Germany Update: Bundestag adopts implementation of the EU Transformation Directive (UmRUG)

On 20 January 2023, the Bundestag passed the Act on the Implementation of the Transformation Directive (UmRUG). The amendments to the Transformation Act (UmwG) are to enter into force on the day after promulgation. This still requires the consent of the Federal Council and the copy by the Federal President. Since the UmRUG is on the agenda of the meeting of the Federal Council on 10 February 2023, it can be assumed that the changes will enter into force by the end of February.

Background

Companies incorporated under the law of an EU Member State enjoy freedom of establishment throughout the European Union. That freedom includes, inter alia, taking up and pursuing activities as self-employed persons and setting up and managing undertakings (Article 49(2) TFEU). This includes cross-border mergers, cross-border changes of legal form and cross-border divisions.

So far, the practice of cross-border conversions has had to contend with many ambiguities, which was due in particular to the different design of cross-border conversions in the legal systems of the Member States.

With the aim of strengthening the internal market and thus competition, productivity and economic growth, cross-border conversions are to be harmonised throughout Europe on the basis of the Transformation Directive.

UmRUG

The UmRUG establishes the legal framework for cross-border changes of legal form and divisions and amends the previous regulations for cross-border mergers. The rules on employee involvement in cross-border conversions were already implemented in December 2022 with the newly introduced MgFSG[1] and the amended MgVG[2].

In addition to protective provisions for shareholders, company creditors as well as employees and their representatives, the UmRUG, as an outflow of the EU Digitisation Directive, also contains regulations that facilitate communication between the participating register courts. This should make it possible to make registration processes much more efficient in the future.

A real novelty in German register law is the abuse test provided for all cross-border conversion processes. If there are indications to this effect, the registry court must examine whether the cross-border conversion serves abusive, fraudulent or criminal purposes. Such a case can be presumed, for example, if the conversion is to be carried out with the aim of evading EU or national law. If the registry court determines such purposes, it refuses the registration.

There is criticism that the scope of the Directive covers only capital companies, but not commercial partnerships. Until now, only corporations had the possibility of cross-border mergers. A commercial partnership with no more than 500 employees could participate in a cross-border merger only as a receiving company. UmRUG adheres to this principle, so that cross-border changes of legal form and divisions will be reserved exclusively for corporations as measures.

The UmRUG also contains innovations that are not limited to cross-border situations:

In future, shareholders of the acquiring legal entity will no longer be able to challenge the conversion measures with the argument that they consider the exchange ratio to be too unfavourable. Instead, they are referred to the so-called court proceedings. Another important innovation is that public limited companies will be able to replace cash compensation with the granting of shares in the event of an inappropriate exchange ratio.

Result

Overall, the innovations are to be welcomed. The procedure will become more manageable and should increase the mobility of companies within the Union.

Irrespective of this, the procedure for cross-border conversions remains complex and becomes (even) more time-consuming, not least due to additional waiting periods and extensive documentation obligations.

[1] Act on Employee Co-Determination in the Event of Cross-Border Change of Legal Form and Cross-Border Division

[2] Act on Employee Co-Determination in a Cross-Border Merger

By MELCHERS, Germany, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact germany@transatlanticlaw.com

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