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European court causes confusion over corporate location rulesBaker & McKenzie, Frankfurt

Articles 43 and 48 of the EC Treaty guarantee the right of establishment to all companies and firms formed in accordance with the law of a member state, and which have their registered office, central administration or principal place of business within the European Community. In a landmark decision, the European Court of Justice (Centros Ltd / Erhvervs v Selskabsstyrelsen, March 9 1999) confirmed that this freedom also applies to situations where the right of establishment is explicitly used to circumvent national laws relating to the establishment of companies. Therefore, a national court or register cannot refuse the registration of a branch, even if all business activities of the company are exclusively undertaken by this single branch, and the foreign place of registration is only a mailing address with no business activities.

Despite the clear wording of the decision, a lot of uncertainty has remained among German practitioners as to whether the European Court of Justice (ECJ) has thereby pronounced a binding ruling in favour of the so called Gründungstheorie. This theory on the applicable law refers to the place of registration of the company. Until now German courts, however, have applied the so-called Sitztheorie (siège réel-theory), which refers to the place of the actual corporate seat. As a result of this rather unclear situation, German business enterprises have reacted carefully to the ECJ Centros-ruling, and have not yet attempted, on a broad scale, to escape the rigorous national laws on the establishment of companies by incorporating a foreign company which solely acts through a branch in Germany. The German Federal Supreme Court, however, has recently presented the ECJ with a new case involving a Dutch company with its corporate seat in Germany, in order to obtain clarification on the question whether the siège réel-theory violates the EC Treaty.

It is also worth noting that the vast majority of European national company laws prevent companies from moving their corporate seat from one member state to another. Despite an ECJ decision of September 27 1988 (Daily Mail), which was often interpreted as accepting such practice, the lower court of Heidelberg has recently brought the question forward to the ECJ over whether these restrictions contravene the right of establishment guaranteed in Articles 43 and 48 of the EC Treaty. The outcome of both cases could by-pass the continuing discussions on the 14th EU-directive relating to the cross-border transfer of the corporate seat and may thereby have a large impact on the freedom of European companies to choose the most appropriate place for their corporate seat and to move it later to other countries as a reaction to economic or legal considerations.

Dietmar Helms

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