Directive on cross-border mergers, conversions and divisions has been adopted

On 12 December 2019, Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 (the “Directive”) amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, was published in the Official Journal of the European Union. The Directive entered into force on 1 January 2020. Member States are required to bring their national laws in line with the Directive by 31 January 2023.

The Directive updates the existing conditions and provisions for cross-border mergers within the European Union and, in addition thereto, introduces new conditions and provisions on cross-border conversions and divisions for limited liability companies. Dutch legislation does not provide for the cross-border conversion or division of a Dutch limited liability company into a European Union equivalent at this moment. All cross-border conversions or divisions involving a Dutch limited liability entity are therefore currently based on case law of the European Court of Justice of the European Union regarding the freedom of establishment, such as the judgement of Cartesio (2008), Vale (2012) and Polbud (2017). It goes without saying that the lack of legislation on cross-border conversion and divisions results in certain practical difficulties. For this reason, the introduction of common European Union procedures for cross-border conversion and divisions of limited liability companies is something Dutch practitioners have been looking forward to.

For the most part the Directive applies the conditions and provisions of cross-border mergers regarding limited liability companies, as laid down in Directive (EU) 2017/1132, to cross-border conversions and divisions of limited liability companies. Available simplifications applicable to all three cross-border operations include the possibility of speeding up the procedure by waiving reports for shareholders and employees in certain circumstances (certain exemptions are already included in Dutch law in relation to cross-border mergers). The Directive also introduces a few changes regarding the position of the stakeholders involved.

Protection of stakeholders
Creditors of the company concerned are granted more safeguards. The proposal drawn up in respect of the cross-border operation needs to contain information about the safeguards offered to the creditors whose claims pre-date the publication of the proposal. In case a creditor is dissatisfied with the safeguards offered in the proposal, he can request additional guarantees from the court within three months after the disclosure of the proposal. The proposal of the Directive (as published by the European Commission in 2018) contained an application period of one month, which seems to be more in line with the publication period of one month as proposed by the Directive. After the publication period the general meeting may resolve upon the cross-border operation. We wonder how the current three month application period shall affect the timing of the effectuation of the cross-border operation. We expect that that this will become clear during the implementation of the Directive.

The shareholders of the company subject to the cross-border conversion or the shareholders of the company ceasing to exist in case of a cross-border merger or division will have the right to dispose their shares and receive adequate cash compensation in cases they disapprove the cross-border operation. Such compensation will need to be examined by an independent expert unless the shareholders waive their right thereto.

Employees will be more informed about the expected impact of the cross-border operation. They will be granted the opportunity to submit to their relevant company comments with regard to the proposed cross-border operation. Shareholders and creditors of the relevant company will also be given this opportunity. A notice informing the stakeholders about their consultation right needs to be disclosed in the business register of the relevant Member State(s) when filing the cross-border operation proposal.  

Pre-operation certificate
The Directive also introduces a system of prior consent by a competent national authority. Companies will need to acquire a pre-operation certificate as part of the effectuation process of the cross-border operation. Each Member State will designate a competent authority (the court, notary or another judicial authority) to check whether the cross-border operation procedure is in line with the relevant national legislation of the Member State of departure. The examination may take up a maximum of three months. If the competent authority of the Member State of departure comes to the conclusion that the cross-border operation is lawful, the national competent authority will issue the pre-operation certificate. A pre-operation certificate can be declined on one of the following grounds: (i) the cross-border operation does not comply with the national legislation of the Member State of departure or not all necessary procedures and formalities of the Member State of departure have been completed, or (ii) the cross-border operation could be used for abusive or fraudulent purposes leading to or aimed at evading or circumventing European Union or national law, or criminal purposes (the anti-abuse check). After issuance, the pre-operation certificate is transmitted to the Member State of destination. The competent authority of the Member State of destination will thereafter check whether the cross-border operation fully complies with its relevant national legislation.

Anti-abuse check
The anti-abuse check was not included in Directive (EU) 2017/1132 (regarding cross-border mergers) and is newly introduced by the Directive. If the competent authority believes that the cross-border operation could be used for abusive, fraudulent or criminal purposes, the competent authority will have an additional three months for further assessment. The assessment can include the requirement of an independent expert report. It has not been decided yet which competent authority will perform the anti-abuse check from a Dutch perspective. It may reasonably be expected that the Dutch notary will be appointed to this end, taking into account that the Dutch notary is already the appropriate authority to issue the pre-operation certificate in case of a cross-border merger. As it is extremely difficult to assess whether a cross-border operation could be of abusive or fraudulent nature (especially in tax matters), the exact scope of the anti-abuse check will need to be determined during the implementation of the Directive.

Process
The main advantage of the Directive is that it provides for a largely identical process for the three cross-border operations throughout the European Union. However, the scope and exact meaning of certain provisions (e.g. regarding the pre-conversion certificate) needs to have some further considerations. We are therefore curious to find out how the Directive will be implemented in existing Dutch (corporate) law.

If you would like to receive more information on the contents of the Directive or if you have any questions regarding the above, please do not hesitate to contact us.