With its decisions in the “Cartesio” and “VALE” cases, the European Court of Justice has established a further milestone regarding cross-border mobility of European companies by clearing the way for cross-border conversions of companies within the European Union.
Since the implementation of harmonized national rules on cross-border mergers in all EU Member States following the European Cross-Border Merger Directive, cross-border mergers have become an attractive cross-border restructuring measure for European multinational companies and are increasingly used by groups for a variety of reasons.
However, the possibilities for cross-border restructuring measures so far have ended just where they start: with mergers in the strict sense. Other types of restructuring, such as spin-offs or conversions of form are not covered by the EU Cross-Border Merger Directive which explicitly enables only ‘true’ mergers.
There are no EU-wide rules enabling companies to transfer their registered seat to another Member State in a way which would preserve the company’s legal personality. So far, when an existing company wanted to transfer its registered seat – and not only its real seat (meaning its headquarters and/or business operations) – to another Member State, for companies in most Member States the only possible way to do so was to wind-up the company in the home Member State and to establish a new company in the host Member State.
The decisions of the European Court of Justice
In its “Cartesio” decision (“Cartesio”, C-210/06), the European Court of Justice declared in an obiter dictum that a home Member State cannot prevent a company incorporated under its law from converting itself – without being liquidated or wound-up – into a company governed by the law of another (“host”) Member State to which the company transfers its registered seat, so long as a conversion is permitted under the law of the host Member State.
Furthermore, in its “VALE” decision (“VALE”, C-378/10), the European Court of Justice had to decide on the transfer of a company’s registered seat to another Member State with a change of the national law applicable to it, while maintaining the legal personality of the company, hence, a cross-border conversion.
The court held that national legislation which allows for the conversion of companies established under its national law, but which – in a general manner – does not permit companies governed by the law of another Member State to convert into a company governed by the national law of the host Member State, violates the principle of the freedom of establishment.
As a consequence, the transfer of a company’s registered seat to another Member State by means of a simultaneous conversion into a company governed by the national law of the host Member State must be permitted if the host Member State recognizes a national conversion – presupposing always that the company then pursues an economic activity in the host Member State through an actual establishment.
Practical difficulties deriving from the lack of common legal framework
But: What is the result of this in practice? While cross-border mergers benefit from the European Cross-Border Merger Directive, based on which the legislation for implementing cross-border mergers is harmonized across the EU Member States, cross-border conversions still lack such a common legal framework.
The European Court of Justice in its “VALE” decision held that the host Member State is entitled to apply its national laws governing the conversion of companies also to cross-border conversions and that such cross-border conversion would require the consecutive application of two national laws.
It is evident that the successive application of the non-harmonized legal provisions of two Member States will give rise to practical difficulties:
How can the existing shareholders’ rights be sufficiently respected? How can an adequate protection of minority shareholders and of creditors be achieved? In what way can the employee participation rights be safeguarded sufficiently? Can the regulations of the EU Cross-Border Merger Directive or the provisions for the transfer of the registered seat of a Societas Europea (SE) be taken into account or even applied? Equally important: How is all this to be coordinated and what is the timeline for such a transaction? Many questions will arise, and have indeed already arisen, that are still unanswered.
A first indication of the approach taken under German law was given by the Higher Regional Court of Nuremberg (12 W 520/13), which recently held that the German national law regarding the conversion of companies must be applied to the conversion of a company established under the laws of another Member State into a company governed by the laws of Germany, interpreted in conformity with European law.
This of course is only one side of the transaction and will not put an end to the discussions yet to come on how a cross-border conversion is to be implemented. What it also implies is that cross-border conversions will probably be handled differently in all Member States unless and until these are harmonized by European legislation.
However, as cross-border company conversions can offer various advantages over other measures, in particular with regard to property transfer tax, and due to the fact that there are many different reasons for the transfer of a company’s registered seat to another Member State, the demand for cross-border conversions is increasing.
It is to date unclear whether a European directive which provides a common legal framework for cross-border conversions of companies between Member States will be passed into law in the near future. Until then, cross-border conversions will require a detailed analysis and accurate application of the legal provisions of both Member States involved as well as close coordination with the company registration authorities in both Member States.