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Nationality of Corporations Under Domestic Law: A Comparative PerspectiveDr Matthias PannierResearch Fellow in European LawThe Fourth Public Conference of the British Institute of Internationaland Comparative Law’s Investment Treaty Forum
Introduction • Rival approaches in Private International Company Law. • Comparative overview (incorporation countries and real seat countries). • EU approach, influence of the freedom of establishment and the free movement of capital. • Impact of BITs on conflict of law rules. • Treaty shopping and regulatory competition.
Rival approaches Lex societatis: The law regulating the internal affairs of a company. Connecting factors: • Control. • Incorporation. • Real seat. • Market place, listing.
Control Theory Refers to the nationality of the persons controlling the company. • No clear distinction between legal status of shareholders and of companies. • Widespread ownership of companies, change of control. • Groups of companies: Braches and subsidiaries.
Incorporation Theory (1) • Applies the law of the place where a company has been incorporated. Advantages: • Certainty, unambiguous determination of lex societatis. • Private autonomy and mobility, company does not lose its legal status just by expanding business, transfer of company's seat across border is possible.
Incorporation Theory (2) Disadvantages: • Pseudo-foreign corporations. • Founders can choose a law which gives less protection to shareholders or creditors than the law of the country where they actually do most of their business (race to the bottom?). • Circumvention of national law.
Real Seat Theory (1) • Uses the seat as the connecting factor determining the law applicable to the company’s affairs. Advantages: • Anti – evasion. • Protection of the home domestic market; law of the state which is mostly affected by the company. • Prevents pseudo foreign companies.
Real Seat Theory (2) Disadvantages: • Determination of real seat difficult. • Different terms and concepts in different countries “Real Seat” “Siege Reel” “Head Office” “Central Management and Control” and the common law “Residence” • Anti-competitive – major inhibition on founding and trading companies at will.
Market place – Listing • City Code: offers for public companies resident in the UK, the Channel Islands and the Isle of Man (whether or not their shares are listed). • France: offers for public companies (French or foreign) listed on a French stock exchange. • Germany: offers for public companies which have their seat in Germany which are listed on an EU/EEA stock exchange. • Austria: offers for public companies which have their seat in Austria and are listed on an Austrian stock exchange.
Comparative Overview (1) Incorporation Countries e.g. USA, Canada, UK, Ireland, many other common law states, The Netherlands, Austria since 2000, Denmark, Sweden, Finland, Switzerland since 1987, Liechtenstein, Hungary, Romania, China.
Comparative Overview(2) England • Henriques v Dutch West India Co (1728). Existence, dissolution and capacity for rights and obligations of a foreign company incorporated under foreign law will be recognized in England. • UK applies significant parts of its laws to all foreign companies on basis of presence (overseas companies). • Some independently on basis of public policy - fraudulent trading, security interests disclosure.
Comparative Overview(3) The Netherlands • Adopts Incorporation doctrine after Hague Recognition Convention in 1959. • WetConflichtenrechtCorporaties (WCC) 1998 Art1(2). • Law on Pro Forma Companies 1998 ie “tramps”.
Comparative Overview (4) Traditionally Real Seat Countries e.g. France, Germany, Belgium, Luxembourg, Portugal, Spain, Poland, Greece, Turkey.
Comparative Overview (5)France • Traditionally: Law applicable to company is that of real seat (siège social) “La direction superieure et controle de la soc”. Art L210-3 Code de Commerce, Art 1837 Code Civil. • But law is ambiguous. Companies with “siège social” in France are subject to French law; 3rd persons may rely on “siège statutaire” (reg seat) but companies may not invoke it against 3rd parties if real seat is not reg seat. • Only applies French law never applies foreign law.
Comparative Overview(6) Italy • Private International law Code 1995, Article 25. • Italian law applies where the seat of management and location of principle object is in Italy. But otherwise asserts that companies are governed by the law of the state where their incorporation was completed. • But no reciprocity – a foreign company moving in to Italy is not given the benefit of its incorporation - must be reformed as an Italian company. But an Italian company moving out stays Italian.
Comparative Overview(7) Germany • Courts rigorously applied Real Seat Theory (Sitztheorie). • Real seat = centre of management is the place where the fundamental decisions of the board are taken effectively carried out. • Reciprocal in sense that applies to foreign cos seated in Germany and German cos seated abroad. • German law uses a renvoi back. • Change after Überseering.
EU approach • Recognition Convention 1968 based on Art 293 EC never entered into force. • Freedom of establishment Arts 43, 48 EC. Case C-208/00 Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC)  ECR I-9919; Inspire Art Case C-167/01 Kamer van de Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd  ECR I-10155. • Supranational company: Societas Europaea. Art 7 SE-Statute: Registered office shall be located in the same Member State as its head office.
Impact of BITs on conflict of law rules • Can BITs overrule national conflict of law rules? • Do real seat countries even have to recognize companies formed in accordance with the rules of an incorporation country but having their real seat in the real seat state (host state)? • German Supreme Court (VIII ZR 155/02, BB 2003, 810, 812) on the American-German Commerce Treaty of 1954; based on ECJ Case C-208/00 Überseering.
Treaty shopping and Regulatory Competition in company law (1) Economic theories • State failure and market failure (Tiebout). Legislators shall be disciplined by market forces. • Evolutionary market process and competition (Hayek) Instrument for creation and distribution of new knowledge.
Treaty shopping and Regulatory Competition in company law (2) US-American precedence: • "race to the bottom“. • "race to the top“. • “vertical competition”. European discussion: • Opposition. • Impossibility. • Support from Centros, Überseering, Inspire Art.
Final Remarks • Objectives of Investment Treaties must be reflected in nationality definitions of BITs. • Control: change of control, difficult to define control in such cases. • Real Seat: Companies are restricted in their mobility. • Incorporation: problems in the cases where investors of the host state abuse this rule (exception). • Flexibility rule based on mutual recognition.