07-29-2016  | Newsletter Brexit July 2016

How the impending Brexit impacts the legal framework of doing business with the UK – the German perspective: Corporate law

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Companies established under EU law

The legal forms available for companies in the EU and EEA states are based predominantly on the respective national legal systems. Nevertheless, the national regulations are supplemented by European law regulations that offer additional types of corporate forms. These are the European Economic Interest Grouping (EEIG), the European Public Limited Corporation (Societas Europaea or SE) and the European Cooperative (Societas Cooperativa Europaea or SCE).

A common characteristic of all European corporate forms is the possibility of transferring the registered office from one EU member state to another.

All European corporate forms are available not only within the EU but also throughout the EEA. Consequently, a Brexit under the "Norwegian" model, in which the UK would remain part of the EEA, would have no effects on companies under EU corporate law with a UK connection.

The following comments therefore apply exclusively to Brexit scenarios involving the UK leaving not only the EU but also the EEA.

  • Companies with registered office in the UK (EEIG, SE and SCE)

A Brexit also involving withdrawal from the EEA would create problems above all for companies under EU corporate law with registered office in the UK. Under the relevant provisions (of EU law), a company can only choose a registered office in an EEA country. A registered office in the UK would no longer satisfy this requirement following withdrawal of the UK from the EEA. Under applicable provisions, the country in which the company has its registered office must work towards rectifying this deficiency and, in the most extreme case, must arrange dissolution of the company. However, the country of the registered office is precisely the UK that would no longer belong to the EEA at the relevant time under this scenario.

It is clear that the existing regulations are not tailored to a Brexit scenario involving withdrawal from the EEA, and therefore offer no leverage.  The texts of the Regulations on the SE and SCE make it clear that the corresponding rulings provide only for cases in which the registered office is in the wrong EEA country, not however for cases in which the country of the registered office no longer belongs to the EEA at all.

The main requirement for action lies with the British lawmaker who has to place "its" EEIGs, SEs and SCEs (i.e. those based and registered in the UK) on a new legal fundament.

The companies concerned can themselves react through timely relocation of their registered office to another EEA country. This cross-border relocation of registered office is possible under applicable law (i.e. as long as the UK is still a member of the EEA). With SEs and SCEs however, it must be noted that the headquarters must also be relocated in addition to the registered office, as both must be in the same country (the requirements for the EEIG are somewhat less strict).

Whether a cross-border transfer of registered office from the UK to an EEA country will still be possible if the UK leaves the EEA appears doubtful, and is likely to depend on the agreements ultimately reached between the EU and the UK. It seems prudent not to assume that this possibility will continue to exist.

Another possible course of action as an alternative to relocating the registered office would be to change the company into a national legal form of the - retained - country of registered office (e.g. an SE with registered office in the UK into a PLC). Under the relevant provisions of EU law, this is possible if at least two years have passed since the entry as SE/SCE. EU law does not provide for a comparable option for the EEIG.

  • UK members of an EEIG

It is important to note that only nationals of an EEA country can be fully entitled members of an EEIG, irrespective of where it has its registered office. This means that, in the event of Brexit with withdrawal from the EEA, UK members would leave an EEIG (and could at most remain with a semi-official status as "associate" member). Every EEIG - including those with their registered office outside the UK - should therefore concern itself with the effects of a Brexit on its membership, especially as an EEIG must have at least two members from two different EEA countries, meaning that if too many members leave, the worst case could be dissolution of the EEIG.

With an SE or SCE, there is no requirement stating that members must be nationals of EEA countries (except in the formation phase), with the result that there is no corresponding need for action with existing SEs and SCEs.

Cross-border Mergers

The merging of companies governed by the law of different states is a legal challenge, as a procedure of this nature is only possible through interaction of the legal systems concerned, and also of the authorities or courts of the countries involved.

Cross-border mergers therefore constitute a subject where the purpose and importance of a supranational or international legal framework are clear.

In 2005, the EU created such a framework through the Directive on Cross-Border Mergers of Limited Liability Companies (Directive 2005/56/EC, the so-called Merger Directive).

The Merger Directive applies not only to the EU but also to the EEA. The participation of UK corporations in cross-border mergers under the regime created by the Merger Directive would therefore remain possible after a Brexit according to the "Norwegian" model.

However, if the UK leaves not only the EU but also the EEA, this participation would no longer be possible. Instead, it would depend on whether the national legal systems of all countries involved permit cross-border mergers, and are sufficiently coordinated to make this process practicable in the first place.

Mergers between UK and German companies would then no longer be possible, as German national law recognizes exclusively mergers within the same country.

Planned mergers involving UK companies should therefore be started soon for precautionary reasons, so that they can be concluded in sufficient time before a Brexit takes effect - taking account of the fact that the process traditionally takes a long time, at least several months.

Recognition of foreign companies, freedom of Establishment

  • UK companies with effective administrative headquarters in Germany

The so-called ‘real seat’ rule is generally applicable as regards the recognition of companies with a foreign legal form in Germany. Under this rule, companies are treated in accordance with the law of the country in which their effective head office is located. If a company is set up under foreign law but has its corporate office/actual head office in Germany (for example if the company has business operations only in Germany but not in its country of formation), the foreign legal form will not be recognized. Instead - provided it is regarded as existing at all - the company will be treated as a non-registered German Civil Law Association (GbR) or Commercial Law Partnership (oHG) (with the not insignificant consequence of personal liability of the partners for all debts of the company).

Based on a series of decisions by the European Court of Justice, this is not the case if the company concerned has been effectively formed under the law of another EU member state (or EEA contracting state). It will then enjoy European freedom of establishment, enabling it to set up branches and to do business in all EEA countries, without other member (or contracting) states being able to call the company's existence (in the chosen legal form) into question. There is no requirement of predominant activity in the country of formation (or indeed any activity at all in, or other connection to, the country of formation).

Accordingly, the UK's membership of the EU currently makes it possible to use an English (or Scottish or Northern Irish) legal form for a company that operates fully or predominantly in Germany, and this has also been the case in practice. Examples include Air Berlin (English PLC), some German law firms or German national organizations of international law firms (English LLP).

Whether this practice will still be possible after a Brexit depends on the withdrawal modalities. With the "Norwegian" model, i.e. continuing membership of the EEA, nothing would change, as freedom of establishment is applicable throughout the EEA and is not restricted to the EU.

With all other models however, freedom of establishment would initially cease to apply, and the ‘real seat’ rule outlined at the beginning would again take effect. The situation would only be different if the UK were to succeed in agreeing bilateral recognition of own companies (as is the case for example in relations between Germany and the USA - not however between Germany and Switzerland). Consequently, if it were to become apparent that the UK intended to withdraw from the EEA without express confirmation of continued freedom of establishment for British companies, the companies concerned would have to consider new organizational forms in good time, possibly through merger into a new company in another EEA country, or, in the case of a PLC, transformation into a European Company (SE) with subsequent transfer of registered office to another country (as long as these instruments remain available).

  • German companies with real seat/head office in the UK

The reverse case of a corporation under German law (Aktiengesellschaft, GmbH) with actual head office/real seat in the UK is less problematic. Under current German law, corporations can have their head office abroad - in any country either inside or outside the EEA. As such, a decision by the UK to leave the EEA would be of no relevance. The only change would be that the UK would no longer be obliged to recognize such companies, as it would no longer be bound by the requirements of freedom of establishment. However, the possibility of non-recognition is unlikely. Under the various jurisdictions in the UK and in contrast to German law, companies have always (and irrespective of European requirements) been governed by the law chosen for the formation of a company and not by the law applicable at its actual head office, with the result that a company, correctly set up in the UK under German law, will automatically be recognized as such.

This leaves the question of German partnerships (in particular KGs). According to prevailing opinion, these are already required to have their actual head office in Germany. European law does not stand in the way of this, as it only obliges the EU member states to respect companies of other EU member states, but leaves them complete freedom concerning the question of which prerequisites must be satisfied for the formation and continued existence of a company under the respective own law. German partnerships with head office in the UK are therefore problematic irrespective of Brexit, and cannot be recommended.


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