Recalling: EU Transfer of Company Seat (de facto)

European Court of Justice established some principles of law in the context of freedom of establishment and the transfer of a company’s de facto head office to other member states that have had a strong impact on national regulation of legal conflicts (incorporation theory v., seat theory).  As a result of the leading cases in this context companies can de facto transfer their head office to the member state of their choice.

• The state to which the company moves its head office is not allowed to limit this transfer. 
• Exceptionally there can be restrictions on the possibility of transferring the de facto head office, but they have to be in line with the strict requirements of freedom of establishment
• The state in which the company was founded still has the power to lay down certain conditions on the emigration of a company (Daily Mail doctrine).

As a result of these decisions there has been growing interest in setting up companies registered in one member state but with their head office in another member state, usually known as letterbox companies.

• Daily Mail (Case 81/87, 27 September 1988). Daily Mail was a tax-law case. Daily Mail plc wanted to move its  factual head office  (tax residence) to the Netherlands because for tax reasonns, though it planned also to remain a company subject to UK company law. The UK Treasury Department refused permission for the transfer of seat, which is necessary under UK law. Daily Mail referred the question to the ECJ, whether the Treaty preclude a member state from obstructing the transfer of the de facto head office from a member state.The ECJ concluded that this issue falls outside the scope of the Treaty provisions on freedom of establishment. The  ECJ added obiter dictum some comments and this judgment was confirmed by the Cartesio decision. See Judgment of the ECJ 

• Centros (Case C-212/97, 9 March 1999). Two citizens from Danemark incorporated Centros Ltd under UK company law. The company traded only in Denmark. The founders stated that they had established Centros under UK company law solely to avoid the minimum capitalisation requirement for Danish limited liability companies. The Danish commercial registry considered this to be an unlawful circumvention of the Danish minimum capitalisation rules and so refused to register the company’s branch office in Denmark . This question was referred to the ECJ: compatibility (or not) with freedom of establishment of the refusal to register a branch of a lawfully founded company that has its registered office in another member state, but in which the company does not itself carry on any business. The ECJ ruled that under frredom of establishment Member States cannot discriminate against this company on the grounds that it was formed in accordance with the law of another member state in which it has its registered office but does not carry on any business. Further, States are not authorised to restrict freedom of establishment on the ground of protecting creditors or preventing fraud if there are other ways of countering such risks. In this leading case the ECJ took quite a liberal approach in the context of company rights. Moreover, the Court considers the conditions governing abuses of EC law restrictive.
• Überseering (Case C-208/00, 5 November 2002) All the directors of Überseering BV, a limited liability company organised under Dutch law, were resident in Germany. The German courts decided that, owing to the location of the company’s principal office, German corporate laws apply to the company and it could not litigate as a "purported" Ducht entity. The  Überseering BV case reached the ECJ. In the judgment, the ECJ ruled that it was incompatible with the freedom of establishment for a member state to deny legal capacity (and standing to sue or be sued in courts) to a company formed in a Member State which moves its central place of administration to another Member State. Against the expectations  the recommendation of the Advocate General, the ECJ also held that where a company incorporated in another Member State exercises its freedom of establishment in another Member State, that other Member State is required to recognise the company’s legal capacity (and capacity to be a party to legal proceedings) which it enjoys under the laws of its state of incorporation. This ECJ judgment means that a company incorporated in a EU Member State is entitled to rely on the principle of freedom of establishment to contest any refusal by a host state to recognise it as a legal entity with the capacity to enter into contracts and be a party to legal proceedings. As a matter of German law, this decision signals the end of the current practice whereby the legal capacity of foreign incorporated companies is not recognised, where the effective seat of administration is in Germany Überseering.pdf. 
• Inspire Art (Case C-167/01; 30 September 2003). A Dutch Businessman established the company Inspire Art Ltd under the laws of England and Wales and requested the registration of the company’s Dutch branch office at the commercial registry in the Netherlands. The registry decided that specific Dutch rules for foreign entities registered in the Netherlands applied. As a consequence, Inspire Art Ltd would have been required, inter alia, to use a company name indicating its foreign origin, and comply with the minimum capitalisation rules for Dutch limited liability companies. The ECJ decided in favour of freedom of establishment by holding that rules submitting pseudo-foreign companies to the company law of the host state were inadmissible. It laid down that a foreign company is not only to be respected as a legal entity having the right to be a party to legal proceedings, but rather has to be respected as such, that is, as a foreign company that is subject to the company law of its state of incorporation. Any adjustment to the company law of the host state is, hence, not compatible with European law. Insipre Art.pdf 
• Cadbury Schweppes (Case C-196/04, 12 September 2006). The Cadbury Schweppes group had established two subsidiaries in Ireland so that profits related to the internal financing activities of the Cadbury Schweppes group might benefit from the more favourable Irish tax regime. In the view of the national court, the subsidiaries were incorporated in Ireland in order not to fall within the application of certain UK tax provisions on exchange transactions and the national tax authorities demanded the corporation tax, Cadbury Schweppes appealed. In the end the relevant UK court referred the case to the ECJ to clarify the EC law implications. The question referred to the ECJ was whether freedom of establishment precludes national tax legislation, under certain conditions, from imposing a charge upon a parent company on the profits made in a foreign subsidiary. The ECJ indicates that it is necessary to examine the behaviour of a taxpayer who incorporates a company in another member state in light of the aim of freedom of establishment in order to assess whether the behaviour at stake is a mere exercise of freedom of establishment or a legal abuse. So, national measures restricting freedom of establishment may be justified where they specifically relate to wholly artificial arrangements aimed at circumventing application of the legislation of the member state concerned.The ECJ considered that freedom of establishment requires a stable and continuing basis in the economic life of a member state other than the state of origin.Therefore a company cannot invoke freedom of establishment in another member state for the sole purpose of benefiting from more advantageous legislation unless the establishment in the other member state is intended to carry on genuine economic activity. According to the ECJ a restriction of freedom of establishment is therefore possible in cases of a ‘letterbox’ or ‘front’ subsidiary.The ECJ seems to move away from Centros, where the company founders set up a company that had never engaged in any economic activity in its founding state and was aimed solely at avoiding Danish company law Cadbury Schweppes.pdf.   
   
• Cartesio (Case C-210/06, 16 December 2008). Cartesio is a Hungarian limited partnership whose application for registration of the transfer of its seat to Italy (only de facto) was rejected by the Hungarian Court of Registration as Cartesio intended continuing to operate under Hungarian company law. The refusal to register de de facto transfer was referred to the ECJ, to determine whether Articles 43 and 48 EC Treaty preclude a member state from imposing an outright ban on a company incorporated under its legislation transferring its de facto head office to another member state without having to be wound up in Hungary first, and to have the seat transfer entered in the Hungarian Company Register. Cartesio case is to a considerable extent similar to the ECJ’s Daily Mail Decision, since it also raises the question of the transfer abroad of the de facto head office. The Court did not overrule its ‘Daily Mail’ decision, which allows member states to restrict the transfer of the central administration of a company abroad. On the contrary, the ECJ reaffirmed its Daily Mail doctrine: ‘Articles 43 EC and 48 EC are to be interpreted as not precluding legislation of a Member State under which a company incorporated under the law of that Member State may not transfer its seat to another Member State whilst retaining its status as a company governed by the law of the Member State of incorporation.’ In an obiter dictum it was stated that freedom of establishment also covers the possibility of a company converting itself into a company governed by the law of another member state – which is de facto the transfer of the registered office (para 111–113). This announcement contrasts with a statement in the same judgment, some paragraphs previously, in which the Court says: ‘It should be pointed out, moreover, that the Court also reached that conclusion on the basis of the wording of Article 48 of the EEC Treaty ... the question whether – and, if so, how – the registered office (siège statutaire) or real seat (siège réel) of a company incorporated under national law may be transferred from one Member State to another as problems which are not resolved by the rules concerning the right of establishment, but which must be dealt with by future legislation or conventions’ (para 108). As a result, the consequences of this obiter dictum for board-level participation rules have not been finally clarified. However, there are good reasons for saying that the obiter dictum applies only if national law completely forbids any kind of transfer of seat to another member state. As long as one form of transfer is allowed under national law, Art. 43 and 48 EC do not apply. Cartesio.pdf 
  
  
  
   
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SPANISH SUPERVISOR PUBLISHES REVIEW  ON CORPORATE GOVERNANCE REPORTS OF IBEX COMPANIES AND SPANISH QUOTED RETRIBUTIONS TO DIRECTORS

Publicado el informe de la CNMV sobre gobierno corporativo de sociedades cotizadas, correspondientes a 2014,es decir, a los informes que aún no están actualizados al CUBG de 2015.

• La web de la CNMV destaca que se están siguiendo un 85,4% de las recomendaciones; se ha alcanzado el 16,7% de diversidad de género en los consejeros del Ibex 35; que 12 sociedades cumplen el 100% de las recomendaciones.
• Muestra también un incremento en el capital flotante de las cotizadas para alcanzar el 42,9%
• En cuanto a los informes de retribuciones destaca la subida e n las retribuciones medias para alcanzar los318.000 €, un 11,6% más
  que en 2013. Las retribuciones fijas medias constituyen más del 50% para los consejeros de las cotizadas que no forman parte del Ibex 35, si bien no superan ese porcentaje en las del índice IB35.  La nota de la CNMV indica que el nivel de responsabilidad es el criterio más utilizado para fijar la contraprestación percibida por los administradores.

Liability of company directors. Individual action concurring with cause of dissolution (qualified losses) and bankruptcy declared. Dismissed. Judgment (Appeal) of the Court of Barcelona (s. 15th) of April 7, 2015 .

1. The claim against III,SL “a company with limited liability” and its manager, was brought  for damages allegedly caused by IIISL and is Director, as they did not promote the dissolution and liquidation of the company for undercapitalization (arts. 236, 241, 363. 1 e / and 367 of the Companies Act  (LSC).
2. The judgment of first instance was decided for the plaintiff
3. The Director’s appeal was founded on (i) the irrelevance of the First Instance Decision based on the provisions of art. 105 LSRL and 51a of the Bankruptcy Act (LC) and (ii) the non-existence of the conditions that can found an “individual action for damages”
4. The first plea is based on the incompatibility (in terms of Article 51bis LC) of the action for not promoting dissolution and liquidation, with the bankruptcy situation (IIISL voluntary bankruptcy was declared on November 27 2012 by the Commercial Court (7) at Barcelona. The First Instance Court had been required to suspend the ordinary process, but did not do it. The TS(as already stated by STS of June 20, 2013, acknowledged such incompatibility and rejected the first bases of the appeal  
5. Art 51bis LC establishes that upon declaration of the “concurso” leading to bankruptcy proceedings initiated before the bankruptcy declaration against the directors of corporations upon allegations that they had breached the duties imposed on them when there is a “cause for dissolution”, shall be suspended.
6. The “so called individual action” to demand liability from Directors is not affected by bankruptcy, but the action of responsibility for “failing to promote dissolution” is affected.
7. In terms of “individual action” for damages brought against the appellant, in its application, the plaintiff stated that the administrator urged supplying, whilst he knew of the under capitalization of the defendant company. The Director ought to have promoted timely dissolution and liquidation thus avoiding the disappearance of the debtor company and the non-payment of the debt to the plaintiff. The aim of Art. 241 of the LSC (individual liability action) is to restore the individual assets of the shareholders or third parties who have been directly damaged by an act or omission attributable to the Director. It is an action for damages to which the company's creditors are entitled and which requires a behavior or facts, acts or omissions - of managers lacking due diligence leading to injury. The injured plaintiff must prove a precise and direct causal link between such an act (omission, etc.) and the harmful result. Such direct causation was not evidenced. This leads to the dismissal of individual action for damages brought against the appellant

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D&O, unserved claims, Duty to Defend

Among the challenges to D&O policies coverage it is to be able to asses whether certain acts do amount or not to to a claims that triggers the duty of the insurer to defend.

• A recent USA case shows an extreme situation where, even though the claim had been filed (and was pending a “reflection legal period granted to Government to decide whether to join the plaintiff), such filing was not considered to be a Claims “first made”. The case delivers an interpretation revlevant to D&O policies, in relation with filed claims which have not yet been served upon the defendant-insured.
• The USA  federal False Claims Act imposes liability on those who breach public sector laws (government) and allows third-parties to bring so-called qui tam actions, liability claims under the FCA; so that the third-party can receive a portion of the recovery (if the Qui Tam Action is successful) . –As the Qui Tam is filed it remains sealed for at least sixty days (unserved on the defendant ) to allow the Public Authorities to decide if they also oursue the Action or if they decline to do so) . As a result  there is sometime a time lag between the date the qui tam action complaint is filed and the date it is served on the defendant. This present a challenge for D&O insurance.

For more information, please see the excellent comment in D&O Diary, "Management Liability Insurance: If a Qui Tam Action is a Claim, When is it “First Made”?,  ‎08‎ April ‎2015, ‏‎13:12:26, by Kevin LaCroix) about the 3^rd April 2015 Decision of a Northern District of California Judge: As the qui tam had not been served, it did not amount to a “first claim” in the sense of “First made claims inD&O Policies” ,so the insurer is under no obligation to advance defense expenses.

Board of Directors. Board, Board Members. Code of corporate governance of Spain. 2015

1. Large part of the changes in the Good Corporate Governance Code relate to the board of directors and its specialised committees, to improve its efficient functioning and to favour the participation and dedication of its members:

I Meeting of the Board.-  It is recommended that the board meets at least eight times a year. 

II Board Members

1. Non attendance.- If a director does not attend a meeting, it is recommended that he or she confers representation with precise voting instructions.                               
2. Gender diversity is encouraged, promoting the objective that in 2020 the number of women directors represents at least 30% of the members of the board of directors.
3. Independent directors are recommended to reach at least half of the total number of directors (or only a third in companies that do not have a high capitalisation or companies with one or various shareholders who jointly control more that 30% of the share capital).  
4. Coordinating Director. The functions of the coordinating director ares extended with respect to those regulated by the Companies Act. He or she ought to be charged with keeping contact with investors and shareholders to learn about their opinions and concerns regarding the company's corporate governance.
5. Conflicts of interests. It is recommended that companies publish on their websites any information on the remunerated activities performed by their directors, whatever their nature.
6. Remunerations.

a.       Some recommendations are included towards there being a balance between the need to remunerate the directors' talent and dedication and promoting corporate sustainability and profitability at long term. It is recommended that the contract with the executive director includes the possibility that the company may claim reimbursement of the variable components of the remuneration when payment is not in line with performance conditions or when they have been paid in view of data that is later proved to be inaccurate.

b.      In relation to the termination compensation, it is recommended that a quantitative limit is established equal to the total annual remuneration for two years, and also that the compensation is not paid until the company has verified that the director has accomplished the established performance criteria.

III Board Structure. Commissions and Units

1. Internal risk control and management unit. The Code recommends its creation under the supervision of the audit committee to the correct functioning of the company's risk control and management systems and monitor compliance of the policy defined by the Board.
2. Nomination and remuneration committee, due to the importance given to the selection of directors and the plurality of technical considerations to be taken into account when establishing their remuneration systems, in high capitalization companies it is recommended that two separate committees be created, one for remunerations and the other for nominations,