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

PUBLISHED: 20th July 2022

Directive (EU) 2019/2121), known as the Mobility Directive, aims to eliminate unjustified barriers to the freedom of establishment of EU companies in the single market.

To achieve this aim, the Mobility Directive amends some of the existing rules on cross-border mergers in the EU and, for the first time, introduces rules on
cross-border conversions and divisions for all Member States.

The official title of the Mobility Directive is 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 conversions, mergers and divisions.

Member States are required to implement the Mobility Directive into national law by 31 January 2023.

This article will outline the key changes being introduced by the Mobility Directive to the existing EU cross border corporate mobility regime (the EU Cross-border Corporate Mobility Regime), which was established under Directive 2005/56/EC, and was subsequently implemented into Irish law by the European Communities (Cross-Border Mergers) Regulations 2008 (S.I. No. 157/2008).

Which type of company can avail of the EU Cross-border Corporate Mobility Regime?

Only a limited liability company formed in accordance with the law of a Member State and having its registered office, central administration or principal place of business within the EU can avail of the procedures on cross-border mergers, conversions and divisions. Notably and logically, however, the Mobility Directive, expressly excludes a limited liability company in liquidation where the distribution of assets has begun from availing of the regime.

EU Cross-border conversions: what are they?

A cross-border conversion is essentially the relocation of a company to another jurisdiction by operation of law. It is defined under the Mobility Directive as:

… an operation whereby a company, without being dissolved or wound up or going into liquidation, converts the legal form under which it is registered in a departure Member State into a legal form of the destination Member State, as listed in Annex II, and transfers at least its registered office to the destination Member State, while retaining its legal personality.

Annex II refers to limited liability companies in the Member States.  The net effect of this definition is that a limited liability company registered in Ireland could, subject to the rules on conversion in the Mobility Directive and national legislation implementing this directive, convert into, for example, a German limited liability company.

A major benefit of the conversion scheme is that following the completion of a conversion, all the assets and liabilities of the company, including all contracts, credits, rights and obligations, shall be those of the converted company, and the members of the company shall continue as members of the converted company.  The rights of employees of the company are also to continue in the converted company.

EU Cross-border conversions: procedural summary

To avail of the conversion scheme, a number of procedural steps must be complied with.

      1. Draft terms of cross-border conversion.

The converting company must draw up a draft terms of cross-border conversion. This is the primary document used to effect the conversion and sets out various particulars in relation to the conversion.

       2. Members and employees report.

Unless certain exemptions are availed of, the administrative or management body of the converting company (for Irish companies, the board of directors) must draw up a report for members and employees, explaining and justifying the legal and economic aspects of the cross-border conversion, as well as explaining the implications of the cross‐border conversion for employees.

       3. Independent expert report.

Unless all of the members agree otherwise, an independent expert’s report must be prepared in relation to the conversion.

       4. Documents published in public register.

A copy of the draft terms of cross-border conversion must be filed in the national corporate registry of the converting company (the Companies Registration Office in Ireland) together with a notice informing the members, creditors and representatives of the employees of the converting company they may submit comments concerning the draft terms of the cross-border conversion. Member States have the option to exempt companies from this requirement if they make the draft terms of cross-border conversions and notice informing the members, creditors and representatives of the employees available on its website for one month prior to a meeting of the members is held to approve the cross-border conversion.

       5. Approval by general meeting.

When steps 1-4 have been completed, a meeting of the converting members must be held to approve the draft terms of cross-border merger.  The Mobility Directive specifies that for such approval to be effective a majority of not less than two thirds but not more than 90% of the votes attached either to the shares or to the subscribed capital represented at the general meeting votes in favour of the approval.

       6. Pre-conversion certificate.

Member States must designate the court, notary or other authority or authorities competent to scrutinise the legality of cross-border conversions as regards those parts of the procedure which are governed by the law of the departure Member State and to issue a pre-conversion certificate attesting to compliance with all relevant conditions and to the proper completion of all procedures and formalities in the departure Member State.  This scrutiny must be completed within three months of the date of receipt of the draft terms of cross-border conversion.  In respect of cross-border mergers, the Irish competent authority is the High Court so it is likely that this court will also be the competent authority in relation cross-border conversions and divisions.

       7. Scrutiny of the legality of the cross-border conversion by the destination Member State.

Once the pre-conversion certificate is lodged with the competent authority of the destination Member State, this authority is to be responsible for scrutinising the legality of the cross-border conversion as regards that part of the procedure which is governed by the law of the destination Member State and to approve the cross-border conversion.

       8. Registration and Consequences of a cross-border conversion.

Once the merger is approved by the competent authority of the destination Member State, it will be registered with the national public registers of the departure and destination Member States and will be legally effective on a date specified by the competent authority of the destination Member State.

       9. Consequences of a cross-border conversion: once the cross-border conversion becomes effective the following is deemed to have occurred by operation of law.  

            a. All the assets and liabilities of the company, including all contracts, credits, rights and obligations, shall be those of the converted company

            b. The members of the company shall continue to be members of the converted company, unless they have disposed of their shares as referred to in Article 86i(1) of the Mobility Directive

            c. The rights and obligations of the company arising from contracts of employment or from employment relationships and existing at the date on which the cross-border conversion takes effect shall be those of the converted company.

       10. Protection of members, creditors and employees.

Various protections are made available to members, creditors and employees of the converting company, such as:

            a. Members.  Member States must ensure that at least the members of a converting company who voted against the approval of the draft terms of cross-border conversion have the right to dispose of their shares for adequate cash compensation. This can be described as a ‘cash out’ option.

            b. Creditors.  Member States must ensure that creditors who are dissatisfied with the safeguards offered in the draft terms of cross-border conversion, may apply, within three months of the disclosure of the draft terms of cross-border conversion referred to in Article 86g, to the appropriate administrative or judicial authority for adequate safeguards, provided that such creditors can credibly demonstrate that, due to the cross-border conversion, the satisfaction of their claims is at stake.

            c. Employees.   The Mobility Directive pays particular attention to the protection of employees where in addition to informational rights and retention of existing rights, a multifaceted employee participation scheme must be followed.

EU Cross-border divisions: what are they?

In addition to new rules on cross-border conversions, the Mobility Directive lays down rules on cross-border divisions, both for partial and full divisions, but those rules only relate to cross-border divisions that involve the formation of new companies.  This means that only one of the two options by which a domestic division can be completed under the Companies Act 2014 is possible under the Mobility Directive as a division by acquisition is also possible under the Companies Act 2014.  A full division by formation is essentially where a company being divided, on being dissolved without going into liquidation, transfers all of its assets and liabilities to two or more recipient companies, in exchange for the issue to the members of the company being divided of securities or shares in the recipient companies and, if applicable, a cash payment.

EU Cross-border divisions: procedural summary

The procedural steps required to implement a cross-border division are essentially the same as the procedural steps applicable to a cross-border conversion, as set out above.   

Amendments to the existing rules on EU cross-border mergers

The rules governing cross-border conversions and divisions were constructed from the existing rules on cross-border mergers with some enhancements to protections for members, creditors, and employees. Therefore, the amendments made by the Mobility Directive to the existing rules on cross-border mergers by and large replicate the procedural rules governing a cross-border division as described above. Accordingly, as with cross-border divisions, to avoid repetition, we will not repeat them again here. However, it should be noted that certain nuances apply to each procedure so once implemented into the national laws of each Member States, the specific rules applicable to each procedure should be reviewed in isolation before embarking on a cross-border merger, conversion or division.

New rule on anti-abuse of process

To avoid abuse of process, the Mobility Directive has introduced a new rule that is applicable to cross border conversions, mergers, and divisions, which requires the relevant competent authority, when scrutinising whether or not to grant a pre-conversion/merger/division certificate, to assess whether or not the relevant procedure is being carried out for abusive or fraudulent purposes, such as for the circumvention of the rights of employees, social security payments or tax obligations, or for criminal purposes. If there is any suspicion of such abuse, the competent authority can extend the three-month period under which it has to decide whether or not to grant a certificate by a further three months, but it is at the discretion of each Member State if this extra review period is to be provided for in national implementing legislation. How this rule will be applied in practice remains to be seen.

National Implementation of the Mobility Directive  

Member States have until 31 January 2023 to implement the Mobility Directive into national law.  In Ireland, it will most likely be the implemented by a statutory instrument in the form of regulations and such regulations.   The Mobility Directive does contain some provisions which are at the discretion of Member States to choose whether or not to implement. The Department of Enterprise, Trade and Employment held a public consultation in 2020 seeking views on these aspects of the Directive.  The consultation process is now closed, and the submissions received are under review.  Some of the discretionary provisions include whether or not to:

• exempt companies from filing requirements where documents are made available on company’s website for a month
• require satisfaction of liabilities with public bodies before a pre-conversion/merger/division certificate is issued by the High Court
• disapply the requirement for an expert report and directors report for single member companies

It will be interesting to see what discretions are included in the draft regulations when published.

Conclusion

The new Cross-border Corporate Mobility Regime being introduced by the Mobility Directive will certainly enhance the corporate restructuring options available to businesses operating in the EU and this can only be a considered as a welcome development.   Particularly as there is currently no defined legal framework for the completion of a EU cross-border conversion or division.  It will be interesting to track the uptake of these new procedures, once the Mobility Directive has been implemented in all Member States.

Our Experience 

At LK Shields we have a wealth of experience and expertise in advising companies on cross-border matters, including acting in the role of lead counsel in cross-border mergers.  If you would like to get in touch, we would be very happy to discuss any of your corporate restructuring plans with you.

For further information please contact Richard Curran (rcurran@lkshields.ie) or Paul Dineen (pdineen@lkshields.ie).