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Act to Transpose the EU Directive on Cross-Border Conversions – An overview

The Directive (EU) 2019/2121 (Directive on Cross-Border Conversions) had to be transposed into national law by 31.1.2023. It will introduce, for the first time, standard rules for cross-border changes of legal form and divisions and amend the rules on cross-border mergers throughout Europe. In Germany, on 20.1.2023, the Bundestag [lower house of the German parliament] passed the ‘Act to Transpose the EU Directive on Cross-Border Conversions’ (Gesetz zur Umsetzung der Umwandlungsrichtlinie, UmRUG) and the accompanying ‘Act to Transpose the provisions in the EU Directive on Cross-Border Conversions relating to Employee Participation in cases of Cross-Border Conversions, Mergers and Divisions’ (Gesetz zur Umsetzung der Bestimmungen der Umwandlungsrichtlinie über die Mitbestimmung der Arbeitnehmer bei grenzüberschreitenden Umwandlungen, Verschmelzungen und Spaltungen, UmRUGMitbestG).

The Aim of the EU Directive on Cross-Border Conversions

The German Reorganisation Act hitherto provided no rules on cross-border changes of legal form or divisions. Solely cross-border mergers of corporations were regulated by legal provisions. Even hitherto unregulated reorganisation transactions were however permitted and possible, according to an ECJ ruling, by virtue of the freedom of establishment (Art. 49, 54 TFEU). In practice, however, the different arrangements for cross-border reorganisations in the legal systems of the Member States created uncertainty and ambiguity in relation to transactions. The requirements of the Directive on Cross-Border Conversions are closely linked to the freedom of establishment and their aim is the harmonisation of cross-border conversions throughout Europe. 

Enhancing protection for the parties concerned as an objective of the German UmRuG

The UmRuG, which transposes the EU Directive, aims to protect the parties concerned; this will be achieved through various measures. 

(1) Shareholders – In cases of cross-border conversions this includes exit rights for members of a company in exchange for adequate cash compensation, whereby the exit rights will be applied such that the members of a company who accept the compensation offer will no longer become shareholders in the offeree company. Another protective measure for shareholders is the right to assert a claim for improvement of an inadequate exchange ratio for both national as well as cross-border conversions.

(2) Creditors – There were also specific creditor protection rules that had to be transposed in the context of the UmRUG. The creditors of the transferor company are entitled to financial guarantees so that their claims cannot be jeopardised by the conversion. 

(3) Employees – An integral part of the UmRUG is moreover the protection of employees and this will be guaranteed through information and consultation rights for works councils and employees as well as by detailed rules with respect to the right of co-determination. 

Procedural simplifications

The UmRUG defines other cases (in particular, corporate group situations) where it will not be necessary to produce a report on the effects of the conversions on the members of the company and its employees. Furthermore, in the future, – both in the case of cross-border conversions as well as national reorganisations – even the members of just one company concerned will be able to effectively waive the report for their company.

The harmonisation of the process for completing cross-border registration through the introduction of a Europe-wide compatible procedure of digital communication between the commercial registries concerned (Business Registers Interconnection System – BRIS) will likewise make a considerable contribution towards simplifying cross-border conversions.

Conclusion: The UmRUG, which also includes important changes for national corporate reorganisations, will create a more transaction friendly environment for cross-border restructuring measures. Whether or not the goal of promoting the European freedom of establishment is achieved will only become clear in future practice. No procedure has been provided for cross-border conversions of partnerships; the scope of application of the UmRUG is limited to corporations only. With respect to corporate conversion measures initiated prior to the date of the promulgation of the UmRUG, please note the transitional rules under Section 355(1) of the Reorganisation Act Draft.

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