6 Conflict of laws with respect to cross-border division

With respect to the preconditions for cross-border division, the law applicable to each company involved in the cross-border division should be applied distributively: each company must comply with the rules of its own applicable law. For example: if a Dutch company is allowed to be involved in a division, it can also be involved in a cross-border division, but the law applicable to other Companies involved in the cross-border division does not have to be applied to the Dutch company. It goes without saying that, to effect a cross-border division, it is necessary that each company should be able to be involved in a (cross-border) division, because of the fact that the freedom of establishment cannot “introduce” the possibility of cross-border division of Companies that cannot be involved in a division under their national law.

The pre-cross-border division phase consists, inter alia, of:

With respect to the pre-cross-border division phase, the laws applicable to the Companies involved in the cross-border division should be app lied as distributively as possible, save for those documents that have to be drawn up by all Companies involved in the cross-border division together, such as is the case for a cross-border division where an acquiring company exists prior to the cross-border division. The explanatory notes to the cross-border division proposal only have to comply with the provisions of the law applicable to the company to which the explanatory notes relate – as the explanatory notes only describe the effects of the cross-border division with respect to one company and the effects of cross-border division may differ for each company. If obligatory under the laws apphcable to the Companies involved in a cross-border division, extemal auditors should be appointed. The appointaient of extemal auditors should be limited to the appointment of no more than one extemal auditor for each company involved in the cross-border division.

If under the laws of a company involved in a cross-border division certain statements are required which specifïcally relate to (minimum) capital requirements, such statements should only be issued with respect to the company to which such (minimum) capital requirements are apphcable. With respect to the filing of the cross-border division proposal and other documents, each company can follow its own apphcable law.

The position of creditors is one of the most interesting and important aspects of a cross-border division. In the Member States of the EU, Systems of crediter protection are not harmonised at all. This has resulted in crediter protection Systems which are applicable before the (cross-border) merger or division becomes effective, Systems which are applicable after the (cross-border) merger or division has become effective and a combination of both types of Systems. By applying the laws of the Companies involved in a cross-border division, this may (as mentioned above) lead to a situation in which (i) creditors are protected twice over (before the cross-border division becomes effective and after the cross-border division has become effective), or (ii) creditors are not protected at all. The latter situation should be avoided, as in such a case the interests of creditors are not adequately protected (which is, from a EU law perspective, not desirable, taking into account the background of Directive 2011/35/EU on national mergers, the Sixth directive on national divisions and the Tenth directive on cross-border mergers). The situation where creditors are protected twice over should also be avoided, as creditors whose interests have been protected before the cross-border division has become effective, will be confronted with protection of (other) creditors after the cross-border division has become effective.

The situation where creditors are not protected at all could be avoided by giving the creditors of all Companies involved in the cross-border division the opportunity to benefit trom the creditor protection Systems under the law of the Member State applicable to the dividing company and/or the law of the Member State applicable to the acquiring company. However, when drafting legislation on the subject of cross-border division, the EU legislator or the national legislators of the Member States should pay attention to the subject of creditor protection by cross-border divisions.

The position of minority shareholders and the protection of their interests should be governed by the laws of the Member States on a distributive basis: minority shareholders of the dividing company are protected under the laws applicable to the dividing company and the minority shareholders of the acquiring company are protected under the laws of that Member State. It should be noted that, in most cases, there is only a need for protection of the minority shareholders of the dividing company, as this company ceases to exist and the shareholders of this company become shareholders of the acquiring company – and thus are governed by the law of another Member State.

The position of employees and the protection of their interests in the case of a cross-border division is of particular importance. The EU legislator made a great effort to protect the participation rights of employees – i.e. the influence of employees and/or employees’ representatives in the affaire of a company by way of the right to elect or appoint some of the members of the company’s supervisory or administrative organs, or the right to recommend and/or oppose the appointaient of some or all of the members of the company’s supervisory or administrative organs – in the case of a cross-border merger where an SE is formed and in the case of a cross-border merger which is based on the Tenth directive. This has resulted in a highly complex system of employee participation where, in some cases, a so-called “Special Negotiating Body” has to be formed to negotiate with the management boards of the merging Companies on employee participation in the acquiring company. As long as there is no agreement between the Special Negotiating Body and the management boards of the merging Companies on employee participation in the acquiring company, the cross-border merger cannot take place.

In practice, the system of protection of the interests of employees with employee participation rights, as used for cross-border mergers, has been seen as a barrier to effectuating cross-border mergers. It is very likely that a similar system for the protection of employees with employee participation rights for cross-border divisions would resuit in a (new) barrier to effectuating cross-border divisions. Furthermore, it could be argued that, in an ideal situation, in the internal market of the EU it should make no différence by which law a company is governed and which employee participation rights are applicable.

In an ideal situation, the protection of employees with employee participation rights should not be a barrier to effectuating cross-border divisions. Avoiding such barrier could be achieved by applying the employee participation rules as laid down in the applicable law to the acquiring company only. Of course, in that case, employee participation might take place “on a lower level” after the cross-border division has become effective, compared with the situation before the cross-border division became effective. In that case, employee participation rights might be diminished upon the cross-border division becoming effective.

To guarantee that employee participation rights in the case of a cross-border division are adequately secured, if this is désirable, the same system that has been used in the Tenth directive on cross-border mergers could be applied to cross-border divisions. This would result in the following rules:

When the exceptions as described under (2), (3) and (4) above are applicable, employee participation rights will not be governed by the law applicable to the acquiring company. Instead of that, the management boards of the acquiring company – or, if the acquiring Companies are to be newly formed in the framework of the cross-border division, the management board of the dividing company on behalf of the new acquiring Companies – will have to start negotiations on employee participation in each acquiring company with a Special Negotiating Body. If there is more than one acquiring company, then a Special Negotiating Body should be formed for each acquiring company. Only (future) employees of each acquiring company can be a member of the respective Special Negotiating Body.

If the management board of the dividing company will not start negotiations on employee participation in the acquiring company, it is obvious that the Standard Rules on employee participation as contained in the Annex to Directive 2001/86/EC should apply. If the members of the Special Negotiating Body do not want to start negotiations on employee participation in the acquiring company, the acquiring company will be subject to the raies concerning employee participation under the law of the Member State where the respective acquiring company has its registered office.

The decision-making process is governed by the laws of each Member State on a distributive basis. The law applicable to each company involved in a cross-border division determines how the decision-making process works, which company body is authorised to decide upon the cross-border division and which majorities should be applied to such resolutions.

The legality of a cross-border division should be scrutinised by competent authorities in each Member State whose law is applicable to each company involved in a cross-border division. The law applicable to each company involved in the cross-border division should be applied distributively.

A competent authority in the Member State whose law is applicable to the dividing company, such as a court, trade register, registrar of the trade register or notary, must issue a pre-cross-border division certificate, conclusively attesting to the proper completion of the pre-cross-border division acts and formalities with respect to the dividing company in the outbound Member State. In the inbound Member State, whose law is applicable to the acquiring company, the competent authority has to scrutinise the legality of the cross-border division as regards that part of the procedure which concerns the completion of the cross-border division and, where appropriate, the formation of a new company resulting from the cross-border division where the company created by the cross-border division is subject to its national law.

The rules with respect to the legal effectiveness of national mergers and national divisions are not harmonised through Directive 2011/35/EU or through the Sixth directive. This means that the moment at which a division becomes effective may differ from state to state. When a cross-border division is being implemented and the rules of the Member States whose laws are applicable to the Companies involved in the cross-border division are being applied on a cumulative basis, a cross-border division may become legally effective at different moments, a situation which should be avoided. The Tenth directive provides for a clear rule with respect to the legal effectiveness of a cross-border merger: a cross-border merger becomes legally effective as per the moment as determined under the law applicable to the acquiring company. Although this rule is very clear, this rule cannot be applied to cross-border divisions as, in a case where there is more than one acquiring company, the cross-border division may become legally effective at different moments. To avoid that situation, cross-border divisions should become legally effective on the date determined in the law applicable to the dividing company.

The cross-border division should be registered in the trade registers of the Companies involved in a cross-border division. First, the cross-border division should be registered with respect to each acquiring company before it is registered with respect to the dividing company. This is in accordance with the System of registration of a cross-border merger. By registering the cross-border division first with respect to each acquiring company and secondly with respect to the dividing company, there is continuity as regards the registration.

The transfer of assets and liabilities as a consequence of a national legal merger, legal division or cross-border merger are not harmonised through Directive 2011/35/EU, or through the Sixth directive or through the Tenth directive. As a consequence of a cross-border division becoming effective, in principle all assets and liabilities – in the case of a full division – or a part of the assets and liabilities – in the case of a partial division – of the dividing company will transfer under universal title of succession by operation of law to each of the acquiring Companies. However, as an exception to this rule, (i) the law governing an asset or liability may contain further requirements, (ii) the substance of an agreement or contract underlying an asset or liability may provide otherwise, and (iii) the nature of the law governing an asset or liability may imply that it does not transfer. Examples of such exceptions are specific personal rights, proprietary legal relationships or contracts, non-proprietary legal relationships such as the right of a company ceasing to exist to appoint directors in other Companies and legal relationships under public law. These exceptions should be taken into account when implementing a cross-border division. Future legislation on cross-border division at EU level should contain a uniform definition regarding the transfer of assets and liabilities, which is not only applicable to cross-border divisions, but also to cross-border mergers, which means that the concept of the transfer of the universal title of succession must take precedence over the exceptions on the transfer of assets and liabilities under universal title of succession as described under (i), (ii) and (iii) above.

The allotment of shares is governed by the laws applicable to each acquiring company. The relationship between the (new) shareholder and the acquiring company is also governed by the law applicable to the acquiring company. The cancellation of shares in the capital of the dividing company is governed by the laws applicable to the dividing company.

In accordance with the Sixth directive, the laws of the Member States may lay down nullity rules for divisions on certain limited grounds. When implementing a cross-border division, this means that from the perspective of certain Member States a cross-border division may be null and void. For cross-border mergers, the EU legislator explicitly declared in the Tenth directive that cross-border mergers may not be declared null and void. However, this rule is not applicable to cross-border divisions and when implementing a cross-border division, the possibility of nullification of a cross-border division under the laws of one of the Member States whose laws are applicable to the Companies involved in the cross-border division should be taken into account.