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The legal basis for cross-border divisions and changes of legal form is coming soon! 

German Parliament (Bundestag) passes law to implement the EU Mobility Directive (UmRUG)

"UmRUG" nearly passes the finish line: After a tough legislative process, the German Parliament (Bundestag) passed the draft bill of the UmRUG introduced by the German government on January 20, 2023 (and thus shortly before the end of the implementation period expiring on January 31, 2023). Prior to this, the bill had been amended by the responsible Legal Affairs Committee (Rechtsausschuss). The promulgation of the Act, which is expected in February 2023, will (finally) create the legal prerequisites for cross-border reorganization transactions in the form of a division and a change of legal form involving German legal entities. Cross-border reorganization processes will thus be significantly facilitated.

Cross-border mobility is becoming increasingly important for entrepreneurs and companies. Particularly against the background of what are sometimes referred to as multiple crises in recent times - pandemics, supply chain disruptions, the war in Ukraine, inflation, energy supply bottlenecks and the explosion in energy costs, as well as a shortage of skilled workers - companies have no choice but to rethink location decisions and relocate.

The instruments previously available for cross-border restructuring or relocation processes under company/reorganization law were limited: Essentially, only cross-border merger transactions involving EU corporations were regulated by law (in the form of the cross-border merger under the provisions of the German Transformation Act as well as the SE merger). In contrast, there was no statutory regulation for other cross-border reorganization measures, in particular the division and the change of legal form. Cross-border division transactions were considered inadmissible; cross-border statutory seat transfers with simultaneous change of legal form were recognized on the basis of precedent and case law, but were associated with considerable imponderables.

This situation, which is fraught with uncertainties, will soon come to an end, at least in part: In the future, EU corporations will also have the options of cross-border division and cross-border transfer of statutory seat with simultaneous change of legal form available to them on a secure legal basis. This considerably expands the scope for the legal implementation of strategic reorganization measures.

We have already reported on the Reorganization Directive and the status and content of German efforts to implement it in our articles "Cross-border Reorganizations within the European Union", "Draft bill for the implementation of the EU-Mobility Directive published" and "Implementation of the EU Mobility Directive reaches final stage". The present article focuses primarily on further legislative developments.

The German Parliament (Bundestag) was originally supposed to decide on the government draft of the UmRUG submitted by the cabinet on October 5, 2022, before the end of 2022, but the draft bill was referred back to the Legal Affairs Committee in mid-December. The background to this was that the responsible committee of the Bundesrat did not agree to a request by the Bundestag to shorten the deadline and that the law could therefore not be discussed in the Bundesrat before February 2023.

The German Bundestag therefore did not pass its resolution until January 20, 2023. The bill was adopted in the version of the government bill dated October 5, 2022 (BT-Drucksache 20/3822), taking into account the resolution recommendation of the Legal Affairs Committee dated January 18, 2023 (BT-Drucksache 20/5237).

The Act still requires the approval of the Bundesrat. The next scheduled meeting of the Bundesrat will not take place until February 10, 2023. The UmRUG will therefore not enter into force on January 31, 2023, as planned. Realistically, it will now probably apply from mid-February 2023.

As is known, the UmRUG serves to implement Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border transformations, mergers and divisions (hereinafter the "Reorganization Directive"). This, in turn, has as its objective the creation of a uniform legal framework for cross-border transformation operations within the EU Member States.

In addition to supplementing the regulations already in place for cross-border mergers, the Reorganization Directive provides in particular for the first codification of regulations for cross-border divisions and cross-border transfers of statutory seat in connection with a simultaneous change of legal form. The admissibility of cross-border divisions involving German legal entities has been controversial in Germany to date and has been predominantly rejected. The cross-border transfer of the registered office of a corporation into Germany with a simultaneous change of legal form into a German legal form was considered permissible, but was previously only possible by invoking the fundamental freedoms and on the basis of principles developed in case law, which was accompanied by corresponding uncertainties in practical implementation.

 

The draft bill that has now been adopted includes amendments made by the Legal Affairs Committee in response to comments raised during the expert hearings. In the following, we briefly summarize the amendments that have been introduced in this context:

I.
Due to the addition of consequential amendments to special laws such as the Insurance Contract Act, the UmRUG has now grown into a comprehensive so-called "article law". In view of this, the title of the Act has been changed to: "Law on the Implementation of the Conversion Directive and amending of other laws".

II.
A relevant substantive change is the addition of the provisions on the so-called abuse control. In order to avoid abusive structures, cross-border conversion measures are to be subject to judicial abuse control, if there are corresponding indications. The court must consider "whether the cross-border merger is intended to be carried out for abusive or fraudulent purposes which have or are intended to have the effect of evading or circumventing Union or national law, or for criminal purposes”.

In this respect, practitioners in particular criticized the fact that the previous draft bill was silent as to when there are indications of abusive measures or what these could be. This point of criticism is taken up by the resolution recommendation of the Legal Affairs Committee and thus, as a result, by the UmRUG in the version adopted by the Bundestag - albeit, possibly, in a form not imagined or desired by practitioners.

Section 316 para. 3 sentence 4 nos. 1-3 UmwG-E now lists examples of cases which can be regarded as indications of abusive arrangements, and which are to be subject to a comprehensive judicial review. The provision shall also apply to cross-border divisions by virtue of the reference in Section 329 sentence 1 UmwG-E; a comparable provision is contained in Section 343 para. 3 UmwG-E for the cross-border change of legal form. Accordingly, the following constellations are to be considered as indications of an abusive arrangement:

  • The negotiation procedure with the employee representatives on the future regulation of co-determination is only be initiated at the request of the competent court;
  • At the level of the relevant transferring legal entity, 4/5 of the relevant threshold for corporate co-determination has already been reached, no value is added in the target country and the administrative headquarters of the company remains in Germany or
  • A foreign company becomes a debtor of occupational pensions or entitlements as a result of the relevant cross-border conversion measure, whereby this foreign company has no other operating business.

According to the explanatory memorandum to the resolution recommendation of the Legal Affairs Committee, the additions made to Section 316 (3) UmwG-E are intended to ensure that the register court observes the required protection of codetermination (employee participation, Unternehmensmitbestimmung) and pensions by means of a comprehensive review of abuse. In this context, the Legal Affairs Committee expressly points out that the general duty of the register court to conduct official investigations remains unaffected and that the court must therefore also investigate indications of abuse outside of the new added facts. The explanatory statement explicitly mentions "indications of abuse presented by a trade union".

According to the FDP parliamentary group, "the potential for abuse has been discussed in detail. The result of the German implementation is a good compromise. It facilitates freedom of establishment, safeguards co-determination, respects the perspective of the workforce, and provides for serious examination in the event of indications of abuse, without placing cross-border conversions under general suspicion." Pracice will tell.

Subsequent amendments to the Rechtspflegergesetz (Section 19 (1) sentence 1 no. 6 RPpflG) ensure that judges are exclusively responsible for examining and deciding on the question of abuse and that this cannot be left to the Rechtspfleger.

III.
Furthermore, the circle of those whom the register court may consult in connection with its abuse review has been expanded. In this respect, Sec. 317 No. 5 UmwG-E now provides that trade unions represented in the respective company may also be heard by the register court.

According to the explanatory memorandum of the resolution recommendation of the Legal Committee, the consultation option of the trade unions represented in the company to be merged, which was introduced in the legislative procedure, is intended to ensure that aspects of corporate co-determination are adequately taken into account in the context of the reorganization process. The amendment applies accordingly to cross-border divisions via the reference in Section 329 sentence 1 UmwG-E; Section 344 no. 5 UmwG-E provides for a comparable consultation option for the cross-border change of legal form.

 

Conclusion

As a result of the resolution passed by the German Parliament on January 20, 2022, the legislative process relating to the UmRUG is now nearly complete. Nevertheless, it is no longer expected that the law will enter into force by the end of the implementation period, i.e. by January 31, 2023. The legislator itself also apparently no longer expects this and has now (at least with regard to the relevant amendments to the German Transformation Act (UmwG) provided for "the day after the promulgation" of the Act as the date of entry into force.

All in all, the UmRUG represents the largest change to German corporate law in the past 15 years and creates a legal framework for cross-border transformations, for which there is a practical need in the current economically challenging times. The amendments recently added by the Legal Committee do not interfere with the fundamental concept or system of the UmRUG. In particular, the above-described specification of constellations in which an abuse control is indicated is to be welcomed from a practical point of view.

In view of the number of innovations associated with the UmRUG, we will present the respective reorganization procedures in more detail in further articles.

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