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The Regulation and Recognition of Foreign Corporations: Responses to the “Delaware Syndrome”

Published online by Cambridge University Press:  09 November 2009

Robert R. Drury
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Extract

It is beyond dispute now that corporations have replaced states as the most important makers of waves in the world's economy. It is also firmly established that with the increasing globalisation of that economy corporations operate in many cases far beyond the borders of the country that presided over their birth. A company which crosses frontiers to operate outside its original jurisdiction can bring problems of several different kinds in its wake. A court dealing with such a company may have to ascertain which law is, or should be, the law which regulates its affairs. The company may have internal disorders or may be experiencing difficulties in its external relationships. In seeking to grapple with these problems the jurisdictions of the world are broadly divided into two camps. There are those which look to the law of the place of the company's incorporation to govern these matters, and those which look to the law of the place of the central administration of the company as being the correct law to be supreme in this field. Some jurisdictions take a variety of half-way positions in this debate.

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The Cambridge Law Journal , Volume 57 , Issue 1 , March 1998 , pp. 165 - 194
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Copyright © Cambridge Law Journal and Contributors 1998

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References

1 See Latty, E.R., “Pseudo-Foreign Corporations” (1955) 65 Yale L.J. 137.CrossRefGoogle Scholar

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3 Rabel, Ernst, The Conflict of Laws A Comparative Study, 2nd. ed. (1960), Vol. II p. 3Google Scholar

4 Consider the criteria used initially by the British Government when it wanted to protect its nationals from “quota hopping” by Spanish owned British registered fishing vessels. It redefined eligibility to register as a British fishing vessel in the Merchant Shipping Act 1988 in terms of the vessel needing to be British owned, a concept which referred to the legal and beneficial ownership of vessels being vested in “qualified persons or companies”. Qualified companies for this purpose were defined as those which were incorporated in the United Kingdom, had their principal place of business there, had a defined percentage of their shares legally and beneficially owned by “qualified persons” and had such “qualified persons” as a defined percentage of its directors. “Qualified persons” were in turn defined as British citizens resident and domiciled in the United Kingdom. This legislation used quite a number of connecting factors in a cumulative way, but was held to fall foul of Articles 52 and 221 of the Treaty of Rome in the Factortame decision. See R. v. Secretary of State for Transport ex parte Factortame Ltd. (No. 2) (Case C–213/89) [1991] 1 A.C. 603.

5 It is interesting to note that Swiss law has recently adopted the place designated in the articles or contract of association as the test for determining the seat, and hence the domicile, of a company in its private international law (see below).

6 This may not always be such an easy matter where, for example, two states lay claim to the same territory, or where there are both de facto and de jure authorities competing for international recognition. For an explanation of the way in which some of these problems are resolved under UK law see the Foreign Corporations Act 1991 and the comments in Dicey, and Morris, , The Conflict of Laws, 12th ed. by Collins, L. (1993), at pp. 1109–1110.Google Scholar

7 Op. cit., at p. 1107.

8 Ibid., at p. 1111.

9 Ibid., at p. 1112.

10 See the cases cited ibid., at p. 1113.

11 For example, in the case of Russian Reinsurance Co. v. Stoddard, 240 NY. 149, 147 N.E. 703 (1925) the Court of Appeals stated, “If the existence of the [foreign] corporation, its capacity to sue, or the authority of its directors to represent it or to bring the action is challenged, we look to the charter and the law of its corporate domicile for the data upon which we may rest our determination of such questions.”

12 The Restatement (Second), Conflict of Laws, § 301 (1971) provides: “The rights and liabilities of a corporation with respect to a third person that arise from a corporate act of a sort that can likewise be done by an individual are determined by the same choice-of-law principles as are applicable to non-corporate parties.”

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14 Op. cit., at p. 1122.

15 The Restatement (Second), Conflict of Laws, § 302 (1971) provides: “(1) issues involving the rights and liabilities of a corporation, other than those dealt with in § 301, are determined by the local law of the state which, with respect to the particular issue, has the most significant relationship to the occurrence and the parties … (2) The local law of the state of incorporation will be applied to determine such issues, except in the unusual case where, with respect to the particular issue, some other state has a more significant relationship to the occurrence and the parties, in which event the local law of the other state will be applied.”

16 Op. cit., at p. 1125.

17 See for example the case of Hausman v. Buckley, 299 F.2d 696, 93 A.L.R. 2d 1340 (2d Cir.), cert, denied, 369 (US) 885 (1962) concerning a Venezuelan corporation.

18 Western Airlines Inc. v. Sobieski, 191 Cal.App. 2d 399, 12 Cal.Rptr. 719 (1961). See also Weede v. Bechtel, 239 Iowa 1298, 31 N.W. 2d 853, 8 A.L.R. 2d 1162 cert, denied 337 U.S. 918 (1948).

19 Leflar, R., American Conflicts Law, 3rd ed. (1977) at p. 512Google Scholar, see also Latty, “Pseudo Foreign Corporations” (op. cit. n. 1 above), and the case of Mansfield Hardwood Lbr. Co. v. Johnson, 268 F.2d 317 (5th Cir.), cert, denied. 361 U.S. 885, 926 (1959).

20 Op. cit. n. 13 above, at p. 1144.

21 The author is indebted to Mark Farrell, a lawyer working with the legal department of ABB, for this information on Swiss law.

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26 Vischer III op. cit. p. 1346—translation by Mark Farrell (see n. 21 above).

27 Bundesgericht, 17 December 1991, BGE, II, 7, 494 et seq.

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33 Wulf-Henning Roth in his contribution to Current Issues of Cross-Border Establishment of Companies in the European Union at p. 32, referring to the decision reported at BGH, 21 March 1986, BGHZ, 97, 269, 272.

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50 See Rb. Amsterdam, 6 April 1982, WPNR 5765, p. 817. The matter may also be affected by the application of the doctrine of “fraus legis”. However, in a later case before the Dutch Supreme Court, 11 November 1988, NJ, 1989, 606, known as the Texelse Visser case, the court showed itself to be unwilling to subject foreign companies to the provisions of Book II of the Dutch Civil Code which require Dutch companies to register, on pain of the joint and several liability of their directors.

51 There are reputed to be some 6,000 of such companies according to Prof. L. Timmerman (University of Groeningen).

52 See section IV D below.

53 Pasicrisie 1849.1.221.

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57 [1897] A.C. 22, House of Lords.

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66 See for example Coffee, John, “The Future of Corporate Federalism: State Competition and the New Trend Toward De Facto Federal Minimum Standards” (1987) 8 Cardozo L.Rev. 759.Google Scholar

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70 Ibid.

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75 Ibid., at FL(AG)-2(iii) where publicity for the formation of a domiciliary enterprise is not published in the official journals as ordinary public companies (AG) are, but is instead posted as a notice on the announcement board of the court (Personen- und Gesellschaftsrecht art. 955).

76 Sealy, L.S., Xuereb, P.G., Drury, R.R., Emmanuel, C.R., Gray, S.J., Murphy, C. and Smith, D. (eds.), International Corporate Procedures (Jordans, loose-leaf), entry for Leichtenstein IV A 1.Google Scholar

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81 128 N.Y. 205, 28 N.E. 645 (1891).

82 Latty, , op. cit., at p. 150.Google Scholar

83 Cleaton v. Emery, 49 Mo.App. 345 (K.C.Ct.App. 1892).

84 Latty, op. cit., at p. 140.Google Scholar

85 Ibid., at p. 141.

86 Carney, William in Current Issues of Cross Border Establishment of Companies in the European Union, at p. 256.Google Scholar

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88 Ibid., at p. 205.

89 Latty, op. cit., at pp. 156–158.Google Scholar

90 Latty, op. cit., at p. 154.Google Scholar He cites as an example the case of State ex rel. Weede v. Iowa Southern Utilities Co. of Delaware, Iowa 784, 2 N.W. 2d 372 where a local Iowa statute that made certain provisions of Iowa corporations law applicable to foreign public utility corporations was applied to a Delaware corporation with utility properties solely in Iowa by a court which emphasised the essentially local character of the corporation.

91 See for example the provisions of ss. 406–114 of the Companies Act 1948, and later those of Part XXIII Companies Act 1985. The registration process included the provision of copies of the constitution of the company, a list of directors and secretary and the names of one or more persons resident in Great Britain authorised to accept service of process and notices. Names used by overseas companies are regulated, and they are required to register copies of their balance sheet and profit and loss accounts.

92 87/666/EC implemented in the UK by the Oversea Companies and Credit and Financial Institutions (Branch Disclosure) Regulations 1992.

93 The provisions governing the registration of accounts are now slightly less rigorous than formerly, because accounts which under the law of the place of incorporation are required to be prepared, audited and disclosed are now acceptable in the UK.

94 See for example the decision of the Bundesgericht, 7 October 1982, BGE, 108, II, 318 et seq.

95 Swiss Private International Law Statute Art. 154. See Samuel, A., “The New Swiss Private International Law Act”, (1988) I.C.L.Q. 681.CrossRefGoogle Scholar

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97 Ibid.

98 Case 79/85 Segers v. Bedrijfsvereging voor Bank-en Vezekeringswezen, Groothandel en Vrije Beroepen [1986] ECR 2375.

99 Rammeloo, S. in Current Issues of Cross Border Establishment of Companies in the European Union, at p. 56.Google Scholar

100 Ibid., at p. 59.

101 Ibid., at p. 56. These rules include registration, certification of compliance with Dutch minimum capital rules and submission of annual accounts and audit rules. These latter provisions though do not apply to companies governed by the law of an EU state.

102 Ibid. at pp. 60–61. These rules will relate in a similar fashion to registration, publicity, minimum capital and disclosure of accounts.