Cross-border Transfer and Change [607663]

Cross-border Transfer and Change
of Lex Societatis After Polbud,
C-106/16: Old Companies Do Not
Die…They Simply Fade Away
to Another Country
GITTE SOEGAARD: PH.D., ASS. PROFESSOR OF COMPANY LAW, AALBORG UNIVERSITY , DENMARK & ERIK WERLAUFF, DR. JUR., PROFESSOR OF COMPANY LAW, AALBORG
UNIVERSITY, DENMARK*
1 POLBUD C-106/16 –A BRIEF SUMMARY
An extraordinary general meeting of shareholders in the Polish
company Polbud –Wykanawstwo sp.z. o.o. ( ‘Polbud ’) decided in
2011 to transfer the registered office of the company to
Luxembourg, hereby notdeciding to transfer the company ’s place of
management or place of carrying out the company ’s business.
According to Article 270 of the Polish Companies Code trans-
ferring the company ’s registered office abroad requires the winding
up after liquidation of the company, and a liquidation procedure
was in fact recorded and a liquidator appointed. However, the
liquidation process was never properly ended.
In 2013 the registered office of Polbud was transferred to
Luxembourg while still maintaining its legal personality also in
Poland. In Luxemburg the company was registered as Consoil
Geotechnik SARL and now under Luxembourg law.
Polbud applied for the removal from Poland ’s commercial reg-
ister, but the application for removal was rejected, for the reason
that the winding up and liquidation processes had never been
properly ended, which was under Polish law regarded as a precon-
dition for deregistering the company in Poland.
An appeal was brought to the Polish Supreme Court, which had
doubts on especially two issues: (1) is the freedom of establishment
applicable to only transferring the registered office when there was
no change of location of the realhead office (the question of ‘brass
plate companies ’)?, and (2) is a Polish law according to which
winding up and liquidation would be a precondition to transferring
the registered office, compatible with the freedom of establishment?
The Court ruled as follows:
1. Articles 49 and 54 TFEU must be interpreted as meaning that
freedom of establishment is applicable to the transfer of theregistered office of a company formed in accordance with the
law of one member state to the territory of another member
state, for the purposes of its conversion, in accordance with the
conditions imposed by the legislation of the other member state,
into a company incorporated under the law of the latter member
state, when there is no change in the location of the real head
office of that company.
2. Articles 49 and 54 TFEU must be interpreted as precluding
legislation of a member state which provides that the transfer of
the registered office of a company incorporated under the law of
one member state to the territory of another member state, for
the purposes of its conversion into a company incorporated
under the law of the latter member state, in accordance with
the conditions imposed by the legislation of that member state, is
subject to the liquidation of the first company.
2. THE IMPLICATIONS OF THE CROSS-BORDER CONVERSION
OFPOLBUD
Even though the cross-border conversion did in fact not change
the place of administration/management or the place of business
activities, the cross-border conversion meant much more to
Polbud than just a change of address; from a legal point of view
Polbud changed its nationality , its name, its by-laws, the applicable
law for ruling company law matters and other matters such as for
instance tax matters, its social form etc. And yet Polbud never gave
up its status as a legal entity , which would have meant going
through a liquidation process followed by winding up the
company.
Consequently, Polbud was to be regarded as a migrant company ,
which in a legal sense means a change of its legal clothes.
* Email: gs@business.aau.dk and erik@werlauff.com.ARTICLE
Soegaard, Gitte. ‘Cross-border Transfer and Change of Lex Societatis After Polbud, C-106/16: Old Companies Do Not Die …They Simply Fade Away to Another Country ’.European
Company Law Journal 15, no. 1 (2018): 21 –24.
© 2018 Kluwer Law International BV, The Netherlands

Besides Polbud two other parties had important interests at
stake:
First, of course, the new host, Luxembourg. Several legal ques-
tions would potentially have to be considered, among others the
question of whether there would be an obligation for Luxembourg to
welcome Polbud/Consoil Geotechnik SARL, whether the‘migrant ’
itself and the form of migration would meet the requirements of
Luxembourg company law, and whether the new host country
could/would impose special conditions on the migrant.
Secondly, Poland, the land of origin of Polbud, would be a part.
Company law-wise Poland was prepared to facilitate the transfer of
a company ’s registered office to a foreign country:
A company shall be wound up …2. Pursuant to a shareholder ’s
resolution to transfer the company ’s registered office abroad, that
resolution being confirmed by minutes drawn up by a notary1
However, Polbud was not liquidated and there had been no winding
up;Polbud did not ‘die ’–it simply faded away to another EU/EEA
country. For that particular reason, the Polish registry court denied
to deregister the company in Poland, and Polbud now had two
nationalities, although that was not the intention.
In the Polish Law on private international law2it was stated:
Upon transfer of its head office to another State, a legal person
shall be subject to the law of that State. The legal personality
acquired in the State where it previously had its head office shall
be retained, if the law of each of the States concerned so pro-
vides. Transfer of the head office within the European Economic
Area shall not lead to the loss of legal personality.
Polbud did not transfer its head office, but instead its registered
office. So Polbud had been placed between the two legal regimes,
although Polbud insisted on both maintaining its legal personality
and on the right to ‘migrate ’with its registered office only without
winding up the company.
And all of a sudden, this case with its cross-border implications
touched upon important and well-known legal EU company law
questions.
Not only did the Court outline the legal answers to the Polbud
challenges –it also specifically outlined a scheme of how to deal
with the analysis. Although the questions from the Polish Supreme
Court were introduced in a different order, the Court also intro-
duced a scheme for dealing with legal matters related to ‘freedom of
establishment ’problems3: first the relevance of the actual transac-
tion (cross-border conversion of a company) must be qualified
according to the range of TFEU Articles 49 and 54. If relevance canbe stated, next step will be to qualify whether any restrictions exist.
In the affirmative, the last step will be to do the Gebhard -test4to
decide, whether the transaction –with its attached restrictions –will
be legitimate according to EU case law.
3. QUALIFYING THE CONCEPT OF ‘ESTABLISHMENT ’IN THE POLBUD
CASE
In a Polbud context, ‘establishment ’means (1) transfer of the registered
office of a company born in one Member State to another Member
State, (2) with the purpose of converting it to a company incorporated
according to the law of the host, (3) and under the legal conditions of
that host, (4) without actually also changing the location of the real
head office. Can Articles 49 and 54 TFEU be interpreted in such a way,
that this is an ‘establishment ’, and that Polbud can therefore benefit
from the freedom of establishment of the Treaty?
It was already a well-known fact based on several leading ECJ
cases, that the concept of ‘establishment ’is a rather broad one.
Centros5and Inspire Art6were early and clear examples:
InCentros a Danish couple established and owned a private
company registered in the UK. They did so to avoid the Danish
capital requirements, which were by then higher than those of a
UK-company. They applied the Danish company authorities for the
registration of a branch of the UK-registered company, since all
business activities were in reality placed in Denmark. Registration of
the branch was refused.
The Court ruled as follows:
It is contrary to articles 52 and 58 [now articles 49 and 54 of TEUF]
of the EC Treaty for at member state to refuse to register a branch of
a company formed in accordance with the law of another member
state in which it has its registered office but in which it conducts no
business where the branch is intended to enable the company in
question to carry on its entire business in the State in which that
branch is to be created, while avoiding the need to form a company
there, thus evading application of the rules governing the formation
of companies which, in that State, are more restrictive as regards the
paying up of a minimum share capital.
InInspire Art Dutch law included rules about ‘pseudo-foreign com-
panies ’meaning foreign companies with all of their business activities
in the Netherlands. They were required to have a label: ‘pseudo-
foreign company ’on letters, and to recognize Dutch capital require-
ments. However, the Court overruled these Dutch provisions.
Actually, in Polbud7the Court referred to the Centros judgment
stating that even a pro-forma establishment as in Centros would entitle
1 Polish Companies Code, Art. 279.
2 Polish law on private international law, Art. 19.1.
3 Polbud, C-106/16, para. 29.
4 Gebhard, C-55/94
5 Centros, C-212/97
6 Inspire Art, C-167/01
7 Polbud, C-106/16, paras 38 –39.
FEBRUARY 2018, VOLUME 15, ISSUE 1 EUROPEAN COMPANY LAW JOURNAL 22

the company to benefit from the freedom of establishment, and that
even an establishment only for the purpose of enjoying the benefits of
more favourable legislation does not, in itself, constitute an abuse.8
This leads to the very relevant conclusion in the Polbud case about
the transfer and conversion of a registered office or real head office,
that since the Court in Centros permitted the establishment of a pro-
forma company ab initio , it would make no sense to prevent companies
from gaining exactly that position at a later stage of the company ’sl i f e .9
However, it is most useful to have the Court ’s say on this matter,
since not all experts seem to view the concept of establishment quite
the same way.
Actually, both the Polish and the Austrian governments claimed,
that freedom of establishment be a benefit for those alone, who
pursuit ‘an actual business by means of a permanent establishment in
the host member state ’.10
Furthermore, the Advocate General, stated11:
To that end, it is necessary to have secured in the host member
state a permanent presence which it is possible to demonstrate
on the basis of ascertainable objective factors.
Furthermore, the AG cites the Court ’s recent case law for the
conclusion, that the concept of establishment ‘presupposes actual
establishment in the host member state and the pursuit of genuine
economic activity there ’.12She refers in that context also to Cadbury
Schweppes13and Cartesio.14
As far as the Polbud case concerns, she concludes15:
‘If, in contrast, Polbud seeks only to change the company law
applicable to it, the freedom of establishment is not relevant ’…,
and‘it does not give them the right to choose the law applicable
to them ’.
Since the Court very clearly states, that the right to move the registered
office and convert the company to Luxembourg law does notrequire
moving the main seat or business activity to the host Member State,
what could then prevent Polbud from registering in Luxembourg?
As no harmonization of EU-company law has been made for this
theme, each Member State has the right to define the ‘connecting
factor ’required to obtain incorporation according with the host
Member State ’s national legislation.16And then the well-known
discussion of registration criteria vs. main seat criteria is all of a
sudden back on the table.Both Poland and Luxembourg are traditionally ‘main seat ’-
countries. Nonetheless, Luxembourg actually registered Polbud
without demanding any transfer of business activities or main seat,
and Polbud thereby ‘wore the legal clothes ’of Luxembourg while
still having its main seat and business in Poland. Polbud/Consoil
Geotechnik SARL thereby became a ‘brass plate/letterbox company ’
in Luxembourg –and with a permission to ‘speculate ’in preferences
of company law.
However, what about Cadbury Schweppes,17being cited by the
Advocate General, as well as Cartesio,18being cited both in the
Polbud judgment and by the Advocate General?
As far as Cadbury Schweppes was concerned, fiscus ’interests
were at stake. As far as Cartesio was concerned, it was discussed
whether a company may transfer its real seat to another Member
State whilst still retaining its status as a company governed by the
law of the Member State of incorporation –although such factual
case of migration probably occurs every day; just look at cases cited
in tax literature. In Polbud the Court rejects firmly, and rightly so,
that the Cartesio case would imply the necessity of a ‘genuine link ’
for the conversion of Polbud to a Luxembourg company.19
Actually, in Cartesio the Court states in an obiter dictum20:
In fact, in that latter case [the company being converted into a
company which is governed by the law of the member state to
which it has moved] the power referred to in paragraph 110 above
[connecting factor test] far from implying that national legislation
on the incorporation and winding-up of companies enjoys any
form of immunity from the rules of the EC Treaty on freedom of
establishment, cannot, in particular , [our emphasis] justify the
member state of incorporation, by requiring the winding-up or
liquidation of the company, in preventing that 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…. Such a barrier to the actual conversion of such a company,
without prior winding-up or liquidation, into a company governed
by the law of the member state to which it wishes to relocate
constitutes a restriction on the freedom of establishment of the
company concerned which, unless it serves overriding requirements
in the public interest, is prohibited [our emphasis].
So far, Polbud has reminded us, that the freedom of establishment is
the rule and should not be restricted –but also that national
8Ibid., para. 49.
9Ibid., para. 41.
10 Ibid., para. 30.
11 Advocate General, Kokott, Opinion 4th May 2017, para. 33.
12 Ibid., para. 34.
13 Cadbury Schweppes, C-196/04.
14 Cartesio, C-210/06.
15 Polbud, C-106/116, para. 38.
16 See also Vale, C-378/10.
17 Cadbury Schweppes, C-196/04.
18 Catesio, C-210/06.
19 Polbud, C-1016/16, para. 43.
20 Cartesio, C-210/06, paras 110 ff.
EUROPEAN COMPANY LAW JOURNAL FEBRUARY 2018, VOLUME 15, ISSUE 1 23

safeguards may be accepted as far as such safeguards serve over-
riding requirements in the public interest.
The ultimate test as far as the justification of restrictions is
concerned is still the Gebhard -test.21In order for a restriction to be
justified, it must (1) constitute an imperative requirement, (2) be in
the general interest, (3) be suitable for securing the attainment of
the objective which they pursue, and(4) not go beyond what is
necessary in order to obtain it.
InPolbud two of these criteria failed: Polish law demanded winding
up and liquidation as a mandatory and general step –no individual
consideration of the actual risk would be made, and there would be no
opportunity to consider less restrictive measures to protect creditors,
minority shareholders and employ ees, such as bank guarantees or other
guarantees and securities.22Already for that reason, the restriction
would not pass the 3rd criteria in the Gebhard -test ( ‘suitability ’).
Furthermore, transferring a regis tered office from one Member State to
another cannot be the basis for a general presumption of abuse and fraud
(such a general presumption being abstraktpräventif ), whereby the 2nd
criteria fails ( ‘general interest ’).23The Court concluded, that the Polish
requirement for winding up and liquidation be ‘disproportionate ’.
And although restrictions can indeed be justified, as for instance
inSevic24and AGET Iraklis ,25both being referred to in the Polbud ,
restrictions, and especially in company law, will very often be
inappropriate (not suitable), whereas restrictions within tax related
cases might be disproportionate. Still, ‘genuine link ’-related issues
will very often not be disproportionate tax related safeguards, and
such safeguards will usually only fail, if they of a general nature.26
InPolbud both elements were there: the Polish legislation was
not suitable, since it was liable to impede, if not prevent, the cross-
border conversion of a company,27and furthermore it was dispro-
portionate, because it went beyond what was necessary to secure
creditors, minority shareholders and employees.
It must be concluded, that a brass plate in the host Member State
is still enough in some respects, and so in the Polbud case, but not
in others.28
4. SOME FURTHER REFLECTIONS ON POLBUD
4.1 Forum Shopping
The case clearly gives some seal of approval to the concept of
forum shopping. Transferring a registered office, and therebyobtaining the nationality and legal identity of that host Member
State, in order to benefit from a more favourable legal regime, is an
activity worthy of protection within the EU freedom of
establishment.29
However, only companies wit hin the group of countries,
where the ‘connecting factor ’is registered office/place of incor-
poration, will be invited to this ‘competition ’, where gaining
depends on transferring the registered office to places with a
c o m p e t i t i v el e g i s l a t i o n ,w h i l ea tt h es a m et i m em a i n t a i n i n g
offices and plants, employees, and customers (economic activ-
ities) where business opportunities may seem to be the better.
While this may encourage some states to optimize their business
legal framework (a race to the bottom?), and skilled business people
to optimize their business, it also leaves e.g. majority shareholders
with an opportunity to select legal regimes, where minority share-
holders are less protected. Furthermore, some may speculate in a
less desirable way in less effective legal systems, e.g. as far as money
laundering is concerned. And still we have not even mentioned tax
related aspects.
However, Europe –and EU –are just small islands in modern
global business life. And EU company law will have to compete in a
global world, where forum shopping is already a given fact.
4.2 Double-Nationality Companies
Another reflection would be the one of having a company with a
double nationality. Polbud clearly states the right to transfer the
registered office and to convert to Luxembourg law without
winding up and liquidation. However, under Polish law the
nationality of a company depends on the place of the main seat –
which is Poland.
The Advocate General describes this phenomenon as follows:
Figuratively speaking, although Polbud already has one foot in
Luxembourg, it still has the other in Poland.30
So, will Polbud now be a legal person with a ‘double citizenship ’
meaning also two different company statutes?
InVale31it was stated that a conversion to a host Member State ’s
law presupposes the consecutive application of two national laws.
It works for natural persons. Will it, in the long term, also work
for companies? –Or will some common IP-based harmonization be
more effective and preferable?
21 Gebhard, C-55/94.
22 Polbud, C-106/16, para. 58.
23 Polbud, C-106/16, paras 62 –63.
24 Sevic, C-411/03.
25 Aget Iraklis, C-201/15
26 See also EFTA Court joined Cases E-3/13 and E-20/13, the so-called Olsen-cases: ‘A restriction on the freedom of establishment …… may be justified on grounds of overriding
public interest, in particular on considerations of preventing tax avoidance or maintaining the balanced allocation of taxing powers between EEA St ates’.
27 Polbud, C-106/16, para. 51.
28 See also Erik Werlauff, 7(1) Eur. Co. L. 25 –30 (2010).
29 Polbud, C-106/16, paras 62 –63.
30 Advocate General, Kokott, Opinion 4th May 2017, para. 42.
31 Vale, C-378/10.
FEBRUARY 2018, VOLUME 15, ISSUE 1 EUROPEAN COMPANY LAW JOURNAL 24