The Freedom of Establishment

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Since the founding of the European Union (EU) one of the main aims has been to create an internal market in order to promote development and economic growth and to offer its citizens an area of freedom, without internal frontiers, in which free movement of persons is ensured[1]. Amongst the basic fundamental freedoms which the TFEU concedes to EU citizens to reach the above mentioned aims is the freedom of establishment. Together with the other ‘freedoms’ found in the TFEU the freedom of establishment is crucial for the functioning of the EU internal market[2]. This freedom is laid down in article 49 and 54 of the TFEU and enables persons, both physical and legal to undertake stable and continuous economic activities in one or more member states (MS). Thus MS have to remove all restrictions for individuals and legal persons who want to maintain a permanent or settled place of business in a MS[3]. For this to succeed the EU has made efforts to harmonise national legal systems especially in the field of corporate law[4]. Due to practical problems, the harmonisation process did not eliminate completely incompatibility problems between MS national corporate laws. Thus, the principle of establishment found in the TFEU has been in great part developed through interpretation by the European Court of Justice (CJEU). There have been a number of cases in front of the CJEU dealing with the right of establishment. In order to try and clarify the scope of freedom of establishment the CJEU has in a number of cases explained how Article 49 and 54 TFEU should be interpreted. The most renowned cases concerning freedom of establishment are, the Daily Mail, Centros, Überseering, Inspire Art and Sevic. Right of Establishment The freedom to establish oneself or a company in any MS other than one’s own, is a right enshrined in articles 49 to 54 of the TFEU. This freedom compliments freedoms such as the free movement of persons and the freedom to provide services. On paper these freedoms might seem easy to apply but in practice they have proved not to be so much. This is mainly due to the different national legislation and the fear by the States that citizens, including companies may abuse the system. The first paragraph of article 49 TFEU prohibits MS restrictions on the freedom of establishment. Restrictions include both unequal treatment and unjustified obstacles.[5] The second paragraph of the article gives a definition of the freedom of establishment. This is described as the ability to be able to pursue activities at par with nationals of the MS where they are established. One must also analyse what constitutes an establishment. The main elements are a stable and continuous basis on which the activity is carried on. This provision has direct effect, which means that MS must change their municipal law which may be incompatible with the spirit of this article. MS may only restrict such freedom in special circumstances such as to protect public policy, security or health[6]. In order remove any doubts whether such freedom applies also to companies, article 54 specifically puts companies at equal footing with natural persons. This holds as long as a company is formed according to the laws of a MS, is registered and has its principal place of business in an EU State. If these simple conditions are met it is considered to be established in the EU. In the Segers[7] case the ECJ widened this concept to cases where a company did not conduct any business in its place or establishment but did so in another MS through a secondary establishment. The ECJ followed the same line of thought in the Centros case and further widened the scope to cover secondary establishments in the Insurance service case.[8] As discussed further in this assignment, a company is free to establish itself through a primary establishment and has the right to open up secondary establishment. This can be done regardless if this is done just the take advantage of the more favourable legislation in the first state[9]. Harmonisation The EU also tries to harmonise the different national legal systems of its MS. This is done for the better functioning of the EU market. The harmonisation of corporate law is very important in this aspect. The freedom of establishment has been one of the main drivers behind this harmonisation since the law wanted to protect creditors of companies established under different national laws. Harmonisation of national corporate laws was regarded as a necessary balance for the right of establishment[10]. It may be opportune to give a brief idea of the main difference in municipal corporate laws. The main difference is in the way MS decide on the applicable law of corporate institutions. UK, Netherlands, Denmark and Ireland use the ‘State of incorporation rule’, that is the applicable law is that where the company is incorporated or registered. On the other hand other MS use the ‘real seat’ theory known also as the siège reel. Although this theory vary from State to State, the main reasoning is that a company is incorporated in that State where the company where it has its main centre of operations[11]. Art 50 TFEU specifically demands that there should be safeguards equivalent to the freedom of establishment for companies within the EU. Thus it clearly emerges that the EU has been trying to find a balance between the freedom granted by the treaty and the creation of a fair and level playing field between companies established in different MS[12]. Obviously harmonisation leads to an amount of security, standardisation and peace of mind and thus creates a fertile environment for economic growth. Companies will be in a better position to make use of the freedom of establishment and expand in other MS[13]. Harmonisation process has been going on since the 1960’s with the issuing of the 1st directive. Following this a number of directives have been issued covering various aspects of corporate law. The process proved to be a difficult one especially with the expansion of the EU and the development of complex systems how big companies started to operate. Reaching a consensus has become an impossible task[14]. Thus there has been a shift in approach to a more regulatory system based on creating equal footing. Today the trend is to make company law more effective at national level within an EU framework. Instead from a top-down harmonisation there is the bottom-up approach. It is accepted that some degree of convergence between MS corporate law will help for the better functioning of the market, but this does not necessarily mean that devising a harmonised corporate law is the best way to achieve it. Some experts believe that the EU has to create a framework and then MS have to legislate within that framework. Thus one is creating a competitive environment within MS and companies choose to establish themselves in the MS whose legislative framework suits best their needs. The aim of creating the right environment for economic growth therefore created through competition rather than through uniformity of laws. Case law The shift in approach has not only been in the way EU legislated but also in the way the Courts of Justice of the EU (CJEU) pronounced itself. The lack of an EU regulation and the importance of freedom of establishment have led to numerous cases in front of the CJEU. The first case was the famous Daily Mail (case 81/87). This case concerned a British company Daily Mail that wished to transfer its central administration from the UK to the Netherlands without losing their status under British law. The company would still maintain their registered office in UK. The purpose of this move was done in order to enjoy the lower taxes in the Netherlands. The company law of the United Kingdom did allow for this, which means that the UK applied the incorporation theory. However, if the move was done for tax purpose consent was needed from the Treasury. The company claimed that Articles 49 and 54 TEFU (Former Articles 52 and 58 of the EEC Treaty) gave them the right to move its seat without permission and still keep their status as a legal person under British company law. The CJEU stated that Article 49 and 54 TFEU grants companies the freedom of establishment. Companies have the right to secondary establishment in opening up agencies, branches or subsidiaries, company also have the right to incorporate in another Member State[15]. This is however different from when a company want to incorporate in another Member State and keep its legal status as a United Kingdom company. The CJEU said 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[16]” Amongst the important principles which the court pronounced itself on during this case was that, under the Treaty, companies have the same rights as individuals do, as regards the right to leave their MS[17]. However, the CJEU also decided that the right of establishment does not include the right of transfer of management and control to another MS whilst retaining an establishment in another MS[18]. Of great importance is the reason which the court gave for such a decision. Laws of MS on the ‘real seat’ of companies were not yet harmonised and thus different MS will have different views on this. The fact that the Member States use both the real seat and the incorporation theory are to be solved by future legislation This point was once again discussed ten years later in another case, the Centros case. This case concerned a Danish company, Centros Ltd, which was incorporated in the UK. The company wanted to open up a branch in Denmark but the Danish authorities refused on the basis that Centros did not trade or pursue any economic activity in the UK and in fact had its actual seat in Denmark. It meant that Centros had it primary establishment in Denmark and it is therefore an internal affair. The reason for incorporation in the UK was to avoid initial taxes in Denmark which the UK did not impose. The company claimed that according to Article 49 and 54 TEFU they had the right to open up a branch in Denmark regardless if they exercised any economic activity in the UK or not[19]. This time the CJEU decided that it is a right inherent in the notion of freedom of establishment for a company to choose where to establish itself[20]. Here the courts seem to be favouring the approach of bottom-up harmonisation rather than top-bottom, thus favouring also competition amongst MS and bringing closer the rights of corporate persons to those of ordinary citizens. The CJEU also pronounced itself on the fact of lack of harmonisation amongst MS national laws, which was also mentioned in the Daily Mirror case and said “the fact that company law is not completely harmonised in the Community is of little consequence[21]” Such stand was also confirmed in the Sevic Systems case. The CJEU said; ‘It is known, and confirmed by the Court's settled case-law, that exercise of the freedom of establishment cannot be made dependent on the adoption of a directive on harmonisation. That is because these directives do not establish the rights laid down in the Treaty but are merely designed to facilitate the exercise thereof.’[22] The CJEU also tackled the Danish claim that this was just a way of how to circumvent national laws and was an abuse of the freedom of establishment[23]. The court said that MS have the opportunity to rely on other provisions of the law to make sure that no evasion was being carried out, and this within the limits of respect towards the freedom established in article. The Centros case was followed by another landmark case in this field, the Überseering case. Überseering was company incorporated in the Netherlands, and owned a property in Germany. The company then commissioned a company to do some repairs on this property. The repairs were done but Überseering claimed that the work was defective. Two years later two German nationals acquired the company and they brought action against the German company in a German court[24]. The German court, however, dismissed the claim because Überseering did not have legal capacity of according to German law. Germany applied the real seat theory. The CJEU had to decide was whether or not Article 49 and 54 TFEU was interpreted as giving a MS the right to decide a company´s legal capacity if it had transferred its central administration there from another MS. Once again the principle of freedom of establishment was given more strength. Harmonisation of laws was not accepted. A company which is incorporated in a MS and according to the laws of that MS, moves its centre of administration to another MS cannot be denied recognition just on the mere fact that it is incorporated in another MS. Once again the CJEU pointed out that there might be instances where such recognition can be restricted but MS have to use proportionality in their decisions and in the case of Überseering, Germany did not[25]. In more recent cases, Cortesio Oktató és Szolgáltató bt (2008) and Vale Construzioni SRL (2012) the CJEU confirmed the principles established in the previous case law. Conclusion When dealing with freedom establishment of companies it is rather a balancing act between competing interests. Both harmonisation of different municipal laws and judgments by the CJEU have contributed to this balancing act. It seems that the trend today is moving away from harmonisation and more towards legislative competition for the most attractive corporate law amongst MS known as reflexive regulatory techniques. The other option would be what is known as ‘negative harmonisation’, that is court-led decisions, but even though one would certainly be on the safe side with such a system, it does not mean that this would lead to a better environment for companies. Harmonisation should be seen as a guarantee for diversity in corporate laws and practices of MS. It should be seen as an instigator for innovation in self-regulation by MS of corporate laws which would avoid the rigid form of a single dominant law regime which leads to the Delaware effect in the US.
[1] Article 3.1 and 3.2 TFEU as amended by the Lisbon Treaty [2] http://ec.europa.eu/internal_market/top_layer/living_working/services-establishment/index_en.htm [3] Craig. P. and De Burca. G. 2011 pg764 [4] http://www.germanlawjournal.com/index.php?pageID=11&artID=216 [5] Craig. P. and De Burca. G. 2011 pg 771 [6] http://ec.europa.eu/internal_market/top_layer/living_working/services-establishment/index_en.htm [7] Case 79/85 Segers [8] Craig. P. and De Burca. G. 2011 pg 780 [9] Wedin. A. pg 14 [10] Mock, S. Harmonisation, Regulation and Legislative Competition in European Corporate Law [11] Ibid pg 15-16 [12] The Future of European Company Law (response to the European Commission’s Consultation), May2012 [13] Mock, s. Harmonisation, Regulation and Legislative Competition in European Corporate Law [14] Deakin, S, Regulatory Competition Versus Harmonisation in European Company Law [15] Case 81/87 The Queen v H. M. Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust plc par. 17 [16] Ibid par 19 [17] Ibid par 16 [18] Craig. P. and De Burca. G. 2011 pg 780 [19] Ibid pg 780 [20] Centros Ltd vs Erhvervs-og Selskabsstyrelsen (Case 212/97) par 27 [21] Ibid par 28 [22] Sevic Systems (Case 411/03) [23] Centros Ltd vs Erhvervs-og Selskabsstyrelsen (Case 212/97) para 23 [24] Mock, S. Harmonisation, Regulation and Legislative Competition in European Corporate Law [25] Craig. P. and De Burca. G. 2011 pg 783
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