“Centros” and Defensive Regulatory Competition in the European Union


Professor Martin Gelter examines the 1999 “Centros” decision by the European Court of Justice and how it has affected the discourse of company law.

Centros, a landmark 1999 decision by the European Court of Justice (now Court of Justice of the European Union or CJEU), has profoundly transformed European company law. Previouslymany EU member states used the “real seat theory” to hinder regulatory arbitrage. Under this theory, a company had to incorporate pursuant to the procedures of the jurisdiction where its administrative center was located. For example, for a firm with its headquarters in Germany to acquire full legal status in the eyes of German courts, it had to be formed under German law. The theory was not aimed at protecting creditors or shareholders but rather a country’s authority to determine the law of businesses operating within its borders. The real seat theory compelled founders to select the law of the real seat jurisdiction, thus protecting that jurisdiction from competition.

All of this changed after Centros.

While so far failing to prompt regulatory competition among jurisdictions for publicly traded companies, Centros and its progeny have had at least two consequences. First, the discourse about EU company law and national corporate law systems has become more international. While the CJEU case law was not the only factor in this development, it likely contributed. Second, some member states have adjusted their laws to mitigate the effects of Centros. In a recent article in the European Business Organization Law Review, I explore “defensive regulatory competition,” the attempt by certain member states to stop the flow of incorporations to other member states by modifying the law.

All of this raises a number of empirical research questions, and my article looks at some of them.

Read the full article.


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