The directive on cross-border conversions, mergers and divisions that was adopted by the European Parliament and the Council (Directive (EU) 2019/2121) on November 27, 2019 (the “Directive”), will bring beneficial changes to the legal frameworks for European Union (EU) cross-border transactions but will also come along with lengthy and more stringent requirements compared to the status quo.
Under current legal regimes, cross-border conversions of companies are one of the simplest ways to move business activities from one to another EU Member State or abroad and should be considered by U.S. and non-U.S. multinationals in the context of cross-border group reorganizations and restructurings.
Germany, Luxembourg, the Netherlands, Italy and France are among the Members States that implement the majority of all cross-border corporate transactions including mergers, conversions and divisions at an EU level. Germany and Luxembourg, in particular, go strong, with Germany heading the overall number of transactions and Luxembourg ranking number one in implementing conversions within and outside of the EU, outnumbering by far all other Member States.
Luxembourg is one of very few Members States that have codified provisions on cross-border conversions within and outside of the EU. Luxembourg’s long-established, widely tested and reliable practice adds legal certainty and predictability when it comes to implementing cross-border conversions or other operations. Member States with no such legal provisions may cross-border convert based on numerous court cases in which the European Court of Justice has confirmed the possibility for companies to cross-border convert between Member States on the basis of the freedom of establishment. However, the absence of codified rules, and the differing applications and interpretations of the principle of freedom of establishment on cross-border conversions throughout all Member States, leaves a level of uncertainty and unpredictability when it comes to implementation of cross-border operations which can result in a reorganization or restructuring being lengthier and costlier.
The Directive will bring significant change to the existing legal cross-border conversion framework.
Twelve questions and answers about the implementation of the Directive into national laws:
1. What are the aims of the Directive?
The Directive aims to create a common legal framework for cross-border conversions and divisions and to clarify the existing provisions on cross-border mergers within the EU.
While the laws of many Member States currently provide codified provisions for cross-border mergers of limited liability companies (e.g., the Netherlands in its Dutch Civil Code under Article 2:308 et seq., or Luxembourg in its Company Law under Article 1020-1 et seq.), those laws either completely lack or include only marginal codified provisions on cross-border conversions or cross-border divisions. Once implemented into national laws, the Directive will close this gap, enhancing legal certainty and harmonization of rules on cross-border conversions and divisions throughout the EU, in addition to strengthening the rights of shareholders, employees and creditors in EU cross-border operations.
2. Which types of companies benefit from the Directive?
The Directive has a limited scope. It covers limited liability companies, i.e., private limited liability companies such as a Luxembourg S.à r.l. (société a responsabilité limitée) or a Dutch B.V. (besloten vennootschap met beperkte aansprakelijkheid) and public limited liability companies such as a Luxembourg S.A. (société anonyme) or a Dutch N.V. (naamloze vennootschap). Those types of companies are outside of the scope of the Directive if they are subject to a liquidation, insolvency proceeding or preventive restructuring measure.
The rationale behind the Directive’s limited scope is that limited liability companies are the most widely used company forms for cross-border operations in the EU. In addition, legal provisions on limited liability companies are sufficiently harmonized throughout the EU while this is not yet the case for other company forms.
The currently applicable Luxembourg law goes beyond the Directive’s scope and permits cross-border conversions not only for limited liability companies but for all commercial companies as long as they have a legal personality, including partnerships limited by shares (SCA or société en commandite par actions) or the European company (SE or société européenne). It is to be seen how Member States will implement the Directive into national law, so its impact on the current scope of law in Luxembourg cannot be determined at this point.
3. What is the jurisdictional scope of the Directive?
The Directive covers cross-border conversions between Member States. Cross-border conversions from or to a jurisdiction outside of the EU are outside of the Directive’s scope and must be based on applicable national legislation and regimes.
Today, most Member States including Luxembourg already allow for cross-border conversions from and to countries that are not EU Member States, thereby providing easy access of foreign companies to the EU financial market, as well as exit strategies to leave it.
4. When do the new provisions kick in?
All Member States will need to implement the Directive into national law by January 31, 2023, at the latest.
As of the date of this article, to the best of our knowledge, no Member State has implemented the Directive into national law.
5. What is a cross-border conversion under the Directive?
A cross-border conversion is the conversion of the legal form of a company with legal personality in a departure Member State into another legal form in a destination Member State. The converting company does not dissolve, wind up or liquidate and retains its legal personality. It continues to own all its assets and hold all its liabilities post-conversion without interruption. All agreements that existed pre-conversion continue to exist post-conversion.
In addition to cross-border mergers, the Directive foresees cross-border divisions through the creation of one or more limited liability companies by means of (i) a split-up (i.e., a full division); (ii) a split-off (i.e., a partial division); and (iii) a transfer to a newly formed subsidiary (i.e., a division by separation). In the last case, it is the dividing company itself (rather than the shareholder(s) of the dividing company) that acquires shares in the acquiring company or companies.
6. How do the real seat theory and the incorporation theory affect a cross-border conversion?
In a cross-border conversion, a company’s registered office (or registered seat) must be transferred from the departure country to the destination country.
If the country of destination applies the “real seat theory,” the place of central administration or principal place of business must be transferred to the country of destination in addition to the registered office.
If the country of destination applies the “incorporation theory,” neither the central administration nor the principal place of establishment must be transferred to the country of destination.
7. What will the cross-border conversion procedure look like?
The cross-border conversion procedure is to a large extent a replication of the merger procedure provisions made available by the directive relating to certain aspects of company law (Directive (EU) 2017/1132) of the European Parliament and the Council of June 14, 2017.
The key steps and documents include:
- Management conversion proposal published with a notice to stakeholders.
- Management report to shareholders and employees explaining and justifying the legal and economic aspects of the conversion, and implications for future business.
- Compliance with employee information, consultation and participation rights.
- Independent expert report examining and reporting on draft conversion proposal.
- At least one month after conversion proposal publication date, holding of general meeting of shareholders approving conversion. Majority requirements (i.e., between 2/3 and 90% of voting rights and equal to or lower than the merger majority requirements).
- Pre-conversion certificate issuance certifying completion of conversion steps in departing Member State within three months. No issuance if conversion serves fraudulent, abusive or criminal purposes. Automatic transmission of certificate to destination Member State competent authority.
- Destination Member State verification by competent authority of compliance with local law incorporation and registration rules.
8. Will waivers of the requirements to prepare certain documents be available?
Waivers are an option for some requirements, including for the preparation of a management report explaining and justifying the legal and economic aspects to shareholders and employees and of an independent expert report thereon.
9. How will cross-border conversion effectiveness be determined?
The destination Member States laws determine the date of effectiveness of the conversion between and toward third parties.