EU Law Blog

Abuse of law and Case C-212/97

Dr. Wolf-Georg Ringe of Oxford University, England, has written an interesting article entitled "Sparking regulatory competition in European Company Law: The impact of the Centros line of case-law and its concept of 'abuse of law'".

The article traces the impact of the judgment of the Court of Justice in Case C-212/97 Centros Ltd v. Erhvervs- og Selskabsstyrelsen and its progeny. Here's what the abstract states:

The case-law of the European Court of Justice in the field of company law has repeatedly touched on the question of abuse, most notably in the situation where a company was set up in a Member State only to do business exclusively in another. Starting with the landmark case of Centros in 1999, the Court has repeatedly stressed that it employs a liberal approach towards abuse in this field. According to the Court, making use of the disparities of different legal standards when setting up a company is not abuse, but explicit use of the freedom of establishment.
This paper analyses the Court’s approach towards abusive behaviour in company law and assesses the impact that the leading cases since 1999 have had both on business behaviour in the EU and on the national law-makers who have responded to the opening of the markets. It is shown that the Court has provoked a sizeable entrepreneurial migration from various countries towards the UK. This in turn has led to regulatory competition, in that other Member States in continental Europe have been forced to adapt their company law to make it more attractive for businesses.
It is argued that at least so far, the (limited) competition between Member States has been beneficial and has reduced both registration time and costs. Questions remain as to the relevance of any comparison with the United States and the future developments for corporate re-incorporations.

You can download it here.

Free Movement of Capital, Shareholder Rights and Volkswagen Law: Case C-112/05

The Court of Justice has handed down an important judgment in Case C-112/05 Commission v. Germany on free movement of capital and restrictions on shareholder rights in the so-called "Volkswagen Law" in Germany.

Germany enacted legislation in 1960 (partly) privatizing Volkswagen. The legislation capped the voting rights at 20% even if a shareholder exceeded that holding, fixed a blocking minority at 20% and gave the German Federal State and the Land of Lower Saxony each the right to appoint two representatives to the supervisory board.

The Commission considered that those provisions of the 1960 law restricted the free movement of capital in a manner contrary to Article 56 EC as well as the freedom of establishment guaranteed by Article 43 EC.

The Court of Justice held that the restrictions placed on shareholder rights in Volkswagen were contrary to Article 56 EC on the free movement of capital. It held that while the EC Treaty did not define ‘movement of capital’ within the meaning of Article 56(1) EC, it has previously recognized the nomenclature set out in Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty [article repealed by the Treaty of Amsterdam] as having indicative value. Movements of capital within the meaning of Article 56(1) EC therefore include direct investments, i.e. investments of any kind undertaken by persons and which serve to establish or maintain lasting and direct links between the persons providing the capital and the undertakings to which that capital is made available in order to carry out an economic activity (see, Case C‑446/04 Test Claimants in the FII Group Litigation, paragraphs 179 to 181, and Case C‑157/05 Holböck, paragraphs 33 and 34).

The Court held that the capping of voting rights at 20% and the fixing of the blocking minority at 20% taken together enable the German Federal State and the Land of Lower Saxony to exert considerable influence of Volkswagen beyond that which they could exert under general company law. That considerable influence is liable to deter investors from other member States.

The Court also found that the right granted to the German Federal State and the Land of Lower Saxony to appoint two representatives to the supervisory board enables them to exert considerably more influence than their actual level of shareholding would allow normally which thus reduces the influence of other shareholders. That too is liable to deter foreign investors.

The Court of Justice stated that restrictions on the free movement of capital could be justified under Article 58 EC. But it held in this case that the German government had advanced no viable justification for the restrictions.

Rather oddly the German government claimed that the privatization legislation of 1960 was not a state measure and thus not caught by Article 56 EC. It claimed that the 1960 law reproduced an agreement which should be classified as a private law contract. The Court would have none of that and held that the fact that the agreement has become the subject of a Law suffices for it to be considered as a national measure for the purposes of the free movement of capital. It concluded rather tartly that the exercise of legislative power by the national authorities duly authorized to that end is a manifestation par excellence of State power.

The Court dismissed the action as regards Article 43 EC because the Commission put forward no arguments to substantiate that claim.

Company law, Centros and Convergence

Professor Paul Rose of Northwestern Law School has written a thoughtful paper on the possibilities for convergence of company law in the EU after the judgment of the Court of Justice in Case C-212/97 Centros Ltd v Erhvervs- og Selskabsstyrelsen.

In that case, the Court held that it is contrary to Articles 43 (ex article 52) and 48 (ex article 58) EC for a member State to refuse to register a branch of a company formed in accordance with the law of another member State in which it has its registered office but in which it conducts no business where the branch is intended to enable the company in question to carry on its entire business in the State in which that branch is to be created, while avoiding the need to form a company there, thus evading application of the rules governing the formation of companies which, in that State, are more restrictive as regards the paying up of a minimum share capital.

This is what the abstract of Professor Rose's article states:

This paper considers the possibilities for company law convergence in the aftermath of the European Court of Justice's landmark Centros decision. The Centros decision introduces the possibility of regulatory competition among EU Member States for company charters. However, entrenched cultural and political features may dissipate the competitive pressures that would give rise to formal convergence of company law statutes. This paper argues that Member States' statutes are more likely to functionally converge in an effort to effectively compete for new incorporations. This paper also considers the possibility of specialization among EU Member States' statutes. Rather than offering a bundle of corporate goods that attempt to appeal to all businesses seeking to incorporate within a jurisdiction, Member States may attempt to craft their corporate codes and associated regulatory institutions to appeal to certain types of companies or industries.

You can download the article here.

Harmonization, legal base & the European Cooperative Society : Case C-436/03

In its judgment in Case C-436/03 European Parliament v. Council the Court dismissed a claim by the European Parliament that Council Regulation (EC) No 1435/2003 of July 22nd 2003 on the Statute for a European Cooperative Society (SCE) should have been based on Article 95 EC and not on Article 308 EC. You will recall that Article 95 EC is the basis for harmonization measures for the internal market whereas Article 308 EC is a residual basis.

The Commission had proposed a regulation to create a new European legal form for cooperatives called the "European cooperative society" on the basis of what was then Article 100a EEC (now, Article 95 EC)

The Court dismissed the European Parliament's action which was supported by the Commission.

It held that Regulation 1435/2003 leaves unchanged the different national laws already in existence and creates a new form of cooperative society in addition to the national forms. Consequently it does not approximate the laws of the member States applicable to cooperative societies. Thus, Article 95 EC was not the correct legal base for such a measure.

The Court held that Article 95 EC empowers the Community legislature to adopt measures to improve the conditions for the establishment and functioning of the internal market and they must genuinely have that object, contributing to the elimination of obstacles to the economic freedoms guaranteed by the Treaty, which include the freedom of establishment (see, in particular, Case C-491/01 British American Tobacco (Investments) and Imperial Tobacco at paragraph 60). Recourse to Article 95 EC as a legal basis is also possible if the aim is to prevent the emergence of obstacles to trade resulting from heterogeneous development of national laws; the emergence of such obstacles must, however, be likely and the measure in question must be designed to prevent them.

On the other hand, the Court held that Article 308 EC may be used as the legal basis for a measure only where no other provision of the Treaty gives the Community institutions the necessary power to adopt it (See, Case C-350/92 Spain v Council at paragraph 26). The Court reiterated that Article 308 EC was properly used as the basis for creating new intellectual property rights in addition to national rights (Case C-377/98 Netherlands v Parliament and Council at paragraph 24).

Corporate social responsibility

Professor Bainbridge drew attention in a recent post to "the close relationship between the EU bureaucrats and the professional corporate social responsibility movement".

Here are some more details. The EC Commission has recently published yet another Communication on corporate social responsibility. Its title is the hopeful sounding “Implementing the Partnership for Growth and Jobs: Making Europe a pole of excellence on CSR”.

According to the Commission's corporate social responsibility web page:

"In this communication, the Commission announces backing for a European Alliance for CSR. This is an open alliance of European enterprises to further promote and encourage CSR. The alliance is a political umbrella for CSR initiatives by large companies, small and medium-sized enterprises, and their stakeholders. It is not a legal instrument to be signed by enterprises, but rather a vehicle for mobilising the resources and capacities of European enterprises and their stakeholders in the interests of sustainable development, economic growth and job creation."

Whatever that means.