Corporate and M&A – The Polbud Case:  Cross-border movement of companies / free transfer of registered office to Luxembourg – 20 December 2017

Corporate and M&A – The Polbud Case: Cross-border movement of companies / free transfer of registered office to Luxembourg – 20 December 2017

Posted on 20/12/2017

The Polbud Case: Cross-border movement of companies / free transfer of registered office to Luxembourg

The Court of Justice of the European Union (“CJEU”) has issued on 25 October 2017 its judgment in the Polbud case (C-106/16). This new decision falls within the series of the well-known judgments rendered by the CJEU on the cross-border mobility of companies and attempts to clarify a question which had been disputed among commentators of previous cases (such as the VALE case of 12 July 2012). The case was heard following a request for a preliminary ruling under Article 267 of the Treaty on the Functioning of the European Union (“TFEU”) by the Sąd Najwyższy (Supreme Court of Poland). The CJEU was asked to answer (i) whether the freedom of establishment applies also to an (outbound) transfer of the statutory seat without transfer of the real seat (central administration) of the company, (ii) whether national laws may restrict that freedom of establishment by requiring the liquidation of the company in its Member State of origin in the context of a cross-border conversion of a company and (iii) whether such restriction is justifiable.

The CJEU affirmed in its ruling upholding freedom of establishment under EU law.

The purpose of this paper is to attempt to shed more light on the meaning and practical implications of the Polbud case law on European corporate mobility of companies, in the absence of harmonization of European corporate mobility law.

1.    Summary of the facts

On 30 September 2011, the shareholders of Polbud – Wykonawstwo sp. z o.o. (“Polbud”), a private limited liability company incorporated under Polish law and established in Łącko (Poland), passed a resolution to transfer the “company’s seat” to the Grand Duchy of Luxembourg (“Luxembourg”) in accordance with Article 270 (2) of the Kodeks spółek handlowych (the Polish Companies Code), without any reference to a transfer to Luxembourg of either the place where Polbud’s business is effectively managed or the place where the company’s business is carried out, though it continued carrying on its economic activities in Poland (1).

On 19 October 2011, Polbud filed an application with the Polish Register of Entrepreneurs of the National Court Registry (“ROE”) to record the cross-border statutory seat transfer. On 26 October 2011, the opening of the liquidation procedure was recorded in the ROE and a liquidator was appointed.

On 28 May 2013, an extraordinary general meeting of the shareholders of Polbud was held before a Luxembourg notary to, inter alia, implement the decision taken by the extraordinary general meeting of the shareholders of Polbud held in Poland on 30 September 2011 to transfer as from 28 May 2013 the “registered office” of the company to Luxembourg, without extinguishing the legal personality of the company and without creating a new legal person, to adopt the legal form of a private limited liability company (“société à responsabilité limitée”) governed by Luxembourg law, to adopt articles of association compliant with Luxembourg law and to change the name of the company into “Consoil Geotechnik S.à r.l.”. Following filing of the notarial deed with the Luxembourg register of commerce and companies, Consoil Geotechnik S.à r.l. was registered on 14 June 2013 with the Luxembourg register of commerce and companies under number B 177.895.

On 24 June 2013, Polbud filed an application with the ROE to be removed from the Polish commercial register. On 19 September 2013, the Polish registry court refused to register the application for removal from the commercial register because Polbud failed to provide evidence of the successful completion of the liquidation procedure and winding-up in its home Member State.

As the appeals lodged by Polbud against that order at first and second instance were unsuccessful, the company brought the case before the Sąd Najwyższy (Supreme Court of Poland) claiming that upon transfer of its registered office to Luxembourg, it has lost its status as Polish corporation and has subsequently become a company governed by Luxembourg laws, that as a consequence thereof the liquidation procedure opened in Poland had ended and Polbud should have been removed from the Polish commercial register.

On 22 October 2015, the Polish Supreme Court submitted the request for a preliminary ruling to the CJEU and referred to the CJEU the following preliminary questions in accordance with Article 267 of the TFEU:

1. Do Articles 49 (2) and 54 (3) TFEU preclude the application by a Member State, in which a [private limited liability] company was initially incorporated, of provisions of national law which make removal from the commercial register conditional on the company being wound up after liquidation has been carried out, if the company has been reincorporated in another Member State pursuant to a shareholders’ decision to continue the legal personality acquired in the State of initial incorporation?

If the answer to that question is in the negative:

2. Can Articles 49 and 54 TFEU be interpreted as meaning that the requirement under national law that proceedings for the liquidation of the company be carried out — including the conclusion of current business, recovery of debts, fulfilment of obligations and sale of company assets, satisfaction or securing of creditors, submission of a financial statement on the conduct of those acts, and indication of the person to whom the books and documents are to be entrusted — which precede the winding-up thereof, which occurs on removal from the commercial register, is a measure which is appropriate, necessary and proportionate to a public interest deserving of protection in the form of safeguarding of creditors, minority shareholders, and employees of the migrant company?

3. Must Articles 49 and 54 TFEU be interpreted as meaning that restrictions on the freedom of establishment include a situation in which — for the purpose of conversion to a company of another Member State — a company transfers its registered office to that other Member State without changing its place of principal establishment, which remains in the State of initial incorporation?

2.    Opinion of Advocate General Kokott

On 4 May 2017, Ms Kokott, as advocate general (“AG”), delivered her opinion in the Polbud case.

In her legal assessment, the AG Kokott primarily considered the first question raised by the Polish Supreme Court and underlined that the CJEU in defining the concept of “establishment” stated that it “involves the actual pursuit of an economic activity through a fixed establishment in that State for an indefinite period” and that “that concept presupposes actual establishment in the host Member State and the pursuit of genuine economic activity there(4).

She emphasized the need for actual establishment for the application of Article 49 and 54 of TFEU, concluding that the freedom of establishment provided for in Articles 49 and 54 TFEU only “applies to an operation whereby a company incorporated under the law of one Member State transfers its statutory seat to another Member State with the aim of converting itself into a company governed by the law of the latter Member State, in so far as that company actually establishes itself in the other Member State, or intends to do so, for the purpose of pursuing genuine economic activity there”. The AG also recalled that this condition of actual establishment would be met either when infrastructure exists in the host Member State such as to enable an economic activity to be pursued there on a stable and continuous basis or when the mere intention to effect such establishment does exist, to finally conclude that in case Polbud pursues activities in Luxembourg, the freedom of establishment should apply.

The AG further argued that “a cross-border conversion is not caught by the freedom of establishment where it is an end in itself, but only where it is accompanied by actual establishment” noting that unlike Polbud, the Cartesio (5) case implied an outbound transfer of the seat of the company without change in the law governing it and that the Centros (6) and Inspire Art (7) cases dealt with the establishment of a company in another Member State than its Member State of origin but in the Member State in which its owners were resident.

Considering the first question raised by the Polish Supreme Court, Ms Kokott concluded that the Polish authorities’ refusal to remove Polbud from the commercial register, unless it is first liquidated and wound up, impedes the completion of the cross-border conversion and that such refusal constitutes a restriction of the freedom of establishment.

In considering the second question raised by the Polish Supreme Court, Ms Kokott had to assess whether the Polish national restrictive measures (i.e. mandatory liquidation procedure in Poland) could be justified by overriding reasons in the public interest.

The AG concluded that “the general obligation to carry out a liquidation procedure in the host Member State does not constitute a proportionate means of protecting the creditors, minority shareholders and employees of a company that performs a cross-border conversion“.

The AG’s opinion in the Polbud case may therefore be summarized as follows: Member States cannot restrict outbound re-incorporations (unless such restriction is justified by general interests and proportionate to attain these goals) provided that the company has also relocated a fixed establishment.

3.    Ruling of the CJEU

The CJEU took partially a different view and held that:

(i)    The freedom of establishment applies to the sole transfer of registered office of a company from one Member State to another, for the purposes of its conversion into a company under the law of another Member State, in accordance with the conditions imposed by the legislation of the host Member State, even though no real business is intended to be conducted in the host Member State.

On that basis the CJEU concluded that Polbud, a company incorporated under Polish law, has the right to convert itself into a company governed by the laws of Luxembourg, as long as the conditions laid down by Luxembourg legislation are satisfied and in particular that the criteria adopted by the Luxembourg legislation to recognize a company as being a company governed by the laws of Luxembourg is satisfied.

The CJEU further recalled that, in the absence of harmonization of the EU law, each Member State has the power to define the connecting factor(s) required for a company to be considered as incorporated under its national legislation and subject to its national legal order and that as such the registered office, the central administration and the principal place of business of a company or a firm are considered connecting factors on an equal footing.

In that regard, the CJEU held that the fact that either the registered office or real head office of a company is established in accordance with the legislation of a Member State for the purpose of enjoying the benefit of more favorable legislation does not, in itself, constitute an abuse. Accordingly, the decision to transfer to Luxembourg only the registered office of Polbud (that transfer not affecting the real head office of that company) cannot, in itself, mean that such a transfer does not fall within the scope of freedom of establishment.

(ii)    National laws hindering the transfer of the registered office of a company to another Member State by requiring the mandatory liquidation of the company if the company requests its removal from the commercial register of the home Member State are contrary to the rules of free establishment.

The CJEU further held that, by requiring the liquidation of the company, the Polish legislation is liable to impede, if not prevent, the cross-border conversion of a company. That legislation therefore constitutes an unjustified restriction on freedom of establishment.

Although the Member States are allowed to put in place measures to protect the interests of minority shareholders, creditors and employees and therefore to somehow restrict the freedom of establishment, such national restrictive measures must be justified by imperative requirements in the general interest, must be appropriate to attaining the objective which they pursue and not go beyond what is necessary to attain it.

4.    Practical implications of the Polbud judgment

The judgment of the CJEU in the Polbud case seems to further facilitate the cross border conversions in Europe and to strengthen the mobility of companies within the European Single Market.

The novelty of this case is that the CJEU clearly decided that the principle of freedom of establishment applies to a cross border change of form by means of the sole transfer of the registered office of the company. As such, Polbud is allowed to move its sole registered office to Luxembourg without moving its headquarters (whereas Poland applies the real seat doctrine) and this irrespective of the fact whether or not Polbud pursues any economic activity in Luxembourg.

However it appears from the explanations given by the CJEU that a cross border change of form by means of the sole transfer of the registered office of the company is subject to the condition that the host Member State considers it sufficient to have the registered office on its territory. Should the legislation of the host Member State expressly require that companies also have their central administration in its country (i.e. Luxembourg), it is less certain whether the freedom of establishment would sufficiently justify the transfer. This question is likely to be further discussed among commentators.

This new case also confirms the need for positive harmonization of cross-border operations under EU law and calls once again for a cross-border transfer of company seats directive which should harmonize legal procedures (including connecting factors), deal with quorum and majority issues, provide minimum harmonization of the conflict of law rules and standard rules on minority shareholders, creditors and employees protection and therefore avoid the misuse of letter-box companies and shell companies.
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(1) Based on the information contained in the request for the preliminary ruling, Polbud continued carrying on its economic activities in Poland. It should however be noted that Polbud’s counsel at the hearing argued that the company relocated its entire business to Luxembourg and no longer carries on any economic activities in Poland.

(2)  Article 49 (ex Article 43 TEU) reads as follows:
Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.
Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.

(3)  Article 54 (ex Article 48 TEU) reads as follows:
Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Members States.
‘Companies or firms’ means companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making”.

(4)  Opinion of Advocate General Kokott delivered on 4 May 2017 Case C 106/16 Polbud — Wykonawstwo sp. z o.o., in liquidation (paragraph 34.) based on the following CJEU case-law: Factortame and Others (C-221/89, EU:C:1991:320, paragraph 20), Commission v United Kingdom (C-246/89, EU:C:1991:375, paragraph 21),  Cadbury Schweppes and Cadbury Schweppes Overseas (C-196/04, EU:C:2006:544, paragraph 54), VALE (C-378/10, EU:C:2012:440, paragraph 34) and AGET Iraklis (C-201/15, EU:C:2016:972, paragraph 51).

(5)  Judgment of 16 December 2008, Cartesio (C-210/06, EU:C:2008:723).

(6)  Judgment of 9 March 1999, Centros (C-212/97, EU:C:1999:126).

(7)  Judgment of 30 September 2003, Inspire Art (C-167/01, EU:C:2003:512).