Directive (EU) 2019/2121 (the "Mobility Directive") which aims to abolish any barriers to the exercise of the freedom of establishment, will introduce a new system of rules on cross-border conversions and divisions for all Member States, similar to those of the existing cross-border merger regulations currently in force in Ireland.
The Mobility Directive seeks to meet the objective of an internal market without internal borders for companies.
The current domestic laws that regulate cross-border mergers in Ireland were transposed into Irish Law via the European Communities (Cross-Border Mergers) Regulations 2008 (the "CBM Regulations"). Member States had until 31 January 2023 to transpose the Mobility Directive into national law, however, Ireland will not be in a position to achieve transposition for a period of time.
- What type of Company does the Mobility Directive apply to?
The Mobility Directive only applies to cross-border mergers, conversions, and divisions (together "Cross-Border Operations") of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union.
- Cross-Border Conversions and Divisions
Currently, companies wishing to relocate cross-border by way of a conversion or a division, must rely on the laws of each individual Member State. The Mobility Directive introduces a harmonised system for cross-border conversions and divisions. This will allow companies within the EU wishing to move across borders, to do so without being concerned whether national legislations permit the Cross-Border Operation. The companies can achieve the Cross-Border Operation without having to contend with the uncertainties arising from different and unaligned processes for implementation.
- Conversions and Divisions-What are they?
A cross-border conversion allows a company (without being dissolved, wound up or going into liquidation) to convert its legal form under which it is registered in its existing Member State, into a legal form of another Member State.
Upon the completion of a conversion, all the assets and liabilities of the company, including all contracts, credits, rights and obligations, shall be those of the converted company, and the members of the company will continue to be members of the converted company. The rights of employees of the company will also continue in the converted company.
A cross-border division allows a company to divide itself into two or more companies across several countries. It can either be "full" or "partial" in nature. In a full division, the company being divided ceases to exist and all its' assets and liabilities are transferred to two or more recipient companies. In a partial division, only part of the assets and liabilities of the company being divided are transferred to one or more recipient companies and the company being divided remains in existence. A partial division can also be a division by ‘separation’, where the main difference is that it would be the company (being divided), rather than its shareholder/s that obtain shares in the recipient company or companies. All three forms only relate to cross-border divisions whereby the recipient company is a new company. This process will allow companies to transfer a business to two or more jurisdictions.
- Implementation of Cross-Border Operations
Cross-border conversions and cross-border divisions will have similar regimes under the Mobility Act which will include:
- The drafting of common draft terms setting out the particulars of the Cross-Border Operation;
- The preparation of a directors' report for shareholders and employees, outlining the legal and economic effects of the Cross-Border Operation and any implication on the rights of employees;
- The Preparation of an independent experts report;
- The requirement of disclosure for the interest of shareholders, employees and creditors;
- The application of a 3-month creditor opposition period- this could potentially extend/effect the date of which the Cross-Border Operation takes effect, as it must be a date after the scrutiny of the Cross-Border Operation has been carried out;
- The holding of a general meeting to approve the draft terms; and
The issuance of a pre-merger/conversion/division certificate by the departing Member State providing that the Cross-Border Operation has complied with all relevant conditions, procedures and formalities in the departure Member State;
- The lodging of the pre-merger/conversion/division certificate. Once this is lodged the legalities of the Cross-Border Operation are then scrutinised by the destination Member State.
- The registration of the Cross-Border Operation in the registers of both the departure and destinations Member States.
- Key Changes to Cross-Border Merger Regulations
Cross-border mergers were first introduced into EU legislation by Directive 2005/56/EC and were implemented in Ireland by the CBM Regulations. The Mobility Directive will introduce some key changes to the existing cross-border merger provisions and will align them with the provisions established for cross-border conversions and divisions when they have been implemented under Irish Law.
Key Changes Introduced:
- The information provided in the directors' explanatory report (the "Report") which will include more information about the Cross-Border Operation for the shareholders and employees of the Company (or companies) involved. The Report will distinguish between information required for shareholders and employees and now includes a separate section for each. Currently, the Report has to be made available not less than one month before the date of the general meeting, however, the Mobility Directive requires that the report is made available not less than six weeks before the date of the general meeting;
- Boards of each company will be required to prepare a notification informing the members, creditors and employees of their option to submit comments on the draft terms to their respective company at least 5 working days before the date of the general meeting.;
- Further safeguards for shareholders and creditors are proposed. Any shareholder who voted against the approval of the draft terms of the Cross-Border Operation must have the right to dispose of their shares for adequate cash compensation. Any creditors with claims pre-dating the publication of the draft terms and who are dissatisfied with the safeguards provided in the draft terms (such as guarantees or pledges), may apply, within three months of the disclosure of the draft terms, to the appropriate administrative or judicial body for adequate safeguards;
- The Mobility Directive focuses considerable attention on the protection of employees and;
- The Mobility Directive has introduced further considerations to be regarded by the competent authority scrutinising the legality of the Cross-Border Operation prior to issuing a pre-operation certificate. The competent authority must now consider if the Cross-Border Operation is set up for abusive or fraudulent purposes such as for the circumvention of the rights of employees, social security payments or tax obligations, or for criminal purposes.
The introduction of a harmonised framework for cross-border conversion and divisions will allow for new opportunities for Irish companies to restructure across various jurisdictions within the union. It will be interesting to see how the Mobility Directive is implemented in Ireland.