Lecture - notes - EU Law Foundations PDF

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LL4F3: Law of Mergers, Acquisitions & Restructurings in EuropeLecture (Week 3)“Foreign” Companies, Restructurings, and EU Law We will look at the problem of foreign companies, implications of EU law for companies and then connect it to our space. In a way, this lecture is more detached to what ...

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LL4F3: Law of Mergers, Acquisitions & Restructurings in Europe Lecture (Week 3) “Foreign” Companies, Restructurings, and EU Law

 We will look at the problem of foreign companies, implications of EU law for companies and then connect it to our space. In a way, this lecture is more detached to what lawyers consider to be core.  Problems arising from PIL, EU law.  Very detailed knowledge of case law in our case is not really essential.  Reading: the one draft chapter covers essential things, the foundational problems of foreign companies. If you don’t look at all of the readings of this week for the exam, it won’t be much problem.

PIL and Company Law: A Primer 

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What are the problems created by companies operating or established “abroad”? o Imagine you have a company which operates outside of the jurisdiction that initially gives that company its legal personality. It is a company established under the rules of company law passed by the French legislator, and this company starts interacting with other companies, customers, in other MS. It also opens a branch in another country. When we have this situation, we end up with a company that in a sense tries to take its own company law and take it with it, and then try to give effect to this law abroad. This problem is not unique in company law, we have it in other areas. But it is relevant because the very existence of a company is a direct consequence of the law and so, the question, how do other countries look at a company which was formed in foreign law. How do conflict of laws rules address these problems? o Private international law rules as “pointers”  The problem could be that the company law under which a company was formed says that someone ahs the power to represent a company or says that shareholders of that company have a joined limited liability, but they are not personally liable for any debts of the company. The problem then is, how do rules of limited liability operate when a foreign court tries to apply its own rules in relation to such a company. Conflict of laws rules try to solve this problem by telling us which company law should apply to the specific company. So, you can say that PIL rules are pointers to specific statute books. PIL will tell us through which lens to look at this company. How is this question likely to be viewed by legislators? o The relevance of companies for (national) economies  Companies are the most relevant players in our national economies. So, the vast majority of business activities in almost all market economies is conducted through companies. Despite globalization, a chunk of that activity is conducted by local companies (domestic companies). It may not be surprising that legislators and policymakers acknowledging the importance of companies may ask themselves whether company law is a useful regulatory tool that you can deploy in order to get companies to behave in a way which you see fit. If you are a legislator and you are

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worried about a social problem (e.g. the treatment of employees), you could say that there are two possible avenues to addressing the problem: (1) pass a specific rule that applies to employees in your country or (2) you could say that the vast majority of employees are employees of a company so that maybe we can tweak company law that also solves this problem. Maybe we can have a company law which makes it more likely that problems don’t arise, which protects the interests of employees. The same is true for the protection of other stakeholders, such as creditors, the environment. Instead of specific environmental standards, maybe we can have a change of my company law rules which makes directors more responsive to some environmental aim that I have. so: o Company law used as tool for the regulation of business  This is very topical – at the centre of debate happening in the US now, where the question around corporate purpose is gaining steam. Maybe we need to change something about the way in which our companies operate, be clear about what the purpose of our companies are. At the heart of this discussion is the notion that all of the business is conducted through company, so we might as well regulate through company law in order for businesses to behave. There is scope for conflict. If a legislator wants to use its own company law as a way of regulating business, then this legislator should be worried about the prospect of a foreign company operating within their borders because these foreign companies bring their own company law, so the way in which they opt out of our company regulatory framework and hence we should be worried of the application of foreign company law within our borders. To a certain extent, whether this is worrying, this depends on the usage of company law as a business regulation tool. So, a rule of thumb would be to say that the more a legislator uses company law for purposes beyond just looking at the internal affairs of the company, the more concerned this legislator would be about the application of foreign company law. There is also correlation here between company law systems which give higher weight to the stakeholders within their company environment and a worry of these foreign companies. We can find this correlation between enabling company laws and mandatory company law. See below. o Note: different views of the corporation  E.g. regulation of “internal affairs”/corporate governance  Stakeholders  Enabling vs mandatory corporate law  Enabling company law is laws that give you abroad template of how things could be organized and a lot of flexibility. And we also have mandatory corporate law which tells you how the company works But also political economy/ economic nationalism / economic protectionism o these are also some concerns which play a factor. Two main approaches in private international law (taken by legislators) 1. Real seat (siege reele) doctrine  This doctrine simply says: if I want to know about a company, which company law applies to that company then I will look at factual links between this company and a jurisdiction. This means that if I want to know if a company is a German, or French, or English, I will ask a bunch of questions about that company’s actual operations and based on the answers I will be able to determine which law applies.

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Countries applying this doctrine will ask where the most important strategic decisions are taken – where is the central management of that company located (physically). Once I know the answer then I will know which law applies. We are incorporated in Bermuda, but really we take all the decisions in the UK. Yes I am resident here in the UK, and I incorporated the company via the internet, but all the decisions are taken by me in London. From the perspective of the real seat doctrine jurisdiction, then all the important decisions are taken in London and in order to determine which rules should apply to your company, w e will simply apply UK law because this is the jurisdiction in which you take these decisions.  The simpler one is the incorporation doctrine. See below. o Applicable law is dependent on “factual links” o Incorporation (often) necessary, but not sufficient condition. 2. Incorporation doctrine  This jurisdiction simply asks you, where in the world, which jurisdiction gave you your status as a legal person. It was Bermuda law which gave me the status of my company, this is where I was registered and filed all the paperwork. A country following the incorporation doctrine will end the discussion here and say that this is your country of incorporation and I know which company law to apply here – your company is governed by Bermudan law. o Legal status depends exclusively on country of incorporation o Acceptance of foreign law  How do these two approaches map with the regulatory conflict and the interests of policy makers that we talked about before? o A country which relies on company law for busines regulation is more likely to apply the real seat doctrine. If you rely on company law as a tool for business regulation, then you would want to make sure that all companies which interact a lot with your own national economy, that they are actually subject to the rules that you pass and that it is not possible to bring in Bermuda or some other legal system into your country, and thereby evading the application of your company law. 

What are the questions that are being resolved on this basis?  Once we have an answer to the PIL issue: of where is your company incorporated – then this way we will determine whether the company exists as a company, so ask the country of incorporation or based on that country’s law, whether this company has legal personality and the board members are liable for certain actions etc. in our space it also includes questions whether our company is a company which can merge with another company. If we are in an incorporation doctrine country, then all of this will be determined by the law of the country of incorporation. o Status o “Internal” governance o Liability of board members o Shareholder rights – board powers o Relationship with creditors o Mergers  ability to merge  disclosure o Takeovers

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e.g. defences, but also indirectly through governance  Also, when talking about takeovers, the national rules of takeover defences will only apply if you are an incorporation doctrine country and the company is actually incorporated in your jurisdiction, and you would accept the fact that takeover defence regulation applies based on foreign law for foreign incorporated companies. For a real seat doctrine jurisdiction, the question is different, so you be incorporated in one jurisdiction, but the real seat doctrine would ask, where are your managers and where do they take decisions, and if it is actually in England, then we will determine whether you actually exist as company based on our rules. This will determine whether you do exist as a company and shareholders have a limited liability. Insolvency?  Which insolvency law applies in a situation like this?  The answer for the EU is that which insolvency law applies is ultimately determined in a way which is similar to the real seat doctrine. So, in insolvency law, we use a concept, known as comi, where we ask where is the centre of main interest of that company, and the law at the place of the comi will apply to insolvency. This can differ from the country of incorporation.  There is tension between insolvency and the company law treatment for companies which operate across borders. But this is not essential for our purposes.

 The difference between incorporation and real seat countries. Even an incorporation doctrine country will make some exceptions in its law in relation to companies which come in from abroad. The UK is a typical incorporation country. This means that company which ahs no permanent establishment in the UK, is treated in the same way as a company which has a branch in the UK, even a company which has most of its commercial activity in the UK, or indeed a company which has everything in the UK (letter box company) – a company that is formally incorporated in some other country, but really all it does is connected to the UK, so all the managers and business are in the UK. So, this letter box company doesn’t have real connection to the country of incorporation. Nevertheless, the UK as an incorporation

doctrine country will accept that all company rules, the existence of internal governance etc, will be taken by foreign law. The fac that you don’t have any connection to the country of incorporation here is of little consequence. However, there are certain special rules which apply in circumstances where the legislator of an incorporation doctrine country believes that there are risks to its national company, e.g. the use of corporate names (there are rules which you have to abide by when applying a name of the company – and these rules are typically determined by the jurisdiction of whose company law applies). So, even though the UK generally accepts you as a foreign company applying only foreign law, no matter how closely you are connected to the UK factually, it still applies some rules to prevent misuse. So, you cannot use certain corporate names that will be legal misleading in the UK even if these names are perfectly legal under the law of the state of your incorporation. Everywhere in the EU and the UK, rules for disclosure for branches in the UK – you need to make certain disclosures about your financial statements etc, in accordance with UK law. This is known as the host state- the state in which you conduct some activities – whose lens we want to assess the company.  In core insolvency law, we still have this trigger that if you have your central management in the UK, then UK insolvency law will apply no matter where you are incorporated. Even countries who don’t have their central management and control in the UK, will still be subject to some of the UK insolvency law.  UK also has rules about disqualification of directors – if a company goes into insolvent liquidation, and it is determined that the director is to be blamed for the insolvency, then under UK law, the court can say that this director should not be allowed to be a director of any company for a certain number of years. If you are subject to this disqualification as director in the UK, then you could have the idea of saying that I am disqualified in the UK, but not really disqualified under Irish law, so I can form a new company under this foreign law, so under Irish law, and under Irish law, it is perfectly legal for me to be a director of that company and then I use this company to conduct business solely in the UK and under these circumstances, UK law would still apply its disqualification rules to this foreign company.

 This is a real seat doctrine country, Germany. Germany ahs a extreme position in its PIL. Germany says whatever you do up until the point where central management and control is in Germany, then that is indeed determined by the incorporation country. So, as long as your management and control is located in your country of incorporation, then we accept that foreign law will apply. So, if Apple signs a contract in Germany (Apple incorporated) and as Apple is managed by Californian law, then California law will apply to that company. However as soon as a company moves its central management to Germany, then everything will be determined in German law, and the question of whether this company actually exists. This company will be looked at by German law which will lead to the consequence that it is no company at all, because in order to be a company in the eyes of German law, you need to comply with all sorts of formalities. And because you are incorporated under Californian law, without registration under German law, then Germany will apply its German law to you and will determine your status under German law which will lead to the drastic consequence that such a country doesn’t exist in the eyes of German law. This led to a lot of headache in connection not Brexit, because a lot of English incorporated companies have been used by German residence to do business in Germany. So, people said that the avoidance of high minimum capital rules, they go online and incorporate their company, then they have an English incorporated company and they use it to do business in Germany. This was alright as long as the UK was a MS of the EU. However, now with Brexit and transition period having ended, all these companies need to ask themselves which law applies. We are a UK incorporated company but where are we on the horizontal axis on the table above? I do have a permanent establishment, but we also have a majority of my commercial activity here, and it is not just the majority of commercial activity, but also my central management and control, because I never left Germany; I only incorporated this business in order to do business in Germany and so all my activity takes place in Germany. What is the consequence now that the UK is no longer a MS? German law will determine my status as a company. German PIL says that German law will apply to the company, and the first question that German law asks, if you do believe that you are a company then show me your registration as a German company. Have you registered with the German Register? The answer will be no, because the company registered in the UK. Then this doesn’t make it a German company, because you never came into existence and did not comply with the formalities necessary in order to become a company. So, German law will tell you that you are not a company. This led to a lot of discussions in Germany in relation to Brexit.

THE EU LAW DIMENSION  How does EU law look at this problem we saw above?

Freedom of Establishment Art 49 TFEU – creates this freedom of establishment 

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Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries […]. Freedom of establishment shall include the right to take up and pursue activities as selfemployed persons and to set up and manage undertakings […] under the conditions laid down for its own nationals […].

 For our purposes, this freedom of establishment prohibited restrictions not only on the movement of a business but also applies to mergers between companies and takeovers. So, if a French company takes over a German company, then they would be exercising in the attempt to take over this company, and a restriction on the freedom to take over this company will be prohibited under EU law. Art 54 TFEU 

Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States.  […]  For our purposes, all EU law companies (companies formed in EU law) will be treated as EU nationals and hence enjoy the freedom of establishment.

Freedom Of Establishment: Case Law  Not really relevant for the exam- no questions will be asked on these. Daily Mail  

UK  Netherlands Tax motivation o In this case, Daily Mail was pretty strong on its pro-Brexit positioning. Daily Mail was engaged in the plant sale of some of its operations. It had some subsidiaries and it wanted to dispose of them. Their lawyers had an idea, to move their headquarters from the UK to Amsterdam, and if we do this and once, we are resident there, we can sell off our subsidiaries, so the gains that we realise in this business sale will not be subject to UK taxation. UK tax authorities said that you cannot just move out because we have a special rule which says that if you leave the jurisdiction, then you need our permission to establish a tax residence outside of the UK, and it was clear that they would be permitted as long as they paid the tax. Daily Mail went to the ECJ and said we have the freedom of establishment, and we tried to establish ourselves in the Netherlands. This movement of our headquarters is an exercise of our freedom of establishment, and the UK law by requiring us to get permission of the Treasury is a restriction of that freedom and hence prohibited. so, it should be inapplicable because it is contrary to the Treaty. The ECJ form a company law perspective is confused and says, yes we agree that there is freedom of establishment by moving, but given that you are a company governed by UK law, it is the UK’s decision what it allows its companies to do and so, if the UK says that companies incorporated in the UK are unable to move their headquarters out of the UK, then the question about freedom of establishment is not really relevant here. It is just a limitation of your own corporate personality. This is the creatures of the law argument. o ...