EU Company Law Package: cross-border mobility for companies

Out-Law Analysis | 23 Jan 2020 | 2:55 pm | 6 min. read

A new EU directive on the cross-border conversions, division and merger of companies will promote legal mobility within the European internal market and harmonise EU company law.

The now-published Directive on Cross-Border Conversion, Mergers and Divisions (MobilRL in German) is one of two central pillars of the so-called EU Company Law Package, together with the Directive on the Use of Digital Tools and Processes in Company Law which entered into force in summer 2019. The two directives make extensive amendments to the 2017 Directive on Certain Aspects of Company Law (GesRRL in German), and thus promote the harmonisation of the European company law system.

The aim of the MobilRL is to standardise the three forms of corporate conversion - change of legal form, division and merger - and promote the legal mobility of corporation, such as the UK's limited liability company or German GmbH, AG and KGaA, within the European internal market. Companies should also be able to carry out cross-border corporate conversions without discrimination.

The directive groups the three different forms together under the term 'cross-border operations'. What they all have in common is that the activity results in a change in the applicable law.

Storz Johanna

Johanna Storz

Rechtsanwältin

The directive makes an important contribution to promoting competition between the legal systems of the Member States and opens up a far-reaching freedom of choice of law for the participants in a European common internal market.

For each of the three cross-border operations, the directive provides a separate comprehensive set of rules including definitions, procedural rules and rules protecting creditors, minority shareholders and employees, as well as rules governing the effect and registration of the operation in question. In addition, the directive clearly regulates the point at which the change in applicable member state law occurs, and so makes a significant contribution to legal certainty.

Cross-border operations

Cross-border change of legal form

This refers to the change of a corporation's current legal form to another one. The legal personality of the corporation and all of its existing legal relationships remain unaffected, and only the 'legal dress' of the company changes.

The European legislator has chosen the somewhat imprecise term "conversion" to refer to this cross-border operation.

Cross-border division

The directive provides for three types of corporate division: full division, partial division and division by separation. These three types of corporate division involve the formation of new companies. Division by absorption was not included in the Directive.

Full division is the distribution of a corporation's assets and liabilities to at least two new companies – called 'recipient companies' – on liquidation of the company being demerged. Partial division occurs where the original company remains in existence and transfers only part of its assets to one or more recipient companies. In both cases, shares or other interests may be granted – in part reciprocally - to shareholders, and additional cash payments may be made.

A division by separation also involves the transfer of only part of the assets and liabilities to one or more new companies. However, shares can only be granted unilaterally to the company carrying out the division and no additional cash payments may be made. The directive provides for a far-reaching simplification of the formalities for division by separation.

Cross-border merger

Cross-border mergers were already regulated by the GesRRL. The new directive amends the existing law and adds new provisions, resulting in a standardisation of the requirements and procedures for all cross-border operations.

The new directive also distinguishes between three forms of merger. One or more companies can be transferred, without liquidation of their total assets, at the time of their dissolution to either an existing or a newly-established company in return for the granting of shares and, if necessary, an additional cash payment. Alternatively, in an intra-group merger, a company may be transferred to its parent company if the parent company holds all the shares in it.

Standard requirements

The directive is aimed at corporations in the EU internal market, as listed in Annex II of GesRRL. It does not cover partnerships. This means that, for the time being, partnerships can rely only on EU case law and the general principle of freedom of establishment if they are planning cross-border operations. It does however remain open to member states to extend the scope of the directive in national law to include partnerships.

Companies in liquidation are also excluded, in order to prevent flight to cross-border conversion.

Common to all cross-border operations covered by the directive is a requirement for the company to prepare a report containing the most important information about the future company including form, schedule, securities and effects on certain areas. This report is reviewed by an independent expert and disclosed to the relevant corporate registrar(s) or other competent body.

In addition, the company's management body must produce a report to inform the shareholders and employees on the aspects of the operation which are relevant to them for example relevant effects, cash compensation offers, exchange ratios and aspects of employment relationships and job security measures. The shareholders may dispense with the report concerning them and the examination by an expert, but the report is mandatory for the employees if the company does not only consist of the management board. Member states may exempt companies which have only one shareholder from the obligation to report to the company.

The directive sets out rules on the quorum required for approval of the cross-border operation by the meeting(s) of shareholders. It also provides specific safeguards for creditors, minority shareholders and employees, and regulates jurisdiction for certain disputes. Existing creditor claims must be secured, and employees have a higher level of information and consultation rights.

Employment relationships remaining in the departure member state are not subject to any change in legal system. Labour law is linked to the place of performance of work. However, employee participation rules follow company law. Depending on the arrangements in the destination member state, employee participation rights may increase following the cross-border operation.

Exchange of documents and communication between company registrars in the member states must take place exclusively via the new pan-European Business Register Interconnection System (BRIS). Once a pre-conversion certificate of the cross-border operation is supplied to the competent registrar in the destination member state, that registrar is only required to check whether the procedure taking place in the destination member state is in order. The pre-conversion certificate is regarded as proof that the operation has until that point been in order under the previous national and European law.

Once a cross-border operation is registered and takes effect, it cannot be subsequently declared null and void. Member states may only impose sanctions within narrow limits, in the event of serious abuses.

Likely impact

In the 2017 Polbud decision, the Court of Justice of the EU (CJEU) ruled that freedom of establishment, as one of the European fundamental freedoms, includes the right of a company formed under the law of one member state to convert into a company governed by the law of another member state. That company should not then be subject to stricter regulation than domestic companies.

In the Polbud case, the court ruled that a blanket requirement to liquidate a company in the event of a cross-boarder change of legal form - and therefore, inevitably, to re-establish it in the member state of incorporation - was discriminatory, provided that domestic companies are not subject to a liquidation obligation in the event of a change of legal form within the member state.

Under the new directive, the transfer of a company's registered office by means of a cross-border change of legal form, and thus maintenance of the company's legal personality, is now expressly standardised and therefore a more attractive option.

The MobilRL inserted numerous new provisions and new chapters into the GesRRL, and amended and revised related regulations. The GesRRL is now gaining in scope and a uniform, harmonised European company law emerging.

In a particularly welcome development, the new directive clearly defines which national law is applicable and when, both during the operation itself and in legal disputes. It is also positive that the operation cannot now be blocked by individual shareholders because of disagreements about the amount or assessment of the cash settlement. Member states are required from the outset to organise and structure the operations and competent bodies in such a way, since the directive lays down maximum time limits which must be respected and a cross-border operation cannot fail due to excessive procedural delays. Above all, the introduction of the pre-conversion certificate should considerably speed up cross-border operations, as the two-stage examination makes a renewed referral to the competent body in the destination member state unnecessary.

Why the European legislator has decided not to regulate division by absorption in the same way is not entirely clear. It is also disappointing that, despite numerous parallels in the procedural rules, the directive contains no general procedural part but rather opens a new chapter for each individual cross-border operation. However, member states have the option of making this clearer and more structured in their national rules. Nevertheless the positive aspects of the directive clearly outweigh these drawbacks.

The directive makes an important contribution to promoting competition between the legal systems of the Member States and opens up a far-reaching freedom of choice of law for the participants in a European common internal market.

Johanna Storz is a company law expert at Pinsent Masons, the law firm behind Out-Law.