On 27 November 2019, the Directive on cross-border conversions, mergers and divisions was adopted by the European Parliament and the Council (Directive (EU) 2019/2121) (Directive). The Directive clarifies the existing rules on cross-border mergers in the EU and, for the first time, introduces rules on cross-border conversion and division for all Member States. For example, the Netherlands, like most other Member States, does currently not have any legislation on cross-border conversions and divisions. A regulation for cross-border mergers of limited liability companies has been included in the Dutch Civil Code since 2008.

The Directive entered into force on 1 January 2020 and amended the so-called Directive 2017/1132. Since this is a European directive, its provisions are not directly applicable and it is up to the Member States to implement the Directive into national law. Member States must do so by 31 January 2023. However, since this is the first time that there is a European legal framework for cross-border conversions and divisions, the Directive is already directly relevant to limited liability companies. This follows, despite the lack of legal rules for both legal operations, from the case law of the Court of Justice of the EU (e.g. the Cartesio case of 2008 and the Vale case of 2012) which has shown that the legal operations were already possible on the basis of the right of freedom of establishment.

Following this case law of the Court of Justice, the first cross-border conversions took place, as supervised by, among others, Loyens & Loeff. However, in the absence of specific legal rules, some uncertainty remained regarding the application of the appropriate procedural rules. The good news is that the Directive will make it easier to opt for cross-border conversions or divisions as of 1 January 2020 and thus before implementation into national law.

2. Cross-border conversions and divisions

A cross-border conversion is defined in 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 in a 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." A major advantage of the conversion scheme is that, while maintaining the legal personality of the company, its assets and liabilities, including the agreements it has concluded, will continue to exist in the converted company. Annex II refers to limited liability companies in the Member States and not to other legal forms such as partnerships, associations or foundations. This means that, for example, a Dutch public limited liability company (NV) or private limited liability company (BV) can convert into a French SA or Sarl according to the Directive. However, in the case of companies other than limited liability companies (e.g., cooperatives), freedom of establishment can still be invoked for cross-border conversions.

In all cases the registered office will have to move to the destination Member State. Whether this also applies to the so-called real seat (actual office) depends on the conflict of law theory applied by the country of destination. If the country of destination applies the incorporation doctrine (internal affairs doctrine), as does the Netherlands, where the actual office is located is irrelevant. If, on the other hand, the country of destination applies the real seat doctrine, the actual office must move with the registered office. In most cases, the actual office is where the central administration or principal place of business is located. Most Member States apply the real seat doctrine, but in recent years a number of Member States have switched to the incorporation doctrine, such as Germany and, in 2019, Belgium. It follows from the Polbud judgment of the Court of Justice of the EU that after conversion no economic activities need to be carried out in the country of destination.

National division has been possible in the Netherlands since 1998 and concerns both split-up , where the dividing legal entity ceases to exist, and split-off. In the latter case, part of the assets and liabilities is split off. In both cases , assets and liabilities will be transferred by universal title in accordance with the allocation chosen by the undertakings concerned. In the event of national division, assets and liabilities may be split off on both new and existing legal entities. The Directive, on the other hand, only allows for cross-border divisions where one or more limited liability companies are newly created. The methods of division in the Directive are split-up (full division), split-off (partial division) and transfer to a newly formed subsidiary (division by separation). In the latter case, it is not the shareholders of the dividing company who acquire shares in the acquiring company or companies, but the dividing company itself.

3. Protection of stakeholders

The most striking provision in the Directive relates to the prevention of abuse. A cross-border conversion, merger or division is not possible if it is established by a competent authority designated for that purpose, in accordance with national law, that it has been set up for illegal or fraudulent purposes leading to or aimed at evading or circumventing Union or national law, or for criminal purposes. This may involve, among other things, workers' rights or tax rules. What it exactly means and how unlawfulness or fraud is established will have to be further crystallised during implementation in the Netherlands.

The Directive provides various forms of protection for shareholders, creditors and employees. In addition to the right to information, special provisions apply to each stakeholder. Besides the right of approval in the general meeting, the most important protection for shareholders is the right of sell-out in cases where shareholders would become shareholders in a foreign company as a result of the legal operation. This concerns shareholders in the case of a cross-border conversion and shareholders of a company ceasing to exist in the case of a cross-border merger or division.

Creditors with claims that are not yet due can request additional guarantees from the court (in the Netherlands) prior to the legal operation (right of opposition). For divisions, an additional joint and several liability scheme applies up to the net assets acquired or retained for the participating companies.

The Directive pays particular attention to the protection of employees. In addition to advisory rights and retention of rights, a complex employee participation scheme applies, among other things. The scheme aims at ensuring that employee participation, whereby employees can exercise influence on the appointment of (some of the) management board members and/or supervisory board members, cannot be abolished or circumvented by a cross-border conversion. This is possible without a protection regime because several Member States have little or no employee participation. In the Netherlands, this participation is included in the so-called statutory two-tier board regime.

4. Process

The Directive set outs a fairly extensive and largely identical process for the three legal operations. In this respect, consideration is also given to the costs incurred by companies. For example, information can be submitted online, the 'one time, last time' principle applies, which means that information only has to be submitted once, and information can be placed on the website as an alternative. Various exemptions and simplified procedures also apply under certain circumstances. The process will be discussed in more detail in a later edition of the Quoted.

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.