The ECJ Allows Cross-Border Conversions
→ Clemens Spitznagel
→ Roman Gruber
In a series of landmark cases, the European Court of Justice (ECJ) has shaped European company law by exploring the scope of the freedom of establishment with regard to cross-border mobility of companies. In its latest decision, VALE (Case C-378/10), issued on 12 July 2012, the ECJ had to rule on the possibility of so-called cross-border conversions.
In the more than two decades that have passed since 1988, the ECJ had several occasions to answer questions on the freedom of establishment (Niederlassungsfreiheit) and the mobility of European companies.
In Daily Mail (1988), the ECJ ruled that an EU state may restrict the migration of a company to another EU state (1988).
After some calm years, the ECJ rulings continued. In Centros (1999), Überseering (1999) and Inspire Art (2003), the ECJ held that, contrary to Daily Mail, cross-border transfers of an EU company’s registered office must be permitted by national law. In Cartesio (2008), the ECJ reaffirmed its Daily Mail doctrine but with the addition that freedom of establishment also covers the possibility of a company converting itself into a company governed by the law of another member state, such a transfer being nothing more than the cross border transfer of the registered office. Following this decision, discussions began about whether member states must accept cross-border conversions. With VALE, the ECJ answered this question.
Facts of the case
VALE Costruzioni Srl (VALE Costruzioni), a limited liability company originally established under Italian law, decided to discontinue business in Italy and to transfer its seat and business to Hungary in order to operate there in accordance with Hungarian law. On its request, the company was deleted from the Italian commercial register. Subsequently, the director of VALE Costruzioni and another natural person adopted the articles of association of VALE Építési kft (VALE Építési), a limited liability company under Hungarian law, with a view to register in the Hungarian commercial register. In the registration application, it was stated that VALE Costruzioni was its predecessor.
The registration was rejected by both the court of first instance and the appeal court. The appeal court argued that under Hungarian law, a company that is not Hungarian cannot be listed as a predecessor in law. The Hungarian supreme court upheld the appeal court’s assessment and stated that the transfer of the seat of a company governed by the law of another member state entailing the reincorporation of the company in accordance with Hungarian Law. A reference to the original Italian company cannot be regarded as conversion under Hungarian law because Hungarian law on conversions applies only to domestic situations. However, the supreme court decided to request a preliminary ruling from the ECJ.
The ECJ’s ruling
In addressing the VALE case, the ECJ stated that national legislation that enables national companies to convert, but does not allow, in a general manner, companies governed by the law of another member state to do so, constitutes a restriction of the freedom of establishment (Articles 49 and 54 TFEU).
Differences in treatment depending on whether a domestic or a cross-border conversion is at issue cannot be justified by the absence of rules laid down in secondary EU law. Restrictions may be justified on the basis of overriding reasons in the public interest, such as protecting the interests of creditors, minority shareholders and employees. The ECJ held that such justification was lacking in the VALE case.
The host state may determine the national law applicable to cross-border conversions as long as the principles of equivalence and effectiveness are observed. These principles preclude the host state from refusing to record the foreign company as the “predecessor in law” if such a record is made for domestic conversions, as well as from refusing to consider documents from the authorities of the member state of origin.
Significance and outlook
In VALE, the ECJ casts some light on an issue raised by the court in Cartesio (Case C-210/06). According to Cartesio, a company may not be hindered from leaving a member state when it intends to move to another member state and will be governed by the law of the host member state. This statement had left observers wondering whether host member states had to provide for the possibility of cross-border conversions. The VALE decision has made clear that member states that provide for national conversions may not prohibit cross-border conversions.
VALE has clarified some aspects of cross-border conversions, but many questions remain, such as creditor and workers protection in the member state of origin. Due to the absence of respective procedural rules, it also remains unclear how company register courts will handle cross-border conversions in practice. For this reason, the calls for European rules on cross-border conversions are justified and will hopefully be heard by the European Commission.