FAQs: Redom updated – Cross-Border Conversion of Limited Liability Companies (Part 1 of 3)

Sarah Fenech is a Senior Associate within the Commercial and Corporate Department of Fenech & Fenech Advocates

These FAQs are the first part of a three-part series on the scope and application of the Companies Act (Cross-Border Conversions of Limited Liability Companies) Regulations 2023 (L.N. 27 of 2023, the “CBC Regulations”), governing the re-domiciliation (referred to therein as cross-border conversion) of companies into and out of Malta.

Prior to the enactment of the CBC Regulations, the process of company re-domiciliation into and out of Malta was governed exclusively by the Continuation of Companies Regulations, 2002, as amended (S.L. 386.05, the “Continuation Regulations”).

This first part is consequently intended to introduce the CBC Regulations and to consider the applicability of the Continuation Regulations following the coming into force of the CBC Regulations.

When and why did the CBC Regulations come into force?

The CBC Regulations are one of three sets of regulations, each of which were published on 7 February 2023 in order to collectively transpose EU Directive No. 2019/2121/EU of the European Parliament and of the Council of 27 November 2019 amending EU Directive No. 2017/1132 as regards cross-border conversions, mergers and divisions (the “Mobility Directive”) into Maltese law with effect from 31 January 2023.

The impetus behind the Mobility Directive was essentially the harmonization of cross-border mobility of corporate entities across EU borders, all the while protecting the rights of employees, shareholders and creditors alike, and simultaneously empowering national authorities with the necessary tools and safeguards to combat fraud and abuse.

Companies within the EU will therefore now be able to move freely across borders without any uncertainty arising from differing legislative frameworks and implementation processes for cross-border operations in member states.

What is cross-border conversion and what are the consequences?

Cross-border conversion is defined in the CBC Regulations 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 jurisdiction, into a legal form of the destination jurisdiction, and transfers at least its registered office to the destination jurisdiction, while retaining its legal personality.

The consequences of cross-border conversion are such that:

1. all the company’s assets and liabilities (including contracts, credits, rights and obligations) become those of the converted company;
2. the company’s members shall continue to be members of the converted company, unless they have disposed of their shares; and
3. the company’s rights and obligations arising from employment contracts and relationships existing at the time the cross-border conversion takes effect, become those of the converted company.

When and to whom do the CBC Regulations apply?

The CBC Regulations apply to:

1. conversions of limited liability companies formed in accordance with the law of an EU Member state or an EEA state and having their registered office, central administration or principal place of business within the European Community, into limited liability companies governed by the law of another jurisdiction;
2. conversions of limited liability companies formed in accordance with the law of any other approved country or jurisdiction, where Malta is either the departure or destination jurisdiction;
3. companies that are subject to preventive restructuring frameworks; and
4. companies that are the subject of crisis prevention measures as defined in Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms.

Are the Continuation Regulations still in force, and if so, when and to whom do they apply?

Yes, the Continuation Regulations remain in force, however, with more limited application, such that they are now effectively applicable to company re-domiciliations that involve an approved country or jurisdiction outside the EU or the EEA.

By way of exception, and only limitedly until the Mobility Directive is transposed in all EU Member and EEA states, the Continuation Regulations currently also apply to company continuations specifically involving any EU Member or EEA states that have not yet transposed the Mobility Directive into their national law. To this end, the application of the Continuation Regulations is merely temporary, such that upon the transposition of the Mobility Directive by all Member/EEA states, company re-domiciliations involving any such jurisdictions would necessarily require to be regulated in terms of the CBC Regulations.

By way of additional information, it is also worthy to point out that while the Continuation Regulations necessarily govern company re-domiciliations involving third country approved jurisdictions, the CBC Regulations also offer the option for such re-domiciliations to be regulated thereby. This means that upon a re-domiciliation to Malta of a company formed or registered in an approved country or jurisdiction outside the EU or the EEA, or a re-domiciliation of a Maltese company to an approved country or jurisdiction outside the EU or the EEA – in either case where Malta is the departure or destination jurisdiction – the parties involved may choose whether to regulate the re-domiciliation in question under the Continuation Regulations or under the CBC Regulations.

In the event that the CBC Regulations are chosen, a legal opinion issued by legal advisers in the third country approved jurisdiction would be required to be submitted to the Malta Business Registry (together with all other required documents), specifically confirming that the cross-border operation is permitted under the laws of the relevant third country approved jurisdiction.

When are the CBC Regulations deemed not to apply?

The CBC Regulations shall not apply to:

1. continuations into or out of Malta under the Continuation Regulations;
2. cross-border conversions involving a company, the object of which is the collective investment of capital provided by the public, which operates on the principle of risk-spreading and the units of which are, at the holders’ request, repurchased or redeemed, directly or indirectly, out of the assets of that company;
3. a company that is subject to resolution tools, powers and mechanisms under Title IV of Directive 2014/59/EU;
4. a company that is the subject of insolvency proceedings; or
5. a company that is the subject of liquidation proceedings.

_______________________________________________________________________

Part 2 of these FAQs will consider the procedure and other relevant considerations with respect to the cross-border conversion of a Maltese converting company, i.e. when Malta is the “departure jurisdiction”.

Should you require any further information or assistance on the matter, please do not hesitate to reach out to Sarah Fenech personally on sarah.fenech@fenechlaw.com.