Legal issue: Whether the duty imposed by the law of a Member State on foreign companies to re-incorporate in that State as a precondition for acquiring legal capacity therein was compatible with the freedom of establishment.

Background of the case: The shares in ‘Überseering BV’, a limited liability company organised under Dutch law, were acquired by two German nationals. ‘Überseering’ had transferred its actual centre of administration to Düsseldorf.  At some moment ‘Überseering’ found itself involved in a court dispute with a contractor in Germany. According to the settled case-law of the Bundesgerichtshof, which is approved by most German legal commentators, a company's legal capacity is determined by reference to the law applicable in the place where its actual centre of administration is established (company seat principle), as opposed to the incorporation principle, by virtue of which legal capacity is determined in accordance with the law of the State in which the company was incorporated. That rule also applies where a company has been validly incorporated in another State and has subsequently transferred its actual centre of administration to Germany. Since a company's legal capacity is determined by reference to German law, it cannot enjoy rights or be the subject of obligations or be a party to legal proceedings unless it has been reincorporated in Germany in such a way as to acquire legal capacity under German law. Therefore, German courts decided that, as a company incorporated under Netherlands law, did not have legal capacity in Germany and, consequently, could not institute legal proceedings there. ‘Überseering’ disagreed on the grounds of the freedom of establishment, and at some stage of proceedings German court applied to the ECJ for a preliminary ruling.

The decision: The European Court of Justice held that it was incompatible with the freedom of establishment guaranteed in Arts. 43 and 48 of the EEC Treaty for a Member State to deny legal capacity (and standing to sue or be sued in courts) to a company formed in a Member State which moves its central place of administration to another Member State. In view of the Court, it is fundamental that states recognise companies incorporated abroad, regardless of whether Member States had conventions on mutual recognition of companies under Article 293. There was no countervailing justification or any overriding requirements relating to the general interest not to uphold the right of freedom of establishment in the case like this.

Significance and implications: Following this ECJ judgment, a company incorporated in a EU Member State is entitled to rely on the principle of freedom of establishment to contest any refusal by a host state to recognise it as a legal entity with the capacity to enter into contracts and be a party to legal proceedings.