The International Law of Business

The freedom of establishment provided for by the Treaty in 1957 was one of the founding principles that the European Union built, abolishing restrictions on the freedom of Multinational enterprises (MNEs). There is a natural extension in the freedom that allows the existing established MNEs in member states to merge with selected corporate member states and become subject to the national corporate laws of such jurisdiction without triggering the loss of legal personality. This paper will focus on the extent in which corporate mobility helps and hinders MNEs to further cross border commercial objectives which includes freedom of establishment. The Court of Justice of the European Union (CJEU) relevant cases have been used in this paper for efficient discussion and understanding.

Three complicating factors delayed an early integration of the corollary of freedom of establishment under EU law. First, how the right to the establishment was worded in the EEC Treaty left sufficient room for interpretation on whether it did or did not include a request for corporate mobility and the constraints within which such a right would operate that most Member States did not feel compelled to adapt their decades-old limitations to inbound or outbound transfers of corporate seats to facilitate those operations^[1]. And while the EEC Treaty contained an undertaking from the Member States to negotiate the terms of secondary legislation in respect of such commitment never materialized into positive law or in a belated manner concerning cross-border mergers.

Second, to this date, Member States are still allowed by European law to use a connecting factor concerning the applicability of their own lex societatis to MNEs. Variations of two legal theories are used in practice: the 'incorporation theory' and the 'real seat theory. Under the former, the MNEs must apply the corporate law of the place where their registered seat has been established, whereas, under the latter, the MNEs are made subject to the laws of the jurisdiction where their business is managed—this lack of harmonization results in practical complications regarding cross-border mobility of EU MNEs. The case law developed by the Court of Justice of the European Union (CJEU) helped tremendously with anxiety over 'artificial' transfers of the seats.

A series of decisions of the CJEU indeed consecrated a right for EU MNEs to move their corporate seat to another EU jurisdiction without suffering substantial restrictions. These were notably the Seviccase, where company transformations are a specific application of the freedom of establishment^[2], Cartesio and Val cases, where the freedom of establishment protects cross-border transfers of seats and conversions^[3]. Restrictions to transfers must be proportionate to the objective of safeguarding stakeholders, and finally, Polbud possibility where cross-border conversions without relocation of the 'real seat' are also permissible^[4]; no further distinction between 'primary' and 'secondary' freedom of establishment.

However, the last judicial decision struck a nerve among the Member States. Its most common interpretation is that EU-based MNEs may now pick the lex societatis of a Member State of their choosing without moving their effective place of management there. This far-reaching result generated fears of a 'race to the bottom' between national corporate laws on the one hand and of artificial cross-border migrations made for the sole purposes of gaining a tax or other advantage detrimental to stakeholders on the other hand.

The Draft Directive's declared goals are twofold: the first is to make cross-border conversions, mergers, and divisions easier, and the second is to safeguard the interests of all stakeholders. While these goals do not appear to be inherently incompatible at first glance, the degree of complexity of specific provisions of the Draft Directive, as well as the generally high level of protection afforded to stakeholders in such text even when their interests are not involved, suggest that the Draft Directive's second goal may have been prioritized over the historically significant first, possibly as a reaction to Polbud^[5]. To underline their significance, I suggest illustrating these difficulties resulting from the approach taken by the EU legislator through two case studies. The first was a cross-border reorganization (including a merger and a division) involving a listed MNE in a regulated business, and the second was the cross-border conversion of a start-up company.

In the first case, it can be assumed that it is not based on facts but constitutes a 'typical' Brexit-driven reorganization. A French company is listed on a regulated market in the European Union and is active in a regulated sector (banking or insurance). It carries out major regulated activities in EU countries through its England-based regulated subsidiary. It is no surprise that the question of the language used in the reorganization documentation is a practical and key one^[6]. Indeed, one would now (before the New Directive) have to deal with an English-speaking regime in England, a French-speaking regime in France, and a regime allowing English and French language use in Luxembourg.

It is fascinating to note that the New Directive recommends allowing required documents to be written in a language used in international business and finance[7]. This is indispensable to make such related cross-border transactions work without loss in translation. Another key concern in these transactions is to ensure that the transaction can be carried out on a specific date with a particular legal effect. As one can imagine, the merger and the demerger transaction in a regulated activity would have to become effective on the same day, ideally, and even in practice, on a specific weekend to allow transition of systems like IT platforms or others.

Under the Cross-border Merger Directive rules, it is the law of the Member State of the MNEs resulting from the cross-border merger. In the case of the division, the direction of the divided company, again, France, determines the date of effectiveness of this transaction. In this case, one is lucky enough to have a single jurisdiction determining those effective dates, but this does not mean that the effective date can be arranged to be the same. This would be even worse if two different jurisdictions determined effectiveness^[8]. Harmonized criteria would be required or, even better, an actual option to set the legally effective date to allow parties to achieve the same date closings.

Under the proposed cross-border division rules, certain verifications need to be done. Notably, in this case, a check on whether the contemplated cross-border division constitutes an artificial arrangement defined by the New Directive is one of the demerger's preconditions. One may regret that more extensive exemptions have not been provided to smooth complex cross-border processes that have already been approved or scrutinized by relevant regulators. The argument will be made that financial regulators have already approved the transaction, and the national authorities designated according to the New Directive to assess whether artificial arrangements are in place should be relatively straightforward.

However, two objections can be made. First of all, it should be remembered that this case study is about a listed company^[9]. It is in the modern world of shareholder activism, not at all excluded that for reasons of its own, objections to a transaction are being made by activist shareholders at the level of the French company leaving no choice, probably in reality, to the Member State authorities making an in-depth assessment and this irrespective of whether the financial regulator has already or not approved the transaction. Secondly, where two authorities have to intervene, it is not certain that one of these authorities will necessarily defer to the judgment that another power has already made on the transaction. In short, given the added corporate requirement of an in-depth assessment, it will become challenging from a corporate law perspective to determine a specific calendar for the transaction. At the same time, this is essential for these sensitive reorganizations.

In addition, the case assumes that the demerger may occur in a newly incorporated Luxembourg entity. This would probably constitute the exception in a regulated environment. Regulators by far prefer that demergers occur into an already regulated entity with all relevant permits and licenses in place and, as the case may be, even have an appropriate regulatory track record^[10]. The fact that the New Directive now clearly seems to exclude cross-border demergers into existing entities from its corporate raises, furthermore, the question of whether such transactions will remain feasible. Luxembourg national law has allowed such cross-border demergers. Whether this solution can persist in light of the new EU regime^[11]. Furthermore, before issuing its certification, the issuing officer may request that the receiving authority certify the completion of all relevant actions in that local jurisdiction, subject to one or more explicitly indicated items.

This will result in the parties to a complex transaction losing the possibility to liaise and pre-discuss with a competent authority to coordinate the timing and, as we have seen in the content, the form and other merger or demerger related issues where notional rules need to cooperate^[12]. It would have been helpful to provide a system whereby pre-consultation procedures are organized in every Member State (at a central national level), which allows acquiring the necessary certainty on a transaction in complete transparency with the competent authorities. This would constitute a real asset for cross-border transactions in a European context, providing further assurance to these transactions.

There is no doubt that the new framework provides certain advantages. However, the framework creates a much more considerable uncertainty between various actors regarding the timing on which such a transaction can occur, given that certain rights are allocated to verify the artificial arrangement threat. Also, generally, more and more protection rights seem to be shifted to a time before the merger becomes effective^[13]. Now it is, for instance, compulsory that the creditors be protected before the union becomes effective. This creates an additional layer of uncertainty in implementing these transactions again^[14]. This is not realistic anymore because the timing remains uncertain due to the many openings for challenges in the procedure.

An opportunity also seems to have been missed to create further coordination and cooperation between Member State authorities in charge of verifying the accuracy of the procedures that are being implemented. In similar transactions, the merger and demerger finally seem to suffer different degrees of regulation. A demerger is more complex and, in certain instances, impossible where the merger transaction would be achievable. That raises a concern about consistency for complex transactions such as those described above.

Many start-ups face the second case at an early stage of their development. A start-up is formed in a European Union Member State because the founder has received advice from a 'friend and lawyer' that, to limit his liability, they should quickly establish a limited liability company to carry out his activity. This has been done without much further thought. However, once it comes to fundraising and further developing the start-up that is ready to take on board a certain number of employees, protect its IP, and get seed or Series A or B funding from investors, the situation may change^[15]. Indeed, better opportunities can potentially be provided in another Member State. This is what the European Union is about: freedom of movement.

Now comes the question of indeed moving that existing start-up company with the original IP into another EU jurisdiction. This will, as we advance, be governed by the New Directive. Before the New Directive, these transactions would have been done through a migration. The cross-border conversion mechanics are justified by the need to make simpler and cheaper procedures that create much more legal certainty. However, the conversion procedure will become a rather complex and delicate procedure. An advance brought by the New Directive will allow a 'friend and family member' who is not happy anymore in the MNEs and who does not want to hold shares in a company of another EU jurisdiction to be cashed out^[16]. This is something positive.

Several reports need to be prepared in the context of a cross-border conversion. First, there is the management report. That management report can be waived if all the shareholders agree. Again, the exemption is not necessarily realistic. In start-up scenarios, you may have had an initial 'friend, family, and fool member who might not be happy with the transaction and try to leverage their getting out of the MNE. Any requests put forward to him to facilitate trade will come at a specific cost. It would have been appropriate to allow this exemption if all consenting members had waived and the dissenting members had had the opportunity to cash out.

The independent review of the transaction items may be excluded in the case of a start-up if the latter qualifies as an SME. This is to be seen as very positive. However, an issue arises as the expert has to be appointed by the competent authority designated by the various Member States^[17]. This takes away flexibility, given that certain transactions require a lot of concentration and discussion to make sure that all kinds of experts who have to be involved understand the marketing correctly. Not allowing actors to freely appoint their experts, who may have to respond and correspond to specific qualification requirements, will make the process cumbersome in its preparatory stages.

The artificial arrangement check becomes, in the context of start-up companies, possibly a very tricky, political one. It may be that a start-up company changes its corporate seat from one jurisdiction to another to benefit from better EU-conforming subsidies and grants regimes and/or tax treatment that goes with it. This will certainly be something that start-up MNEs that have developed certain IPs will be concerned about, and will certainly not lead to a good integration of the market. It will give the government an undue say in what sensitive companies it allows or not to move. When a technology that is developed by a start-up company is sensitive and requires protection, this should be caught by legislation other than company legislation.

Mergers, divisions, and conversions are done with a view to imposing such transactions on counterparties. A specific procedure needs to be followed since certain checks are to be performed. There are also creditors' protection rights. But there must be a limit to it. One is evolving in a European Union framework, especially for start-up MNEs and small companies trying to establish^[18]. To create an indefinite liability for a difference in legislation while staying in the same single market will kill the use of the conversion system^[19]. A start-up will not use the conversion mechanics, which are supposed to provide legal protection.

The start-up will incorporate a 100% subsidiary in the other jurisdiction and transfer all of its business to it under a much less protective contract. There is much more uncertainty for the start-up and the counterparties on the other side. And as the case may be, there could even be an arbitrage for doing a cross-border merger at the end because, again, the cross-border merger does not contain the artificial arrangement purpose rule. This is not what this legislation is supposed to be about: creating legal certainty at a lower cost. It will encourage circumvention, which is entirely a pity.

Last but not least, and going beyond Case Study 1 and Case Study 2, is that the New Directive seems incomplete. In today's world, MNEs are not only merging or dividing; they are converting into other legal forms, but they also transfer branches, businesses, or assets where they want the universal transfer regime to apply[20]. Such regimes, which are similar to a division, exist in a number of jurisdictions. These are very important in restructurings like the one we have seen. It is a real pity that the opportunity of this New Directive has not been used to consecrate this type of transfer mechanics.

The New Directive fails to achieve its fundamental goal because it does not appear to strike the correct balance between preserving specific interests on the one hand and permitting effective MNE movement in a legally secure environment on the other. There is a high probability that this imbalance is, at least in part, the product of an overreaction of the EU Commission to the CJEU's most recent case law incorporating mobility matters and current proposed changes in the international tax environment.

This instrument does not provide enough exemptions to specific rules where there are legitimate reasons or economic sense that would perfectly justify such exemptions. And where better coordination between competent authorities should have been the priority, it does not even start to address these very down-to-earth issues. The New Directive will have a clear result: less intra-European Union corporate mobility and increased use of alternative structures to implement the same economic purposes[21]. This is much regrettable, as a more nuanced approach, closer to the concerns of the field, would have resulted in significant progress in ensuring the legal certainty and effectiveness of cross-border mergers, divisions, and conversions.

1.EEC Treaty, Art. 52. ↑
2.CJEU, Case C-411/03, Sevic Systems AG. ↑

3.CJEU, Case C-210/06, Cartesio Oktató és Szolgáltató bt. ↑
4.CJEU, Case C-378/10, Vale Építési kft. ↑
5.CJEU, C-106/16, Polbud - Wykonawstwo sp. z o.o. ↑
6.Treaty Establishing the European Economic Community, 25 Mar. 1957 (the EEC Treaty) ↑
7.Bellenghi, G. (2021). Corporate mobility and regulatory competition in the evolution of the EU internal market: a critical appraisal. ↑
8.Inkpen, A., Minbaeva, D., & Tsang, E. W. (2019). Unintentional, unavoidable, and beneficial knowledge leakage from the multinational enterprise ↑
9.Liou, R. S., Rao-Nicholson, R., & Sarpong, D. (2018). ↑
10.Narula, R., & Van der Straaten, K. (2020). A comment on the multifaceted relationship between multinational enterprises and within-country inequality ↑
11.Mehreen, H., Rammal, H. G., Pereira, V., & Del Giudice, M. (2021). ↑
12.Meyer, K. E., Li, C., & Schotter, A. P. (2020). Managing the MNE subsidiary: Advancing a multi-level and dynamic research agenda ↑
13.Meyer, K. E., Li, C., & Schotter, A. P. (2020). Managing the MNE subsidiary: Advancing a multi-level and dynamic research agenda. ↑
14.Narula, R., & Van der Straaten, K. (2020). A comment on the multifaceted relationship between multinational enterprises and within-country inequality ↑
15.Zeng, J., Khan, Z., & De Silva, M. (2019). The emergence of multi-sided platform MNEs: Internalization theory and networks. ↑
16.Treaty Establishing the European Economic Community, 25 Mar. 1957 (the EEC Treaty) ↑
17.Jędrzejowska-Schiffauer, I., Schiffauer, P., & Thalassinos, I. E. (2019). EU Regulatory Measures Following the Crises
18.Lamotte, O., Chalençon, L., Mayrhofer, U., & Colovic, A. (2021). Intangible resources and cross-border acquisition decisions ↑
19.Chidlow, A., Wang, J., Liu, X., & Wei, Y. (2021) ↑
20.Liou, R. S., Brown, L. W., & Hasija, D. (2021). Political animosity in cross-border acquisitions: EMNCs’ market and nonmarket strategy in a developed market ↑
21.Jooss, S., McDonnell, A., & Conroy, K. (2021). Flexible global working arrangements ↑

Cases

Legislation

EEC Treaty, Art. 52.

Treaty Establishing the European Economic Community, 25 Mar. 1957 (the EEC Treaty)

Journals and articles

Bellenghi, G. (2021). Corporate mobility and regulatory competition in the evolution of the EU internal market: a critical appraisal. http://tesi.luiss.it/30063/1/147573_BELLENGHI_GUIDO.pdf

Inkpen, A., Minbaeva, D., & Tsang, E. W. (2019). Unintentional, unavoidable, and beneficial knowledge leakage from the multinational enterprise. Journal of International Business Studies, 50(2), 250-260. https://research.cbs.dk/files/57667604/dana_minbaeva_et_al_unintentional_unavoidable_and_beneficial_knowledge_leakage_acceptedversion.pdf

Jędrzejowska-Schiffauer, I., Schiffauer, P., & Thalassinos, I. E. (2019). EU Regulatory Measures Following the Crises: What Impact on Corporate Governance of Financial Institutions. European Research Studies Journal, 22(3), 432-456. https://www.researchgate.net/profile/Izabela-Schiffauer/publication/338630764_EU_Regulatory_Measures_Following_the_Crises_What_Impact_on_Corporate_Governance_of_Financial_Institutions/links/5e20735f92851cafc38a7320/EU-Regulatory-Measures-Following-the-Crises-What-Impact-on-Corporate-Governance-of-Financial-Institutions.pdf

Jooss, S., McDonnell, A., & Conroy, K. (2021). Flexible global working arrangements: An integrative review and future research agenda. Human Resource Management Review, 31(4), 100780. https://www.sciencedirect.com/science/article/pii/S105348222030053X

Lamotte, O., Chalençon, L., Mayrhofer, U., & Colovic, A. (2021). Intangible resources and cross-border acquisition decisions: The impact of reputation and the moderating effect of experiential knowledge. Journal of Business Research, 131, 297-310. https://www.sciencedirect.com/science/article/abs/pii/S0148296321002083

Liou, R. S., Brown, L. W., & Hasija, D. (2021). Political animosity in cross-border acquisitions: EMNCs’ market and nonmarket strategy in a developed market. Multinational Business Review. https://www.emerald.com/insight/content/doi/10.1108/MBR-02-2020-0034/full/html?skipTracking=true&utm_source=TrendMD&utm_medium=cpc&utm_campaign=Multinational_Business_Review_TrendMD_0&WT.mc_id=Emerald_TrendMD_0

Narula, R., & Van der Straaten, K. (2020). A comment on the multifaceted relationship between multinational enterprises and within-country inequality. critical perspectives on international business. https://www.emerald.com/insight/content/doi/10.1108/cpoib-10-2019-0080/full/html

Meyer, K. E., Li, C., & Schotter, A. P. (2020). Managing the MNE subsidiary: Advancing a multi-level and dynamic research agenda. Journal of International Business Studies, 51(4), 538-576. https://link.springer.com/article/10.1057/s41267-020-00318-w

Zeng, J., Khan, Z., & De Silva, M. (2019). The emergence of multi-sided platform MNEs: Internalization theory and networks. International Business Review, 28(6), 101598. https://eprints.bbk.ac.uk/id/eprint/28236/1/28236.pdf