The Directive (EU) 2019/2121 of 27 November 2019 on cross-border conversions, mergers and divisions (the “Mobility Directive”) aims to ensure and strengthen the freedom of establishment for companies within the EU market through the harmonization of the EU Member States’ laws while protecting the rights of employees, creditors and shareholders of the company(ies) involved in cross-border transactions. For the first time, it introduces harmonized set of rules on cross-border conversions and cross-border divisions and clarifies the existing rules on cross-border mergers within the EU.
The Mobility Directive marks the end of cross-border conversions based on established jurisprudence of the European Court of Justice (“ECJ”). Having enabled cross-border conversions within the EU in the first place, the procedures applicable to intra-EU conversions based on the ECJ’s far-reaching case law remained fragmented and strongly dependent on the varying requirements of the Member States involved. Adopted in 2019, the Mobility Directive aimed to strengthen the right of limited liability companies to convert, merge or split across borders, with an emphasis on the protection and interests of their employees, creditors and shareholders.
The transposition of the Mobility Directive was scheduled on 31 January 2023.
The Luxembourg legislator is currently working on the transposition of the Mobility Directive into national law. The draft bill of law n°8053 was introduced to the Luxembourg Parliament on 27 July 2022 (the “Draft Bill”). The Luxembourg Chamber of Commerce commented on the Draft Bill on 11 November 2022 and recently, the opinion of the Luxembourg Bar Association dated 10 May 2023 was published in this respect. The timing for the adoption of the Draft Bill cannot be predicted at this stage.
As of 2023, companies envisaging corporate restructurings should prepare for a new regime applicable to cross-border operations (used hereinafter to refer to cross-border mergers, divisions and conversions). The Draft Bill currently provides that the new law will only apply to cross-border operations for which the relevant restructuring plan is published on the first day of the month following the date on which the new law comes into effect. Therefore, where restructuring plans have been published beforehand, the current legal rules will remain applicable to the remaining restructuring steps.
Luxembourg will apply the changes proposed by the Mobility Directive only to cross-border restructurings within the Mobility Directive’s intended scope, in contrast to other Member States (such as Germany) who opted to extend their reforms to national conversions as well.
While strengthening the interests of shareholders, creditors and employees, the Mobility Directive is likely to negatively affect intra-group restructurings and increase the administrative and time burden for companies. Consequently, more flexible, cheaper, quicker and easier to implement procedures – provided for under national legislation in various jurisdictions – should be considered by companies, such as the so-named “collapse merger” (please see below in paragraph below 4.2 for more details).Given that the Mobility Directives provides for the first time, a harmonised, streamlined regime for cross-border conversions, it deserves more detailed analysis.
- New EU Framework for Cross-Border Conversions
The Mobility Directive applies only to conversions of limited liability companies incorporated in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Union. The Mobility Directive does not apply to companies which are in liquidation and where the distribution of assets has already begun. Member States may also exclude from the scope of the provisions laid down by the Mobility Directive companies subject to insolvency proceedings or preventive restructuring measures as defined by national law, irrespective of whether such proceedings are national, EU or foreign. Companies having collective investment of capital provided by the public as object and which operates on the principle of risk-spreading and the units of which are, at the holders’ request, repurchased or redeemed, directly or indirectly, out of the assets of that company (e.g. UCITS) are excluded from the scope of the Mobility Directive.
The Mobility Directive regulates cross-border conversions within the European Union. The term “cross-border conversion” is defined 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 of the destination Member State and transfers at least its registered office to the destination Member State, while retaining its legal personality.
Conversions or migrations from or to a non-EU country are not covered by the Mobility Directive. Some EU Member States are expected to uphold restrictions on conversions involving third countries. Non-EU companies depending on a cross-border conversion can work around these restrictions by on-boarding first to EU Member States without such restrictions (e.g. Luxembourg) and continuing their migration from there to the desired EU destination state.
The Mobility Directive introduces the following steps applicable to cross-border conversions of limited liability companies, mainly based on the procedures applicable to cross-border mergers and divisions:
a) The administrative or management body of the company draws up the draft terms of conversion outlining the particulars of the conversion. These draft terms shall be published together with a notice to stakeholders (i.e. employees, shareholders and creditors of the converting company).
b) The administrative or management body issues the report (containing two sections) or two separate conversion reports to the shareholders and employees, where applicable, explaining and justifying the legal and economic aspects of the conversion and its implications for future business.
- As far as shareholders are concerned, the report should include remedies available to them, especially information about their newly introduced exit right and information regarding the implications of the cross-border conversion for them. The shareholders may agree to waive the report.
- The section or a separate report for employees should explain the implications of the cross-border conversion on employment relationships and any material changes to be made to the current/existing conditions of employment.
c) The company is required to comply with employee information, consultation and participation rights, where applicable.
d) An independent expert examines and issues a report on the draft terms of conversion, unless such report is waived by the shareholders.
e) No earlier than one month following the publication of the draft conversion terms, the general meeting of the company involved in the cross-border conversion resolves on the conversion. The required majority to be determined by the departure Member State may range between two thirds and 90% of the represented voting rights and may not be higher than the majority required for cross-border mergers in that Member State.
f) The completion of the conversion steps in the departure Member State will be certified by a so-named “pre-conversion certificate”. The competent authority to be designated by the Member States shall not issue the certificate if it determines that the conversion has been set up for abusive, fraudulent or criminal purposes. The authority generally takes up to three months for its assessment. If the competent authority has serious doubts indicating that the cross-border conversion is set up for abusive or fraudulent purposes leading to or aimed at the tax evasion or circumvention of EU/national law or for criminal purposes, it may either refuse to issue the pre-operation certificate or require additional information to be considered or additional investigative activities to be performed. In such a case, a period of three months for assessment of legality of a cross-border conversion may be extended for another three months. This requirement of fraud, abuse or criminal motives’ checks by a designated authority is also newly introduced to the cross-border merger and division procedures.
g) The pre-conversion certificate will be automatically transmitted to the competent authority of the destination Member State through a digital/electronic system of interconnections of registers. The competent authority in the destination Member State must review the legality of the cross-border operation as regards that part of the procedure which is governed by the law of the destination Member State and to authorize the cross-border operation. It shall particularly ensure that the relevant provisions of national law concerning the incorporation and registration of companies are complied with.
h) Following approval by the competent authority of the destination Member State, the company will be registered in the destination Member State and de-registered in the departure Member State.
i) The law of the destination Member State determines the date of effectiveness. For a period of three months following the publication of the draft conversion terms, creditors whose claims antedate the disclosure of the draft terms of the cross-border conversion and have not fallen due at the time of such disclosure, may apply for adequate safeguards. Additionally, creditors whose claims pre-date the draft terms may continue to instigate proceedings in the departure Member State for two years after the effective date of the conversion.
2.3. Protection of third-party interests
The Mobility Directive focuses strongly on the protection of employees, creditors and shareholders considered most at risk of being marginalised by fraudulent or abusive intent:
- The company carrying out the cross-border operation should draw up a report for its shareholders and employees explaining and justifying the legal and economic aspects of said proposed cross-border operation.
- Shareholders who do not agree with the cross-border operation have the right to exit the company for an adequate cash consideration.
- The management report should explain the implications of the proposed cross-border operation on the employment situation and whether there would be any material change to the employment conditions laid down by law.
- Creditors shall benefit from various protection rules, including a right to apply for safeguards to the appropriate authority, and
- shareholders, creditors and employees (or their representatives) shall have the right to make observations before the general meeting is called to decide on the operation.
- Focus on Luxembourg
In the Grand Duchy of Luxembourg, the Draft Bill proposes to transpose the Mobility Directive by amending, among others, the Law of 10 August 1915 on Commercial Companies, as amended (the “Law of 1915”). The Draft Bill revises the sections of the Law of 1915 relevant to mergers, divisions and conversions by introducing a general section applicable to national and cross-border restructurings outside the scope of the Mobility Directive, (e.g. involving non-EU companies or EU partnerships, and a special section dedicated to the rules imposed by the Mobility Directive).
The Luxembourg legislator has emphasized its intention to enable corporate restructurings. Consequently, it is introducing the possibility of mergers and divisions for the special limited partnership (société en commandite spéciale, SCSp) and is implementing the most burdensome requirements under the Mobility Directive, such as the abuse and fraud checks, only to the public limited liability company (société anonyme, S.A.), the partnership limited by shares (société en commandite par actions, SCA) and the private limited liability company (société responsabilité limitée, S.à r.l.)
In Luxembourg, the competent authority responsible for determining whether a cross-border merger, division or conversion is intended for abusive, fraudulent or criminal purposes will be notaries.
- Current and Alternative Routes
4.1. National cross-border conversion regime
Currently and subject to be replaced by the above new rules features by the transportation of the Mobility Directive, there exists a well-established Luxembourg practice for cross-border conversions in view of relocating a foreign company to the Grand Duchy of Luxembourg. In a nutshell the following measures, steps and conditions must be fulfilled to migrate a foreign company to Luxembourg at present:
An official confirmation is required that the transfer of registered office and central administration to the destination country (here: Luxembourg) will not lead to the dissolution of the company, which will continue to exist under the laws of the receiving country without any disruption of its legal personality.
Furthermore, an extraordinary general meeting of shareholders must be held in front of a Luxembourg notary to resolve upon and approve the migration and to adopt one of legal forms existing under the Law of 1915 as relevant Luxembourg corporate law (e.g. SA, S.à.r.l., SCA). Last but least the ensuing formalities of registration with Luxembourg Trade and Companies Register, RCS and publication in the Luxembourg state gazette, RESA must be observed.
In comparison with the upcoming new regime for cross-border conversions under the Mobility Directive the current local regime is easy to handle, straightforward at limited costs. In a situation where a company has no employees, no property and does not require any specific authorisations, the above-described measures may be completed within a few weeks. Unfortunately, the national conversion regime will no longer be applicable for most companies relocations once the Mobility Directive has been transposed into Luxembourg law.
A striking example for the foreshadowing of the future Mobility Directive regime is the recent relocation of a private bank (Pictet & Cie Europe S.A.) from Luxembourg-City to Frankfurt by switching from a Luxembourg public limited company (Société anonyme) to a German Aktiengesellschaft. This relocation under Luxembourg law followed slavishly the exact rules and procedures set out by the Mobility Directive, with its implementation still pending as of today.
4.2. Collapse Merger
An alternative way to relocate foreign companies to Luxembourg, neither covered by the Mobility Directive nor by any other national specific rules and regulations, may be the so-called « collapse merger », if and when the corporate law of the departure Member State provides this scheme.
The underlying concept of such collapse merger mechanism, as stated for example in the German civil and commercial code (BGB and HGB), is the dissolution without liquidation of any partnership which occurs as soon as and insofar as the second-last partner steps down or resigns.
In the German legal M&A practice the collapse merger mechanism is commonly used to relocate German companies abroad. The main steps of such collapse merger under German law can be described as follows:
As a preparatory measure the limited liability company at hand (e.g. private limited company – “GmbH”) is converted into a limited partnership (“GmbH & Co. KG”), with an external company, set up under foreign law and with registered office in the target jurisdiction, stepping in as general partner.
The exit of the limited partner by way of a termination letter leads to the immediate and automatic collapse of the partnership, with any assets and debt accruing to the remaining general partner.
In contrast to a conventional cross-border conversion the legal personality of the original company is not continued or maintained in the process of such collapse merger. In case of property companies owning real estate the tax impact of such change in legal personality must be closely tracked and duly considered regarding the relevant real estate transfer tax legislation in place. The collapse merger mechanism may also cause hidden reserves to be disclosed, so that a close assessment of potential tax consequences is also key in that respect.
 Only cross-border divisions (both partial and full) that involve the formation of new companies are covered by the Mobility Directive.