The EU Corporate Sustainability Due Diligence Directive (CSDDD) proposal can be interpreted as an attempt to cope with the under-deterrence of...
Read moreIn 1999, the (then) Court of Justice issued its decision the Centros case (C-212/97), which is without doubt the most influential judgment in the field of European company law.
In contrast to the United States, founders of companies were historically often not given free choice where to incorporate in Europe. Conflict of law rules were divided between the incorporation theory and the real seat theory. Under the latter, the law of the company’s real seat or head office governs its operations. If, for example a firm is incorporated in state A, but is actually based in state B, and if B is a real seat state, courts might apply B’s corporate law to the company. Because the company did not go through the incorporation procedure in B, the company might be treated as non-existent, or as a partnership between its shareholders. Consequently, founders and companies were deprived of the ability to choose the law most suitable to their purposes, and regulatory arbitrage in company was essentially impossible in the European Union. One might be tempted say that the real seat theory was intended to protect national laws from competing with each other.
All of this changed with Centros and a number of follow-up cases, most prominently Überseering (C-208/00, 2002) and Inspire Art (C-167/01, 2003). The court found, in particular, that national authorities could not deny the registration of a branch office of a “pseudo-foreign” firm incorporated within an EU or EEA country, they could not deny the legal personality of such a company, and they are not permitted to impose special disclosure requirements on such companies and impose a special types of liability on such companies. Actions by Member States to this effect were found to be compatible with the freedom of establishment as interpreted by the Court. The practical result is that Member States can no longer apply the real seat theory to firms incorporated in other EU and EEA members.
In the early years after the case, scholars began to analyse whether EU Company Law would see a “race to the top” or “race to the bottom” in company law, as it has been debated in the United States for many decades. While large and publicly traded firms seemed to take little notice of the debate in the early years, a considerable number of founders of new businesses from Continental European countries set up Private Limited Companies in the United Kingdom for the purpose of doing business in the founders home Member State. This trend seems to have abated at least in some Member States, but Centros has left Europe with a greater freedom of choice between different corporate laws, especially for small firms.
Centros has contributed to the internationalization of company law scholarship in Europe, and it has inspired scholarship written by ECGI Research Members in the following areas, among others:
- The effects of regulatory arbitrage and regulatory competition, e.g. whether EU company is undergoing a “race to the top” or “race to the bottom”;
- The merits and demerits of the legal capital system, most of all minimum capital, which arguably was one of the most important reasons for incorporating in another EU Member State;
- the ability of Member States to impose their own legal rules and doctrines on companies founded in another Member State;
- the interaction of company and insolvency law in cross-border cases;
- Possibilities for cross-border mobility of corporations, which Member States must permit under the freedom of establishment, and for which the Directive on Cross-Border Mergers (formerly Directive 2005/56/EC, now, art. 118 to 134 of the (codified) Company Law Directive 2017/1132/EU).
- Cultural, legal hurdles and practical hurdles that inhibit free choice of corporate law and corporate mobility;
- The effects of some Member States’ efforts to make their own company law less unattractive to avoid an exodus of companies to other states.
- The impact of Brexit on English Private Limited Companies with their real seat in Continental Europe.
This page is intended as a continuing resource section on this subject and will be updated when necessary. It contains papers of relevance and ECGI researchers that are knowledgeable on the topic.
Queries, suggested inclusions and other ideas?
In 1999, the (then) Court of Justice issued its decision the Centros case (C-212/97), which is without doubt the most influential judgment in the field of European company law.
In contrast to the United States, founders of companies were historically often not given free choice where to incorporate in Europe. Conflict of law rules were divided between the incorporation theory and the real seat theory. Under the latter, the law of the company’s real seat or head office governs its operations. If, for example a firm is incorporated in state A, but is actually based in state B, and if B is a real seat state, courts might apply B’s corporate law to the company. Because the company did not go through the incorporation procedure in B, the company might be treated as non-existent, or as a partnership between its shareholders. Consequently, founders and companies were deprived of the ability to choose the law most suitable to their purposes, and regulatory arbitrage in company was essentially impossible in the European Union. One might be tempted say that the real seat theory was intended to protect national laws from competing with each other.
All of this changed with Centros and a number of follow-up cases, most prominently Überseering (C-208/00, 2002) and Inspire Art (C-167/01, 2003). The court found, in particular, that national authorities could not deny the registration of a branch office of a “pseudo-foreign” firm incorporated within an EU or EEA country, they could not deny the legal personality of such a company, and they are not permitted to impose special disclosure requirements on such companies and impose a special types of liability on such companies. Actions by Member States to this effect were found to be compatible with the freedom of establishment as interpreted by the Court. The practical result is that Member States can no longer apply the real seat theory to firms incorporated in other EU and EEA members.
In the early years after the case, scholars began to analyse whether EU Company Law would see a “race to the top” or “race to the bottom” in company law, as it has been debated in the United States for many decades. While large and publicly traded firms seemed to take little notice of the debate in the early years, a considerable number of founders of new businesses from Continental European countries set up Private Limited Companies in the United Kingdom for the purpose of doing business in the founders home Member State. This trend seems to have abated at least in some Member States, but Centros has left Europe with a greater freedom of choice between different corporate laws, especially for small firms.
Centros has contributed to the internationalization of company law scholarship in Europe, and it has inspired scholarship written by ECGI Research Members in the following areas, among others:
- The effects of regulatory arbitrage and regulatory competition, e.g. whether EU company is undergoing a “race to the top” or “race to the bottom”;
- The merits and demerits of the legal capital system, most of all minimum capital, which arguably was one of the most important reasons for incorporating in another EU Member State;
- the ability of Member States to impose their own legal rules and doctrines on companies founded in another Member State;
- the interaction of company and insolvency law in cross-border cases;
- Possibilities for cross-border mobility of corporations, which Member States must permit under the freedom of establishment, and for which the Directive on Cross-Border Mergers (formerly Directive 2005/56/EC, now, art. 118 to 134 of the (codified) Company Law Directive 2017/1132/EU).
- Cultural, legal hurdles and practical hurdles that inhibit free choice of corporate law and corporate mobility;
- The effects of some Member States’ efforts to make their own company law less unattractive to avoid an exodus of companies to other states.
- The impact of Brexit on English Private Limited Companies with their real seat in Continental Europe.
This page is intended as a continuing resource section on this subject and will be updated when necessary. It contains papers of relevance and ECGI researchers that are knowledgeable on the topic.
Queries, suggested inclusions and other ideas?
Topic Contributors
Professor Marco Becht
viewBoard Member, Fellow, Institutional Member, Research Member
Professor of Finance and the Goldschmidt Professor of Corporate Governance
from Solvay Brussels School for Economics and Management, Université libre de Bruxelles
Professor Jill Fisch
viewResearch Member
Saul A. Fox Distinguished Professor of Business Law
from University of Pennsylvania Law School
Professor Avv. Marco Ventoruzzo
viewRepresentative Member, Research Member
Head of Department and Professor of Corporate Law
from Paolo Baffi Center on Financial Regulation, Bocconi University Law Department
Professor Carsten Gerner-Beuerle
viewResearch Member
Professor of Commercial Law
from University College London
Professor Luca Enriques
viewBoard Member, Fellow, Research Member
Professor of Corporate Law
from University of Oxford
Professor Mathias Siems
viewResearch Member
Professor of Private Law and Market Regulation
from European University Institute
Professor Dr Horst Eidenmüller
viewRepresentative Member, Research Member
Freshfields Professor of Commercial Law
from University of Oxford
Professor Jens Dammann
viewResearch Member
Professor in Law
from The University of Texas School of Law
Professor Tobias Tröger
viewResearch Member
Professor of Private Law, Commercial and Business Law
from Leibniz Institute SAFE, Goethe University Frankfurt, House of Finance
Professor Wolf-Georg Ringe
viewResearch Member
Professor of Law & Finance
from University of Hamburg
Professor Colin Mayer
viewFellow, Research Member
Emeritus Professor of Management Studies
from Blavatnik School of Government and Saïd Business School, University of Oxford
Professor John Armour
viewFellow, Research Member
Professor of Law and Finance
from University of Oxford, Faculty of Law
Professor Stefano Lombardo
viewResearch Member
Associate Professor of Economic Law
from Free University of Bolzano