EU: ECJ Rules On Cross-Border Conversions

In a series of landmark cases, the European Court of Justice (ECJ) has shaped European company law by exploring the scope of the freedom of establishment with regard to companies. In its latest decision, VALE (Case C-378/10), issued on 12 July 2012, the ECJ had to rule on the possibility of so-called cross-border conversions.

Facts of the case

VALE Costruzioni Srl ("VALE Costruzioni"), a limited liability company originally established under Italian law, decided to discontinue business in Italy and to transfer its seat and business to Hungary in order to operate there in accordance with Hungarian law. On its request, the company was deleted from the Italian commercial register. Subsequently, the director of VALE Costruzioni and another natural person adopted the articles of association of VALE Építési kft ("VALE Építési"), a limited liability company under Hungarian law, with a view to registration in the Hungarian commercial register. In the registration application, it was stated that VALE Costruzioni was its predecessor.

The registration was rejected by both the court of first instance and the appeal court. The appeal court argued that under Hungarian law, a company that is not Hungarian cannot be listed as a predecessor in law. The Hungarian supreme court subsequently upheld the appeal court's assessment and stated that the transfer of the seat of a company governed by the law of another Member State entailing the reincorporation of the company in accordance with Hungarian Law and a reference to the original Italian company cannot be regarded as conversion under Hungarian law, because Hungarian law on conversions applies only to domestic situations. However, the supreme court decided to request a preliminary ruling from the ECJ.

The ECJ's ruling

In addressing the VALE case, the ECJ stated that national legislation that enables national companies to convert, but does not allow, in a general manner, companies governed by the law of another Member State to do so, constitutes a restriction of the freedom of establishment (Articles 49 and 54 TFEU).

Differences in treatment depending on whether a domestic or a cross-border conversion is at issue cannot be justified by the absence of rules laid...