Implementation of the Directive on cross-border conversions, mergers and divisions

Background

Legal regulations for cross-border mergers

Since the implementation of the Merger Directive¹ , the guidelines of which have in the meantime been incorporated into the Company Law Directive² , the German Transformation Act (Umwandlungsgesetz, “UmwG”) contains provisions for cross-border reorganizations, i.e. corporate law reorganizations involving foreign legal entities, in Sections 122a to 122m. The same holds true for other EU/EEA member state jurisdictions. However, the aforementioned statutory provisions only cover a partial area of possible cross-border reorganizations. They only concern mergers and are - at least as far as the foreign legal entities involved are concerned - limited to corporations.

Lack of regulations for other types of reorganization

In contrast, there is a lack of statutory provisions in Germany (as in other EU Member States) for reorganizations not covered by Sections 122 a et seq. UmwG. Thus, essential building blocks for a (tax-neutral) cross-border restructuring of groups of companies have not yet been regulated by statutory law. This will change with the implementation of the Mobility Directive³ in Germany and the other EU/EEA Member States.

The Mobility Directive

The Mobility Directive not only provides for changes in the requirements for cross-border mergers, but also, in particular, requirements for the cross-border change of legal form (Articles 86a to 86t) and the cross-border demerger (Articles 160a to 160u).

The provisions on cross-border demergers generally only cover demergers for the purpose of new formation. A demerger for the purpose of absorption by already existing legal entities is not regulated. The regulations on cross-border demergers contained in the Mobility Directive concern, among other things, the protection of shareholders and creditors, employee co-determination at corporate law level (or, in the terminology of the European Union: employee participation) and information and consultation rights of employees. Once again, the scope of the Mobility Directive is limited to corporations - which does not necessarily mean, however, that the member states cannot also provide for regulations for commercial partnerships in their national provisions

Current practical handling of cross-border changes of legal form and demergers

Cross-border relocations of registered offices with simultaneous change of legal form have - despite the lack of legal regulation - already arrived in practice and are increasingly being implemented. The authors of the present article have already accompanied several such processes, primarily in the form of the relocation of foreign corporations from Luxembourg, Belgium, the Netherlands and Austria into Germany with a simultaneous change of legal form of the respective entities to that of a German GmbH.

The admissibility of the cross-border demerger de lege lata, on the other hand, is highly controversial. Its admissibility can probably only be justified by applying the principles of the ECJ ruling of December 13, 2005 in the Sevic Systems case. It is therefore - as far as can be seen - hardly used in legal practice.

See also our earlier article on the Company Law Package and our earlier article on the applicable law in the case of a change of legal form.

The Dutch (Preliminary) Draft Mobility Directive Implementation Act

The Dutch legislator has now undertaken the first significant activities with regard to the implementation of the Mobility Directive and has presented a first preliminary draft of a corresponding Mobility Directive Implementation Act⁴ (the “Draft Act”) and submitted it to the consultation procedure.

Hereinafter, we will try to provide, in summary form, an overview on some of the most relevant provisions contained in the Draft Act. It should be noted that the Draft Act comprises 36 pages and the Explanatory Memorandum (in Dutch: memorie van toelichting) comprises 140 pages wherefore it is impossible to provide full detail of the contents of the Draft Act.

General provisions

The Draft Act determines that the Dutch statutory framework concerning mergers and demergers as included in Title 7 of Book 2 (Legal Entities) of the Dutch Civil Code (Burgerlijk Wetboek, „BW“) also applies to demergers (in Dutch: splitsingen) of joint stock companies and limited liability companies under the law of a member state of the EU or the EEA.

Changes in the provisions on cross-border mergers

Furthermore, the regulations for Cross-Border Mergers in the BW are amended and adapted to the requirements of the Mobility Directive.

Art. 2:333c BW (new) provides in its new para. 5 for a prohibition of mergers involving legal entities over whose assets insolvency proceedings have been opened.

The recast Art. 2:333e BW (new) modifies the notification, filing, announcement and disclosure obligations.

Pursuant to this provision , the management board of each merging entity will be obligated to inform its shareholders, creditors and works council (or if no works council is installed, its employees) that, up until 5 days prior to the date that the decision concerning the merger is made by the general meeting, they have the right to provide their feedback on the merger proposal.

The newly worded Art. 2:333f (new) contains amended requirements for the declarations and explanations to be addressed to shareholders and employees.

Amongst others, explanations will need to be given concerning the consequences of the proposed merger for shareholders and employees.

Pursuant to Art. 2:333gb BW (new), a merger resolution shall in any case require a majority of at least two thirds of the votes cast at the General Meeting/Shareholders Meeting if less than two-thirds of the issued capital is represented at the General Meeting.

Art. 2:333h BW (new) contains provisions on the rights of shareholders who believe that the proposed compensation is not appropriate.

A shareholder can request the Enterprise Chamber of the Appeals Court to appoint one or more independent experts to determine the valuation.

The newly inserted Art. 2:333ha BW (new) provides for rules on the provision of security.

Pursuant to the said provision, any creditor may object to the merger plan up to three months after all merging companies have announced the filing or disclosure of the merger plan by filing an application with the court and specifying the security demanded.

The amendments in Art. 2:333i BW (new) result in more extensive requirements for the certificate to be issued by the Dutch notary and the information and documents that the transferring entity must enclose with the application for the notarial certificate.

It is expressly provided that the notary may not issue the certificate if he or she finds that the cross-border merger was carried out for unlawful or fraudulent purposes leading to or aimed at circumvention of European Union law or national law, or for criminal purposes.

The Draft Act provides for numerous other changes to the provisions for for cross-border mergers. These cannot be presented in detail here.

Cross-border divisions

Pursuant to the Draft Act, a new section is inserted after Article 2:334ii, entitled "Section 6 - Special Provisions for Cross-Border Demergers", which contains the provisions on cross-border demergers.

2:334jj BW (new) regulates the scope of application of Section 6.

Section 6 shall apply in accordance with Art. 2:334jj BW (new), in case of (i) the division of a Dutch public limited company or a Dutch limited liability company to one of more companies that are newly formed under the law of another Member State of the European Union or the European Economic Area, or (ii) if one or more Dutch public companies or Dutch limited liability companies are formed as successor companies following the demerger of a company governed by the law of another Member State of the European Union or the European Economic Area. The section does not apply to companies which are UCITS within the meaning of the Financial Supervision Act (icbe als bedoeld in de Wet op het financieel toezicht).

Art. 2:334kk BW (new) expressly provides that the section does not apply to a demerger into and involving existing companies, exempts some of the provisions applicable to cross-border mergers from their applicability to cross-border demergers, regulates sole shareholder demergers , and makes arrangements for the case of the participation of legal entities that are in insolvency proceedings.

Art. 2:334ll BW (new) concerns the additional information that the demerger proposal must contain.

More in particular, information must be given with respect to, including but not limited to, an indicative timeframe of the demerger, possible employment consequences and information on the valuation of the assets and liabilities of the entities involved.

Art. 2:334mm BW (new) regulates information obligations towards shareholders, creditors and the works council or employees and deposit obligations.

Pursuant to this Article, the management board of the demerging entity will be obligated to inform its shareholders, creditors and works council (or if no works council is installed, its employees) that, up until 5 days prior to the date that the decision concerning the demerger is made by the general meeting, they have the right to provide their feedback on the demerger proposal.

Art. 2:334nn BW (new) concerns the obligations to provide explanations to shareholders and employees and the contents of the corresponding declarations.

Amongst others, explanations will need to be given concerning the consequences of the proposed demerger for shareholders and employees.

Art. 2:334pp BW (new) regulates quorums and majority requirements in accordance with Art. 2:333gb BW (new).

Art. 2:334qq BW (new) provides for an entitlement of dissenting shareholders to compensation and, analogously to Art. 2:333h BW (new), contains provisions on the rights of shareholders who consider that the proposed compensation is not appropriate.

In accordance with the amendments to the provisions on cross-border mergers, Art. 2:334rr BW (new) provides for a right of objection and security.

Art. 2:334ss BW (new) provides for regulations on the legal consequences of the demerger, in particular the transfer of assets, and imposes joint and several liability on acquiring companies.

Art. 2:334tt BW (new) further provides for a more extensive (objectively limited) joint and several liability.

It orders: "Notwithstanding Article 334t, paragraph 2, the acquiring company to which the obligation is transferred or, if the obligation is not transferred to an acquiring company, the continuing demerged company shall be liable for the entirety of the obligations of the demerged company. The liability for the obligations of the company being demerged shall be limited, with respect to any other company, to the value of the assets and liabilities acquired or retained by it in the demerger. "

Pursuant to Art. 2:334uu BW (new) regulates the time when the cross-border demerger becomes effective, as well as the certificate to be issued by the notary and the information and documents to be attached to the application for the relevant certificate.

At the same time, the conditions for granting or not granting the certificate are regulated, including the prohibition of granting the certificate in case of a demerger carried out for illegal or fraudulent purposes.

Art. 2:334xx BW (new) contains regulations on co-determination (employees participation). These are very detailed and require a detailed examination in each individual case.

Art. 2:334yy BW (new) orders that the nullity or annulment of a cross-border demerger may not be declared.

Cross-border transfer of registered office

By renumbering Article 2;335 BW (old) as Article 2:335q BW (new), a Title 7A is inserted after Title 7 to read as follows "Special provisions for cross-border changes of legal form".

Art. 2:335 BW (new) regulates the scope of application of the provisions.

Pursuant to the provision, Title 7A shall apply in case a Dutch public limited company or a Dutch limited liability company is to be converted into a corporation under the law of another EU/EEA Member State and expressly orders that such a change of form shall have no effect on the existence of the entity changing its form, in particular that it shall not lead to its termination. Companies subject to financial supervision are again excluded.

Art. 2:335a BW (new) excludes certain provisions from application to cross-border changes of legal form.

At the same time, the provision stipulates that a dissolved company cannot undergo a cross-border transformation of legal form if a distribution in connection with the liquidation has already been made. Cross-border change of legal form is excluded for legal entities which are undergoing insolvency proceedings.

Art. 2:335b BW (new) provides instructions for the change of legal form proposal and its minimum contents.

Art. 2:335c and 2:335d BW (new) regulate information obligations towards shareholders, creditors and the works council.

Amongst others, explanations will need to be given concerning the consequences of the proposed change of form for shareholders and employees.

Art. 2:335e BW (new) regulates certain audit obligations.

An auditor will need to review the change of legal form proposal and will need to declare whether the proposed compensation for the shareholders is adequate. The audit obligations included in this Article can be set aside by the shareholders.

Art. 2:335f BW (new) concerns publication and filing obligations concerning the change of legal form proposal and the explanatory notes thereto.

Art. 2:335h BW (new) contains requirements for the adoption of resolutions by the shareholders, including quorums and majority requirements - again analogous to the requirements for cross-border mergers and demergers.

Art. 2:335i BW (new) gives objecting shareholders the right to request compensation and contains provisions in the event that the objecting shareholders do not consider the compensation offered to be adequate.

Art. 2:335j BW (new) provides for the provision of security.

According to this Article, "the company to be converted [changes legal form] shall be obliged to provide security or another guarantee for the satisfaction of its claim to any creditor of the company who so requests, if the creditor declares its objection in accordance with the following paragraph. This shall not apply if the creditor has sufficient security or if the company's assets sufficiently guarantee the satisfaction of the claim. " The creditor concerned must substantiate the reasons for his application.

Art. 2:335k BW and Art. 2:335l (new) regulate the effective date and consequences of the cross-border change of legal form and the certificates/declarations to be issued by the notary, including the conditions for their issue/non-issue.

Art. 2:335m BW (new) contains provisions on the formal and other requirements for a change of legal form into the Netherlands, according to which, among other things, a notarial deed of conversion [change of legal form] is required.

Art. 2:335o BW (new) contains the regulations on co-determination (employee participation). These are again very detailed and require careful analysis in individual cases.

Art. 2:335p BW (new) directs that nullity or invalidation of a conversion on the basis of this section may not be declared.

Classification and outlook

The further legislative process in the Netherlands remains to be seen. Due to the particular importance of the Mobility Directive for cross-border legal transactions and the freedom of establishment and for the Netherlands as a major holding location, it can be assumed that various interest groups will submit proposals for amendments during the consultation process.

It is to be welcomed that the Dutch legislator is initiating the corresponding legislative project in such good time before the expiry of the transposition deadline on January 31, 2023, thus allowing sufficient time for a substantive discussion of the draft law by those affected, in particular practitioners. This approach differs considerably from the recent behavior of the German legislator.

In terms of content, the Draft Act is within the bounds of what can be expected in accordance with the Mobility Directive and developments in practice. As is so often the case, however, the devil may be in the details, because it cannot be ruled out that individual EU/EEA member states will implement the requirements of the Mobility Directive in (completely) different ways, so that careful preparation will be required even after implementation. In particular, this will have to include a comparison of the requirements of the respective transposition acts yet to be enacted by the respective member states. It remains to be seen whether the Dutch legislator will adhere to the repetition in the Draft Act of individual provisions which are essentially identical in content for the different types of conversion (majority requirements, quorums, provision of security, notarial certification) or whether it will make them part of general and overarching provisions during the legislative process.

It should be noted that the Mobility Directive, after its implementation in the national legal systems, will contribute significantly to legal certainty and facilitate the use of the instruments of transformation law also in cross-border legal transactions. This is to be welcomed without reservation.

It remains to be seen when the German legislator will "follow" and give legal scholars and practitioners (as well as other stakeholders) the opportunity to submit proposals for implementation of the Mobility Directive in German law and comment on a bill.

For Germany, other forms of "conversion" may continue to be considered, such as the collapse merger or accretion (in German: Anwachsung). In addition, the toolbox of available instruments in Germany will further be expanded by the Act on the Modernization of the Law on Partnerships (Gesetz zur Modernisierung des Personengesellschaftsrechts). This provides for an expansion of the catalogue of legal entities capable of being participating entities in corporate law reorganizations as listed in Section 3 of the German Reorganization Act (§ 3 UmwG) to include the legally capable civil-law partnership (GbR), which in the future will be entered in the newly created companies register.

Together, this will create new and interesting possibilities for the reorganization of groups of companies.

Of course, we and our Dutch colleagues are available to answer your questions on the Draft Act as well as to exchange views on the possibilities that (will) arise from the extended instruments of conversion law, as will be available in future.

Contact Details Germany:

Felix Felleisen
Rechtsanwalt | Partner | Corporate/M&A
Dutch Desk
Deloitte Legal Rechtsanwaltsgesellschaft mbH
Rather Str. 49 g, 40476 Düsseldorf, Deutschland
Phone: +49 211 8772 2553 | Mobile: +49 172 8669732
ffelleisen@deloitte.de | www.deloitte.com/de | www.deloittelegal.de

Dr. Fleur Johanna Prop, LL.M.
Rechtsanwältin (D) | advocaat (NL)
Dutch Desk
Counsel | Corporate/M&A
Deloitte Legal
Rechtsanwaltsgesellschaft mbH
Rather Str. 49 g, 40476 Düsseldorf, Deutschland
Phone: +49 (0)211 8772 2385 | Mobile: +49 (0)152 09311070
fprop@deloitte.de | www.deloitte.com/de | www.deloittelegal.de

Contact Details Netherlands:

John Paans
Partner | Corporate
Deloitte Legal B.V.
Gustav Mahlerlaan 2970, 1081 LA Amsterdam, The Netherlands
T: +31 (0)88 288 5748 | M: +31 (0)6 54351856
jpaans@deloitte.nl | www.deloitte.nl

Thijs Butter
Manager | Corporate
Deloitte Legal B.V.
Gustav Mahlerlaan 2970, 1081 LA Amsterdam, The Netherlands
T: +31 (0)88 288 0370 | M: +31 (0)6 2966 0561
tbutter@deloitte.nl | www.deloitte.nl