A company registered in and governed by the laws of one EU member state should be permitted to “convert” itself into a company governed by the laws of another EU member state, provided it satisfies the relevant conditions laid down by the destination state. So ruled a 13-strong panel of judges at the European Court of Justice in Polbud - Wykonawstwo sp. z o.o., in liquidation [Case C 106/16] on 25 October 2017.
On a reference from the Supreme Court of Poland for a preliminary ruling on a point of European law, the Grand Chamber of the ECJ ruled that the principle of freedom of establishment enshrined in articles 49 and 54 of the Treaty on the Functioning of the European Union should be interpreted to mean that:
- A company registered in and governed by the laws of one EU member state (the origin state) should be permitted to “convert” itself (or continue) into a company governed by the laws of another member state (the destination state) provided it satisfies the relevant conditions laid down by the destination state.
- Each member state has discretion to define the connecting factor required for a company to be governed by its national legislation. For some states, the connecting factor is the company’s head office (broadly the place in which key management decisions are taken) - i.e. for the company to be subject to the law of that state, its head office must be in that state; while for other states, including the UK, the connecting factor is the company’s registered office.
- If the destination state allows a company to become governed by its laws if the company’s registered office is located in the destination state, the company does not need to transfer its head office to the destination state: the head office can remain in the origin state or be located elsewhere.
- If the origin state imposes conditions that must be satisfied before a company can cease to be governed by its laws (i.e. transfer out to another member state), such conditions must not unreasonably restrict or prevent such freedom of establishment. A condition that the company must go through a full winding-up process, which would involve concluding the company’s current business, getting in its assets, paying off its creditors and distributing any surplus to its shareholders, would not be reasonable and would therefore breach EU law. However, conditions designed to protect minority shareholders, employees and/or creditors would be reasonable if they were targeted and proportionate.
In this instance, the companies legislation of the origin state (Poland) specifically allows a Polish company to transfer out of Poland and continue into a company governed by the laws of another member state without losing legal personality if the company’s shareholders resolve to transfer its registered office to the destination state. And the Polish Law on Private International Law of 4 February 2011 says:
“Upon transfer of its head office to another State, a legal person shall be subject to the law of that State. The legal personality acquired in the State where it previously had its head office shall be retained, if the law of each of the States concerned so provides. Transfer of the head office within the European Economic Area shall not lead to the loss of legal personality.”
The legislation of the destination state (Luxembourg) likewise allows a company previously registered in another member state to convert into a Luxembourg company. To do so, the company must, among other things, transfer its registered office (but not its head office) to Luxembourg.
When a Polish company, Polbud, passed shareholder resolutions in accordance with the Polish companies legislation to convert itself into a Luxembourg company, the Polish companies registrar refused to de-register it until the company had been liquidated. The company challenged this decision in court. (The company claimed that it intended also to transfer its head office to Luxembourg, but the ECJ proceeded on the basis that only the company’s registered office would be transferred.) The ECJ received submissions from the Polish, Austrian, German and Portuguese governments, as well as from the European Commission. The ECJ held that the company was entitled to convert itself into a Luxembourg company and that the requirement under Polish law for the company first to go through a liquidation process was an unjustified restriction on freedom of establishment.
It appears to follow that any conditions imposed by the destination state must also not unnecessarily restrict or prevent the freedom of EU citizens to establish a company in whichever member state they choose.
At present, UK law does not include any provisions that either allow a company governed by the laws of another member state to continue into and become a UK company (i.e. transfer into the UK) or that allow a company registered in the UK to continue into and become a company governed by the laws of another member state (i.e. transfer out of the UK). Although the European Commission can commence infringement proceedings against a member state that fails to implement EU law, in practice it seems unlikely that the UK Government will introduce any such provisions before the UK leaves the EU. Whether the UK Government may introduce such provisions during any post-Brexit transitional period is likely to depend on, among other things, whether the Government receives pressure from UK companies that wish to migrate out to an EU member state and whether reciprocal arrangements can be established with the European Commission or (less likely) with individual EU countries. Unless and until such provisions are introduced into UK law, it is difficult to see how a UK company could transfer out to another member state or vice versa.
However, other EU countries whose national law does not already include provisions that enable companies to migrate to and from other EU member states are now more likely to introduce them. And where such provisions already exist, the member states concerned will need to review them to ensure that any conditions that could restrict the freedom to migrate are reasonable, properly targeted and proportionate.
In time, we could well see more companies starting life in one EU member state but subsequently migrating to another member state, particularly if the centre of the company’s commercial activities moves to the destination state; and it is possible that some companies may even periodically “forum-shop” for the member state whose company law (as well as tax regime) is perceived to be most amenable.