ABSTRACT

As globalisation and digitalisation continue to expand, corporations regularly operate in different jurisdictions, which highlights the overlap of corporate law and Private International Law (PIL). This paper considers the significant topics of corporations’ existence, regulations and transnational activities from a PIL perspective. We examine how different legal systems determine what law applies to a corporation; how they accept a corporation’s legal personality and apply jurisdictional considerations to foreign corporations; and the applications of normative and restrictive rules that those situations can create for active corporations. The article considers relevant theoretical conceptions, including incorporation theory and the real seat theory, which productively and theoretically relate to a corporation’s ability to determine its governing law. The differences between common law and civil law approaches to corporate law create different practices, which produce unpredictability in regulatory enforcement, implications for shareholder rights, and consequences for multiple regimes of liability

This article explores additional contemporary challenges, including regulatory arbitrage, cross-border insolvency, and the legal status of digital companies. Subsequent passages of the article highlight some of the limitations of traditional PIL regimes to govern multinationals and propose recommendations to achieve better legal certainty and fairness within cross-border commercial regulation.

Ultimately, the article argues for greater harmonisation of the rules of PIL regulating corporations through international conventions, model laws, and judicial cooperation to enable smoother cross-border commerce and provide a certain level of adequate legal protection and accountability.

KEYWORDS: Corporation, Real Seat theory, Incorporation Theory, challenges.

INTRODUCTION

Private International Law is the field of law regulating cases with multiple jurisdictions and the interaction of legal systems. It is rules applicable in situations where a person, business, or entity from one country is connected to a legal issue that spills over into, and thus becomes real international, a second country.

The basic building blocks of PIL are jurisdiction, choice of law, and recognition and enforcement. Jurisdiction operates as a gateway question: Does this court have authority to consider this dispute? Choice of law refers to identifying what weight of legal order is correct for resolving the underlying dispute, if any weight is to be assigned. Finally, recognition and enforcement identify to what extent, and in what form, the foreign court is accepted and enforced by the home legal order. These three building blocks become particularly salient in corporate disputes where one entity or corporation is incorporated in one jurisdiction, and operates only in another, and there are shareholders or other stakeholders that operate from multiple national entities.

THE CONCEPT AND LEGAL PERSONALITY OF CORPORATIONS

Definition and Characteristics of Corporations:

A corporation is a separate legal entity from its shareholders that has rights and responsibilities of its own. The defining features of corporations when compared to sole proprietorships and partnerships are limited liability, perpetual succession, and centralised management. Corporations are legally independent from their shareholders, which simplifies the process of conducting business and making significant investments on a large scale. Corporations create legal personalities to accommodate members of the corporation through their shareholder status.[1]

The Recognition of Corporate Personality in Different Jurisdictions:

Private International Law acknowledges the legal personality of corporations in a later context. States typically recognise foreign corporations as incorporated or incorporated by other states that permit the foreign corporation to conduct business under the jurisdiction, in other words, states that permit a foreign corporation to conduct business in the territory of that state. Recognition of a foreign corporation or its legal personality is not absolute and can be controlled by domestic law and public policy considerations. In the case of Barcelona Traction[2], the International Court of Justice ruled that under international law, a state can only espouse the claim of a corporation if it is a national of that state. In coming to this decision, the Court observed that the nationality of a corporation is determined by the state of incorporation.

CONNECTING FACTORS IN PRIVATE INTERNATIONAL LAW FOR CORPORATIONS

INCORPORATION THEORY

Incorporation theory posits that a corporation’s legal identity and applicable corporate law are fixed by the location of incorporation or registration–it is not dependent on where a corporation conducts business.

Incorporation theory has the following distinguishing features:

• Legal Certainty:  Corporations can operate with a level of predictability in their legal transactions because the governing law does not change, even if the corporation is operating in more than one jurisdiction.
• Flexibility: A corporation can make the strategic decision to incorporate in jurisdictions that have favourable corporate laws, which allows for strategic planning.
• Corporate Mobility: Corporations can relocate their business, but their legal identity and associated obligations remain tied to the initial jurisdiction of incorporation without the need to re-incorporate.

Jurisdictions that follow this theory:

• United States: Companies tend to incorporate in states with the best corporate statutes, and Delaware is the most popular state under this theory.
• United Kingdom: The United Kingdom operates under the incorporation theory, allowing companies to incorporate in the United Kingdom and benefit from the legal corporate framework in the UK while they carry out their business in a separate jurisdiction.

Benefits:

• Facilitates businesses doing so across borders.
• Gives predictability and certainty to businesses.[3]

Concerns:

May cause “forum shopping,” as companies may select jurisdictions with more relaxed regulations, potentially undermining stricter domestic regulations. ​

REAL SEAT THEORY

Real Seat Theory states that a corporation is legally regulated by the jurisdiction in which its central management and control, or main place of business, is located, regardless of where the corporation is incorporated.

Key components:

• Substance over form: The focus on the actual location of management and operations, rather than place of incorporation.
• Regulatory consistency: Companies operating in that jurisdiction are subject to the corporate laws of that jurisdiction, encouraging predictability in regulation.
• Jurisdictions operating on this theory: Germany and France have historically operated under this theory, subjecting companies with their real seat of business in their territory to their domestic corporate laws.

  Belgium used to operate similarly, though more recently has contemplated switching to the incorporation theory with a focus on corporate mobility.

Benefits:

• Prevent regulatory arbitrage because it obligates enterprises to only act under the laws of the state in which they are organised.
• Protect all stakeholders, including employees and creditors, and use the same law and policies that the parties have expectations of in their dealings.

Critiques:

• This may impede cross-border transactions by requiring reincorporation as part of the transfer of the location of central administration.
• This may run counter to the freedom of establishment principle, especially in the EU.

Hybrid Models in Jurisdictions:

• France: France has historically followed a Real Seat Theory. However, there has been debate and a proposal to abolish the Incorporation Theory. The French Presidential Committee on the Future of the Company issued a report that recommended that France introduce the incorporation theory. The rationale was that it would give investors legal certainty around the legal regimes underpinning the companies that operate primarily in France, thereby encouraging foreign investment in France. Such a change would represent a significant shift for France to operate with jurisdictions that apply the place of incorporation theory.[4]
• Belgium: Belgium has historically followed the Real Seat Theory. There have even been a number of reforms that have considered a hybrid approach to employment elements of the incorporation theory. For example, before the shift to the statutory seat theory, a company with a real seat in Belgium that was incorporated pursuant to Dutch law was considered a dual national. That entity with a real seat in Belgium was only da dual national until the authorities shifted to the statutory seat theory unless its statutory seat was in Belgium.

INTERNATIONAL CONVENTIONS:

Private International Law outlines how to resolve disputes with an extraterritorial element—namely, multi-national businesses or companies operating across national borders. To help states provide a degree of legal certainty, predictability and fairness about businesses that would fall into this category, a number of international conventions and model laws have been created, which attempt to address some consistency in the areas of jurisdiction, choice of law, insolvent companies and enforcement of foreign judgments.

1. The Hague Conference on Private International Law

The Hague Conference on Private International Law (HCCH) has created some significant instruments to try and harmonise Private International Law in a set of jurisdictions. Most of the conventions created have been in the context of family law or civil procedure; however, there are a few conventions that could have significance in the context of corporate issues.[5]

2. New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)

The New York Convention is one of the most critical tools for businesses participating in cross-border commercial transactions, as it provides a legal basis to recognise and enforce arbitral awards from foreign jurisdictions in over 170 countries. As a global instrument, it provides a uniform legal framework that has become so widely used as to be the almost exclusive legal framework for international commercial arbitration. Arbitration is popular with businesses for many reasons, including confidentiality, neutrality, and enforcement under the New York Convention.

The Convention dramatically lessens the chasm of legal uncertainty that multinational corporations face when choosing to go the route of international arbitration.[6]

3. UNCITRAL Model Law on Cross-Border Insolvency (1997):

• Offers a legal framework for dealing with insolvency matters across borders and, in particula,r provides the opportunity for cross-border judicial cooperation. The model law is a valuable resource for companies with assets and creditor relationships in multiple jurisdictions.
• It is an alternate means of facilitating cooperation, treating creditors fairly and equally, and administering insolvency effectively and efficiently.
• Has been adopted by many jurisdictions, including the USA, the United Kingdom and to a degree India.[7]

4. ICSID Convention (1965):

Insurance for corporate investment. The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) was established for the resolution of investment disputes between foreign investors (typically corporations) and the host state.

ICSID arbitration provides corporations with a neutral forum for mediation of their foreign direct investments. The convention avoids bias of the host states and provides some assurance to the investor in terms of promoting the investor’s confidence to invest.[8]

5. Regional Instruments: The Brussels I Recast Regulation (2012)

Corporate private international law within the European Union is very much in the realm of regional instruments, and in this case, the Brussels I Recast Regulation. The regulation provides a harmonised way of determining jurisdiction and recognising judgments for civil and commercial matters for member states of the EU. This is important when corporate entities are doing business in the EU.[9]

CHALLENGES ABOUT THIS MATTER:

Choosing the Friendliest Law – Forum Shopping and Regulatory Arbitrage

Many corporations will choose countries where the laws are easier or cheaper to register, even if they never do business there, for instance. While regulatory arbitrage or forum shopping is essentially legal, it can create some unfair advantage and challenge the ability of countries to enforce their laws.

A particularly famous example is the Centros case. The company was registered in the UK but operated entirely in Denmark to avoid more stringent regulations there. The court held that Denmark had to recognise the company because it complied with EU law. stricter regulations there. The courts held that Denmark had to recognise the company because it complied with EU law.

The Age of Online and Digital Companies

Many companies, especially in the age of the internet and blockchain, are only online and 100% digital. Many of these companies do not even have a physical address or an office, and they are sometimes referred to as a virtual corporation, or a DAO (Decentralised Autonomous Organisation).

Trouble arises due to rules and legislation that depend on the address or place of registration of a company to determine which country’s laws apply. But how does one apply laws to a digital company that may not have a physical address? These rules confuse the courts.

Varying Rules in Each Country:

The first major challenge is that each country has differing rules with respect to corporations. Some countries follow the incorporation theory, which means that we can recognise a corporation simply on the basis that it is incorporated in another country. Other countries subscribe to the real seat theory and analysis, where a corporation ‘lives’ operationally.

There is no coherent and comprehensive international framework, and therefore, businesses have no idea what to expect when doing business in the rest of the world. There are a number of treaties, such as the Hague Convention on Company Recognition, that exist to facilitate such information flow, but very few countries ratify them.

Conclusion

In the regulation of corporations within Private International law, we are confronted with a broad diversity of legal theories, jurisdictional principles, and transnational cooperation. To begin with, the existence of opposing theories, such as the incorporation theory and the real seat theory, evidences a lack of a globally accepted connecting factor to identify the law applicable to a corporation. The incorporation theory seeks predictability and mobility in the corporation, while the real seat theory seeks regulation that reflects real effect and economic realities. The opposition between these theories often gives rise to forum shopping, legal uncertainty and compliance burdens for transnational corporations.

Furthermore, the issue of recognition and enforcement of foreign corporations and foreign judgments often remains unresolved. Although correct steps have been made towards harmonisation, through international frameworks such as some Hague Conventions and UNCITRAL model laws, gaps in jurisdictions remain, especially in the areas of digital corporations, piercing the corporate veil and corporate group liability. The absence of commonality means they lack certainty in law and present risks for investors, creditors and regulators.

In conclusion, while culturally specific considerations should influence or give way to sovereignty and national interest, legally, the development of Private International Law under the corporate umbrella must enhance legal certainty, fairness, and the global good.

 [1]Julia Kagan, Corporation, Investopedia, https://www.investopedia.com/terms/c/corporation.asp.

[2]Barcelona Traction (Belg. v. Spain), 1970 I.C.J. 3 (Judgment of Feb. 5)

[3]http://smucker.house.gov/media/press-releases/smucker-reintroduces-main-street-tax-certainty-act

[4]Ready? French Committee Proposes to Abandon Real Seat as a Connecting Factor in Company Law, EAPIL, https://eapil.org/2021/06/22/ready-french-committee-proposes-to-abandon-real-seat-as-a-connecting-factor-in-company-law/#:~:text=Proposed%20Reform,reference%20to%20the%20real%20seat.

[5]Hague Convention on the Recognition and Enforcement of Foreign Judgements in Civil or Commercial Matters, HCCH, https://www.hcch.net/en/instruments/conventions/full-text/?cid=137.

[6]Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 38

[7]UNCITRAL Model Law on Cross-Border Insolvency, United Nations, https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency

[8]Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention), https://icsid.worldbank.org/sites/default/files/ICSID%20Convention%20English.pdf.

[9]Commission Proposal for a Regulation on the Statute for a European Private Company, COM (2012) 341 final, https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2012:0341:FIN:EN:PDF