Mobility Directive Objectives
Freedom of establishment is one of the fundamental principles of Union law.
Under Article 49 and 54 of the Treaty of the Functioning of the European Union (TFEU), the freedom of establishment for companies or firms includes the right to form and manage such entities under the conditions laid down by the legislation of the Member State of establishment.
The 2017 Directive (Directive 2019/2121/EU of the European Parliament and of the Council of 27 November 2019) was limited to providing rules on cross-border mergers of limited liability companies. The lack of a legal framework for cross-border conversions and cross-border divisions led to legal fragmentation and legal uncertainty, hindering the freedom of establishment, together with providing negligible protection of employees, creditors and minority members within the internal market.
In addition, Member States’ laws were often inconsistent with each other.
One of the primary objectives of the Mobility Directive is to adopt a harmonised set of rules on cross-border conversions and divisions, which would further contribute to the removal of restrictions on the freedom of establishment, while providing adequate protection for stakeholders such as employees, creditors and members.
Malta’s Implementation of the Mobility Directive.
In line with the EU’s efforts to enhance the freedom of establishment and remove legal barriers, Malta has just implemented and transposed the Mobility Directive as regards cross-border conversions, mergers and divisions into its law through the introduction of the following Regulations:
- Cross-Border Divisions of Limited Liability Companies Regulations, 2023 (introduced by virtue of Legal Notice 26 of 2023);
- Cross-Border Conversion of Limited Liability Companies Regulations, 2023 (introduced by virtue of Legal Notice 27 of 2023);
- Cross-Border Mergers of Limited Liability Companies Regulations, 2023 (introduced by virtue of Legal Notice 28 of 2023).
Furthermore, Legal Notice 25 of 2023 repealed the ‘Cross-Border Mergers of Limited Liability Companies Regulations’ (Subsidiary Legislation 386.12), which Regulations shall nevertheless apply with respect to any action, decision or proceeding, taken or commencing before the coming into force of the Cross-Border Mergers of Limited Liability Companies Regulations, 2023.
This will aid both public and private limited liability companies incorporated in one EU member state to conduct a cross-border mobility operation to or with any other EU member state.
It is to be noted that, although the Regulations were published on 7th February 2023, they are to be deemed to have come into force on 31st January 2023.
Malta Business Registry’s CEO and Registrar of Companies, Dr Geraldine Spiteri Lucas, “remarked that the new legal initiatives in place will encourage business to venture in the international markets whilst ensuring that the operation of the company and the employees are safeguarded throughout.”
Mobility Directive changes
The following are the main changes introduced by the Mobility Directive:
- A harmonised legal framework governing cross-border conversions;
- Procedural steps to implement cross-border divisions;
- Amendments to the existing rules on cross-border mergers, in order to align these with the procedural rules governing cross-border divisions.
1. Cross-Border Conversions
A cross-border conversion is essentially the relocation of a company to another jurisdiction by operation of law. It is defined under the Mobility Directive as: ‘an operation whereby a company, without being dissolved or wound up or going into liquidation, converts the legal form under which it is registered in a departure Member State into a legal form of the destination Member State, while retaining its legal personality.’
Cross-border conversions are more commonly known as the re-domiciliation of companies which, under Maltese law, are currently governed by the Continuations of Companies Regulations (S.L. 386.05).
The Mobility Directive introduces some new rules for cross-border conversions:
- The requirement to draw up the draft terms of a cross-border conversion;
- The issuance of a notice informing the members, creditors and employees of the company that they may submit comments concerning the draft terms of the cross-border conversion;
- The requirement to draw up a report for members and employees explaining and justifying the legal and economic aspects of the cross-border conversion, explaining the implications of said cross-border conversion on employees;
- The introduction of an independent expert report examining the draft terms of cross-border conversion for the members of a company.
2. Cross-Border Divisions
In addition to the new rules on conversions, the Mobility Directive lays down rules on cross-border divisions. However, said rules only relate to cross-border divisions that involve the formation of new companies while it does not provide a harmonised framework for cross-border divisions in which a company transfers assets and liabilities to one or more existing companies, since these are very complex, requiring the involvement of competent authorities from several Member States and include additional risks with respect to the circumvention of Union and national rules.
The Mobility Directive defines a “division” as an operation whereby:
(a) a company being divided, on being dissolved without going into liquidation, transfers all its assets and liabilities to two or more recipient companies, in exchange for the issue to the members of the company being divided of securities or shares in the recipient companies and, if applicable, a cash payment not exceeding 10% of the nominal value, or, in the absence of a nominal value, a cash payment not exceeding 10% of the accounting par value of those securities or shares (“full division”);
(b) a company being divided, transfers part of its assets and liabilities to one or more recipient companies, in exchange for the issue to the members of the company being divided of securities or shares in the recipient companies, in the company being divided or in both the recipient companies and the company being divided, and, if applicable, a cash payment not exceeding 10 % of the nominal value, or, in the absence of a nominal value, a cash payment not exceeding 10 % of the accounting par value of those securities or shares (“partial division”); or
(c) a company being divided transfers part of its assets and liabilities to one or more recipient companies, in exchange for the issue to the company being divided of securities or shares in the recipient companies (“division by separation”).
The Maltese Companies Act, Chapter 386 of the Laws of Malta, already provides rules such as the requirement to draw up draft terms of a division together with detailed reports. With respect to cross-border divisions, the purpose of the Mobility Directive is fundamentally to establish a harmonised set rules regarding procedure.
Mobility Directive: Protective measures
Moreover, the Mobility Directive provides for protective measures for shareholders, creditors and employees:
- The company carrying out the cross-border operation should prepare a report for its members and employees explaining and justifying the legal and economic aspects of said proposed cross-border operation.
- Members will have the right to exit the company as one of the remedies granted to them in the report.
- The report should explain the implications of the proposed cross-border operation on the employment situation and whether there would be any material change to the employment conditions laid down by law.
- There will be an exit right for minority shareholders opposed to the cross-border operation, who are entitled to dispose of their shares and receive adequate cash compensation equivalent to the value of said shares.
- With respect to cross-border mergers or divisions, members who did not have or did not exercise the right to exit the company shall have a right to dispute the share-exchange ratio.
- Creditors shall benefit from various protection rules, including a right to apply for safeguards to the appropriate authority.
- Shareholders, creditors and employees (or their representatives) shall have the right to make observations before the general meeting is called to decide on the operation.
New rule on anti-abuse
The Mobility Directive introduces a new rule applicable to cross-border conversions, mergers and divisions, whereby upon examining whether to grant a pre-operation certificate, the relevant competent authorities must scrutinise the legality of the operation. The competent authority should assess whether due process is being carried out for abusive or fraudulent purposes, leading to or aimed at the circumvention of the rights of employees, social security payments or any tax obligations, or for criminal purposes. Should the competent authority suspect abuse or fraudulent practice, it may extend the standard three-month assessment period by a further three months.
For more information on the Freedom of Establishment for companies or firms, please contact Dr. Sarah Galea, Dr. Caterina Galati or any other member of IURIS Advocates.