The recent adoption by the Council of Ministers of a directive which makes provision for streamlined rules regulating cross-border conversions, mergers and divisions of companies augurs well for the enhancement of EU companies’ right to freedom of establishment in the single market.

One of the main objectives of the EU’s acquis regulating companies is that of enabling businesses to be set up and to carry out operations anywhere within the EU while providing protection to shareholders and other third parties, such as employees and creditors.

In order to ensure the viability of EU companies in the face of global threats to competitiveness, the European Commission proposed, in 2018, a set of rules intended to provide EU companies with a modern regulatory framework within which to operate and conduct business in Europe.

The newly-approved rules introduce comprehensive procedures for cross-border conversions and divisions of companies and provide for additional rules on cross-border mergers of limited liability companies established in an EU member state. They also make provision for a simplified legal framework which will apply to all three operations while at the same time ensuring that there are safeguards in place to discourage abuse.

The new law has recognised the right for a company operating within the EU’s single market to transfer its registered seat from one member state to another without having to go through liquidation and losing its legal personality.

The rules thus now make provision for a procedure whereby a limited liability company can convert the legal form in which it is incorporated in one member state into another recognised in another member state, by transferring its registered office to the latter state while at the same time retaining its legal personality. Companies in liquidation or otherwise being wound up are excluded from the application of these new rules.

The new rules include safeguards to protect employees’ rights. Employees effected by a cross-border conversion, merger or division must be informed and consulted about its expected effects. Minority and non-voting shareholders’ rights will also enjoy greater protection. Minority shareholders disapproving of a cross-border conversion or merger will have a right to dispose of their shares and receive adequate cash compensation. Such compensation is examined by an independent expert unless shareholders waive their right to receive such an external assessment. In addition, minority shareholders are granted the right to contest the amount of the cash compensation or, if they do not exit the new company, to challenge the exchange ratio of old to new shares. Creditors of the company concerned have also been granted clearer and more reliable safeguards during cross-border operations.

The rules also seek to ensure that cross-border operations cannot be misused for fraudulent or abusive purposes. While most companies move for genuine reasons, there is a risk that cross-border conversions and divisions could be misused to set up fictitious structures for abusive ends, such as tax avoidance or undermining workers’ rights. To this end, the new directive introduces a mandatory anti-abuse control procedure.

The procedure will allow national authorities to block a cross-border operation when it is carried out for abusive or fraudulent purposes. A crucial element of the conversion and division procedures is therefore that the member state of departure of the company must prohibit operations that constitute an artificial arrangement aimed at obtaining undue tax advantages or undermining the legal or contractual rights of employees, creditors or shareholders. In medium and large companies where this analysis may be more complex, an independent expert will be involved in providing the factual elements for the assessment by the authority of the member state of departure.

The directive encourages the use of digital tools throughout the cross-border operation. It will be possible to complete formalities, such as the issuance of the pre-operation certificate, online. All relevant information will be exchanged through existing, digitally interconnected, business registers.

Member states now have three years within which to transpose these new rules.

There is no denying that a modern, streamlined and simplified EU-wide regulatory framework is necessary in order to ensure the viability of European companies in today’s competitive business environment. Provided that the safeguards laid down work in practice, this new legal framework is definitely the way forward for companies established in Europe which want to avail themselves of the benefits of operating within the single market.

Mariosa Vella Cardona M’Jur, LL.D., is a freelance legal consultant specialising in European law as well as competition law, consumer law, data protection law and intellectual property law. She is also a visiting examiner at the University of Malta.

mariosa@vellacardona.com