Enhancing Freedom of Movement of EU Limited Companies

Ireland is to introduce new laws to facilitate EU companies’ freedom of establishment in the EU single market. Cross border conversions and divisions will be introduced and new amendments to the existing cross-border merger regime made. Safeguards will be put in place to protect minority shareholders, employees and creditors on those cross-border operations. Ireland is required to implement the relevant EU directive into Irish law on or before 31 January 2023. Corporate Governance partner, Nicholas Metcalfe sets out how these changes will enhance corporate restructuring options available to companies throughout the EU and provide a clearly defined framework to achieve a suitable restructuring.

Ireland is required to implement EU legislation[1], known as the ‘EU Mobility Directive', into Irish law by 31 January 2023. This directive aims to remove barriers in order to enable certain EU companies to freely establish in the single market.

The EU Mobility Directive includes new harmonised rules on cross-border conversions and cross-border divisions. In addition, the EU Mobility Directive also amends the existing procedure for cross-border mergers.

Specific measures relating to each of these cross-border operations aim to ensure that the relevant transaction is not artificial or abusive and that the interests of employees, members and creditors are protected.

Enhanced procedures

New enhanced procedures assisting limited companies moving within the EU will be introduced into Irish law when the EU Mobility Directive is implemented into national law. The EU Mobility Directive enables companies to effectively relocate from one EU Member State to another Member State, by means of a:

• Conversion
• Division, or
• Merger

Together these are known as ‘cross-border operations’.

What types of EU companies are eligible?

The cross-border operations will be applicable to limited liability companies incorporated within the EU.

Overview of the three different cross-border operations

The procedural steps required to implement the cross-border conversions and divisions are similar to the existing steps required to effect a cross-border merger with the introduction of some additional enhancements. A separate comprehensive set of rules will apply to each of the operations with slight deviations in each case. In summary, the characteristics of the newly introduced conversions and divisions are:

• Cross-border conversions; will enable limited companies to change their legal form from one Member State into a similar form in another Member State, and
• Cross-border diversions; will enable a limited company to transfer all of its assets and liabilities to two or more companies in a full division, or transfer part of its assets and liabilities to one or more companies in the case of partial division or division by separation.

The EU Mobility Directive provides updates to the existing cross-border merger rules which are similar to the rules applying to cross-border divisions. Further protections for employees, creditors and members will be introduced which are not within the existing cross-border rules. The same protections for employees, creditors and members will also apply for any cross-border conversions or divisions.

New rules will be introduced at the initial stages of the cross-border operation process which will aim at deterring abuse of the process. A designated “competent authority” in each Member State will be required to issue a pre-operation certificate. In order to do so the relevant competent authority will need to be satisfied that the cross-border operation is not for abusive or for fraudulent purposes, such as for the circumvention of the rights of employees, social security payments or tax obligations, or for criminal purposes.

Timeline for implementation into Irish law

Ireland is obliged to implement national laws by 31 January 2023 to comply with the EU Mobility Directive. Ireland will be under pressure to stick closely to this timeline in order to make this new legislation effective. Importantly under the Directive, where a company seeks to effectively relocate by means of the cross-border operations, both the departing Member State and the proposed destination Member State need to have implemented the Directive in order for a company to avail of the legislation.

Conclusion

With the 31 January 2023 deadline for implementation fast approaching, Ireland will be under pressure to meet this deadline to make this new legislation effective. The procedure framework and rules set out in the EU Mobility Directive aims to enhance the corporate restructuring options available to companies throughout the EU and provide a clearly defined framework to achieve a suitable restructuring.

For more information and expert advice, contact a member of our Corporate or Corporate Governance & Compliance teams.

[1] Directive (EU) 2019/2021 of the European Parliament and of the council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions