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Corporate mobility in the European internal market – a flash in the pan?

Corporate mobility in the European internal market – a flash in the pan? . Université de Laval, 18 Mars 2014. Paper motivation.

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Corporate mobility in the European internal market – a flash in the pan?

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  1. Corporate mobility in the European internal market – a flash in the pan? Université de Laval, 18 Mars 2014

  2. Paper motivation • This is an empirical paper, testing the extent of “regulatory competition” in European Union (EU) company law[NB: the paper is available at http://ssrn.com/abstract=2247323] • One of the EU’s cornerstones is “freedom of establishment” for companies • As interpreted in the famousCentroscase (1999), it has opened up the borders for companies, similar to the Delaware effect in the US • This is the ‘market solution’ = let companies decide on where to incorporate • -> competition between lawmakers? Corporate mobility in the European internalmarket – a flash in thepan?

  3. Overview • The Centroscase and its impact • First empirical evaluations • Regulatory responses of EU Member States • Empirical re-assessment and evaluation • Interpretation of the results • Conclusion Corporate mobility in the European internalmarket – a flash in thepan?

  4. (1) Centros and its impact Historically, jurisdictions have followed different principles in company law • Incorporation theory (UK, NL) • Real seat theory (Germany, Austria) Transfer of seat mostly not possible Daily Mail ruling (1988) Proposal for a directive on the transfer of seat (1990s) Centrosruling (1999) Corporate mobility in the European internal market – a flash in the pan?

  5. Centros(1999) Member State B (‘host’) Member State A (‘home’) No operation in A; only reason for incorporating in A is to circumvent minimum capital requirements in B Incorporation May B refuse the registration of the company’s branch in B due to the fact that the only reason for incorporating in A is to circumvent more restrictive legal requirements in B?

  6. Überseering(2002) Member State A (‘home’) Member State B (‘host’) Incorporation and operation Transfer of real seat May B refuse immigration (transfer of real seat) of a validly incorporated company because of different conflict rules regarding company law?

  7. Inspire Art (2003) Member State A (‘home’) Incorporation Member State B (‘host’) No operation in A; the only reason for incorporating in A is to circumvent minimum capital requirements in B May B impose a minimum capital require-menton ‘formally foreign’ companies?

  8. (1) Centros and its impact Further ECJ rulings: • SEVIC (2005) • Cadbury Schweppes (2006) • Cartesio (2008) • Vale (2012) Impact: • Liberal interpretation of freedom of establishment • Creation of a ‘market for corporate law’ • English corporate law is most attractive • No minimum capital requirement • Incorporation service – fast and supportive • Strong impact in D where min capital of € 25,000 • Competition accelerated by the emergence of intermediary agencies Corporate mobility in the European internalmarket – a flash in thepan?

  9. (2) First empirical evaluations Armour (2005) Corporate mobility in the European internalmarket – a flash in thepan?

  10. (2) First empirical evaluations Bratton et al (2008) Corporate mobility in the European internalmarket – a flash in thepan?

  11. (2) First empirical evaluations Becht et al (2008) Corporate mobility in the European internalmarket – a flash in thepan?

  12. (2) First empirical evaluations Becht et al (2008) Corporate mobility in the European internalmarket – a flash in thepan?

  13. (3) Regulatory responses National corporate law reforms • France 2003 (SARL reformed) • Spain 2003 (new SLNE) • Germany 2008 (UG = new GmbH variant) • Denmark 2009 • Netherlands 2010 • UK (!) 2006 (CA) Corporate mobility in the European internalmarket – a flash in thepan?

  14. (3) Regulatory responses Corporate mobility in the European internalmarket – a flash in thepan?

  15. (3) Regulatory responses Open questions • Why reforms in continental Europe? • What is the impact? • Slowing down of English incorporations? • Slowing down of English incorporations because of the law reforms? • ‘Success’ of law reforms? Corporate mobility in the European internalmarket – a flash in thepan?

  16. (4) Empirical re-assessment • Data of Fame database (English Companies House) • Incorporations 2004-2011 • Filter: ‘Foreign companies’ • At least one director is German • Registered office is identical for at least 100 companies • Monthly coverage Corporate mobility in the European internalmarket – a flash in thepan?

  17. (4) Empirical re-assessment Corporate mobility in the European internalmarket – a flash in thepan?

  18. (4) Empirical re-assessment Corporate mobility in the European internalmarket – a flash in thepan?

  19. (4) Empirical re-assessment Corporate mobility in the European internalmarket – a flash in thepan?

  20. (4) Empirical re-assessment Corporate mobility in the European internalmarket – a flash in thepan?

  21. (4) Empirical re-assessment MoMiG 23/10/2008 Reform Rumours First draft 29/5/2006 (€ 10 000) Gvt draft 23/5/2007 (€ 10 000) Corporate mobility in the European internalmarket – a flash in thepan?

  22. (4) Empirical re-assessment • Claim of ‘successful law reform’ questionable • Support by comparison to Austria • Similar legal system and tradition • Minimum capital requirement for an Austrian GmbH: € 35,000 • No lowering of minimum capital requirements after Centros • Identification of a corresponding data sample • Filter: ‘Foreign companies’ • Fame database 2004-2011 • At least one director is Austrian • Registered office is identical for at least 10 companies (adapted to GDP) Corporate mobility in the European internalmarket – a flash in thepan?

  23. (4) Empirical re-assessment Corporate mobility in the European internalmarket – a flash in thepan?

  24. (4) Empirical re-assessment Austria-operating English companies 2004-2011 Corporate mobility in the European internalmarket – a flash in thepan?

  25. (4) Empirical re-assessment Corporate mobility in the European internalmarket – a flash in thepan?

  26. (4) Empirical re-assessment Results • Slowing down of the number of incorporations for Germany and Austria since spring 2006 (‘flash in the pan’) • Timeframe is important • Before German law reform (MoMiG) • Slowing down in Austria despite no abolition of minimum capital requirements  there have to be other explanations • First conjectures • Anticipation of law reforms • Initial demand met • (Psychological) acceptance problems • Bad reputation due to high rate of insolvencies Corporate mobility in the European internalmarket – a flash in thepan?

  27. (5) Interpretation of the results Decreasing attractiveness • Legal loopholes closed • Elimination of restructuring opportunities 2003-05 mobility-friendly case-law • Acceptance of foreign companies (BGH March 2003) • Liability of shareholders and directors according to foreign law (BGH March 2005) Corporate mobility in the European internalmarket – a flash in thepan?

  28. (5) Interpretation of the results Since 2006 more restrictive caselaw to prevent misuse • Obligation to file for insolvency and liability according to German lawLG Kiel 2006; MoMiG 2008; KG 2009 • Ban on exercising a profession or business for managing directors of a GmbH applies to directors of a foreign companyOLG Jena 2006, BGH 2007 (+ MoMiG, Nov 2008) • German principles of estoppel liability applyBGH February 2007 • Ban on sole ‘corporate director’ according to English lawReform of English law, October 2008 • Disqualification of foreign directors according to English lawReform of English law, October 2009 • UK jurisdiction for intra-company disputes acc to Art 22(2) Brussels RegulationOLG Frankfurt Feb 2010; BGH 2011 • German criminal law applies (embezzlement)BGH April 2010 Corporate mobility in the European internalmarket – a flash in thepan?

  29. (5) Interpretation of the results Corporate mobility in the European internalmarket – a flash in thepan?

  30. Obligation to file for insolvency, April 2006 Ban on exercising a business, March 2006 / May 2007 English disqua-lification, Oct 2009 Inadmissibility of a corporate director, Oct 2008 Jurisdiction is in the UK, Feb 2010 Estoppel liability, February 2007 German criminal law, April 2010 Corporate mobility in the European internalmarket – a flash in thepan?

  31. (5) Interpretation of the results Austria: 2004-09 mobility-friendly caselaw • Acceptance of legal capacity and capacity to act (OGH 1999) • Acceptance of entire law of incorporation (OGH 2004) • No piercing of the corporate veil (OGH 2009) Also restrictive attitude from the beginning • OGH 2004: Strict evidence requirements for Austrian branch • Minimum corporation tax as domestic GmbH (Feb 2006) • No registration where lack of Austrian banking licence (OGH 2008) Are there German UGs in Austria? Corporate mobility in the European internalmarket – a flash in thepan?

  32. (5) Interpretation of the results Overall: a combination of factors • Theory of initial demand • Disadvantages had not been known in the beginning • (Psychological) acceptance problems • Bad reputation due to high rate of insolvencies • Restrictive attitude of caselaw, registries and tax authorities • Law reforms (and anticipation of them) • UG in Germany • UG in Austria (?) • Tax reform in Austria • Reform of English Companies Act Corporate mobility in the European internalmarket – a flash in thepan?

  33. (6) Conclusion Results • Initially high demand for foreign legal forms of companies • Slowing down of incorporations for Germany and Austria since spring 2006 • Before German law reform (MoMiG) • Slowing down in Austria despite no reform of minimum capital • Explanations • (Psychological) problems of acceptance • Bad reputation due to high rate of insolvencies • Initial demand met • Anticipation of law reform • Increasing restrictive attitude; closure of loopholes from both sides of the channel • and German law reform (MoMiG) Corporate mobility in the European internalmarket – a flash in thepan?

  34. (6) Conclusion Implications • Has the German law reform (MoMiG) been superfluous, wrong, without effect? • Impact on legal policy for a law reform in Austria 2013 • Overall positive effect of the competition of corporate legal forms • Defensive competition • Faster and simpler incorporations; entrepreneurship culture • Negative integration achieves common standards in the same way as positive integration does Corporate mobility in the European internalmarket – a flash in thepan?

  35. Wolf-Georg Ringe Professor of International Commercial Law Copenhagen Business School University of Oxford georg.ringe@law.ox.ac.uk http://ssrn.com/author=836081 Corporate mobility in the European internalmarket – a flash in thepan?

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