Edil Work 2: the ECJ confirms its settled case law on the impact of the freedom of establishment in the EU on the Member States’ corporate conflict of laws (J. Meeusen)

Edil Work 2: the ECJ confirms its settled case law on the impact of the freedom of establishment in the EU on the Member States’ corporate conflict of laws

Johan Meeusen
University of Antwerp

At its meeting in Milan in 2016, GEDIP adopted ‘Draft rules on the law applicable to companies’, which were meant to inspire the EU legislature when it would adopt a new ‘Rome regulation’ holding corporate choice-of-law rules. Although the EU has achieved important results in the field of company law since -in particular through the adoption of Directive 2019/2121 on cross-border conversions, mergers and divisions and Directive 2024/1760 on corporate sustainability due diligence- a regulation harmonizing the Member States’ rules on the law applicable to companies, the so-called lex societatis, is still lacking. As a result, the 27 Member States still hold widely diverging choice-of-law rules in that respect. As is well known, the real seat theory and the incorporation theory are the Member States’ main approaches for determining the lex societatis. The more flexible and market-friendly incorporation theory is on the rise, however, which is to a large extent due to the impact of EU law and the requirements of corporate mobility in the internal market.

Pursuant to Article 49 TFEU, the nationals of the Member States enjoy the right of establishment within the Union. According to Article 54 TFEU companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union must be treated in the same way as natural persons who are nationals of Member States.

Since the mid-eighties, the European Court of Justice (ECJ) has adopted a series of judgments which have clarified the impact of the Treaty rules on freedom of establishment on the Member States’ corporate conflict of laws (cf. J. Meeusen, “Companies” in P. Beaumont and J. Holliday (eds.), A Guide to Global Private International Law, London, Bloomsbury, 2022, 224-227). Its judgment in Edil Work 2 (ECJ 25 April 2025, case C-276/22, Edil Work 2 Srl and S.T. Srl/STE Sàrl) constitutes the most recent addition to this long line of case law and will be briefly discussed hereafter.

The case arose from a preliminary ruling requested by Italy’s Supreme Court of Cassation (Corte suprema di cassazione) in proceedings between several companies on the lawfulness of the transfer of ownership of a castle located in Italy. It was the only property of Agricola Torcrescenza Srl, a company whose business was the management of the castle. In 2004, that company first changed its name to STA Srl and then transferred its registered office to Luxembourg, where it was converted into a Luxembourg company, STE Sàrl, while continuing to operate the castle. In 2010, S.B. was appointed as sole director at an extraordinary general meeting of STE in Luxembourg. S.B. appointed F.F., who was neither a shareholder nor a member of the board of directors of STE, as general agent with the power to perform all necessary acts and operations within the scope of the company’s objects. In 2012, F.F., acting in the name and on behalf of STE, transferred ownership of the castle to S.T., which subsequently transferred it to Edil Work 2. In 2013, STE brought an action against S.T. and Edil Work 2 before the District Court in Rome, seeking annulment of the two transfers of the castle’s ownership on the ground that the conferral of powers at issue was unlawful under Italian law. This court ruled that the allocation of jurisdiction was lawful, but its judgment was subsequently reversed by the Court of Appeal in Rome. Edil Work 2 and S.T. then brought an appeal before the Supreme Court of Cassation, which referred a preliminary question to the ECJ.

According to Italian private international law – as laid down in Article 25, paragraph 1, of the Italian Law No 218 on the reform of the Italian system of private international law of 31 May 1995 (‘Law No 218/1995’) – companies shall be governed by the law of the State in which they are incorporated, but Italian law is nevertheless applicable if the seat of the administration or their principal object is located in Italy. According to Article 25, paragraph 2, of the same law, the lex societatis governs, inter alia, the powers of the company’s bodies as well as its representation. Paragraph 3 of this provision stipulates that a transfer of the company’s registered office to another State shall only have effect if it is carried out in accordance with its law. Further, Article 2381, second paragraph, of the Italian Civil Code stipulates that if the statutes or the general meeting allow it, the board of directors may delegate its powers to an executive committee made up of some of its members, or to one or more of its members.

Crucial for the resolution of the case, according to the Italian Supreme Court of Cassation, was therefore whether the incorporation of STE as a Luxembourg company implied that the management acts of this company, which maintained its principal place of business -the castle- in Italy, were subject to Luxembourg law or not. Under Italian law, the delegation of powers to a third party outside the company, as had occurred in this case, was indeed unlawful, resulting in the two subsequent transfers of ownership also being invalid. Under Luxembourg law, on the other hand, no such restriction applied and the delegation of powers to F.F. and the two transfers of ownership were valid.

In light of this, the Court examined whether Articles 49 and 54 TFEU preclude legislation of a Member State which provides generally for its national law to apply to the acts of management of a company established in another Member State but carrying on the main part of its activities in the first Member State.

Advocate General (AG) Medina gave a positive answer to that question in her Opinion. In its judgment of 25 April 2025, the Court was critical as well of the Italian legislation and decided that Articles 49 and 54 TFEU indeed preclude such choice-of-law regime.

The Court examines successively the scope of the freedom of establishment, the existence of a restriction on that freedom and its possible justification.
Firstly, the Court points out that STE was incorporated in 2004 as a Luxembourg company, has its registered office in Luxembourg and carries on the main part of its activities in Italy. Hence, its situation, and in particular the management acts which it adopts in respect of the activities which it carries out in Italy, are covered by the freedom of establishment (points 22-28).
Secondly, there is a restriction on the freedom of establishment, as a company in STE’s situation could be subject, cumulatively, both to Luxembourg and to Italian law, which may render the management of that company more difficult (points 29-34).
Thirdly, due to non-compliance with the proportionality requirement, such restriction cannot be justified by the objective of protecting the interests of creditors, staff and minority shareholders, nor by the objective of combating abuse (points 35-49).
The Court therefore concludes that Articles 49 and 54 TFEU preclude legislation of a Member State which provides generally for its national law to apply to the acts of management of a company established in another Member State but carrying on the main part of its activities in the first Member State (point 50).

The Italian corporate choice-of-law regime, as it is laid down in Article 25 of Law No 218/1995, rests on a rather peculiar compromise between a multilateral application of the incorporation theory and a unilateral application of the real seat theory in favor of Italian law. While the case law of the Court of Justice to a certain extent stimulates Member States to adopt the incorporation theory, as it better fits corporate mobility in the Union’s internal market, the ECJ has not gone so far as to declare the real seat theory incompatible with EU law and its provisions on the freedom of establishment more specifically. Quite to the contrary, the ECJ once again confirms in Edil Work 2 that, in the absence of harmonization of EU law, the determination of the lex societatis falls within the powers of the Member States and that Article 54 TFEU places the registered office, the central administration and the principal place of business of the company on the same footing as connecting factors (point 26). Neither the real seat theory nor the incorporation theory are inherently incompatible with Union law, and both may therefore still be followed by the Member States for the determination of the lex societatis. Nevertheless, the concrete application of such a choice-of-law rule may be problematic from an internal market perspective in certain circumstances, which actually is the case for the dual Italian choice-of-law rule.

In her Opinion, AG Medina rightly distinguished between the issue of “emigration”, which was at stake in Daily Mail (ECJ 27 September 1988, 81/87), and that of restrictions imposed on companies that are incorporated in one Member State but wish to carry out economic activities in another Member State, as this was examined e.g. in Überseering (ECJ 5 November 2002, C-208/00) and Inspire Art (ECJ 30 September 2003, C-167/01). The latter issue was also addressed in Edil Work 2, with Luxembourg as the Member State of origin and Italy as the Member State where the company in question carries out its economic activities. In this case, there was therefore a prohibited, obstructive “double burden” as a result of the application of Italian company law to a company validly incorporated under Luxembourg law and governed by Luxembourg law (notwithstanding the doubts one may have on the correct interpretation by the Italian courts of Luxemburg corporate conflict of laws, which indeed applies the real seat theory…).

The ECJ’s judgment in Edil Work 2 reaffirms the obligation of mutual recognition, which it had already applied more than two decades earlier in Centros (ECJ 9 March 1999, Case C-212/97), Überseering and Inspire Art, in order to enable the exercise of the freedom of establishment in the host Member State by a company which has been incorporated in accordance with the legislation of another, home Member State and still has its registered office there. In principle, nothing prevents Italy from imposing its legislation as lex societatis on all companies with the seat of administration or principal object in Italy… as long as it concerns companies incorporated under Italian law. Companies which have been incorporated in another Member State in accordance with its private international law regime and which exercise their freedom of establishment must, on the other hand, be recognized in the Italian legal order regardless of their connection to Italy and the Italian corporate choice-of-law rules. This would only be different if Italy could justify the application of its own law by overriding reasons in the public interest. Due to the proportionality requirement, the justification grounds discussed in Edil Work 2 did not qualify for such purpose.