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Regulatory Competition in Company Law in the European Union after Cartesio

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Abstract

In the Cartesio decision of December 2008, the European Court of Justice has legitimated the real seat theory for those Member States that require the presence of the administrative seat and the statutory seat in their territories as a condition for a company’s valid formation. The Court, by an obiter dictum, has also put forward the idea that the transnational conversion is included in the freedom of establishment of Articles 43 and 48 as a form of international mobility. This article analyses the possible consequences of the Court’s decision for regulatory competition in company law in Europe, taking into consideration both aspects.

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References

  1. See Case C-210/06 of 16 December 2008. Cartesio follows a series of decisions that, after the Daily Mail decision of 1989 (Case 81/87 The Queen v. H.M. Treasury and Commissioners of Inland Revenue ex parte Daily Mail and General Trust plc [1989] ECR 5483), opened the door to regulatory competition in company law in the EU: Centros (Case C-212/97 Centros Ltd v. Erhvervs- og Selskabssyrelsen [1999] ECR 1-1459), Überseering (Case C-208/00 Überseering BV v. Nordic Construction Company Baumanagement GmBH [2002] ECR I-9919), Inspire Art (Case C-167/01 Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art Ltd [2003] ECR 1-10155) and SEVIC (Case C-411/03 SEVIC Systems AG [2005] ECR I-10805).

  2. On Cartesio, see G.J. Vossestein, ‘Cross-Border Transfer of Seat and Conversion of Companies under the EC Treaty Provisions on Freedom of Establishment. Some Considerations on the Court of Justice’s Cartesio Judgment’, 6 European Company Law (2009) p. 115; K. Korom and P. Metzinger, ‘Freedom of Establishment for Companies: the European Court of Justice Confirms and Refines Its Daily Mail Decision Case C-210/06’, 6 European Company and Financial Law Review (2009) p. 125; B. Knof and S. Mock, ‘Anmerkung’, 30 Zeitschrift für Wirtschaftsrecht (2009) p. 30; P. Kindler, ‘Ende der Diskussion über die so genannte Wegzugfreiheit’, 12 Neue Zeitschrift für Gesellschaftsrecht (2009) p. 130; S. Leible and J. Hoffmann, ‘Cartesio — fortgeltende Sitztheorie, grenzüberschreitender Formwechsel und Verbot materiellrechtlichen Wegzugbeschränkungen’, 64 Betriebs-Berater (2009) p. 58; C. Teichmann, ‘Cartesio: Die Freiheit zum Formwechselnden Wegzug’, 30 Zeitschrift für Wirtschaftsrecht (2009) p. 393; D. Zimmer, ‘Das Cartesio-Urteil des EuGH: Rück- oder Fortschritt für das Internationale Gesellschaftsrecht?’, 62 Neue Juristische Wochenschrift (2009) p. 545.

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  3. The decision of the European Court of Justice can be regarded as a surprise. Indeed, scholars had criticised the requirement to keep the administrative office in the Member State of incorporation, basically arguing that the Treaty protects freedom of establishment in terms of entry (Centros,Überseering and Inspire Art) but also exit. See, e. g., W.-H. Roth, ‘“Das Wandern ist des Müllers Lust…”: Zur Auswanderungsfreiheit für Gesellschaften in Europa’, in S. Lorenz, A. Trunk, H. Eidenmüller, C. Wendehorst and J. Adolf, eds., Festschrift für Andreas Helderlich zum 70. Geburtstag (München C.H. Beck 2005) p. 973; W.G. Ringe, ‘No Freedom of Emigration for Companies?’, 16 European Business Law Review (2005) p. 621. F.M. Mucciarelli, ‘Company “Emigration” and EC Freedom of Establishment: Daily Mail Revisited’, 9 European Business Organization Law Review (2008) p. 267. The conclusions of Advocate General Maduro stressed the incompatibility of the requirement with freedom of establishment and were mainly positively commented upon by scholars. See W.-G. Ringe, ‘Anmerkung’, 29 Zeitschrift für Wirtschaftsrecht (2008) p. 1072; M. Szyło, ‘Emigration of Companies under the EC Treaty: Some Thoughts on the Opinion of the Advocate General in the Cartesio Case’, 16 European Review of Private Law (2008) p. 973. Contra, see R. Wilhelmi, ‘Der Wegzug von Gesellschaften im Lichte der Rechtsprechung des EuGH zur Niederlassungsfreiheit’, 61 Der Betrieb (2007) p. 1811.

  4. A useful introduction to the literature on regulatory competition is provided by K. Kocaoglu, A Comparative Bibliography: Regulatory Competition on Corporate Law, Georgetown Law Working Paper (2008), available at: http://www.ssrn.com.

  5. See M. Jensen and W. Meckling, ‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’, 3 Journal of Financial Economics (1976) p. 305; H. Hansmann, The Ownership of Enterprise (Cambridge, Massachusetts Harvard University Press 1996). This kind of literature has developed on the basis of the seminal article by R. Coase, ‘The Nature of the Firm’, 4 Economica (1937) p. 386; for the development in US corporate law scholarship, see J.S. Johnston, ‘The Influence of the Nature of the Firm on the Theory of Corporate Law’, 18 Journal of Corporation Law (1993) p. 213.

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  6. On the structure of ownership costs, see Hansmann, supra n. 5, at pp. 11–49 and 53–65.

  7. See Hansmann, supra n. 5, at pp. 11–49 and 53–65.

  8. For an introduction to the economic structure of company law, see the classical F. Easterbrook and D. Fischel, The Economic Structure of Corporate Law (Cambridge, Massachusetts Harvard University Press 1991); R.R. Kraakman, P. Davies and H. Hansmann, The Anatomy of Corporate Law (Oxford, Oxford University Press 2004).

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  9. See Note, ‘The Internal Affairs Doctrine: Theoretical Justifications and Tentative Explanations for Its Continued Primacy’, 115 Harvard Law Review (2002) p. 1480; N.P. Beveridge, ‘The Internal Affairs Doctrine: The Proper Law of a Corporation’, 44 Business Lawyer (1989) p. 693; P.J. Kozyris, ‘Corporate Wars and Choice of Law’, 1 Duke Law Journal (1985) p. 1.

  10. The usual reference is W.L. Cary, ‘Federalism and Corporate Law: Reflections upon Delaware’, 83 Yale Law Journal (1974) p. 663.

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  11. See R. Romano, ‘Law as a Product: Some Pieces of the Incorporation Puzzle’, 1 Journal of Law, Economics & Organization (1985) p. 225. See also R. Romano, The Genius of American Corporate Law (Washington, AEI Press 1993).

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  12. See S. Lombardo, Regulatory Competition in Company Law in the European Community.Prerequisites and Limits (Frankfurt am Main, Peter Lang 2002); see also S. Lombardo, ‘Conflict of Law Rules in Company Law after Überseering: An Economic and Comparative Analysis of the Allocation of Policy Competence in the European Union’, 4 European Business Organization Law Review (2003) p. 301.

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  13. See Romano, supra n. 11; see also R. Daines, ‘Does Delaware Law Improve Firm Value?’, 62 Journal of Financial Economics (2001) p. 525.

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  14. A consequence of this fact is that corporate law in the US mainly regulates the relationship between shareholders and managers and not also the relationship between shareholders and creditors as it does in (continental) Europe. Prof. Romano’s statement ‘In the United States, corporate law, which concerns the relation between firms’ shareholders and managers, is largely a matter for the states’ (see Romano, The Genius,supra n. 11, at p. 1) shows the difference in perspective between the two approaches. On capital requirements in the US system, see R.A. Booth, Capital Requirements in United States Corporation Law, Working Paper (2006), available at: http://www.ssrn.com (2006). The extent to which the costs of credit are or are not increased by a choice of (re)incorporation (in Delaware) is the subject of empirical studies with respect to the agency problem between shareholders and bondholders. Provided that loan agreements are generally governed by the law of New York State as a free choice of law for credit purposes because this State is the seat of the New York Stock Exchange, bonds are typically registered according to Section 5 of the Securities Act. It follows that there is a specialisation in the provision of law based on comparative advantages: Delaware provides corporate law and New York credit-debt law. On empirical research on the agency problem between shareholders and bondholders, see Y. Qu and J. Wald, ‘State Law and Debt Covenants’, 51 Journal of Law and Economics (2008) p. 179; S.A. Mansi, W.F. Maxwell and J.K. Wald, Creditor Protection Laws and the Costs of Debt, Working Paper (2008), available at: http://www.ssrn.com. Of course, provided that debt covenants, even if expensive, are able to prevent exploitation of bondholders by shareholders, the core of the problem in evaluating the overall results of a (re)incorporation of a nexus of contracts in Delaware, is to empirically demonstrate that the shareholders’ gains are smaller than the (increased) costs of bondholders protection. In this case a (re)reincorporation in Delaware would be indeed, efficiency decreasing.

  15. US legal scholarship debates on the merits of this Delaware supremacy. My point is simply that the debate has not yet produced a substantial modification by way of a complete federalisation of corporate law. I therefore agnostically share the point made by S. Levmore, ‘Uncorporations and Delaware Strategy’, University of Illinois Law Review (2005) p. 195, at p. 197: ‘I will proceed with the shared and common understanding that, at present, Delaware is simply immensely popular, perhaps because of network effects (with so many corporations arranged there, it is convenient to share in the pool of law and practitioners operating in that stew) or reliability’.

  16. Statistical evidence of the increasing importance of the United Kingdom in the European market for corporate charters is provided by M. Becht, C. Mayer and H. Wagner, ‘Where Do Firms Incorporate? Deregulation and the Costs of Entry’, 14 Journal of Corporate Finance (2008) p. 241.

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  17. This simple statement follows from general contract theory where, absent market failures, a free choice of applicable law has to be respected because it is per se Pareto-efficient. Since the freely chosen company law regulates (in the form of a contractual device) the ownership costs, an efficiency presumption has to be granted. On the efficiency of free choice of law, see F. Parisi and L.E. Ribstein, ‘Choice of Law’, in P. Newman, eds., The New Palgrave Dictionary of Economics and the Law (New York, Stockton Press 1999) p. 236.

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  18. On regulatory competition and creditors’ protection, see, e. g., J. Armour, ‘Legal Capital: An Outdated Concept?’, 7 European Business Organization Law Review (2006) p. 5; also, for a consideration of insolvency law, see L. Enriques and M. Gelter, ‘Regulatory Competition in European Company Law and Creditor Protection’, 7 European Business Organization Law Review (2006) p. 417.

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  19. For a possible application of codetermination by the host Member State, but only in the case of large and not small and medium-sized companies, see A. Johnston, ‘EC Freedom of Establishment, Employee Participation in Corporate Governance and the Limits of Regulatory Competition’, 6 Journal of Corporate Law Studies (2006) p. 71.

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  20. See Case C-55/94 Reinhard Gebhard v. Consiglio dell’Ordine degli Avvocati e Procuratori di Milano [1999] ECR 4165.

  21. Here, the Gebhard test is actually not used at all. Indeed, carrying out such a test with respect to minority shareholders would be paternalistic. They are intentionally choosing a foreign jurisdiction and prohibition of such a free choice would be difficult to justify.

  22. See Centros, para. 27.

  23. This is the core reasoning of Inspire Art.

  24. The Court has not yet formally discussed the topic of involuntary creditors but would probably not recognise their rights as a limit to the freedom of establishment because of the difficulty to insist on the argument that involuntary creditors would be better protected by an internal incorporation.

  25. Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE). Here, I intentionally do not cover the issue of the efficiency of ‘German-style’ codetermination as a form of workers’ protection/involvement. The issue is of course economic, but in Europe a delicate political one. It is dramatically simple: if the codetermination system is efficiency-decreasing, a foreign incorporation is efficiency-increasing because it escapes it (the foreign nexus of contracts has a higher value than an internal nexus of contracts). On the other hand, if the codetermination system is efficiency-increasing, a foreign incorporation, being able to escape it, is efficiency-decreasing (the foreign nexus of contracts has a lower value than an internal nexus of contracts).

  26. See, e. g., Roth, supra n. 3; Ringe, supra n. 3. Even if the statutory seat and the registered office are not exactly synonymous, I understand them as such. On the statutory seat from a German perspective and the registered office, see J. Hoffmann, ‘Das Anknüpfungsmoment der Gründungstheorie’, 101 Zeitschrift für vergleichende Rechtswissenschaft (2002) p. 283, at p. 293. Furthermore, I assume that in reality the statutory seat (registered office) is always in the Member State of incorporation, though also this statement could be wrong in theory as it is possible for the statutory seat (registered office) to be in a Member State which is not the same as the one where the company is incorporated, i. e., registered in a public register.

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  27. See the Opinion of Advocate General Maduro delivered on 22 May 2008.

  28. Since in paras. 110 and 111 the Court refers to the term ‘seat’, without specifying whether this is the administrative seat or the statutory seat and since in para. 111 the Court specifies that it is the company that moves to another Member State, I interpret ‘seat’ in paras. 110 and 111 as both the administrative seat and the statutory seat. On the same result, see Teichmann, supra n. 2, at p. 394.

  29. The Court is still competent to assess the discriminatory character of the rules which Member States define to regulate the company’s formation. This derives from Articles 10, 43 and 48 of the Treaty. Furthermore, the subsidiarity principle is enhanced also from the perspective of conflict of law rules because in dubious cases (like firms or hybrids between companies and contracts), absent clear evidence of parties’ will with respect to the Member State of formation, it could be that different Member States claim the formation of the company/legal entity. In these cases, Article 48 cannot help because this Article can only verify that a formation has been univocally granted by a Member State (in case of an incorporation there are register’s documents and verification is extremely simple) and, after such verification, can make the company eligible for freedom of establishment imposing the recognition of the company on other Member States. But the Article cannot, in itself, be used to decide a dubious case of formation: this is a decision which must be taken by the Member States on the basis of their conflict of law rules. For such cases where it is dubious whether and under what law the company exists, see also M.V. Benedettelli, ‘Libertà comunitarie di circolazione e diritto internazionale private delle società’, 37 Rivista di diritto internazionale privato e processuale (2001) p. 569, at p. 576.

  30. On the real seat theory as a protection theory see H. Wiedemann, Gesellschaftsrecht, Band I (München, C.H. Beck 1980), at p. 782.

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  31. For a historical introduction to the real seat theory and the incorporation theory, see B. Grossfeld, ‘Die Entwicklung der Anerkennungstheorien im internationalen Gesellschaftsrecht’, in W. Hefermehl, R. Gmür, and H. Brox, eds., Festschrift für Harry Westermann zum 65. Geburtstag (Karlsruhe, C.F. Müller 1974) p. 199.

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  32. Of course, a possible objection to the statement in the text is that at the end of 1800, there were different approaches to the freedom of contract in the different legal orders and that the real seat theory was developed by some (Member) States in a context of a paternalistic and protectionist approach to contracts and to the regulation of business activity and the economy. The protectionist approach was, for instance, justified by the very prominent Italian scholar D. Anzillotti, ‘Il mutamento di nazionalità delle società commerciali’, 1 Rivista di diritto internazionale (1912) p. 109, at p. 122.

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  33. I intentionally avoid examining the development of the real seat theory aimed at protecting the (legitimate?) interests of national lawyers. Indeed, in the US, the national legal culture is based on a single language and the human capital of a lawyer is invested in this single language. In Europe, the situation is more complex and language may become a barrier for the legal services, jeopardising the investment of this human capital.

  34. In a multilingual context such as the European one, the free choice of law for an internal type could be legitimately invoked precisely for language reasons.

  35. In fact, for small companies organised as limited liability companies (i. e., GmbH,sarl and srl) the imposed requirement concerning the internal administrative office limits the freedom of establishment only to secondary establishment because generally the administrative office is the main centre of business.

  36. For Hungary, see Korom and Metzinger, supra n. 2, at p. 158; for Germany, where § 4a GmbHG (Limited Liability Companies Act) and § 5 AktG (Stock Corporation Act) have been recently amended to the effect that the statutory seat and the central place of administration may now be located in different places (or countries), see S. Otte, ‘Folgen der Trennung von Verwaltungs- und Satzungsitz für die gesellschaftsrechtliche Praxis’, 64 Betriebs-Berater (2009) p. 344.

  37. Indeed, according to the explanatory text of the proposal for a European Private Company, this type of company may have its registered office and its administrative office in two different Member States: ‘The name of any European Private Company must be followed by the abbreviation “SPE”. The SPE is required to have its registered office and its central administration or principal place of business in the territory of the Member States. However, in accordance with the Centros judgment … of the European Court of Justice, the SPE may be set up with its registered office and central administration or principal place of business in different Member States. Shareholders may also decide to transfer the registered office of the company to another Member State’, see European Commission, COM (2008) 396/3, Proposal for a Council Regulation on the Statute for a European Private Company, at p. 6.

  38. In Daily Mail, the European Court of Justice was more prudent when referring to entities as creatures of their states of ‘birth’, because it added, in para. 19, ‘in the present state of Community law’ (‘In that regard it should be borne in mind that, unlike natural persons, companies are creatures of the law and, in the present state of Community law, creatures of national law. They exist only by virtue of the varying national legislation which determines their incorporation and functioning’). The reference to the present state of Community law seems to refer either to the possibility that, in future, the European Community would have the competence to create legal entities, or to the possibility of unifying the ‘birth’ of companies by way of regulations or coordinating it by way of directives.

  39. See Centros, para. 27.

  40. This is the core meaning of Überseering.

  41. See Centros, para. 28.

  42. See Centros, para. 34.

  43. Council Directive 68/151/EEC of 9 March 1968 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community.

  44. The point is made also by Leible-Hoffmann, supra n. 2, at p. 58.

  45. Cartesio is what under the Italian or German classification of companies would be called a società di persone/Personengesellschaft. Under the law of the United Kingdom it would probably be qualified as a firm and not as a company. My impression is that even if the Court explicitly refers to Cartesio as a limited partnership at the beginning of the decision, it goes on to qualify it as a company for the purposes of the judgment. This qualification (which seems the same in the languages that I have checked, i. e., English, Italian and German) derives directly from the preliminary questions and is used also by Advocate General Maduro.

  46. According to Leible-Hoffmann, supra n. 2, at p. 59, Cartesio can be qualified as a Körperschaft for private international law purposes.

  47. As pointed out by Teichmann, supra n. 2, at p. 399, whatever is not a natural person under Article 43 is a company (legal entity) under Article 48 EC.

  48. This means that the conflict of law issues related to the agreement among the parties are contractual matters and are regulated by Regulation (EC) No. 593/2008 of the European Parliament and the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I).

  49. The treatment of the different legal bodies has also been analysed by Leible-Hoffmann, supra n. 2, at p. 59, and particularly by S. Leible and J. Hoffmann, ‘“Überseering” und das (vermeintliche) Ende der Sitztheorie’, 48 Recht der internationalen Wirtschaft (2002) p. 925, at p. 933. Article 48 includes a large group of entities, referring also to companies and firms formed in accordance with the law of a Member State. The Article clearly refers to incorporated and unincorporated, registered and unregistered bodies. To give an example, forgetting for a moment the problem of the real seat/administrative office as a connecting factor, these bodies may or may not have legal capacity (such as the Scottish general partnership, which is a legal entity, and the English one, which is an aggregation of individuals and not a legal body, see J.J. Henning, ‘Partnership Law Review: The Joint Consultation Papers and the Limited Liability Partnership Act in Brief Historical and Comparative Perspective’, 25 Company Lawyer (2004) p. 163, at p. 164). My point is that the decision on the kind of freedom of establishment (under Article 43 or 48) will have to be made by taking as a basis the original (i. e., Member States of formation) legal institute. If I have understood correctly, in case of an English (limited) partnership the legal institute is a contractual one without a separate legal entity, with the consequence that natural persons, members of the English partnership, are acting on the basis of Article 43 through a contractual relationship which is an English one because of the application of the choice of law for contracts. The result is that the host Member State (e. g., Italy, where the società in nome collettivo is a legal body separate from its members) has to respect this choice and apply the chosen (contractual) law but can neither modify the English general partnership into a different contractual one, nor requalify the English general partnership as an Italian one (i. e., a società in nome collettivo). On this issue, see also G. Beitzke, ‘Anerkennung und Sitzverlegung von Gesellschaften und juristischen Personen im EWGBereich’, 127 Zeitschrift für das gesamte Handels- und Wirtschaftsrecht (1964-1965) p. 1, at pp. 7 and 8.

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  50. On the harmonisation programme and recognition among Member States (freedom of establishment) as well as on their relationship, see, e. g., Y. Scholten, ‘Company Law in Europe’, 4 Common Market Law Review (1967) p. 377; C.W.A. Timmermans, ‘Die europäische Rechtsangleichung im Gesellschaftsrecht’, 48 Rabels Zeitschrift für ausländisches und internationals Privatrecht (1984) p. 1; W.F. Ebke, ‘Unternehmensrecht und Binnenmarkt — E pluribus unum?’, 62 Rabels Zeitschrift für ausländisches und internationals Privatrecht (1998) p. 195; J. Wouters, ‘European Company Law: Quo Vadis?’, 37 Common Market Law Review (2000) p. 269; on the crisis of company law harmonisation, see P. Behrens, ‘Krisenssymptome in der Gesell-schaftsrechtsangleichung’, in U. Immenga, W. Möschel and D. Reuter, eds., Festschrift für ErnstJochen Mestmäker (Baden-Baden, Nomos 1996) p. 831.

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  51. See Beitzke, supra n. 49, at p. 3: ‘Zufolge Art. 58 sind Gesellschaften und juristische Personen im weitesten Sinne anzuerkennen. Die Anerkennung — wesensgemäß Bezugnahme auf eine fremde, den Gesellschaftsstatut begründende Rechtsordnung — bedingt, dass man die Gesellschaften und juristische Personen eines anderen Vertragsstaates so gelten läßt, wie sie nach der Rechtsordnung eines anderen Vertragsstaates entstanden sind. Es kommt also nicht darauf an, ob die Rechtsordnung des anerkennenden Landes denselben Typus von Gesellschaft oder juristischer Person kennt, wie die Rechtsordnung des Staates, unter welcher die juristische Person oder Gesellschaft entstanden ist. Der Vertrag verbietet das Aufwerfen des Typenproblems. Wenn früher gelegentlich deutsche oder belgische Gerichte die Anerkennung ausländischer Gesellschaften deshalb abgelehnt haben, weil die Gesellschaft keinem vergleichbaren Typ des deutschen oder belgischen Rechts entspreche … so ist eine derartige Judikatur im Rahmen des EWG-Rechts unzulässig.’ Beitzke, discussing the recognition problem regarding the issue of the real seat doctrine, seems to reach the conclusion that recognition can be denied and subjected to the harmonisation programme under Article 44(2)(g) (former Article 54(3)(g)), see Beitzke, supra n. 49, at p. 18. Today, the situation is different because the European Court of Justice has recognised the direct applicability of freedom of establishment independently of ex ante harmonisation measures (see, e. g., Centros, para. 27).

  52. I am not aware of the extent to which this kind of company exists in modern Germany. The point I wish to make is that according to Beitzke, supra n. 49, at p. 3, this company form was typical of Germany and the Netherlands and did not seem to exist in the other original Member States, but would (have) enjoy(ed) freedom of establishment. Regarding the opinion that Article 48 (former Article 58) includes a large spectrum of entities, as decided by the Member States of formation, see also F. Capotorti, ‘Sub. Art. 58. Libertà di Stabilimento’, in R. Quadri, R. Monaco and A. Trabucchi, Trattato Istitutivo della Comunità Economica Europea. Commentario (Milano, Giuffrè 1965) p. 447, at p. 455.

  53. Recently, the issue of regulatory competition in partnership law in the European Union was covered in M.M. Siems, Regulatory Competition in Partnership Law, Working Paper (2008), available at: http://www.ssrn.com, forthcoming International and Comparative Law Quarterly.

  54. Article 48 indeed excludes non-profit-making legal entities.

  55. The idea is that competition is a discovery mechanism (learning process), able to find efficient solutions to modified contexts. On this concept, see, e. g., R. Van den Bergh, ‘Regulatory Competition in Europe’, 53 Kyklos (2000) p. 435, at p. 438.

  56. For the numerus clausus from a law and economics perspective, see T.W. Merril and H.E. Smith, ‘The Numerus Clausus Principle’, 110 Yale Law Journal (2000) p. 1; H. Hansmann and R. Kraakman, ‘Property, Contract, and the Verification: The Numerus Clausus Problem and the Divisibility of Rights’, 31 Journal of Legal Studies (2002) p. 313; H. Fleischer, ‘Der Numerus clausus der Sachenrechte im Spiegel der Rechtsökonomie’, in T. Eger, C. Ott, J. Bigus and G. von Wangenheim, eds., Internationalisierung des Rechts und seine ökonomische Analyse; Internationalization of the Law and its Economic Analysis. Festschrift für Hans-Bernd Schäfer zum 65. Geburtstag (Wiesbaden, Gabler 2008) p. 125.

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  57. On Typenzwang and Gestaltungsfreiheit see, e. g., M. Lutter and H. Wiedemann, eds., Gestaltungsfreiheit im Gesellschaftsrecht (Berlin, Walter de Gruyter 1998); J. Bak, Aktienrecht zwischen Markt und Staat. Eine ökonomische Kritik des Prinzips der Satzungsstrenge (Wiesbaden, Gabler 2003); on freedom of contract, see also H. Hansmann, ‘Corporation and Contract’, 8 American Law and Economics Review (2006) p. 1.

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  58. See H. Hansmann and R. Kraakman, ‘The Essential Role of Organizational Law’, 110 Yale Law Journal (2000) p. 387.

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  59. For instance, my impression is that the (for Europe new) discussion on the possible categorisation of the listed public company as an autonomous type in comparison to the non-listed closely held public company type goes in this direction. For the closed company and the listed company European regulation is quite developed so that there is coordinated regulation for both types. On the two possible types for the US, see, e. g., H.G. Manne, ‘Our Two Corporation Systems: Law and Economics’, 53 Virginia Law Review (1967) p. 259; for Europe, see J.A. McCahery and E.P.M. Vermeulen, ‘The Evolution of Closely Held Business Forms in Europe’, 26 The Journal of Corporation Law (2000) p. 855; E. Wymeersch, ‘Comparative Study of the Company Types in Selected EU States’, 6 European Company and Financial Law Review (2009) p. 71.

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  60. The first considerandum of Directive 68/151/ECC indeed stresses the importance of limited liability companies for the transnational business: ‘Whereas the coordination provided for in Article 54(3)(g) and in the General Programme for the abolition of restrictions on freedom of establishment is a matter of urgency, especially in regard to companies limited by shares or otherwise having limited liability, since the activities of such companies often extend beyond the frontiers of national territories’. After the recognition that the US system is working without ex ante harmonisation, the terms of the doctrinal discourse changed also in Europe. See, e. g., M. Gelter, ‘The Structure of Regulatory Competition in European Corporate Law’, 5 Journal of Corporate Law Studies (2005) p. 249; L. Enriques, Company Law Harmonization Reconsidered: What Role for the EC?, ECGI Law Working Paper 53/2005; J. Armour, Who Should Make Corporate Law? EC Legislation versus Regulatory Competition, ECGI Law Working Paper 54/2005.

  61. Entities such as the European Company (Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE)) or the European Cooperative Society (Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE)) or the proposed European Private Company (see European Commission, Proposal for a Council Regulation on the Statute for a European private company, Brussels COM (2008) 396/3).

  62. There is also the federal jurisdiction that provides for uniform law (i. e., bankruptcy and securities regulation) and for federal incorporated entities.

  63. In this context it is worth noting that law and economics scholarship has advanced the idea that not only a public territorial body like a jurisdiction could produce legal entities but also a private body, see G. Hadfield and E. Talley, ‘On Public versus Private Provision of Corporate Law’, 22 Journal of Law, Economics & Organization (2006) p. 414.

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  64. See R.W. Hamilton, ‘Entity Proliferation’, 37 Suffolk University Law Review (2004) p. 860. Also taking into consideration federal tax law, the system has been characterised as substantially ‘balkanised’ by R.R. Keating, ‘Corporations, Unincorporated Organizations, and Unincorporations: Check the Box and the Balkanization of Business Organizations’, 1 Journal of Small & Emerging Business Law (1997) p. 201. On the US debate on unincorporated vs. incorporated types, see L.E. Ribstein, ‘Introduction to the “Unincorporation”’, University of Illinois Law Review (2005) p. 1; Levmore, supra n. 15; R.W. Hilmann, ‘The Bargain in the Firm: Partnership Law, Corporate Law, and Private Ordering Within Closely-Held Business Associations’, University of Illinois Law Review (2005) p. 171; R.H. Sitkoff, ‘Trust As “Uncorporation”: a Research Agenda’, University of Illinois Law Review (2005) p. 31; H. Hansmann, R. Kraakman and R. Squire, ‘The New Business Entities in Evolutionary Perspective’, University of Illinois Law Review (2005) p. 5.

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  65. On the conflict of law issues for unincorporated entities, see J.J. Johnson, ‘Risky Business: Choice-of-Law and the Unincorporated Entity’, 1 Journal of Small and Emerging Business Law (1997) p. 249, at. p. 275.

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  66. Compare, for instance, the data provided by Levmore, supra n. 15, at p. 201, footnote 22, stressing the increasing importance of Delaware also for unincorporated entities, without the imposition of particular franchising fees, and the more cautious statements of Johnson, supra n. 65, at p. 291, footnote 173. See also the data provided by Siems, supra n. 53, at p. 8.

  67. For the pros and cons of a possible ‘rationalisation’ of the US system, see L.E. Ribstein, ‘Making Sense of Entity Rationalization’, 58 Business Lawyer (2003) p. 1023.

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  68. For instance, taking the United Kingdom as the European Delaware, J.A. McCahery and E.P.M. Vermeulen, ‘Limited Partnership Reform in the United Kingdom: A Competitive, Venture Capital Oriented Business Form’, 5 European Business Organization Law Review (2004) p. 61, develop the idea that the UK limited partnership could be an efficient structure to organise venture capital, while Siems, supra n. 53, develops the hypothesis that the British limited liability partnership could become an alternative to German and French types for organising law firms under British law.

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  69. The extent to which harmonised EC law creates effective coordination has been doubted by L. Enriques, ‘EC Company Law Directives and Regulations: How Trivial Are They?’, ECGI Law Working Paper 39/2005.

  70. I acknowledge that in cases of partnerships where the contract can be just verbal and the company exists also without registration in a register in the Member State of formation, the imposition of disclosure requirements in the host Member State may substantially alter the informality of the original structure.

  71. As specified supra n. 29.

  72. Intervention in the field of private international law has taken the form of regulations.

  73. Legal doctrine has characterised the issue as the affirmation of the country of origin principle also in the field of private international law for companies, see, e. g., H. Eidenmüller, ‘Wettbewerb der Gesellschafsrechte in Europa’, 23 Zeitschrift für Wirtschafsrecht (2002) p. 2233, at p. 2241.

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  74. Article 293 has been completely marginalised by the Court. Its meaning and content are considered to have been fully overtaken by the development of the jurisprudence of the European Court of Justice. On the meaning of Article 293 before SEVIC, see S. Lombardo, ‘Libertà di stabilimento e mobilità delle società in Europa’, 21 La nuova giurisprudenza civile commentata (2005) p. 353, at p. 374.

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  75. At least one group gains and nobody loses (this is apparently the result of a reincorporation to Delaware where shareholders gain and creditors do not lose): the value of the entire nexus of contracts increases.

  76. The gain of one or more groups is large enough to potentially compensate for the losses of the other group(s): the value of the entire nexus of contracts increases.

  77. The value of the entire nexus of contract decreases.

  78. The level of possible adverse consequences depends on the differences in legal treatment granted by the Member State of origin and the Member State of destination.

  79. Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies.

  80. On the status of the proposed Directive, see Vossestein, ‘Transfer of Registered Office. The European Commission’s Decision Not to Submit a Proposal’, 4 Utrecht Law Review (2008) p. 53.

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  1. School of Economics and Management, Free University of Bolzano, Italy

    Stefano Lombardo (Assistant Professor of Economic and Business Law, CRELE Associate, ECGI Research Associate)

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Lombardo, S. Regulatory Competition in Company Law in the European Union after Cartesio . Eur Bus Org Law Rev 10, 627–648 (2009). https://doi.org/10.1017/S1566752909006272

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