Last Updated on Thursday, 16 March, 2023 at 10:49 am by Andre Camilleri
On 7th February 2023, three new regulations were published which transposed into Maltese law EU Directive No. 2019/2121 (the “Directive”) amending EU Directive No. 2017/1132 on cross-border conversions, mergers and divisions. The Directive introduces a harmonised regime for cross-border conversions and divisions for the first time, namely those involving more than one Member State and amends existing EU legislation relating to cross-border mergers.
The scope of the Directive is to enhance cross-border mobility of corporate entities within EU borders through harmonised processes while at the same time ensuring the protection of other public interests such as those of employees, creditors and minority shareholders and providing national authorities with the necessary safeguards to combat fraud and abuse.
The Directive was transposed into Maltese law by virtue of (1) the Cross-border Conversions of Limited Liability Companies Regulations (the “Cross-Border Conversions Regulations” (2) the Cross-border Divisions of Limited Liability Companies Regulations (the “Cross-Border Divisions Regulations”) and (3) the Cross-border Mergers of Limited Liability Companies Regulations (the “Cross-Border Mergers Regulations”). A fourth regulation – the Cross-Border Mergers of Limited Liability Companies (Repeal) Regulations – was also issued in order to repeal the previous regulations governing cross-border mergers and to cater for a transitory provision applicable to cross-border mergers which were in the process of being completed prior to 31 January 2023.
For ease of reference, in this article each of cross-border conversions, mergers and divisions may at times singly or collectively be referred to as “cross-border operation(s)”.
It is worth noting that when transposing the Directive, the Maltese legislator took the initiative to widen the geographical scope of the Directive by extending the applicability of the regulations to cross-border operations carried out by/with companies situated outside the EU/EEA. In such instances the company involved in the cross-border operation will need to submit to the Malta Business Registry a legal opinion issued by legal advisers in the third country approved jurisdiction confirming that the cross-border operation is permitted under the laws of their jurisdiction.
In the new regulations, cross-border conversions are defined 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, as listed in Annex II of Directive 2017/1132/EU, and transfers at least its registered office to the destination jurisdiction, while retaining its legal personality.”
The effects of a cross-border conversion are similar to those of re-domiciliations implemented in accordance with the Continuation of Companies Regulations (S.L. 386.05 of the Laws of Malta). Indeed, re-domiciliations into and out of Malta to certain EU and non-EU jurisdictions which permit such re-domiciliations have been a regular occurrence since the introduction of the Continuation of Companies Regulations. However, as practitioners, we have often come across situations where companies were unable to move across EU borders due to the lack of a legislative framework permitting cross-border mobility in certain Member States. The transposition of the Directive will address this lacuna and facilitate movement across borders via cross-border conversions.
It is to be noted that following the publication of the Cross-Border Conversions Regulations, the Continuation of Companies Regulations remain in force. This means that companies are being given an additional method through which they may seek to move into/out of Malta. The method chosen will most likely depend on whether the foreign jurisdiction permits the continuation/conversion process to take place in terms of the Continuation of Companies Regulations or the Cross-Border Conversion Regulations.
The Cross-Border Divisions Regulations, introduce three forms of cross-border division, namely full division, partial division and division by separation of companies. In all three forms of cross-border division, the recipient company/ies must be newly formed companies. This is unlike what we are accustomed to when implementing divisions under the provisions of the Companies Act (Chapter 386 of the Laws of Malta) where the recipient company/ies may either be newly formed companies or existing companies. Indeed, this was a conscious decision taken by the EU Commission as it was deemed that allowing for existing companies to be recipient companies would prove to be overly complex. Having said that the EU Commission has not excluded the possibility of introducing cross-border divisions with existing companies being recipient companies in the future.
Another distinguishing factor is the fact that unlike domestic divisions carried out under the Companies Act, the new regulations cater for the possibility that as a result of a cross-border division (being a partial division or a division by separation of companies) the company being divided continues to exist once the cross-border division becomes effective. It is only in a full division that the regulations require that upon the cross-border operation becoming effective, the company being divided ceases to exist.
Since 2007 cross-border mergers between Maltese companies and companies situated in the EU/EEA have been quite a common occurrence and the process used to be regulated by the now repealed Cross-Border Mergers of Limited Liability Regulations (S.L. 386.12) which transposed EU Directive 2005/56/EC. The process under the new Cross-Border Mergers Regulations is very similar to that prevailing under the “old” regulations however it has been streamlined in order to make it similar to that introduced for cross-border conversions and cross-border divisions. Importantly, it is now possible for a Maltese company to carry out a cross-border merger with companies which are situated outside of the EU/EEA.
The Cross-Border Mergers Regulations introduce a new form of cross-border merger such that four types of cross-border mergers are available: (1) merger by acquisition (2) merger by formation (3) merger between a parent company and its subsidiaries and (4) merger between companies having the same ownership. The latter is defined by the regulations as a cross-border operation “whereby one or more companies on being dissolved without going into liquidation, transfer all their assets and liabilities to an existing acquiring company without the issue of any new shares by the acquiring company provided that one person holds directly or indirectly all the shares in the merging companies or the members of the merging companies hold their shares in the same proportion in all merging companies”. Given that the ownership structure of the merging companies will remain the same upon completion of the process, simplified procedures are made to apply to this new type of cross-border merger.
The processes for implementing each cross-border operation have a number of similarities which feature in each set of regulations, some of these being:
- The requirement to prepare draft terms containing details of the proposed cross-border operation, including where applicable, the details of the offer of cash compensation payable to any dissenting shareholders;
- Preparation of detailed directors’ reports addressed to shareholders and employees;
- Preparation of a report by an independent expert;
- Disclosure requirements in the interest of shareholders, employees and creditors;
- Application of a three-month creditor notification period which will commence to run upon initial disclosure of the draft terms;
- The requirement of obtaining shareholder approval and protection of minority interests;
- Review of the cross-border operation by the Malta Business Registry (which may take up to three months) with the possibility of the application of an anti-abuse provision if the Registrar has serious doubts on the real purpose of the cross-border operation.
Furthermore, in transposing the Directive, the Maltese legislator has taken onboard certain options which are applicable to all three cross-border operations, namely:
- Maltese companies wishing to carry out a cross-border operation need to submit a declaration of solvency together with the draft terms;
- Maltese single member companies are exempt from the requirement of including a section addressed to members in the directors’ report and they are also exempt from the requirement of obtaining a report on the cross-border operation from an independent expert;
- Cross-border operations are available to companies which are subject to preventive restructuring frameworks or crisis prevention measures.
The implementation requirements, which are derived from the Directive, reflect the EU Commission’s balancing act of harmonising processes while at the same time ensuring the protection of shareholders’, employees’ and creditors’ interests and the prevention of the use of EU freedoms for illicit purposes.
Undeniably the timeframes imposed by the Directive (and which have been reflected in the regulations) lengthen the process for completing a cross-border operation since the Registrar now has up to three months to review the cross-border operation prior to issuing a pre-operation certificate. The period of review may be extended by a further period of three months where the Registrar sees the need to conduct additional investigations due to serious concerns on the ultimate scope of the cross-border operation.
Notwithstanding the lengthened timeframes, the regulations seem to allow companies to apply for a pre-operation certificate while the creditor protection period is still running even though no certificate can be issued prior to the lapse of the said period. This means that the Malta Business Registry should be able to commence its review process in advance and companies would be gaining some time in transactions where usually time is of the essence.
Although cross-border operations have already been recognised by the ECJ in its judgments, the lack of harmonised legislation created legal uncertainties and barriers to the exercise of the freedom of establishment. The transposition of the Directive will now give an opportunity to companies situated within the EU to move across borders without having to be concerned whether national legislations permit the cross-border operation and without having to contend with the uncertainties arising from different and unaligned processes for implementation. In this respect, Maltese companies have the added advantage of being able to move within the EU and beyond thanks to the gold-plating exercise undertaken by the Maltese legislator. It is now hoped that through the efficient implementation of the new regulations Malta will increase its attractiveness as a jurisdiction of choice for international corporate business.
Rosette Aquilina is Counsel at Ganado Advocates and forms part of the firm’s corporate finance and tax team.