Legal issue: Whether company-law requirements of a particular Member State should apply to companies from other Member States wishing to carry on business in that State.

Background of the case: The company ‘Inspire Art Ltd’ was incorporated in the United Kingdom, which adheres to the ‘incorporation theory’ rather than the ‘real seat theory’ as regards the law applicable to corporate structures. The company wished, though, to carry out business in the Netherlands, not in England. In principle, the Netherlands also followed incorporation theory, but the Dutch law, however, applied to such foreign ‘pseudo foreign’ companies some additional formalities – in the first place, minimum capital requirements (18,000 Euro). For this reason, the request of the company to have registered its Dutch branch office at the commercial registry in the Netherlands was dismissed. The question referred to the ECJ was whether this disproportionately interfered with the company’s right to the freedom of establishment.

The decision: Relying on its prior case law (including Centros case), the ECJ held that national laws which restrict freedom of establishment must be:

-        non-discriminatory;

-        necessary in order to protect a public interest objective;

-        appropriate for securing the attainment of the objective;

-        proportionate.

The ECJ held that in the case at hand the protection of creditors did not justify imposing requirements in addition to those of the United Kingdom, where ‘Inspire Art Ltd’ was incorporated. Creditors were sufficiently protected by the fact that the company did not hold itself out as a Dutch company, but one subject to the UK law.

The Court opined that the provisions of the Treaty on freedom of establishment are intended specifically to enable companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community to pursue activities in other Member States through an agency, branch or subsidiary. That being so, the fact that a national of a Member State who wishes to set up a company can choose to do so in the Member State the company-law rules of which seem to him the least restrictive and then set up branches in other Member States is inherent in the exercise, in a single market, of the freedom of establishment guaranteed by the Treaty.

In addition, the fact that a company does not conduct any business in the Member State in which it has its registered office and pursues its activities only or principally in the Member State where its branch is established is not sufficient to prove the existence of abuse or fraudulent conduct which would entitle the latter Member State to deny that company the benefit of the provisions of Community law relating to the right of establishment.

Significance and implications: By this decision, the ECJ continued its tendency of deciding in favour of freedom of establishment by holding that rules subjecting ‘pseudo-foreign’ companies to the company law of the host state were inadmissible. Thus an important step towards free competition of corporate laws of various states has been made (see also Überseering case).