Cross-border mergers have become an integral part of corporate restructuring within the EU internal market. Groups have taken advantage of harmonized rules to move or consolidate operations, ownership of assets and liabilities in member states – for example, many companies have used cross-border mergers to reorganize their structures following Brexit. However, the level of harmonization of cross-border reorganizations was limited, covering only mergers of limited liability companies, while other forms were absent. The new legislation, discussed in more detail in this article, expands the rules applicable to cross-border reorganizations by also introducing comprehensive procedures for cross-border conversions and divisions and revising the rules for cross-border mergers of limited liability companies. It aims to make the process simpler, faster and cheaper, while ensuring greater protection for shareholders, employees and creditors and allowing national authorities to block cross-border reorganizations put in place for fraudulent or abusive purposes, such as evading social security payments or tax obligations.
Underlying legislation in this area is Directive 2017/1132 relating to certain aspects of company law. Experts have often pointed out the insufficiency of the current legislation. The absence of a harmonized legal framework leads to many practical problems and, to a large extent, fails to ensure effective protection of vulnerable stakeholders. To address these concerns, the European Union adopted a new Directive 2019/2121, amending Directive 2017/1132 as regards cross-border conversions, mergers and divisions. As the transposition deadline of 31 January 2023 approaches, we believe it is time to recall some of the main changes introduced by this new legislation.
Firstly, the directive establishes comprehensive rules for cross-border conversions and divisions of limited liability companies involving the creation of new companies (the transfer of assets and liabilities to one or more existing companies remains excluded from the harmonized framework). Cross-border divisions will also contain a new category which is currently not recognized by Czech law. By demerger, a company may transfer part of its assets and liabilities to one or more beneficiary companies, in exchange for shares in the beneficiary companies. This “division by separation”, in which shares of the beneficiary company will be issued for the benefit of the divided company, instead of the shareholders of the divided company, will thus offer an alternative to the constitution of a subsidiary by the contribution non-monetary contributions by an investment company.
The directive also clarifies and extends the information obligations with regard to shareholders and employees. The extent of the information contained in the report of the management body explaining and justifying the legal and economic aspects of the cross-border reorganization project and its implications for employees is provided in much more detail. The employees (or their representatives) will then be able to comment on the relevant parts of the report by submitting their opinion. For shareholders, the report should include the protection tools available to them, including information on their right to withdraw from the company. In order to expedite the reorganization process, shareholders may waive their right to this report. Additional information rights are also granted to creditors. Member States will also have to ensure that creditors who are not satisfied with the protection offered by the company in the draft common clauses (and where they have not been able to find a satisfactory solution with the company) can contact the authority responsible for protective measures.
In order to carry out a cross-border reorganisation, it will be necessary to obtain a pre-conversion, pre-merger or pre-split certificate from the competent authorities of the Member States attesting to the fulfillment of all the relevant conditions and the proper execution of all procedures and formalities in the Member State of the participating company. Member States must ensure that companies can apply for the certificate online.
In addition, in the context of a cross-border reorganization, companies will have to publish a notice in a register informing shareholders, creditors and employees (or their representatives) of their right to comment on the proposed reorganization. The observations submitted, as well as the draft common specifications, the report of the management body and the information relating to the approval of the draft common specifications by the supreme body of the company will be attached to the application. certificate described in the paragraph above.
According to the European Commission, the new legislation and harmonization should speed up the cross-border reorganization process, which can take around 3 to 6 months depending on the circumstances of the case, and make it cheaper. Estimated savings are between EUR 12,000 and EUR 19,000 per single cross-border reorganization.
The directive was adopted on November 27, 2019 and enters into force on January 1, 2020. As mentioned above, the deadline for transposition of the directive into national laws is January 31, 2023. As of the date of publication of this article, no changes to the relevant laws, in particular Law No. 125/2008 Coll., on the transformations of companies and cooperatives, which would implement the Directive, have gone through the legislative procedure in the Czech Chambers of Deputies.