IBCL-CL2_2023-24_Part_I_Unit_2_Section_4_EU-Freedom-of-Establishment.pdf

IBCL-CL2 A.A. 2023-24 (II semester) Part I, Unit 2 LEGAL PERSONALITY THE “CHOICE” OF THE APPLICABLE CORPORATE LAW: THE “FREEDOM OF ESTABLISHMENT” UNDER E.U. LAW IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 1 Section 4 THE “CHOICE” OF THE APPLICABLE CORPORATE LAW AND THE “FREEDOM OF ESTABLISHMENT” UNDER E.U. LAW IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 2 Section 4.0 INTRODUCTION IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 3 Globalization and Companies as personae fictae A central feature of the “globalized economy”, is the existence of “incorporated” business often referred to as “legal entities” – corporations and companies among others – which, whilst created under a specific (national) company law, carry out business in other countries (e.g., Company Alfa, whilst created under Italian Law, carries out its business in Poland); Therefore, any time one is faced with a corporate law problem, the first question he/she needs to ask is: – Which corporate law(s) shall govern such (in)corporate(d) firms? – Or, differently stated: “what are the applicable rules governing the (company-related) issues at hand?” 4 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 Globalization and Companies as personae fictae/2 In order to answer those questions, we always need to bear in mind that the “company” is a persona ficta, a creature of State law that could be considered as a “person” (or, rather, a “legal person”) only in the light of a specific set of legal provisions provided for by a (any) legal system(s), i.e., insofar as a legal rules acknowledge their very existence within the domain of the law of a given jurisdiction; – Typically, any State – if not bound by supra-national ru- les (treaties, etc.) – would recognize the “legal entity” status only according with its own legal rules/principles (i.e., according to its own “company law rules”); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 5 Globalization and Companies as personae fictae/3 Often (though not always: remember the “pseudo-foreign corporations” rule under § 2115 of the California Corporation Law!) the answer to the question: Which corporate law(s) shall govern such (in)corporate(d) firms? - is the result of a previous, and usually voluntary, determination: that is, the private “choice of (applicable company) law”. It’s usually a choice made upon forma- tion of the legal entity by those (founding shareholder(s)) choosing the country where the firm should be incorporated; - and such (private) choice expresses the: Freedom of Incorporation (US)  Freedom of Establishment (EU) 6 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 «Choice of Law» Issues vs. «Jurisdictional» Issues Note: “Choice of Law” problems must be distinguished from another type of issues (yet still regarding the appli- cation of (corporate) law, but from a different angle), : that is: “in which jurisdiction should the litigation (regarding one or more specific aspects of company law) be lodged?” (or, in other words: “what is the Court that is entitled to hear the case regarding the company law issues?) Unfortunately, there is not a “one-fits-all” answer to this question; often it depends where the company law litigation is lodged: e.g., Delaware (Italian, French etc.) judges may deem themselves “the right judges” in some cases and deny their jurisdiction in other cases; 7 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 Choice of Law Issues vs. Jurisdiction Issues/2 (continued) in order to answer the question: “in which jurisdiction should the (corporate law) litigation be lodged?” – “Jurisdiction” = this legal term also used to indicate the power to adjudicate a case by a given local court (e.g.: Italian Courts). – Whenever one situation involves elements located in more than one “State” (or, more technically, in more than one “jurisdiction”), you probably should also answer to a second question: which is the appropriate court where to lodge the litigation concerned with that situation? 8 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 «Choice of Law» Issues vs. «Jurisdictional» Issues Remember: – “Choice of law” = short form for “choice of the applicable (company, family, bankruptcy, contract, tort, ecc.) law to the case: whenever the factual situation to be litigated in court involves “elements” located in more than one “State” (or, more technically, in more than one “jurisdiction”), you probably should answer first to the following question: “what is the substantive legal provision that should be applied to the issue at hand?” For example: if – like in McDermott v. Lewis case – the legal question is “whether voting the shares a subsidiary owns in the parent company is permissible or not”, in order to answer the question, you should first figure out what company law is to be applied to the case: shall I apply Italian Company Law (art. 2359-bis of the Italian Civil Code), or another State’s company law (e.g. Delaware Corporation Law § 160(c), or Panama Company Law, or … etc. …)? 9 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 Choice of Law Issues vs. Jurisdiction Issues/4 Note that these two questions (choice of law and choice of jurisdiction) are strictly intertwined: it is sometimes diffi- cult to say which one comes first: typically, if you start a litigation in one State, then the Courts of that State may: – First “assert” its own jurisdiction: i.e., the court will have to ascertain whether or not it can claim its own “jurisdic- tion” over the case, according to its own “conflicts of law rules” (=> “procedural” conflicts of law rules); o If jurisdiction is “denied” (not asserted) by the court of a particular State, then the “plaintiff” needs to choose another Court, sitting in another jurisdiction; – if the court’s jurisdiction could be legitimately “asserted”, then that court will have to figure out the “choice of (sub- stantive) law”, e.g., what substantive company law should be applied to the legal issues involved in the litigation; 10 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 Choice of Law Issues vs. Jurisdiction Issues/5 However, sometimes a supra-national set of rules (treaty rules, like rules adopted under the Treaty on the Functioning of the European Union, “TFEU”) may provide additional rules involving (or having an impact on) either of both questions; These rules, if accepted by the “forum state” (state where the litigation is lodged by one of the parties thereto), will “preempt” (override) the domestic rules on either or both “jurisdiction” and/or on the “choice of laws”; The purpose of these supra-national rules on both jurisdictional (choice of court) matters and on choice of substantive law matters, is to offer a standardized (predictable) solution to these complicated issues; IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 11 Section 4.1 FREEDOM OF ESTABLISHMENT (ONE OF THE 4 FUNDAMENTAL ECONOMIC FREEDOMS UNDER THE “TREATY OF THE FUNCTIONING OF THE EUROPEAN UNION” (“TFEU”) IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 12 «Freedom of Establishment» as one of the 4 F.E.Fs of the EU as far as “EU companies” (under art. 54 TFEU) are concerned, each national Law of EU Member States dealing with Business Organizations must also comply with the Freedom of Establishment (“FE”), FE constitutes one of the four Fundamental Economic Freedoms within EU “internal market”, established by the EU Treaties; Art. 26, TFEU, para. 2 (=> over to the next slide); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 13 Freedom of Establishment as one of the 4 F.E.Fs of the EU Art. 26, TFEU, paragraph 2:  “The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties”.  “Treaties” = 1. Treaty on the European Union (“TEU”); 2. Treaty on the Functioning of the European Union (“TFEU”); 3. Charter of Fundamental Rights of the European Union (“EU Charter FRs”) IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 14 Freedom of Establishment as one of the 4 FEF of the EU/2 The “internal market” as a common economic and legal area that ought to be governed by the same rules (i.e., by the EU Law) has been instituted by Art. 3, para. 3rd, of the Treaty on European Union (“TUE”), and it is mainly regulated under Articles 26-66 and 101-109 of the Treaty on the Functioning of the European Union (“TFEU”). Thus, thee 4-FEFs are necessary for the correct functio- ning of the EU Internal Market, since they contribute to the creation of a “level playing field” where businesses, workers, professionals, consumers (and citizens in gene- ral) can carry out their respective activities on equal foo- ting with nationals (“persons”) of other Member States; 15 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 Freedom of Establishment: the Governing Rules Art. 49, paragraph 1, TFEU Art. 49, par. 1, TFEU (formerly art. 43 EC Treaty) Nel quadro delle Within the framework of the disposizioni che seguono, le provisions set out below, restrizioni alla libertà di restrictions on the freedom of stabilimento dei cittadini di uno Stato membro nel establishment of nationals of a territorio di un altro Stato Member State in the territory membro vengono vietate. of another Member State shall Tale divieto si estende be prohibited. Such prohibition altresì alle restrizioni shall also apply to restrictions relative all'apertura di on the setting-up of agencies, agenzie, succursali o filiali, branches or subsidiaries by na- da parte dei cittadini di uno tionals of any Member State es- Stato membro stabiliti sul territorio di un altro Stato tablished in the territory of any membro. [Libertà di Member State. [Secondary FE] stabilimento secondaria] IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 16 Freedom of Establishment: the Governing Rules/2 Art. 49, paragraph 2, TFEU Art. 49, par. 2, TFEU Freedom of establishment La libertà di stabilimento shall include the right to take importa l'accesso alle attività autonome e al loro up and pursue activities as esercizio, nonché la self-employed persons and costituzione e la gestione di to set up and manage imprese […], alle condizioni undertakings, […], under the definite dalla legislazione conditions laid down for its del paese di stabilimento own nationals by the law of nei confronti dei propri cittadini, fatte salve le the country where such disposizioni del capo establishment is effected, relativo ai capitali. subject to the provisions of [Libertà di stabilimento the Chapter relating to primaria] capital. [Primary FE] IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 17 Freedom of Establishment: the governing rules/5 FE within EU “internal market” (“FE”) – Art. 49, paragraphs 1 and 2, TFEU (including both the freedoms of each “national” of any EU’s “Member State” to exercise any business/professional activities, and to transfer such economic activity into any Member State) refers to art. 16 of the Charter of EU Fundamental Rights Article 16 - Freedom to conduct a business «The freedom to conduct a business in accordance with Union law and national laws and practices is recognised». – [Please compare art. 49 TFEU with art. 41, paragraph 1 of the Italian Constitution]; IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 18 Freedom of Establishment: the governing rules/3 Art. 49, TFEU (Treaty on the Functioning of EU): o General rule (art. 49, para, 1, first sentence, TFEU): restrictions on the “freedom of establishment” are forbidden  it applies both, to primary, and to secondary FE;  it applies to “nationals of a Member State”, wishing to establish OR to transfer the primary or secondary headquarters of their business activities in the territory of “another Member State” (=> the latter being still a portion of the “internal market”!) IBCL/CL2 A.Y. 2023-24  Typically, there are (at least) two EU “Member States” involved: “Member State of Origin”, and a “M-S of Destination” © Maurizio Bianchini 2024 19 FE: the Governing Rules /4 What is an “establishment”? To find an answer we must look into ECJ’s “case law”: – As regards the existence of a restriction on the freedom of establishment, the European Court of Justice noted that the “concept of establishment within the meaning of the Treaty provisions on the freedom of establishment involves the actual pursuit of an economic activity through a fixed establishment in the host Member State for an indefinite period. Consequently, it presupposes actual establishment of the company concerned in that State and the pursuit of genuine economic activity there” (Vale case, 2012, point no. 34). 20 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 Freedom of Establishment: the governing rules/5 (continued) FE within EU “internal market” (“FE”) – Art. 49, besides its general statement (= restrictions of FE are forbidden), sets forth two additional rules: o Art. 49, para. 2, TFEU includes, both, the freedom of each “national” of any EU’s “Member State”: i. to set up and to engage in (=> to implement and © Maurizio Bianchini 2024 to exercise) any economic (trade or business) activity and/or professional activities, and ii. to transfer such economic/professional activity – as first established in one Member State (sometimes referred to as the “State of Origin”) – into another Member State (“State of IBCL/CL2 A.Y. 2023-24 Destination”); without unreasonable/disproportionate/discriminato- ry restrictions being imposed on those 2 prerogatives; 21 Who is entitled to Freedom of Establishment? Art. 49, par. 2, TFEU Art. 49, par. 2, TFEU Freedom of establishment La libertà di stabilimento im- shall include the right to take porta l'accesso alle attività up and pursue activities as autonome e al loro esercizio, self-employed persons and to nonché la costituzione e la set up and manage underta- gestione di imprese e in par- kings, in particular companies ticolare di società ai sensi or firms within the meaning dell'articolo 54, secondo of the second paragraph of comma, alle condizioni definite Article 54, under the condi- dalla legislazione del paese di tions laid down for its own stabilimento nei confronti dei nationals by the law of the propri cittadini, fatte salve le country where such establi- disposizioni del capo relativo ai shment is effected, subject to capitali. the provisions of the Chapter [Libertà di stabilimento relating to capital. [Primary FE] primaria] IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 22 Freedom of Establishment: does it apply to «companies»? Art. 54, para. 1, TFEU Art. 54, para. 2, TFEU IBCL/CL2 A.Y. 2023-24 Companies or firms formed in “Companies or firms” accordance with the law of a means companies or Member State and having their firms constituted registered office [la sede sociale o under civil or «sede legale»], central commercial law, administration [l'amministrazione including cooperative centrale] or principal place of societies, and other business [o il centro di attività principale], legal persons within the Union shall, for the governed by public or purposes of this Chapter, be treated in the same way as private law, save for natural persons who are those which are non- nationals of Member States. profit-making. © Maurizio Bianchini 2024 23 FE: the Governing Rules and Company Law Natural persons vs. Legal Persons: as anticipated, there are different scopes and rules in the application of the FE, depending on the nature of the person involved (natural person vs. legal entity) o Generally, with regard to an “undertaking” economic activity, profession or business), the freedom of establishment of any national of one Member State into another Member State includes the freedom to access and to exercise an economic (business, or professional) activity in that second Member State; o As far as a natural person of any given Member State is concerned, the term “national” is determined with regard to the natural person nationality rules…. IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 24 FE of Companies within EU “internal market” o As far as an entity different from a natural person – and especially an entity falling within the (broad) definition of “company” under Article 54 of the TFEU – is concerned, there are more complex issues to be addressed; o This is true especially when the “company” has been formed in one E.U. Member State (MS “of origin”), and it intends to transfer its headquarters (seat) in another E.U. Member State (“host MS” or “MS of destination”), thereby exercising its primary FE; sometimes (e.g. in Polboud) the business firm wants to transfer the “registered seat” to another EU Member States, while retaining headquarters (“real seat”) in the MS of origin; IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 25 Freedom of Establishment within EU “internal market” o More specifically, two main issues should be taken into account if an “entity” is involved: a) the notion of “company” is very broad: art. 54, para. 2nd, TFEU, includes any form of partnerships, company or corporation, cooperatives; only not-for-profit entities are excluded from such a broad definition; b) art. 54, para. 1°, TFEU, states that, for purposes of FE, a company should be treated like a natural person, i.e., just like a citizen, national of any of the EU Member States, IF: i. the company was formed accordingly to the Company Law of any EU Member States (e.g., Italy), and ii. such company maintains any of the following IBCL/CL2 A.Y. 2023-24 “connecting links” with the EU: (a) its formal “seat” (“registered seat”) OR (b) its central headquarters OR (c) its centre of primary activities within the EU. 26 © Maurizio Bianchini 2024 How does a “company” qualify as “EU Company” under Article 54 of the TFEU, in order to enjoy the FE? in many occasions, the European Court of Justice (“ECJ”) specified that: with regard to companies, the finding of any of the alternative and equivalent criteria of: (i) the formal company’s “seat” (“registered seat”) [legge dello Stato della sede sociale => art. 2328, co. 2°, no. 2, c.c.], (ii) the central administrative office [legge dello Stato della “sede dell’amministrazione”], or (iii) the place of actual business operations [della “sede operativa”] will respectively determine – like “nationality” would do with regard to a natural person – the necessary and sufficient connecting link with the legal system of a EU Member State, i.e., the link whereby the company may qualify as a “national” of a given, specific EU Member State. IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 27 FE of Companies within EU “internal market” EU companies formed under the Company Law of any EU Member States, and/or conducting their trade or business according to any of the three criteria listed in art. 54 TFEU are qualified as “EU Companies” for FE purposes; – that implies that “national” for purposes of art. 54 means a company that the (Company) Law of any EU Member States qualifies as “national” of that EU MS, pursuant to any of the 3 connecting links – that also means that entities that do not qualify as EU companies under article 54 TFEU, cannot enjoy the FE; Note that the connecting link is freely selected by each Member State’s conflicts of law rules concerned with company law; IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 28 FE of Companies within EU “internal market”: Italy Italy, under Article 25 of its own “Private International Law” rules (Law no. 218/1995, as amended) adopted a “mixed” connecting link system, in order to identify the “nationality” of companies, before Italian Courts: - Primary “connecting link”: state of incorporation (“registered seat”): it resembles to Delaware’s conflicts of laws rule re. corporations (=> “incorporation theory”); - But Italy also provides alternative connecting links: Italian Laws shall nevertheless apply to corporations formally “foreign”, but de facto “Italian” (~ California “pseudo-foreign corporation”), in two situations: - if the place of the company’s “Centre of business administration” (“real seat”) is located in Italy; - if the place where the main corporate (business) purpose(s) is (are) carried out is in Italy: here the (main) “business purpose” is assessed in fact (not just on the records); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 29 Italian connecting link(s) for corporations (continued) - Art. 25, («Società ed altri enti»), of Law no. 218/1995, as amended (i.e., the Italian International Private Law) states that: «1. Companies, associations, foundations and any other entity, public or private, even if not of an associative nature, are governed by the law of the State in whose territory the constitution procedure was completed. However, Italian law applies if the seat of the administration is located in Italy, or if the main purpose of those entities is located in Italy. «2. In particular, the following are governed by the law applicable to the entity: a) the legal nature; (b) the name or business name; (c) constitution, conversion and dissolution; (d) capacity; (e) the formation, powers and mode of operation of the entity’s organs; (f) the authority to act on behalf and represent the entity; (g) the arrangements for acquiring and losing the status of entity’s associate or member and the rights and obligations inherent in that status; (h) liability for the obligations of the entity; (i) the consequences of breaches of the law or the instrument of incorporation [= articles of incorporation and by-laws]. «3. Transfers of the registered office to another State and mergers of entities established in different States shall take effect only if they are carried out in accordance with the laws of all States concerned». IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 30 Italian connecting link(s) for corporations (continued) NOTE: - we learnt that the Company Law rules applicable to the very existence of the company as a “legal person” (= rules concerned with company’s formation) fall within the scope of the so called “internal affairs doctrine” of the corporate entity, according to the US (state) corporate law (=> McDermott v. Lewis, 1987); - Now check Article 25, para. 2nd, of the Italian Private International Law in order to grasp the wide range of the “internal affairs” according to Italian “conflicts of laws” rules; IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 31 FE of Companies within EU “internal market” Thus, with specific regard to “companies”, (primary) FE principle (Article 49 TFEU), entitles everyone, both – to create a new for-profit entity in order to engage in any lawful trade or business activity, as if this business entity were a “national” of the Member State of Origin, by exercising her free choice to incorporate (= “business freedom”) a business firm, in accordance with the specific © Maurizio Bianchini 2024 EU legal system pre-selected for the company’s formation; – and, to transfer/relocate o the registered office, o or “real” seat (i.e., the main center of administration of the business affairs), IBCL/CL2 A.Y. 2023-24 o or the principal place of business, of an already existing legal business entity to another E.U. Member State, subject to reasonable, proportionate, and non-discriminatory conditions only ; 33 The meaning of forbidden restrictions on FE pursuant to Art. 49, paragraph 1 (first sentence), TFEU forbidden restrictions on EU “undertakings” FE shall include any EU MS measures (legal or administrative rule(s), principles) which would have the direct or indirect effect of: prohibiting, preventing or rendering less attractive, as a matter of fact, the exercise of the “FE” to any entity that qualifies as “company” under Art. 54 TFUE; Accordingly, it would also be inconsistent with art. 54 and art. 49, paragraph 1, TFEU – and therefore it shall be forbid- den: for a “host” EU Member State to treat differently from a domestic Company (= to discriminate) a “EU Companies” operating in the host EU Member State, while formed (registered) in another EU Member State, or whose main “centre of administration” (or actual center of operations) has been established in another EU Member State; IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 34 The meaning of FE forbidden restrictions (cont’d) under the FE principle, it shall be forbidden pursuant to Art. 49, paragraph 1, first part: – Typically, a discriminatory treatment between EU businesses (EU corporations) registered or operating in two different EU Member States occurs under disguised legal provisions, and thus bearing indirect negative effects, selectively, only to the “foreign” (but still “EU” company). For example: o a (host) Member State could impose some special legal pre-condition(s) in order for a “foreign” company to operate in, or to re-locate in the host-Member State which could be: easily respected by “domestic” companies, but not as easily complied with by a “foreign” company (see, for example: Vale case, for primary Freedom of establishment; and Centros case, for “secondary FE”); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 35 The meaning of FE forbidden restrictions (cont’d) pursuant to Art. 49, paragraph 1, first part, and to Art. 54 TFEU, restrictions of “EU Companies” FE shall be forbidden: – (cont’d) typically, discriminatory treatments between EU businesses (EU corporations) registered or operating in two different EU Member States occur under disguised legal provisions. For example: o The “MS of origin” may impose some unreasonable/disproportionate legal burden on “national” companies that would like to relocate their “seat” (whether their real seat, or their registered seat) in another MS: thereby hindering the “freedom” to “quit” the State of Origin and to relocate in the Member State of destination (see, e.g., the Vale case and the Polboud case); o restrictions on EU companies’ “exit” are allegedly justified by the MS of origin’s “sovereign right” to protect (local) creditors and employees from opportunistic behaviours by the “relocating” companies (“free meal problem”); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 36 FE of Companies within EU “internal market” Note that any Company Secondary FE is subordinated to that same Company’s Primary Establishment – despite the apparent wording of the previous rules (art. 54 TFEU), any company wishing to establish a secondary seat (i.e., a “subsidiary” or a “branch” within the wording of Art. 49 TFEU) in any EU Member State - thereby exercising its secondary freedom of establishment – must first be able to show its (previous) primary establishment of a center of operations within the EU, corresponding to the formal venue of formation (incorporation State) or consisting in the headquarters (its “centre of operations”) of the company itself; 37 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 FE of Companies within EU “internal market” (continued) Any Company Secondary FE is subordinated to the Company’s Primary Establishment In other words, a “EU” company, within the meaning of Art. 54, TFEU, is entitled to exercise its secondary freedom of establishment, - subject to non discriminatory, reasonable and proportionate conditions only (like primary FE); and - insofar and to the extent such company has previously exercised (or otherwise, to the extent it is allowed to benefit of) its primary FE (either by choice of company formation or by previous transfer of its corporate seat/registration/principal place of business, in any of the EU Member States); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 38 Transfer of Company’s Seat/Registration and company’s “nationality”: a complicated relationship according to the Company Law of many EU Member States: – if and when a Company formed/registered/operating according to any of the 3 previous criteria or “connecting link” (and thus, qualified as a “EU company”) in that MS…. – …. decides to transfer its main business activities (its formal/registered seat, or its effective main headquarters/real seat) from its own EU Member State, (State of Origin) to another EU Member State (State of Destination), according to the FE (artt. 49 and 54 TFEU), – then it may be deemed to have also changed its “nationality”, according to either (or both) the law(s) of » the “originating” Member State rules, and/or » the “destination” Member State rules Why? (=> over to the next slide, please) IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 39 FE of Companies within EU “internal market” Because both: 1. the use of different “connecting links” employed by each Member State (originating MS, and destination, MS respectively), and 2. the different transfer of corporate seats requirements and procedures (either the registered or the real seat, depending on the specific connecting links used by the Member States involved) that could be applied in such cases according to either or both EU Member States involved in the transfer are still to be provided and regulated by each domestic company law, enacted by each EU Member State, within the exercise of their own “sovereignty”; IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 40 FE of Companies within EU “internal market” Indeed, currently (according to the holdings of the E.C.J. decisions), each E.U. Member State is still entitled to define – independently from any other E.U. Member State – both: (a) the link(s) connecting a Company to its own legal system, and according to which such a Company could qualify as a (Member State’s) “national company”; and (b) any additional connecting link(s) that would be deemed necessary, under that Member State Company Law, in order for that Company to legitimately retain its current “national” status; and this also includes the possibility, for that same (home) Member State, to enjoin a company, already subject (or made subject) to its legal system, from maintaining such national status, should that company transfer (or should it be deemed to have transferred according to that MS domestic law) its registered seat or its effective (real) seat in another (destination) Member State; IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 41 FE of Companies within EU “internal market” Ultimately, the sovereign power retained by each EU M-S to select its own “connecting link(s)” in order to deem a company “domestic” or “foreign” is why we still experience “loopholes” in the application of the FE principle, some EU Member States are always trying to use “legal loopholes” in order to (indirectly/disguisedly) discriminate “foreign” EU companies to the benefit of their own “domestic” companies; However, FE principle should ensure that such domestic legislative powers (still entrusted with each EU Member State) will not result in a disproportionate/unreasonable, direct/indirect (disguised) legal burden on the transfer of a company’s nationality (from and/or into) any EU M-S, IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 42 FE of Companies within EU “internal market” ROOM FOR Company Laws CONFLICTS (conflicts of laws): - Since these national requirements (“connecting links”) may be different in every EU Member State, some problems of coordination with each-others are likely to arise, at least for those Member States that use the “State of the real/effective seat” criterion in order to determine the “nationality” of a company (i.e., the connecting link between the entity and the legal system governing it), as opposed to the “State of incorporation” rule; o Example: a company registered under EI Law, maintains its “real seat” (place of administration) in Berlin; - It will be deemed, at the same time: - a “EI company”, from a EI Law perspective (incorporation theory). - a “German company” from a German Law perspective (real seat theory) IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 43 FE of Companies within EU “internal market” (cont.d) ROOM FOR Company Laws CONFLICTS (conflicts of laws): - if a Company that is deemed a “national” of the Member State A, moves its “real seat” – which would normally correspond to the “centre of administration” of its business activities – into Member State B, then, if Member State A (the State of Origin) adopted the “real seat” connecting factor, might no longer recognize said legal entity as a “national” company, just because of such transfer of the company’s “real seat” abroad; o Example: a German Company moves its “real seat” (place of central administration) to Italy: it will be no longer a “German” company under German Laws (“real seat” doctrine); from an Italian point of view, according to Article 25 of It. Law no. 218/1995, Italian IBCL/CL2 A.Y. 2023-24 (Company) law would pre-empt the application of German (Company) Law, because its “real seat” is now located in Italy, according to Italian law contact test; © Maurizio Bianchini 2024 44 FE of Companies within EU “internal market” - in any of such situations of jurisdictional “conflict”: (i) Pursant to the FE rules, the Company Law of the State of Destination (sometimes also referred to as the “host state”) cannot legitimately limit the establishment (the “immigration”), including a “cross-border conversion”, i.e. it cannot refuse to recognize a “foreign” corporation that intends to “migrate” out of its State of Origin (by cancelling © Maurizio Bianchini 2024 the company from the State of Origin Company Registrar), e.g. depriving a foreign corporation of its “legal capacity” to stand in Court or imposing other limits to the carrying out of business activities in the host (destination) Member State, either by applying in a discriminatory way the “real seat” “connecting link” provided by its own Choice of Law IBCL/CL2 A.Y. 2023-24 rules (International private law provisions), or by imposing undue burdens on foreign companies; => Vale case of 2012 [Überseering case of 2002; Inspire Art case of 2003] 45 FE of Companies within EU “internal market” (continued) room for confict(s) of laws (ii) In the light of the primary FE rule, it may also be disputable whether or not the Laws of the EU Member "of Origin” could legitimately require – according to its own rules (= according to the State of Origin’s company law rules) – the previous dissolution and/or cancellation from the MS of Origin’s Business Registrar, of its “national” company, in order to allow such company to “emigrate” to another State (the EU Member State “of Destination” or “host State), and thereby changing its original “nationality”, i.e., thereby changing the corporate law rules applicable to its very existence as a “legal person” and to its “internal affairs”; - according to the ECJ in the Cartesio case of 2008: next slide please IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 46 Freedom of Establishment: Cartesio holding Cartesio case (ECJ 16.12.2008 C-210/06, ECR 2008, I-9641) – The ECJ held that Articles 43 and 48 of the EC Treaty (today: Articles 49 and 54 of the TFEU) ought to be interpreted as not precluding the legislation of a EU Member State, under which a company did incorporate, to limit the ability of such company to transfer its seat (whether its “real seat” or its “registered seat”) to another EU Member State, whilst retaining its status as a company governed by the law of the Member State of incorporation (i.e., whilst retaining its original “nationality”); – This ECJ ruling was generally considered ambiguous, incomplete, and, thus, unsatisfactory; subsequent cases better clarified the actual limits to acceptable restrictions to “inbound” and “outbound” transfer of EU companies’ seat (registered and/or real seats); 47 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 Freedom of Establishment: Vale case holding Room for confict(s) of laws? ECJ defines FE limits vis-à-vis inbound transfer of company’s (real or registered) seat: Vale Costruzioni case (ECJ, C-378/10, 2012) – this case deals with a cross-border transfer of a legal person’s “nationality” from Italy to Hungary, by means of: (a) cancellation from the Italian Business Registrar (which occurred pursuant to the Italian company law rules, and therefore to be deemed legitimate and effective from an Italian law perspective), and (b) a contemporaneous registration of the same “legal person” in the MS of destination Business and Companies Registrar, which was contested by the Hungarian authorities – the ECJ held that the Hungarian rules on (domestic) transfer of seat by not providing specific rules for cross-border transfer of seat and imposing extra-burdens to foreign IBCL/CL2 A.Y. 2023-24 companies relocating in Hungary, breached Articles 49 and 54 TFEU (=> disguised discrimination vis-à-vis “foreign” companies => legal protectionism); © Maurizio Bianchini 2024 48 FE of Companies within EU “internal market” Room for confict(s) of laws? ECJ defines FE limits vis-à-vis outbound transfer of company’s (real or registered) seat: - in Cartesio, the ECJ did not fully answer to the question if and when any (direct or indirect) limitations to the company’s “emigration” imposed by the law provisions of the EU Member State “of origin” were to be deemed legitimate (acceptable) under the FE main rule; - In other words, under Cartesio it was not entirely clear if, under the FE main rule, any limitations/conditions imposed by the State of Origin to either: (a) the transfer of a EU company’s real seat or (b) the transfer/change of registration, were admissible under the FE principle; - Today, however, we may answer to this question mostly in the negative => read the ECJ’s Polboud case(2017); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 49 FE of Companies within EU “internal market” ECJ’s Polboud case (Judgment of the Court (Grand Chamber) of 25 October 2017, C-106/16, Polbud - Wykonawstwo sp. z o.o., EU:C:2017:804) – The Polbud decision confirmed the ECJ position that the FE principle: (a) includes the freedom to be re- incorporated in another Member State, as stated by the Articles 49 and 54 TFEU, and (b) applies to companies © Maurizio Bianchini 2024 across the EU, (c1) without the prior legal obligation to be liquidated (dismissed as legal person) in the Member State of incorporation (“of origin”), and (c2) without lo-sing their legal personality in the change to the “host State”; – The ECJ clarified that the regulatory power of a Member IBCL/CL2 A.Y. 2023-24 State ends when a company changes into a company governed by the law of another Member State (when the company changes “nationality” from EU Member State of origin into the EU Member State of destination).50 FE of Companies within EU “internal market” ECJ’s Polboud case – therefore, it is for the latter State to determine the legal and/or economic conditions that shall be satisfied by the company, in order to bring the cross-border transfer of seat (AKA “international conversion”) into effect. – under Articles 49 and 54 TFEU, the EU Member State of origin is only allowed to provide legislation for the protection of public interests (such as the protection of creditors, minority shareholders and employees): » but may not impose mandatory company’s liquidation; » if that legislation is proportionate to the public interests ends of the EU MS of origin (next slide) IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 51 FE of Companies within EU “internal market” ECJ’s Polboud case (Judgment of the Court (Grand Chamber) of 25 October 2017, C-106/16, Polbud - Wykonawstwo sp. z o.o., EU:C:2017:804) – Proportionality test: the Member State of emigration can only impose justified and proportionate restrictions to protect interest of workers, minority shareholders or creditors, but they cannot constitute unjustified restrictions. – In addition, the ECJ extended the principle of equivalence to the country of origin, and not only the Member State of destination, thereby stating that the first State cannot impose, in the context of a cross- border conversion, conditions which are more restrictive than those applied to the conversion of a company within the same Member State. IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 52 FE of Companies within EU “internal market” ECJ’s Polboud case (continued) – The relevance of Polboud’s decision: in the fact that the ECJ clearly decided that the principle of FE applies to a cross- border change of form by means of the sole transfer of the registered office of the company: there should no © Maurizio Bianchini 2024 additional legal obligation to transfer also the company’s “centre of administration”, nor the company’s “principal place of business” in order to change the company’s “nationality” and enjoy new domestic status under the (company) laws of the “destination Member State”; – therefore, the Polboud judgment raised new discussions concerning the “regulatory competition” among Member States (“race” to the top/bottom) and the increased IBCL/CL2 A.Y. 2023-24 possibilities of “forum shopping”, including the development of “letterbox companies” with the purpose of exploiting a more favorable legal and tax regime; 53 FE of Companies within EU “internal market” Incorporation Theory vs. Real-Seat Theory “Legal Certainty” with respect to the Better protection of the host State’s applicable substantive law (e.g. DE domestic market and company’s company law rules) => Predicability stakeholders (creditors, employees, and more uniformity of the decisions customers of the company), because of company law cases; it provides a more accurate and strict selection of the relevant «contacts» It is deemed as one of the driving of BOs with the «territory» where factor of the economic development the business activities take place; © Maurizio Bianchini 2024 of the hosting State (more business will choose the “hosting state” as BUT: their incorporation State); – it may be sometimes difficult to BUT: find out the place of «real seat» (place where the company is being – There may be a problem with the managed); so-called «letterbox companies» (companies registered in the – The «Real Seat Theory» is likely to incorporation State but doing raise more concerns with regard to business elsewhere); FE rules: i.e., it could be used by some MSs in order to deny the FE IBCL/CL2 A.Y. 2023-24 – It may favour a «race to the to «foreign» Companies, thereby bottom» (a “race” to “legal laxity”), favoring «domestic» companies, towards lower protecting standards and/or limiting companies’ of company’s stakeholders genuine relocations (creditors, employees, customers) – (e.g., Überseering case) 55 How does the ECJ legal analysis work in FE’s cases?/1 - Generally, while the ECJ case law admits that both the country of incorporation (“home” or “origin” EU Member State) and the host EU Member State (“of destination” may introduce conditions for the exercise of the FE, it also clarifies that such conditions cannot prevent companies to exercise their freedom of establishment across the EU; - The ECJ usually approaches a “FE” case using the following 3-steps analysis: 1) Does the issue(s) at hand fall within the “FE” principle? Three issues are typically analyzed here: a) whether the law (usually one or more corporate law provisions) that is being challenged by the plaintiff would be, or would not be able to infringe – directly or indirectly – the “freedom of establishment” principle, as set forth under Art. 49 TFEU; b) Is it about a violation of a “primary” or a “secondary” FE? c) typically, Art. 54 TFEU definition of “company” comes also into play: it is used to check if the alleged limitation(s) to FE would hinder a “EU company” freedom; IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 56 How does the ECJ legal analysis work in FE’s cases?/2 - (continued) The ECJ usually approaches a “FE” case using the following 3-steps analysis: 2) If the answer is yes, then the ECJ further investigates if is there is a FE’s breach (= a “restriction” on the company’s FE) in the case at hand; o Any undue restriction on the FE, albeit indirect (disguised) must always be substantiated in practice; IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 57 How does the ECJ legal analysis work in FE’s cases? /3 3) If such a restriction does exist in practice, then the ECJ evaluates whether or not the FE breach could be “justified” by the EU Member State that imposed such “measure(s)” restricting the exercise FE in that specific Member State [=“proportionality test”] a) Is there any overriding reason of “public interest” that would justify the Member State to impose the rule(s) whose effect is an (direct/indirect) restriction of the FE imposed on (foreign) EU companies? If the answer is “no”, then FE restriction is illegal; b) If yes, are the “public interest” measures (usually consisting in one or more legal rules) that are restricting the FE, appropriate for ensuring the attainment of those “public interest” objectives (as these “public interest” purposes have been stated by the national legislator that imposed such measures)? If no: illegal; c) If yes, then: did the “public interest measure(s)” go beyond what is strictly necessary in order to preserve the “public interest”, as claimed by the Member State? In other words, can these measures be deemed non-disproportionate with respect the public interest purposes they are supposed to accomplish? IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 58 Freedom of Establishment: How does the ECJ work/4 c)-(continued): If yes, then the national restriction to the FE is to be respected (the national restriction of the FE is ok under EU Law); if not, the FE restriction is illegal, and it must be removed by the EU Member State that tried to enact it; Gebhard test (=proportionality test): any measure imple- menting any of such “public interest reasons” must always be “proportionate” with respect to both: (a) the “way” (mode) and (b) the “intensity” those public interest(s) is/are in fact protected at the expenses of the FE  The means (the legal restrictions to FE) must always be proportionate (strictly instrumental) to the pursuance of the end whose such FE restrictions are intended for (= protection of a specific national public interest); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 59 Freedom of Establishment: How does the ECJ work/5 Moreover, any “restriction” at stake must be assessed in practice, that is with regard to its “practical effects” on companies’ FE (equal treatment); It is important to stress that, in assessing whether or not a genuine “public interest” exist, in order to justify a restriction to the FE, the ECJ repeatedly pointed out: - that exercising the FE for the purpose of enjoying the benefits of a most favorable EU legislation, does not, in itself, amount to an abuse of rights (see, e.g.: Daily Mail (1988), Centros and National Grid Indus (2011) decisions); - that the very fact that the company does not conduct any business in the host Member State (where the company was originally formed or where it intends to move its registered office afterwards) is insufficient to prove the existence of abuse or fraudulent conduct (Centros); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 60 Freedom of Establishment: How does the ECJ reason/6 In determining if any domestic legal provision of either: – the EU Member State “of origin” (in case of “domestic” EU company “emigrating” to another EU MS, of “destination”), or – the EU Member State “of Destination” (in case of a “foreign” EU company trying to “immigrate” into that EU MS from another EU Member State (“of origin”) is “unduly” burdening the Freedom of Establishment, the ECJ will take into account both: 1. Principle of equivalence, whereby the detailed rules of national law aimed at safeguarding the rights which individuals derive from European Union law (including the FE rights) shall not be less favorable than those governing similar situations under national law; and 2. Principle of effectiveness, whereby the detailed rules of na- tional law (including procedural provisions) shall not render impossible, even in practice, or excessively burdensome the practical/procedural exercise of any rights conferred to EU (legal) persons by the EU legal order (including the FE rights); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 61 Freedom of Establishment: How does the ECJ work/7 Note that, within the “Public interests” (or “Public policy”) purposes that, in principle, may allow a EU Member State to enact (company law) rules that would result in a “restriction” to the FE, one may legitimately list, inter alia: – the protection of the interests of (i) creditors, (ii) minority shareholders and (iii) employees, (iv) customers, – the preservation of the effectiveness of fiscal supervision, – and the fairness of commercial transactions, in general; However, up to now, the ECJ has established that public interest objectives such as protection of: creditors, minority shareholders, workers, limitation of tax avoidance can be attained with less restrictive measures than imposing the prior liquidation of the emigrating company (such as guarantees from creditors, exit rights for minority shareholders, etc.); But the tax debts a company owes to the EU Member State of “origin” must be paid before that company becomes a “national” of another EU M-S (= emigrating company’s tax clearance is an OK “public interest” restriction to FE); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 62 Freedom of Establishment: summary/1 In sum: – Freedom of Establishment within EU “internal market” (“FE”) provides that any “national” wishing to set up or transfer any business activity (more generally, any “economic activity”) is entitled to establish itself in, and/or to be transferred from/to each Member State. – FE includes the freedom to set up, to carry out (direc- tly, or through branches or subsidiaries) any trade, bu- siness, or profession (“economic activity”), and to tran- sfer such economic activity into another Member State, by complying to the rules of the M-State of Origin and of the M-State of Destination, and provided that such rules are not unreasonable, disproportionate, nor direc- tly or indirectly discriminatory (= intended: to prevent the exercise of the FE by other Member-States’ busi- nesses, and/or to make IBCL/CL2 A.Y. 2023-24 the “relocation” more difficult);63 © Maurizio Bianchini 2024 Freedom of Establishment: summary/2 In sum : – Art. 49 roughly implements “business freedom”, as set forth under art. 16 of the Charter of EU Fundamental Rights (and art. 41, paragraph 1, of the Italian Constitution). – The principle of the Freedom of Establishment is granted both to natural and legal persons => for profits companies. It finds its legal basis in Articles 49 and 54 of the TFEU; – However, the FE rules shall apply differently to natural persons as opposed to legal persons, and namely to companies; – the 3 connecting factors listed in Art. 54, para. 1, TFEU are alternative and equivalent in the light of EU Law, but they are very different if regarded with the “glasses” of each Member State’s set of Private International Law rules concerned with “corporate nationality”: this might create “conflicts of laws”; 64 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 Freedom of Establishment: summary/3 In sum (continued): – Forms of Establishment of firms protected by the FE:  Formation of “companies” [including Subsidiaries: note that a “subsidiary” is a separate legal entity from the “parent” company, a “branch” is not]  Agencies: an independent business or organization established to provide a particular service (e.g. distribution of good or services); © Maurizio Bianchini 2024  Branches: a branch office is not a separate legal entity of the parent corporation – Establishment of businesses organized in the form of “companies”:  Primary setting-up/winding-up, transfer of seat, conversion, re- incorporation of companies (including subsidiaries of other companies);  Secondary – agencies, branches [“branch” in the EIR ~ “establishment”]; – Nationality of a company (“connecting factors” or “links”): IBCL/CL2 A.Y. 2023-24  Registered office: the official address forming part of the public records;  Central administration: where the business headquarters are located (where the company is managed; business decisions taken);  Principal place of business: where the business premises are located or the business activity (business “purpose”) is primarily conducted; 65 Freedom of Establishment: summary/4 In sum (continued): – The laws of the Member State of Origin cannot make the transfer of the business abroad (to the Member State of Destination) unduly burdensome to the “emigrating” and also, vice-versa, to the “immigrating” companies: – According to the Court’s settled case-law, such restrictions to the FE principle, may be permissible (tolerated) only if: (1) they may be justified by overriding reasons in the public interest of the Member State that wants to impose them; (2) such restrictions shall be found reasonably appropriate for ensuring the attainment of the MS public interest objective in question (the domestic law’s rationale), and (3) In any case, these domestic provisions’ restrictive effects shall never go beyond what is strictly necessary in order to attain the legal provisions’ objective(s) (proportionality principle); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 66 Freedom of Establishment: summary/5 In sum (continued): – FE usually focus on the “disguised” provisions of a MS that has the effect of “discriminating” national companies from foreign companies – neither the State of Origin’s Laws nor the State of Destination Laws cannot unduly burden the transfer of EU companies out and/or in, with conditions, terms or requirements that are not equally imposed to (and equally effective in respect of) “domestic” company (for example: inbound conversions: imposing re-incorporation of foreign companies, in order to transfer their seat internally or that will result in a forced liquidation; and/or outbound change of seat: by imposing a complete liquidation/dissolution of the domestic legal entities, as a pre-condition for allowing their transfer in another EU Member State); 67 IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 Summary of some issues decided by the ECJ/1 1. MS are free (sovereign) to select their own “connecting links” (place of registration, place of central administration, place of main trade or business activities) (virtually all ECJ cases) 2. There is a free choice granted to shareholders to choose the legal order and the legal form they prefer for incorporate their business entity in another Member State (Centros); 3. There is a direct applicability of the freedom of establishment also in absence of measures of harmonization according to Article 49 TFEU (Centros): The recognition by the hosting Member State of any foreign EU companies must be complete and include, inter alia, the right of “standing in court” (Überseering); 4. The Member State of incorporation may reasonably restrict “emigration” of its own (national) companies to other Member States by a cross-border “conversion” proceeding if emigration occurs without any conversion purpose (Cartesio); IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 68 Summary of some issues decided by the ECJ/2 5. Member State of departure may request the fulfilment of tax obligations in order to authorize the departure (Daily Mail); 6. Reasonable limits to “emigration” of companies with a change of corporate articles of incorporation must comply with the Gebhard (proportionality) test (Cartesio; Polboud). IBCL/CL2 A.Y. 2023-24 © Maurizio Bianchini 2024 69

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