New EU rules on company law: more flexibility, more protection?

Company Law package may have large impact on cross-border mobility of EU companies

Yesterday, the European Commission launched two proposals for new rules on the cross-border mobility and digital registration of companies. The rules are intended to make it easier for companies to merge, divide or move within the European Union, as well as to prevent social dumping, tax evasion and other forms of abuse.

The measures proposed by the Commission include:

  • a harmonized, fully online procedure for registering companies;
  • exchange of information between Member States about disqualified directors;
  • harmonized procedures for cross-border mergers, divisions and relocations of limited liability companies, including safeguards for creditors and employee participation; and
  • a veto right of the departure Member State against relocation to another Member State in case the intended transfer would constitute an “artificial arrangement aimed at obtaining undue tax advantages or at unduly prejudicing the legal or contractual rights of employees, creditors or minority members“.

The goal of the Commission’s proposals is to ensure the effective exercise of the freedom of establishment within the internal market, while protecting the rights of tax authorities, employees, creditors and minority shareholders against abuse of legal personality. This tension between the freedom of establishment and the protection of stakeholders is at the heart of a long-standing debate on the cross-border mobility of companies:

  • On the one hand, the proponents of the so-called “incorporation theory” assert that businesses should have the right to choose the company law applicable to them. In this spirit, the EU Court of Justice has repeatedly struck down national measures restricting the freedom of a company to select the company law applicable to it by transferring its registered seat to another Member State, even if the company in question has no link whatsoever with the selected legal system (see e.g. our discussion of the recent Polbud case).
  • On the other hand, advocates of the “real seat” mechanism point out that companies, in particular legal entities, have far-reaching effects on third parties such as creditors and minority shareholders. Therefore, insofar as the rights of third parties are protected by mandatory rules of company law, the freedom of controlling insiders to select the applicable company law should be restricted.

It will be interesting to see to what extent the Commission’s proposals will have an impact on this fundamental – and politically sensitive – debate.

Gillis Lindemans

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