Corporate / M&A

The ECJ Allows Cross-Border Conversions

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.

With VALE the ECJ gave the green light to cross-border conversions in principle. However, countless issues remain unsolved, making the implementation of respective EU rules necessary.

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schoenherr attorneys at law /