On December 19, 2024, the Court of Justice of the European Union (CJEU) held that member states of the European Union (EU) may prohibit purely financial investors from holding shares in law firms, to safeguard the independence of lawyers and ensure compliance with their professional and ethical obligations. The CJEU ruled that member states have the discretion to conclude that such restrictions on the freedom of establishment and free movement of capital are justified by overriding reasons of public interest.
Facts of the Case
In 2020, the German lawyer Dr. Michael Halmer founded the German law firm Halmer Rechtsanwaltsgesellschaft UG (Halmer UG), a limited liability company. In June 2021, he transferred a narrow majority of shares to the Austrian SIVE Beratung und Beteiligung GmbH (SIVE GmbH), a limited liability company governed by Austrian law. SIVE GmbH is a financial investment firm, and is not registered as a law firm in Austria or Germany. In conjunction with the transfer of shares, the articles of association of Halmer UG were amended to mitigate the influence of SIVE GmbH and to reserve the management of Halmer UG exclusively to licensed attorneys to ensure its independence.
After the share transfer was reported to the Munich Bar Association, it revoked Halmer UG’s registration as a law firm on November 9, 2021. The bar association determined that the participation of a financial investor violates the applicable professional practice rules for lawyers.
Halmer UG filed a complaint against the revocation with the Bavarian Lawyers’ Court, alleging that the general prohibition on external capital investment in law firms violates EU law, in particular its right to free movement of capital (Treaty on the Functioning of the European Union (TFEU), art. 63, para. 1), freedom of establishment (TFEU, arts. 49, 54), and its rights under article 15 of Directive (EU) 2006/123 (requirements to provide services in the EU).
The Bavarian Lawyers’ Court stayed the proceedings and submitted several questions to the CJEU for a preliminary ruling under article 267 of the TFEU, in particular whether restrictions on the participation of purely financial investors in law firms violate the right to free movement of capital. (CJEU decision, para. 46.)
Applicable Law
Under the German legislation in effect at the time, the Federal Lawyers’ Code 2017 (Bundesrechtsanwaltsordnung (BRAO) 2017) restricted membership in law firms to lawyers and members of certain liberal professions. (BRAO 2017, § 59a, para. 1, sentence 1, para. 2.) If the competent bar association identified a violation of this requirement, it was authorized to revoke the law firm’s registration. (§ 59e, para. 1 sentence 1; § 59h, para. 3.) Even after amendments to the BRAO in 2022, which liberalized the rules governing the formation of law firms, purely financial investors remained ineligible to serve as members of law firms. (BRAO 2022, §§ 59b, 59c.)
While the TFEU guarantees the right to free movement of capital (art. 63) and the freedom of establishment (arts. 49, 54), among other fundamental EU freedoms, it permits national legislation to impose restrictions on such freedoms to maintain public order and security, provided such measures are proportionate. (TFEU, art. 65, para. 2.)
Directive (EU) 2006/123 governs the provision of services in the EU internal market and limits national laws that may restrict the free provision of services. Article 15, paragraph 2, letter (c) explicitly identifies restrictions on company shareholding as limitations requiring scrutiny. These restrictions must comply with the conditions of non-discrimination, necessity, and proportionality. (Directive (EU) 2006/123, art.15, para. 3.)
Ruling
The CJEU held that the applicable EU law does not preclude national legislation prohibiting purely financial investors from acquiring shares in a law firm, even under penalty of the firm losing its registration. (CJEU decision, paras. 47–80.) In the opinion of the CJEU, such restrictions on the freedom of establishment and free movement of capital may be justified by overriding public interest, in particular ensuring lawyers’ independence and adherence to professional ethics. (Paras. 73, 74.) It added that the German law complies with EU requirements for non-discrimination, necessity, and proportionality as outlined in Directive (EU) 2006/123. It also aligns with the public interest objectives of safeguarding legal professional privilege and the sound administration of justice. (Paras. 64–66.) The CJEU emphasized that financial investors motivated solely by profit could undermine lawyers’ compliance with their professional obligations, potentially creating conflicts of interest. (Paras. 70, 71.) The court concluded that member states retain discretion to regulate these matters to ensure compliance with their legal traditions and the integrity of the legal profession. (Paras. 73, 74.)
Prepared by Maximilian Spitzley, Law Library Intern, under the supervision of Jenny Gesley, Foreign Law Specialist
Law Library of Congress, January 8, 2025
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