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Freedom of establishment after Polbud: Free transfer of the registered office
Bastian Brunk, research assistant and doctoral student at the Institute for Comparative and Private International Law at the University of Freiburg (Germany), has provided us with the following first thoughts on the CJEU’s groundbreaking Polbud judgment.
The Judgment
In its judgment in Polbud (C-106/16), the CJEU again took the work out of the EU legislature’s hands while further developing the freedom of establishment provided for in Articles 49 and 54 TFEU. The case was heard following a request for a preliminary ruling under Article 267 TFEU by the Sad Najwyzszy (Supreme Court of Poland). In short, the CJEU had to decide on the following questions:
(1) Are Articles 49 and 54 TFEU applicable to a transfer of the registered office of a company incorporated under the law of one Member State to the territory of another Member State with the purpose of converting its legal form, when the company has no intention to change the location of its real head office or to conduct real economic activity in the latter Member State?
(2) Is a national legislation that makes the removal of a company from the commercial register and, accordingly, the out-migration of that company conditional upon its liquidation compatible with the freedom of establishment?
Answering these questions, the CJEU made Polbud, the company at stake, a liberal gift and strengthened the mobility of companies within the European Single Market. First, the CJEU stated that the freedom of establishment applies to the transfer of the registered office of a company from one Member State to another even if no real business is intended to be conducted in the latter Member State. Secondly, the CJEU ruled out national legislation providing for the mandatory liquidation of a company if the company requests the removal from the initial commercial register in cases of outward migration.
The facts
In September 2011, the shareholders of Polbud, a limited liablity company established under Polish law, decided to transfer the company’s registered office from Poland to Luxembourg. The resolution made no reference to a simultaneous transfer of either the real head office or the place of real economic activity. Based on that resolution, the registry court in Poland recorded the opening of the liquidation procedure. In May 2013, following a resolution adopted by a shareholder meeting in Luxembourg, the registered office of Polbud was transferred to Luxembourg. Polbud was renamed to Consoil Geotechnik and its legal form was changed to the Société à responsabilité limitée (S. à r. l.), the Luxembourgish private limited liability company. Subsequently, Polbud lodged an application with the Polish registry court for its removal from the commercial register. This application was refused to be registered because, as the registry court stated, Polbud failed to provide evidence of the successful execution of a liquidation procedure. Polbud appealed against this decision, arguing that no liquidation was needed because the company continued to exist as a legal person incorporated under Luxembourgish law.
The precedents
Articles 49 and 54 TFEU provide for the freedom of establishment. According to the CJEU case-law, the concept of “establishment” within the meaning of these Articles is a very broad one, allowing a Union national to participate, on a stable and continuous basis, in the economic life of another Member State and to profit therefrom (CJEU in Gebhard, C-55/94, para. 25 and Almelo, C-470/04, para. 26). It involves the actual pursuit of an economic activity through a fixed establishment in another Member State for an indefinite period (CJEU in Factortame and Others, C-221/89, para. 20 and Commission v. United Kingdom, C-246/89, para. 21). In order to claim freedom of establishment, it is generally necessary to have secured a permanent presence in the host Member State (CJEU in Centro di Musicologia Walter Stauffer, C-386/04, para. 19 and Schmelz, C-97/09, para. 38). This case law can, generally speaking, be translated as “no freedom of establishment without establishment”.
On the other hand, the CJEU generously extended the application of Articles 49 and 54 TFEU to letterbox companies without “fixed establishment” and/or “permanent presence” in their home Member State. In Centros (C-212/97) the Court ruled that EU law is applied to the set-up of subsidiaries, branches and agencies in other Member States and, in that regard, it is immaterial that the company was formed in one Member State only for the purpose of establishing itself in another Member State, where its main, or indeed entire, business is to be conducted (Centros, para 17).
The CJEU then used its 2009 Cartesio judgment (C-210/06) as an opportunity to, obiter dictu, set guidelines for cross-border transfers of seat. It stated that, on the one hand, a Member state has the power to define both the connecting factor required of a company if it is to be regarded as incorporated under the law of that Member State and, as such, capable of enjoying the right of establishment, and that required if the company is to be able subsequently to maintain that status (thus treating companies as legal creatures of their country of origin). On the other hand, freedom of establishment comprises the right of a company to move from one Member State to another. If domestic legislation of the Member State of origin requires the liquidation of the company, thereby preventing it from converting itself into a legal person governed by the law of the target Member State, such a measure cannot be justified under the rules on freedom of establishment (Cartesio, paras. 110 ff.).
This jurisdiction was complemented by the CJEU in Vale (C-378/10) where the Court clarified the legal position of the Member State of destination. If a Member State allows for the conversion of companies governed by national law, it must also grant the same possibility to foreign EU companies (Vale, para. 46). In the absence of relevant EU-law, the target Member State may set up procedural rules to cover the cross-border conversion but must ensure that they are not less favourable than those governing similar domestic situations (principle of equivalence) and that they do not render impossible in practice or excessively difficult the exercise of rights conferred by the European Union legal order (principle of effectiveness) (Vale, para. 48).
The Opinion of AG Kokott
In her Opinion of 4 May 2017 (see here), AG Kokott took up a distinct position emphasizing the need for actual establishment for the application of Articles 49 and 54. This criterion is sufficiently met, as AG Kokott states, if, at least, the company intends to set up an actual establishment in the sense of conducting at least a nominal economic activity in the target Member State (Opinion, para 36). The AG underlines her position citing the above mentioned CJEU case-law in Factortame and Others (C-221/89), Commission v. United Kingdom (C-246/89), Centro di Musicologia Walter Stauffer (C-386/04) and Schmelz (C-97/09). She concludes that the freedom of establishment “gives economic operators in the European Union the right to choose the location of their economic activity, it does not give them the right to choose the law applicable to them” (Opinion, para. 38).
Implications of the Polbud judgment for the internal market
The CJEU now takes a different point of view: Once formed in accordance with the legislation of a Member State, companies enjoy the full range of that freedom. Nothing new, so far, as Geert van Calster suggests in his comment (see here). But what makes Polbud (r)evolutionary?
First, the CJEU creates legal certainty in an area that is particularly important for the functioning of the European Single Market. In its Cartesio judgment, the Court allowed for the cross-border conversion of EU companies in general but did little to shape the relationship between the involved Member States. Therefore, it was widely thought, that, just like AG Kokott propounds, the conversion of a company from one Member State to another required a genuine economic link with the State of destination. In Polbud, the CJEU clarifies that the regulatory power of a Member State ends when a company converts itself into a company governed by the law of another Member state. It is for the latter State to determine the legal and/or economic conditions that have to be satisfied by the company in order to bring the conversion into effect (paras 33 ff.). Under Articles 49 and 54 TFEU, the State of origin is only allowed to provide legislation for the protection of public interests (such as the protection of creditors, minority shareholders and employees) but cannot impose mandatory liquidation.
Secondly, the CJEU obliges the State of origin to observe the principle of equivalence. This principle, already known from the Vale decision (see above), was generally considered as obliging only the target Member State in cross-border conversion cases to legally treat domestic and foreign companies equally. By contrast, the State of origin was only thought to be bound by the general prohibition of restrictions (i.e. the prohibition of rules hampering or rendering less attractive the exercise of fundamental freedoms, see CJEU in Kraus, C-19/92, para. 32). In Polbud, the CJEU, without being explicit on this point, extends the scope of application of the principle of equivalence to the Member State of origin by stating that “the imposition, with respect to such a cross-border conversion, of conditions that are more restrictive than those that apply to the conversion of a company within that Member State itself” is not acceptable (para. 43).
Finally, recapitulating its jurisdiction in Daily Mail and National Grid Indus (C-371/10), the CJEU points out that exercising the freedom of establishment for the purpose of enjoying the benefit of the most favourable legislation, does not, in itself, amount to an abuse of rights (para. 62). The Court further explains its position saying that “the mere fact that a company transfers its registered office from one Member State to another cannot be the basis for a general presumption of fraud and cannot justify a measure that adversely affects the exercise of a fundamental freedom guaranteed by the Treaty” (para. 63).
Assessment
As already observed, Polbud encouragingly facilitates the cross-border mobility of companies but, on the other hand, leaves the reader with open questions.
It was high time to free cross-border conversions from the requirement of a genuine economic link with the Member State of destination. The legal situation before Polbud, that allowed letterbox companies to conduct their business in other Member States (which can be compared to initial choice of law) but prevented the formation of letterbox companies through the transfer of an existing company’s registered office to another Member State (which can be compared to subsequent choice of law), was somewhat arbitrary from a legal and economic point of view.
On the other hand, the extension of the scope of application of the principle of equivalence to the Member State of origin can only be seen as inconsistent with the legal doctrine of the freedom of establishment provided for in Articles 49 and 54 TFEU. Heretofore, only EU-foreigners could enjoy the right to non-discrimination, whereas, in regard to EU law, Member States were free to impose (relatively) stricter rules to its own citizens. This principle finds its expression, for example, in the above-mentioned treatment of companies as creatures of their state of origin that the CJEU established in its Cartesio judgment. As the principle of equivalence corresponds to the prohibition of discrimination, it is even more astonishing that the CJEU permits exemptions for overriding reasons in the public interest. These unwritten exemptions generally apply only in cases of restrictions of the freedom of movement (see Kraus, para. 32 and Gebhard, para. 37). On the contrary, discriminations require the strict observance of the catalogue of justifications set out in Article 52 TFEU. In future decisions, the CJEU should recall this clear distinction and cease to further the linguistic ambiguity.
Court of Appeal allows in England claims against English-based multinational for overseas human rights violations
Written by Ekaterina Aristova, PhD in Law Candidate, University of Cambridge
On 14 October 2017, the London’s Court of Appeal passed its long awaited decision in Lungowe v Vedanta confirming that foreign citizens can pursue in England legal claims against English-based multinationals for their overseas activities.
In 2015, Zambian villagers commenced proceedings against Vedanta, an English-based mining corporation, and its indirect Zambian subsidiary, KCM, alleging responsibility of both companies for the environmental pollution arising out of the operation in Zambia of the Nchanga Copper Mine by KCM. In 2016, the High Court allowed claims against both companies to be heard in England. The overall analysis of the judgement (see the author’s earlier post on this blog) suggested that (1) claims against the parent company on the breach of duty of care in relation to the overseas operations of the foreign subsidiary can be heard in the English courts and (2) the existence of an arguable claim against the English-domiciled parent company also establishes jurisdiction of the English courts over the subsidiary even if the factual basis of the case occurs almost exclusively in the foreign state. The Court of Appeal has entirely upheld a High Court ruling.
Vedanta has focused their argument on the fact that Article 4 of the Brussels I Regulation Recast does not automatically allow an English-domiciled parent company to be sued in England and, despite the CJEU’s ruling in Owusu v Jackson, there is always discretion as to whether the English court should allow the claims to be tried in England. In response, the three appeal judges were very clear in confirming the univocal effect of Owusu decision which precludes English courts from declining a mandatory jurisdiction to try claims against the English-domiciled defendant. Logically, analysis further moved to KCM’s applications. KCM as a foreign defendant was brought into proceedings on the basis of a ‘necessary or proper party’ gateway under the English traditional rules of jurisdictions. It allows service out of the jurisdiction subject to two additional conditions: (1) there is between the claimant and English-domiciled defendant a real issue which it is reasonable for the court to try; and (2) England is the proper forum for trying the claims. Unsurprisingly, an initial question of whether uncustomary claims alleging liability of the local parent company for overseas damages are viable in England was a major stumbling block for the corporate defendants.
First of all, Lord Justice Simon, who delivered a leading judgement, confirmed that absence of the reported cases on the breach of duty of care by the parent company owed to the persons affected by its subsidiary’s operations does not automatically render such a claim unarguable. He then relied on several well-known English cases to derive basic principles for the imposition of such duty of care on the parent company: (1) The three-part test of foreseeability, proximity and reasonableness set out in Caparo Industries Plc v Dickman constitutes a starting point of the analysis; 2) A duty of care may be owed, in appropriate circumstances, to the employees of the parent company and those directly affected by the subsidiary’s operations; 3) Such a duty of care arises when the parent company has taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim, or controls the operations which give rise to the claim; 4) Some of the circumstances in which the existence of the duty of care may, or may not, be established can be traced in Chandler v Cape and Thompson v The Renwick Group; 5) It is necessary to determine whether the parent company was well placed, because of its knowledge and expertise to protect the claimants; proving that parent company and the subsidiary run the same business is not sufficient; (6) The evidence sufficient to establish the duty may not be available at the early stages of the case. Following these principles, it was concluded that, irrespective of the strength or the weakness of the claim against the parent company (as opposed to the claim against the subsidiary as an operator of the mine) and in light of the supporting evidence already presented by the claimants, the claim against Vedanta cannot be dismissed as not properly arguable.
The Court of Appeal’s decision is particularly interesting for two reasons. The first issue relates to how its conclusions should be approached in the context of similar environmental litigation against English-based multinational in Okpabi v Shell. Earlier this year, Fraser J, sitting as a judge in the Technology and Construction Court, ruled that a claim against English-based parent company and the Nigerian subsidiary of the Shell group for oil pollution in Nigeria will not proceed in the English courts. The judge himself did not make any conclusions which would question the ultimate decision reached by the two instances in Lungowe v Vedanta. More importantly, his analysis fairly suggests that determination of the parent company liability should be approached on a case-by-case basis weighing the particular characteristics of the corporate organisation of the group and the nexus between the parent company and its subsidiaries (see the author’s earlier post on this blog). Nevertheless, the reasoning of Fraser J could be criticised for the scrupulousness of identifying whether sufficient evidence on each factor of the duty of care test was presented by the claimants at such an early stage of the proceedings. The jurisdictional inquiry into existence of an arguable claim against the parent company should not substitute the determination of the substantive argument and the trial itself. This approach was rightly emphasised by the Court of Appeal in Vedanta. By contrast, thorough analysis of the liability argument carried by Fraser J in Okpabi v Shell is arguably very close to the resolution of the case on the merits. The decision was appealed by the claimants, the Nigerian citizens, on these very grounds.
The second set of issues arises from the Court of Appeal’s reluctance to engage in the discussion of the regulatory significance of the litigation against major transnational corporations for their overseas operations in the English courts. In the course of appeal’s hearing Vedanta argued that allowing cases against English multinationals in their home state was not in the public interest. The judgement itself refrained to consider whether public interest factors have any impact on the jurisdictional inquiry in the disputes concerned with the private interests of the litigants. Therefore, foreign direct liability claims against powerful corporate groups were placed in the context of conventional theoretical public/private divide of the rules of private international law. The Parliament and the Government have at least twice engaged into discussion of the UK role in promoting responsibility and ensuring accountability of its companies in the course of 2009 and 2017 human rights and business inquiries. Further increase in the number of legal claims against English-based transnational corporations brought by the foreign citizens in the English courts may revive interest in the role of the discipline of private international law to take part in the global governance debate.
Dutch collective redress dangerous? A call for a more nuanced approach
Prepared by Alexandre Biard, Xandra Kramer and Ilja Tillema, Erasmus University Rotterdam
The Netherlands has become dangerously involved in the treatment of mass claims, Lisa Rickard from the US Chamber of Commerce recently said to the Dutch financial daily (Het Financieele Dagblad, 28 September 2017) and the Dutch BNR newsradio (broadcast of 28 September 2017). This statement follows the conclusions of two reports published in March and September 2017 by the US Institute for Legal Reforms (ILR), an entity affiliated with the US Chamber of Commerce. Within a few hours, the news spread like wildfire in online Dutch newspapers, see for instance here.
Worryingly enough, the March 2017 report, which assessed collective redress mechanisms in ten Member States, predicted that ‘there are a number of very powerful indicators that all of the same incentives and forces that have led to mass abuse in other jurisdictions are also gathering force in the EU’. Among the jurisdictions surveyed, the Netherlands appeared as a place particularly prone to such abuse. The September 2017 report focuses on consumer attitudes towards collective redress safeguards, and ultimately concludes that 85% of respondents tend to support the introduction of safeguards for the resolution of mass claims.
The publication of the aforementioned reports is timely as the European Commission’s evaluation report on the 2013 Recommendation on Collective Redress is expected this autumn, following the recent call for evidence. Some of the statements in these reports call for a more nuanced view. Indeed, the Dutch approach to the resolution of mass claims might have its drawbacks. It is certainly not exempt from criticisms. However, in a matter of such expedient nature, it is of the utmost importance that both sides are thoroughly addressed and assessed.
For the information of readers that are not familiar with the Dutch system: the Netherlands currently has two mechanisms that have been designed for collective redress specifically. The first one is the collective action for injunctive or declaratory relief. A verdict in such action can provide the basis for an amicable settlement or for individual proceedings to seek monetary compensation. The second mechanism is the much-discussed WCAM settlement (based on the Dutch Collective Settlements Act, see also a previous post linking to papers and a report on the WCAM procedure). In addition, there is a proposal to introduce a collective action for damages (see a previous post on this blog).
Bad apples and the bigger picture
In the past years, few incidents have occurred in Dutch collective redress that may indeed come close to ‘American situations’ that are generally feared in Europe. Unfortunately, some commentators have chosen to mainly highlight such incidents. Notably, the ILR report of March 2017 refers to the notorious case of Stichting Loterijverlies, in which a foundation initiated a collective action on behalf of aggrieved lottery ticket holders against the Dutch State Lottery. The report rightfully mentions that the foundation’s director has been accused of funnelling elsewhere, for personal gain, part of the consumers’ financial contribution to the foundation. However, the report neglects to mention that the foundation had also been litigating for quite some years and that, ultimately, the Supreme Court ruled in its favour: the Dutch State Lottery had misled consumers for years. Furthermore, the report fails to mention that some of the foundation’s participants successfully filed a request to replace the foundation’s board. Moreover, despite (or on account of) the complexity of establishing causation and damages, the case has now been amicably settled. As part of the settlement, participants of the foundation have been reimbursed their financial contribution thereto, and all class members were free to participate in the settlement: an extraordinary, one-off lottery draw. Reportedly, 2.5 million individuals have done so.
Obviously, incidents such as the aforementioned case are of no avail to civil justice, and justify concerns about claim vehicles’ activities and motives. However, we should also consider the many positive effects of collective redress mechanisms. Generally, Dutch collective actions and WCAM settlements provide for much-needed effective and efficient dispute resolution in mass harm situations.
Safeguards work: learning from experience
The March report by the ILR warns against the gradual decline of safeguards in the Netherlands, and in the EU more generally. Yet, various safeguards already exist, continue to do so, and generally function well in practice. For instance, the admissibility rules regarding representative organizations (that bring collective actions or are involved in a WCAM settlement) have become more stringent and are applied increasingly strict by courts. As to the current Dutch collective actions, there is proof that its numbers have slowly risen since 1994, but no proof exists that this is necessarily attributable to entrepreneurial parties, let alone that they have increased the number of frivolous claims (Tillema 2017). The proposed collective action for damages further raises the current threshold for representative organizations to obtain standing. The requirements concern the organizations’ governance, financial means, representativeness, experience and expertise, and individuals’ participation in the decision-making process. Indeed, a judgment will have binding effect upon all aggrieved parties who have not opted out, but all actions will be publicly registered, there is a strict scope rule, and individuals can raise objections.
So far, eight WCAM settlement have been declared binding. Undeniably, various parties have entered this market, including US counsels and their sizeable fees. However, in spite of its difficult task, the Amsterdam Court of Appeal seems growingly comfortable in assessing the reasonableness of a collective settlement, including the representative organizations’ remuneration. In Converium, the reasonableness of (contingency) fees was assessed for the first time. In the currently pending eighth WCAM case, the Fortis-settlement, the court has demonstrated its awareness of the risks and of its task to also scrutinize the motives of representative organizations. In its interlocutory judgment, it has ruled that the settlement, in its current state, cannot be declared binding. It is deemed not reasonable due to, inter alia, the sizeable remuneration of the representative organizations and their lack of transparency thereon.
A Dutch ‘manoeuvre’ to become a ‘go-to-point’ for mass claim or an attempt to enhance access to justice for all?
‘The Netherlands and the UK seem to be manoeuvring themselves to become the go-to jurisdictions for collective claims outside the EU’, the March report highlighted. Obviously, this not the first time that other countries express their concerns against the extra-territorial effects of the Dutch legislation, an issue that has been discussed for several years in the context of the WCAM (Van Lith, 2011). The ILR report indeed highlighted that in the Converium case, the Amsterdam Court of Appeal declared the settlement binding where a majority of shareholders were domiciled outside the Netherlands. Yet, the key question here is whether, for reasons linked to equality and efficiency, individuals who have suffered from losses resulting from a same misbehaviour should not be treated in a same manner and in the same proceeding, regardless of their actual location. By asserting global jurisdiction, the Amsterdam Court of Appeal ultimately ensured access to justice and equal treatment for all parties placed in similar situations, and ultimately avoided costly fragmentation of the case for parties and courts. In this regard, it should also be highlighted that the WCAM is a settlement-only mechanism, and – to the benefit of victims of wrongdoings – it is the wrongdoing party and the representatives of the aggrieved parties that jointly choose to address the Amsterdam Court of Appeal considering that the Netherlands has a suitable procedure to declare such settlement binding.
It is evident that collective redress mechanisms have both benefits and drawbacks. More than ever, the challenging, yet indispensable key word here is balance. As Commissioner Jourova recently observed at the release of the ILR September report, ‘the discussion in EU countries is in full swing on how to strike the right balance between access to justice and prevention of abuse’. We hope this short post can contribute to the discussion.
News
Conference in Milan on the European Account Preservation Order, 3 March 2023
On 3 March 2023, the Catholic University of the Sacred Heart will host a conference titled The European Account Preservation Order – Six Years On. The aim is to discuss the operation of Regulation (EU) 655/2014 in light of practice and case law, six years after its provisions became applicable, in January 2017.
Presentations will be given in English and Italian, with simultaneous interpretation.
The speakers include Fernando Gascón Inchausti (Complutense University of Madrid), María Luisa Villamarín López (Complutense University of Madrid), Katharina Lugani (Heinrich Heine University, Düsseldorf), Antonio Leandro (University of Bari), Carlos Santalò Goris (Max Planck Institute, Luxembourg), Caterina Benini (Catholic University of the Sacred Heart), Elena Alina Ontanu (Tilburg University), Raffaella Muroni (Catholic University of the Sacred Heart), Elena D’Alessandro (University of Torino), and Gilles Cuniberti (University of Luxembourg).
The event will also serve as a launch event for an article-by-article commentary on the EAPO Regulation, edited by Elena D’Alessandro and Fernando Gascón Inchausti, and recently published by Edward Elgar Publishing in its Commentaries in Private International Law series. Augusto Chizzini (Catholic University of the Sacred Heart) and Luca Radicati di Brozolo (formerly of the same University, now partner at ArbLit) will discuss the commentary with the editors and the audience.
Attendance is free, but prior registration is required.
See the registration form and the full programme. For further information: pietro.franzina@unicatt.it
Book launch/webinar: Cross-border litigation in Central Europe 23 February 2023
The Centre for Private International Law of the University of Aberdeen is organising a webinar/book launch for Csongor István Nagy (ed.), Cross-Border Litigation in Central Europe (Kluwer Law International, 2022) on 23 February 2023, 13:00 – 15:00 UK time.
Speakers:
Prof Carmen Otero García-Castrillón, Complutense UniversityComplutense University, Madrid (Spain)
Dr Mihail Danov, University of Exeter (UK)
Prof Csongor István Nagy, University of Szeged (Hungary)
Moderator:
Dr Michiel Poesen, University of Aberdeen (UK)
ASIL Private International Law Interest Group (PILIG) Newsletter and Commentaries on Private International Law (Vol. 5, Issue 2)
The American Society of International Law (ASIL) Private International Law Interest Group (PILIG) has just published its most recent Newsletter and Commentaries on Private International Law (Vol. 5, Issue 2). The primary purpose of the newsletter is to communicate global news on PIL. Accordingly, the newsletter attempts to transmit information on new developments on PIL rather than provide substantive analysis, in a non-exclusive manner, to provide specific and concise information that our readers can use in their daily work. These updates on developments on PIL may include information on new laws, rules and regulations; new judicial and arbitral decisions; new treaties and conventions; new scholarly work; new conferences; proposed new pieces of legislation; and the like.
Please see find the Newsletter and Commentaries in the attachment seen above.