Freedom of Reincorporation and the Scope of Corporate Law in the U.S. and the E.U.

In the U.S. corporations can be incorporated in any of the 50 states and can “reincorporate” afterwards in another state. In the E.U., by contrast, such freedoms are a much more recent achievement: In the last decade, first the European Court of Justice has liberalized initial incorporations and only in 2005 the cross-border directive has open the doors to freedom of midstream reincorporation from one member state to another. Midstream reincorporations, however, in the E.U. have a much different impact than on the other side of the Atlantic. In the U.S., indeed, the competence of the state where a company is incorporated is limited: on the one hand, it is restricted by federal laws and, on the other hand it regulates only the “internal affairs” of corporate activities. By contrast, in the European Union, the agency relations between shareholders and board are bundled with the agency problem between shareholders and creditors, all being part of "corporate law" and in the exclusive competence of the member state of incorporation. Consequently, in the U.S. reincorporations are a relatively easy task, since they shift only rules that address the shareholders - board relation, while creditors and other stakeholders are not affected. By contrast, in the E.U., any change of the applicable corporate law risks to jeopardize also creditors. Adjusting creditors will discount this risk from the credit rate or will protect themselves through specific covenant, but not-sophisticated creditors will bear entirely the risk of opportunistic reincorporations. For this reason, many E.U. member states provide mechanisms for creditors’ protection in case of reincorporation, often by requiring the debtor to give a security or to pay the debts that are not yet due. These mechanisms are necessary to avoid negative externalities in "multi-stakeholder" corporate laws, yet they make reincorporations more expensive and will impede a certain number of efficient transactions.