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.

Queries, suggested inclusions and other ideas?

Contact Martin Gelter

Research Member

Professor of 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.

Queries, suggested inclusions and other ideas?

Contact Martin Gelter

Research Member

Professor of Law

Topic Contributors

Professor Avv. Marco Ventoruzzo

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Representative Member, Research Member

Head of Department and Professor of Corporate Law

from Paolo Baffi Center on Financial Regulation, Bocconi University Law Department

Professor  Carsten Gerner-Beuerle

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Research Member

Professor of Commercial Law

from University College London

Professor Andreas Engert

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Research Member

Professor of law

from Freie Universität Berlin

Prof. Hannes Wagner

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Research Member

Associate Professor

from Bocconi University

Professor Marco Becht

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Board Member, Fellow, Institutional Member, Research Member

Professor of Finance and the Goldschmidt Professor of Corporate Governance

from Solvay Brussels School for Economics and Management, Université libre de Bruxelles

Professor Dr Horst Eidenmüller

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Research Member

Freshfields Professor of Commercial Law

from University of Oxford

Professor Colin Mayer

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Board Member, Fellow, Research Member

Peter Moores Professor of Management Studies

from Saïd Business School, University of Oxford

Professor John Armour

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Fellow, Research Member

Hogan Lovells Professor of Law and Finance

from University of Oxford, Faculty of Law

Professor Martin Gelter

view

Research Member

Professor of Law

from Fordham University School of Law

Professor Tobias Tröger

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Research Member

Professor of Private Law, Commercial and Business Law

from Leibniz Institute SAFE, Goethe University Frankfurt, House of Finance

Professor Wolf-Georg Ringe

view

Research Member

Professor of Law & Economics

from University of Hamburg

Professor Luca Enriques

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Board Member, Fellow, Research Member

Professor of Corporate Law

from University of Oxford

Professor Mathias Siems

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Research Member

Professor of Commercial Law

from Durham University

Professor Jens Dammann

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Research Member

Professor in Law

from The University of Texas School of Law

Professor Jill Fisch

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Board Member, Research Member

Saul A. Fox Distinguished Professor of Business Law

from University of Pennsylvania Law School

Professor Gérard Hertig

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Fellow, Research Member

Professor of Law

from ETH Zurich

Professor Stefano Lombardo

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Research Member

Associate Professor of Economic Law

from Free University of Bolzano