remark or observation made by the court which is included in the body of the court’s opinion but which is not a necessary part of the court’s decision in the particular case. The ECJ uses obiter dicta to clarify the legal situation and provide general guidelines for questions which—although not decisive for the individual case—are closely related to the problems of the case and which it deems particularly important.

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purpose of this ‘U-Turn-Construction’was to avoid the Dutch regulations regarding the required statutory minimum capital.17 According to Dutch law,18 private limited companies and foreign companies having similar legal forms which are established in a Member State of the European Community may conduct business in Denmark through a branch which has to be registered by the Erhvervsog Selskabsstyrelsen (Trade and Companies Board). This Board refused to register a branch of Centros Ltd. arguing that since Centros Ltd. neither conducted any actual business in the UK nor was intended to do so, the business in question was not a branch but rather the principal place of business.

However, when the Centros case was brought to the ECJ, the court upheld its decision made in the Segers case and decided that it is contrary to the Freedom of Establishment

for a Member State to refuse to register a branch of a company formed in accordance with the law of another Member State in which it has its registered office but in which it conducts no business where the branch is intended to enable the company in question to carry on its entire business in the State in which that branch is to be created, while avoiding the need to form a company there, thus evading application of the rules governing the formation of companies which, in that State, are more restrictive as regards the paying up of a minimum share capital.19

In addition to the Segers decision, the ECJ introduced a standard describing under what circumstances a restriction of the Freedom of Establishment of companies can be justified. The ECJ applied for the first time its so-called ‘four condition test’ as developed initially for the Free Trade of Goods.20 Restrictions of the Freedom of Establishment can only be justified if they fulfill the following four conditions:

•they must be applied in a non-discriminatory manner;

•they must be justified by imperative requirements in the general interest;

•they must be suitable for securing the attainment of the objective which they pursue and

•they must not go beyond what is necessary in order to attain it.

In the Centros case, however, the Court considered that the refusal of the Danish authorities to register a branch did not meet these requirements.The Danish government argued that the Danish regulations concerning the higher amount and stricter regulations regarding the minimum capital were necessary to protect the Danish creditors of the company. However, the ECJ did not agree with these arguments for two reasons: First, even if Centros Ltd. would have conducted business in the United Kingdom and consequently the Dutch branch would have been registered,

17  The Opinion ofAdvocate General La Pergola as of 16 July 1998 states in para. 3: “Appearing as a witness in the proceedings before the competent Dutch court (the Højesteret), Mr. Bryde said he did not know if the purchase of Centros and the subsequent establishment of a branch in Denmark could be called a circumvention of Danish law but admitted that ‘it is certainly easier to find GBP 100 than DKK 200,000’”.

18  In particular Sec. 117 Anpartsselskabslov.

19  ECJ, case C-212/97 Centros ECR [1999] I-1459, para. 39.

20  On this see ECJ, case 120/78 Cassis de Dijon ECR [1979] 649, para. 8.