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The freedom of establishment, one of the fundamental principles of Union law, allows for the mobility of businesses within the EU. Up until the entry into force on the 1st of January 2020 of the new Directive (EU) 2019/2121 on cross-border conversions, mergers and divisions (hereafter “the 2019 Directive”) one could argue that the harmonisation of the European company law system was sluggish and behind.
The 2017 Directive on Certain Aspects of Company law with respect to matters of cross border company mobility dealt primarily with rules concerning only cross-border mergers with few safeguards for members, creditors and employees, provided only for domestic divisions of public limited liability companies with no provision for cross-border divisions whilst the option of conversion was not dealt with at all leaving it for companies wishing to re-domicile within the EU to rely entirely on the respective national laws.
There was lack of a clear and unified EU legal framework for cross-border mobility of EU companies which led to legal fragmentation and legal uncertainty resulting in barriers for cross border mobility as well as weaker protection of members, creditors and employees.
The 2019 Directive fine-tunes the regulations that already exist on cross-border mergers, but most importantly for the first time it provides uniform EU regulations on cross-border conversions and divisions for all Member States in the European Union. As per the statement of Věra Jourová, the Commissioner for Justice, Consumers and Gender Equality, the 2019 Directive provides for new rules that “will give EU businesses more opportunities to move and grow by providing clear procedures for companies, which will cut costs and save time. At the same time, there will be strong safeguards to protect employees’ rights and to prevent abuse”.
Moreover, apart from standardising the three forms of corporate conversion and promoting the legal mobility of EU corporations, the 2019 Directive pays attention to the costs incurred by companies in pursuit of any of the above cross-border operations. It explicitly allows for the information to be submitted online and be placed on the website as an alternative as well as for the information to be required to be submitted only once at the Business Register Interconnection System. Additionally, in order to cut costs and reduce the length of the procedures and administrative burden for companies, Member States should apply the ‘once-only’ principle in the area of company law.
The procedure, although, appearing too stretched and guarantees a long process before the cross-border operation is finalised, it provides a necessary level of protection not only for the company’s business, its members and employees but also in regards to preventing the carrying out of the cross-border operation for abusive or fraudulent purposes.
It is worth noting that the 2019 Directive, like its predecessors, does not cover partnerships meaning that for the time being partnerships may rely only on EU case law or applicable national law.
The purpose of this Article is to briefly analyse the 2019 Directive and how its provisions will affect the current state in Cyprus.
The procedure for cross-border merger operations as mentioned above was already regulated by the 2017 Directive on Certain Aspects of Company law. The amendments introduced by the 2019 Directive provide for additional safeguards for members and employees which are outlined below. Furthermore, a new fast-track process is introduced for simpler cross-border mergers along the pre-existing regulations.
The 2019 Directive distinguishes three different types of mergers:
(a) one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, in exchange for the issue to their members of securities or shares representing the capital of that other company and, if applicable, a cash payment;
(b) two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, the new company, in exchange for the issue to their members of securities or shares representing the capital of that new company and, if applicable, a cash payment;
(c) a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities or shares representing its capital;
(d) one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the 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 securities and shares in the same proportion in all merging companies.
According to the 2019 Directive the definition of a cross-border conversion is “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 in a destination Member State and transfers at least its registered office to the destination Member State, while retaining its legal personality”.
In essence a cross border conversion is effectively the procedure widely known in Cyprus as company re-domiciliation (transfer of registered office of companies to and outside Cyprus), which until recently the relevant EU regulatory position was that an EU company may re-domicile in another Member State provided that the local legislations of the involved Member States allowed for such procedures. Clearly now, the provisions of the 2019 Directive create a harmonized approach in respect of this at least between Member States.
Much like the existing Cyprus legislation on re-domiciliation, the 2019 Directive allows for the company to retain its legal personality whilst its assets and liabilities, including any concluded agreements, will continue to exist in the converted company which is an advantage as it does not need to liquidate or dissolve in its origin Member State. Specifically, a cross-border conversion will have the following consequences:
(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;
(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.
Cyprus legislation already includes provisions and mechanisms allowing for both a division and a partial division at a national level. The 2019 Directive allows for cross-border divisions which is an important development as this will improve the functioning of the internal market for companies and firms as it will allow for greater flexibility in businesses that have the intention to move in different EU countries.
Another significant differentiation is that Cyprus legislation – albeit only at national level – allows for companies to transfer all of their assets and liabilities to one or more branches of their activities to new or pre-existing companies. On the contrary, the 2019 Directive explicitly states that a cross-border division is solely allowed when one or more limited liability companies are newly created.
The recipient company in either of the cases must be a company newly formed in the course of a cross border division. The option of all or part of the assets of a company being transferred to an existing company pursuant to the provisions of the 2019 Directive is not possible. Having said that, the ability to perform a cross border division is a very important step forward.
According to the 2019 Directive, there are three different types of divisions:
(a) Full division where the company is 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 of securities or shares in the recipient company to the members of the company being divided and if applicable, cash payment;
(b) Partial division where the company being divided, transfers parts 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;
(c) Division by separation where the 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.
Protection from Abuse
The 2019 Directive has introduced an anti-abuse control procedure. A cross-border operation shall not be possible if the Member State designated competent authority is not satisfied that such operation is not for abusive, illegal, fraudulent or criminal purposes.
More specifically, when a competent authority is in serious doubt as to the purposes of the cross-border operation all relevant facts and circumstances need to be considered such as the indicative factors relating to the characteristics of the establishment in the Member State in which the company or companies are to be registered after the cross-border operation which includes the intention of the operation, the sector, the investment, the net turnover and profit or loss, the number of employees, the composition of the balance sheet, the tax residence, the assets and their location, equipment, the beneficial owners of the company, the habitual places of work of the employees and of specific groups of employees, the place where social contributions are due, the number of employees, and the commercial risks assumed by the company or companies before and after the cross-border operation.
The aim of transparency in the procedures is evident throughout the 2019 Directive. The relevant disclosure articles state that the Member States need to ensure that the draft terms of the cross-border operations and the notice that might be prepared by the relevant stakeholders for the general meeting need to be disclosed publicly. Member States have the discretion to decide whether they require the independent expert report to be publicly disclosed as well. Equally important is that confidential information need to be excluded from such public disclosure for the safeguard of the relevant stakeholders.
Moreover, the relevant stakeholders have been provided with additional safeguards. The Members are provided with the right of information, the right of approval in the general meeting and the right of selling-out in case they do not want to become shareholders in a foreign company.
A company carrying out a cross-border operation needs not prejudice its creditors; thus, the competent authority needs to check whether the company has fulfilled all of the obligations towards any public creditors and whether any open obligations have been secured sufficiently. Also, any creditors who are dissatisfied with the safeguards they are offered from the draft terms of the cross-border operation have the option to apply to the appropriate administrative or judicial authority that they have not obtained adequate safeguards. Employees also have the right to information and consultation.
Furthermore, for the employee participation to not be unduly prejudiced due to the cross-border operation, the company will need to follow the rules of the destination Member State on employee participation but if the national law of the destination Member State does not provide the same level of protection as the national law of the departure Member State, then, the company will need to enter into negotiations with the employees to obtain the appropriate employee participation.
The 2019 Directive is a crucial development for the harmonisation of EU Company law and cross border company mobility. Such improvements most definitely reinforce the principles of freedom of establishment and the economic activity of organizations will be boosted and strengthened. Such operations facilitate access to markets and break down barriers in cross-border trade.
The adoption of the 2019 Directive has introduced the simplification and modernisation of cross-border operations as the Member States are provided with legislation with an explicit procedure to be followed that takes into account time and costs. Additionally, there is more legal certainty due to the harmonisation of regulations for cross-border operations and the introduction of strong protection for relevant stakeholders. It provides for more procedural certainty as there is a clear and unified EU legal framework for cross-border operations and provides a clear process for each of the cross-border operations covered.
The right of information and consultation to the relevant stakeholders as well as the possibility of scrutiny of the legality of the operation are necessary safeguards before the enforcement of any cross-border operation. The specificity and structure of the 2019 Directive is a useful tool for the simpler enforcement of cross-border operations which prospectively will result to a better market environment. Nevertheless, it must be noted that there is some legal uncertainty regarding the period until the deadline of the implementation of the 2019 Directive.
This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.