For decades now, supporters of the real seat theory have been arguing with supporters of the incorporation theory over which theory (or which variant of either theory) best corresponds to the needs of modern business for purposes of determining which national company laws are applicable to bodies corporate.
Under the real seat theory, the company laws applicable to a legal entity are those of the jurisdiction in which the entity has its real seat. The concept of real seat differs slightly from one jurisdiction to the next, but generally boils down to the place where the company is effectively managed and/or operated. Under the incorporation theory, on the other hand, the company laws applicable to a legal entity are those of the jurisdiction in which the legal entity has been incorporated, irrespective of where the entity has its real seat.
The choice is not a binary one. Many EU countries have cherry-picked elements of both theories in an attempt to protect domestic third parties and stakeholders from the Evils of Limiteds and the like. From time to time their protective enthusiasm was curbed by the European Court of Justice (“ECJ“), which keeps a close watch over the EU freedom of establishment.
Debate
In Belgium, which is a country adhering to the real seat theory, this debate was recently revived in the wake of the proposals for the modernisation of Belgian company law by the Belgian Centre for Corporate Law (“BCCL“). One of the suggestions that the BCCL has put forward is the adoption of the incorporation theory. This proposal has met a number of objections from Belgian proponents of the real seat theory.
Among the many arguments that dominate discussions on this topic, two important ones have been reiterated to make a case for the adoption of the incorporation theory in Belgium. First, it is a theory that allows for a more extensive exercise of the freedom of establishment. Secondly, it reduces legal uncertainty as to the applicable company laws by using a clear and transparent connecting factor. Another argument that was tabled was that the incorporation theory could be used as a tool for “exporting” Belgian company law. From a Belgian perspective, however, the benefits of “exporting” Belgian company law might not outweigh the possible drawbacks of an increased “import” of foreign company laws resulting from the adoption of the incorporation theory.
The main argument for maintaining the real seat theory is the anti-abuse argument. The main purpose of the real seat theory is to act as a mechanism for the protection of stakeholders (such as employees and minority shareholders), non-adjusting creditors (who do not have sufficient bargaining power to negotiate the terms on which they do business with the company) and (non-voluntary) third parties (such as tort victims) against a wrongful evasion of the protection offered to such parties by domestic company laws. In that sense, the real seat theory can be regarded as a form of “piercing the corporate veil” in favour of the economic reality. However, the ECJ case law on the freedom of establishment has eroded this anti-abuse function for a large part with respect to EU companies. Also, the international jurisdiction and conflict of laws rules in other areas of law, such as insolvency and tort, have mitigated the need for the real seat theory to play its part as an anti-abuse mechanism.
Insolvency rules
In Belgium, the rules relating to (i) directors’ liability for breach of company law and breach of the bylaws of the company and (ii) the extent to which the legal entity is liable towards third parties for the payment of debts incurred by its corporate bodies are currently regarded as company law rules. Hence, these matters are governed by the company laws of the jurisdiction in which the company’s real seat is located. If Belgium changes from the real seat theory to the incorporation theory, courts will no longer be able to apply the Belgian rules governing these matters to foreign companies having their real seat in Belgium. From the ECJ’s Kornhaas judgement, which was discussed in one of Corporate Finance Lab’s previous posts, it follows that these rules can be “salvaged” by treating them as insolvency rules. That way, they can continue to be applied to foreign companies having their real seat (or Centre of the Main Interests) in Belgium.
Bottom line
Adopting the incorporation theory in Belgium might increase flexibility and legal certainty for cross-border businesses. But moving away from the real seat theory should not compromise the accountability of ill-intentioned promoters and directors of a foreign company conducting business in Belgium. Law makers should consider how insolvency rules can be optimised to prevent this from happening. Next step is making sure that these rules are properly enforced in practice.
This post is based on an article by the author that appeared in International Company and Commercial Law Review, January 2017 issue, entitled “Real Seat Theory v Incorporation Theory – The Belgian Case for Reform”.
Marc Van de Looverbosch
lawyer at Baker Mckenzie
The views expressed by the author are personal and are not necessarily the views of Baker McKenzie
Corporate Finance Lab 
A very interesting analysis, emphasizing the increasing importance of insolvency law. Some interesting insights from GILSON, HANSMANN and PARGENDLER should be taken into account in this debate. Their 2015 lecture on this topic and their paper “Corporate chartering and federalism: a new view”, can be consulted here: http://gcgc.global/presentations/corporate-chartering-and-federalism-a-new-view/
My personal interpretation and recap:
Although the common assumption is that the incorporation doctrine promotes regulatory competition (depending on the point of view: ‘a race to the bottom’ or ‘a race to the top’), leading to legal homogeneity, these authors consider a different dynamic: they see regulatory dualism instead of regulatory competition. In their view, states opting for market-oriented law (for example Delaware) will co-exist with states opting for politics-oriented law. If one state offers market-oriented law, other states are relieved of pressure from companies seeking market-oriented law – these companies can incorporate in the state offering market-oriented law – and can focus on their local interests.
The authors seem to notice little cross-border chartering in Europe, despite the liberal case law from the court of justice, for lack of a European state like Delaware, offering pure market-oriented law (GILSON, HANSMANN and PARGENDLER, “Corporate chartering and federalism: a new view”, 2015, 26).
Hence, we should ask the question: can Belgium become the European Delaware, as envisaged by the adoption of the incorporation doctrine? One answer could be: yes, if the legislator clearly and explicitly opts for market-oriented corporate law. No doubt: to be continued.
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