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Going Beyond Borders: The EU Mobility Directive

MEDIA ROOM

February 22, 2023

On the 31st of January, 2023, the Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers, and divisions (hereinafter referred to as the ‘Mobility Directive’) was officially transposed into Maltese law with direct effect.

Before the coming into force of the Mobility Directive, the freedom of establishment of limited liability companies, a right encompassed within Articles 49 and 54 of the Treaty on the Functioning of the European Union, was largely dependent on the applicable laws within Member States’ national laws, thereby leading to inconsistency and legal uncertainty. By forming a harmonised legal framework applicable to all Member States within the sphere of cross-border movement of limited liability companies, in particular cross-border divisions and conversions, the Mobility Directive aims at improving cross-border mobility for companies and destructing as much as possible the existing barriers to the exercise of the freedom of establishment.

On a national level, to fully implement the Mobility Directive into Maltese law, on the 7th of February, 2023 the existing Cross-border Mergers of Limited Liability Companies Regulations (S.L. 386.12) was repealed and replaced by three new Regulations under the Companies Act, namely:

  1. the Companies Act (Cross-border Conversions of Limited Liability Companies) Regulations;
  2. the Companies Act (Cross-border Mergers of Limited Liability Companies) Regulations; and
  3. the Companies Act (Cross-border Divisions of Limited Liability Companies) Regulations.

Main Changes

Importantly, the Mobility Directive has successfully (i) established a harmonised legal framework governing cross-border conversions, (ii) established a harmonised multi-layer procedure governing cross-border divisions by formation of new companies, and (iii) amended the current framework governing cross-border mergers by introducing a procedure for ‘less complex mergers’. Moreover, the Mobility Directive has also established specific rules to increase creditor and minority shareholder protection thus removing legal barriers to same and enhancing the freedom of establishment.

  1. Cross-Border Conversions

The Mobility Directive defines the term cross-border conversion 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…while retaining its legal personality.’

Essentially, the Mobility Directive has introduced certain new requirements to be adhered to and submitted in order for cross-border conversions to take place, including but not limited to:

  • The drawing up of the draft terms of a cross-border conversion;
  • The issuance of a notice informing the company’s members, creditors and employees that they may submit feedback on the draft terms of the cross-border conversion;
  • The drawing up of a report for the company’s members and employees explaining and justifying the legal and economic aspects of the cross-border conversion and the implications of said conversion on the employees; and
  • The drawing up of an independent expert report examining the draft terms of cross-border conversion.

Once the conversion is approved by the competent authority of the destination Member State, it will be registered with the national registers of both the departure and destination Member States and would become legally effective. In this regard, a cross-border conversion would have the below consequences:

  • All the company’s assets and liabilities shall become those of the converted company;
  • The company’s members shall continue to be members of the converted company, unless they have disposed of their shares as referred to in Article 86i(1) of the Mobility Directive; and
  • The company’s rights and obligations arising from employment relationships existing at the time of the cross-border conversion, shall become those of the converted company.

  1. Cross-Border Divisions

The Mobility Directive also provides certain rules on cross-border divisions, albeit limited only to cross-border divisions that involve the formation of new companies, with the main purpose being that of establishing a harmonised set rules in relation to procedure.

Under this Directive, “division” means an operation whereby:

  • 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”);
  • 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
  • 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”).

The procedure involved in implementing a cross-border division is principally the same as the procedure applicable to a cross-border conversion, as set out above. In this regard, a cross-border division would have the below consequences:

  • the assets and liabilities and all rights and obligations should be transferred to the recipient companies in accordance with the allocation specified in the draft terms of division;
  • the members of the company being divided who do not exercise their exit rights will either become members of the recipient companies, or remain members of the company being divided or else become members of both; and
  • the recipient companies shall respect any rights and obligations arising from any employment relationships.

  1. Cross-Border Mergers

The Mobility Directive has created additional safeguards for employees, members and other stakeholders including, inter alia, the necessity of transparency through the disclosure of certain information and the presentation of detailed reports. Furthermore, the Mobility Directive has provided the possibility of ‘exit rights’ to members of companies undertaking cross-border operations by allowing them to dispose of their shares in exchange of monetary compensation.

By and large, the amendments created by the Mobility Directive to the existing rules on cross-border mergers reproduce the procedural rules governing a cross-border division and conversion as described above. Nonetheless, it should be pointed out that the specific regulations applicable to each procedure should be studied in isolation before undertaking a cross-border merger, conversion or division.

Ultimately, a cross-border merger would have the below consequences:

  • the assets and liabilities and all rights and obligations of the company will be transferred to the acquiring company or to the new company;
  • the members of the merging companies who do not exercise their exit rights will become members of the acquiring company or the new company; and
  • the acquiring company or the new company shall respect any rights and obligations arising from employment relationships.

  1. New Rule on Anti-Abuse of Process

Apart from the above, the Mobility Directive has also introduced a new rule applicable to cross-border operations to avoid abuse of procedure. Essentially, this new rule requires the relevant competent authorities, when analysing whether to grant a pre-conversion/division/merger certificate, to evaluate whether the relevant procedure is being carried out for fraudulent or abusive purposes, including inter alia the circumvention of employees’ rights, social security payments or tax obligations, or for criminal purposes. Should abuse or fraudulent practice be suspected, the competent authority may extend the applicable three-month assessment period under which it has to elect whether to grant a certificate by a further three months, which extra three month period has also been implemented within national law through the afore-mentioned Regulations.

Ultimately, the Mobility Directive may only be considered as a welcomed development as it will certainly assist limited liability companies incorporated in one Member State to conduct a cross-border operation to or with any other Member State with a more standard set of rules and regulations governing the transaction across all Member States.

About the Authors

This article has been authored by Dr Luana Agius, Junior Regulated Industries Advisor and Dr Edward Meli, Senior Associate and Assistant Manager. Contact us on https://www.csbgroup.com/contact-us/ for more information.