14.12.2022 M&A and Corporate

From February 2023, in addition to cross-border merger, cross-border division and cross-border conversion will be possible

Starting from the next year February, EU companies can among other things migrate to another EU country without a liquidation. This change enables to change registered seat of the company simply and smoothly, removing barriers to the free movement of capital and business in the EU. For instance, there will be no need to establish new company to be able to change the seat within the EU.

On 07.12.22, Estonian parliament adopted a law that amends the regulation on cross-border movements of EU companies. The law act transposes Directive (EU) 2019/2121 of the European Parliament and of the Council as of 27 November 2019 (the Directive). The purpose of the above is, inter alia, to enable companies to carry out, in addition to cross-border mergers, also cross-border divisions and migrations.

The amendments primarily concern the Commercial Code (CC) and the date of entry into force of the law is 01.02.2023.

It should be noted that the process of preparation of the draft law, was delayed. The Directive was adopted already three years ago, i.e. the cross-border division and migration should have been granted to Estonian companies earlier. In our practice, there were cases, where an Estonian company has wanted to migrate itself from a public limited company into a company operating under the law of another member state. In such a case, the business register has so far not satisfied the respective application, and the company has had to go to court. The court’s assessment has been uncompromised: the provisions of both domestic migration and cross-border merger of the CC must be applied by analogy. Since the processes of cross-border merger and migration are different, it turned out to be practically impossible for companies to prepare correct documentation that could be acceptable by the commercial register and make an entry of cross-border migration in the commercial register. Since similar disputes in the past were complicated and it took years before a solution could be reached, this change is of the utmost importance and long-awaited. The answer to the question that may arise from pending registry proceedings, in which the actual migration was formalised as a merger or migration in accordance with the provisions of the CC due to a lack of regulation, will only be shown by the court’s practice.

In many European countries such regulation already exists, e.g. Austria, the Czech Republic, France, Germany, Ireland, Italy, Latvia, Liechtenstein, Luxembourg, the Netherlands, Poland, Spain and the United Kingdom. Notably in order to conduct the cross-border movement, both legislatures, i.e of the state of origin and destination, must allow relevant cross-border actions.

In the case of cross-border movements, a draft contract and a report must be drawn up 6 weeks before the general meeting, which must then be published through the commercial register or website. The decision on the cross-border merger, division or migration can then be adopted. An application must be submitted to the registrar for a certificate, which the registrar has 3 months to issue (in exceptional cases, this period may be extended). After issuing the certificate and making the corresponding entry, the registrar forwards the certificate to the authority of the destination country, as a result of which the registrar receives information on cross-border movements from the destination country and makes the corresponding entry.

Participation in cross-border mergers, divisions and migrations is possible for private limited companies and public limited companies registered in the Estonian commercial register. This means that other types of companies will not be able to participate in cross-border movements. In addition, the law provides that cross-border movements are prohibited both when a company is in liquidation and the distribution of its assets to its shareholders has begun, and when rehabilitation or bankruptcy proceedings have been initiated against the company.

In domestic mergers and divisions, the relevant agreement must reflect the data required by § 392 and 435 of the CC. The information required in the draft decision on migration is set out in § 480 of the CC. According to the law, in the case of cross-border mergers and divisions, § 433² and 477² of the CC additionally apply to contracts, and in the case of a migration project, § 491² of the CC applies. According to the amendments, the contract of merger and division, as well as the draft terms of migration, must reflect, in addition to basic information, the compensation offered to shareholders and the procedure for determining it, the principles of creditor protection, including the guarantees offered and the benefits granted to members of the company’s management bodies.

The report on the merger, division or migration shall contain a description of the implications of the cross-border movement for employees. The report must also be made available electronically to the company’s employees and shareholders at least six weeks before the meeting or general meeting that adopts the decision on the merger.

In the course of cross-border movement, it is necessary to obtain a corresponding certificate from the registrar. According to the law, a number of cases are foreseen in which the registrar does not issue a certificate, e.g. if the merger/division/migration does not comply with the applicable requirements, or if the cross-border movement is planned with the aim of circumventing company’s obligations etc. In addition, cross-border movement may also be rejected if it may pose a threat to Estonia’s security. If the registrar has a reasonable doubt that the cross-border movement is being planned for the aforementioned purposes, a certificate will not be issued. In order for the registrar to be able to ensure that the cross-border movement procedure is carried out, state and local government authorities and other legal entities governed by public law (in particular, the Tax and Customs Board and the Financial Intelligence Unit) must give the registrar their assessment of whether the company could move across borders.

Cuesta’s experts have a long-term hands-on experience in the number of processes of cross-border movements. So that the possible legal hurdles will be foreseen, evaded and relevant risks mitigated.

Lada Riisna
Cuesta Law Office partner

Brigitta Jõgi
Cuesta Law Office lawyer