In a series of landmark cases, the European Court of Justice (ECJ) has shaped European company law by exploring the scope of the freedom of establishment with regard to companies. In its latest decision, VALE (Case C-378/10), issued on 12 July 2012, the ECJ had to rule on the possibility of so-called cross-border conversions.
Facts of the case
VALE Costruzioni Srl ("VALE Costruzioni"), a limited liability company originally established under Italian law, decided to discontinue business in Italy and to transfer its seat and business to Hungary in order to operate there in accordance with Hungarian law. On its request, the company was deleted from the Italian commercial register. Subsequently, the director of VALE Costruzioni and another natural person adopted the articles of association of VALE Építési kft ("VALE Építési"), a limited liability company under Hungarian law, with a view to registration in the Hungarian commercial register. In the registration application, it was stated that VALE Costruzioni was its predecessor.
The registration was rejected by both the court of first instance and the appeal court. The appeal court argued that under Hungarian law, a company that is not Hungarian cannot be listed as a predecessor in law. The Hungarian supreme court subsequently upheld the appeal court's assessment and stated that the transfer of the seat of a company governed by the law of another Member State entailing the reincorporation of the company in accordance with Hungarian Law and a reference to the original Italian company cannot be regarded as conversion under Hungarian law, because Hungarian law on conversions applies only to domestic situations. However, the supreme court decided to request a preliminary ruling from the ECJ.
The ECJ’s ruling
In addressing the VALE case, the ECJ stated that national legislation that enables national companies to convert, but does not allow, in a general manner, companies governed by the law of another Member State to do so, constitutes a restriction of the freedom of establishment (Articles 49 and 54 TFEU).
Differences in treatment depending on whether a domestic or a cross-border conversion is at issue cannot be justified by the absence of rules laid down in secondary European Union law. Restrictions may be justified on the basis of overriding reasons in the public interest, e.g. protecting the interests of creditors, minority shareholders and employees. The ECJ finds that such justification is lacking in the VALE case.
However, the host state is allowed to determine the national law applicable to cross-border conversions as long as the principles of equivalence and effectiveness are observed. These principles preclude the host state from refusing to record the foreign company as the "predecessor in law" if such a record is made for domestic conversions, as well as from refusing to take account of documents obtained from the authorities of the Member State of origin.
Significance and outlook
In the VALE decision, the ECJ casts some light on an issue that has been raised by the court’s judgment in Cartesio (Case C-210/06). According to this decision, a company must not be hindered from leaving a Member State when it intends to move to another Member State and will consequently be governed by the law of the host Member State. This statement had left observers wondering whether host Member States had to provide for the possibility of cross-border conversions. The VALE decision has made clear that Member States that provide for national conversions may not prohibit cross-border conversions.
While the VALE decision has clarified some aspects with regard to cross-border conversions, a lot of questions still remain unsolved. For this reason, the calls for European rules on cross-border conversions are justified.