In its seminal judgment of 25 October 2017 in the Polbud case (ECLI:EU:C:2017:804) the CJEU – building upon its leading decision in the VALE case – decided that the scope of freedom of establishment also encompasses cross-border conversions by way of an isolated transfer of the registered office. Thereby, the CJEU has finally unequivocally – and convincingly – resolved an issue which had been in dispute for a long time. Moreover, the CJEU has qualified the requirement to dissolve and liquidate the company in the Member State of origin as a violation of freedom of establishment, thus further clarifying the limits on restrictions of freedom of establishment. The judgment marks another important milestone. At the same time, it clearly demonstrates that in the absence of a clear and secure EU legal framework there is still no complete cross-border mobility for companies within the Common Market. Hence, further legislative initiatives are urgently needed.

1. The case

Polbud was a limited-liability company established in Poland. In 2013, the shareholders decided to transfer the registered office to Luxembourg, adopt the legal form of an S.à.r.l. and change the name to Consoil Geotechnik S.à.r.l. But the Polish authorities refused to remove Polbud from the Polish registry, requiring that the company be first dissolved and wound-up in Poland. The Polish Supreme Court ultimately referred the case to the CJEU.

2. The salient points of the CJEU’s decision

According to the CJEU, the freedom of establishment (Art. 49, 54 TFEU) encompasses the right of a company formed in accordance with the legislation of a Member State to convert itself into a company governed by the law of another Member State, provided that the conditions laid down by the legislation of that other Member State are satisfied and, in particular, that the test adopted by the latter State to determine the connection of a company to its national legal order is satisfied. Hence, Polbud – as a company incorporated under Polish law – had the right to convert itself into a company incorporated under Luxembourg law, provided that the conditions laid down by Luxembourg legislation are satisfied and, in particular, that the test adopted by Luxembourg to determine the connection of a company to its national legal order is satisfied.

The CJEU quashed the objection that Polbud did not actually conduct any business in Luxembourg. From the point of view of the Court, it does not make a difference whether the freedom of establishment is exercised by the establishment of a branch (cf. the Centros case) or by way of a cross-border conversion. From the perspective of EU law, it is irrelevant that the company conducts its main (or even entire) business in a different Member State than that by whose law it is governed or will be governed after the cross-border conversion. EU law generally accepts that the registered office and the head office are located in different Member States.

However, in light of the fact that the law applicable to companies is not harmonised and that Member States are free to determine the relevant connecting factor (registered office and/or head office), the CJEU, in its decision, stipulated an important caveat. The freedom to effect a cross-border conversion by way of an isolated transfer of the registered office is guaranteed only if the host Member State requires that the registered offices of ‘its’ companies must be within its territory. However, if the host Member State also requires the head office to be within its territory, freedom of establishment does not provide the right to effect a cross-border conversion by way of an isolated transfer of the registered office. 

Metaphorically speaking, freedom of establishment grants companies the right to slip into the ‘legal garment’ of a company of another Member State by way of a cross-border conversion. But it has to slip into this ‘legal garment’ the way it is tailored by the host Member State. And when this ‘legal garment’ contains a ‘corset’ consisting of the requirement of a head office in that jurisdiction, the company will either have to slip into this ‘corset’ or stay in the ‘legal garment’ of the Member State of origin. By contrast, if the host Member State has ‘tailored’ a less tight-fitting ‘legal garment’ which only hinges on the strap of the registered office, freedom of establishment grants the company the right to slip into this ‘legal garment’ by way of an isolated transfer of the registered office. In this case, the Member State of origin cannot prohibit this.

Some may criticise this as inconsistent  and from the point of view of legal policy this may indeed be correct. However, from a doctrinal perspective, the CJEU only further develops its previous jurisprudence against the background of the tension created by the TFEU between freedom of establishment, on the one hand, and the lack of harmonisation of the law applicable to companies (and thus Member States’ autonomy to determine the relevant connecting factor) on the other hand. 

3. Creation of a clear EU legal framework as an eminent desideratum 

With its seminal decisions in Cartesio, VALE and Polbud, the CJEU has laid down important cornerstones. But for a really ‘complete picture’ many pieces are still missing. Hence, the creation of a clear EU legal framework with respect to cross-border mobility of companies remains an eminent desideratum. 

Ideally, title II of the Company Law Directive (Directive (EU) 2017/1132) should be expanded into a real cross-border mobility directive, which not only covers cross-border mergers, but also cross-border divisions and cross-border conversions of all legal entities within the meaning of Art. 54 TFEU. Moreover, the rules on the law applicable to companies should be harmonised by way of a new Rome Regulation based on the incorporation theory. 

This post draws on the article ‘Grenzüberschreitende Mobilität von Gesellschaften: Formwechsel durch isolierte Satzungssitzverlegung’. 

Walter Bayer is Professor of Law at the University of Jena and Jessica Schmidt is a Professor of Law at the University of Bayreuth.