Centros and European Company Law

Centros and European Company Law

Centros and European Company Law

In 1999, the (then) Court of Justice issued its decision the Centros case (C-212/97), which is without doubt the most influential judgment in the field of European company law.

In contrast to the United States, founders of companies were historically often not given free choice where to incorporate in Europe. Conflict of law rules were divided between the incorporation theory and the real seat theory. Under the latter, the law of the company’s real seat or head office governs its operations. If, for example a firm is incorporated in state A, but is actually based in state B, and if B is a real seat state, courts might apply B’s corporate law to the company. Because the company did not go through the incorporation procedure in B, the company might be treated as non-existent, or as a partnership between its shareholders. Consequently, founders and companies were deprived of the ability to choose the law most suitable to their purposes, and regulatory arbitrage in company was essentially impossible in the European Union. One might be tempted say that the real seat theory was intended to protect national laws from competing with each other.

All of this changed with Centros and a number of follow-up cases, most prominently Überseering (C-208/00, 2002) and Inspire Art (C-167/01, 2003). The court found, in particular, that national authorities could not deny the registration of a branch office of a “pseudo-foreign” firm incorporated within an EU or EEA country, they could not deny the legal personality of such a company, and they are not permitted to impose special disclosure requirements on such companies and impose a special types of liability on such companies. Actions by Member States to this effect were found to be compatible with the freedom of establishment as interpreted by the Court. The practical result is that Member States can no longer apply the real seat theory to firms incorporated in other EU and EEA members.

In the early years after the case, scholars began to analyse whether EU Company Law would see a “race to the top” or “race to the bottom” in company law, as it has been debated in the United States for many decades. While large and publicly traded firms seemed to take little notice of the debate in the early years, a considerable number of founders of new businesses from Continental European countries set up Private Limited Companies in the United Kingdom for the purpose of doing business in the founders home Member State. This trend seems to have abated at least in some Member States, but Centros has left Europe with a greater freedom of choice between different corporate laws, especially for small firms.

Centros has contributed to the internationalization of company law scholarship in Europe, and it has inspired scholarship written by ECGI Research Members in the following areas, among others:

  • The effects of regulatory arbitrage and regulatory competition, e.g. whether EU company is undergoing a “race to the top” or “race to the bottom”;
  • The merits and demerits of the legal capital system, most of all minimum capital, which arguably was one of the most important reasons for incorporating in another EU Member State;
  • the ability of Member States to impose their own legal rules and doctrines on companies founded in another Member State;
  • the interaction of company and insolvency law in cross-border cases;
  • Possibilities for cross-border mobility of corporations, which Member States must permit under the freedom of establishment, and for which the Directive on Cross-Border Mergers (formerly Directive 2005/56/EC, now, art. 118 to 134 of the (codified) Company Law Directive 2017/1132/EU).
  • Cultural, legal hurdles and practical hurdles that inhibit free choice of corporate law and corporate mobility;
  • The effects of some Member States’ efforts to make their own company law less unattractive to avoid an exodus of companies to other states.
  • The impact of Brexit on English Private Limited Companies with their real seat in Continental Europe.

This page is intended as a continuing resource section on this subject and will be updated when necessary. It contains papers of relevance and ECGI researchers that are knowledgeable on the topic.

For queries, or to suggest updates to the page please contact: Martin Gelter (mgelter@law.fordham.edu)




Academic papers:

Policy papers, reports, viewpoints and speeches:

EU Legislation

CJEU Case Law relevant to the Freedom of Establishment for Companies:

Case C-106/16, Polbud — Wykonawstwo sp. z o.o.

Blog posts and articles: 




Prof. Martin Gelter




Collateral Damage: Brexit's Negative Effects on Regulatory Competition and Legal Innovation in Private Law

This article attempts to assess the consequences of Brexit for English and European private law. More specifically, I am interested in how the level of legal innovation in private law will be influenced by Brexit. I argue that Brexit will reduce...Read more

Horst Eidenmüller
07 May 2018

Why Do Businesses Incorporate in Other EU Member States? An Empirical Analysis of the Role of Conflict of Laws Rules

Research in law, political science and economics has taken a strong interest in the way companies strategically incorporate in foreign jurisdictions. However, the empirical research about corporate mobility in the EU has so far been limited in...Read more

Carsten Gerner-Beuerle
Federico M. Mucciarelli
Mathias Siems
03 August 2017

Centros, the Freedom of Establishment for Companies, and the Court's Accidental Vision for Corporate Law

In consequence of the three ECJ cases in Centros (1999), Überseering (2002), and
Inspire Art (2003), EU member states can no longer effectively apply the real seat theory to companies from other Member States or take other measures to avoid...Read more

Martin Gelter
01 February 2015

How Does Corporate Mobility Affect Lawmaking? A Comparative Analysis

This paper examines the impact of increased corporate mobility on corporate lawmaking in the European Union (EU). More specifically, we seek an answer to a simple question: Has the increased mobility which arose from the implementation of the...Read more

William Bratton
Joseph McCahery
Erik Vermeulen
01 January 2008