The European Commission has recently published a notice to stakeholders on the UK's withdrawal from the EU and EU rules on company law. The purpose of this is to remind private parties of the company law implications of the UK leaving the single market.
A point which the notice highlights is that a UK-incorporated company that has its "real seat", i.e. central administration or principal place of business, in another member state could, on the UK leaving the single market, potentially lose its limited liability status in that country.
This is because, if Article 54 of the Treaty on the Functioning of the European Union no longer applies to UK-incorporated companies, those companies will no longer have the Treaty right to freedom of establishment in other member states. Article 54 overrides national law rules but, once it no longer applies, national law rules will determine the treatment of UK companies in a member state. In a member state that applies the "real seat" principle, local law may provide that a UK-incorporated company with its central administration or principal place of business in that country is not locally incorporated. Local law may therefore treat the entity not as a company with separate legal personality but as a partnership, and consequently its shareholders may have personal liability for its debts.
This is a different approach from that of English law, which recognises the limited liability of companies incorporated in other jurisdictions, regardless of whether that jurisdiction is in the EU or not.
UK-incorporated companies that have their central administration or principal place of business in another EU member state which applies the "real seat" principle (for example Germany) should consider this issue as part of their Brexit planning.
On a related point, the notice also notes that, on the UK leaving the single market, a branch of a UK-incorporated company in an EU member state will become a branch of a "third country" (i.e. non-EU member state) company in that jurisdiction. A member state's national company law for third country companies (e.g. on branch registration) may differ from those which EU law requires it to apply to a branch of a company incorporated in another EU member state.
From a UK perspective, the notice points out that EU law on disclosure, incorporation, capital maintenance and other matters will no longer apply to the UK. However, as we have discussed in previous bulletins, most of the law governing companies in the UK, while incorporating EU company law minimum harmonisation directives, has remained a matter of domestic law contained mainly in the Companies Act 2006 and the secondary legislation made under that Act. That legislation will remain the cornerstone of UK corporate legislation. The extent to which divergence between UK corporate law and corporate law in EU member states may occur over time will, of course, depend on multiple political and other factors.
The notice also reflects that those EU company law regimes that depend on reciprocity and mutual recognition between EU member states will, absent special arrangements, no longer be available in the UK or to UK companies. This affects the cross-border merger regime and the Societas Europaea (European public company).
Notice to Stakeholders: withdrawal of the United Kingdom and EU rules on company law
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