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„NO-DEAL”-BREXIT and Corporate Law – Part II


  1. Brexit and corporate law
  2. Example of Germany: What does the formation and corporate domicile theory has to do with Brexit?
  3. Brexit: In- and Outbound Situations (-Daily Mail-, -Cartesio- and -National Grid Indus-) in the context of formation and corporate domicile theory
  4. What happens after the transition period of Brexit?

I. Brexit and corporate law

What is the main reason for Brexit changing (European) corporate law? It is the difference between the so-called “corporate domicile theory” and the “formation theory” and their role within the EU. Due to the latter, no matter where a company will operate, it will be governed by the law of the jurisdiction it has been founded in. In opposition to that, the corporate domicile theory requires companies to apply the law of the country where the executive management is situated (“real seat” approach). Within the EU, the European Court of Justice (ECJ) had denied member states to adhere to the corporate domicile theory. To the court, formation theory is of the essence here, because this legal concept supports the competition among different company laws.

After the transition period, member states are free to return to the corporate domicile theory in regard to the UK again. This will have consequences for company structures with contacts to the UK and leads to question, which law applies in such cases eventually.

II. Example of Germany: What does the formation and corporate domicile theory has to do with Brexit?

German conflicts of laws require the application of the corporate domicile theory for third country businesses (please see Art. 3 EGBGB). If such a company has its administration or principal place of business in Germany, German law is essential to decide whether this business entity has legal capacity or not. No matter where a company has been founded, courts will apply German law. Therefore, German corporate law is to be followed as company statute generally. But in regard to EU member states, this corporate domicile rule does not apply according to Art. 49, 54 of the Treaty on the Functioning of the EU. In this context, there has been landmark court rulings like –Centros-, –Überseering– and –Inspire Art-. As a result of this, Germany’s Supreme Federal Court (BGH) had to accept this legal doctrine ever since. All courts of the EU member states are bound by the ECJ rulings (This will change in relation to the UK starting on January 1st 2021).

This formation theory says that the actual place of management of a business entity is not crucial, but the jurisdiction it has been founded in. The law of this state applies. Hence, a limited company by shares that has been founded in London, but has its main center of administration in Germany, is governed by English law, for instance.

III. Brexit: In- and Outbound Situations (-Daily Mail-, –Cartesio– and –National Grid Indus-) in the context of formation and corporate domicile theory

In order to internalize this complex thoroughly, we need to understand what happens if a company changes its corporate domicile. For that, the distinction between in- and outbound situations is significant. An exit state is still allowed to restrict the use of its law. Every state has the right to require companies to have their actual place of management on its territory (Hungary, for example). This could also mean dissolution of business entities. But it is the receiving (member) state that cannot constrain foreign law, as this would undermine the battle of the national corporate laws of the EU, of course.

Brexit does not only affect the EU, but the whole world. How could we put the pieces into a global corporate framework, where does the formation theory rule at all? The US and with some limitations, Switzerland, Italy, Spain, the Netherlands, Denmark, Sweden, Japan and Liechtenstein follow this legal concept. In the eyes of the EJC, EEA States fall also within the formation theory. The US and Germany have a special bilateral understanding. According to Art. XXV of the German-US treaty of friendship, the formation theory has to be applied between both states, although Germany follows the corporate domicile theory by default. This is why German Courts require a “genuine-link”. That is founding a company in the US is not enough, there also have to be “true and effective relations” to the US. Nevertheless, this jurisdiction does not have to be taken too seriously as the bar for proving this genuine link is set low.

IV. What happens after the transition period of Brexit?

The end of the transition period of Brexit is not only a big thing for private limited companies having their registered address in the UK while being effectively administered in Germany. The basic parameters of company law between the EU and UK are reconfigured. This has effects on businesses around the globe. For instance, German law will not be usurped by European law in regard to the UK. Therefore, Germany will reapply the corporate domicile theory in this context and limited companies by shares will have to comply with national German law as discussed. Without formal incorporation in Germany, the legal personality of these companies is no longer recognized, the limited liability of their shareholders is lost and these will automatically be held as partnerships by law. This means such companies may be dangerous for entire cross-border group structures. A solution might be the incorporation of a UK entity and transferring business to this entity through a merger.

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