By Segismundo Alvarez
In an increasingly changing and global business environment, companies need to be able to reorganise, also internationally, through cross border, mergers, divisions and conversions. At the same time, these operations pose a risk to stakeholders’ rights, and international reorganisations are increasingly seen by the public, NGOs and EU institutions as a means to avoid social and tax legislation, especially for transnational companies. This tension has been obvious in the preparation of the Directive on cross-border mobility (hereinafter: the new Directive)approved by the European Parliament on April 18th –see the final text here , subject only to the corrigendum procedure– that amends Directive 2017/1132 relating to certain aspects of Company Law (hereinafter: the 2017 Directive).
The key novelty is that the scope of regulated cross border transactions is broadened, as the new Directive adds cross-border divisions and conversions to the already harmonised regulation of cross-border mergers. The EU Court of Justice (hereinafter: ECJ) had declared that companies should be allowed to carry out cross-border transactions as a consequence of their right to freedom of establishment (cases SEVIC, Cartesio, VALE Építési and POLBUD) but the lack of regulation implied practical difficulties.
The rules introduced by the new Directive basically apply the procedure of cross-border mergers to conversions and divisions, with the necessary adjustments. This is reasonable, since if they were different, requirements for cross-border conversions could have been circumvented through the creation of a foreign company and a subsequent merger.
Some minor changes are introduced to the previous procedure on mergers as harmonised by the 2017 Directive: information requirements for members and workers are intensified (article 86.e); the draft terms of the operation must include the cash compensation that members can obtain if they decide to exit the company, and this compensation has to be reviewed by an independent expert (article 86.g). In addition, the employees are given the opportunity to express an opinion which will be communicated to the shareholders and annexed to the report; creditors and members can also make comments to the draft terms (86.h).
The most important – and controversial – change in the procedure is that control of the operation by the authority of the company’s country of origin is expanded. Up to now, Member States designated a national authority that would control “the proper completion of all procedures and formalities in the departure Member State” (article 86.m.1); if the procedure was correct it would issue a certificate that would prove this compliance in the destination Member State. The authority of this State would therefore confine itself to verifying the requirements for formation and registration of the new or acquiring company under its national law. This system remains, but the control by the authority of the Member State of origin will go beyond formal compliance under the new Directive: it will include “the satisfaction of payments, or securing payments or non-pecuniary obligations due to public bodies or the compliance with special sectorial requirements, including securing payments or obligations arising from ongoing proceedings” (article 86.m.1). This may lead to a stay of the transaction, and will certainly lengthen the procedure as the competent authority will have to consult other national public authorities to obtain information about those requirements and proceedings. Accordingly, the new Directive extends the period for issuing the pre-transaction certificate from 1 to 3 months.
Additionally, if the authority of the country of origin has serious doubts that the operation “is set-up for abusive or fraudulent purposes leading or aimed to lead to evasion or circumvention of national or EU law, or for criminal purposes” (article 86.m.8), it will have an additional 3 months for further investigations that can include other consultations or the requirement of an independent expert report. The maximum period of 6 months can be extended on the grounds of the complexity of the case. In the original version of the Commission’s proposal , the authority had to determine if the operation implied an artificial arrangement that prejudiced stakeholder’s rights. That examination was widely criticised (in this blog and also here) and the reference to artificial arrangements has been suppressed, but the final text version of the new Directive poses similar problems.
Indeed, the procedure has become longer and more uncertain: the idea of circumvention of national or EU law is vague and gives a wide margin of discretion to the national authorities to stop the operation. It is true that some limits to this discretion can be inferred from the new Directive: the examination must be done on a case-by-case basis and in accordance with a procedure laid down in national law, and the indicators of abuse cannot be considered in isolation (article 86.m.9). The scope of the restrictions might eventually be determined by the ECJ, but in the meantime this uncertainty will undoubtedly reduce these operations. And it is important to note that these restrictions now apply also to mergers, unlike in the original version of the proposal. This means the overall effect of the new regulation will probably be the opposite of its intention: cross border operations will be made more costly, time consuming and uncertain.
Besides, my opinion is that the new procedure, and particularly the reinforced ex ante control, does not guarantee that the operation is sound, as it is extremely difficult for an authority to determine ex ante the abusive or fraudulent nature of a transaction, especially in tax matters.
I believe that the concerns regarding the abusive use of these cross-border operations is not unfounded, but that there are other –and better- alternatives than a cumbersome and inefficient ex ante control.
Some of them have in fact found their way into the final text. One way to avoid the fraudulent intent of these operations is to ensure that certain effects are unenforceable towards prejudiced parties: this is what the new Directive does by allowing creditors to “institute proceedings against the company also in the departure Member State within two years from the date the conversion has taken effect” (article 86.k.4).
Another way to prevent fraud is to limit ex post the effects of the transaction in specific cases. The new Directive declares that a “cross-border conversion which has taken effect in compliance with the procedures transposing this Directive may not be declared null and void” (article 86.u). However, the principle of abuse (fraus omnia corrumpit) is part of EU law according to the ECJ (Kefalas and others, Diamantidis). This idea has made its way into article 86.u, which declares that although the operation cannot be annulled, this “does not affect Member States’ powers, inter alia, in the field of criminal law, terrorist financing, social law, taxation and law enforcement, to impose measures and penalties, in accordance with national laws, after the date on which the cross-border conversion took effect”. This must be interpreted broadly, so that courts can determine in specific situations that the change of lex societatis does not prevent the application of the law of the Member State of origin that was intended to be circumvented. It is also possible that certain matters that affect taxation or employees’ participation rights should not be linked at all to lex societatis: they should rather be connected to the State where the activities of the company (production, sales, etc..) actually take place. Moreover, in certain cases, probably the best way to promote freedom of establishment and at the same time avoid legal arbitrage on sensitive matters is greater harmonisation at a EU level.