With effect from March 1, 2023, German legislation has amended the German Transformation Act (UmwG) to include new provisions on cross-border divisions (Sections 320-332 UmwG) and cross-border conversions (Sections 333-345 UmwG).
The so called Mobility Directive of the EU (Directive (EU) 2019/2121) was thereby implemented in German law. This is one element which provides a legal basis for the freedom of establishment for EU corporations guaranteed by the EU Treaties.
Cross-border merger already in existence since 2007
German law has included regulations on cross-border mergers since 2007. For example, pursuant to this, a German corporation (a limited liability company called “GmbH” or a stock corporation called “AG”) can be merged into an Austrian GmbH, so that the German corporation ceases to exist and all assets and employees of the German corporation are transferred by way of “universal succession” to the Austrian GmbH.
In return, the shareholders of the German corporation receive shares in the Austrian GmbH. In this way, for example, the entire business operations of a German GmbH can be transferred to a sister company in another EU state and this sister company then continues the business of the German company.
What is universal succession?
Universal succession means that all assets are transferred as a whole and unlike, for example, the transfer of individual assets by singular succession (as in the case of the acquisition of a company through an “asset deal,” i.e., purchase of the assets). From the perspective of the companies involved, this has the particular advantage that the transfer of contracts (and thus also customer relationships or employment relationships) is possible without the consent of the other contracting parties (i.e., also without the consent of customers or employees).
The regulations on cross-border mergers were previously addressed in Sections 112a-122m UmwG. They have now been adopted with some amendments in the new Sections 305-319 UmwG.
Until now, there have only been legal regulations on domestic German divisions (e.g., one German GmbH (limited liability company) becomes two German GmbHs through a division) and on domestic German conversions (e.g., a German GmbH is converted into a German AG (stock corporation) through a conversion).
The cross-border division is new
The newest component of the act is the possibility of a cross-border division for the formation of new companies (and with restrictions on absorption by existing companies as well) under Sections 320-332 UmwG. It is therefore possible, for example, to transfer part of the assets of a German GmbH, or an incorporated company, e.g., a complete business division including all contracts and employees, to a newly created company in another EU country in exchange for shares in this company. In this case as well, a universal succession occurs with regard to the transferred assets, e.g., the transferred business area, with the cited advantages. The cross-border division can also be carried out in such a way that all assets of the transferring company are transferred to several companies and the transferring company ceases to exist (full division) or it continues to exist with the remaining assets (partial division). It is also possible to divide the company into several companies, even in different EU countries.
Cross-border conversion also now possible
The other new transformation variant is the cross-border conversion based on Sections 333-345 UmwG. Accordingly, a German corporation (GmbH, AG, or KGaA) can change its legal form into a foreign corporation. In this case, for example, a German GmbH becomes a Dutch NV (public limited company) while retaining its legal identity. There is no transfer of assets, but the legal entity only changes its corporate attire, so to speak.
The conversion may also be accompanied by the relocation of the company’s actual administrative office in the country of the new corporate form, but this may also remain in the previous country. Thus, when changing the legal form from Germany to another EU country, the foreign legal form can be used in the future for an activity with administrative office and operational seat in Germany, so that, under corporate law, only the corporate seat migrates to other EU countries.
The possible motives for carrying out a cross-border merger, division, or conversion can be manifold. These can serve
- the unification of the Group structure,
- the withdrawal from a market or the development of a new market,
- a foreign IPO,
- to create better access to foreign investors,
- the separation of shareholder groups, or
- the choice of a more advantageous legal system.
This can also be due to group restructuring in preparation for or following an M&A transaction.
Cross-border conversions are possible from and into Germany
The cited operations are also possible in the reverse direction based on the amendment of the law. It is
- an inbound merger,
- the possible division of a foreign company for the purpose of establishing a German company, or
- the inbound conversion of a foreign corporation into a German corporation.
For example, a Danish ApS (Danish corporate form comparable to the German GmbH) can transfer its corporate seat and administrative office from Denmark to Germany and be converted into a German GmbH while preserving its identity.
German Transformation Act only for German companies
The aforementioned (new) provisions of the German Transformation Act apply to German companies involved in cross-border mergers, divisions, and conversions. The corresponding provisions of the applicable foreign law shall apply to the foreign companies involved. This is because, in the case of cross-border conversion transactions, the laws of the EU countries involved always apply in parallel.
This means that for the newly introduced cross-border division and conversion legislation, it is necessary that the other EU countries involved have also already implemented the regulations of the Transformation Directive. Without clear legal regulations, this is not possible.
Just as Germany has somewhat exceeded the deadline of January 31, 2023 set for the implementation of the Transformation Directive into German law, some other EU countries have also not yet implemented the Transformation Directive into their national law.
For the sake of simplicity, the above statements refer to EU countries. However, the above-mentioned cross-border conversions are also possible with the participation of EFTA countries (Iceland, Liechtenstein and Norway), to which these regulations also apply.
We advise companies on cross-border conversions and divisions
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