Cross-border transformation of the company and freedom of establishment

The issue of cross-border transformation of the company, due to the progressive integration of the European Union, is one more important topics on European company law. Expressed in the Treaty on the Functioning of the European Union 1 Freedom of establishment creates new business opportunities within the EU.

In practice, there is a legislative gap on the part of the Member States and the EU institutions. This problem has therefore become the subject of numerous case law by the Court of Justice of the European Union.

The lack of a legal framework for cross-border transformations leads to fragmentation of legal solutions and legal uncertainty that create barriers to the exercise of freedom of establishment.

one of the main demands of EU entrepreneurs is to create a clear regulation concerning the cross-border transfer of the registered office of the company, combined with its cross-border transformation.

There is a directive in the European Parliament introducing appropriate procedures into European company law to harmonise and facilitate the cross-border mobility of companies.

1. Freedom of establishment in the light of the Treaty on the Functioning of the European Union and the case law of the EU courts
2. 1. Characteristics of freedom of establishment

Freedom of establishment, in addition to freedom of movement of goods, freedom of movement of workers, freedom to provide services and freedom of movement of capital, is one the general principles of the existing Member States of the European Union, which are guaranteed by the Treaty on the Functioning of the European Union.

Freedom of establishment includes self-employed activities, as well as the establishment and management of enterprises, in particular companies within the meaning of Article 54 paragraph second TFEU, under the conditions laid down by the legislation of the host State for its own nationals (Article 49 TFEU).

This means that citizens can do business one an EU Member State in another Member State under the same conditions as it provides for its citizens[2].

According to Article 54 The TFEU of companies established under the law of a Member State and having their registered office, management or principal establishment within the Union shall be treated as natural persons with the nationality of a Member State. That provision in the paragraph second defines the concept of a company indicating that it is a company governed by civil or commercial law, as well as a cooperative and another legal person governed by public or private law, provided that their activities are profit-making.

The scope of freedom of establishment has been clarified in a judgment given by the Court of Justice of the European Union 3 25 July 1991, as an option to carry out business independently and effectively with a permanent facility in another Member State for an indefinite period of time’ 4 .

Freedom of establishment generally consists of three elements such as 5 : – „Self-reliance: freedom of establishment can be exercised by self-employed persons at their own expense and at their own risk, especially in the form of so-called self-employment, which distinguishes this freedom from freedom of movement for workers; – sustainability: understood as organisational sustainability, i.e.

the establishment and operation of activities in another country, participation in a continuous and permanent manner in its economic life; – cross-border: the protection of the freedom of establishment is only subject to cross-border economic activity, i.e. in the territory of another Member State’ 6 .

1.2. Restrictions on freedom of establishment

The Treaty on the Functioning of the European Union introduced, in principle, a prohibition on the restriction of freedom of establishment (Article 49, paragraph numbered 1, TFEU). Restricting the freedom of establishment can be the case when a Member State uses appropriate measures, e.g.

by introducing regulations that differentiate the position of operators from other Member States vis-à-vis home providers, hinders access to the market or makes it less attractive or attractive.[7]. Exceptions under the TFEU or Union case law were provided for in this rule.

According to Article 52 The TFEU allows Member States to restrict their freedom of establishment to nationals of other Member States where it requires the protection of public policy, public security and public health.

A Member State may potentially restrict access to or exercise of an economic activity, but in practice, the Court of Justice has significantly more often allowed restrictions on the entry or residence of nationals of other Member States than restrictions on the commencement or pursuit of an economic activity[8].

In accordance with the judgment of the Court of Justice of the European Communities, 12 September 2006 the possibility of limiting the freedom of establishment exists where an entity from another Member State is allowed to abuse it using the freedom of establishment.

In that judgment, the Court of Justice considered that it was not possible to rely on a prohibition of restriction of freedom where the exercise of that freedom fulfils the criteria of abuse or fraud[9].

In the judgment of the Court of Justice of the European Communities 30 September 2003 the possibility of limiting the freedom of establishment, where this is justified by the essential needs of the public interest, and the measures taken to this end: (i) are not applied in a discriminatory manner, (ii) are adequate to achieve the objective pursued, (iii) and do not go beyond what is necessary to achieve that objective;[10].

1. Cross-border transformation and transfer of the registered office of a company and freedom of establishment in the light of selected EU jurisprudence

Judgment in the Daily Mail case 11 is one of the first judgments indicating the transfer of the company's registered office outside the country where the company was incorporated. Under British law, companies can transfer their headquarters abroad without their liquidation only with the permission of the Minister of Finance.

The Daily Mail company decided to transfer its management to the Netherlands for tax reasons.

It initially asked the Minister of Finance to give his permission to change his seat, but finally stated that this procedure constitutes a restriction on the freedom of establishment expressed under Article 52-58 Treaty establishing the European Economic Community 12 and therefore went to the General Court.

The Court of Justice of the European Communities has taken the view that companies are created and functioning under national legislation, and it is therefore for the Member States to decide whether to introduce regulations allowing the transfer of the registered office of the company abroad without its liquidation.

The absence of such rules does not constitute a restriction on freedom of establishment. The law of the State incorporation of the company may therefore restrict or even exclude the possibility for the company to exercise its freedom of establishment in this respect.[13].

Subsequent ruling 14 on freedom of establishment 9 March 1999 The case concerned the refusal of registration in Denmark of branches of British company Centros Ltd, which did not operate in the UK. The company was registered in the UK due to lower capital requirements than in Denmark.

The Danish party argued that the way in which it operates was intended to circumvent Danish law.

The Court of Justice refused the Danish side to be correct by arguing that there was no circumvention of the law, as the principle of freedom of establishment gives rise to the right to conduct business in a place which guarantees the smallest restrictions.

In turn, in the judgment of 30 September 2003 15 The Court of Justice presented a more liberal position. A British limited liability company took up business in the Netherlands by notifying a branch to a register maintained by the Amsterdam Chamber of Commerce.

The Chamber concluded that, under Dutch law, Inspire Art operates not through a branch but as a foreign company. A foreign company under Dutch law is a company which almost exclusively carries on business in the Netherlands and has no links with the country in which it was registered.

Additionally, foreign companies have additional requirements and formalities that Inspire Art wanted to avoid. The Court of Justice has held that any national measure to restrict the transfer of a company to another Member State is prohibited because it infringes Article 43(48) Treaty establishing the European Community.

The Dutch Act provides that the persons who operate a foreign company are jointly and severally liable for the activities carried out by such a company during the period when the company did not have the minimum capital even when the company was registered.

In the case of domestic companies, liability covers only the period before registration. The Court of Justice considered this practice to be a discriminatory action, the impact of which significantly reduced freedom of establishment.

A breakthrough decision on the transfer of the company’s registered office to another State is a judgment from 16 December 2008 16 . Cartesio Oktato es Szolgaltato Bt, a limited partnership established under Hungarian law, applied to the Hungarian registry court to register a change of registered office including its transfer to Italy.

The registry court refused to register the amendment, arguing that there were no national rules allowing the transfer of the registered office abroad. The company intended to transfer its seat abroad and to remain a Hungarian law company at the same time.

The Court of Justice has indicated that freedom of establishment allows a legal establishment one the Member State has transferred its seat to another Member State, while being governed by the law of the State in which it was incorporated. However, that State has the right to refuse that company to maintain the status of a domestic company where that company intends to reorganise in accordance with the law of the host country.

The right to cross-border transfer of the registered office of the company abroad, while being part of the legal system of the State of establishment of the company, depends on the rules in force in the country of origin[17].

Although the Court of Justice has determined that the possibility of a company to designate its registered office outside the borders of the home Member State depends on the decision of the Member State concerned and that the lack of regulation in national law in this matter cannot be considered to be contrary to the principle of freedom of establishment, it is already a prohibition on the transfer of the registered office of the company to another Member State, combined with the amendment of the personnel statute, i.e.

without the liquidation and dissolution of the company, it should be considered a restriction on the freedom of establishment[18].

Court of Justice issued 12 July 2012 Vale settlement[19]. The Italian law company Vale Construzionii submitted to the Italian registry court an application for deletion from the register in connection with the intention to transfer its seat to Hungary.

The company wanted to conduct economic activity there and at the same time stop doing this activity in the territory of Italy. The Italian registry court removed the company from the register. The company then requested the Hungarian court to register in Hungary.

However, the Hungarian court held that, under Hungarian law, a company established and operating under the legislation of another Member State cannot transfer its seat to Hungary[20].

According to the Hungarian Supreme Court, ‘the transfer of the seat of a company governed by the law of another Member State (...), involving the re-establishment of a company under Hungarian law and the indication of its Italian predecessor (...) cannot be regarded as a transformation under Hungarian law because national conversion rules apply to purely internal situations’.

The case went to the Court of Justice, which, in its ruling, indicated that if the laws of the host State provided for the possibility of changing the legal form, i.e. The transformation of the company, such a State cannot refuse to convert a foreign company into a converted company.

Otherwise, a foreign company is not treated on an equal footing with national companies, which constitutes a breach of the freedom of establishment[21]. The lack of regulation in the national law of a Member State and the European Union shall not prevent the entry of a cross-border transformation in the register[22].

The last significant decision of the Court of Justice on the cross-border transformation of companies is the judgment of 18 December 2017 on Polbud[23].

Polbud-Executiveness, a limited liability company in liquidation, at a meeting of shareholders decided to move its seat to Luxembourg, change the company to Consoil Geotechnik and subject the company to Luxembourg law.

The company applied to the competent registry court to remove it from the register of entrepreneurs of the National Court Register.

The registration court called on the company to submit the documents required to carry out the liquidation (the constituency of the meeting of shareholders showing the company's bookkeeper and documents, the financial statements signed by the liquidator and the person entrusted with keeping the accounts, as well as the resolution of the meeting of shareholders on the approval of the liquidation report).

In the company’s assessment, the Court’s request was unfounded as the company, when moving its seat, was incorporated in Luxembourg, meaning that it continues its legal existence in another country.

The registry court dismissed the application for the company's removal, then the district court dismissed the action and the district court dismissed the appeal.

Following the appeal, the Supreme Court suspended the proceedings and asked the Court of Justice for a preliminary ruling concerning: 1. Compliance Article 270(2) Act on 15 September 2000 Commercial Companies Code 24 (transfer of the registered office abroad as a reason for the company's dissolution) from Article 49(54) TFEU; 2.

Recognition of the obligation to conduct winding-up proceedings of a company converted as a measure justified by important public interest needs; and 3. The need to transfer the seat of the main undertaking of the converted company.

Court of Justice as regards the question first and second concluded that the provisions of the Polish Commercial Companies Code, which require the liquidation of the company, in the event of the transfer of the registered office of the company abroad, could impede or even prevent the cross-border transformation of the company, and as such constitute a restriction on freedom of establishment.

The Court of Justice has also not found that the obligation to carry out winding-up proceedings in the present case justifies a restriction on freedom of establishment.

The obligation to carry out liquidation laid down by the national rules in the main proceedings goes beyond what is necessary to protect the interests of creditors, minority shareholders and employees and beyond what is necessary to achieve it.

Court of Justice third the question referred for a preliminary ruling replied that Article 49(54) The TFEU must be interpreted as meaning that the freedom of establishment applies to the transfer of the registered office of a company established by law one the State, in the territory of another State, in order to convert it into a company of the law of that other State, in accordance with the conditions laid down in the legislation of the latter State, to which the transfer is not accompanied by the transfer of the actual place of establishment of that company.

1. Draft amending directive Directive 2017/1132 for the cross-border transformation, merger and division of companies

On 25 April 2018 The European Commission has presented a package of changes to European company law, including the introduction of rules on cross-border transformations, mergers and divisions of companies[25].

The European Commission's legislative proposal was read in the European Parliament 18 April 2019 Following approval and amendment, the European Parliament forwarded the resolution with its position on the proposal 26 to the Council of the European Union and the European Commission.

It should be noted that the following text only takes into account the version proposed by the European Parliament In the first reading, so its wording may be amended at the stage of further legislative work.

According to Article 86b(2) a directive amending cross-border conversion means an operation whereby a company which has not been dissolved or put into liquidation transforms the legal form under which it is registered in the Member State of departure into the legal form of a company in the Member State of destination and transfers at least its registered office to the Member State of destination, while retaining its legal personality. As defined above, no real and permanent transfer of the company to the host country is required for the operation to be classified as a cross-border transfer.[27].

The provisions of the amending Directive impose a number of obligations on Member States to ensure consistent procedures for cross-border transformation[28].

Part of the procedures and formalities to be completed in connection with a cross-border transformation in order to obtain a certificate confirming the admissibility of the conversion is governed by the national law of the Member State of departure, while part of the procedures and formalities to be implemented after receiving a certificate confirming the admissibility of the conversion, in accordance with Union law, is governed by the national law of the Member State of destination (Article 86c(4) amending Directive).

These procedures should include drawing up and announcing a conversion plan together with the reports of the Management Board to the shareholders and employees of the company, subjecting that plan to an assessment by an independent expert, who will draw up his opinion, and approving the plan by a resolution of the Board of Shareholders of the (free assembly) of the converted company.

In addition, it is up to the State of departure to provide measures to protect minority shareholders, creditors and employees of the converted company.

As a result of cross-border operations, partners often face a situation where the law applicable to their rights would change as they would become shareholders of a company governed by the law of a Member State other than the law applicable to the company prior to the operation.

Therefore, Member States should at least offer the right to leave the company and to receive remuneration for shares or shares in capital equal to their value in the case of shareholders holding shares or shares with voting rights who voted against the plan.

However, Member States may decide to offer that right also to other shareholders, such as non-voting shareholders or non-voting shareholders, or to members who, as a result of cross-border distribution, would obtain shares or shares in a company in a different proportion than they had before the operation, or to shareholders who have not undergone a change in applicable law but whose rights have changed as a result of the operation.

Member States should ensure that creditors who have established relations with the company are adequately protected before it makes public its intention to carry out cross-border operations.

In addition to the general provisions laid down in the Regulation, Member States should therefore provide that such creditors should be able to lodge a claim in the Member State of departure for a period of time. two years after the disclosure of the cross-border conversion plan.

After disclosure of the plan, creditors should also be able to take into account the potential impact of the change in jurisdiction and applicable law as a result of cross-border operations.

The company's creditors to be protected may also be active and former employees with accumulated occupational non-retirement rights and persons receiving benefits from occupational pension schemes.

In order to ensure that the cross-border operation does not result in an unjustified breach of the employee participation right, where the company conducting the cross-border operation operates under the employee participation system, the company or companies resulting from the cross-border operation should be required to adopt a legal form allowing participation, including through the presence of employees' representatives in the competent management or supervisory body of the company or companies.

Furthermore, if negotiations are held in good faith between the company and its employees, they should be conducted in accordance with the procedure laid down in Directive 2001/86 and to seek an amicable solution that reconciles the company's right to cross-border operations with employees' right to participate.

In order to protect the agreed solution or to apply standard rules during the period four years, the company should not be able to abolish the right of participation through further national or cross-border transformations

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