What has been regulated by law so far and what is changing?
With the entry of the Conversion Directive (also at times referred to as the "Mobility Directive") into force on 1 January 2020, cross-border demergers for the purpose of founding new entities and cross-border conversions of the legal form (in the form of transfer of the registered office) are being introduced for European corporations on the basis of a European directive for the first time. In addition, existing regulations governing cross-border mergers are being modified. On 20 April 2022, the German Federal Ministry of Justice submitted the long-awaited draft bill on the implementation of the Conversion Directive. The requirements laid down in the Conversion Directive are to be transposed into national law by 31 January 2023, so a timely conclusion of the legislative process can be expected.
Essential points in the draft bill
- The draft bill provides for a legally secure register procedure that is compatible throughout the Union in which the commercial registers involved are to communicate digitally with each other. In future, courts of register will also have a wider duty of review. Within the framework of controls to check abuse, they are to examine whether cross-border conversions serve abusive, fraudulent or criminal purposes, and in particular whether the aim of the conversion is to circumvent national or European law. Courts of registry are granted discretionary latitude in cases of abuse. If indeed a case of abuse is deemed to be present, no preliminary certificate attesting to the legality of the cross-border conversion will be issued.
- The draft bill furthermore greatly expands protection of creditors. The focus here is on reports to be issued by an independent expert and a right of creditors to collateral. In principle, the conversion measure may only be registered if creditors are provided a security deposit in they event they have claims that existed prior to the disclosure of the structural measure, but such claims were not due, and they credibly demonstrate that there is a threat to the realisation of such claims through the conversion.
- In order to protect minority shareholders, the draft bill provides for a right of withdrawal in return for cash compensation and a right to an improvement of the exchange ratio in the case of cross-border mergers and divisions. The unequal treatment of minority shareholders in transferring and acquiring companies in mergers is to be ended by making the so-called judicial review procedure available to both groups of minority shareholders in the future.
- Employees' rights will be protected through more transparency and information, for example through a comprehensive and early duty to inform and report to employees. In this respect, the draft is fundamentally based on the negotiation model familiar from the European Company (SE), with a fall-back solution in the so-called special negotiating body. This already applies, however, if the company has a number of employees that corresponds to four-fifths of the national threshold.
- Another important provision is that in the case of mergers involving public limited companies and partnerships limited by shares, the obligation to pay cash can be replaced by granting shares as compensation in the event of an inappropriate exchange ratio.
New statutory arrangements will ensure legal certainty and efficiency
The German Act on the Implementation of the Conversion Directive will facilitate cross-border conversions in the future by providing for much-needed standardisation in the protection of the stakeholders involved and by making cross-border conversions possible in many cases in the first place. It should nevertheless be pointed out that the new statutory arrangements only apply to companies within the EU and the EEA and that cross-border conversions involving third countries continue to be ignored by law.