Directive (EU) 2019/2121: Improving Mobility of Companies Across the European Union

Matters of cross-border company mobility are addressed at European Union level by means of Directive (EU) 2017/1132 (the “2017 Directive”) which provides for cross-border mergers and domestic divisions of public limited liability companies. The 2017 Directive, however, neither provides for cross-border divisions nor for re-domiciliation of companies within the European Union, with companies registered under the laws of Member States having to rely on their national law provisions should they wish to continue as being registered under the laws of another Member State. The lack of a legal framework for cross-border conversions and divisions leads to legal uncertainty and barriers to the exercise of freedom of establishment.

These shortcomings are sought to be addressed by means of Directive (EU) 2019/2121 (the “2019 Directive”) which was published on 12th December 2019 and is to be transposed by the Member States by 31st January 2023. The 2019 Directive amends the 2017 Directive by not only improving the provisions that are already in force in relation to cross-border mergers, but also introduces provisions intended for the harmonisation of cross-border conversions and cross-border divisions across the European Union, with the aim to achieve the desired result in a more efficient and less costly manner. The 2019 Directive shall not apply to any company which is undergoing liquidation, insolvency or other similar proceedings.

The main amendments which are being implemented by the 2019 Directive are examined below.

As mentioned above, the 2017 Directive already regulates cross-border mergers across the European Union, however the 2019 Directive provides for additional safeguards for the employees, members and other stakeholders which safeguards apply across the three types of cross-border operations being examined herein. Such safeguards include, inter alia, the requirement of transparency which is achieved through the disclosure of certain information and the presentation of detailed reports. Furthermore, the 2019 Directive provides exit rights to members of companies undergoing said cross-border operations by allowing them to dispose of their shares for adequate cash compensation.

As a consequence of a cross-border merger, the assets and liabilities and all rights and obligations, including any rights and obligations arising from contracts, acts or omissions, should be transferred to the acquiring company or to the new company, and the members of the merging companies who do not exercise their exit rights should become members of the acquiring company or the new company respectively. In particular, the acquiring company or the new company should respect any rights and obligations arising from contracts of employment or from employment relationships, including any collective agreements.

A 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.” Locally, this procedure is known as the continuation of companies (or more widely known as the re-domiciliation of companies) in terms of the Continuation of Companies Regulations (Subsidiary Legislation 386.05) (the “Maltese Continuation of Companies Regulations”) which, until the transposition of the 2019 Directive, will wholly apply to the transfer of a registered office between Malta and any other jurisdiction (including both EU Member States and non-EU Member States).

The following are requirements for a cross-border conversion in terms of the 2019 Directive, which are not currently provided for in the Maltese Continuation of Companies Regulations:

• the drawing up of draft terms of cross-border conversion;
• a notice informing members, creditors and employees that they may submit their comments regarding the draft terms of cross-border conversion to the company;
• the drawing up of a report for members and employees explaining and justifying the legal and economic aspects of the cross-border conversion, as well as explaining the implications of the cross-border conversion for employees; and
• the possibility of requiring an independent expert report relating to the draft terms of cross-border conversion.

The 2019 Directive also introduces provisions for the protection of members, creditors and employees, which provisions are not seen within the Maltese Continuation of Companies Regulations.

A cross-border conversion will have the following consequences:

• all the assets and liabilities of the company, including all contracts, credits, rights and obligations, shall be those of the converted company;
• the members of the company shall continue to be members of the converted company, unless they have disposed of their shares; and
• the rights and obligations of the company arising from contracts of employment or from employment relationships and existing at the date on which the cross-border conversion takes effect shall be those of the converted company.

In addition to new rules on conversions, the 2019 Directive lays down rules on cross-border divisions, both for partial and full divisions, but those rules only relate to cross-border divisions that involve the formation of new companies. The 2019 Directive does not provide a harmonised framework for cross-border divisions in which a company transfers assets and liabilities to one or more existing companies, as such cases have been viewed as being very complex, requiring the involvement of competent authorities from several Member States. This is unlike the Companies Act (Chapter 386 of the laws of Malta) (the “Companies Act”) which provides for three different kinds of divisions: (i) division by acquisition; (ii) division by formation of new companies and (iii) division by a combination of a division by acquisition with a division by the formation of one or more new companies.

Under the 2019 Directive, “division” means an operation whereby

(a) a company being divided, on being dissolved without going into liquidation, transfers all its assets and liabilities to two or more recipient companies, in exchange for the issue to the members of the company being divided of securities or shares in the recipient companies and, if applicable, a cash payment not exceeding 10 % of the nominal value, or, in the absence of a nominal value, a cash payment not exceeding 10 % of the accounting par value of those securities or shares (“full division”);

(b) a company being divided transfers part of its assets and liabilities to one or more recipient companies, in exchange for the issue to the members of the company being divided of securities or shares in the recipient companies, in the company being divided or in both the recipient companies and the company being divided, and, if applicable, a cash payment not exceeding 10 % of the nominal value, or, in the absence of a nominal value, a cash payment not exceeding 10 % of the accounting par value of those securities or shares (“partial division”); or

(c) a company being divided transfers part of its assets and liabilities to one or more recipient companies, in exchange for the issue to the company being divided of securities or shares in the recipient companies (“division by separation”).

Unlike cross-border conversions, the provisions under the Companies Act relating to division of companies already contemplate the requirement of the drawing up of draft terms of division and detailed reports and therefore such requirements under the 2019 Directive are not alien to our local legislation in the context of company divisions.

As a consequence of the cross-border division, the assets and liabilities and all rights and obligations, including any rights and obligations arising from contracts, acts or omissions, should be transferred to the recipient companies in accordance with the allocation specified in the draft terms of division, and the members of the company being divided who do not exercise their exit rights should become members of the recipient companies, should remain members of the company being divided or should become members of both. In particular, recipient companies should respect any rights and obligations arising from contracts of employment or from employment relationships, including any collective agreements.

The harmonisation of cross-border operations of limited liability companies within the European Union as envisaged by the amendments provided in the 2019 Directive simplifies the procedures thereof and therefore reinforces the principle of freedom of establishment. This will certainly improve the functioning of the internal market for companies and firms as such harmonisation removes barriers to trade and allows for greater flexibility in businesses that have the intention to move across different Member States.

As seen above, Maltese legislation already provides for the division of companies and the transfer of the registered office from one jurisdiction to another. The most significant changes will be seen in the latter cross-border operations due to the fact that many requirements stipulated under the 2019 Directive are not provided for under local legislation. It will therefore be interesting to see how our local legislators will be transposing the 2019 Directive into Maltese law in conjunction with the current local law provisions.