Beyond Borders: Eversheds Sutherland's ICR insights series. EU Mobility Directive – Legal Update

• Europe

• Corporate
• Labor law and trade union issues

05-10-2022

The 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 (the “Directive”) entered into force on 1st of January 2020. The Directive is one of the many initiatives of the European Union to improve the functioning of the single market by promoting and simplifying cross-border mobility and freedom of establishment.

The European Member States have until 31 January 2023 to implement the Directive into national law. Currently, the Member States are at different stages of their legislative process. If not implemented locally, however, certain provisions of the Directive that are unconditional, sufficiently clear and precise, shall have direct legal effect.

There is currently already European legislation regarding cross-border mergers of limited liability companies (Directive (EU) 2017/1132)(the “2017 Directive”). The 2017 Directive primarily regulated cross-border mergers of limited liability companies. The Directive aims to further simplify the cross-border merger procedure in parts, and to standardise other aspects with the newly introduced European legislation on cross-border conversions (re-domiciliations) and divisions. There is currently no European regulation regarding cross-border conversions and divisions of limited liability companies, nor do most Member States currently have any local legislation regulating such transactions. Instead, the freedom of establishment as interpreted by the Luxembourg Court of Justice of the European Union is, among others, used as a legal basis. The current lack of a clear unified legal framework hinders the exercise of the freedom of establishment within the European Union, which is why the Directive also provides a harmonised legal framework for cross-border conversions and divisions.

Why is this important?

The Directive aims to simplify and align the local legislation for cross-border conversions, mergers or divisions within the European Union, while safeguarding the interests of shareholders, creditors and employees. In our experience, this harmonised legal framework will further facilitate cross-border transactions, through conversions, mergers or divisions throughout the EU/EEA, and provides for important structuring tools allowing (multinational) corporates or financial institutions to efficiently organise their group structure in support of their business operations expanding across the EU/EEA.

Scope of the Directive

The Directive only applies to limited liability companies that have been established in an EU/EEA Member State and have their registered office or principle place of business within the European Union.

The Directive:

• establishes a harmonised legal framework for cross-border conversions (a conversion is an operation whereby a company, without being dissolved or liquidated, converts into a legal form of another Member State and transfers at least its registered office to that designation Member State)
• establishes a harmonised legal framework for cross-border divisions, however, this is limited to divisions by formation of new companies
• amends the current (harmonised) legal framework for cross-border mergers, specifically designed to align with the framework for conversions and divisions, and introduces a simplified merger procedure

Process

The Directive provides for an extensive legal framework and (largely) harmonised legal process for the three legal transactions. The procedural steps for a cross-border conversion include:

• draft conversion proposal;
• draft explanatory notes;
• filing in public register;
• public announcement;
• approval by general meeting;
• pre-conversion certificates; and
• effectuation and registration of cross-border conversion.

The process for cross-border mergers or divisions is largely the same.

Pre-transaction certificate

The Directive requires the Member States to designate one or more competent authorities to supervise the legality of the cross-border transaction, attesting that all conditions have been met and all formalities have been properly completed in the relevant Member States, and to perform an anti-abuse check. A local court, civil law notary or other judicial authority may qualify as a competent authority.

Anti-abuse check

The Directive introduces an anti-abuse check. A similar check was not included in the 2017 Directive. A contemplated cross-border transaction could be used for abusive or fraudulent purposes leading to or aimed at evading or circumventing European Union or national law, or for criminal purposes. In case a competent authority believes a contemplated cross-border transaction could be used for abusive, fraudulent or criminal purposes, an additional three-month-period may be used to further verify this. An independent expert report may be requested.

Safeguards

The Directive introduces different safeguards for creditors, employees and (minority) shareholders. In addition to requisite approval by the general meeting, shareholders who voted against the cross-border transaction have the possibility, under certain conditions, to dispose their shares for an adequate compensation. Creditors may raise objections against the cross-border transaction before an appropriate administrative or judicial authority, like the District Court, within three months after the transaction is proposed. Finally, the Directive seeks to address the protection of employees and particularly employee participation rights that exist under a Member State. The aim is to secure existing employee participation rights, for example, where employees have certain rights regarding the appointment of (supervisory) board members.

Beyond EU/EEA

Transactions under the Directive are principally limited to EU/EEA Member States. However, certain EU Member States may, based on local legislation, permit those transactions with limited liability companies outside of the EU/EEA.

Brexit

As a consequence of Brexit, after the transition period ended on 31 December 2020, EU law no longer applies to the United Kingdom. Whilst the Directive was published before Brexit, the UK is no longer held to implement the Directive into national law. Therefore, for any cross-border transactions between UK and EU/EEA companies, the harmonised legal framework for conversions, mergers or divisions as presented by the Directive is not available. Alternative or equivalent options will need to be considered.

Country specific

As part of this Insight Series we will be providing more detailed country-specific information.

• Belgium
• Bulgaria
• Czech Republic
• Estonia
• Finland
• France
  
• Germany
• Hungary
• Ireland 
• Italy
• Lithuania
• Netherlands
• Poland
• Romania
• Slovakia
• Spain
• Sweden

Key contacts

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