On 31 January 2023, three (3) legal notices (the "Legal Notices") were published in Malta, transposing Directive 2019/2121/EU of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 in terms of cross-border conversions, mergers and divisions (the "Mobility Directive").
The aim of the Mobility Directive is to create harmonized rules across European Union Member States for cross-border mergers, divisions and conversions with efforts to enhance the right of freedom of establishment throughout the European Union. Through the Mobility Directive, one is likely to see an increase in cross-border movement for limited liability companies which consequently enhances the European single market while protecting the rights of all stakeholders involved.
Here are the main take aways from the Legal Notices:
Cross-Border Mergers of Limited Liability Companies (L.N 28 of 2023: Cross-border Mergers of Limited Liability Companies Regulations, 2023) ("Cross-Border Merger Rules")
Maltese law previously regulated cross-border mergers of limited liability companies by way of the Cross-Border Mergers of Limited Liability Companies Regulations (S.L. 386.12) ("Regulations"). These Regulations have been repealed and subsequently replaced by the Cross-Border Merger Rules, which transpose the relevant provisions concerning cross-border mergers from the Mobility Directive. The main change between the Regulations and the newly transposed Cross-Border Merger Rules is the introduction of stronger member, creditor and employee protection when limited liability companies undergo cross-border merger procedures. The Cross-Border Merger Rules aim to safeguard each member's, creditor's and employee's interests in the company primarily through the requirement of having the company present detailed reports on the proposed merger, allowing for the interested parties to put forth their comments and allowing for these parties to challenge certain aspects of the proposed merger.
Additionally, exit rights to the members of companies undergoing cross-border merger procedures have also been introduced, allowing such members to dispose of their shares for cash consideration. In terms of the Rules asper the previous Regulations, entities undergoing cross-border merger procedures are required to transfer all assets, liabilities, rights and obligations of the merging company to the acquiring company or the newly established company.
Cross-Border Divisions of Limited Liability Companies (L.N 26 of 2023: Cross-border Divisions of Limited Liability Companies Regulations, 2023) ("Cross-Border Divisions Rules")
The Cross-Border Divisions Rules lay down the procedures for both partial and full cross-border divisions through the formation of new companies. However, the Cross-Border Divisions Rules do not cater for cross-border divisions that involve the transfer of a company's assets and liabilities to existing companies (as was held in the preamble of the Mobility Directive) which to date remains regulated by way of the Companies Act (Chapter 386, Laws of Malta).
The Cross-Border Division Rules provides for three (3) types of divisions:
- Full Division, whereby a company being divided, on being dissolved without going into liquidation, transfers all 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 not exceeding ten percent (10%) of the nominal value, or, in the absence of a nominal value, a cash payment not exceeding ten percent (10%) of the accounting par value of those securities or shares;
- Partial Division, whereby a company being divided transfers part of its assets and liabilities to one 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, in the company being divided or in both the recipient companies and the company being divided, and, if applicable, a cash payment not exceeding ten percent (10%) of the nominal value, or, in the absence of a nominal value, a cash payment not exceeding ten percent (10%) of the accounting par value of those securities or shares; and
- Division by separation, whereby a company being divided transfers part of its assets and liabilities to one or more recipient companies, in exchange for the issue to the company being divided of securities or shares in the recipient companies.
Similarly to cross-border mergers, in a cross-border division, the assets, liabilities, rights and obligations of the dividing company are to be transferred to the recipient companies in accordance with the draft terms of terms of division.
Should the members of the dividing company decide against exercising their exit rights by disposing of their shares for cash consideration, they shall either become members of the recipient companies or otherwise remain members of the dividing company or both.
Cross-Border Conversions of Limited Liability Companies (L.N 27 of 2023: Cross-Border Conversions of Limited Liability Companies Regulations, 2023) ("Cross-Border Conversions Rules")
The Cross-Border Conversions Rules allow for a company to convert its legal form under which it has been registered in a Member State into a legal form of the destination Member State, while retaining its legal personality without being dissolved, wound up or liquidated. For the purpose of these Cross-Border Conversions Rules, Malta must either be a departure jurisdiction or destination jurisdiction.
Cross-border conversions, more commonly known as re-domiciliation of companies, were regulated by Subsidiary Legislation 386.05, Continuation of Companies Regulations (the "Subsidiary Legislation").. To date, the Subsidiary Legislation is still in force, and applies to cross-border conversions which do not follow the Cross-Border Conversions Rules.
In terms of the Cross-Border Conversions Rules, the following requirements for a cross-border conversion, which are not currently provided for in the Subsidiary Legislation, must be catered for:
- the drawing up of draft terms of cross-border conversion;
- a notice informing members, creditors and employees that they may submit their comments regarding the draft terms of cross-border conversion to the company;
- the drawing up of 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; and
- the requirement of an appointment of an independent expert who shall examine the common draft terms of cross-border conversion.
Similarly to the other Legal Notices, the Cross-Border Conversions Rules also introduces provisions for the protection of members, creditors and employees, which provisions are not provided for in the Subsidiary Legislation.
Common Elements to all Cross-Border Operations
The Mobility Directive is far reaching. It amended and created several common procedures for cross-border operations. Although the Legal Notices are primarily aimed at regulating cross-border operations between European Union Member States and the European Economic Area, they also give discretion to the Registrar to apply these rules to other jurisdictions, provided that these jurisdictions have been approved by the Registrar. A reasoned opinion by a lawyer would be required together with the procedures of that jurisdiction which confirm that any such cross-border operation is allowed under the laws of that jurisdiction. Furthermore, all cross-border operations now require having common draft terms, as well as detailed reports on the consequences of the cross-border operations addressed to members and employees.
The Legal Notices introduced a new requirement for a declaration of solvency to be made by the board of directors of the company undergoing the cross-border operation, stipulating that they are unaware of any reason why the company would not be in a position to pay its liabilities when they fall due as a result of the cross-border operation. Companies which are undergoing insolvency proceedings are excluded from availing of the Legal Notices. Where the board of directors of a company make any such declaration of solvency when they had no reasonable grounds to do so, would be liable to a multa of €50,000 and / or a term of imprisonment of three (3) years.
By way of the Legal Notices, an extraordinary resolution by the members of the company having a minimum of sixty-seven percent (67%) of the nominal value of the shares conferring the right to vote is required to be passed in order for a company to undergo a cross-border operation.
Finally, a right of appeal has been enacted in the Legal Notices for matters concerning: (i) dissenting shareholders challenging compensation or shareholders challenging share-exchange ratio; (ii) challenging a registration; and (iii) requesting for creditors' rights to be safeguarded.
When comparing the previous legislations which were in place concerning cross-border operations and these Legal Notices, the main distinguishing factors include the establishment of standardized procedures throughout the cross-border operations and the safeguarding of stakeholders' interests in ascertaining that these are not prejudiced by way of the cross-border operation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.