EU Directive No. 2019/2121 (the “Directive”) amending EU Directive No. 2017/1132 on cross-border conversions, mergers and divisions needs to be transposed into national law by all Member States by 31 January 2023. The Directive introduces a harmonised regime for cross-border conversions and divisions for the first time, namely those involving more than one Member State and amends existing EU legislation relating to cross-border mergers.
The scope of the Directive is to enhance cross-border mobility of corporate entities within EU borders through harmonised processes while at the same time ensuring the protection of other public interests such as those of employees, creditors and minority shareholders and providing national authorities with the necessary safeguards to combat fraud and abuse.
For ease of reference, in this article each of cross-border conversions, mergers and divisions may at times singly or collectively be referred to as “cross-border operation(s)”.
Cross-border conversions are defined by the 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.”1 The effects of a cross-border conversion are similar to those of re-domiciliations implemented in accordance with the Continuation of Companies Regulations (S.L. 386.05 of the Laws of Malta).
Although cross-border conversions have already been recognised by the ECJ in its judgments2, the lack of harmonised legislation created legal uncertainties and barriers to the exercise of the freedom of establishment. The introduction of cross-border conversions across EU Member States will now give an opportunity to companies situated within the EU to move across borders without having to be concerned whether national legislations permit the cross-border operation and without having to contend with the uncertainties arising from different and unaligned processes for implementation.
The Directive introduces three forms of cross-border division, namely full division, partial division and division by separation of companies. In all three forms of cross-border division, the recipient company/ies must be newly formed companies. This is unlike what we are accustomed to when implementing divisions under the provisions of the Companies Act (Chapter 386 of the Laws of Malta) where the recipient company/ies may either be newly formed companies or existing companies. Indeed, this was a conscious decision taken by the EU Commission as it was deemed that allowing for existing companies to be recipient companies would prove to be overly complex. Having said that the EU Commission has not excluded the possibility of introducing cross-border divisions with existing companies being recipient companies in the future.3
Another distinguishing factor which is worth mentioning is the fact that unlike domestic divisions carried out under the Companies Act, the Directive caters for the possibility that as a result of a cross-border division (being a partial division or a division by separation of companies) the company being divided continues to exist once the cross-border division becomes effective. It is only in a full division that the Directive requires that upon the cross-border operation becoming effective, the company being divided ceases to exist.
Cross-Border Mergers were first introduced into EU legislation by Directive 2005/56/EC and later consolidated in EU Directive 2017/1132. The new Directive amends existing provisions relating to cross-border mergers and streamlines the process to make it similar to that introduced for cross-border conversions and cross-border divisions.
The Directive also introduces a new form of cross-border merger such that four types of cross-border mergers will be available: (1) merger by acquisition (2) merger by formation (3) merger between a parent company and its subsidiaries and (4) merger between companies having the same ownership. The latter is defined by the Directive as a cross-border operation “whereby one or more companies on being dissolved without going into liquidation, transfer all their assets and liabilities to an existing acquiring company without the issue of any new shares by the acquiring company provided that one person holds directly or indirectly all the shares in the merging companies or the members of the merging companies hold their shares in the same proportion in all merging companies”.4 Given that the ownership structure of the merging companies will remain the same upon completion of the process, simplified procedures are made to apply to this new type of cross-border merger.
Implementation of the Cross-Border Operations
The processes for implementing each cross-border operation have a number of similarities some of which are:
- The requirement of preparing draft terms containing details of the proposed cross-border operation;
- Preparation of detailed directors' reports addressed to shareholders and employees;
- Preparation of a report by an independent expert;
- Disclosure requirements in the interest of shareholders, employees and creditors;
- Application of a 3-month creditor notification period;
- Shareholder approval and protection of minority interests;
- Review by the competent authorities with the possibility of the application of an anti-abuse provision if the authorities have serious doubts on the real purpose of the cross-border operation.
These requirements clearly reflect the EU Commission's balancing act of harmonising processes while at the same time ensuring the protection of shareholders', employees' and creditors' interests and the prevention of the use of EU freedoms for illicit purposes.
31 January 2023 marks the deadline for Member States (including Malta) to transpose the provisions of Directive No. 2019/2121. The Directive clearly presents new business opportunities for companies wishing to move across the EU's borders. As practitioners we look forward to assisting with its implementation once the Directive is transposed into Maltese law.
1 Article 86b point (2) of EU Directive No. 2017/1132 as amended by EU Directive No. 2019/2121.
2 Case C-210/06 – Cartesio Oktató és Szolgáltató bt; Case C-378/10 – VALE Építési kft; Case C‑106/16 – Polbud — Wykonawstwo sp. z o.o., in liquidation.
3 Proposal 2018/0114 for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, p. 9.
4 Article 119 point (2) paragraph (d) of EU Directive No. 2017/1132 as amended by EU Directive No. 2019/2121.
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.