FRRA Legal Blog: Companies become mobile in the European Union

Through the national implementation of the Mobility Directive, it will be possible in future to reorganize corporations in the EU area across the border.

With the Mobility Directive, the European legislator has for the first time created a uniform legal framework for cross-border conversions and divisions in order to overcome de facto obstacles to the exercise of the freedom of establishment. Austria did not meet the transposition deadline for the Mobility Directive, which was 31st January 2023, but in the meantime the government bill for the EU Reorganisation Act (“EU-UmgrG”) is available. The government bill provides for the date of entry into force of the EU Reorganisation Act to be 1st August 2023. At the same time, the EU Merger Act is to expire. In future, the EU Reorganisation Act will regulate cross-border reorganisation measures, namely cross-border transformation, cross-border merger and cross-border division. Up to now, only the cross-border merger of corporations was expressly regulated in Austrian law. The implementation of the Mobility Directive therefore brings welcome relief for the practice of reorganisations.

It is also gratifying that all cross-border types of reorganisations are summarised in one law. That this is not a matter of course is shown by a look at national reorganisation law, where a uniform codification has been lacking up to now. The relevant legal provisions can be found in various material laws. For example, the (domestic) merger is regulated in the Stock Corporation Act and partly in the Limited Liability Company Act, while the provisions for the (domestic) division are found in a separate Division Act. The government bill on the EU Reorganisation Act departs from this (extremely confusing) regulatory technique.

Below we summarize the key points of the proposed law, which – if implemented in this form – will represent a milestone in Austrian reorganisation law.

Cross-border conversion enables transfer of registered seat

The EU Reorganisation Act does not speak of the cross-border transfer of the registered seat, but uses the term “cross-border conversion”. This is due to the fact that it is not only a matter of an isolated transfer of the registered seat of a corporation, but the legal form of the company also changes. If, for example, an Austrian limited liability company moves its registered seat to the Netherlands, it becomes a Dutch B.V. after the conversion has been completed. Due to the EU Reorganisation Act, a cross-border conversion can be carried out in both directions; one then speaks either of an outward conversion (Austrian corporation moves its registered seat to another Member State) or an inward conversion (EU-foreign corporation moves its registered seat to Austria).

Transfer of the provisions on cross-border mergers into the EU Reorganisation Act

The merger (colloquially also often referred to as amalgamation) of domestic and foreign corporations has already been regulated by law since the EU Merger Act came into force in 2007. In order to avoid further fragmentation of Austrian reorganisation law, the EU Merger Act is to be repealed when the EU Reorganisation Act comes into force and the cross-border merger is to be combined with the cross-border transformation and division in the EU Reorganisation Act. In view of the already delayed implementation, explicit transitional provisions – in the sense of a continued applicability of the EU Merger Act beyond 31st July 2023 – are refrained from, because it does not seem at all guaranteed that other Member States would then still participate in a cross-border merger conceived according to the outdated legal situation. In terms of content, the transfer to the EU Reorganisation Act changes little. Certain facilitations are now provided for the merger to incorporate a wholly-owned subsidiary. For example, no merger audit is required here – even without an express waiver by the shareholders.

Cross-border division now also permissible

The EU Reorganisation Act now also enables cross-border divisions of corporations for the first time. In future, therefore, an Austrian limited liability company, for example, can transfer assets to one or more German limited liability companies by way of a division (outward division). The reverse variant, i.e., a division of assets of a foreign corporation to one or more domestic corporations, is of course also permitted (inward division).

If the transferring company is to continue to exist after the division, this is called a spin-off. In a split-off, on the other hand, the transferring company is dissolved and all its assets are transferred to two or more acquiring companies. The acquiring companies must be newly formed in the course of the cross-border division (division for new formation). A cross-border division onto already existing companies (division for absorption) is – in contrast to domestic divisions – not permissible.

A novelty in Austrian division law is provided by the EU Reorganisation Act (or the Mobility Directive implemented with it) with the separation. In this case, a company transfers part of its assets to one or more newly founded companies in another Member State. Unlike other forms of divisions, however, it is not the shareholders of the transferring company that receive shares in the acquiring company or companies, but the transferring company itself. The separation therefore enables companies to establish subsidiaries in other EU countries and transfer assets to them at the same time. Since the transferring company is the sole shareholder of the acquiring company(ies), neither a division report nor a division audit is required here, which reduces the costs of the reorganisation measure.

EU Reorganisation Act protects minority shareholders, creditors, employees and the public

Similar to the law applicable to domestic reorganisations, the EU Reorganisation Act provides for a variety of rules to protect various interest groups in the case of cross-border reorganisations:

  • Minority shareholders who object to the cross-border outward reorganisation are entitled to an appropriate cash settlement, the amount of which can also be reviewed in court.
  • Creditors may demand security from the company if they can credibly demonstrate that the fulfilment of their claim is endangered by the cross-border conversion, merger or division.
  • In the case of outward conversion, merger and outward division, the board of directors shall address in the restructuring plan the expected effects of the cross-border reorganisation on the employees, the employment situation, the employment conditions and the procedure for regulating employee involvement rights. The reorganisation plan, the reorganisation report and the annual accounts and balance sheets must be submitted to the works council or – if no works council has been established – to the employees.
  • Within the framework of the provisions on the outward transformation, there are also the provisions on the planned “abuse control”, which by virtue of reference also apply to the outward merger and the outward division. This is a novelty in Austrian reorganisation law. In the case of an outward reorganisation, the Commercial Register Court must now examine “whether the conversion [or the merger or division] is to be carried out for abusive or fraudulent purposes which lead or are intended to lead to evading or circumventing Union or national law, or for criminal purposes“. Abuse occurs in particular when the transformation is used to evade employees’ rights, social security payments, tax obligations, claims of other creditors or for criminal purposes. This requires a check based on the circumstances of the individual case, whereby in the absence of concrete indications from the notification or possibly also from information provided by third parties, the court can in principle assume that there is no abuse. It then does not have to take any further investigative steps. Accordingly, a cross-border reorganisation is to be regarded as abusive if, among other things, the company in question has engaged in conduct that qualifies as social fraud. For the tax area, which is particularly important in practice, the Company Register Court is bound by an information notice on the (non-)existence of abuse according to § 118 of the Federal Fiscal Code (BAO), provided that such notice is submitted. The explanatory notes clarify that the departing or transferring corporation is not obliged to submit this information. However, they also emphasise that this can make an important contribution to simplifying the judicial examination of abuse. It is likely that the company register courts will demand the submission of such information notice in the future.

Authors: Stefan Hammerschmidt and Florian Wünscher

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