¹ [1999] ECR I–1459 (hereafter referred to as Centros Ltd ).

² The German courts have accepted this practice on several occasions; see the judgments reported in Europäisches Zeitschrift für Wirtschaftsrecht (1992) 548, (1998) 31, and (1999) 288.

³ The survey was conducted by the Dutch Ministry of Justice and is discussed in Timmerman, L. “Sitzverlegung von Kapitalgesellschaften nach niederländischem Recht und die 14. EU-Richtlinie” (1999) Zeitschrift für Unternehmens- und Gesellschaftsrecht 147.

⁴ Further see section IV.B below.

⁵ In its judgment, the High Court stressed that the concept of “branch” implies the existence of a parent body which directs and controls the branch. As Centros Ltd did not have any parent body in England or in any other Member State, the company had not, in reality, applied for the registration of a branch in Denmark. The Companies Board also put forward this argument before the European Court of Justice, but the Court did not consider it in its judgment. The judgment of the Danish High Court is published (in Danish) in (1995) Skat Udland 324. A translation and a brief discussion of the grounds for the decision of the High Court appear in Andersen, P.K. and Sørensen, K.E. “Free Movement of Companies from a Nordic Perspective” 6 (1999) Maastricht Journal of European and Comparative Law 47 CrossRefGoogle Scholar.

⁶ Even though Centros Ltd was decided prior to the entry into force of the Amsterdam Treaty, this paper will hereinafter refer to the new article numbers.

⁷ See Case 79/85 Segers [1986] ECR 2375.

⁸ Centros Ltd above n 1 at para 18. This is consistent with the existing case law of the European Court of Justice, in which it has held that the rules regulating free movement also apply to situations where it is intended to escape the legislation of another Member State, but another question is what measures a Member State may take to prevent such evasion; see e.g. Case C–23/93 TV 10 [1994] ECR I–4795, para 15.

⁹ Centros Ltd above n 1 at paras 21 and 22.

¹⁰ Ibid at para 25.

¹¹ Ibid at para 27, first sentence.

¹² Ibid at para 29.

¹³ The requirement of a genuine link was established by the International Court of Justice in the Nottebohm case, Int. Court of Justice Rep. 4, 1955, 4. In one case, the German courts have refused to recognise a Delaware corporation because it had no genuine link with the United States, but all links were with Germany, see OLG Düsseldorf, from 15.12.1994 reported in (1995) Zeitschrift für internationalen Privatrecht 1009. In Danish legal literature, it has been argued that a genuine link with the country of incorporation is generally required to recognise a foreign company, see Werlauff, E. “Common European Company Law: Status 1998” (1998) European Business Law Review 169 Google Scholar. Whereas the requirement of a genuine link may still be enforced against American corporations, it no longer seems possible to refuse to recognise companies incorporated in other Member States on this basis.

¹⁴ Centros Ltd supra n 1 at para 34.

¹⁵ See Directive 78/660 on the annual accounts of certain types of companies OJ 1978 L 222/11, and Directive 89/666 concerning disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State OJ 1989 L 395/36.

¹⁶ Centros Ltd supra n 1 at para 34.

¹⁷ The judgment in Case C–55/94 Gebhard [1995] ECR I–4165 is normally cited in support of the view that Article 43 prohibits any restriction on the exercise of the right of establishment. It is still an open question whether this prohibition of non-discriminatory restrictions has general application or only applies to certain areas or to certain types of obstacles; see e.g. Daniele, Luigi “Non-Discriminatory Restrictions to the Free Movement of Persons” (1997) ELR 191 Google Scholar; Jørgensen, E.B. Union Citizens—Free movement and non-discrimination (Djøf, 1996), 214 Google Scholar; Sørensen, K.E. “Restriktionsforbudet på etableringsrettens område” (1999) Europarättslig Tidsskrift 620 Google Scholar.

¹⁸ Centros Ltd above n 1 at para 24.

¹⁹ Ibid at para 29.

²⁰ Ibid at para 27.

²¹ However, some restrictions may follow from the conflict of laws rules applicable to companies in some Member States; see section V below.

²² See Case C–148/91 Veronica [1993] ECR I–487, para 12. Similarly Case 33/74 van Binsbergen [1974] ECR 1299, para 13; and Case C–23/93 TV 10 [1994] ECR I–4795, para 20.

²³ See Case C–61/89 Bouchoucha [1990] ECR I–3551, paras 14 and 15; and Case 115/78 Knoors [1979] ECR 399, para 25.

²⁴ The fact that the company holds rights of its own under the EC Treaty may also explain why the European Court of Justice did not accept that the subject-matter of Centros Ltd was purely internal to Danish law, see para 16. Even though the case concerned Danish nationals intending to do business in Denmark, one must not overlook the fact that the English company is effecting a cross-border establishment, rendering the situation one falling within the scope of the EC Treaty. The argument that the subject-matter was purely internal may have been inspired by the judgment of a German court in the so-called Landshuter Druckhaus decision (see BayObLG from 18th September 1986, reported in (1986) Wertpapier-Mitteilungen 1557). The case concerned an English private limited company which did not satisfy the requirement that the company must have its central administration (real seat) in England. Therefore the company was denied the registration of a branch in Germany. The German court considered whether this refusal of registration might have infringed the right of establishment but rejected this because the case concerned a situation purely internal to Germany. Thus, according to the German court, the case concerned a company run and owned by German nationals and these individuals could not rely on the rules on establishment against the German state. Centros Ltd would seem to be inconsistent with the German judgment.

²⁵ Centros Ltd above n 1 at para 25.

²⁶ Ibid at para 25. In the same paragraph the European Court of Justice refers to its previous decision in Case C–206/94 Paletta [1996] ECR I–2357. In this case the Court held that the national court must determine whether there is abuse or fraud on a case by case basis, and it rejected the possibility of stipulating requirements which make it difficult for persons seeking to invoke free movement rights to obtain evidence. Accordingly, a Member State is not free to require foreign companies to prove certain matters—for instance that they pursue activities in other Member States—as it is for the national authorities to prove abuse.

²⁷ See Case 270/83 Avoir Fiscal [1986] ECR 273, and Case C–264/96 ICI v. Colmer [1998] ECR I–4695. Similar reasoning is found in Case 79/85 Segers [1986] ECR 2375 in which the European Court of Justice held that it is contrary to Community law if the competent authorities prevent circumvention of Dutch company law rules by excluding directors of foreign companies conducting their activities in the Netherlands from a national sickness insurance benefit.

²⁸ Centros Ltd supra n 1 at para 37. The European Court of Justice does not explain how such a guarantee scheme should function. It must be clear, however, that guarantees cannot be required of foreign companies without having equivalent schemes for national companies. This scheme could, for instance, require the provision of bank guarantees or similar guarantees for the benefit of tax authorities as a prerequisite for conducting business of a certain volume within a Member State. It could also be provided that the guarantee requirement will be waived if the business can show a net capital of a specified amount according to the most recent annual accounts. Whereas it is unlawful to discriminate against companies because of a small authorised or subscribed capital, it must be objectively justified in this case to discriminate against companies with a small net capital.

²⁹ Centros Ltd above n 1 at para 38.

³⁰ Situations in which the corporate form is abused to defraud creditors is one area in which legal scholars and the case law of some Member States allow for holding shareholders liable for the obligations of the company (so-called lifting the veil); see e.g. the comparative study in Wymeersch, E. (ed.) Groups of Companies in the EEC—a survey report to the European Commission on the law relating to corporate groups in various member states (de Gruyter, 1993)Google Scholar. For a discussion of the conflict of laws problems involved in lifting the veil of foreign companies, see Ulmer, P. “Schützinstrumente gegen die Gefahren aus der Geschäftigkeit inländischen Zweigniederlassungen von Kapitalgesellschaften” (1999) Juristen Zeitung 662, 665.

³¹ Directive 89/666. OJ 1989 L 395/36.

³² See the fifth recital in the Preamble to the Directive.

³³ Normally, the effects of (total) harmonisation is that the Member States cannot go beyond the Directive. The Eleventh Company Law Directive is unique in that it also covers companies from non-Member States and it is therefore reasonable to assume that the Directive does not contain any exhaustive regulation in relation to such companies. Companies from non-Member States are thus not protected by the EC Treaty, including the right of establishment.

³⁴ See Latty, E.R. “Pseudo-Foreign Corporations” 65 (1955) Yale Law Journal 137 CrossRefGoogle Scholar.

³⁵ See also Kaplan, S.A. “Foreign Corporations and Local Corporate Policy” 21 (1968) Vanderbilt Law Review 433 Google Scholar, and Kozyris, P.J. “Corporate laws and choice of law” (1985) Duke Law Journal 1 Google Scholar.

³⁶ See the discussion by Carney, W.J “The Political Economy of Competition for Corporate Charters” in Wouters, J. and Schneider, H. (eds) Current Issues of Cross-Border Establishment of Companies in the European Union (Nomos, 1995), 259 Google Scholar; Buxbaum, R.M. and Hopt, K.J. Legal Harmonization and the Business Enterprise. Corporate and Capital Market Law Harmonization in Europe and the USA (de Gruyter, 1988), 91 Google Scholar; and Kozyris, above n 35 at 66 et seq.

³⁷ See Timmerman, above n 3. As early as in the mid-1980s the Netherlands clearly had a problem with foreign companies. At that time a case was pending before the European Court of Justice concerning a Dutch national running a business whose activities were entirely pursued in the Netherlands, see Case 78/85 Segers [1986] ECR 2375. Nevertheless he decided to incorporate his business in England. In his paper, Timmerman states that he knows of a cleaning contractor which exclusively cleans windows in Groningen, but operates as a Delaware corporation.

³⁸ See Rammeloo, S.F.G “Recognition of Foreign Companies in ‘Incorporation’ Countries: A Dutch Perspective” in Wouters and Schneider above n 36 at 59. Rammeloo mentions the proposal for the statute which was later enacted in order to protect the Netherlands against certain foreign companies. In this context, he mentions that the Dutch Supreme Court has refused to apply certain parts of the Dutch rules to foreign companies, and this was the imme diate reason for the proposed legislative measure.

³⁹ The official title of the Act is: “Wet op de Formeel Buitenlandse Vennootschappen.”

⁴⁰ It may also be questioned whether the Dutch sanction is compatible with the principle of proportionality. If the registration requirements are not met, the directors will be personally liable for any legal acts performed in a period prior to the compliance with the requirements of registration, see s. 4(4) of the Act.

⁴¹ In para 10 of his Opinion delivered on 16 July 1998, the Advocate General pointed out that, during the proceedings, the Commission maintained that it was possible to require foreign companies to meet the minimum capital requirements; however, he rejected this possibility.

⁴² This question has, however, been much discussed; see e.g. Buxbaum and Hopt, above n 36 at 90 et seq.; Latty, above n 34; and Kaplan, above n 35.

⁴³ 216 N.Y. 57, 109 N.E 875 (1915).

⁴⁴ 191 Cal. App. 2ed 399, 12 Cal. Rptr. 719 (1961).

⁴⁵ The literature on this topic is extensive and includes the comparative studies by Grossfeld, B. Internationales und Europäisches Unternehmensrecht (C.F. Müller, 1995)Google Scholar; Rabel, E. The Conflicts of Laws: A Comparative Study, Vol. Two (Ann Arbor, 1969)Google Scholar; and the report prepared for the Commission by K.P.M.G. European Business Center Study on transfer of the head office of the company from one Member State to another (1993).

⁴⁶ See e.g. Buxbaum and Hopt, above n 36 at 68; and Latty, above n 34 at 106. The siège réel theory was thus developed in the middle of the nineteenth century on the basis of the French “fraude á la loi” doctrine.

⁴⁷ See Case 81/87 Daily Mail [1988] ECR 5483.

⁴⁸ Daily Mail above n 47 at paras 19 and 20.

⁴⁹ Ibid at para 21

⁵⁰ See Werlauff, E. “Udenlandsk selskab til indenlandsk aktivitet” (1999) Ugeskrift for Retsvæsen 163 Google Scholar; Freitag, R. “Der Wettbewerb der Rechtordnungen im internationalen Gesellschaftsrecht” (1999) Europäisches Zeitschrift für Wirtschaftsrecht 267 Google Scholar; Hansen, S.F. Julebog (Djøf, 1999), 143 and Risse, J. “Zwingende Eintragung det Zweigniederlassungen von Gesellschaften” (1999) Monatsschrift für Deutsches Recht 752 Google Scholar.

⁵¹ In other judgments, the European Court of Justice has made it explicit when it changed the law based on a previous judgment, see e.g. Case C–10/89 HAG II [1990] ECR I–3711, and Case C–267–268/91 Keck [1993] ECR I–6097.

⁵² The same conclusion is reached by Kindler P. “Niederlassungsfreiheit für Scheinauslandsgesellschaften” (1999) Neue Juristische Wochenschrift 1993, Sonnenberger H.J. & Grosserichter H. “Konfliktlinien zwischen internationalem Gesellschaftsrecht under Niederlassungsfreiheit” (1999) Recht der Internationalen Wirtschaft 721 and Ebke W.F. “Das Schicksal der Sitztheorie nach dem Centros-Urteil des EuGH” (1999) Juristen Zeitung 656. One of Ebke’s main arguments is that the Court and the parties involved all assumed that Centros Ltd was making a secondary establishment and therefore the problem of the siège réel theory was never raised. This assumption is only partly correct at best since the Danish Companies Agency argued in its observations submitted to the Court that Centros Ltd was not establishing a branch but a primary establishment in Denmark. As mentioned above n 5 this argument was decisive in the ruling by the Danish High Court, but was not commented upon by the European Court of Justice.

⁵³ See Carney, above n 36 at 264; and Latty, above n 35 at 145 et seq.

⁵⁴ See Cary, W.L. “Federalism and Corporate Law: Reflections Upon Delaware” 83 (1974) Yale Law Journal 663 CrossRefGoogle Scholar.

⁵⁵ Cary, above n 54 at 705.

⁵⁶ This does not mean that the problem has been ignored by the states; as mentioned in section IV.B above, some states tried to prevent this development by introducing measures regulating pseudo-foreign corporations.

⁵⁷ Centros Ltd above n 1 at para 27.

⁵⁸ In its written observation in Centros Ltd, the British Government gave a detailed explanation why it was of the opinion that a minimum capital requirement did not constitute an appropriate measure to protect creditors.

⁵⁹ In 1990 the revenue from the franchise tax exceeded USD200m, equivalent to 17.7% of the total tax revenue of the state of Delaware, see Romano, R. The Genius of American Corporate Law (AIE Press, 1993), 7 Google Scholar.

⁶⁰ See Article 10 of Directive 69/335 as interpreted in Joined Cases C–71/91 and C–178/91 Carni Spa [1993] ECR I–1915.

⁶¹ The right to tax the worldwide income of companies is not necessarily conferred on the country of registration, because double taxation conventions usually confer the right to tax on the country in which the place of effective management is situated, see Article 4(3) of the OECD Model Tax Convention on Income and on Capital.

⁶² See Cheffins, B.R. Company Law: Theory, structure and operation (Oxford, 1997), 443 and 450Google Scholar; and Merkt H. “Die Europäische Gesellschaftsrecht und die Idee des Wettbewerbs der Gesetzgeber” (1995) Rabels Zeitschrift für ausländisches und internationales Privatrecht 545, 546. Both authors single out the United Kingdom as the most likely candidate to become a European Delaware. Drury R.R. “The Regulation and Recognition of Foreign Corporations: Responses to the Delaware Syndrome” (1998) Cambridge Law Journal 165 at 186 argues that small states, such as Liechtenstein and Gibraltar, may turn out to be those states which offer most advantages. It is possible, however, that companies from such small states may find it more difficult to become generally accepted than English companies.

⁶³ There is still no official proposal for a Fourteenth Company Law Directive, but a draft was published in (1997) Zeitschrift für Wirtschaftsrecht und Privatrecht 1721. If, after Centros Ltd, businesses are free to use a company incorporated in another Member State there is, prima facie, no basis for also making it possible for a company which is incorporated in another Member State to change nationality. A company may, however, want to change nationality for several reasons, inter alia, because it is more expedient to apply the company law of the State in which it pursues its main activities, see the comments on this point in section VI above. Also the application of the siège réel theory will require a company to change nationality if it moves its central administration to another Member State. In the United States corporations also change nationality (referred to as reincorporation), but the main reason appears to be that the corporation wants to change to a more favourable company law to effect a restructuring, or to protect itself against a hostile takeover, see Cox, J.D., Lee Hazen, T. and O’Neal, F.H. Corporations (Aspen, loseleaf, vol. 1), §3.2Google Scholar; Romano, above n 59 at 32; and Stith, C.D. “Federalism and Company Law: A Race to the Bottom in the European Community” 79 (1991) Georgetown Law Journal 1581, 1606Google Scholar.

⁶⁴ See e.g. Timmermanns C. “Die europäische Rechtsangliederung im Gesellschaftsrecht (1984) Rabels Zeitschrift für ausländisches und internationales Privatrecht 1, 14; Merkt, above n 62 at 546; and Schmitthoff C.M. “The Future of the European Company Law Scene” in Schmitthoff C. (ed) The Harmonization of European Company Law (The United Kingdom National Committee of Comparative Law, 1973), 9.

⁶⁵ Article 54(3)(g) has been renumbered Article 44(2)(g).

⁶⁶ In the discussion of competition among jurisdictions in different areas of law, a distinction is generally made between negative and positive, or between desirable and unnecessary competition, see Riech N. “Competition between legal orders: A new paradigm of EC law?” (1992) CMLRev 861, 863. This distinction is especially clear in tax law where positive competition is deemed desirable, whereas negative or harmful tax competition is now being combated by the new guidelines adopted by the Council, see OJ 1998 C 2/1, and Pinto C. “EU and OECD to Fight Harmful Tax Competition: Has the Right Path Been Undertaken” (1998) Intertax 386.

⁶⁷ See the report: “Studie über die Erweiterung des Anwendungsbereichs der zweiten Richtlinie auf Gesellschaften anderer Rechtsformen” from 1993. The report is discussed in Lutter, M. “A Mini-Directive on Capital” in De Kluiver, J-H. and Van Gerven, W. (eds) The European Private Company? (Nomos, 1995), 201 Google Scholar.

⁶⁸ See Schön, W. “Mindestharmonisierung in europäischen Gesellschaftsrecht” (1996) Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht 221, 239.

⁶⁹ This view was also taken by Cary, above n 54.

⁷⁰ Therefore, Cary suggested the provision for minimum standards for the duties and liability of the directors, see n 54 at 701. Other American scholars have suggested that the European Union should harmonise the rules on the duties and liability of the directors in order to avoid unfavourable competition among Member States, see Charney, D. “Competition among Jurisdictions in Formulating Corporate Law Rules: An American Perspective on the Race to the Bottom in the European Communities” 32 (1991) Harvard International Law Journal 423, 447Google Scholar; and Stith, above n 63 at 1596.

⁷¹ See Stith, above n 63 at 1587 et seq.

⁷² See Cheffins, above n 62 at 449; and Stith, above n 63 at 1591.

⁷³ See e.g. Hopt, K.J. “Labour Representation on Corporate Boards: Impacts and Problems for Corporate Governance and Economic Integration in Europe” in Buxbaum, R.M., Hertig, G., Hirsch, A. and Hopt, K.J. (eds) European Economic and Business Law (de Gruyter, 1996) 261, 274Google Scholar.

⁷⁴ See Romano, above n 59 at 52 et seq.; Merkt, above n 62 at 556; and Kozyris, above n 55 at 4 et seq.

⁷⁵ The former subject is proposed harmonised in the pending proposal for a Thirteenth Company Law Directive, OJ 1997 C 378/10, Art. 8(a), whereas the second subject is covered by the proposed Fifth Company Law Directive, OJ 1991 C 321/10, Art. 36(3).

⁷⁶ See the Dutch survey in Timmermann, above n 3. In its Resolution on industrial restructuring and relocation in the European Union, the European Parliament emphasised the lack of data concerning relocations of enterprises in the European Union, OJ 1996 C 362/147.