Article

Cross-border reorganizations within the European Union

Increased mobility for companies?

Together with the digitalization directive, which came into force in July 2019, the directive on cross-border conversions, mergers and divisions as of December 12, 2019 completes the Company Law Package. The directive constitutes the basis for increased mobility of corporations within the EU and a greater degree of legal security.

Background - Freedom of establishment as fundamental freedom for companies

With a number of landmark rulings (e.g. "Centros", "Überseering", "Inspire Art", "VALE"), the European Court of Justice (ECJ) made clear that European companies must be able to exploit their economic opportunities in the European internal market on the basis of freedom of establishment.

Except for regulations on cross-border mergers introduced in 2007, no consistent legal framework for cross-border conversion measures throughout the EU was in place. In fact, cross-border reorganizations were governed by the applicable laws of the respective member states. However, as national provisions considerably differ from one Member State to another this resulted in legal uncertainty, fragmentation and inadequate protection for shareholders, employees and creditors of the relevant companies. As a result, the planning and implementation of cross-border reorganizations was extremely difficult and discouraged many companies from taking advantage of economic opportunities because the bureaucratic burden seemed too heavy.

With its groundbreaking Polbud decision in 2017, the ECJ paved the way for a greater corporate mobility, by ruling that the freedom of establishment for European companies also includes the right to change into a legal form of another EU country without having to dissolve the company in the country of origin.
Despite the decisions of the ECJ, companies faced considerable difficulties for the implementation of cross-border projects due to the lack of a reliable legal framework.

To compensate this regulatory shortfall, and to create higher legal security, with the second part of the Company Law Package the EU legislator aimed to design and implement a legal framework for cross-border conversions. The new Mobility Directive essentially implements the measures already envisaged in the 2012 European Company Law and Corporate Governance Action Plan to improve cross-border measures. It supplements and optimizes the already existing rules on cross-border mergers and codifies for the first time cross-border changes of legal form and the cross-border divisions for new formation.
 

Scope

The Directive establishes a legal framework for European corporations for reorganization measures with cross-border implications, i.e. corporate reorganization which lead to a change in the laws applicable to the entity in questions. The Directive is not applicable to corporate reorganizations involving partnerships. When transposing the Directive into national law, however, national legislators are free to extend the scope of their national provisions accordingly.

Cross-border projects

The directive amends the regulations on cross-border mergers as introduced in 2007 as well as the regulations of the Company Law Directive of 2017 and supplements these with regulations on further cross-border reorganization measures (so-called cross-border projects).

In addition to cross-border mergers, regulations concerning the cross-border change of legal form and cross-border divisions are introduced for the first time. Unfortunately, the Directive only provides regulations for division measures, i.e. split-ups and spin-offs as well as hive-downs, only for the purpose of new incorporation. Cross-border divisions involving an existing legal entity as absorbing entity are not included in the scope of the Directive.

 

 

Procedure

The overarching goal is to standardize the procedures for carrying out reorganizations and to appropriately balance the interests of those involved in cross-border projects.

The provisions of the Directive are largely based on the already known procedures for the Societas Europaea (SE) and cross-border mergers. It sets-up proceedings for the respective reorganization measures, which are largely the same. Unfortunately, there are still some inconsistencies in the procedural rules for various forms of reorganizations. The preparation of a detailed time schedule for the planned reorganization measure is only provided for changes of legal form and for divisions, but not for mergers).

First, for all cross-border projects the preparation of a reorganization plan is required, which summarizes the most important information, such as explanations pertaining to the new legal form and the economic and legal effects of the conversion. Such reorganization plan has to be audited by an independent expert.

Further, the management of the company is obliged to prepare a report concerning the merger, change of legal form or division for its shareholders and employees each (or, if the company decides so, one report with two different sections, respectively), which illustrates and explains the legal and economic aspects and effects of the cross-border project. The report must be made available to the shareholders or, employees, respectively, six weeks before the resolution on the reorganization measure is adopted.

The reorganization plan and the expert report needs to be made publicly available no later than one month before the shareholders’ meeting resolving on the cross-border project takes place.

After the shareholders' meetings of the participating companies have approved the cross-border project by shareholder resolution, there is a two-stage legality scrutiny process:

First, the authority of the member state of origin evaluates whether the prerequisites for the implementation of the cross-border project are met. If the examination comes to positive results, a pre- reorganization certificate will be issued. Such pre- reorganization certificate is submitted to the authority of the country of destination via the Business Register Interconnection System (BRIS), which was established in 2017. The competent authorities of the country of destination then scrutinizes the effectiveness of the conversion measure exclusively in accordance with its national regulations. If all requirements are met, the cross-border project becomes effective upon entry in the commercial registers of the participating countries.
 

Conclusion

The EU Directive constitutes the basis for a harmonization of European corporate law and has to be transposed into national law by the member states until January 31, 2023. In Germany the Federal Ministry for Justice and Consumer Protection has set-up a commission of experts for this purpose.

The new regulations provide companies more flexibility to settle within the EU by standardizing the institutions of cross-border changes of legal form and divisions, which were until now not regulated by statutory law. The risk of procedural delays is reduced considering the statutory maximum deadlines provided for in the Directive, which have to be observed by the authorities of the participating member states. The abovementioned procedural inconsistencies of the Directive are, however, to be viewed critically. It remains to be observed how the Directive will be transposed into national laws in detail. Provided that national legislators succeed in implementing the requirements of the Directive in a technically clean and harmonious manner, companies will be given a new set of codified tools for the efficient design and implementation of cross-border reorganization measures within the EU.

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