European Company Law After Centros: Is the EU on the Road to Delaware?

8 Colum. J. Eur. L. 323 (2002)

Catherine Holst. J.D. Candidate, Columbia University School of Law, Class of 2002.

In 1999 the European Court of Justice (the “ECJ”) handed down its decision in the now famous case of Centros Ltd v. Erhvervs- og Selskabsstyrelsen. The case concerned the ability of two Danish nationals to incorporate their company in the UK without carrying out any business there for the purpose of operating their company in Denmark through a “branch,” all the while skirting Danish rules on minimum capitalization. Despite the Danish government’s protestations that this constituted blatant fraud and endangered creditors, the ECJ held that the Danish nationals’ scheme was permissible under the right to freedom of establishment as guaranteed by the EC Treaty.

Centros, in the words of one commentator, immediately provoked “great waves of unrest on the continent.” To understand why this is so, it is necessary to understand the system of conflict-of-laws approaches within Europe – a system which at this point rises to the level of deeply held convictions. Although the ECJ did not explicitly address conflict-of-laws in Centros, many commentators have argued that the case has serious implications for this issue.

The Netherlands, the UK, Ireland and Denmark subscribe to incorporation theory in their conflict-of-laws legislation, while the rest of Europe subscribes to the system of siège réel, or seat theory. As far as the Netherlands, the UK, Ireland and Denmark are concerned, they are willing to recognize any corporation as a legal entity so long as it has been duly incorporated under the laws of a particular jurisdiction. The rest of Europe, however, insists that a company’s legal personality be bound to the place of its “real seat,” or central administration. Therefore, a duly incorporated company seeking to locate its central administration in a seat theory state will not be recognized legally until it reincorporates itself under that state’s laws.

For years, seat theory has guaranteed those countries that adhere to it effective control over the businesses whose activities concentrate within their borders. Indeed, seat theory is designed as a first line of defense against corporations governed by (presumably less stringent) foreign laws. It has also effectively prevented the prospect of regulatory competition within the European Union (the “EU”) in the area of company law. The question is, does seat theory survive after Centros? And if it does not, is the EU on the road to Delaware?

This paper will attempt to provide some answers to these questions. Part II will summarize the key points of the Centros judgment. Part III will examine several perspectives on the impact of the case, while Part IV will explore the validity of continental fears of a “race to the bottom” in Europe in the wake of the Centros judgment. Ultimately this paper will conclude that while Centros may continue to leave some room for seat theory, the costs of Europe’s schizophrenic approach to its conflict-of-laws legislation outweigh whatever it gains from its present inertia in this area, which is rationalized by the potential for a “race to the bottom.” In this respect it will be argued that while commentators may conjure up of the specter of Delaware effects, this is more about political posturing than it is about objective analysis.