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Seat theory versus incorporation theory

An analysis of the ECJ's jurisdiction and its implications

Research Paper (undergraduate) 2007 27 Pages

Business economics - Law

Excerpt

Table of Contents

List of abbreviations

1. Abstract

2. Introduction

3. Seat theory versus incorporation theory: An analysis of the ECJ’s jurisdiction and its implications
3.1. Analysis of the implications of the ECJ’s jurisdiction on German Corporate Law, with particular focus on the application of the seat theory
3.1.1. Issue
3.1.2. Definitions
3.1.3. Legal foundations: The relationship between European Law and National Law
3.1.4. The implications of the ECJ’s jurisdiction on National Law
3.1.5. The impact of the ECJ cases Daily Mail, Centros, Überseering and Inspire Art
3.1.6. Consequences regarding the application of the seat theory
3.2. Analysis of the effects of this ECJ jurisdiction on the use of foreign legal forms in Germany and German GmbHs
3.2.1. Threat: Race to the bottom
3.2.2. Trend: Formation of a British Limited in Germany
3.2.3. Consequences: MoMiG – Reform of the German GmbHG
3.3. Advantages and disadvantages of this newly created competition of legal forms within the European Union
3.3.1. Advantages
3.3.2. Disadvantages
3.3.3. Findings

4. Conclusion / Prospects

5. Appendix
5.1. Appendix 1 – foreign legal forms Public companies and limited liability companies
5.2. Appendix 2 – Articles applied Consolidated Version of the Treaty establishing the European Community (EGV)

6. References

List of abbreviations

illustration not visible in this excerpt

1. Abstract

This report is about the European Court of Justice’s jurisdiction and its implications on
German Corporate Law: It explores how European Law is influencing and thereby changing national Corporate Law. In doing so, the author analyses the impact of the ECJ’s rulings in the cases Daily Mail, Centros, Überseering as well as Inspire Art and their effect on the – until recently in continental Europe prevailing – seat theory. Furthermore, the author carefully analyses the subsequent developments in Germany, with a particular focus on the trend to form a British Limited instead of a German GmbH as well as the thus resulting reform of German Limited Liability Company Act (GmbHG). Finally, the new competition of legal forms is evaluated by balancing the arguments in favour and/or against this development.

Keywords

seat theory, Sitztheorie, incorporation theory, Gründungstheorie, Daily Mail, Centros, Überseering, Inspire Art, race to the bottom, race for laxity, Limited, SE, Limited Liability Company Act, GmbHG

2. Introduction

“Thank you, all your properties have just been assigned to the Queen’s estate.”

The German businessman still could not believe what had just happened. When forming a British Limited in Germany, he was convinced that this was the least expensive option to set up a firm – with a registered share capital of just one British pound, instead of the EUR 25,000 that were required to form a German GmbH at that time. He was not aware that he could be made liable for not following the publication requirements in the UK, which leads to cancellation in the trade register and loss of the legal capacity. This, in turn, implies that the company’s British estate devolves to the British Crown and the previous managing directors can even be made liable personally.[1] Despite forming a British Limited has become very popular in Germany, as is shown by the increasing number of registrations, many company’s founders seem not to be aware of the responsibilities and risks attached to this foreign legal form. How come that German entrepreneurs set up a British Limited?

Prior to analysing the use of foreign legal forms such as the British Limited and the thus resulting changes in German GmbHG, the author analyses the underlying legal framework.

First, he outlines the ECJ’s recent jurisdictions regarding the application of the seat theory versus the incorporation theory, referring to the cases Daily Mail, Centros, Überseering and Inspire Art. Thereafter, he explains how the ECJ’s jurisdiction influences and changes national law and discusses whether there is still room for an application of the so-called seat theory in Germany. Subsequently, he analyses the effects on the use of foreign legal forms in Germany, with a particular focus on British Limiteds, and explores the German legislator’s reaction by reforming the GmbH. The author concludes with the consideration of advantages and disadvantages of this newly created competition of legal forms.

3. Seat theory versus incorporation theory:
An analysis of the ECJ’s jurisdiction and its implications

The main part of this report is divided in three sub-categories, (1) implications on German Corporate Law and the application of the seat theory, (2) effects on the use of foreign legal forms such as the British Limited and reform of the German GmbHG as well as (3) careful consideration of the advantages and disadvantages of this newly created competition of legal forms.

3.1. Analysis of the implications of the ECJ’s jurisdiction on German Corporate Law, with particular focus on the application of the seat theory

This section focuses on the analysis of the European Court of Justice’s jurisdiction and its implications on German Corporate Law, considering the ECJ-cases Daily Mail, Centros, Überseering and Inspire Art. The author explains how the ECJ’s jurisdiction influences and changes National Law and explores whether there is still room for an application of the so-called seat theory under German Law.

3.1.1. Issue

The ECJ could further restrict German Corporate Law and thus the application of the seat theory in terms of the expatriation of companies, following its former jurisdiction in the cases Daily Mail, Centros, Überseering and Inspire Art, pursuant §§52, 58 EGV[2] regarding the European Union right to freedom of establishment.

3.1.2. Definitions

Within International Corporate Law, two major opposing theories exist regarding the assessment of foreign and domestic companies, namely seat theory and incorporation theory. This assessment is of major importance, as the impact of relocating to or from another EU member state varies significantly among the theories.

3.1.2.1. Seat theory

The seat theory has been prevailing in Continental Europe until recently. According to this theory, the company’s rules and regulations are determined by the company’s domicile. It is crucial that not only the company’s statutory domicile but also the actual domicile, i.e. the headquarters, is located within the state of domicile’s territory. Prior to the ECJ’s jurisdictions, companies founded in Germany who transferred their actual domicile abroad have become a legal company abroad and thus the German company had to be closed. In turn, companies founded outside Germany with an actual domicile in Germany have not been fully recognised in Germany in terms of their legal capacity and, thus, had to form a German corporation first to have legal capacity.[3] Even though the seat theory has certain advantages in regard to the impatriation of firms such as federal control and protection of creditor interests, the regulation to close a company in times of expatriation is seen as a disadvantage.

3.1.2.2. Incorporation theory

The incorporation theory has been prevailing in other countries, such as the UK, Denmark or the Netherlands. Pursuant this theory, the country where the company has been founded determines its statute. This means that companies founded in the UK have been allowed to transfer their actual domicile abroad without having to close their British company, and companies founded outside the UK with an actual domicile in the UK have been fully recognised in terms of their legal capacity. The advantage of this approach lies within the free choice of domicile and the recognition of all EU companies as equal, whereas the variety of legal forms within the EU, all with their specific rules and regulations, leads to confusion for the customer, who has to get familiar with each company’s legal status in the respective home country.

3.1.3. Legal foundations: The relationship between European Law and National Law

European Law – whether of primary or secondary nature – has priority over National Law. The ECJ has deduced this order of priority on the basis of the autonomy of the European Law and the requirement to have consistent validity of this European Law. Consequently, no national rules and regulations may override this law.[4] This has been confirmed by the German Federal Constitutional Court, even though they justified their decision differently, i.e. with the approval of the European Community Treaty pursuant articles 59 (2) in conjunction with 24 (1) GG. The latter permits to open up German Law and thus to take back its exclusive claim to power to allow the application of European Law. Besides that, it is an unwritten rule of Primary European Law that European Law takes priority over future and current National Law (“Anwendungsvorrang”). This means that in case of contradicting National Law and European Law, German courts have the obligation not to apply the National Law.

[...]


[1] Compare Happ & Holler (2004), p. 8

[2] The detailed wording of the articles can be obtained from the appendix

[3] Compare Bücker & Hirte (2005), RN 1-2

[4] Costa/ENEL: ECJ, verdict dated 17.07.1964 – Rs 6-64; NJW 1964, 2371

Details

Pages
27
Year
2007
ISBN (eBook)
9783638016148
ISBN (Book)
9783638918916
File size
647 KB
Language
English
Catalog Number
v85963
Institution / College
Heilbronn University of Applied Sciences – Business School Heilbronn (MBA)
Grade
1,2
Tags
Seat

Author

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Title: Seat theory versus incorporation theory