11 Colum. J. Eur. L. 187 (2004)

Patrick S. Ryan. Denver, Colorado.

The European Union (EU) does not yet have the U.S. equivalent of Delaware; that is, the EU does not yet have a place where it is fairly common to incorporate, regardless of where business is done. Recently, there has been much debate among European states (and legal scholars) in the corporate law field regarding the possible emergence of a “Delaware of Europe.” Some European countries have overtly fought a trend towards this possibility by passing local laws that make it difficult to establish a branch or subsidiary company in a location outside the country of origin. In response, the European Court of Justice (ECJ) has heard several cases that have progressively limited the ability of individual countries to restrict the establishment of companies, agencies, branches, and subsidiaries in other European countries. On September 30, 2003, the ECJ delivered its latest blow to countries that have put in place prohibitive regulations regarding incorporation with its decision in the case Inspire Art. This judgment is consistent with the ECJ’s jurisprudence on the matter of corporate headquarters and subsidiaries, beginning with Daily Mail, continuing with Centros, and peaking with Überseering. Daily Mail pertained to a so-called “outbound” case, and Überseering and Centros dealt with so-called “inbound” cases. All three cases were decided in the context of “freedom of establishment” from Article 43, paragraph 1, of the Treaty Establishing the European Community (“TEC”), which, read together with Articles 46 and 48 TEC, grants great leeway to European corporations that want to move about within the Community.

Inspire Art, like Centros, expanded upon the interpretation of Article 43 TEC’s freedom-of-establishment clause with regard to an inbound case, although it differs from the facts of Centros on one fundamental point: in Centros, the registration of a branch of a U.K. company in another European country – in this case Denmark – was unjustly refused by the Danish government, whereas in Inspire Art, the registration of a branch of a U.K. company in the business register of another European country – here, Holland –    was not refused. What was the difference? In Inspire Art, the company was separately identified under Dutch law as a so-called “pseudo-foreign company;” as such, certain legal requirements and capital expenditures were linked to the registration. Consequently, the ECJ was called in to decide if this distinction (i.e., linking registration with the fulfillment of additional conditions and additional capital outlay) conflicts with the European principle of freedom of establishment. In the end, the ECJ determined that a conflict did, in fact, exist. In this Case Note, we will analyze the development of the ECJ case law as it led to Inspire Art. In so doing, we shall review the underlying theories and principles that govern the different legal treatments of European companies when they choose to establish subsidiaries or branches in other European countries.

A. Sitztheorie and Gründungstheorie

Under the theory of domicile (Sitztheorie), a legal dispute involving a corporation is governed by the law of the state in which the company has established its actual headquarters. If, however, the theory offoundation (Gründungstheorie) is applied, legal disputes are governed by the law of the company’s place of incorporation. We will review the distinctions shortly. Most of the heated discussion on the distinction between these two theories has taken place in Germany, and, invariably, the terms Sitztheorie and Gründungstheorie can be translated in numerous ways. Accordingly, for purposes of simplification, we shall use the German terms in this Note.

As we have seen, under Sitztheorie, when a lawsuit arises among corporate parties with different nationalities, conflicts of law are decided by the company’s domicile, or Sitz. However, there is a twist: the Sitz is the place considered by law as the official headquarters, not necessarily the company’s place of incorporation. Per German law, a “headquarters” is designated, according to the Bundesgerichtshof (German Supreme Court), by determining the place “where fundamental management decisions are transformed into ongoing management acts.”Thus, under Sitztheorie, if the company in question is not incorporated in the state where a legal conflict arises, it does not enjoy either a so-called “legal personality” or the limited liability associated with a “corporate personality.” Not surprisingly, the raison d’étre for many corporations is their ability to create a legal personality-that is, to have a corporate protective “shell”-and to enjoy the limited liability that this shell provides. As a consequence, if a given country has incorporated Sitztheorie into its laws governing corporations (as Germany has),” companies are encouraged (and often required) to separately incorporate in the state where Sitztheorie exists. Neglecting to do so can severely limit the advantages associated with incorporation.

B. Gründungstheorie

According to Gründungstheorie, the place of incorporation governs whether or not a corporation may (a) take part in a lawsuit and (b) enjoy the shell protections and limited liabilities that incorporation grants. Accordingly, this is a much broader, much less restrictive regime than Sitztheorie, and it does not matter where a corporation’s administrative offices are located. Rather, a headquarters is selected (for tax, convenience, or other reasons) and business operations can take place in any other country. Conceptually, Gründungstheorie, in its application, is not unlike a U.S. firm incorporating in Delaware and operating in Colorado. Companies under Grfindungstheorie are generally free to relocate their headquarters without losing their original legal status, just as a Delaware corporation may move from state to state within the United States without losing the protections of Delaware corporate law. Accordingly, perhaps the most notable characteristic of Gründungstheorie is that it encourages “forum shopping;”in other words, companies are thus encouraged to incorporate in the countries that have the most favorable laws of incorporation (e.g., regarding taxation). Corporations and corporate movements under Gründungstheorie are sometimes referred to as “pseudo-foreign companies,” a term used to classify companies that set up their headquarters in one European country (e.g., the United Kingdom) while also establishing legal operations in another (e.g., Spain).