The Concept of a Virtual Registered Office for EU Law

 

Virginijus Bitė, Professor of Law at the Law School of Mykolas Romeris University

Ivan Romashchenko, Senior Researcher of the Legal Technology Centre at the Law School of Mykolas Romeris University

Photo credit: EmDee, via Wikimedia Commons

On 29th of March 2023 the European Commission published a Proposal for a Directive within the initiative devoted to upgrading digital company law. It mostly focuses on the increased transparency and access to information as well as cross-border use of company data. These goals were earlier mentioned in the inception impact assessment report published on 20th of July 2021. However, the inception impact assessment included one more policy option that was omitted in the Proposal: making the EU company law rules and procedures fit for digital age. Virtual registered office (VRO), surprisingly, has not been given green light due to mixed feedback from stakeholders.

Before the European Commission mentioned VRO in the documents, there was an attempt in Lithuania to stipulate this concept at the national level. The draft law on the introduction of a VRO was submitted to the Lithuanian parliament, the Seimas, in 2018. Although the Seimas in general supported the idea, the provisions on VRO have not yet been adopted.

Despite the lack of regulation at the EU and national levels and the apparent lack of academic consideration of VROs, researchers and practitioners have displayed enthusiasm concerning the opportunities that the introduction of VRO might provide. According to the 2017 report by Adelė Jaškūnaitė and Raminta Olbutaitė, prepared within the ‘Create Lithuania’ programme, even in the absence of a legal framework on VROs, Lithuania possessed the technical resources necessary to ensure communication with public institutions as a basis for the establishment of VRO. They concluded that there was a need to replace the physical address with a virtual one since a physical address, as an official registered office, had not fulfilled its purposes effectively. Legal entities had often been registered at so-called ‘mass addresses’, with some addresses serving as the registered offices of hundreds of companies. If VRO were to be introduced properly, this idea would reduce the financial burden on both public authorities and companies. The introduction of VRO would neither impact the corporate governance negatively as most communication among stakeholders in a company has been happening digitally. Inspired by the editorial of Lina Mikalonienė, in our recent research we have delved into the concept of a VRO and tried to evaluate the proper way it might be introduced.

For a VRO to replace registered office, it should be able to achieve the same functions as the registered office does: to ensure that the applicable law and jurisdiction are determined with respect to the legal person, and to ensure proper communication between a legal entity and its counterparties.

As far as the first function is concerned, there are reasons to conclude that applicable law and jurisdiction can be determined without knowing the exact physical location of a legal entity: information about the country where the entity is located should suffice. The VRO would be perfectly able to cope with the function of ensuring a connection between a legal entity and applicable law, even if we only knew the country that the legal entity came from. In that case, national law would be assigned the task of connecting the entity with the proper local laws and regulations, as well as the relevant local authorities. For instance, as far as Lithuania is concerned, a legal entity might have a VRO with a link to Vilnius and its city authorities.

Regarding the second function, it should primarily be noted that the existing regulation needs change. Such change needs to move in the direction of wider digitalisation, so that legal entities can act through a VRO instead of a physical address. While moving in this direction care should be taken not to forget about weaker parties, including consumers, some of which might be forced to communicate by regular mail due to poor digital skills or the absence of access to electronic tools. In addition, it is possible that some foreign state authorities might be prohibited to use such electronic system and be allowed to use only regular mail or services of clerks. Therefore, a link to a physical address to establish communication between a legal entity and its counterparties seems temporarily practical for the transition period till all players and society adapt to the system of e-communication and accept it more easily.

For these reasons, it is recommended that the EU interferes in this sphere by removing any misunderstandings and defining a registered office as including both a physical address and a VRO. EU intervention should also stipulate requirements for organisations that provide VRO in Member States, as well as setting out a legal basis for selecting a virtual address instead of a physical one and for the communication of domestic and foreign actors through VRO. These new rules need to contain safeguards against fraudulent practices, for this all legal entities using VRO should temporarily maintain a link to a physical address – for instance, the address of the director or another contact person. The suggested connection to a physical address should be viewed as a transitional compromise on a path to full VRO and the gradual development of improved virtual cross-border communication being the future replacement of the traditional registered office with its virtual counterpart.

 

For more information see: Bitė, V. and Romashchenko, I., 2023. The Concept of a Virtual Registered Office in EU Law: Challenges and Opportunities.  Utrecht Journal of International and European Law,  38(1), p.25–38.DOI: https://doi.org/10.5334/ujiel.605