On 25 April 2024 the Court of Justice of the European Union (CJEU) handed down a judgment in case C-276/22, “Edil Work2”, which will have important implications for corporate law within the European Economic Area. This decision addresses the freedom of establishment and the application of national law to the activities of companies operating transnationally.
The Italian Supreme Court of Cassation referred a question to the CJEU for a preliminary ruling on Articles 49 and 54 of the Treaty on the Functioning of the European Union (TFEU). The question arose in a dispute between the Italian companies Edil Work 2 Srl and S.T. Srl, and the Luxembourg company STE Sàrl, concerning the legality of the transfer of ownership of a castle in Italy.
STE Sàrl, originally incorporated in Italy as STA Srl, moved its registered office to Luxembourg in 2004, becoming a Luxembourg company. Despite being domiciled in Luxembourg, STE Sàrl maintained its centre of effective management (or ‘real seat’) in Italy, precisely in the castle which would later be the subject of the sale. In 2010, an administrator of STE Sàrl delegated his powers to an attorney-in-fact under Luxembourg law. That proxy sold the château to an Italian company which then resold it to Edil Work 2 Srl, controlled by the proxy. Subsequently, STE Sàrl sued the two Italian companies, claiming that the delegation of powers was invalid under Italian law (where STE Sàrl had its ‘real seat’), but valid under Luxembourg law (where STE Sàrl had its registered office).
The question raised was whether Articles 49 and 54 TFEU allow a Member State to apply its national law to a company originally incorporated in that State, but which has transferred its registered office to another Member State and maintains its principal activity in the State of origin.
The CJEU ruled that applying national law generally to the management acts of a company established in another Member State constitutes a restriction on the freedom of establishment, contrary to Articles 49 and 54 TFEU.
The main legal implications of this ruling are set out below:
- Strengthening freedom of establishment: The judgment reaffirms that companies can manage their activities under the law of the Member State of establishment, protected by Articles 49 and 54 TFEU.
- Limitation on the application of national laws: This restricts the ability of a Member State to apply its national law to the activities of a company that has its real seat in that State if it is established in another Member State, avoiding double regulation and simplifying the administrative burden.
- Public interest: According to the CJEU, restrictions under the real seat theory can only be accepted where they are based on overriding reasons of general interest, such as the protection of workers, creditors or employees. However, any restriction must be proportionate and not go beyond what is necessary to achieve its objective.
- Protection against artificial arrangements: Although freedom of establishment is protected, Member States may adopt measures against fraud and artificial arrangements, provided they are specific and do not impose general restrictions.
- Clarity on the applicable law: The law of the State of establishment prevails, unless there are justified and proportionate reasons for applying the law of the State where the main activity is carried out.
In short, this ruling strengthens the freedom of establishment in the European Union, ensuring that companies can operate more freely between Member States. At the same time, it sets clear limits on the restrictions that States may impose, requiring sound and proportionate justifications for any measures that may hinder this freedom. This favours a more integrated and less bureaucratic business environment in the European Union, facilitating the operation and management of transnational companies.
From the point of view of Spanish domestic law, we venture to say that the CJEU’s doctrine will possibly force a re-reading of Articles 8 and 9 of the Capital Companies Act. Indeed, historically, these Spanish provisions have been the subject of some doctrinal controversy that will surely have to be reviewed now. Using above all the argument of fraud prevention, part of the doctrine has been arguing that, if a company has its main centre of activity in Spain, it must be subject to Spanish law, even if it is not domiciled in Spain. The “Edil Work2” ruling clears up these doubts, at least with regard to companies domiciled in the European Economic Area: a company may be incorporated or established under the law of any of the EEA States and establish its registered office there, governed by the laws of that State, even if it has its principal place of business or operation in Spain.