3 Advantages of cross-border division in relation to other corporate restructurings

Recent decades have seen several developments in the field of corporate mobility of Companies within the Member States of the EU. The possibility of forming supranational legal forms, such as the Societas Europaea (“SE”) and the Societas Cooperativa Europaea (“SCE”) on the basis of the SE Regulation1 and the SCE Regulation,2 and the possibility of cross-border merger by which such supranational legal forms are created or the possibility of transferring the official seat and head office of an SE or SCE, have improved the corporate mobility of Companies within the EU.

Apart from supranational legal forms, there have been other developments in the field of corporate mobility of Companies within the EU. These developments arise from (i) the harmonization of company law through European Directives and (ii) case law of the Court of Justice of the EC/EU.3

The most important European directives regarding (cross-border) corporate restructurings are the (former) Third directive on legal merger4 (now Directive 2011/35/EU),5 the Sixth directive on legal division6 and the Tenth directive on cross-border legal merger.7 Directive 2011/35/EU and the Tenth directive together form the legal framework for cross-border merger of Companies with limited liability. Although there is no European directive yet on the subject of cross-border division, the Sixth directive, being the framework for national divisions, forms the basis for cross-border divisions.

The most important case law of the Court of Justice of the EC/EU with respect to cross-border divisions is to be found in the Sevic case,8 the Cartesio case9 and the Vale case.10

In the Sevic case, the récognition of a cross-border merger between a German Aktiengesellschaft (public company with limited liability under German law), as the “surviving” company, and its subsidiary, a Luxembourg Société Anonyme (public company with limited liability under Luxembourg law), as the “disappearing” company, was under discussion.11 The Court of Justice of the EC ordered that cross-border mergers constitute particular methods of the exercise of the freedom of establishment as laid down in sections 43 and 48 EC Treaty (now sections 49 and 54 TFEU12 ).13 Therefore, a cross-border merger can be implemented on the basis of the freedom of establishment. The existence of a written legal framework for cross-border mergers is not a precondition for the implémentation of a cross-border merger on the basis of the freedom of establishment.14

The Cartesio case and the Vale case concemed the cross-border transfer of the seat of a company from one Member State of the EU to another. In the Cartesio case, the Court of Justice of the EC held that the freedom of establishment does not entail the right of a company to transfer its seat to another Member State of the EU (the “Host Member State”), while remaining to be governed by the laws of the original Member State of the EU (the “Home Member State”).

However, the Court of Justice of the EC stated, in an obiter dictum, that the situation where the seat of a company incorporated under the law of one Member State of the EU is transferred to another Member State of the EU with no change as regards the law applicable to that company, has to be distinguished from the situation where a company governed by the law of one Member State of the EU transfers its seat to another Member State of the EU with an attendant change as regards the national law applicable to that company, since in the latter situation the company is converted into a corporate legal form which is governed by the laws of that Member State (the Host Member State). A barrier to the actual conversion of such a company, without prior winding-up or liquidation, into a company governed by the law of the Host Member State – to which Member State it wishes to relocate – constitutes a prohibited restriction on the freedom of establishment. The Court of Justice of the EC clarified in the Cartesio case that cross-border conversions fall within the scope of the freedom of establishment, but only “to the extent that it is permitted under that law to do so” (considération 112 in the Cartesio case). This has been interpreted to mean that cross-border conversions are only possible if the Host Member State allows cross-border conversions of Companies under the laws of other Member States into Companies under its own laws.

Although the Cartesio case provided certainty on the possibility of implementing an “outbound cross-border conversion”, the restriction “to the extent that it is permitted under that law” created a certain level of uncertainty. After the judgment in the Cartesio case, questions were raised in literature and practice as to the interprétation of this restriction. The Court of Justice of the EU has given a clear answer to such questions in the Vale case.

In the Vale case, a cross-border conversion of a company governed by the laws of Italy into a company under the laws of Hungary was under discussion. The Court of Justice of the EU held that cross-border conversions fall within the scope of the freedom of establishment as laid down in sections 49 and 54 TFEU. It follows from this case that Member States cannot prohibit, in a general manner, the conversion of a company governed by the laws of its own Member State. The Court of Justice of the EU concluded that the freedom of establishment must be interpreted as precluding national legislation which enables Companies established under national law to couvert, but does not allow, in a general manner, Companies governed by the law of another Member State to couvert into Companies governed by national law by incorporating such a company.15

The main conclusion that can be derived from the Vale case is that not only do outbound cross-border conversions fall within the scope of the freedom of establishment – which had already been confirmed in the Cartesio case – but so also do inbound cross-border conversions.

Furthermore, it can be derived from the Sevic case, the Cartesio case and the Vale case that the term “conversion” has to be interpreted broadly and does not only refer to the change of the legal form and applicable law to a company, but also to other types of corporate restructurings, such as, for example, cross-border mergers that are not covered by the Tenth directive.

In relation to the other cross-border corporate restructuring methods as described above, cross-border division has several advantages. Although the same resuit as a cross-border division can be achieved with:

cross-border division has several advantages compared with these other cross-border corporate restructuring methods. Cross-border division consists of one legal act, while the alternatives that are mentioned above consist of more than one legal act. Therefore, cross-border division can have advantages from a cost efficiency point of view for Companies.

Furthermore, cross-border division has specific characteristics in comparison with other cross-border corporate restructurings. No other restructuring method provides for the possibility by which a company ceases to exist; by which two or more Companies acquire assets and liabilities under universal title of succession from the dividing company; or by which a part of the assets and liabilities of the dividing company transfers under universal title of succession to one or more acquiring Companies while the transferring company does not cease to exist.

Another advantage of cross-border division in comparison with cross-border conversion is that a cross-border division entails an actual transfer of assets and liabilities, while cross-border conversion takes place without any transfer of assets and liabilities: the converting company remains the same legal person. Therefore, the possibility of cross-border division is also a complement to the other possibilities of cross-border corporate restructurings.

Cross-border division also improves the possibilities for Companies to access and to benefit from economie markets in other Member States. Thus, cross-border division does not only have advantages for Companies themselves, but also improves the proper functioning of the internal market of the EU.