Short Reads

Proposed EU Directive to help companies move across borders

Proposed EU Directive to help companies move across borders

Proposed EU Directive to help companies move across borders

09.05.2018

On 25 April 2018 the European Commission proposed a new directive, amending the EU Directive 2017/1132 on company law. The proposed rules should support companies in moving from one EU country to another, i.e. cross-border mergers, divisions or conversions. However, the proposed rules for cross-border divisions and conversions will also require companies to get prior consent from a competent national authority before moving. Who will act as such authority is not clear yet.

The proposed amendment to EU Directive 2017/1132 seems to be a response to the ECJ Polbud judgment of October 2017. This case concerned Polish legislation prohibiting a Polish company from moving to Luxembourg by requiring liquidation of the company before deregistering it from the Commercial Register. The ECJ deemed this national limitation to be in breach of the freedom of establishment pursuant Article 49 of the Treaty on the Functioning of the European Union. The ECJ clarified that freedom of establishment includes the right for a company to convert itself into a company governed by the law of another Member State, provided the requirements of the Member State of destination for its incorporation are satisfied.

In response to the Polbud judgment, the European Commission proposes a simpler and less burdensome procedure for companies moving cross-border by introducing common EU procedures for cross-border conversions and divisions and by updating the existing rules on cross-border mergers.

In addition to unifying and, as the European Commission states, simplifying the rules for companies moving between Member States, the proposed rules for cross-border divisions and conversions also introduce a system of prior consent by a competent national authority by means of requiring companies to obtain a pre-conversion respectively pre-division certificate from the competent national authority before moving. EU Directive 2017/1132 already contains similar rules for mergers.

In case of a cross-border division or conversion, the competent national authority of the Member State of departure will issue such certificate if it, after an examination, comes to the conclusion that the division or conversion is lawful. It will not issue a certificate when a company does not comply with provisions regarding, for example, the decision making process relating to the proposed move, taking into account the cross-border nature of the move, or when the move is aimed at avoiding taxes, or can harm the protection of creditors, debenture holders, security holders, shareholders or employees. In analysing whether a proposed move of a medium or large company will have such effects, an independent expert will be involved in providing the factual elements for the assessment by the competent national authority of the Member State of departure. The expert report will take into account the characteristics of the company in the Member State of destination, including the intent, the sector, the investment, the net turnover and profit or loss, number of employees, the composition of the balance sheet, the tax residence, the assets and their location, the habitual place of work of the employees and of specific groups of employees, the place where social contributions are due and the commercial risks assumed by the converted company in the Member State of destination and the Member State of departure.

After issuance, the certificate is transmitted without delay to the Member State of destination. Upon receipt, the competent national authority will check if the divided/converted company complies with the provisions of the national law of the Member State of destination.

The European Commission emphasizes that its aim is not to limit the possibilities for cross-border enterprise activity; therefore the cross-border moving of companies is supposed to become easier, provided that the required consent from the national authority is obtained. We note that the Polbud judgment the European Commission refers to in its press release meant a step forward for cross-border moving of companies. We wonder whether a system of prior consent really fits into this forward movement, or will in fact hamper the cross-border moving of companies and will become a strenuous, administrative procedure. Will the proposed rules hinder the (solvent) restructuring of a company by moving its "centre of main interests" to (for example) the UK to undergo a "Scheme of arrangement"? We look forward to more information on either an EU or national level on the implementation of the new proposed rules.

Team

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