The new German rules for EU cross-border conversions, mergers, and spin-offs, implementing the EU Transformation Directive (EU) 2019/2121, introduce new interesting restructuring options and will provide standardized procedures for cross-border corporate transformations.
The new German law applies to corporations, i.e. stock corporations, partnerships limited by shares, and limited liability companies. For the first time, cross-border conversions and spin-offs into and out of Germany within the European Union will have a clear statutory footing. For EU cross-border conversions and spin-offs the new law provides interesting new transaction options. In addition, the existing regime for EU cross-border mergers will be amended and aligned with the new rules for the other two cross-border transformations. The principal aspects of the new law are:
1. Protection of minority shareholders
Minority shareholders will be entitled to file a motion for judicial review of the compensation originally set forth in the transformation documents. The proceedings are governed by the German rules for judicial appraisal. Motions may be filed both by shareholders that remain invested and, in deviation from the current law, shareholders that are deprived of their shareholding as a result of the cross-border transformation. This will also apply to purely domestic transformations.
For stock corporations and partnerships limited by shares the new rules allow that additional compensation claims of minority shareholders resulting from a judicial appraisal can be settled in new shares instead of cash. This option preserves the company’s liquidity and, therefore, provides more flexibility in dealing with appraisal claims. It also opens the door to cross-border mergers of publicly listed companies. Again, this option will also be available in purely domestic mergers.
2. Protection of creditors
The second main feature of the new rules on EU cross-border transformations is the pre-emptive protection concept for creditors of the transforming company. Creditors that notify the company within three months of publication of the transformation plan and whose claims would be negatively affected by the proposed transformation are entitled to be granted security for their claims. The transformation cannot be entered in the commercial register and thereby completed until such security has been granted. However, given that the creditors' claims are generally not jeopardized, in practice this should be the exception.
3. Employees
The information obligations towards employees have been extended and now specifically include the effects of the cross-border transformation on applicable employment terms and on the business locations of the company.
Further, in the context of the new cross-border rules, the German rules on employee participation in the supervisory board of a company have been uniformly revised and now require negotiations with employee representatives if four fifth (4/5) of the relevant headcount thresholds that lead to employee co-determination are reached by the transforming company (so-called four-fifth-rule). In practice, this means for a German transforming company that negotiations with employee representatives are required in case the German company (including its subsidiaries) employs at least 400 employees (regarding the one-third co-determination regime) or at least 1,600 employees (regarding the equal co-determination regime).
4. Abuse control
As a new feature, German courts will have to review whether there are indications that a cross-border transformation serves abusive, fraudulent or criminal purposes. While this will certainly cover illegal tax evasion schemes, it is less clear in other scenarios. In a last minute effort three specific examples for abusive transformations were included in the statute that relate to employee participation and safeguarding of company pensions. However, we generally expect courts to interpret this provision rather narrowly.
5. Digitalization of commercial register process
The transformation procedure will reach the digital age. The commercial register certificates for the transformation will now be transmitted through a European register network, thus easing the administrative burden of dealing with various company registers.
6. Outlook
The new rules came into force March 1, 2023, after the German legislator initially missed the deadline of January 31, 2023, for implementing the EU Transformation Directive. The new law provides new standardized and transaction-friendly cross-border restructuring options for corporations and legal practice will evolve to put them to use. We will monitor these developments and are available to help with your restructuring needs.
If you have any questions concerning the material discussed in this client alert, please contact the members of our Corporate practice.
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