Two Rival Theories On The Personal Law Of Judicial Persons And China's Choice

The area of personal law of judicial persons has long been the battlefield of two rival theories.The Anglo-American conflict of laws adheres to the incorporation theory,which argues that the personal law of judicial persons should be the law of the place of incorporation.Conflict of laws of French,German and some other civil law countries opt for the real seat theory,which contends that the personal law of judicial persons should be the law of the place of real seat.The term "real seat" is commonly construed as referring to the place where the judicial person's central management and control is located.The dispute between the incorporation theory and the real seat theory is insignificant when the place of incorporation and the place of real seat of judicial persons locate at the same jurisdiction.But with the development of transnational transactions,judicial persons may change their real seats away from their places of incorporation frequently.Investors always have a strong motivation to establish corporations in the states with the most lenient corporate law and the least tax burdens.The "true conflict" between the incorporation theory and real seat theory then comes into existence while the place of incorporation and the place of real seat of judicial persons lie in different jurisdictions.Article 14 of the Act of Application of Law to Foreign-related Civil Relations provides that the law of the place of registration shall apply to such issues as the civil rights capacities,civil acts capacities,organizational institutions,rights and obligations of shareholders,etc.of a judicial person and its branches.Article 14 seems to have adopted the incorporation theory.However,it is worthy of noting that section 2 of Article 14 stipulates that the law of the principal place of business may apply if the principal place of business is different from the place of registration.In fact,legislators have been reluctant to solve the "true conflict" between the two theories.Instead,the legislation leaves discretion for court to make a choice of law.As illustrated by this thesis,in judicial practice,the courts choose the law of the principal place of business when the principal place of business is different from the place of incorporation.It is highly doubtful whether China has actually adopted the real seat theory.The reluctance of legislators to provide detailed rules can be explained by the lack of theoretical research in China.Courts seem to also be bewildered without theoretical support.Therefore,comprehensive analysis of the two theories of personal law of judicial persons is indispensable to a proper examination on China's choice.Some suggestions for legislative further refinement can also be put.Chapter ? examines the general arguments of the two theories in order to identify their common features and differences.Both theories recognize the practical utility of certainty,uniformity and continuity,but they select different connecting factor for the personal law of judicial persons.The real seat theory recognizes that only the jurisdiction with the most significant relationship with the matters in question provides the governing law,that is,the jurisdiction where the judicial person's real seat is located.The circumvention of domestic law can also be prevented by mandating the incorporation or re-incorporation of judicial persons in their places of real seat.The incorporation theory conceives of the investors' act of incorporation as an implicit contractual choice of law which should be respected by the courts.Such important choice-of-law factors as certainty,predictability,uniformity of result and ease in the application of the law are also compelling functional justifications for the incorporation theory.Besides,this chapter also demonstrates the decline of the real seat theory in Europe.In a series of judgments from 1999 to 2003,the European Court of Justice rules that articles 43 and 48 of the EC Treaty,properly construed,mandate that the legal capacity of a judicial person be determined,and its internal affairs be governed,by the law of the place of incorporation rather than the place in which the judicial person has its real seat.Chapter ? explores the origins of the differences between the two theories and the reason of decline of the real seat theory in Europe.With the historical analysis and the demand of the method of policy analysis,when choosing the connecting factors for the personal law of judicial persons,the legislator or the court should consider the policy of its corporate law and the character of relevant rules.Corporate law is,by and large,private law in which provisions are not in principle mandatory by nature.The real seat theory's denial of investors'freedom in selecting the governing law of their corporations'internal affairs contradicts the enabling character of most provisions of corporate law.This fatal defect leads to the decline of the real seat theory in Europe.The relative merit of the incorporation theory is its tacit recognition,generally,the investors' choice of law by incorporating in a specific state.Chapter ? demonstrates the essential defect of incorporation theory,namely the fact that it may result in the application of a law with which the corporation has in fact no genuine connection other than the act of its incorporation.A corporation is regarded as a "pseudo-foreign corporation" if it has little contact with the place of incorporation other than the act of incorporation,when instead its center of management and activities lie elsewhere.Corporations always affect so many stakeholders,and even the most "internal" rule has implications for these stakeholders.With the consideration of the effective protections offered by mandatory rules in the corporate law of the principal place of business or the state with the most significant relationship with the internal affairs,the jurisdictions which have adopted the incorporation theory usually recognize an exception to the theory of incorporation and adhere to the doctrine of "pseudo-foreign corporations",which allows the direct imposition of mandatory rules of corporate law other than the law of incorporation to the "pseudo-foreign corporations".This chapter enumerates and makes comparative analysis on different patterns of the "pseudo-foreign corporations" legislations adopted by California,New York,Restatement(Second)of Conflict of Laws(1971)and some EU member states.Chapter ? evaluates China's choice on the personal law of judicial persons and the specific provisions.China has adopted the incorporation theory as the main method to determine the personal law of a judicial person.Article 14 of the Act of Application of Law to Foreign-related Civil Relations provides that internal affairs of juridical persons should be governed by the law of the place of registration,but the law of the principal place of business may apply if the principal place of business is different from the place of registration.While authorizing courts to select the law of the place of incorporation or the law of the principal place of business in the specific circumstance,Article 14 is too vague to provide clear guidance for courts.Without defining the term "principal place of business",this uncertainty has resulted in confusion and inconsistence in judicial practices.The Supreme People's Court should publish guiding case decisions to clarify that only the mandatory rules in the law of the principal place of business shall be applied exceptionally.The future judicial interpretation should also specify that the principal place of business shall be the place where the judicial persons conduct most of their business activities,usually the place where the judicial persons derive most of their income.