Arendt, CMS, Troutman Pepper | Restructuring Within Europe Made Easier – The EU’s New Mobility Directive

This article summarizes the key messages of a seminar that EACCNY organized at the end of November, 2023 on the EU’s New Mobility Directive.

The introduction of a harmonized European framework for cross-border change of legal form and demerger of companies opens up new opportunities for US businesses to restructure their subsidiaries across various jurisdictions within the European Union.

By the end of January this year, member states of the EU were obliged to transpose the so-called EU Mobility Directive into national law. Whereas cross-border mergers were already possible before then, there was no solid European codification for demerger or change of legal form across borders. The new legislation tries to reconcile flexibility in cross-border corporate mobility with protection of third-party interests (such as creditor protection or employee co-determination rights).

Thanks to the directive, a significant increase in cross-border conversions is expected. The reasons for such conversions can be manifold: A US parent company may have an interest in reducing administrative expenses, optimizing cash management, streamlining group structures, preparing real estate transactions, joint ventures or M&A transactions and finding the most suitable regulatory environment for their subsidiaries. In comparison to the transfer of individual rights and assets, a conversion has the legal advantage of universal succession, which means that in principle all rights and obligations can be transferred without the consent of third parties and e.g., without incurring income tax.

The EU Mobility Directive still only enables cross-border conversions within the EU and EEA. However, in some jurisdictions such as Austria or Luxembourg, cross-border mergers with third countries are permitted so that mergers with third-country companies would in fact be possible via the detour of a merger into one of the aforementioned jurisdictions.

The practical course of a e.g., cross-border merger starting in Germany and ending in Austria can be estimated to take around 8-12 months and be roughly divided into a preparatory phase, a resolution phase and a completion phase. During the first phase (approx. months 1-3), a merger plan is drawn up, which contains details on cash compensation for minority shareholders who wish to leave the company, information on creditor securities and on employee pensions and pension entitlements. This plan must then be disclosed within the company and submitted to the national commercial register. Alongside the merger plan a merger report (if not dispensable) and an audit report must be prepared. In the next phase, the necessary resolutions on the merger must be passed. Parallel to the preparatory measures and resolutions, it may be necessary to involve the employees (this process of employee participation can take up to 6-8 months). In the final phase, the agreed merger needs to be registered with the commercial register of the country of departure which will carry out a legality check including an abuse control if there are indications that the merger is being used for abusive, fraudulent or criminal purposes, e.g., if the merger appears to be carried out in order to circumvent employee co-determination rights or taxes in the national jurisdiction. If the commercial register has no objections to the merger, it can issue a preliminary certificate (known as pre-merger certificate). The register of the country of destination then also carries out a legality check before the merger is entered in the register of the country of destination. As a last step the original company will be deleted from the register of the country of departure.

The current issues being discussed in connection with the directive in Europe, which were also addressed in the event, include tax law problems. While a major advantage of domestic conversions lies precisely in the income tax neutrality, this and regulations on tax retroactivity do not automatically apply to other types of tax in a cross-border context. This applies in particular to real estate transfer tax. If the transferring company itself or one of its direct or indirect subsidiaries holds real estate, this can lead to unwanted tax burdens.

Despite the uncertainties that still exist regarding the precise handling of the respective national conversion rules including abuse control, as well as the necessary planning effort (taking into account corporate, labor and tax law implications), cross-border conversions represent a powerful instrument for a more flexible choice of legal form and optimization of the regulatory environment within Europe.

For more information, please contact the authors:
> Joan C. Arnold, Partner, TROUTMAN PEPPER
> Eckart Gottschalk, Partner, CMS
> Natalia Tsirmpa, Senior Associate, ARENDT

Compliments of Arendt, CMS and Troutman Pepper – members of the EACCNY.