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The Cartesio JudgementA Jurisprudential AnalysisByAsgeir JohannessonCandidatus Juris, University of Iceland, 2005Diploma in Philosophy, University of St Andrews, 2008MA with Distinction in Philosophy, University of Southampton, 2009A ThesisSubmitted in Fulfillment of the Requirements for aLLM in European and International Business LawSupervisor: Professor DDr. Thomas RatkaLaw FacultyUniversity of ViennaOctober 2011

Asgeir Johannesson2The Cartesio JudgementTABLE OF CONTENTSIntroduction 41.Freedom of Establishment within the European Union 61.1 The Principle of Free Establishment 61.2 Introduction to Connecting Factors 101.3 Overview of the Cartesio Case 112.Analysis of the Relevant Case Law Prior to Cartesio 172.1 Daily Mail and Criticism 172.2 Relevant Post Daily Mail Case-Law Regarding Secondary Establishment 212.3 Relevant Post Daily Mail Case-Law Regarding Inbound Situations of PrimaryEstablishment 232.4 Relevant Post Daily Mail Case-Law Regarding Outbound Situations of PrimaryEstablishment 243.The Jurisprudence of the Cartesio Judgement 273.1 Confirmation of the Case-Law and the Alternatives 273.2 Respecting Precedents 303.3 Caution Regarding Connecting Factors 353.4 The Legislative Development 373.5 The Obiter Dictum 434.Overall Jurisprudential Assessment 474.1 Overview of Criticism and Endorsement 474.2 Rule of Law 504.3 Conclusion Regarding the Jurisprudence 555.The Need for Legislative Change 575.1 The Current Situation 575.2 The 14th Company Law Directive 625.3 European Delaware Effect 73

Asgeir Johannesson5.4 A Rational Way Forward 79Conclusion 82Works Cited 86List of Cases 913The Cartesio Judgement

Asgeir Johannesson4The Cartesio JudgementThe Cartesio Judgement:A Jurisprudential AnalysisFormalism and rule-skepticism are the Scylla and Charybdis ofjuristic theory; they are great exaggerations, salutary where theycorrect each other, and the truth lies between them.– H. L. A. Hart 1IntroductionCross-border corporate mobility within the European Union (EU) has for a longtime been a prominent issue in European company law. One aspect of thatprominence has been the case-law of the Court of Justice of the EuropeanCommunities (ECJ) regarding freedom of establishment for legal persons, whichhas been a source of much scrutiny and scholarly debate.2In this thesis, ʻThe Cartesio Judgementʼ, I will contribute to that debate byanalyzing the European Courtʼs so-called Cartesio case from December 16th2008, or, more precisely, the part of the case which deals with cross-bordercorporate mobility.3First, I am going to give a necessary introduction by accounting for theprinciple of freedom of establishment within the EU. Then I will put the case incontext by discussing the relevant case-law prior to Cartesio. My account of boththe principle and the case-law is not simply a repetition of what has been saidbefore, but based on my own insights, and serves as an important prelude to theculmination of my main task of analyzing and assessing the jurisprudence behindthe Courtʼs ruling, from which the thesis takes its subtitle: ʻA JurisprudentialAnalysisʼ. Before I summarize my conclusion, I will discuss the desirability oflegislative amendments regarding cross-border corporate mobility and thus deal1H. L. A. Hart (1961), The Concept of Law (2nd edn., New York: Penguin Books, 1997), p. 147.2The Court of Justice of the European Communities is formerly known as European Court ofJustice. My abbreviation is of the latter name, which is still widely used.3C-210/06 (2008) Cartesio Oktató és Szolgáltató bt. (Cartesio).

Asgeir Johannesson5The Cartesio Judgementwith the question whether and in what way a new directive should change thescope of freedom of establishment. Such discussion of lex ferenda is particularlyproper in relation of Cartesio because while the case was pending before theECJ the European Commission halted its intended directive on cross-bordercorporate mobility, not least in order to see whether an alleged obscurity wouldbe clarified by the Court and an alleged incongruity harmonized.

Asgeir Johannesson6The Cartesio Judgement1. Freedom of Establishment within the European UnionRights are a moral concept – the concept that provides a logicaltransition from the principles guiding an individualʼs actions to theprinciples guiding his relationship with others – the concept thatpreserves and protects individual morality in a social context –the link between the moral code of a man and the legal code of asociety, between ethics and politics. Individual rights are themeans of subordinating society to moral law.– Ayn Rand 41.1 The Principle of Free EstablishmentThe Internal Market of the EU comprises an area without internal frontiers inwhich four fundamental freedoms are ensured: free movement of goods,persons, services and capital.5 The second of these, free movement of persons,includes a free movement of workers and freedom of establishment.But what exactly does the term ʻestablishmentʼ mean in European law? Thearticles concerning establishment in the Treaty on European Union (TEU) areidentical to the provisions of the previous Treaty Establishing the EuropeanCommunity (TEC), and they provide no definition of establishment.6 However, itsmeaning has been formulated in ECJʼs case-law; the following is an extract fromthe Gebhard case:The concept of establishment within the meaning of the Treaty is a very broad one, allowing a Community national toparticipate, on a stable and continuous basis, in the economic lifeof a Member State other than his State of origin and to profittherefrom, so contributing to economic and social interpenetration within the Community in the sphere of activities asself-employed persons[.]74Ayn Rand (1964), The Virtue of Selfishness (New York: Signet), p. 92.5Art. 26(2) TEU (ex. art. 14(2) TEC). The provision was enacted with the Single European Act,which functioned as a vehicle for the completion of the single market.6TEU, which entered into force on December 1st 2009, amended TEC (also known as the ECTreaty or the Treaty of Rome). TEC was in force at the time of Cartesio.7C-55/94 (1995) Reinhard Gebhard v. Consiglio dellʼOrdine degli Avvocati e Procuratori diMilano (Gebhard), para. 25.

Asgeir Johannesson7The Cartesio JudgementA few crucial features can be subtracted from this clause: The pursuit ofeconomic activity of a self-employed person, on a stable and continuous basis, inanother Member State than the State of origin. Here, ʻeconomic activityʼ is alsomeant to cover professional activity, ʻpersonʼ includes both natural and legalpersons, and ʻon a stable and continuous basisʼ refers both to a stable base inthe host country and an indefinite duration of the activity.8 The cross-borderfeature is necessary to make European Community law applicable.9The right of establishment is the subject of Arts. 49-55 TEU, which at thetime of Cartesio were Arts. 43-48 and 294 TEC.10The principle of freeestablishment is codified in the first of these Articles:Within the framework of the provisions set out below, restrictionson the freedom of establishment of nationals of a Member Statein the territory of another Member State shall be prohibited. Suchprohibition shall also apply to restrictions on the setting-up ofagencies, branches or subsidiaries by nationals of any MemberState established in the territory of any Member State.11Art. 49 TEU begins by stating the general rule that restrictions on the freedom ofestablishment shall be prohibited. In the second sub-paragraph, secondaryestablishment – in the form agencies, branches and subsidiaries – is explicitlyincluded, i.e. undertakings have the right to expand their business in such way inother countries than the state of incorporation.The second paragraph of Art. 49 casts further light of the scope of freedomof establishment:Freedom of establishment shall include the right to take up andpursue activities as self-employed persons and to set up andmanage undertakings, in particular companies or firms within themeaning of the second paragraph of Article 54 [ex. 48 TEC],under the conditions laid down for its own nationals by the law of8The self-employment feature distinguishes freedom of establishment from free movement ofworkers, while the lack of temporality feature distinguishes it from service. In Gebhard thetemporary nature was determined by looking at the factors of duration, regularity, periodicityand continuity.9Hereafter: EC law.10Secondary legislation regarding establishment includes the Residence Directive (2004/38/EC)and, indirectly, the 10th Company Law Directive on cross-border mergers (2005/56/EC).11Art. 49(1) TEU (ex. Art. 43(1) TEC).

Asgeir Johannesson8The Cartesio Judgementthe country where such establishment is effected, subject to theprovisions of the Chapter relating to capital.12What concerns us here is the right to ʻset up and manage undertakingsʼ. Theterm ʻundertakingʼ is a broad one, but it is vaguely narrowed down by adding thatit applies particularly to ʻcompanies and firms within the meaning of the secondparagraph of Article 54ʼ, which excludes non-profit making entities, but isotherwise very inclusive:ʻCompanies or firmsʼ means companies or firms constitutedunder civil or commercial law, including cooperative societies,and other legal persons governed by public or private law, savefor those which are non-profit-making.13The first paragraph of Art. 54 TEU states that the principle of free establishmentshould apply equally to natural and legal persons. It is obvious which naturalpersons belong to the EU, but it is not clear what legal persons should count asEU undertakings. Thus a rule is laid down in the Article to distinguish betweencompanies and firms within the Community and those who are not regarded asbelonging to it:Companies or firms formed in accordance with the law of aMember State and having their registered office, centraladministration or principal place of business within theCommunity shall, for the purposes of this Chapter, be treated inthe same way as natural persons who are nationals of MemberStates.14So, on the one hand, a company or firm has to be formed in accordance with thelaw of one of the Member States. On the other hand, they have to have at leastone of the three following links to the Community: a registered office within theEU, central administration within the EU, or principal place of business within itsboundaries. These links are called connecting factors. They are a central subjectregarding freedom of establishment and they are indeed intertwined with any indebt analysis of the Cartesio case. But before I give a brief introduction toconnecting factors, I will elaborate a little bit further on the context of the principleof free establishment and say a few words about the exceptions from the12Art. 49(2) TEU (ex. Art. 43(2) TEC).13Art. 54(2) TEU (ex. Art. 48(2) TEC).14Art. 54(1) TEU (ex. Art. 48(1) TEC).

Asgeir Johannesson9The Cartesio Judgementprinciple, which play a role in Cartesio, both in the Opinion of the AdvocateGeneral (AG) and, in different context, in the ECJʼs ruling.15It has to be kept in mind that the provisions regarding the right ofestablishment are – along with similar rights of workers and suppliers andrecipients of services – specific prohibitions of discrimination that fall under thegeneral non-discrimination principle of Art. 18 TEU (ex. Art. 12 TEC) in whichprohibition of any discrimination on the ground of nationality is prohibited.16 It hasbeen established in ECJʼs case-law that the fundamental freedoms, including thefreedom of establishment, do not only prohibit direct discrimination, where thereis discrimination by law, but also indirect discrimination, where there isdiscrimination by fact. Moreover, it was established in the Gebhard case that theprotection of the fundamental freedoms prohibits indistinctly applicable measuresthat are liable to hinder or render less attractive the freedom of establishment.This kind of protection is considered to be needed because many rules ofMember States are non-discriminatory, both legally and factually, but still havenegative impact on the capability of non-nationals to exercise their right. Thisespecially concerns indistinctly applicable measures that put a burden on themarket access of individuals or companies.However, there are exceptions from the principle of free establishment. InArt. 51 TEU (ex. Art. 45 TEC) it is stated that the provisions regarding right ofestablishment shall not apply to activities that are connected with the exercise ofofficial authority, and in Art. 52 TEU (ex. Art. 46 TEC) it is stated that theprovisions do not prevent discrimination on grounds of public policy, publicsecurity or public health. There are also important exceptions which are onlyconsidered when there is neither a direct nor indirect discrimination butindistinctly applicable measures which hinder or render less attractive thefreedom of establishment. Such national measures have to fulfill four conditionswhich were introduced in the Gebhard case and have become a standard test inlater cases, known as the ʻGebhard formulaʼ. First, the measures must be applied15The AGs of the ECJ assist with each case and deliver Opinions on questions, where they offerindependent legal solutions. But their Opinions are not binding and they are not participants inECJʼs deliberations. Eight AGs work for the Court.16The non-discrimination principle applies only to EU persons; it does not protect non-EUpersons against discrimination.

Asgeir Johannesson10The Cartesio Judgementin a non-discriminatory manner; secondly, they must be justified by overridingrequirements of the public or general interest; thirdly, they must be suitable forsecuring the attainment of the objective which they pursue; and at last, they mustnot go beyond what is necessary in order to attain the objective. It is the secondof these conditions, namely when a measure can be justified by reference tooverriding requirements in the general interest, which is often the main focal pointwhen the exceptions are considered by the ECJ.1.2 Introduction to Connecting FactorsThe connecting factors mentioned in Art. 54(1) are factors that connectcompanies and firms to the EU, but national connecting factors also play a hugerole in cross-border corporate mobility within the Union.Countries have two basic conflict-of-law methods of determining theapplicable law for companies: a method based on the incorporation theory and amethod based on the real seat theory. According to the first method, theapplicable law is the law of the state of incorporation, i.e. where the company isformed and registered. When this is the connecting factor it does not matterwhether companies transfer their central administration or principal place ofbusiness to another Member State; the governing law continues to be the lawwhere they were incorporated and the lex societatis does not change. Thesituation is different if the home country follows the real seat doctrine becausethen the applicable law is the law where the companyʼs real seat is located,which is usually determined by where its central administration is located. Whenthe connecting factor is such, companies cannot transfer their seat to anotherMember State and remain companies of the original state and continue to beincorporated by its laws and at least partially under its jurisdiction. Thus,companyʼs residence and nationality are intertwined. Among those countries thatfollow the incorporation theory are United Kingdom, the Netherlands andDenmark, while the majority of EU Member States – including countries such asGermany, Austria, France and Belgium – follow the real seat theory.A question can be raised whether Arts. 49 and 54 were intended to changethe Member Statesʼ national systems regarding connecting factors, i.e. whetherthe principle of free establishment was indirectly meant to let European conflict-

Asgeir Johannesson11The Cartesio Judgementof-law rules replace the inharmonious private international law (PIL) trends of theEU countries. This will be discussed later in relation to the Daily Mail case.1.3 Overview of the Cartesio CaseCartesio Oktató és Szolgáltató Bt., the undertaking of the case which bears itsname, is a limited partnership, formed according to Hungarian law and registeredin the Hungarian commercial registry.17 ʻBt.ʼ is an abbreviation of betéti társaság,which is a type of limited partnership that is not a legal person de jure, but is sode facto according to Hungarian legal experts: ʻalthough the Bt. is not formally alegal person, it has separate legal personality. The Bt. is subject to the samecompany law legislation as are legal persons and its profits are subject tocorporation tax.ʼ 18 They therefore conclude that Art. 54 TEU should be interpretedas covering the form of the Bt. enterprise, as the ECJ did indeed confirm in theCartesio ruling.The owners of Cartesio sought to transfer its central administration fromHungary to Italy and they accordingly applied for a registration of a new seat inthe Hungarian commercial registry.19 Their aim was not to move the registeredoffice to Italy, as seemed to be the common perception of Member States beforethe Opinion of the AG was published, but only to transfer the seat to Italy whileremaining being registered in Hungary and governed by Hungarian law. Still,despite the ownerʼs desire and the fact that the case was resolved on this17The registry located the limited partnership in the small city of Baja in southern Hungary.Cartesio was registered there on May 20th 2004.18Veronika Korom & Peter Metzinger (2009) ʻFreedom of Establishment for Companies: TheEuropean Court of Justice confirms and refines its Daily Mail Decision in the Cartesio CaseC-210/06ʼ (ECFR, 1/2009), p. 129f. – In paragraph 22 of the Cartesio case on can find thefollowing facts about the Cartesio undertaking: “Cartesio has two partners both of whom arenatural persons resident in Hungary and holding Hungarian nationality: a limited partner,whose only commitment is to invest capital, and an unlimited partner, with unlimited liability forthe companyʼs debts. Cartesio is active, inter alia, in the field of human resources, secretarialactivities, translation, teaching and training.”19A more direct translation of what Cartesio sought to transfer is ʻoperationalheadquartersʼ (központi ügyvezetés helye), but the meaning is the same. – The seat transferapplication was filed in the regional court of Bács-Kiskun on November 11th 2005. The appliedlocation was the city of Gallarate in the region of Lombardo in northern Italy.

Asgeir Johannesson12The Cartesio Judgementground, there is a good reason for the confusion: ʻstatutory seat and the real seatof a company had to coincide under Hungarian law.ʼ 20The application was rejected by the Hungarian company court whichmaintained the commercial registry.21 The reason which it gave for the refusalwas that Hungarian law did not allow a legal person to transfer its seat abroadwhile continuing to be a legal entity structured by Hungarian law, or, as it is oftenput, to have Hungarian law as its personal law. Rather, the court maintained thatan enterprise that sought to transfer its seat across the Hungarian border wouldhave to be wound up in Hungary and reconstituted according to the law of thecountry where the new seat would be located. Cartesio appealed the judgementto a higher court, which referred the issue to the ECJ.22Four questions were referred to the European Court, but only the last one iswithin the scope of our subject. The fourth question was rephrased by the ECJ,but in its original form it was as follows:a)If a company, constituted in Hungary under Hungariancompany law and entered in the Hungarian commercialregister, wishes to transfer its seat to another Member Stateof the European Union, is the regulation of this fi

therefrom, so contributing to economic and social inter-penetration within the Community in the sphere of activities as self-employed persons[.]7 Asgeir Johannesson 6 The Cartesio Judgement 4 Ayn Rand (1964), The Virtue of Selfishness (New York: Signet), p. 92. 5 Art. 26(2) TEU (ex. art. 14(2) TEC). The provision was enacted with the Single .

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