Abuse of Companies Through Choice of Incorporation?

34 Pages Posted: 5 Aug 2019 Last revised: 13 Aug 2019

See all articles by Martin Gelter

Martin Gelter

Fordham University School of Law; European Corporate Governance Institute (ECGI)

Lécia Vicente

Louisiana State University, Baton Rouge - LSU Paul M. Hebert Law Center

Date Written: August 1, 2019

Abstract

This paper explores the concept of abuse of law in the context of the choice of the state or country of incorporation: Can the choice of a particular jurisdiction constitute “abuse”? The case law of the Court of Justice of the European Union (CJEU) on the freedom of establishment for companies has in principle left open the possibility for the Member States to take measures against “abuse” at least in specific cases. We explore two scenarios. First, we highlight cross-border incorporations of private limited companies and look at the systemic consequences of a line of judicial decisions that started with Centros and compare them to regulatory competition and the role of ‘pseudo-foreign incorporation statutes’ in the United States. Second, we look at cross-border mergers, comparing them with ‘reverse mergers’ in the US, a phenomenon that some scholars and practitioners have considered problematic and that allows an ex post choice of jurisdiction for established corporations. While the number of firms making use of these opportunities has remained relatively small, the changes had a systemic effect. Restrictions on the choice of incorporation are often not designed to protect specific stakeholders of the firm (such as shareholders, employees, or creditors), but rather to protect the state’s lawmaking authority concerning companies (corporations) primarily active in its territory. Member States have historically employed restrictions on the choice of incorporation to discourage cross-border incorporations and to protect their laws from regulatory competition. Overall, the CJEU’s case law has left us with a vision for corporate law without space for a doctrine of abuse. The court’s vision is rooted in the idea that informed market participants are informed actors that understand that different laws govern forms of companies from different countries and adjust their expectations accordingly. This ‘self-protection’ model may be at odds with many Continental European traditions but was likely an inevitable consequence of the freedom of establishment. Nevertheless, Member States have been able to able to compensate for the loss of control over some aspects of the law of business organization through insolvencification. Consequently, there does not appear to be a strong need to extend abuse of law as a doctrinal mechanism.

Keywords: Abuse of Law, Centros, Überseering, Inspire Art, Polbud, Kornhaas, Regulatory Competition, Insolvencification, Regulatory Arbitrage, Internal Affairs, Pseudo-Foreign Incorporation Statutes, Cross-Border Mergers, Reverse Mergers, Cross-Border Transfer of Seat, Eu Company Law

JEL Classification: K22

Suggested Citation

Gelter, Martin and Vicente, Lécia, Abuse of Companies Through Choice of Incorporation? (August 1, 2019). Fordham Law Legal Studies Research Paper No. 3430655, August 2019. Available at SSRN: https://ssrn.com/abstract=3430655 or http://dx.doi.org/10.2139/ssrn.3430655

Martin Gelter (Contact Author)

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States
646-312-8752 (Phone)

HOME PAGE: http://www.fordham.edu/info/23135/martin_gelter

European Corporate Governance Institute (ECGI)

Brussels, B-1050
Belgium

HOME PAGE: http://www.ecgi.org/members_directory/member.php?member_id=621

Lécia Vicente

Louisiana State University, Baton Rouge - LSU Paul M. Hebert Law Center ( email )

1 E Campus Dr
Baton Rouge, LA 70803
United States

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