Article

More (and more unified) corporate restructuring options available in the EU

An EU directive on cross-border conversions, mergers and divisions has been adopted.

On 18 November 2019, the European Council adopted a new directive to facilitate cross-border conversions, mergers and divisions within the EU. The Directive unifies the legal procedure for each of these cross-border transactions, which we will describe in more detail below.

On 18 November 2019, a new directive was adopted by the European Council the purpose of which is to facilitate cross-border conversions, mergers and divisions within the EU (the “Directive”).

A directive covering cross-border mergers was adopted by the European Council in 2005, and accordingly, the cross-border merger procedure has been implemented in domestic legislation of each EU member state for more than ten years. It is therefore often used as a corporate restructuring option within the EU. Following EU case law, cross-border conversions are also generally accepted in the Netherlands as well as a few other member states. There was, however, within the Netherlands only draft legislation available on the applicable legal procedure, as a result of which the procedure to be followed currently differs per legal service provider in the Netherlands. As a contrast, within the UK no move has been made to amend or vary domestic legislation or practice as a result of the EU case law governing cross-border conversions, the view of the legislative bodies being that as a domestic “conversion” is not permitted, the UK does not need to allow cross-border conversions. Looking at divisions, only a limited number of cross-border divisions have been implemented in the Netherlands so far, as there is no specific EU case law nor legislation available on cross-border divisions. The harmonisation that will result from the introduction of the Directive means that the Directive introduces more (and more unified) corporate restructuring options within the EU!

The Directive has entered into force as per 1 January 2020 and will have to be implemented in the local laws of the EU member states ultimately on 31 January 2023. Unfortunately, as it looks like the UK will have left the EU before that date and will no longer be an EU member state, the Directive will not need to be implemented in the UK, but within the remaining EU jurisdictions this harmonisation offers amazing structuring opportunities.

Scope of the Directive

The Directive only applies to limited liability companies (i.e. NVs and BVs in the Netherlands). Companies that are in liquidation and have begun to distribute assets to their members (note that the Directive uses this term, which we consider to be the shareholders). For the sake of consistency we will use the
terminology of the Directive) cannot enter into the respective transactions, as is the same for credit institutions or investment firms subject to recovery measures as provided for in Directive 2014/59. Furthermore, EU member states may provide that the Directive does not apply to companies that are subject to insolvency proceedings, liquidation proceedings or crisis prevention measures.
Finally, the Directive does not apply to cross-border conversions and divisions of a company of which the object is to collectively invest capital provided by the public.

Only a limited type of cross-border divisions are supported by the Directive. Although both partial and full cross-border divisions are permissible, these can only be implemented by means of a division into one or more newly incorporated company/ies in another EU member state. A cross-border division to an existing company is not allowed under the Directive, mainly due to the complexity of such a transaction. The Directive does not impose similar restrictions with regard to the type of cross border mergers that can be entered into, so a cross-border merger into a newly incorporated company is permissible. A cross-border conversion does not change the corporate personality of a company and therefore no new company is required to be incorporated.

Legal procedure for cross-border conversions, mergers and divisions

The directive provides for the same overall legal procedure to be followed for each cross-border transaction, although some transaction specific requirements may be slightly different. In general, the legal procedure to be undertaken is as
follows:

  1. Drafting of the draft terms for the cross-border transaction by the management board(s) of the converting company, the merging companies or the dividing company, as the case may be. The draft terms should be made available electronically to the members of each involved company at least six weeks before the general meeting in which a resolution is to be adopted concerning the transaction.
  2. Drafting of a report with two sections, or two separate reports, explaining and justifying the legal and economic aspects of the transaction for: 
    • the members, explaining inter alia the cash compensation, the implications of the transaction for the members, the share exchange ratio, and the rights and remedies available if they wish to dispose of their shares or wish to dispute the share exchange ratio; and
    • the employees, explaining the implications of the transaction for employment relationships, any material changes to the applicable employment conditions or location of the company’s place of business, as well as how both factors affect any subsidiaries.
      The report prepared for members can be waived by consent of all members. The report for employees is not required if all employees are part of the management board of the company and its subsidiaries. The report(s) should be made available electronically to the members and employees (or their representatives) at least six weeks before the general meeting during which a resolution is to be adopted concerning the transaction.
  3. Examination of the draft terms of the cross-border transaction by an independent expert who will also draw up a report for the members. The report should include the expert’s opinion on whether the cash compensation is adequate. With the consent of all members, the expert’s report is not required. The expert’s report, if required, should be made available to the members at least one month before the general meeting during which a resolution is to be adopted concerning the transaction: there is no requirement for this report to be made 
  4. Disclosure and publication in the register of the departure EU member state of:
    •  the draft terms of the cross-border transaction; and
    • notice informing the members, creditors and representatives of the employees or, if not applicable, the employees themselves, that they may submit comments regarding the draft terms five working days before the date of the general meeting at the latest.

      EU member states may require that the management board provides a declaration that accurately reflects the current financial status of the date no earlier than one month before the disclosure of that declaration. This declaration is to be disclosed together with the draft terms and notice. Additional information has to be submitted to the register of the  departure EU member state, and in the event of a cross-border merger, to the registers of each EU member state involved in the transaction. This information includes, inter alia, information about the legal form, name and location of the companies involved, details of the website where the draft terms and notice can be found and an indication of the arrangements for creditors, employees and members.

      EU member states may require that the independent expert’s report be disclosed and made publicly available. Disclosure should occur not later than one month prior to the general meeting during which a resolution is to be adopted concerning the transaction. Furthermore EU member states may require a publication in the national gazette or through a central electronic platform.

5.    Taking into account the aforementioned timelines, the general meeting can be held during which the resolution concerning the cross-border transaction will be considered and may be adopted. The majority required for a resolution to enter into a cross-border conversion or division should be at least two thirds but not more than 90% of the votes attaching to the shares represented at the general meeting. The voting threshold may in any event not be higher than provided for in national law for the approval of cross-border mergers.

6.    Within three months after receipt of the documentation concerning the approval of the cross-border transaction by the general meeting, the court, notary or other authority designated by the respective departure EU member state shall issue a pre-transaction certificate. The certificate should confirm that the cross-border transaction complies with all the relevant conditions and that all necessary procedures and formalities have been completed. The deadline of three months may be extended by a maximum of three months, but only if further investigation is required to make sure the transaction is not set up for abusive or fraudulent purposes.

7.    Additionally, the court, notary or other authority designated by the destination EU member state is to issue a pre-transaction certificate, stating that the company complies with the provisions of national law on the incorporation and registration of companies and, where applicable, arrangements for employee participation have been determined. In the event of a cross-border merger, the certificate should state that all relevant conditions and procedures and formalities in the respective EU member state have been complied with. This certificate can only be issued after issuance of the pre-transaction certificate in the departure EU member state.

8.    In the event of a cross-border division or conversion, the converted or incorporated entity should be registered with the register of the destination EU member state. A notification of this registration should be sent to the register of the departure EU member state.

9.    The laws of the destination EU member state are to determine when the cross-border transaction enters into force, which date should be after the issue of the pre-transaction certificates. In the event of a cross-border division, the effective date cannot be earlier than the notification of the register in the departure EU member state described under 9.

Protection of creditors, members and employees

Creditors who are dissatisfied with the safeguards offered in the terms of the transaction, must be given the opportunity, within three months of the disclosure and publication, to request adequate safeguards are put in place. The creditors must be able to demonstrate credibly that the satisfaction of their claim is at stake. EU member states should ensure that any such safeguards put in place are conditional on the transaction taking effect. It is currently unclear how this will be implemented in local legislation and whether the companies can proceed with the transaction before these three months have elapsed. It is our interpretation that it is possible to issue the certificate referred to under paragraph 6 above during the creditors’ opposition period, but this will depend on the implementation in Dutch, and each other domestic, legislation. It is worth mentioning that creditors should be able to institute proceedings against the company also in the departure EU member state within two years of the date the transaction has taken effect.

The Directive furthermore provides a procedure for the protection of members that do not agree to the transaction, allowing them to dispose of their shares for adequate cash compensation. Each member state will be free to establish the period of time given to members to exercise this right, provided that it shall not exceed one month after the general meeting.

Finally, a procedure has been included to ensure protection of employees’ rights to information and consultation and employee participation rights.

Timeline

Please see below a high level indicative timeline of a cross-border transaction. This timeline assumes that any required pre-work, such as due diligence to identify the assets and liabilities to be transferred, has been undertaken and that there are no complications as a result of employee involvement.

Conclusion

Although some specific procedural requirements have to be clarified by implementation domestic legislation, the Directive provides for a unified procedure for the three types of cross-border transactions. Considering that some aspects still require further clarification, these procedures will require thorough consultation with the jurisdictions involved and review by the respective authorities. Once relevant domestic draft legislation is available, we will provide you with a further update on this topic.

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