VALE: a never ending story on free movement of companies within the EU finally ended?

On 12 July 2012 the European Court of Justice (ECJ) ruled in the VALE case (C-378/10) that

“Articles 49 TFEU and 54 TFEU are to be interpreted as precluding national legislation which enables companies established under national law to convert, but does not allow, in a general manner, companies governed by the law of another Member State to convert to companies governed by national law by incorporating such a company.”

The case concerned a cross-border conversion of a company established under Italian law, VALE Construzioni Srl, into a company incorporated under Hungarian law, VALE Építési kft. Under Italian law it is possible for a company to convert into a company established under foreign law. Under Hungarian law only companies incorporated under the law of Hungary are allowed to convert. The VALE case is the ‘mirror image’ of the Cartesio case (C-210/06) which concerns a transfer of a registered office of a company under Hungarian law to Italy without a conversion. In the Vale case the Court stated that a Member State may restrict a company governed by its law to retain the status of the company established under the law of that Member State if the company intends to move its seat to another Member State, thereby breaking the connecting factor required under the national law of the Member State of incorporation. However, the Member State of origin of that company cannot prevent a company from converting itself into a company governed by the law of the other Member State, to the extent that it is permitted under that law to do so.

In the VALE judgment the Court refers to its earlier SEVIC judgment (C-411/03) where it ruled that company transformation operations respond to the needs for cooperation and consolidation between companies established in different Member States. They constitute particular methods of exercise of the freedom of establishment, important for the proper functioning of the internal market, and are therefore amongst those economic activities in respect of which Member States are required to comply with the freedom of establishment laid down by Article 49 TFEU. The Court reaffirms in the VALE case that companies as creatures of national law only exist by virtue of the national legislation (Daily Mail, Case 81/87). The applicable national law determines their incorporation. The power of the Member States to define the connecting factor required of a company to be regarded as a company under its national law is not infringed by the obligation under Article 49 and 54 TFEU to permit a cross-border conversion (par. 30). However, a situation where national law enables national companies to convert, but it does not allow companies incorporated under the law of another Member State to do so, falls within the scope of the provisions of the TFEU regarding the freedom of establishment (par. 36).

As regards the absence of rules on cross-border laid down in secondary EU law, the court notes that their existence cannot be made a precondition for the implementation of the freedom of establishment. Any restriction of this freedom may only be justified on the basis of overriding reasons in the public interest. Such a justification lacks in the present case. Hungarian law precludes a conversion of foreign companies into companies under Hungarian law in a general manner. This rule goes beyond what is necessary to protect these interests. As regards the conversion procedure to be followed the Court states that in the absence of specific rules in secondary EU law the applicable law is to be found in the national law of the Member State of origin of the company seeking to convert and in the national law of the host Member State, i.e. the law of the state which will apply after the conversion of the company. These rules do not only apply to domestic situations but they also guarantee the rights which the individuals acquire under the EU law, provided that in the latter case they are not less favourable than those governing the domestic situations and they do not make it impossible to exercise the rights acquired under EU law.

It might be the case that this judgment of the Court is the last one in the on-going saga on free movement of companies within the EU. Some particular questions remain unanswered though, such as e.g. what happens in a case where the national law only states that domestic conversions of companies are possible but does not contain any procedural rules regarding the conversion of companies. Such problems might be solved when the Directive on Cross-Border Transfer of Company Seats is adopted (see the earlier post). Under this Directive a transfer of a registered office/statutory seat of a company from one Member State to another Member State will lead to a conversion of the company at stake. However, it is not clear yet when (or even whether) this Directive will become reality. On 2 February 2012 the European Parliament requested the European Commission to swiftly submit a proposal for a directive on cross border transfer of company seat. The European Commission stopped the work on this proposal in December 2007. The decision in the VALE case calls attention, once more, to the urgency and need for such a Directive.

One comment

  1. Merle

    ‘The VALE case is the ‘mirror image’ of the Cartesio case (C-210/06) which concerns a transfer of a registered office of a company under Hungarian law to Italy without a conversion’ – Didn’t Cartesio concern the transfer of the company seat and subsequently the request of Cartesio to the Hungarian authorities to change the information about its seat in the company register? So Cartesio never planned to register in Italy? Or did I misunderstand something?

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