European Corporate Law: Article-by-Article Commentary 9781509924073, 9783848736911

Citation preview

Company Law National company laws have been increasingly shaped by European Union (EU) acts in the past. European regulations and directives aim to provide a level playing field for corporations established in the EU member states. More specifically, they aim to reduce the competition among member states for companies to choose their legal framework, to effectively protect shareholders and others competitors, and to facilitate and safeguard internal and external trade. However, by-products of these measures are that directives have become more complex and voluminous in the past, resulting in challenges for companies and legal practitioners to interpret and apply these legal instruments. Against this background, we have structured the content and analysed all relevant issues relating to EU company law in depth. This volume assembles the most important EU acts in the area of company law. The major part of this volume deals with the Company Law Directive (Directive 2017/1132/EU). It includes provisions on incorporation, nullity of the company and validity of its obligations, online procedures (formation, registration and filing), disclosure, registers, capital maintenance and alteration. Besides, the directive covers structural changes, such as cross-border conversions, internal and cross-border mergers and divisions. Furthermore, the volumes comprises the important directives on financial statements (2013/34/EU), the single-membered company (2009/102/EC), shareholders’ rights (2007/36/EC) and takeover bids (2004/25/EC). This book is structured like a commentary following a civil law approach. The directives are analysed article by article, primarily on an abstract level. Examples and cases support the understanding wherever relevant and helpful. From that abstract level, lawyers can apply the rationales to the case at hand. The analysis always comes from the wording of the provision. References to the recitals are drawn, the history, background and debate of the provision are displayed and other general tools for interpreting the provision are used. This is aimed to provide assistance to regulators, attorneys, counsels, judges, and academics. Additionally, we would like to contribute to a well-informed debate on EU legislation, which matches the sophistication of the existing texts. Finalizing this volume would not have been possible without the help of others. Our first thanks go to the authors. Without them, this volume would not have been possible at all. Furthermore, we would like to thank our assistants that were involved in that project, namely Felix Karpp (Freiburg) and Dr Simon Jobst as well as Helene Evers (Munich). We would also like to thank Matthias Knopik from Nomos publishing house for his tireless efforts in completing this book.

Munich/Freiburg, June 2021

Peter Kindler / Jan Lieder

V

List of authors Klaus Bader Dr. Klaus Bader is a partner at global legal practice Norton Rose Fulbright in Munich. He advises multinational enterprises and financial investors on domestic and international M&A-transactions, joint ventures and corporate reorganizations predominantly in the energy and infrastructure sector. He is author of various legal publications on corporate and energy related matters. Martin Bialluch Martin Bialluch, Dr. iur., is a legal clerk at the Hanseatic Higher Regional Court, research fellow with Prof. Dr. Dr. h.c. mult. R. Zimmermann at the Max Planck Institute for comparative and international private law Hamburg and lecturer at Albert Ludwigs University of Freiburg, Germany. His publications focus on German, European and international corporate law, civil and commercial law Andreas Börner Andreas Börner is a partner at the international law firm Clyde & Co. He advises on a range of corporate, regulatory, commercial and international arbitration law matters with a focus on clients from the insurance and financial services industry. Prior to joining Clyde & Co, he was a partner at Norton Rose Fulbright. Jan P. Brosius Dr. Jan P. Brosius, LL.M. (King’s College London) is a Partner of corporate/M&A boutique VOIGT WUNSCH HOLLER Partnerschaft von Rechtsanwälten and advises clients in crossborder and domestic M&A transactions as well as on German and European corporate law. He is a lecturer at the Law Faculty of the University of Hamburg. Dr. Brosius also advises and acts as arbitrator in corporate disputes. Larissa Furtwengler Larissa Furtwengler is a law clerk at the Higher Regional Court Karlsruhe and is working with Dr. Maul & Janson-Czermak. She is a doctoral candidate in international law at Heidelberg University. David Günther Dr. David Günther, LL.M., is a corporate lawyer at an international law firm in Hamburg. His doctoral thesis dealt with an economic and legal analysis of Special Purpose Acquisition Companies (SPACs) under different national corporate laws. Simon Jobst Simon Jobst, Dr. iur., Maître en droit, Rechtsanwalt with CMS Hasche Sigle in Munich. He works in the field of dispute resolution and advises on general commercial and civil law matters. He is particularly engaged in international commercial and investment arbitration. Peter Kindler Professor Peter Kindler, Dr. iur., Dr. h.c. (Università del Molise/Italy), holds a chair for business law, corporate law, private international law & comparative law, at Munich Law Faculty, Institute for International Law. His publications focus on German and European corporate law (including corporate insolvency), private international law and Italian law. Professor Kindler has large experience as expert witness and as arbitrator.

XVII

List of authors Karsten Kühnle Karsten Kühnle is a partner at global legal practice Norton Rose Fulbright in Frankfurt am Main/Germany. He advises multinational enterprises on M&A-transactions, joint ventures, corporate governance and cross-border reorganizations. Michael Lamsa Michael Lamsa is a German qualified lawyer admitted in Germany. He is salary partner at the international law firm Taylor Wessing and practising in the Frankfurt office. He is specialised in M&A, corporate law and cross border transactions. He holds a PhD in law of the Rheinische Friedrich-Wilhelms-Universität Bonn. Further, he holds lectures at the Frankfurt School of Finance & Management. He has numerous publications in the field of company law and private international law. Dieter Leuering Professor Dieter Leuering, Dr. iur., specialist lawyer for corporate and commercial law as well as tax law, Director of the Institute for Corporate Law (IUR) at Heinrich-HeineUniversity Dusseldorf. Professor Leuering has experience in corporate law, corporate litigation, mergers and acquisitions, capital markets law and as an arbitrator. He is editor of the periodical “Neue Zeitschrift für Gesellschaftsrecht”. His publications focus on corporate and commercial law as well as on capital market law. Jan Lieder Professor Jan Lieder, Dr. iur., LL.M. (Harvard), holds the chair for civil law, commercial and corporate law and is Director Department Business Law at the Institute for Business, Labor and Social Law at Albert Ludwigs University of Freiburg, Germany. Furthermore, he serves as judge at the Court of Appeals in Schleswig, Germany. His publications focus on German, European and International corporate law, civil and commercial law. Professor Lieder has experience as expert witness. Silja Maul Dr. Silja Maul is a corporate law litigator with Dr. Maul & Janson-Cermak in Mannheim. She has extensively published on German and European corporate law with a special focus on the law of limited liability companies and stock corporations. Hanno Merkt Professor Hanno Merkt, Dr. iur., LL.M. (Univ. of Chicago), is Director of the Institute for Foreign and International Private Law, Department II of the Albert-Ludwigs-University Freiburg. He is a judge at the Higher Regional Court of Karlsruhe. His research areas are German, European and unernational commercial and capital market law. Tobias de Raet Dr. Tobias de Raet is a partner at the law firm lindenpartners in Berlin/Germany. He advises companies, investors and directors on M&A transactions, joint ventures, corporate governance matters and corporate litigation. Prior to joining lindenpartners, he worked for the law firms Hengeler Mueller in Duesseldorf/Germany and Davis Polk & Wardwell LLP in New York/USA. Alexander Schall Professor Alexander Schall, Dr. iur., is full Professor of private and corporate law at the University of Lüneburg.

XVIII

Abbreviations AG AGB AktG B2B B2C BayObLGZ BB BeckOGK HGB BeckRS BGB BGBl. BGH BKR BR-Drs. BRIS BRRD BT-Drs. CDE cf. CFILR Chap. Cia CISG CJEU CMLR Co. COM Corp. CUP CV CYELS DB DNotZ Doc DrittelbG DStR e.g. E.L.Rev. EAFRD EBLR EBOR ECFR ECL ECLI

Die Aktiengesellschaft Allgemeine Geschäftsbedingungen Aktiengesetz (German Stock Corporation Act) Business-to-Business Business-to-Consumer Entscheidungen des Bayerischen Obersten Landesgerichts in Zivilsachen Der Betriebs-Berater Beck Online Großkommentar zum Handels- und Gesellschaftsrecht Beck online Rechtsprechung Bürgerliches Gesetzbuch Bundesgesetzblatt (German Law Gazette) Bundesgerichtshof Zeitschrift für Bank und Kapitalmarktrecht Bundesrats-Drucksache Business Registers Interconnection System Bank Recovery and Resolution Directive (2014/59/EU) Bundestags-Drucksache Cahiers de Droit Européen confer Company Financial and Insolvency Law Review Chapter Compania Colektiva United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980 Court of Justice of the European Union Common Market Law Review Company Communication Corporation Cambridge University Press Commanditaire Vennootschap Cambridge Yearbook of European Legal Studies Der Betrieb Deutsche Notar-Zeitschrift Document Drittmittelbeteiligungsgesetz (Employee Representation Act) Das deutsche Steuerrecht for example European Law Review European Agricultural Fund for Rural Development European Business Law Review European Business Organization Law Review European Company and Financial Law Review European Company Law European Case Law Identifier

XIX

Abbreviations ECU ed(s) edn EEC EFTA EIRL EP et al et seq. etc. EU EUA EUAccD EuInsVO EuR EUR Eur.J.Law&Econ. EURATOM EURL EuZW EWiR EWS FS GbR GesnbR GmbH GmbHR GPR GVG Harv. L. Rev. HGB IAS ICC IFAC IFRS Inc. IntCompLQ Intro IPRax IStR JBl. JCL JIBFL JZ KG KMU KTS KWG XX

European Currency Unit editor(s) edition European Economic Community European Free Trade Association estabelecimento individual de responsabilida de limitada European Parliament and others and the following et cetera European Union European Units of Account EU-Accounting Directive (2013/34/EU) Verordnung (EU) 2015/848 über Insolvenzverfahren (Regulation on insolvency proceedings) Europarecht euro(s) European Journal of Law and Economics European Atomic Energy Community Entreprise unipersonnelle à responsabilité limitée Europäische Zeitschrift für Wirtschaftsrecht Entscheidungen zum Wirtschaftsrecht Europäisches Wirtschafts- und Steuerrecht Festschrift Gesellschaft bürgerlichen Rechts Gesellschaft nach bürgerlichem Recht Gesellschaft mit beschränkter Haftung GmbH-Rundschau Zeitschrift für das Privatrecht der Europäischen Union Gerichtsverfassungsgesetz (German Judicature Act) Harvard Law Review Handelsgesetzbuch (German Commercial Code) International Accounting Standards International Chamber of Commerce International Federation of Accountants International Financial Reporting Standards Foundation Incorporated International and Comparative Law Quarterly Introduction Praxis des Internationalen Privat- und Verfahrensrechts Internationales Steuerrecht Juristische Blätter Journal of Comparative Law Journal of International Banking and Financial Law JuristenZeitung Kommanditgesellschaft kleine und mittlere Unternehmen (small and medium-sized enterprises) KTS – Zeitschrift für Insolvenzrecht Kreditwesengesetz

Abbreviations LLC LSK Ltd. MiFID II MoU MüKoAktG NJW NJW-RR No. NZ NZG OG OGH oHG OJ OLG OR OUP p./pp. PICC PIE Pub RabelsZ Rev. Soc. RIW RNotZ SAD SAR SCP SLIM SME SPE SpruchG SRD II SUP Supp. TEC UCITS UG UK UmwG US v VOF Vol

Limited Liability Company Beck-Leitsatzkartei Limited Markets in Financial Instruments Directive (2014/65/EU) Memorandum of Understanding Münchener Kommentar zum Aktiengesetz Neue Juristische Wochenschrift Neue Juristische Wochenschrift-Rechtsprechungsreport Zivilrecht Number Österreichische Notariatszeitung Neue Zeitschrift für Gesellschaftsrecht Offene Gesellschaft Oberster Gerichtshof der Republik Österreich offene Handelsgesellschaft Official Journal Oberlandesgericht Official Records Oxford University Press Page(s) UNIDROIT Principles of International Commercial Contracts Public interest entities Publication Rabels Zeitschrift für ausländisches und internationales Privatrecht Revue des sociétés Recht der internationalen Wirtschaft Rheinische Notarzeitschrift Statutory Audit Directive (2006/43/EC) Statutory Audit Regulation ((EU) No. 537/2014) Société civile professionelle Simpler Legislation for the Internal Market Small and medium-sized enterprises Societas Privata Europaea Spruchverfahrensgesetz (German Award Proceedings Act) Shareholders Rights Directive II (2017/828/EU) Societas Unius Personae Supplement Treaty on the Foundation of the European Community of Maastricht Undertakings for Collective Investments in Transferable Securities Unternehmergesellschaft United Kingdom Umwandlungsgesetz (German Transformation Act) United States of America versus Vennootschap Onder Firma Volume XXI

Abbreviations WM WPg Yale L.J. ZEuP ZfPW ZGR ZHR ZIP ZVglRWiss

XXII

Zeitschrift für Wirtschafts- und Bankrecht Die Wirtschaftsprüfung Yale Law Journal Zeitschrift für Europäisches Privatrecht Zeitschrift für die gesamte Privatrechtswissenschaft Zeitschrift für Unternehmens- und Gesellschaftsrecht Zeitschrift für das gesamte Handels- und Wirtschaftsrecht Zeitschrift für Wirtschaftsrecht Zeitschrift für Vergleichende Rechtswissenschaft

Introduction Bibliography: Andenæs and Wooldridge, European Comparative Company Law (2009); Andenæs, European comparative company law (2009); Arenas Garçia, ’Rechnungslegungspflichten der Zweigniederlassung von ausländischen Gesellschaften’ Recht der internationalen Wirtschaft (RIW) 2000, 590; Arzt-Mergemeier, Der gesellschaftsrechtliche Minderheitenschutz in Deutschland, England und Frankreich (2006); Bachmann, in Bachmann, Eidenmüller, Engert, Fleischer and Schön (eds), Regulating the Closed Corporation (2013), 201; Bachmann, ‘Der “Europäische Corporate Governance-Rahmen” – Zum Grünbuch 2011 der Europäischen Kommission’ Zeitschrift für Wirtschafts- und Bankrecht (WM) 2011, 1301; Bachmann, ’Vertikaler Regulierungswettbewerb im Europäischen Gesellschaftsrecht’, in Erle, Goette, Kleindiek, Krieger, Priester, Schubel, Schwab, Teichmann and Witt (eds), Festschrift für Peter Hommelhoff zum 70. Geburtstag (2012), 21; Bachmann, Eidenmüller, Engert, Fleischer and Schön, Regulating the closed corporation (2014); Bachner, in Lutter (ed), Das Kapital der Aktiengesellschaft in Europa (2006), 526; Bachner, Creditor Protection in Private Companies Anglo-German Perspectives for a European Legal Discourse (2009); Bayer and Habersack (eds), Aktienrecht im Wandel, Vol. 1 (2007); Bayer and J.Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2011/12’ Betriebs-Berater 2013 (68), 3; Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/19 – Teil I: Company Law Package’ Betriebs-Berater 2019 (74), 1922; Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/19 – Teil II’ BB 2019 (74), 2178; Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2016/17’ BB 2017 (72), 2114; Bayer and J. Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das europäische Unternehmensrecht: Eine Bilanz von 1968 bis zur Gegenwart’, in Bayer and Habersack (eds), Aktienrecht im Wandel, Vol. 1 (2007), 994; Bayer and J. Schmidt, ’BBGesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2010/2011’ BB 2012 (67) 3; Bayer, ‘§ 4a’, in Lutter and Hommelhoff (eds), Kommentar zum GmbHG, (17 th edn.); Bebchuk and Fried, ’The Uneasy Case for the Priority of Secured Claims in Bankruptcy’, 105 (1996) The Yale Law Journal 857; Bebchuk and Fried, ’The Uneasy Case for the Priority of Secured Claims in Bankruptcy: Further Thoughts and a Reply to Critics’, 82 (1997) Cornell Law Review 1279; Bebchuk, ’Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law’, 105 (1992) Harvard Law Review (Harv. L. Rev.) 1435; Behrens, ‘Introduction (B.)’, in Ulmer, Habersack, Löbbe (eds), Gesetz betreffend die Gesellschaften mit beschränkter Haftung. Großkommentar (2nd edn, 2016); Birk, ‘Codetermination in Germany’, 4 (1980) Comparative Law Yearbook 69; Bleckmann, ‘Zu den Auslegungsmethoden des Europäischen Gerichtshofs’ NJW 1982, 177; Bock, ‘Company Hijacking im Vereinigten Königreich’ ZIP 2011, 2449; Böhlhoff and Budde, ’Company Groups – the EEC Proposal for a ninth Directive in the light of the legal situation in the Federal Republic of Germany’, 6 (1984) Journal of Comparative Business & Capital Market Law 163; Bokelmann, ‘Die Gründung von Zweigniederlassungen ausländischer Gesellschaften in Deutschland und das deutsche Firmenrecht unter besonderer Berücksichtigung des EWG-Vertrages’ Der Betrieb (DB) 1990 (20), 1021; Burmeister, Rosengarten and Klein, The German Limited Liability Company (8th edn 2015); Chiapetta and Tombari, ‘Perspectives on Group Corporate Governance and European Company Law’, 9 (2012), 261; Conac, ‘Start-up Europe: la proposition de directive du 25 avril 2018 sur la digitalisation du droit des sociétés’, Revue des sociétés 2019, 31; Corapi and De Donno, ‘European Corporate Law’, in Bussani and Werro (eds), European Private Law. A Handbook, Vol. 2 (2014), 209; Däubler and Heuschmid ‘Cartesio und MoMiG – Sitzverlagerung ins Ausland und Unternehmensmitbestimmung’ NZG 2009 (12), 493; Davies, ‘The Impact of Brexit on Company Law’ Giurisprudenza commerciale I 46 (2019), 5; De Luca, European company law: text, cases and materials (2017); de Raet, ’Urteilsanmerkung zum BGH-Beschluss v. 14.05.2019 – II ZB 25/17 – EuGH-Vorlage zur Handelsregistereintragung der Zweigniederlassung einer Gesellschaft mit beschränkter Haftung mit Sitz in anderem EU-Mitgliedstaat’ Entscheidungen zum Wirtschaftsrecht (EWiR) 2019, 485; Dorresteijn, European corporate law (2009); Easterbrook and Fischel, The Economic Structure of Corporate Law (1991); Ebenroth, ‘Gaining Access to Fortress Europe – Recognition of US Companies in Germany and the Revision of the Seat Rule’, 24 (1990) The International Lawyer 459; Edwards, EC Company Law (1999); Eidenmüller and Rehberg, ‘Umgehung von Gewerbeverboten mittels Auslandsgesellschaften’ Neue Juristische Wochenschrift (NJW) 2008, 28; Eidenmüller and Schön, The Law & Economics of Creditor Protection (2008); Eidenmüller, ‘Recht als Produkt’ JuristenZeitung (JZ) 2009, 641; Eisenberg, ‘The Conception That the Corporation Is a Nexus of Contracts, and the Dual Nature of the Firm’, 24 (1999) J. Corp. L. 819-836; Embid Irujo in Lutter (ed), Das Kapital der Aktiengesellschaft in Europa (2006), 679; Enriques, ‘A Harmonized European Company Law: Are We There Already?’, 66 (2017) International and Comparative Law Quarterly (IntCompLQ) 763; Farmery, 'The EC Draft Proposal For a Ninth Company Law Directive on Groups: A Business Viewpoint', 7 (1986) Business Law Review 88; Fleischer and Zimmer, Beitrag der Verhaltensökonomie zum Handelsund Wirtschaftsrecht (2011); Fleischer, ‘Europäisches Konzernrecht: Eine akteurzentrierte Annäherung’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (ZGR) 2017 (46), 1; Fleischer, ‘Europäisches Konzernrecht: Entwicklungslinien und Tendenzen’ ZGR 2017 (46), 1; Fleischer, ‘Gesetz und Vertrag als alternative

Peter Kindler

1

Introduction Problemlösungsmodelle im Gesellschaftsrecht – Prolegomena zu einer Theorie gesellschaftsrechtlicher Regelsetzung’ ZHR 2004 (168), 673; Fleischer, ’Supranationale Gesellschaftsformen in der Europäischen Union’ Zeitschrift für das gesamte Handels- und Wirtschaftsrecht (ZHR) 2010 (174), 385; Former Reflection Group on the Future of EU Company Law, ‘Response to the European Commission’s Action Plan on Company Law and Corporate Governance’, 10 (2013) ECFR 304; Garcimartín and Gandía, ‘Cross Border Conversions in the EU: The EU Commission Proposal‘, 16 (2019) European Company and Financial Law Review (ECFR) 15; Geiler, Die wirtschaftlichen Strukturwandlungen und die Reform des Aktienrechts (1927); Gerner-Beuerle, Mucciarelli, Schuster and Siems, Study on the Law Applicable to Companies, European Commission, Final report (2016); Gerner-Beuerle, Mucciarelli, Schuster and Siems, The Private International Law of Companies in Europe (2019); Gernert, ‘Harter Brexit und IPR – Vorbereitende Papiere für einen ungeregelten Austritt des Vereinigten Königreichs’ IPRax 2019, 365; Gerven (ed), Cross-Border Mergers in Europe, Vol. I & II (2010), national reports; Großfeld, ’Internationales Gesellschaftsrecht’ in Staudinger (Sellier-de Gruyter 1998); Grundmann, Europäisches Gesellschaftsrecht (2 nd edn, 2011); Grundmann, European Company Law (2007); Grzeszick and Verse, ‘Auswirkungen eines harten Brexit auf britische Gesellschaften in Deutschland – der Gesetzgeber ist gefordert!‘ NZG 2019 (22), 1129; Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019); Habersack, ‘Das Aktiengesetz und das Europäische Recht’ ZIP 2006, 445; Habersack, ‘Einleitung’ in Münchner Kommentar zum Aktiengesetz (5 th edn, 2019); Habersack, ‘Europäisches Gesellschaftsrecht im Wandel – Bemerkungen zum Aktionsplan der EG-Kommission betreffend die Modernisierung des Gesellschaftsrechts und die Verbesserung der Corporate Governance in der Europäischen Union’ NZG 2004 (7), 1; Hallstein, ‘Die Gesellschaft mit beschränkter Haftung in den Auslandsrechten, verglichen mit dem deutschen Recht’ RabelsZ 1938/39 (12), 341; Haussmann, Vom Aktienwesen und Aktienrecht (1928); von Hein, ‘Agency in the Conflict of Laws: A New German Rule’ Rivista di diritto internazionale privato e processuale 54 (2018), 5; von Hein, ‘Der Vorschlag der GEDIP für eine EU-Verordnung zum Internationalen Gesellschaftsrecht’ in Hess, Jayme and Mansel (eds), Europa als Rechts- und Lebensraum: Liber Amicorum für Christian Kohler zum 75. Geburtstag (2018), 551; Heine, Regulierungswettbewerb im Gesellschaftsrecht (2003); Hirte, The European Private Company – Societas Privata Europaea (SPE) (2013); Hofmann, Der Minderheitsschutz im Gesellschaftsrecht (2010); Hoger, ’Offene Rechtsfragen zur Eintragung der inländischen Zweigniederlassung einer Kapitalgesellschaft mit Sitz im Ausland’ NZG 2015 (18), 1219; Hommelhoff, ’Zum revidierten Entwurf einer Konzernrechtsrichtlinie’, in Goerdeler, Hommelhoff, Lutter, Wiedemann (eds), Festschrift für Hans-Joachim Fleck zum 70. Geburtstag (1988), 125; Hopt, in Markesinis (ed), The Clifford Chance Millennium Lectures: The Coming Together of the Common Law and the Civil Law (2000), 105 (German version in ZGR 2000 (39), 779; Hopt, ‘Europäisches Gesellschaftsrecht im Lichte des Aktionsplans der Europäischen Kommission vom Dezember 2012’ ZGR 2013 (42), 165; Hopt, ‘Europäisches Gesellschaftsrecht und deutsche Unternehmensverfassung – Aktionsplan und Interpendenzen’ ZIP 2005, 461; Hopt, ‘Europäisches Gesellschaftsrecht: Quo Vadis?’ EuZW 2012, 481; Hopt, ‘Legal Elements and Policy Decisions in Regulating Groups of Companies’ in Schmitthoff and Wooldridge (eds), Groups of Companies (1991), 81; Hübner, ‘Eine Rom V-VO für das Internationale Gesellschaftsrecht – zugleich ein Beitrag zur Kohärenz im Internationalen Gesellschaftsrecht’ ZGR 2018 (47), 149; Immenga, ’Abhängige Unternehmen und Konzerne im Europäischen Gemeinschaftsrecht’ RabelsZ 1984 (48), 48; Immenga, ’L’harmonisation du droit des groupes de sociétés. La proposition d’une Directive de la Commission de la C.E.E.’ Giurisprudenza Commerciale Parte I 14 (1986), 846; Just, ‘Keine Pflicht zur Bestellung eines ständigen Vertreters für die deutsche Zweigniederlassung einer Ltd. – Anm. zu OLG München, Beschl. v. 14.02.2008 – 31 Wx 67/07’ EWiR 2009, 145; Kalss and Klampfl, Europäisches Gesellschaftsrecht (2015); Kieninger, ‘Die weitere Kodifikation des Europäischen IPR’ IPRax 2017, 200; Kieninger, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt (2002); Kienle in Süß and Wachter, Handbuch des internationalen GmbHRechts (3rd ed 2016); Kindler and Brüggemann, ‘Die kollisionsrechtliche Anknüpfung kaufmännischer Vollmachten nach Art. 8 EGBGB’ RIW 2018, 473; Kindler and Jobst, ‘Die Online-Gründung nach dem Company Law Package – Chancen und Risiken bei der Umsetzung ins deutsche Recht’ DB 2019 (72), 1550; Kindler and Jobst, ‘Costituzione di società ed identificazione elettronica: il company law package e la sua attuazione nell’ordinamento tedesco ed in quello italiano’ Le nuove leggi civili commentate 57 (2019), 1557; Kindler, ‘Keine Flucht aus der Unternehmensmitbestimmung durch Einsatz von EU-Scheinauslandsgesellschaften’, in Deinert (ed), Festschrift für Peter Winkler von Mohrenfels zum 70. Geburtstag (2013), 147; Kindler, ‘“Cadbury Schweppes”: Eine Nachlese zum internationalen Gesellschaftsrecht’ Praxis des Internationalen Privat- und Verfahrensrechts (IPRax) 2010, 272; Kindler, ‘Bezugsrechtsausschluss und unternehmerisches Ermessen nach deutschem und europäischem Recht’ ZGR 1998 (27), 35, Kindler, ‘Die sachliche Rechtfertigung des aktienrechtlichen Bezugsrechtsausschlusses im Lichte der Zweiten Gesellschaftsrechtlichen Richtlinie der Europäischen Gemeinschaft’ ZHR 1994 (158), 339; Kindler, ‘Entwicklungslinien des italienischen Gesellschaftsrechts seit Beginn dieses Jahrhunderts’ ZEuP 2012 (20), 72; Kindler, ‘Grundzüge des neuen Kapitalgesellschaftsrechts – Das Gesetz zur Modernisierung des GmbHRechts und zur Bekämpfung von Missbräuchen (MoMiG)‘ Neue Juristische Wochenschrift (NJW) 2008, 3249; Kindler, ‘Internationales Insolvenzrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8 th edn, 2021);

2

Peter Kindler

Introduction Kindler, ‘La s.p.a. nell’esperienza tedesca: I tratti essenziali della Aktiengesellschaft’ in Cagnasso and Panzani (eds), Le nuove s.p.a. (2013), 415; Kindler, ‘La s.r.l. tedesca (GmbH) a 125 anni dalla sua nascita’ Rivista di diritto societario 3 (2019), 540; Kindler, ‘Portale, Giuseppe B., Lezioni di Diritto Privato Comparato (Book review)’ Zeitschrift für vergleichende Rechtswissenschaft 2007 (106), 359; Kindler, ‘Sitzverlegung und Insolvenzrecht’ IPRax 2006, 114; Kindler, ‘Transparenz und Nachhaltigkeit. Transparenz und Mobilität: konfligierende Regelungsziele im Europäischen Gesellschaftsrecht?‘ Deutsche Notar-Zeitschrift-Sonderheft zum 29. Deutschen Notartag (Berlin 2016) (DNotZ) 2016 (75), 75; Kindler, ‘Transparenz und Nachhaltigkeit. Transparenz und Mobilität: konfligierende Regelungsziele im Europäischen Gesellschaftsrecht? ‘ Deutsche Notar-Zeitschrift-Sonderheft zum 29. Deutschen Notartag (Berlin 2016) (DNotZ) 2016 (75), 75; Kindler, ‘Verdeckte Sacheinlage und Kapitalschutzrichtlinie – Zur Umwandlung von Geldkrediten in Nennkapital der AG’ in Ebenroth, Hesselberger and Rinne (eds), Verantwortung und Gestaltung: Festschrift für Karlheinz Boujong zum 65. Geburtstag (1996), 299-318; Kindler, ‘§ 290 HGB’ in Canaris, Schilling and Ulmer (eds), Staub, Großkommentar zum HGB (German commercial code) (6 th edn, de Gruyter 2021); Kindler, ’Aspetti essenziali di un futuro regolamento comunitario sulla legge applicabile alle società’ Rivista di diritto internazionale privato e processuale 2006, 657; Kindler, ’Die Abgrenzung von Gesellschaftsund Insolvenzstatut’ in Sonnenberger (ed), Vorschläge und Berichte zur Reform des europäischen und deutschen internationalen Gesellschaftsrechts (2007), 389; Kindler, ‘EU-ausländische Beteiligungskonsortien im Visier der BaFin’ in Grundmann, Haar, Merkt, Mülbert and Wellenhofer (eds), Unternehmen, Markt und Verantwortung: Festschrift für Klaus J. Hopt zum 70. Geburtstag, Vol. 2 (2010), 2081; Kindler, ’Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8 th edn, 2021); Kindler, ’Kapitalgesellschaftsrechtliche Durchgriffshaftung und EU-Recht’, in: Joost, Oetker and Paschke (eds), Festschrift für Franz Jürgen Säcker zum 70. Geburtstag (2011), 393; Kindler, ’Kapitalgesellschaftsrechtliche Durchgriffshaftung und EU-Recht’ in Joost, Oetker and Paschke (eds), Festschrift für Franz Jürgen Säcker zum 70. Geburtstag (2011), 393; Kindler, ‘Unternehmensmobilität nach Polbud: Der grenzüberschreitende Formwechsel in Gestaltungspraxis und Rechtspolitik’ Neue Zeitschrift für Gesellschaftsrecht (NZG) 2018 (21), 1; Kindler, ‘Unternehmensmobilität nach Polbud: Der grenzüberschreitende Formwechsel in Gestaltungspraxis und Rechtspolitik’ NZG 2018 (21), 1; Kindler, Einführung in das italienische Recht (2nd edn 2008); Kindler, Italienisches Handels- und Wirtschaftsrecht (2nd edn 2014); Kindler, The Single-Member Limited Liability Company (SUP) – A Necessary Reform of EU Law on Business Organizations? (2016); Klöhn, ’Supranationale Rechtsformen und vertikaler Wettbewerb der Gesetzgeber im europäischen Gesellschaftsrecht Plädoyer für ein marktimitierendes Rechtsformangebot der EU’ Rabels Zeitschrift für ausländisches und internationales Privatrecht (RabelsZ) 2012 (76), 276; Knieper, Eine ökonomische Analyse des Notariats (2010); Koch, ‘§ 13’, in: Staub, Canaris, Habersack and Schäfer (eds), Handelsgesetzbuch. Großkommentar, Vol. 1 (5th edn, de Gruyter 2016); Kohler, ‘Eine europäische Verordnung über das auf Gesellschaften anzuwendende Recht – Tagung der Europäischen Gruppe für Internationales Privatrecht in Mailand’ IPRax 2017, 323; König and Bormann, ‘“Genuine Link” und freie Rechtsformwahl im Binnenmarkt’ NZG 2012 (15), 1241; Korch, ‘Die Rolle der Gesellschafter im künftigen Restrukturierungsverfahren’ ZIP 2020 (41), 446; Korch, ‘Sanierungsverantwortung von Geschäftsleitern – Krisenpflichten im Lichte des Art 19 der Restrukturierungsrichtlinie’ ZGR 2019 (48), 1050; Kornblum, ‘Bundesweite Rechtstatsachen zum Unternehmens- und Gesellschaftsrecht (Stand 1.1.2020)’ GmbHR 2020 (111), 677; Kraakman, Armour, Davies et al, The Anatomy of Corporate Law (3 rd edn 2017); Kumpan and Pauschinger, ‘Entwicklung des europäischen Gesellschaftsrechts’ EuZW 2019, 357; Kurcz and Paizis, ‘Company Law, Connecting Factors and the Digital Age – A New Outlook’, 16 (2019) ECFR 434; Lenoir and Conac, ‘Rapport du groupe de réflexion sur le futur du droit européen des sociétés: vers un changement de cap?’ Recueil Dalloz 2011, 1808; Licari and Bauerreis, ‘Das neue französische Handelsgesetzbuch – ein kritischer Beitrag zur Methode der codification à droit constant’ Zeitschrift für Europäisches Privatrecht (ZEuP) 2004, 132; Lieder, ‘Digitalisierung des Europäischen Unternehmensrechts – Online-Gründung, Online-Einreichung, Online-Zweigniederlassung’ NZG 2018 (21), 1081; Lutter (ed), Europäisches Unternehmensrecht (4th ed 1996); Lutter, ‘Legal Capital of public companies in Europe – Executive summary of considerations by the expert group on Legal Capital in Europe’ in Lutter (ed), Legal Capital in Europe, ECFR Special Vol. 1 (2006), 1; Lutter, ‘Legal Capital of public companies in Europe – Executive summary of considerations by the expert group on Legal Capital in Europe’ in Lutter (ed), Legal Capital in Europe, ECFR Special Vol. 1 (2006), 1; Lutter, ‘The Commission Recommendations of 14 December 2004 and 15 February 2005 and their implementation in Germany’ in Tison, de Wulf, van der Elst and Steennot (eds), Perspectives in Company Law and Financial Regulation – Essays in Honour of Eddy Wymeersch (2009), 132; Lutter, ‘The German System of Worker Participation in Practice’, (1982) Journal of Business Law 154; Lutter, ‘Zur Europäisierung des deutschen Aktienrechts’; in: Heldrich, Henrich and Sonnenberger (eds), Konflikt und Ordnung: Festschrift für Murad Ferid, Vol. 1 (1978), 599; Lutter, ’Die Entwicklung der GmbH in Europa und in der Welt’ in Lutter, Ulmer and Zöllner (eds), Festschrift 100 Jahre GmbH-Gesetz (1992), 49; Lutter, ’Limited Liability Company’, in: Conard and Vagts (eds), International Encyclopedia of Comparative Law, Vol. XIII/1 (2006), 1; Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017); Malberti, ‘La proposta di direttiva sulla Societas Unius Personae: Una nuova

Peter Kindler

3

Introduction strategia per l’armonizzazione del diritto societario europeo?’ Rivista delle società 4 (2014), 848; Mäsch, Gausing and Peters, ‘Deutsche Ltd., PLC und LLP: Gesellschaften mit beschränkter Lebensdauer? – Folgen eines Brexits für pseudo-englische Gesellschaften mit Verwaltungssitz in Deutschland’ IPRax 2017, 49; Mayer, Language and Law in the European Company (SE) (2018); Mazzarella, ‘Kingdom of Italy (1861-1946)’ in Löhnig and Wagner (eds), Das ADHGB von 1861 als gemeinsames Obligationenrecht in Mitteleuropa (2018), 305; Merkt, ‘Der internationale Anwendungsbereich des deutschen Rechnungslegungsrechts’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (ZGR) 2017, 460; Merkt, ’Schutz der Gesellschaftsgläubiger im Binnenmarkt durch gesetzliches Mindestkapital und andere Maßnahmen’ in Müller-Graff and Teichmann (eds), Europäisches Gesellschaftsrecht auf neuen Wegen (2010), 81; Mock in Fleischer and Thiessen (eds), Gesellschaftsrechtsgeschichten (2018), 729; Möslein, ’Europäisierung der Haftungsbeschränkung’ NZG 2011 (14), 174; Mülbert, ‘Shareholder Value aus rechtlicher Sicht’ ZGR 1997 (36), 129; Murray and Stürner, The Civil Law Notary – Neutral Lawyer for the Situation. A Comparative Study on Preventative Justice in Modern Societies (2010); Mustaki and Engammare, Droit européen des sociétés (2009), 315; Otte-Gräbener, ‘Anforderungen an die Anmeldung der Zweigniederlassung einer Limited zur Eintragung in das Handelsregister auf dem Prüfstand des EuGH’ Neue Zeitschrift für Gesellschaftsrecht (NZG) 2019 (22), 934; Papadima, ‘Recent Developments regarding Gender Balance on EU Corporate Boards’, 12 (2015) ECL 245; Pederzini, Percorsi di diritto societario europeo (2 nd edn, 2011), 66; Petite, ‘The Conditions for Consolidation under the Seventh Company Law Directive’, 21 (1984) Common Market Law Review 81; Raiser and Veil, Recht der Kapitalgesellschaften (5th edn, 2010); Ranieri, ‘Gesellschaftsrecht’ in Coing (ed), Handbuch der Quellen und Literatur der neueren europäischen Privatrechtsgeschichte, Vol. III/3 (1986), 3261; Rathenau, Vom Aktienwesen (1918); Reich, ‘Die Entwicklung des deutschen Aktienrechts im 19. Jahrhundert’ Ius Commune II (1969), 239; Rodiére, ‘L’harmonisation des legislations européennes dans le cadre de la C.E.E.’ Revue trimestrielle de droit européen 1 (1965), 336; Roest, ‘Corporate Mobility – The Involvement of Employees’, 16 (2019) ECFR 74; Röpke, Gläubigerschutzregime im europäischen Wettbewerb der Gesellschaftsrechte (2007); G.H. Roth, ‘Das Ende der Briefkastengründung? Vale contra Centros’ ZIP 2012, 1744; G.H. Roth, Vorgaben der Niederlassungsfreiheit für das Kapitalgesellschaftsrecht (2010); Roth and Altmeppen, ‘Introduction to § 64 margin no. 2’ in GmbH-Gesetz: Kommentar (9 th edn, 2019); Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013); Roth and Wörle, ‘Die Unabhängigkeit des Aufsichtsrats – Recht und Wirklichkeit’ ZGR 2004 (43), 565; Sachdeva, ‘Regulatory Competition in European Company Law’, 30 (2010) European Journal of Law and Economics (Eur.J.Law&Econ.) 137; Schaal, ‘§ 13d’ in BeckOGK HGB (as at 15.9.2019); Schall, ‘Das Kornhaas-Urteil gibt grünes Licht für die Anwendung des § 64 GmbHG auf eine Limited mit Sitz in Deutschland – Alles klar dank EuGH!‘ ZIP 2016, 289; Schmidt, ‘Auswirkungen des Brexits im Bereich des Gesellschaftsrechts’ ZIP 2019, 1093; J. Schmidt, ‘Corporate Law and Brexit’ in Biondi and Birkinshaw and Kendrick (eds), Brexit: The Legal Implications (2019), 175; J. Schmidt, ‘The New Unternehmergesellschaft (Entrepreneurial Company) and the Limited: A Comparison’, 9 (2008) German Law Journal 1093; J. Schmidt, ‘Cross-border mergers and divisions, transfers of seat: Is there a need to legislate?’ European Parliament, Study for the JURI Committee (2016); J. Schmidt, ‘Cross-border Mergers, Divisions and Conversions: Accomplishments and Deficits of the Company Law Package’, 16 (2019) ECFR 222; J. Schmidt, ‘Brexit: Implikationen des EU-UK TCA im Bereich des Gesellschaftsrechts’ GmbH-Rundschau (GmbHR) 2021 (112), 229; Schollmeyer, ‘Der Gläubigerschutz bei grenzüberschreitenden Umwandlungen nach der neuen Umwandlungsrichtlinie’ ZGR 2020 (49), 62; Scholten, ‘Company Law in Europe’, 4 (1967) CMLR 377, 382; Schön, 'Playing different games? Regulatory competition in tax and company law compared', 42 (2005) Common Market Law Review 331; Schopper and Skarics, 'Grenzüberschreitende Umwandlungen nach der Entscheidung des EuGH in der Rs. VALE’ Österreichische Notariatszeitung (NZ) 2012, 321; Seifert, ’Kommentar zu AG Westerstede vom 31.10.2000 – 10 AR 99/00’ RIW 2001, 68; Sonnenberger (ed), Vorschläge und Berichte zur Reform des europäischen und deutschen internationalen Gesellschaftsrechts. Vorgelegt im Auftrag der 2. Kommission des Deutschen Rates für IPR, Spezialkommission internationales Gesellschaftsrecht (2007); Sonnenberger and Bauer, ‘Vorschlag des Deutschen Rates für Internationales Privatrecht für eine Regelung des Internationalen Gesellschaftsrechts auf europäischer/ nationaler Ebene’ RIW 2006, Beilage zu Heft 4, 1; Sonnenberger, Classen and Großerichter, Einführung in das französische Recht (4th edn 2012), no 157; Spada, Diritto commerciale, I, Parte generale: storia, lessico e istituti (2004); Stelmaszczyk ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’ GmbH-Rundschau (GmbHR) 2020 (111), 61; Stelmaszczyk, ’Unionsrechtskonformität der Geschäftsführerversicherung bei der Anmeldung von Zweigniederlassungen’ Europäische Zeitschrift für Wirtschaftsrecht (EuZW) 2019, 819; Stürner, Markt und Wettbewerb über alles? Gesellschaft und Recht im Fokus neoliberaler Marktideologie (2007); Teichmann and Götz, ‘Metamorphosen des Europäischen Gesellschaftsrechts: SUP, Company Law Package und SPE 2.0’ Zeitschrift für Europäisches Privatrecht (ZEuP) 2019 (27), 260; Teichmann, ‘The Company Law Package – Content and State of Play’, 16 (2019) ECFR 3; Teichmann, ’Europäisches Konzernrecht: Vom Schutzrecht zum Enabling Law’ in Die Aktiengesellschaft (AG) 2013, 184; Tomasic, ‘Corporate Governance Reforms in the EU’, 8 (2011) European Company Law 142; Trenker, ‘Insolvenzanfechtung gesellschaftsrechtlicher

4

Peter Kindler

Introduction Maßnahmen’ in Innsbrucker Schriften zum Unternehmensrecht, Vol. 1 (2012); Triebel, ’Der Kampf ums anwendbare Recht’ in Anwaltsblatt 2008, 305; Veil, European capital markets law (2017); Vicari and Schall, Company Laws of the EU (2020); Wachter, ’Keine Pflicht zur Versicherung des Fehlens von Bestellungshindernissen bei Eintragung der Zweigniederlassung einer Ltd. – Anm. zu LG Cottbus, Beschl. v. 14.02.2005 – 11 T 1/05’ EWiR 2005, 733; Wackerbarth, ‘The Consequences of Brexit for Company Law’, in: Szuka, Prinz von Sachsen Gessaphe and Garcia Blesa (eds), Legal Implications of Brexit (2018), 277; Weber, Behavioral Finance (1999); Weller and Hübner, ’Kornhaas und seine Auswirkungen auf insolvenznahe Haftungsinstrumente’ in Kayser, Smid and Riedemann (eds), Nichts ist beständiger als der Wandel: Festschrift für Klaus Pannen zum 65. Geburtstag (2017), 259; Westermann, ‘Die GmbH in der nationalen und internationalen Konkurrenz der Rechtsformen’ GmbHR 2005 (96), 4; Wiedemann, ‘Codetermination by Workers in German Enterprises’, 28 (1980) The American Journal of Comparative Law 79; Williamson, ‘Transaction-Cost Economics: The Governance of Contractual Relations‘, 22 (1979) Journal of Law and Economics 233; Winner, ‘Protection of Creditors and Minority-Shareholders in Cross-border Transactions’, 16 (2019) ECFR 44; Wolters, Worker involvement in the European Company (SE). A handbook for practitioners (2011), 69; Wymeersch and Kruithof, The Law of Groups of Companies – an International Bibliography (1991); Zimmer, ‘Ein Internationales Gesellschaftsrecht für Europa’ RabelsZ 2003 (67), 298; Zweigert and Kötz, Einführung in die Rechtsvergleichung (3rd edn, 1996). A. The Spirit of European Corporate Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Protective Standards vs. ‘Shareholder Value’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. European corporate law at a crossroads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The purpose of corporate law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Leading Legal Systems in Continental Europe and their Influence on EU Company Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. European Company Law and its Neighbouring Areas . . . . . . . . . . . . . . . . . . . . . . . . 1. Four key issues of protective standards in EU and domestic company law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Capital structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Organisational structure (including the involvement of employees) . . . . . (i) Supervision of the management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Employee participation at the board level . . . . . . . . . . . . . . . . . . . . . . . . . . c) Protection of minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) External control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Capital markets law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Insolvency law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Company conflicts of laws (‘international company law’) and fundamental freedoms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Framework for the screening of investments from non-EU countries . . . . B. Scope of Application and Current Legal Policy of European Company Law I. Companies Subject to EU Harmonisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Limited liability companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The focus on the public limited liability company . . . . . . . . . . . . . . . . . . . . . . . . . 3. Companies from third Countries; ‘Brexit’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Material Scope of EU Company Law Directives . . . . . . . . . . . . . . . . . . . . . . . . . 1. Types of companies involved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Formation and current business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Validity, representation, disclosure, limited liability, capital and capital alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Harmonised Accounting Law (Financial Statements and Approved Auditors) . . . . . . . . . . . . . . . . . . . . . . . . . 3. Establishment and structural changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Branches and cross-border conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Mergers and divisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Takeover bids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Groups of companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Financial reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iii) Transparency requirements in capital markets . . . . . . . . . . . . . . . . . . . . . (iv) The preliminary draft of a Group Law Directive . . . . . . . . . . . . . . . . . . . (v) Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Peter Kindler

1 1 1 10 23 41 41 42 44 44 48 55 58 63 64 66 73 74 74 74 76 78 86 86 90 91 96 97 99 101 104 105 105 107 112 117 130

5

Introduction III. Current Legal Policy and Recent Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Diversity in the laws governing small corporations and the state of EU legal policy in the area of corporate law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Starting point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Low degree of ‘Europeanization’ of the small corporation . . . . . . . . . . . . . . . c) State of EU legal policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The 2003 EU Action Plan on the modernisation of company law and improvement of corporate governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Shareholders’ Right to choose between monistic and dualistic management structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Capital maintenance and capital alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Reform initiative 2011/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The EU Green Paper ‘European corporate governance framework’ . . . . . . b) ‘Reflection Group’ and Action Plan 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Supranational entities created (or planned) by the EU . . . . . . . . . . . . . . . . . . . . a) European Economic Interest Grouping (EEIG) . . . . . . . . . . . . . . . . . . . . . . . . . . b) European Company (Societas Europaea – SE) . . . . . . . . . . . . . . . . . . . . . . . . . . c) European Cooperative Society (Societas Cooperativa Europaea – SCE) d) European private company (SPE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Single-membered Company (SUP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. The Institutional Framework of European Company Law . . . . . . . . . . . . . . . . . . . . I. The Interaction between EU and Member States’ Law . . . . . . . . . . . . . . . . . . . . . . . 1. The EU Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Primary Law of the European Union (Treaty Law) . . . . . . . . . . . . . . . . . . . . . . b) Secondary Law of the European Union (Legislation) . . . . . . . . . . . . . . . . . . . . 2. The Member States’ level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Impact of the TFEU in the Field of EU Company Law . . . . . . . . . . . . . . . . . . . . . . . 1. EU conform interpretation of national law; primacy of application of EU law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Legal Basis for (secondary) European company law . . . . . . . . . . . . . . . . . . a) Principle of Conferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Influence of Majority Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The interpretation of European (secondary) company law . . . . . . . . . . . . . . . III. EU Law Monitoring National Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. EU law rendering national law inapplicable via its fundamental freedoms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Freedom of establishment and of capital movements as the fundamental freedoms governing company law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Conditions of application and effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. EU law rendering national law inapplicable via directives . . . . . . . . . . . . . . . . a) Full harmonisation vs. minimum harmonisation . . . . . . . . . . . . . . . . . . . . . . . b) Direct effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

134 134 134 136 146 148 148 149 150 151 151 152 166 166 168 172 173 174 176 176 177 177 179 180 181 181 184 184 187 189 193 193 193 194 200 200 203

A. The Spirit of European Corporate Law1 I. Protective Standards vs. ‘Shareholder Value’ 1. European corporate law at a crossroads 1

Two paths have led to the current face of European corporate law and examples for the development of these paths have already been sketched out in the case of the corporation. One path is harmonisation and the creation of uniform law by having EU institutions establish protective standards; decision-making ‘from above’. The other 1 Section A.I. and II. of this Introduction is based on Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 1 et seq.

6

Peter Kindler

Introduction path is the choice between different national offerings – competition among legal systems – in which citizens are guided by their preferences; decision-making ‘from below’. Harmonisation initially stood in the foreground. This was reflected in corporate law directives starting in 19682 which primarily addressed the public limited liability companies and, from a substantive standpoint, followed the high level of regulation and legal certainty provided by the public limited liability companies in the German legal system. A further example of this is the Second or Capital Directive of 1976 3 largely inspired by French and German law. The private limited company has served as the alternative model for free choice ac- 2 cording to decisions of the CJEU since 1999. Its decisions in Centros (1999), Überseering (2002) and Inspire Art (2003)4 were and are primarily understood to mean that the founder of an enterprise located in a specific European Union Member State can avail itself of EU-foreign entity forms even if there is no factual relationship whatsoever to the respective country.5 Even if this interpretation rests since Cadbury-Schweppes (2006) and Vale (2012)6 on shaky ground, the practice has been to quickly act based on this interpretation, especially in Germany as well as Denmark and the Netherlands. 7 What is clear is a preference for legal systems with a low degree of regulation related to formation requirements. In 2019, EU legislators have encouraged this practice by introducing a form of ‘cross-border conversion’ whereby a company converts the legal form under which it is registered in a departure Member State A into a legal form of the destination Member State B and transfers ‘at least’ its registered office to the destination Member State B (Art 86a(2) Directive 2017/1132/EU: 8 the real seat may remain in the departure Member State A. This legal trend strikes to the core of the Continental European private limited company which had been designed as a regulatory alternative to the public limited liability companies (Aktiengesellschaft, société anonyme) as early as 1892.9 2 First or Disclosure Directive 68/151/EEC of 9 March 1968; incorporated in Directive 2017/1132/EU Title I Chapter I, Chapter II Section 2, Chapter III Section 1. 3 Directive 77/91/EEC of 13 December 1976; incorporated in Directive 2017/1132/EU Title I Chapter IV. 4 Case C-212/97, 09.03.1999, Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECLI:EU:C:1999:126; Case C-208/00, 05.11.2002, Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC) [2002] ECLI:EU:C:2002:632; Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512. 5 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512 para. 95; Kurcz and Paizis, ‘Company Law, Connecting Factors and the Digital Age – A New Outlook’, 16 (2019) ECFR 434, 437 et seq; BGH 14.03.2005 – II ZR 5/03, NZG 2005 (8), 508; Austrian OGH 15.07.1999, 6 Ob 123/99 b, Österreichisches Recht der Wirtschaft (RdW) 1999, 719; from the German literature rather than others Behrens, ‘Introduction (B.)’ in Ulmer, Habersack, Löbbe (eds), Gesetz betreffend die Gesellschaften mit beschränkter Haftung. Großkommentar (2 nd edn, 2016), margin no 39; Bayer, ‘§ 4a’ in Lutter and Hommelhoff (eds), Kommentar zum GmbHG, (17th edn) margin no 9; Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 7 margin nos 30, 60 et seq; Raiser and Veil, Recht der Kapitalgesellschaften (5th edn, 2010), § 58 margin no 5. 6 Case C-196/04, 12.09.2006, Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECLI:EU: C:2006:544; Case C-378/10, 12.07.2012, Vale Epitesi kft. [2012] ECLI:EU:C:2012:440; Kindler, ‘“Cadbury Schweppes”: Eine Nachlese zum internationalen Gesellschaftsrecht’ Praxis des internationalen Privat- und Verfahrensrechts (IPRax) 2010, 272. 7 Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th edn 2017), § 7 margin no 60 et seq, with additional citations. 8 As amended by Directive 2019/2121/EU on cross-border conversions, mergers and divisions; see Stelmaszczyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’ GmbH-Rundschau (GmbHR) 2020 (111), 61.; J. Schmidt, ‘Cross-border Mergers, Divisions and Conversions: Accomplishments and Deficits of the Company Law Package’, 16 (2019) ECFR 222.

Peter Kindler

7

Introduction This is because Anglo-American law embodied and still embodies a regulatory philosophy which is not very demanding, at least in relation to the requirements for formation. The capital requirements provide a striking example of this point. For example, Austria requires minimum capital of EUR 35,000 and Germany required EUR 25,000 through 2008. By contrast, an English Limited could always be formed with one GBP. This is not only attractive to founders, but the legal policy approach as such has not missed making an impact on European institutions. This is most likely because it may be equated with deregulation in a general sense, which, for example, may be seen in the efforts to liberalise the 1976 Capital Directive (codified in Arts 44 et seq. Directive 2017/1132/EU).10 4 At the same time, Anglo-American law stands for the second path of the legal trend described at the outset (→ mn. 1): that of a liberal fundamental philosophy regarding the choice of legal form and of the associated legal system and regarding the designing of the articles of association. Where companies are involved, English law and closely related legal systems employ the so-called place of incorporation theory for conflict of laws purposes. In doing so they consequently leave freedom of contract of the shareholders a great deal of latitude in both aspects – that of substantive law as well as conflicts of law: freedom to design the articles of association on the one hand and free choice of legal form on the other. Similarly consistently, Germany, Austria, Denmark, the Netherlands, and other countries which attach importance to a high level of mandatory law in order to provide effective legal protection for minority shareholders and third parties (creditors et al.), demanded (and demand to the extent possible) of their domestic enterprises that they subject themselves to national company laws using a company form under domestic law; the so-called corporate domicile theory for conflict of laws purposes. They place responsibility on the parties for complying with the governmental regulatory framework at both levels. 5 In this manner, European legal policy currently finds itself faced with the decision of whether to follow one or the other regulatory philosophies or, based on various compromises, to provide more room for one or the other. This fundamental question presents itself not only along the way to further standardisation of European corporate law, with the Anglo-American tradition and the Continental European tradition struggling for substantive influence, but also with regard to the decision for or against free competition among legal systems. The latter involves impediments to competition provided by legal standards that the Continental European Member States view as essential. 6 The European Commission appears to be perfectly aware of this crossroads. In its February 201211 consultation paper on the future of company law it presented the question of what objectives should EU company law have12 and, amongst others, provided the following responses to this question, combining the two paths described 3

9 Fleischer, ‘Supranationale Gesellschaftsformen in der Europäischen Union’ Zeitschrift für das gesamte Handels- und Wirtschaftsrecht (ZHR) 2010 (174), 385, 411; on the ‘invention’ of the private limited liability company by the German legislator see Kindler, ‘La s.r.l. tedesca (GmbH) a 125 anni dalla sua nascita’ Rivista di diritto societario 3 (2019), 540. 10 See also alternatively Merkt, ‘Schutz der Gesellschaftsgläubiger im Binnenmarkt durch gesetzliches Mindestkapital und andere Maßnahmen’ in Müller-Graff and Teichmann (eds), Europäisches Gesellschaftsrecht auf neuen Wegen (2010), 81; Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 19 margin no 6; for an example see the Amending Directive 2006/68/EC (introducing a modest deregulation primarily in Art 10 a and 19 et seq of the 1976 capital maintenance directive). 11 European Commission, Internal Market and Services Directorate General, Consultation on the future of European company law. 12 Under heading II., Objectives of European company law, question 5.

8

Peter Kindler

Introduction above (harmonisation through defining common standards of protection or competition of legal systems; → mn. 1): – – –

setting the right framework for regulatory competition allowing for a high level of flexibility and choice; better protection for employees; better protection for creditors, shareholders and members.

In some respect different, on its website, in 2020 the European Commission states the 7 purpose of EU rules in Company Law being to – – – –

enable businesses to be set up and to carry out operations anywhere in the EU, provide protection for shareholders and other parties with a particular interest in companies, such as employees and creditors, make business more efficient, competitive and sustainable in the long term, encourage businesses based in different EU countries to cooperate with each other. 13

Regulatory competition is no longer mentioned as (potential) guideline for legal policy in the field of company law. Competition amongst legal systems also brings new theoretical concepts related to 8 European company law to the fore. Although it is not in dispute that the single market is a guiding principle of EU law 9 (Art 3(3) TEU) which in turn is bound by principles of competition, however if this appears to many to suffice as justification to entrust it with developing the law as well,14 this approach neglects the difference between the market and/or competition as space to manoeuvre and as the legal regulatory framework in which it operates.15 Most of all, it neglects negative externalities to the damage of third parties who did not choose the applicable corporate law and had no influence on the designing of the articles of association.16 As far as non-adjusting creditors are concerned, self-protection is mere fiction.17

13 https://ec.europa.eu/info/business-economy-euro/doing-business-eu/company-law-and-corporate-g overnance_en#eu-rules-in-this-area. 14 Accord – even if some accents are placed elsewhere – Eidenmüller, ‘Recht als Produkt’ JuristenZeitung (JZ) 2009, 641 et seq; Grundmann, (2006) 35 ZGR, 783 et seq; Kieninger, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt (2002); Klöhn, ‘Supranationale Rechtsformen und vertikaler Wettbewerb der Gesetzgeber im europäischen Gesellschaftsrecht Plädoyer für ein marktimitierendes Rechtsformangebot der EU’ Rabels Zeitschrift für ausländisches und internationales Privatrecht (RabelsZ) 2012 (76), 276. 15 For a critical approach see Stürner, Markt und Wettbewerb über alles? Gesellschaft und Recht im Fokus neoliberaler Marktideologie (2007). 16 In economics, an externality is the cost or benefit that affects a third party who did not choose to incur that cost or benefit. Externalities often occur when the production or consumption of a product or service’s private price equilibrium cannot reflect the true costs or benefits of that product or service for society as a whole. This causes the externality competitive equilibrium to not be a Pareto optimality. 17 As to non-adjusting creditors see Bebchuk, ‘Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law’, 105 (1992) Harvard Law Review (Harv. L. Rev.) 1437, 1489; Kieninger, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt (2002), 71; especially addressing the ‘non-adjusting creditors’ need for protection Eidenmüller, ‘Rechtsmissbrauch im Europäischen Insolvenzrecht’ Zeitschrift für Insolvenzrecht (KTS) 2009, 137, 141 with reference to Bebchuk and Fried, ‘The Uneasy Case for the Priority of Secured Claims in Bankruptcy’, 105 (1996) The Yale Law Journal 857, 882 et seq; Bebchuk and Fried, ‘The Uneasy Case for the Priority of Secured Claims in Bankruptcy: Further Thoughts and a Reply to Critics’, 82 (1997) Cornell Law Review 1279, 1295 et seq; ferner Eidenmüller, ‘Recht als Produkt’ JZ 2009, 641, 649 et seq; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 450.

Peter Kindler

9

Introduction 2. The purpose of corporate law In fact, the interrelations are more complex. The competing regulatory philosophies rest on two differing theories of the very purpose of corporate law; they are referred to here as the freedom to contract theory and the state regulatory policy theory. The former understands the law, simply put, as a model provided in order to simplify privately negotiated agreements and the latter understands the law as the governmental specification of a regulatory framework which can neither be waived nor opted out of. The latter is the tradition followed by Continental European corporate law and core elements of its regulatory framework will be the subject of the following discussion. 11 The Anglo-American inspired standard work on comparative corporate law, ‘The Anatomy of Corporate Law’, summarises the freedom to contract theory with memorable clarity and presents it otherwise as a significant explanatory model with global application: ‘… the defining elements of the corporate form could in theory be established simply by contract … Corporate law … offers a standard form contract that the parties can adopt, at their option ... it simplifies contracting among the parties involved.’18 12 According to this approach, the corporation is therefore a ‘nexus of contracts’ which the shareholders can design entirely on their own; the law is a model agreement which the parties may use at their discretion in order to simplify the organisational task which they otherwise perform on their own.19 This also means that the participants can take all necessary precautions to protect their own interests in order to allocate the economic risks in the manner desired and/or accepted by them and/or hedge them with risk premiums, to guarantee their rights of involvement and control,20 to exercise them in their own interests and it means that the law merely offers non-binding proposals for all of these issues. According to another publication, the assumption is ‘that no regulation should be proposed if market solutions seem available’.21 13 Admittedly the theory underlying this premise is on the whole more complex than is reflected in the excerpts quoted;22 and admittedly it does not ignore the existence of compulsory law. However, the existence of such compulsory law is again explained as acting to compensate for a feared ‘contracting failure’, i.e. a break down in the contract process. Standards such as accounting laws are seen as fulfilling a standardisation function, creating legal clarity through uniformity, or mandatory law is even claimed to increase private autonomous free choice and legal certainty at the same time, namely if a ‘broad range of alternative forms to choose from’ is offered. In such cases, the specific entity form is dispositive to a lesser extent. The sphere in which private autonomy may 10

18 Kraakman, Armour, Davies, Enriques, Hansmann, Hertig, Hopt, Hideki Kanda, Pargendler, Ringe and Rock, The Anatomy of Corporate Law (3rd edn, 2017), 19-20. 19 Easterbrook and Fischel, The Economic Structure of Corporate Law (1991); see Kindler, ‘Portale, Giuseppe B., Lezioni di Diritto Privato Comparato (Book review)’ Zeitschrift für vergleichende Rechtswissenschaft 2007 (106), 359. 20 Decades ago, at the height of the co-determination debate, this central idea likewise applied the primarily Anglo-American and legal-economics inspired criticism of employee co-determination rights in the supervisory board; cf G.H. Roth, ‘Qualität und Preis am Markt für Gesellschaftsformen’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (ZGR) 2005 (44), 348, 360. 21 Eidenmüller and Schön, The Law & Economics of Creditor Protection (2008). 22 Eisenberg, ‘The Conception That the Corporation Is a Nexus of Contracts, and the Dual Nature of the Firm’, 24 (1999) The Journal of Corporation Law 819, 823: ‘Nothing in the nexus-of-contracts conception requires a denial that there are mandatory corporate rules. After all, even real contracts are governed by a number of mandatory rules, such as the rules that concern consideration, unconscionability, and good faith.’; for further references regarding the American literature and the antagonism between ‘contractarians’ and ‘anticontractarians’, see Fleischer, ‘Gesetz und Vertrag als alternative Problemlösungsmodelle im Gesellschaftsrecht – Prolegomena zu einer Theorie gesellschaftsrechtlicher Regelsetzung’ ZHR 2004 (168), 673, 685.

10

Peter Kindler

Introduction be exercised is created by the breadth of the spectrum itself. This may likewise be further increased by the ability ‘to choose among different jurisdiction's laws’, i.e. the ability to choose among several legal systems.23 On the other hand, Continental European company laws also allow for autonomy in structure and choice of the legal form, namely the choice already provided for under national laws to choose between various forms of corporate entities – adopted much later by American law – which allow the standards set out in the respective statutes to be deviated from to various degrees. Of course, freedom to contract has a place here as well and accordingly national laws already provide for that variety of legal forms and structuring options which citizens may expect without the need to be enhanced by additional foreign legal forms at the shareholders’ disposal. On the contrary, the latter may represent an alien element within the Continental European system; then the efficiency of the market and/or private autonomy is met with great scepticism within this system which places comparatively greater importance in its company laws on the regulatory framework provided by mandatory law and its legal protective function. This is done with a claim to legitimacy that needs to stop without further ado in the face of European legal developments. Nevertheless, these countries want to, even if not voluntarily, defy international competition among legal systems – and they should as well – if they are convinced of the advantages of their respective legal frameworks. Then, if compared to the alternative models, the regulatory policy model is on balance, based on the standard of social efficiency, to use the modern jargon, taking all affected interests into account, it should have no problem holding its own in international competition. Once founders determine that they are better received based on higher degrees of creditor protection, these models should increase in acceptance. For example, founders may borrow funds more easily and on better terms thanks to better creditworthiness which in turn provides them with an advantage. In a joint initiative, Germany and France – likewise representing all of Continental Europe to certain degree and ‘in a nutshell’ – are marketing their ‘Roman-Germanic’ company law under the title: Continental Law – global, predictable, flexible, cost-effective.24 Amongst others, ‘the values of security, predictability and efficiency’, the range of ‘flexibility and entrepreneurial freedom of design in connection with legal and investment security for business partners, creditors and investors are emphasized as advantages ensured last but not least by the responsible role played by the civil law notary. 25 Nevertheless, Germany’s experience after five years of competing against the Limited (from Inspire Art in 2003 through the Unternehmergesellschaft [entrepreneurial company] in 2008 which marked the beginning of the decline of the ‘Germany based Kraakman, Armour, Davies et al, The Anatomy of Corporate Law (3rd edn, 2017), 23. On the topic of expanding the range of available legal entity forms by means of vertical regulatory competition with legal entity forms based on Community law such as the SPE: Bachmann, ‘Vertikaler Regulierungswettbewerb im Europäischen Gesellschaftsrecht’ in Erle, Goette, Kleindiek, Krieger, Priester, Schubel, Schwab, Teichmann and Witt (eds), Festschrift für Peter Hommelhoff zum 70. Geburtstag (2012), 21; Bachmann in Bachmann, Eidenmüller, Engert, Fleischer and Schön (eds), Regulating the Closed Corporation (2013), 201 et seq; ‘Supranationale Rechtsformen und vertikaler Wettbewerb der Gesetzgeber im europäischen Gesellschaftsrecht Plädoyer für ein marktimitierendes Rechtsformangebot der EU’ RabelsZ 2012 (76), 276; Fleischer, ‘Supranationale Gesellschaftsformen in der Europäischen Union’ ZHR 2010 (174), 413; Jung (ed), Supranationale Gesellschaftsformen im Typenwettbewerb (2011). 24 Brochure from the lawyers’ organisations of both countries under the auspices of both ministries of justice Berlin/Paris 2011. 25 Murray and Stürner, The Civil Law Notary – Neutral Lawyer for the Situation. A Comparative Study on Preventative Justice in Modern Societies (2010); Knieper, Eine ökonomische Analyse des Notariats (2010). 23

Peter Kindler

11

14

15

16

17

18

Introduction English Limited’)26 leads to the sobering conclusion that the founders’ interest in as comfortable a formation process as possible is the decisive factor. The market of legal systems and corporate forms is apparently not efficient enough such that all parameters of concern can be adequately taken into account.27 19 However, the critical debate needs to take place at a still deeper level. Ideally, the framework for a market needs to be created in such a manner so that market actors cannot pass along – i.e. ‘externalise’ – costs to uninvolved third parties (→ mn. 9). For this reason, proponents of Continental European regulatory policy rightly oppose having standards of creditor protection, employee protection, etc., which are seen as essential, being made subject to the discretion of the founder. Can Anglo-American law sensibly view this otherwise? An explanation of perhaps not all, but indeed many, inconsistencies may be found in the fact that although these countries make their company law subject to discretion, this applies by no means to the protective standards which they likewise have enacted and see as indispensable. Rather, many of these rules have been placed in other fields of law within their legal systems, i.e. given another ‘label’. For example, creditor protection is found in laws on insolvency, employment law protects the interests of employees, capital markets legislation provides in part for shareholder and creditor protection in the form of investor protection, etc., and at the same time eliminates freedom of choice with regard to conflict of laws rules. 28 In other cases, other forms of the defence instruments found in European domestic company law have developed as functional substitutes, such as administrative and criminal sanctions in the event of wrongdoing (e.g. wrongful trading under English law) rather than the preventative justice functions performed by civil law notaries and registry courts, 29 and in turn the preventative effect of personal disqualification attaches to such alternative forms.30 20 It was not by chance that the 2008 German small company reform [German Act to Modernise the Law on Private Limited Companies and Combat Abuses] took the first steps to shift creditor protection instruments traditionally rooted in company law – 26 As of 1 January 2020, only 5.862 German based Limiteds were registered in the German commercial register, see Kornblum, ‘Bundesweite Rechtstatsachen zum Unternehmens- und Gesellschaftsrecht (Stand 1.1.2020)’ GmbHR 2020 (111), 677, 678. The peak was reached by the end of 2006 with approx. 46.000 registrations, see Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th edn, 2017), § 7 margin no 69. 27 G.H. Roth, ‘Qualität und Preis am Markt für Gesellschaftsformen’ ZGR 2005 (44), 348. Regarding competition among legal systems in the field of company law in the EU: Kieninger, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt (2002); Heine, Regulierungswettbewerb im Gesellschaftsrecht (2003); Westermann, ‘Die GmbH in der nationalen und internationalen Konkurrenz der Rechtsformen’ GmbHR 2005 (96), 4; Schön, ‘Playing different games? Regulatory competition in tax and company law compared’, 42 (2005) Common Market Law Review 331; Röpke, Gläubigerschutzregime im europäischen Wettbewerb der Gesellschaftsrechte (2007); Fleischer, ‘Supranationale Gesellschaftsformen in der Europäischen Union’ ZHR 2010 (174), 385; Sachdeva, ‘Regulatory Competition in European Company Law’, 30 (2010) European Journal of Law and Economics 137; Bachmann in Bachmann et al. (eds), Regulating the Closed Corporation (2013), 201 et seq. 28 Regarding English creditor protection through insolvency laws, see e.g., Bachner in Lutter (ed), Das Kapital der Aktiengesellschaft in Europa (2006), 526. For purposes determining the COMI (Centre of main interests) for purposes of insolvency law, see Art 3 EIR; on cases of its arbitrary transfer from one Member State to another for the sake of ‘forum shopping’ see Case C-196/04, 12.09.2006, Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECLI:EU:C:2006:544; comments from Kindler, ‘Sitzverlegung und Insolvenzrecht’ IPRax 2006, 114; Case C-444/07, 21.01.2010, MG Probud Gdynia [2010] ECLI:EU: C:2010:24 = Zeitschrift für Wirtschaftsrecht (ZIP) 2010, 187; Case C-396/09, 20.10.2011, Interedil [2011] ECLI:EU:C:2011:671 = ZIP 2011, 2153. 29 Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 151 et seq (chapter on external control of the corporation). 30 England: Company Directors Disqualification Act 1986.

12

Peter Kindler

Introduction subordination of shareholder loans in case of corporate insolvency, directors’ obligation to file for insolvency etc.31 – to the Insolvency Code [Insolvenzordnung]. And one could easily toy with the idea of replacing the minimum capital requirements contained in the respective laws governing the public limited liability companies and the private limited company with a rule on commitment amounts for shareholders within insolvency laws in order to remove these requirements from the shareholders’ ability to choose among legal options.32 However, reclassifications within the legal system or re-labelling can hardly be the solution.33 This is entirely apart from the fact that the traditional systematic is not arbitrary but rather its elements are interrelated and coordinated and is assigned its own value to this extent. This in turn promotes transparency and therefore legal certainty, which ultimately has solidified to dogma. In truth, what is involved is the substance of the regulatory policy of the Continental 21 European system of legal protections, in particular for creditors and minority shareholders. In the international context, the ability to subject it to a critical review and to derive a claim to legitimacy based on this review, which not only wants to be taken into account in future European company law but which also refuses to permit discretionary waiver through an exchange of company statutes, must also be made clear. Nonetheless, the misgivings about a free choice of the law applicable to a com- 22 pany34 appear to resound with the CJEU itself when it makes their legal basis, the primary-law principle of freedom of establishment, expressly dependent upon actual establishment in the country of choice.35 In regard to further deregulation in secondary law based on the Anglo-American model, the European Commission noted ‘a lack of progress on some simplification initiatives’ in its December 201236 Action Plan and did not announce any substantive realignment for the continued development of company law but rather limited itself to a plan to create an overarching codification by means of 31 On the latter, see Roth and Altmeppen, ‘Introduction to § 64 margin no 2’ in GmbH-Gesetz: Kommentar (9th edn, 2019). 32 Regarding interfaces between corporate law and insolvency law, see the similarly entitled contribution by Kienle in Süß and Wachter (eds), Handbuch des internationalen GmbH-Rechts (3rd edn, 2016), 137; more comprehensive Kindler, ‘Die Abgrenzung von Gesellschafts- und Insolvenzstatut’, in Sonnenberger (ed), Vorschläge und Berichte zur Reform des europäischen und deutschen internationalen Gesellschaftsrechts (2007), 389 et seq. 33 Accord, Trenker, ‘Insolvenzanfechtung gesellschaftsrechtlicher Maßnahmen’ in Innsbrucker Schriften zum Unternehmensrecht, Vol. 1 (2012), 132. 34 Still expressed by the Advocate General in his opinion in the ‘Vale‘ matter, ECLI:EU:C:2012:440. 35 Case C-196/04, 12.09.2006, Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECLI:EU:C: 2006:544; Case C-378/10, 12.07.2012, Vale Epitesi kft. [2012] ECLI:EU:C:2012:440; Kindler, ‘Cadbury Schweppes: Eine Nachlese zum internationalen Gesellschaftsrecht’ IPRax 2010, 272, and also Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8 th edn, 2021), margin no 128; Roth, Vorgaben der Niederlassungsfreiheit für das Kapitalgesellschaftsrecht (2010), 12; G.H. Roth, ‘Das Ende der Briefkastengründung? Vale contra Centros‘ ZIP 2012, 1744; König and Bormann, ‘“Genuine Link” und freie Rechtsformwahl im Binnenmarkt’ NZG 2012 (15), 1241; Schopper and Skarics, ‘Grenzüberschreitende Umwandlungen nach der Entscheidung des EuGH in der Rs. VALE’ Österreichische Notariatszeitung 2012, 321. The European Commission also took the key passage of the Vale judgment, para. 34, into account in its Action Plan 2012 (→ mn. 152 et seq). 36 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Action plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies, Brussels, 12.12.2012, COM (2012) 740/2; for a survey see Bayer and Schmidt, ‘BB-Gesetzgebungsund Rechtsprechungsreport zum Europäischen Unternehmensrecht 2011/12’ Betriebs-Berater (BB) 2013 (68), 3, 12 et seq; Former Reflection Group on the Future of EU Company Law, ‘Response to the European Commission‘s Action Plan on Company Law and Corporate Governance’, 10 (2013) ECFR 304; Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 13 margin no 14.

Peter Kindler

13

Introduction ‘merging existing company law Directives’. As part this process, the intent is to eliminate inconsistencies to make the texts more ‘reader friendly’.

II. Leading Legal Systems in Continental Europe and their Influence on EU Company Law The regulatory approach – substantive protective standards for minority shareholders and creditors – worked out in I. as the true spirit of corporate law in continental Europe (para. 1 et seq.) has been given more emphasis in Continental European legal systems than in their English-American counterparts. ‘Shareholder value’ is at the fore of corporate law in the latter with less emphasis on protecting minority shareholders and third parties.37 Its influence on EU company law is very limited; examples are the true and fair value approach in the field of accounting (Art 4(3) and (4) Directive 2013/34/EU)38 and the ‘control concept’ in the law of groups of companies (→ mn. 111). 24 As to the leading company law jurisdictions, within the Latin legal tradition the focus can essentially be limited to France and Italy. France had significant influence on the Second Company Law Directive on Capital Maintenance 77/91/EEC (later replaced by Directive 2012/30/EU and ultimately incorporated in Directive 2017/1132/EU, Title I Chapter IV).39 The main goal of the Directive was to establish the concept of a fix minimum capital (‘intangibilité du capital’) for the public limited liability company at an EU level.40 France is the cradle of the modern law of public limited liability companies: The first statutory rules for the société anonyme (SA) in a purely private form may be found in the French Code de Commerce from 1807.41 Its roots reach back to the 17th century ordinances from Colbert governing trade on land and at sea. In the process, the SA descended from the pre-revolutionary (Ancien Régime) compagnies royales.42 25 Today, French corporate law may be found laid out in orderly fashion in the second book of the Nouveau Code de Commerce dated 18 September 2000 (CCom).43 The CCom consists of a statutory part (partie legislatif, Art L223-1 et seq. governing corporate law) and a corresponding part containing regulations (partie legislatif, Art L223-1 23

37 Modern Company Law – For a Competitive Economy – The Strategic Framework – A Consultation Document from the Company Law Review Steering Group, 2/1999, 35, 49 et seq; Hopt in Markesinis (ed), The Clifford Chance Millennium Lectures: The Coming Together of the Common Law and the Civil Law (2000), 105, 118 (German version in ZGR 2000 (39), 779 et seq); Mülbert, ‘Shareholder Value aus rechtlicher Sicht’ ZGR 1997 (36), 129 et seq; providing a summary Grundmann, Europäisches Gesellschaftsrecht (2nd edn, 2011), margin nos 461, 462. 38 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 9 no 2; COM(2000) 359 final. 39 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 5 no 7. 40 See Lutter, ‘Zur Europäisierung des deutschen Aktienrechts’ in Heldrich, Henrich and Sonnenberger (eds), Konflikt und Ordnung: Festschrift für Murad Ferid, Vol. 1 (1978), 599 et seq, 602. 41 The colonial corporations of the 17th century will not be considered here in their role as the first real forerunners of the public limited liability company whose example was the Dutch East-India Company of 1602. It was not formed by means of a contract but rather by an act of state which also governed its internal structure; for additional information see Raiser/Veil § 2 margin no 1. 42 Sonnenberger, Classen and Großerichter, Einführung in das französische Recht (4 th ed 2012), no 157. Spanish public limited liability company law likewise finds its roots in the 17th century, see Hierro Anibarro, El origen de la sociedad anonima en Espana (Madrid 1998). 43 For an introduction to French company law see Vicari and Schall, Company Laws of the EU (2020), 1; for a critical view of the new CCom, see Licari and Bauerreis, ‘Das neue französische Handelsgesetzbuch – ein kritischer Beitrag zur Methode der codification à droit constant’ Zeitschrift für Europäisches Privatrecht (ZEuP) 2004, 132 et seq; comprehensive overview in Sonnenberger, Classen and Großerichter, Einführung in das französische Recht (4th edn, 2012), no 145; Grundmann, Europäisches Gesellschaftsrecht (2nd edn, 2011), margin no 77; current statutory text at http://www.legifrance.gouv.fr/.

14

Peter Kindler

Introduction et seq. relating to corporate law) each of which employs its own numeration of articles. The CCom regulates the public limited liability company (société par actions44) and the – introduced in 1925 patterned after the German model –45 company with limited liability (société à responsabilité limitée) as separate legal entity forms. In addition, Arts 1832 to 1844-17 CC apply to all companies. Shareholders may choose from among two organisational models in the case of public limited liability companies: The classic, monistic model with an administrative board (conseil d’administration) and an executive officer (Arts L225-17 to L225-56 CCom) and the newer, dualistic model with a board of directors (directoire) and a supervisory board (conseil de surveillance) (Arts L225-57 to L225-93 CCom). What is striking is that corporate formation requires only the simple written form (Art 1835 cc), that is the agency maintaining the registry is solely responsible for reviewing formation. As explained, in addition to France as the parent legal system, Italy must be included 26 when establishing the group of Latin legal tradition countries with a significant influence on legal policy within the EU.46 The ingenuity of the civil law theory as well as that of the legislature is particularly impressive here. Commercial law originally developed based on the French model: The first Codice di Commercio of the just-founded Kingdom of Italy was enacted in 1865 and largely followed the Code de commerce of its previous occupying power, France.47 However, the introduction of the, like its French example, relatively undeveloped, pre-industrial Codice di commercio of 1865 immediately faced significant opposition from commercial circles in the Venetian provinces after their annexation (1866). The modern German codifications, amongst others the General German Commercial Code (ADHGB) after 1863, had been in force in these previously Austrian territories.48 Thereafter, the Codice di commercio was completely revised and re-enacted in 1882 (‘Codice Zanardelli’). Since that point, the influence of German commercial legislation and jurisprudence has dominated substantively. For example, plans to create separate legislation for corporate law were abandoned – subject to the influence of German commercial law jurisprudence. This grouping retained its placement in the first book. The concession system (→ mn. 29) was abolished as one of many innovations. Today, Italian corporate law is set out in the fifth book of the Codice civile (CC) 27 of 1942.49 The public limited liability company (società per azioni) and the company with limited liability (società a responsabilità limitata) – introduced in 1942 based on 44 In the alternative forms société anonyme, société en commandite par actions and société par actions simplifiée; for additional information see Sonnenberger, Classen and Großerichter, Einführung in das französische Recht (4th edn, 2012), no 157. 45 The reason for this was the need to offer mid-sized businesses a corporate form subject to personalisation. In fact, this was already available in the form of the ‘société par actions fermée’: as a public limited liability company with shares with limited transferability and rights of pre-emption. For additional information, see Hallstein, ‘Die Gesellschaft mit beschränkter Haftung in den Auslandsrechten, verglichen mit dem deutschen Recht’ RabelsZ 1938/39 (12), 341, 364 et seq. 46 On this and the subsequent issue, see Zweigert and Kötz, Einführung in die Rechtsvergleichung (3 rd edn, 1996), § 3 IV, 40. 47 Regarding the development of commercial and corporate law in Italy, see Kindler, Einführung in das italienische Recht (2nd edn 2008), § 8 margin nos 2 et seq; Kindler, Italienisches Handels- und Wirtschaftsrecht (2nd edn, 2014), § 4 marginal nos 1 et seq; Spada, Diritto commerciale, I, Parte generale: storia, lessico e istituti (2004); Ranieri, ‘Gesellschaftsrecht’ in Coing (ed), Handbuch der Quellen und Literatur der neueren europäischen Privatrechtsgeschichte, Vol. III/3 (1986), 3261 et seq. 48 Mazzarella, ‘Kingdom of Italy (1861-1946)’ in Löhnig and Wagner (eds), Das ADHGB von 1861 als gemeinsames Obligationenrecht in Mitteleuropa (2018), 305 et seq. 49 Regarding the unification of civil and commercial law in Italy, see Kindler, Einführung in das italienische Recht (2nd edn, 2008), § 8 margin no 6; texts of current Italian statutes at www.altalex.com; for an introduction to Italian company law see Vicari and Schall, Company Laws of the EU (2020), 427.

Peter Kindler

15

Introduction the German model –50 are at the founders’ disposal as two separate legal forms. Italian corporate law shows originality, amongst others, with its three options to choose from for the organisational structure of a public limited liability company51 and with the complete transfer of the substantive review function for corporate formations to the civil law notary (Art 2330 CC). 28 German law had significant influence on the First Company Law Directive on Disclosure 68/151/EEC (later replaced by Directive 2009/101EC and ultimately incorporated in Directive 2017/1132/EU, Title I Chapter I, Chapter II Section 2, Chapter III Section 1).52 It is primarily taken into consideration in the countries of the German legal tradition. The history of German public limited liability company law is virtually the story of protecting minority shareholders and third parties, especially creditors. In Germany, the starting point for a standardised law on public limited liability companies (Aktiengesellschaft, AG) was the 1861 General German Commercial Code (Allgemeines Deutsches Handelsgesetzbuch, ADHGB).53 29 In its original version, the ADHGB included a provision in Art 208 according to which a public limited liability company could only be formed with governmental approval (‘concession system’) but at the same time empowered state legislatures to waive this provision in Art 249. The authoritarian concession system was abolished by the public limited liability company law reform of 11 June 1870 and replaced by the liberal ‘system of normative conditions with compulsory registration’ (‘System der Normativbedingungen’) which is still in place today. Based on this system, a corporation attains legal personality – without any governmental approval – following satisfaction of the statutory conditions defined by company law and entry in the commercial register. 54 Lawmakers were aware of the associated potential for abuse from the outset: The fear that the abolition of the concession system and the transition to the system of normative conditions could trigger a ‘period of share-based fraud’ (‘Aktienschwindel’) had already been expressed in the explanatory statement to the public limited liability company law reform of 1870 – a fear that would prove itself true.55 A series of public limited liability companies were formed during the ‘Gründerzeit’ following the Franco-Prussian war (1870/71),56 a boom which ultimately collapsed leading to the loss of huge amounts of money invested by numerous savers (great stock market crash of 1873). 30 The regulatory intent of the public limited liability company law reform of 18 July 1884, enacted in reaction to these circumstances, was accordingly to codify important protective standards for shareholders by means of a tightening of the foundation requirements and the introduction of minority rights (special audit, assertion of claims 50 Hallstein, ‘Die Gesellschaft mit beschränkter Haftung in den Auslandsrechten, verglichen mit dem deutschen Recht’ RabelsZ 1938/39 (12), 341 et seq. 51 Kindler, ‘Entwicklungslinien des italienischen Gesellschaftsrechts seit Beginn dieses Jahrhunderts’ ZEuP 2012 (20), 72 et seq. 52 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 5 no 7. 53 On the historical development of public limited liability company law in Germany, see e.g., Habersack, ‘Einleitung’ in Münchner Kommentar zum Aktiengesetz (5th edn, 2019), margin no 12 et seq; Reich, ‘Die Entwicklung des deutschen Aktienrechts im 19. Jahrhundert’ Ius Commune II (1969), 239 et seq; for comprehensive treatment, see Bayer and Habersack (eds), Aktienrecht im Wandel, Vol 1 (2007); see also e.g. Kübler and Assmann, Gesellschaftsrecht (6th edn, 2006), § 2; for an introduction to German company law see Vicari and Schall, Company Laws of the EU (2020), 199. 54 Today Sections 38 AktG, 9 c GmbHG. 55 Habersack, ‘Einleitung’ in Münchner Kommentar zum Aktiengesetz (5th edn, 2019), margin no 16 et seq. 56 In Germany, as a consequence of the large influx of capital resulting from French war reparations from the Franco-Prussian War of 1870–1871, and the subsequent unification of Germany, there followed an economic boom, giving rise to the description of these years as the ‘founders’ years’.

16

Peter Kindler

Introduction for damages against board members). Furthermore, since the reform of 1884, German corporation law requires all public companies to have two boards: a management board called a Vorstand and a supervisory board called an Aufsichtsrat (two-tier-system). The shifting of the set of rules of public limited liability company law from the ADHBG to the newly-created Commercial Code (HGB) of 10 May 1897 did not include any substantive changes. The result of the 1884 reform measures was that the public limited liability compa- 31 ny was no longer suited to small enterprises with a modest number of shareholders. The private limited company (Gesellschaft mit beschränkter Haftung, GmbH) was developed in Germany in order to provide these enterprises with an appropriate legal form as well.57 The GmbH was designed as a small public limited liability company, took on however – primarily with respect to the principle of freedom to design company statutes as between shareholders (section 45 GmbHG [German Act on Private Limited Companies]) – important characteristics of commercial partnerships and accordingly comprised a hybrid entity.58 Since its enactment in 1892, the German GmbHG has served as a model for numerous corresponding legal forms in other countries, including Austria, Switzerland, France and Italy.59 The development of GmbH law was and is characterised by protection of the shareholders and of third parties who enter into a contractual obligation with the entity or who enter into some other form of legal transaction.60 In the realm of public limited liability company law, further reforms related 32 to shareholder and creditor protection were included in the emergency decrees of 19 September 1931 and 6 October 1931 (compulsory audit of the annual financial statements by an auditor; new layout for the annual financial statements; limitation on the acquisition of own shares; simplification of capital reductions). These rules were included in the new Public limited liability company Act of 30 January 1937 (AktG 1937) which, amongst others – in the spirit of the times – required that in the event of differences of opinion on the management board, the chairman had dictatorial powers and could make a decision in a matter even against the will of all other members of the board (‘Leadership Principle’). At the same time, an idea developed following the First World War related to the social obligation of an enterprise61 resulting from its economic significance found its way into the AktG 1937 in the form of the codification of an obligation on the part of the management board to manage the company in a manner ‘required for the overall benefit of people and Reich’ (Section 70 AktG 1937, public interest obligation). Following the Second World War, several co-determination laws effected further 33 intrusions into organisational structures. A first important step in this direction was 57 Cf Schubert in Lutter, Ulmer and Zöllner (eds), Festschrift 100 Jahre GmbH-Gesetz (1992), 1 et seq; Text of the GmbHG at www.bmjv.de (also available in English). On the ‘invention’ of the private limited liability company by the German legislator see Kindler ‘La s.r.l. tedesca (GmbH) a 125 anni dalla sua nascita’ Rivista di diritto societario 3 (2019), 540. 58 Raiser/Veil § 2 margin no 4. 59 Cf regarding an earlier report on the reception of the GmbH in various countries of the world Hallstein, ‘Die Gesellschaft mit beschränkter Haftung in den Auslandsrechten, verglichen mit dem deutschen Recht’ RabelsZ 1938/39 (12), 341 et seq. 60 Important protective standards (directors’ disqualification et al.) were introduced with the 2008 Act to Modernise the Law on Private Limited Companies and Combat Abuses (Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen); providing an overview Kindler, ‘Grundzüge des neuen Kapitalgesellschaftsrechts – Das Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG)’ Neue Juristische Wochenschrift (NJW) 2008, 3249 et seq. 61 Rathenau, Vom Aktienwesen (1918); Geiler, Die wirtschaftlichen Strukturwandlungen und die Reform des Aktienrechts (1927); Haussmann, Vom Aktienwesen und Aktienrecht (1928).

Peter Kindler

17

Introduction

34

35

36

37

38

the Allied Control Council Act No. 2 of 1946 with new rules on the establishment and the activities of works councils. One year later, in 1947, an Agreement between the Trust Administration of the Iron and Steel Companies in the British sector and the re-established Trade Unions brought parity co-determination on supervisory boards of companies operating in the iron and steel business. So, remarkably, it was the British who helped re-establishing co-determination on company boards in Germany. Today they find themselves among the most severe critics of that legislation. After the foundation of the Federal Republic of Germany in 1949, comprising the three industrial sectors mentioned, the Agreement of 1947 was confirmed by the 1951 Act on Co-Determination in the coal, steel and mining sector. The 1952 Works Constitution Act (introducing a 1/3 co-determination in companies with more than 500 employees, replaced by the law of 2004 on one-third-co-determinaton), the 1956 Supplementary Coal and Steel Co-Determination Act (applicable to certain holding companies) and, most important, the 1976 Co-Determination Act (introducing near parity co-determination at the board level in companies with more than 2000 employees). With its judgment of 1 march 1979, the German Constitutional court confirmed that the 1976 Co-Determination Act is not contrary to the right of property and the freedom of association, both guaranteed by the German constitution.62 In its 2017 ‘Erzberger’ preliminary ruling, the CJEU63 declared German codetermination law to be in compliance with EU law. It argues that, given ‘the absence of harmonisation or coordination measures at Union level’ in the field of workers’ collective representation rights on company boards, Member States have the right to ‘set the criteria for defining the scope of application of their legislation’. According to the CJEU, the German national law limiting such rights to workers employed in that country does not breach equal treatment or freedom of movement if the criteria set by the law ‘are objective and non-discriminatory’. A further ‘small reform’ to the laws governing public limited liability companies from 1959 was intended to simplify the acquisition of company shares for large segments of the population. This was to be accomplished via capital increases from the company’s reserves, the organisation of the income statement and by allowing companies to purchase own shares for purposes of distributing them to their employees (employee shares). On the other hand, the 1965 AktG was characterised by a strengthening of shareholder rights, the final elimination of the ‘leadership principle’ (→ mn. 32) and the realisation of three particular protective mechanisms: (1) increased influence on the part of shareholders and the annual general meeting, (2) improvement of disclosure and information rights on the part of the shareholders and (3) regulation of the power of control and responsibility for the protection of minority shareholders within a corporate group.64 62 Bundesverfassungsgericht (German Constitutional Court), 01.03.1979 – 1 BvR 532/77, 1 BvR 533/77, 1 BvR 419/78, 1 BvL 21/78, NJW 1979, 705, [1979] E.C.C. 324 (English version in Westlaw); English summary in 28 (1980) The American Journal of Comparative Law 88; for details see Birk, ‘Codetermination in Germany’, 4 (1980) Comparative Law Yearbook 69; Lutter, ‘The German System of Worker Participation in Practice’, 1982 Journal of Business Law 154; Wiedemann, ‘Codetermination by Workers in German Enterprises’, 28 (1980) The American Journal of Comparative Law 79. For further details see Kindler, ‘La s.p.a. nell’esperienza tedesca: I tratti essenziali della Aktiengesellschaft‘ in Cagnasso and Panzani (eds), Le nuove s.p.a. (2013), 415, 450 et seq. 63 Case C-566/15, 18.07.2017, Erzberger v TUI AG [2017] ECLI:EU:C:2017:562; for details see GernerBeuerle, Mucciarelli, Schuster and Siems, The Private International Law of Companies in Europe (2019), 96 et seq.

18

Peter Kindler

Introduction In the interim, considerable shortcomings in the area of the private company 39 had become evident, primarily due to low capitalisation on the part of many private limited companies and the resulting risk of insolvency. The ‘small’ GmbH reform of 1980 confronted this issue by increasing minimum share capital, tightening formation requirements and reducing the priority of repayment claims related to shareholder loans in the event of insolvency. The legal position of the shareholders was strengthened by the introduction of a mandatory right to information. Additional important reforms followed as part of the previously-mentioned Act to Modernise the Law on Private Limited Companies and Combat Abuses dated 23 October 2008 (‘MoMiG’), → mn. 20. They primarily resulted in defining further circumstances which preclude the appointment as board member of a GmbH (section 6(2) GmbHG) and directors’ liability in the case of breaches of the capital commitment requirements (section 30(1) read with section 43(2) first sentence GmbHG) and in the case of a crisis on the part of a GmbH (section 64 third sentence GmbHG, liability for bringing about insolvency).65 Further developments in the law of public limited liability companies after 1965 40 need not be set out here in detail. From an organisational standpoint, it is primarily characteristic that the German public limited liability company continues to employ a dualistic management structure (management board and supervisory board) even though the monistic ‘board system’ likely prevails on an international level and numerous legal systems have introduced shareholder options between various organisational structure models.

III. European Company Law and its Neighbouring Areas 1. Four key issues of protective standards in EU and domestic company law The need for protection taken into consideration in a legal system relates to standard- 41 ised interests and therefore to categories of persons who – under company law – have an interest in or are affected by a company or its entrepreneurial activities. These corporate constituencies primarily involve creditors, minority shareholders and/or partners already referred to in the EU consultation paper (→ mn. 6), including investors seen as future shareholders or creditors as well as employees. This must be distinguished from the categories of defence instruments some of which relate to specific persons to be protected as well as to several categories or groups who (are supposed to) benefit them. These four categories represent the core elements of Continental European company law: – –

capital structure (→ mn. 42 et seq.); organisational structure (including the involvement of employees) (→ mn. 44 et seq.); protection of minority interests (→ mn. 55 et seq.); external control (→ mn. 58 et seq.).

– –

a) Capital structure First and foremost, the capital structure of the corporations is one of the central ele- 42 ments of EU Company Law (see arts 44 et seq. Company Law Directive 2017/1132/EU), Text of the AktG 1965 at www.bmjv.de (also available in English). For details see Bachner, Creditor Protection in Private Companies Anglo-German Perspectives for a European Legal Discourse (2009), 15 et seq. 64

65

Peter Kindler

19

Introduction although restricted to the public liability company (Aktiengesellschaft, société anonyme). Differences of opinion are at their greatest in this regard and this is perhaps also the case because it may be illustrated in figures; they have been the subject of discussion for a long time and the controversy has created the greatest stir within legal academic and policy circles. A common starting point may be expressed here as well: The capital structure of a corporation is important for protecting creditors and at the same time for the individual shareholder in relation to his or her co-shareholders and potential investors.66 However, the primary focus of Anglo-American law is on capital maintenance, whereas the focus is conventionally on raising capital especially in the German legal tradition and here, pars pro toto, has made a specific figure, the required minimum capital as in Art 45(1) Directive 2017/1132/EU67, the lynchpin, a feature that is met with rejection to incomprehension in foreign legal systems. This is also the reason for efforts to reform the 1976 Capital Directive (later codified in Arts 44 et seq. Company Law Directive 2017/1132/EU) in this respect for the public limited liability companies, primarily driven by the Anglo-American camp. 43 By contrast, on the Anglo-American side, raising capital is a topic where its theoretical base, the freedom of contract model (→ mn. 4), must be clearly illustrated and criticized. Then it is here that the idea that not only shareholders but also every creditor can and must protect its own interests by making the relevant contractual arrangements unmistakeably meets the reality of the parties’ limited rationality, the dynamics of long-term legal relationships, imbalances in the parties’ bargaining power, information deficits, transaction costs, etc. Indeed, that is the fundamental problem of the theory of private contractual autonomy. Behavioural theory and risk research have similarly shown the limits on the validity of the private self-protection idea advanced by this theory.68 It has already been pointed out that, as far as non-adjusting creditors are concerned, self-protection is mere fiction (→ mn. 9).69

66 Other priorities related to creditor protection: Schön in Bachmann et al. (eds), Regulating the Closed Corporation (2013), 123, 155. 67 Art 45(1) Directive 2017/1132/EU (Minimum capital): ‘The laws of the Member States shall require that, in order for a company to be incorporated or obtain authorisation to commence business, a minimum capital shall be subscribed the amount of which shall be not less than EUR 25 000’; see Lutter, ‘Legal Capital of public companies in Europe – Executive summary of considerations by the expert group on Legal Capital in Europe’ in Lutter (ed), Legal Capital in Europe, ECFR Special Vol. 1 (2006), 1 et seq. 68 Williamson, ‘Transaction-Cost Economics: The Governance of Contractual Relations’, 22 (1979) Journal of Law and Economics 233; Fleischer and Zimmer, Beitrag der Verhaltensökonomie zum Handelsund Wirtschaftsrecht (2011); Weber, Behavioral Finance (1999); both aspects are addressed in further detail by Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 27 et seq (chapter on capital structure). 69 As to non-adjusting creditors see Bebchuk, ‘Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law’, 105 (1992) Harv. L. Rev. 1437, 1489; Kieninger, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt (2002), 71; especially addressing the ‘non-adjusting creditors‘‘ need for protection Eidenmüller, ‘Rechtsmissbrauch im Europäischen Insolvenzrecht’ KTS 2009, 137, 141 with reference to Bebchuk and Fried, ‘The Uneasy Case for the Priority of Secured Claims in Bankruptcy’, 105 (1996) The Yale Law Journal 857, 882 et seq; Bebchuk and Fried, ‘The Uneasy Case for the Priority of Secured Claims in Bankruptcy: Further Thoughts and a Reply to Critics’, 82 (1997) Cornell Law Review 1279, 1295 et seq; ferner Eidenmüller, ‘Recht als Produkt’ JZ 2009, 641, 649 et seq; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8 th edn, 2021), margin no 450.

20

Peter Kindler

Introduction b) Organisational structure (including the involvement of employees) (i) Supervision of the management With respect to the second topic, organisational structure (not yet tackled by EU company law), the first underlying problem, well known as the principal-agent conflict, is fundamentally recognisable in all legal systems. Due to diverging opinions as to employees’ participation (the second underlying problem, → mn. 48 et seq.), the EU has not yet enacted any directives on the structure of the company. The last draft of a Fifth Directive on Company Law dates back to 1991,70 and the European Parliament has recommended, without success, its adoption.71 In this field, in Continental Europe there is likely consensus that a two-track solution is expedient in order to establish as close a harmonisation of interests as possible. This could be accomplished through suitable incentives in conjunction with as effective control over agents as is possible in order to prevent opportunism and indolence. The paths first part when implementing a promising organisational structure, a fact which is also the case within Continental European legal systems. Germany and Austria have devised a dualistic structure which has the executive body supervised by a strong and independent control body, the supervisory board – both in the case of the public limited liability companies and the large private limited company. Several other countries such as Italy have adopted the dualistic system as an option (→ mn. 149),72 and also the Council Regulation (EC) No 2157/2001 on the Statute for a European company (SE) leaves the choice between the monistic and the dualistic systems to the shareholders. However, the fact that control of company management cannot solely be left to the shareholders as a whole has also been recognised in the alternative, monistic system where hopes have been placed on independent members within the governing bodies and/or boards. However, the independence of the supervisory board is also one of the principal problems of corporate governance within the German legal system; the conflicting interests of management and shareholders are borne in mind in Germany and the independence of management remains an issue.73 Within the Anglo-American sphere of influence, independence of the majority shareholder is also desired in the interests of the minority shareholders. Within its own monistic system, this goal is seen as being better insured through independent directors on the board rather than by a supervisory board.74

70 Third amendment to the proposal for a Fifth Council Directive based on Article 54 of the EEC Treaty concerning the structure of public limited companies and the powers and obligations of their organs of 20 November 1991, [1991]OJ C 321/9; see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 62. 71 European Parliament resolution of 14 June 2012 on the future of European company law (2012/2669(RSP)), P7_TA(2012)0259, [2013]OJ C 332/E 78; see Hopt, ‘Europäisches Gesellschaftsrecht im Lichte des Aktionsplans der Europäischen Kommission vom Dezember 2012’ ZGR 2013 (42), 165; as to the structure of the board of directors in several European jurisdictions see table 4.3. in Gerner-Beuerle, Mucciarelli, Schuster and Siems, The Private International Law of Companies in Europe (2019), 80 et seq; for an early analysis Westermann, ‘Tendenzen der gegenwärtigen Mitbestimmungsdiskussion in der Europäischen Gemeinschaft’ RabelsZ 1984 (48), 123 et seq. 72 Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 71 et seq. 73 Roth and Wörle, ‘Die Unabhängigkeit des Aufsichtsrats – Recht und Wirklichkeit’ ZGR 2004 (43), 565 et seq. 74 Kraakman, Armour, Davies et al, The Anatomy of Corporate Law (3 rd edn, 2017), 65, 95, 311.

Peter Kindler

21

44

45

46

47

Introduction (ii) Employee participation at the board level Over the last decades, the involvement of employees and especially employee participation in company organs such as the supervisory board has proven to be one of the most political and sensitive subjects of European company law. It has been a barrier to directives on the structure of the company (→ mn. 44) as well as to the creation of European legal forms (such as the European Company) and to the establishment of directives in the field of cross-border corporate operations (conversion, mergers and divisions).75 49 In a European company law context, the overarching concept ‘involvement of employees’ does not necessarily affect the organisational structure of the company; it is defined as any mechanism, including information, consultation and participation, through which employees’ representatives may exercise influence on decisions to be taken within the company (Art 2(h) SE Directive76). Employee participation (at the board level) is defined (Art 2(k) SE Directive) as the influence of employee representatives in the affairs of a company by way of 48

–

the right to elect or appoint some of the members of the company’s supervisory board (in a two-tier structure) or administrative body (in a one-tier governance model), or the right to recommend and/ or oppose the appointment of some or all of the members of these organs.

–

Employee participation thus has a specific meaning in EU company law and should be distinguished from softer forms of co-determination comprising rights of employees to information and to consultation which belong to the branch of labour law.77 51 A deeper comparative analysis78 shows that between the Member States that provide for employee participation in the private sector,79 there is a wide variety of systems. There are remarkable differences as to the thresholds, the lowest being 25 (Sweden) up to 1000 (Luxembourg). The number of employee representatives in the management board (one-tier board structure) or supervisory board (two-tier board) ranges from one single member (Croatia) to half of the members (e.g. Germany in companies with more than 2000 employees). In most of the Member States the participation rights are limited to one third of the members of the board (e.g. Austria, Denmark, France, Hungary, Luxembourg). In some systems employees or their representatives have the right to appoint members to the board (e.g. Germany) while other Member States grant the right to recommend candidates for appointment. But there are also Member States without any system of employee participation at all (Belgium, Bulgaria, Cyprus, Estonia, Italy, Latvia, Lithuania, Malta and the United Kingdom).80 50

Roest, ‘Corporate Mobility – The Involvement of Employees’, 16 (2019) ECFR 74, 76. Directive 2001/68/EC with regard to the involvement of employees (SE Directive). 77 Roest, ‘Corporate Mobility – The Involvement of Employees’, 16 (2019) ECFR 74, 77. 78 For such an analysis see the overview of the various employee participation systems included in the table in Annex 10 to the Impact Assessment published in SWD(2018) 141 (190-193) together with the Proposal for a directive of the European Parliament and of the Council amending Directive 2017/1132/EU as regards cross-border conversions, mergers and divisions, COM (2018)241 final; Stollt and Wolters, Worker involvement in the European Company (SE). A handbook for practitioners (2011), 69-85, see table 7 at 84–85 and in more detail: Gerven (ed), Cross-Border Mergers in Europe, Vol. I & II (2010), national reports. 79 In some Member States, employee participation is limited to state-owned companies (e.g. Greece, Ireland, Portugal and Spain). 80 Roest, ‘Corporate Mobility – The Involvement of Employees’ 16 (2019) ECFR 74, 78. 75

76

22

Peter Kindler

Introduction At EU level, the first milestone in the harmonisation of involvement of employees 52 – but without any impact on the organisational structure of the company – was the adoption of the European Works Council Directive (EWC Directive) in 1994 81 a recast of which was adopted in 2009.82 It does not provide for any board-level representation of employees but merely aims to improve the right of employees to information and to consultation in transnational companies and groups; national laws are too different in this regard (→ mn. 51). Another step forward in terms of involvement of employees was made with Council 53 Regulation (EC) No 2157/2001 on the Statute for a European company (SE). For the first time, EU company law addressed the board-level representation of employees, albeit not by defining substantive rules but by protecting national standards applicable to the companies involved in the formation of an SE. While the Regulation for the European Company (SE Regulation) contains provisions on the formation and the internal structure of the SE, the accompanying SE Directive83 regulates the involvement of employees. Following the blueprint of the EWC Directive (→ mn. 52), the management of the companies participating in the formation of the European Company will start negotiations in order to reach an agreement on the involvement of employees. Such an agreement should contain provisions on employee participation rights if such board-level employee representation exists in one of the participating companies.84 The creation of the SE and the agreement on employee participation (Art 12(2) and 54 (3) of the SE Regulation) paved the way for the European Cooperative (2003)85 and for adoption of the Cross-border Merger Directive (2005/56/EC).86 Because the Directive contains no substantive provisions on information and/or consultation of employees affected by the envisaged merger, national co-determination rights, if existing, apply. Art 16 of the Directive (subsequently codified in Art 133 Directive 2017/1132/EU as amended by Directive 2019/2121/EU on corporate mobility) does provide for the protection of existing board-level participation rights under national law. Following this example, in case of cross-border conversions and divisions, Directive 2019/2121/EU on corporate mobility (inserting Arts 86 l, 160 l Directive 2017/1132/EU) protects board-level participation rights existing under national law.87 c) Protection of minority interests As regards the protection of minority interests, again no relevant EU legislation has 55 been enacted.88 This situation is hardly satisfying: Although there is a fundamental need for majority decision-making by the shareholders, one cannot turn a blind eye to the 81 Directive 94/45/EC on the establishment of a European Works Council (EWC) or a procedure in Community-scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees; for details see Roest, ‘Corporate Mobility – The Involvement of Employees’ 16 (2019) ECFR 74, 78 et seq. 82 Directive 2009/38/EC on the establishment of a European Works Council or a procedure in Community-scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees. 83 Directive 2001/68/EC with regard to the involvement of employees (SE Directive). 84 For details see Roest, ‘Corporate Mobility – The Involvement of Employees’ 16 (2019) ECFR 74, 82 et seq. 85 Regulation 1435/2003/EC on the Statute for a European Cooperative Society (SCE) accompanied by Directive 2003/72/EC of 22 July 2003 supplementing the Statute for a European Cooperative with regard to the involvement of employees; → mn. 172. 86 Directive 2005/56/EC on cross-border mergers of limited liability companies (codified in Arts 118 et seq Directive 2017/1132/EU); → mn. 102. fn. 145. 87 For details see Roest, ‘Corporate Mobility – The Involvement of Employees’ 16 (2019) ECFR 74, 88 et seq.

Peter Kindler

23

Introduction resulting threat to the interests of the minority (taken into account, inter alia, by Art 50(2)(g) TFEU). This is on blatant display in cases where the voting majority pursues its own interests at the expense of the remaining shareholders, but even in the case of day-to-day conflicts of interest as well, for example differences in financial strength or business policy conflicts such as different attitudes toward risk. An entire bundle of various possible solutions employed in a variety of combinations and with divergent emphasis are seen as providing a remedy. What is involved here are formal minority rights on the one hand, starting with graduated majority requirements for especially important matters such as the modification of the articles. Such minority rights progress to guaranteeing participation, as in ‘outvoted but not ignored’, through to guaranteeing access to information which in turn is intended to assist in making appropriate decisions (which is of little use to the outvoted minority) but which also effects transparency and supervision. 56 The supervision issue leads to the other side of the coin: the substantive protection of the minority with its focus on providing a substantive review of the decisions of the majority which the minority can also assert before a court by way of litigation.89 The assessment is likewise universally accepted here as well that, at a minimum, obligations on the part of the majority for loyalty and consideration should be enforced through substantive controls, however at the same time it is accepted that there is no right to challenge genuine business decisions. 57 Such a consensus on fundamental issues would be remarkable because it involves the relationship amongst shareholders and thereby, from the perspective of the AngloAmerican legal system as well, genuine corporate law,90 the design of which could be left to the parties in precisely this instance based on the freedom of contract theory (→ mn. 4). Of course, the fundamental objections to this approach, which have already been alluded to above under the heading of limited rationality (para. 43), become especially clear in this instance in the form of a typical problem caused by excessive optimism and/or an underestimation of risks.91 However, in fact the Anglo-American system frequently leaves formal minority rights to the discretion of the parties as a matter of law92 and substantive protective standards are primarily implemented by means of judicial decisions based on general clauses. 93 Accordingly, the Anglo-American 88 On domestic law in this field see Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 113 et seq. 89 For a German and EU law examples see Case C-4295, 19.11.1996, Siemens v. Henry Nold [1996] ECLI:EU:C:1996:444; Kindler, ‘Die sachliche Rechtfertigung des aktienrechtlichen Bezugsrechtsausschlusses im Lichte der Zweiten Gesellschaftsrechtlichen Richtlinie der Europäischen Gemeinschaft’ ZHR 1994 (158), 339; for Italy see Cass., 26 ottobre 1995, n. 11151, Giurisprudenza commerciale, II 69 (1996), 329 with comments from Jaeger, Angelici, Gambino, Costi and Corsi, ‘Good faith as a limit to majority rights in company law’, for further references see Kindler, ‘Entwicklungslinien des italienischen Gesellschaftsrechts seit Beginn dieses Jahrhunderts’, ZEuP 2012 (20), 72, 85. 90 However, in the U.S., capital markets law provides stimulus for important elements of voting rights and their exercise, e.g. with regard to proxy voting. 91 Accord on this point, Fleischer in Bachmann, Eidenmüller, Engert, Fleischer and Schön (eds), Regulating the Closed Corporation (2013), 35 et seq, 50 et seq, 73. 92 On the issue of minority representation in the administrative and/or supervisory board which is placed very much at the fore, see Kraakman, Armour, Davies et al, The Anatomy of Corporate Law (3rd edn, 2017), 90 et seq, 105 et seq; other focus on the topic of participation rights under English law Arzt-Mergemeier, Der gesellschaftsrechtliche Minderheitenschutz in Deutschland, England und Frankreich (2006), 109. Similarly on the topic of subscription rights, which is a significant instrument for protecting minority participation rights in the U.S., largely dispositive, see Fleischer in Bachmann, Eidenmüller, Engert, Fleischer and Schön (eds), Regulating the Closed Corporation (2013), 35; for a comparison to Continental Europe see Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 133 et seq.

24

Peter Kindler

Introduction system may also be seen here as expressing a larger degree of restraint in this area; however the effectiveness of minority protection – and that is the contradiction which appears surprising at first glance – receives better notes in this system. d) External control External control as the fourth of the general topics of protective legislation might 58 seem the most ‘exotic’ one. 94 On the one hand, this has to do with the legacy of the Latin notary which may be found in the corporate laws of most Continental European countries (→ mn. 17; with the exception of Scandinavia),95 and on the other with the fundamental attitude toward preventative control on the part of public authorities. Although the Company Law Directive 2017/1132/EU prescribes, for all of the EU, either preventative administrative control or official certification for the formation of a corporation (Art 10), for cross-border conversions (Arts 86 m, 86 o) and for mergers and divisions (Arts 102, 148), it nevertheless allows not only the waiver of the latter, but also apparently permits various degrees of strictness related to monitoring mandatory registrations in registries (Art 16 of the Company Law Directive 2017/1132/EU). For example, in the case of the (private and public) limited liability company which 59 has not been properly formed and registered, the German Registergericht [registry court] shall refuse to make the entry in the Commercial Register. This protective standard also applies where contributions in kind have been over-valued to a not insignificant degree.96 On the other hand, the English Companies House expressly states with regard to the information it publishes: ‘We do not have the statutory power or capability to verify the accuracy of the information that companies send to us. We accept all information that companies deliver to us in good faith and place it on the public record.’97

By contrast, Germany, Austria and other Continental European Countries require 60 notarial certification in addition to review of entries in the registry and accordingly expose themselves time and again to the criticism that they make business formations unnecessarily expensive. This has been disproved by empirical studies98 and it is likely more accurate to speak of an interest-driven struggle for the competence to control corporate formations which is not only being waged between different professional groups within the legal field in a given country, but also – which is not always recognised – to increase the attractiveness of certain counties and their professionals for formations abroad.99 93 Accord Arzt-Mergemeier, Der gesellschaftsrechtliche Minderheitenschutz in Deutschland, England und Frankreich (2006), 170 et seq, 233 for England, in principle Hofmann, Der Minderheitsschutz im Gesellschaftsrecht (2010), for the U.S. However, a general right to avoid resolutions is unknown in England, Fleischer in Bachmann, Eidenmüller, Engert, Fleischer and Schön (eds), Regulating the Closed Corporation (2013), 57. 94 On external control mechanisms see Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 151 et seq. 95 For details see Murray and Stürner, The Civil Law Notary – Neutral Lawyer for the Situation. A Comparative Study on Preventative Justice in Modern Societies (2010); among the Latin countries, France fundamentally dispenses with certification by a notary. As an alternative, Portugal now allows verified signatures to suffice. 96 Section 9 c of the German law pertaining to private limited liability companies; Section 38 of the German law pertaining to public limited liability companies. 97 Disclaimer on the homepage of the Companies House; see also Bock, ‘Company Hijacking im Vereinigten Königreich’ ZIP 2011, 2449. 98 Knieper, Eine ökonomische Analyse des Notariats (2010); Murray and Stürner, The Civil Law Notary – Neutral Lawyer for the Situation. A Comparative Study on Preventative Justice in Modern Societies (2010).

Peter Kindler

25

Introduction Last but not least, this also reflects the antithesis of the two fundamental theories: A legal system obligated by governmental regulatory policy will also gladly place compliance with its guidelines under the responsibility of impartial public institutions; the contract theory reflects the contradictory principle of mutual negotiation resting with members of the legal profession where each party is advised by its own counsel. The validity and reliability of entries in a company register are in any event strongly favoured if a court and/or a civil law notary is responsible for the substantive accuracy of the entries.100 Inasmuch as this is not a part of the English system, a more complete picture must take into account the fact that the U.S. has long prescribed a regulatory agency in the form of the Securities and Exchange Commission which also intervenes to an extensive degree in corporate law in order to exercise a preventative function from the capital markets side. 62 The third external control institution, the auditor, presents yet another picture. 101 On the one hand, its control function is standardised to a large degree via accounting guidelines and, on the other, other economic nations outside of the EU have realised such a comparable standard102 that Europe need not shy from a comparison (see Directive on Statutory Audits (2006/43/EC)). 61

2. Capital markets law 63

As to the neighbouring areas, European capital markets law103 forms an important part as far as listed companies are concerned. It contains a considerable amount of law on primary markets – e.g. information and rules on admission that apply when securities – shares inter alia – are issued, i.e. placed on a market for the first (‘primary’) time. The range of duties – information rules and in this case also the rules on admission – is very extensively harmonised if the securities are (to be) admitted to official listing on a stock exchange.104 Besides, capital markets law deals with secondary markets. Within the NOMOS commentaries on International and European Business Law, capital markets law is dealt with in the volume ‘European Financial Services Law’ (2019, eds Lehmann and Kumpan).

3. Insolvency law 64

Insolvency law largely interferes with company law, e.g. as regards directors’ duties in the crisis of the company. This has become clear in the light of the CJEU case ‘Kornhaas’105 and the Directive 2019/1023/EU on preventive restructuring frameworks.106 Pursuant to Art 19 of that Directive (‘Duties of directors where there is a likelihood of insolvency’), Member States shall ensure that, where there is a likelihood of insolvency, directors have due regard the interests of creditors, equity holders and other stakeholders. Furthermore, insolvency law deals with the insolvency of groups of companies (Art 56 et seq. EIR).107 99 See Triebel, ‘Der Kampf ums anwendbare Recht’ in Anwaltsblatt 2008, 305; Roth, Vorgaben der Niederlassungsfreiheit für das Kapitalgesellschaftsrecht (2010), 35. 100 Accord in Lutter (ed), Das Kapital der Aktiengesellschaft in Europa (2006), 686. 101 Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 151 et seq. 102 Regarding audits of GmbHs under Swiss law, Arts 818 with 727 et seq Obligationenrecht and Schindler and Töndury, ‘ex Switzerland’ in Süß and Wachter, Handbuch des internationalen GmbH-Rechts (3rd edn, 2016), margin no 152 et seq. 103 Veil, European capital markets law (3rd edn, 2021); Lamandini and Ramos Muñoz, EU Financial Law (2016). 104 Grundmann, European Company Law (2007), margin no 5.

26

Peter Kindler

Introduction Insolvency law also interferes with shareholders’ rights vis-á-vis the company, 65 e.g. as regards restructuring via a debt-equity-swap contained in a restructuring plan (Section 217 German Insolvency Code) or as regards the exclusion of voting rights on the grounds of Art 9(3)(a) Directive 2019/1023/EU on preventive restructuring frameworks etc.108

4. Company conflicts of laws (‘international company law’) and fundamental freedoms European company law does not comprise an instrument harmonising (companies’) 66 conflicts of laws. The Rome I Regulation on the law applicable to contractual obligations (593/2008) explicitly excludes company statutes from its scope (Art 1(2)(e). The question of which national company law applies is therefore decided by national choiceof-law rules109 interpreted in the light of general principles derived from EU Treaty law as far as intra-EU situations are concerned (→ mn. 2). In this regard, two main PIL approaches are used by the Member States in order to determine the law applicable to companies: the incorporation doctrine (inspired by the idea of party autonomy for company founders) and the real seat doctrine (aiming at the application of the protective standards of the country where most of the company’s creditors reside). 110 In addition, in some jurisdictions renvoi has to be taken into account.

105 Case C-594/14, 10.12.2015, Kornhaas [2015] ECLI:EU:C:2015:806, also in Revue critique de droit international privé 105 (2016), 544 commented by Nabet; Europäische Zeitschrift für Wirtschaftsrecht (EuZW) 2016, 155 with an essay of Kindler, 136; for a comment see Schall, ‘Das Kornhaas-Urteil gibt grünes Licht für die Anwendung des § 64 GmbHG auf eine Limited mit Sitz in Deutschland – Alles klar dank EuGH!’ ZIP 2016, 289; Weller and Hübner, ‘Kornhaas und seine Auswirkungen auf insolvenznahe Haftungsinstrumente’ in Kayser, Smid and Riedemann (eds), Nichts ist beständiger als der Wandel: Festschrift für Klaus Pannen zum 65. Geburtstag (2017), 259; Mock in Fleischer and Thiessen (eds), Gesellschaftsrechtsgeschichten (2018), 729 et seq. 106 Directive 2019/1023/EU on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt; on directors’ duties see Korch, ‘Sanierungsverantwortung von Geschäftsleitern – Krisenpflichten im Lichte des Art 19 der Restrukturierungsrichtlinie’ ZGR 2019 (48), 1050; Bayer and Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/19 – Teil II’ BB 2019 (74), 2178, 2185. 107 On the relationship between company law and insolvency law see Kindler, ‘Internationales Insolvenzrecht’ in Kindler, Nachmann and Bitzer (eds) Handbuch Insolvenzrecht in Europa (2021), § 4 marginal no 1; in detail Kindler, ‘Internationales Insolvenzrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8 th edn, 2021), Art 7 EIR margin no 54 et seq; as to the material scope of insolvency law vis-á-vis corporate law see table 4.4 in Gerner-Beuerle, Mucciarelli, Schuster and Siems, The Private International Law of Companies in Europe (2019), 102 et seq. 108 On shareholders‘ rights in corporate insolvency under the Directive 2019/1023/EU see Korch, ‘Die Rolle der Gesellschafter im künftigen Restrukturierungsverfahren’ ZIP 2020 (41), 446. 109 Directive 2019/2121/EU amending Directive 2017/1132/EU as regards cross-border conversions, mergers and divisions, Recital 3: ‘In the absence of harmonisation of Union law, defining the connecting factor that determines the national law applicable to a company or firm falls, in accordance with Article 54 of the TFEU, within the competence of each Member State.’; the same statement can be found in Case C-106/16, 25.10.2017, Polbud – Wykonawstwo [2017] ECLI:EU:C:2017:804, para. 34. 110 For domestic Private International Law rules see the useful country reports in Gerner-Beuerle, Mucciarelli, Schuster and Siems, The Private International Law of Companies in Europe (2019), 209 et seq, table 3.1 on the connecting factors (24 et seq), XVII et seq; Basedow et al. (eds), Encyclopedia of Private International Law (2027); Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 508 et seq.

Peter Kindler

27

Introduction –

–

67

68

69

70

71

Member States following the incorporation doctrine: Bulgaria (Art 56 PIL Act 2005), Croatia (Art 19 PIL Act 2017), Czech Republic (Art 30 para. 1 PIL Act), Hungary (Art 22 PIL Act 2017), Italy (Art 25 PIL Act 1995), the Netherlands (Art 118 Book 10 NBW), Romania (Art 2571 Civil Code 2009). Member States following the real seat doctrine: Austria (Section 10 PIL Act 1978), Belgium (Art 110 PIL Act 2004), Denmark, France, Greece (Art 10 Civil Code), Luxembourg, Poland (Art 17 PIL Act 2011), Portugal, Slovenia (Art 17 para. 3 PIL Act) und Spain.

Thus, a Swiss-incorporated public limited liability company (Aktiengesellschaft) with real seat in Germany is regarded as a German partnership by German courts, 111 whereas a court in the Netherlands would treat the very same company as a Swiss company. The same is true for an UK-incorporated company after 31 December 2020 because of Brexit (→ mn. 78 et seq). Furthermore, a company incorporated in EU Member State A with real seat in EU Member State B is governed by the law of Member State A. Most Member States following the real seat doctrine would apply the incorporation doctrine in intra-EU situations (→ mn. 2, 66). As regards companies from third countries, some EU Member States are bound by bilateral Treaties based on the incorporation doctrine, e.g. the Treaty of Friendship, Commerce and Navigation between the United States of America and the Federal Republic of Germany of 29 October 1954 (Art 25 para. V).112 Under this Treaty, German judges apply the doctrine of incorporation to all US-incorporated companies irrespective of where their real seat is situated. In 2006, the ‘German Council for Private International Law’ – a permanent group of experts advising the German Federal Ministry of Justice – has proposed an EU Regulation on the law applicable to companies.113 Following the doctrine of incorporation, Art 2(1) of this Proposal lays down the law of the state in which the company is entered in a public register as the basic connecting factor. The proposal was critized, inter alia, because it allows corporations to escape from board-level employee participation (→ mn. 48 et seq.)114 and because of its application to companies registered in third countries, i.e. beyond the reach of EU substantive law protection standards.115 Further proposals of an EU Regulation – again based on the doctrine of incorporation – have been elaborated by legal scholars.116 The same is true for the European Group for Private International Law (EGPIL/GEDIP) with its proposal of 2016.117 BGH 27.10.2008 – II ZR 158/06, NJW 2009, 289 (‘Trabrennbahn’). Text available at: https://treaties.un.org/doc/publication/unts/volume%20273/volume-273-i -3943-english.pdf; for details see Ebenroth, ‘Gaining Access to Fortress Europe – Recognition of US Companies in Germany and the Revision of the Seat Rule’, 24 (1990) The International Lawyer 459; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 333 et seq. 113 Proposal of 9 February 2006, English version and Explanatory Note in Sonnenberger (ed), Vorschläge und Berichte zur Reform des europäischen und deutschen internationalen Gesellschaftsrechts. Vorgelegt im Auftrag der 2. Kommission des Deutschen Rates für IPR, Spezialkommission internationales Gesellschaftsrecht (2007), 65 et seq; on this proposal see Ballarino, ‘Book Review’, 9 (2007) Yearbook of Private International Law 605; French version in Revue critique de droit international privé 95 (2006), 712; Italian version in Rivista di diritto internazionale privato e processuale 17 (2006), 876; for a presentation (and critical assessment) see Kindler, ‘Aspetti essenziali di un futuro regolamento comunitario sulla legge applicabile alle società’ Rivista di diritto internazionale privato e processuale 2006, 657; Sonnenberger and Bauer, ‘ Vorschlag des Deutschen Rates für Internationales Privatrecht für eine Regelung des Internationalen Gesellschaftsrechts auf europäischer/nationaler Ebene’ RIW 2006, Beilage zu Heft 4, 1; for further references see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 64 et seq. 111

112

28

Peter Kindler

Introduction Besides domestic conflict-of-law rules (→ mn. 66), there are several substantive pro- 72 visions related to companies in international situations. In some countries substantive law requires residence or the real seat within the territory for national corporations. 118 In addition, the laws of all Member States allow for an ordre public-based disapplication of foreign law contrary to fundamental moral conceptions or policy choices of the lex fori.119

5. Framework for the screening of investments from non-EU countries The Regulation (EU) 2019/452 sets up a framework for the screening of direct 73 investments from non-EU countries (foreign direct investment – FDI) that may affect security or public order.120 The regulation's objective is to make sure that the EU is better equipped to identify, assess and mitigate potential risks for security or public order, while remaining among the world’s most open investment areas. It fully applies since 11 October 2020.

114 Däubler and Heuschmid, ‘Cartesio und MoMiG – Sitzverlagerung ins Ausland und Unternehmensmitbestimmung’ NZG 2009 (12), 493; dazu auch Weller, ‘Unternehmensmitbestimmung für Auslandsgesellschaften’ in Erle, Goette, Kleindiek, Krieger, Priester, Schubel, Schwab, Teichmann and Witt (eds), Festschrift für Peter Hommelhoff zum 70. Geburtstag (2012), 1274; Kindler, ‘Keine Flucht aus der Unternehmensmitbestimmung durch Einsatz von EU-Scheinauslandsgesellschaften’ in Deinert (ed), Festschrift für Peter Winkler von Mohrenfels zum 70. Geburtstag (2013), 147. 115 G.H. Roth, Vorgaben der europäischen Niederlassungsfreiheit für das Kapitalgesellschaftsrecht (2010), 41 et seq. 116 Zimmer, ‘Ein Internationales Gesellschaftsrecht für Europa’ RabelsZ 2003 (67), 298; Hübner, ‘Eine Rom V-VO für das Internationale Gesellschaftsrecht – zugleich ein Beitrag zur Kohärenz im Internationalen Gesellschaftsrecht’ ZGR 2018 (47), 149. 117 Proposal dated 18 September 2016; see http://www.gedip-egpil.eu/documents/Milan%202016 /GEDIPs%20Proposal%20on%20Companies.pdf; the text is available also in IPRax 2017, 321 and in ZEuP 2017, 500; dazu Kieninger, ‘Die weitere Kodifikation des Europäischen IPR’ IPRax 2017, 200, 202 et seq; Kohler, ‘Eine europäische Verordnung über das auf Gesellschaften anzuwendende Recht – Tagung der Europäischen Gruppe für Internationales Privatrecht in Mailand’ IPRax 2017, 323; von Hein, ‘Der Vorschlag der GEDIP für eine EU-Verordnung zum Internationalen Gesellschaftsrecht’ in Hess, Jayme and Mansel (eds), Europa als Rechts- und Lebensraum: Liber Amicorum für Christian Kohler zum 75. Geburtstag (2018), 551. 118 Gerner-Beuerle, Mucciarelli, Schuster and Siems, The Private International Law of Companies in Europe (2019), 14 et seq, table 2; Recital 44 to Directive 2019/2121/EU. 119 Gerner-Beuerle, Mucciarelli, Schuster and Siems, The Private International Law of Companies in Europe (2019), 138 and table 5, 129 et seq. 120 Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJ L 79, 21.3.2019, p. 1; on this Regulation see Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2019/20’ BB 2020 (75), 1794, 1802 (with further references); Dalmas et al., JCP E 2020, 1024; Farnoux, JCP G 2019, 1201; Gadocha, ‘Assessing the EU Framework Regulation for the Screening of Foreign Direct Investment—What Is the Effect on Chinese Investors?’, The Chinese Journal of Global Governance 2020 (6), 36; Link and Becker, ‘Ausländische Direktinvestitionen in Europa’, RIW 2019, 415.

Peter Kindler

29

Introduction

B. Scope of Application and Current Legal Policy of European Company Law I. Companies Subject to EU Harmonisation 1. Limited liability companies Most of the European company law directives based on Art 50(2)(g) TFEU – freedom of establishment – and since 2017 codified in Title I of Directive 2017/1132/EU – apply only to limited liability companies (see Annexes I, II to that Directive). This narrow approach is rather surprising, since the freedom of establishment (Art 49, 54 TFEU) and the main legal basis for company law directives contained in Art 50(2)(g) TFEU cover all ‘profit-making’ organisations, including partnerships. The same is true for Title II of Directive 2017/1132/EU with its provisions on corporate mobility, i.e. cross-border conversions and cross-border mergers and divisions (Arts 86 a et seq., 118 et seq., 160 a et seq.) which are all meant to enhance intra-EU freedom of establishment.121 75 Extending EU company law harmonisation to partnerships was urged by the European Economic and Social Committee already at the very beginning of the harmonisation process,122 but without any major results. In European company law, partnerships are dealt with only in a few instrument of EU law, such as the 1985 EEIG Regulation and Art 1(1)(b) Financial Statements Directive 2013/34/EU read with Annex II on partnerships. 74

2. The focus on the public limited liability company 76

Within the category of limited liability companies, the public limited liability companies (Aktiengesellschaft, société anonyme, etc.)123 are more thoroughly harmonised than the private limited companies (Gesellschaft mit beschränkter Haftung, société à responsabilité limitée, etc.).124 A number of important sectors of European company law apply exclusively to public limited liability companies, such as namely the capital maintenance (Art 44 et seq. Directive 2017/1132/EU) and the provisions on internal mergers and the divisions (Art 87 et seq., 135 et seq. Directive 2017/1132/EU). Moreover, only for the public limited liability companies there is an equivalent type of supranational company created by EU law (Societas Europaea; → mn. 168 et seq.). The differentiated scope of application of EU company law has often been questioned. One main reason for this is that the different types have differing practical importance in the different Member States, that the criteria for distinction vary, and that in some Member States choice between legal forms is not free; furthermore in some States there is only the public limited liability companies.125 121 Directive 2019/2121/EU amending Directive 2017/1132/EU as regards cross-border conversions, mergers and divisions, Recital 1: ‘Directive 2017/1132/EU of the European Parliament and of the Council regulates cross‐border mergers of limited liability companies. The rules on cross-border mergers represent a significant milestone in improving the functioning of the internal market for companies and firms and their exercise of the freedom of establishment. However, evaluation of those rules shows that they need to be changed. Furthermore, it is appropriate to provide for rules regulating cross-border conversions and divisions, since Directive 2017/1132/EU only provides for rules on domestic divisions of public limited liability companies.’ (emphasis added). 122 [1964] OJ, 3249, 3250; Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 5 no 9. 123 See Directive 2017/1132/EU, Annex II. 124 See Directive 2017/1132/EU, Annex I.

30

Peter Kindler

Introduction The focus on public companies can hardly convince. According to Recital 2 of the 77 2017 Directive ‘[t]he coordination provided for in Art 50(2)(g) of the Treaty and in the General Programme for the abolition of restrictions on freedom of establishment, which was begun by the First Council Directive 68/151/EEC, is especially important in relation to public limited liability companies because their activities predominate in the economy of the Member States and frequently extend beyond their national boundaries.‘ This statement – taken from Recital 1 of the 1976 (!) Directive on capital maintenance (77/91/EEC) – is far from reality in 2021. It underestimates grossly the sheer number of private limited liability companies126 and the economic relevance of their international business activities. EU company law harmonization therefore should address both the private company and the public company.

3. Companies from third Countries; ‘Brexit’ Several provisions in EU Directives apply to companies from third countries. This is 78 the case e.g. for disclosure obligations pursuant to Art 36 et seq. Directive 2017/1132/EU as regards branches or for accounting standards (Art 23(8)(b) Directive 2013/34/EU). Non of the company law directives addresses the exit of a Member State from the 79 EU. This is dealt with by Art 50 TEU according to which any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements. Since 31 January 2020 the United Kingdom of Great Britain and Northern Ireland is no longer a Member State of the EU (‘Brexit’) and EU law no longer applies. However, according to Art 126 of the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (EUWA) of 17 October 2019 between the EU and the UK (entered into force on 1 February 2020)127 there was a transition or implementation period, which started on the date of entry into force of the Agreement and ended on 31 December 2020. Pursuant to Art 127 of the Agreement, unless otherwise provided in the Agreement, Union law was applicable to and in the United Kingdom during the transition period. In the absence of any agreement governing the future relationship between the UK and the EU in the field of company law, since 1 January 2021 EU law does no longer apply to and in the United Kingdom. As far as company law is concerned, what happened was a ‘hard Brexit or ‘no deal Brexit’. Infact, in the EU-UK Trade and Cooperation Agreement (TCA) signed on 30 December 2020 128 there are no provisions as to company law directives or relating to the freedom of establishment of UK companies in the European Union within the meaning of Arts 49, 54 TFEU. As regards a possible ‘Hard [Company Law] Brexit’ on December 31, 2020, already 80 in 2017 the European Commission has published a ‘preparedness notice’ to stakeholders on the UK's withdrawal from the EU and EU rules on company law.129 A point which the notice highlights is that an UK-incorporated company that has its ‘real seat’, i.e. Grundmann, European Company Law (2007), margin no 14. In Germany as of 1 January 2020 only 14.193 public limited liability companies were registered, whereas the number of private limited liability companies amounted to 1.329.277; see Kornblum ‘Bundesweite Rechtstatsachen zum Unternehmens- und Gesellschaftsrecht’ (Stand 1.1.2020)’ GmbHR’ 2020 (111), 677, 678. 127 [2019] OJ, L 278 p I/1; [2019] OJ, C 384 I. 128 [2020] OJ, L 444 p 14; [2021] OJ, L 1 p 1; ratified by the UK on 31 December 2020, European Union (Future Relationship Act) 2020, ch. 29. 129 European Commission (Directorate-General Justice and Consumers), Brussels, 21 November 2017: Notice to Stakeholders. Withdrawal of the United Kingdom and EU Rules On Company Law; for a summary see Gernert, ‘Harter Brexit und IPR – Vorbereitende Papiere für einen ungeregelten Austritt des Vereinigten Königreichs’ IPRax 2019, 365. 125

126

Peter Kindler

31

Introduction

81

82

83

84

central administration or principal place of business, in another Member State could, on the UK leaving the single market, potentially lose its limited liability status in that country. This is because Art 54 TFEU no longer applies to UK-incorporated companies since 1 January 2021. Since that day, UK-incorporated companies no longer have the Treaty right to freedom of establishment in other member states. Art 54 TFEU overrides national law rules but, once it no longer applies, domestic private international law rules will determine the treatment of UK companies in the Member States. There is no EU regulation or directive in this field (→ mn. 66 et seq.). In a Member State that applies the ‘real seat’ principle with respect to companies from third countries, e.g. Germany, substantive local company law may provide that a UK-incorporated company with its central administration or principal place of business in that country is not locally incorporated (→ mn. 67). Local law may therefore treat the entity not as a company with separate legal personality but as a partnership, and consequently its ‘shareholders’ (now ‘partners’) may have personal liability for its debts including debts arisen before 1 January 2021 (in German law see Arts 128, 130 Commercial code).130 The TCA does not oblige Member States to apply the doctrine of incorporation vis-à-vis UK-incorporated companies).131 Furthermore, on the UK leaving the single market, a branch of a UK-incorporated company in an EU member state has become a branch of a ‘third country’ company in that jurisdiction (within the meaning of Art 36 et seq Directive 2017/1132/EU). A Member State's national company law for third country companies (e.g. on branch registration) may be more stringent than the rules which EU law requires it to apply to a branch of a company incorporated in another EU member state. From a UK perspective, EU law on disclosure, incorporation, capital maintenance and other matters – Arts 1 to 86 Directive 2017/1132/EU – since 1 January 2021 no longer applies to the UK. However, most of the law governing companies in the UK, while transposing EU company law directives, has remained a matter of domestic law contained mainly in the Companies Act 2006 and the secondary legislation made under that Act. That legislation will, for the time being, remain the cornerstone of UK corporate legislation as ‘retained EU law’ (under Section 2, 6 [Saving for EU-derived domestic legislation] of the European Union (Withdrawal) Act 2018).132 In this context the UK left, however, the BRIS (Art 22 Company Law Directive) (by repealing sec. 1079A Companies Act 2006), ended the privileged treatment of branches of EU-incor130 For details see Mayer and Manz, ‘Der Brexit und seine Folgen auf den Rechtsverkehr zwischen der EU und dem Vereinigten Königreich seit dem 1.1.2021’ Betriebs-Berater 2021, 451; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8 th edn, 2021), margin no 519; Schmidt, ‘Auswirkungen des Brexits im Bereich des Gesellschaftsrechts’ ZIP 2019, 1093; Schmidt, ‘Corporate Law and Brexit‘ in Biondi, Birkinshaw and Kendrick (eds), Brexit: The Legal Implications (2019), 175; Wackerbarth, ‘The Consequences of Brexit for Company Law’ in Szuka, Prinz von Sachsen Gessaphe and Garcia Blesa (eds), Legal Implications of Brexit (2018), 277; for a German perspective see Grzeszick and Verse, ‘Auswirkungen eines harten Brexit auf britische Gesellschaften in Deutschland – der Gesetzgeber ist gefordert!’ NZG 2019 (22), 1129; Mäsch, Gausing and Peters, ‘Deutsche Ltd., PLC und LLP: Gesellschaften mit beschränkter Lebensdauer? – Folgen eines Brexits für pseudo-englische Gesellschaften mit Verwaltungssitz in Deutschland’ IPRax 2017, 49. 131 For a different interpretation of the TCA see J. Schmidt, ‘Brexit: Implikationen des EU-UK TCA im Bereich des Gesellschaftsrechts’ GmbH-Rundschau (GmbHR) 2021 (112), 229, 231-234: this author refers to Arts SERVIN.2.1 through SERVIN.2.7 TCA on ‘investment liberalisation’ ([2020] OJ, L 444 p 14, 92 et seq) codifying the principles of ‘national treatment’ and the ‘most favoured nation treatment’. 132 Davies, ‘The Impact of Brexit on Company Law’ Giurisprudenza commerciale, I 46 (2019), 5, 11 et seq; J. Schmidt, ‘Brexit: Implikationen des EU-UK TCA im Bereich des Gesellschaftsrechts’ GmbH-Rundschau (GmbHR) 2021 (112), 229, 234-235.

32

Peter Kindler

Introduction porated companies (sec. 1047 Companies Act) and repealed the Cross-border Mergers Regulations 2007.133 Those EU company law regimes that depend on reciprocity and mutual recognition 85 between EU member states are, absent special arrangements in the TCA (→ mn. 79), no longer available in the UK or to UK companies. This affects the cross-border mobility regime – Title II of Directive 2017/1132/EU with its provisions on corporate mobility, i.e. cross-border conversions and cross-border mergers and divisions (Arts 86 a et seq., 118 et seq., 160 a et seq.), → mn. 2, 74 – and the Societas Europaea (European public company), → mn. 168 et seq.134

II. The Material Scope of EU Company Law Directives 1. Types of companies involved The traditional core of European company law is formed by Title I Directive 2017/1132(EU) (Arts 1 to 86) covering incorporation and nullity of the company and validity of its obligations, online procedures (formation, registration and filing), disclosure and registers, capital maintenance and alteration. The structural changes in the broad sense are regulated by Title II Directive 2017/1132/EU (Arts 86 a to 160 u) covering cross-border conversions as well as both internal and cross-border mergers and divisions. Besides Directive 2017/1132/EU, several smaller directives deal with specific aspects of company law such as financial statements (2013/34/EU), the single-membered company (2009/102/EC), shareholders’ rights (2007/36/EC) and takeover bids (2004/25/ EC). These directives are dealt with in this Commentary: → Accounting and Auditing Law of the European Union. With respect to these legal instruments a distinction has to be made between types of company. Some sectors of EU company law apply to all limited liability companies, i.e. the public limited liability company, the partnership limited by shares and the private limited liability company (→ mn. 76 et seq.). The Financial Statements Directive (2013/34/EU) also applies additionally to certain partnerships (with solely limited companies as partners personally liable), while other sectors of European company law apply only to public limited companies. The scope of application is easy to determine because the types of company captured are listed each time in Annexes to the legal instrument concerned.

86

87

88

89

2. Formation and current business Formation and current business of the company are regulated, disregarding financ- 90 ing on capital markets (→ mn. 63) in two respects.135 In this context, Title I Directive 2017/1132/EU (Arts 1 to 86) together with the Twelfth Directive on single-member companies (2009/102/EC) form one section, the Financial Statements Directive (2013/34/EU) together with the Directive on Statutory Audits (2006/43/EC) the second. 133 J. Schmidt, ‘Brexit: Implikationen des EU-UK TCA im Bereich des Gesellschaftsrechts’ GmbH-Rundschau (GmbHR) 2021 (112), 229, 236-237 referring to section 5 The Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2019, SI 2019/348. 134 For alternative solutions see Davies, ‘The Impact of Brexit on Company Law’ Giurisprudenza commerciale, I 46 (2019), 5, 7 et seq. 135 Grundmann, European Company Law (2007), margin no 108 et seq; as to national formation requirements see table 4.2 in Gerner-Beuerle, Mucciarelli, Schuster and Siems, The Private International Law of Companies in Europe (2019), 66 et seq.

Peter Kindler

33

Introduction a) Validity, representation, disclosure, limited liability, capital and capital alterations 91

92

93

94

95

The first set of rules, contained in Title I Directive 2017/1132/EU (Arts 1 to 86) together with the Twelfth Directive on single-member companies (2009/102/EC), deals with questions of the reliability of the limited liability company in relation to its partners. These rules address control of formation and the validity of the company; the latter was to be fostered, nullity being confined – after registration – to exceptional cases, taking effect only ex nunc and requiring a specific procedure.136 Furthermore, the power of representation is defined, in principle, unrestricted and restrictable only in some exceptional cases. All his is treated in Title I Chapter 1 Section 2 (Arts 7 to 12) of the Company Law Directive 2017/1132/EU; these provisions date back to the First or Disclosure Directive 68/151/EEC dated 9 March 1968. In addition, there are the paramount obligations of disclosure, particularly for the purpose of protecting the legitimate expectations of third parties (Recital 7 to Directive 2017/1132/EU). Again the First Directive 68/151/EEC contained the first European rules in this regard, since 2017 codified in Title I Chapter III of the Company Law Directive 2017/1132/EU (Arts 13 to 28). Limited liability as the automatic consequence of a formally valid formation (with registration) and (often) corollary of raising of a capital is not stated explicitly in European company law.137 This is true for the Company Law Directive 2017/1132/EU and also for the Twelfth Directive 2009/102/EC on single-member companies (Art 7). At least for the private limited company a minimum number of shareholders may not be imposed by the Member States, there must be an instrument for limiting liability for the sole trader. The 1976 Second Directive on capital maintenance and alterations (77/91/EEC) was codified as Chapter IV in Title I of the Company Law Directive 2017/1132/EU (Arts 44 to 86). These rules primarily concern the raising of capital, its maintenance, increases and reductions, i.e. the protection of capital altogether at EU level, albeit only for the public limited liability companies (for critical remarks on this [far too narrow] scope → mn. 76 et seq.). The goal of these provisions is that of securing a minimum capital for creditors, but also to guarantee some ‘constitutional’ rights of shareholders protecting them against dilution of equity (with the pre-emption right in particular) and a guarantee of the influence of shareholders as a group (competence of shareholders´meeting and regulation of the purchase of own shares). For any further issues regarding the structure of the company, there are no harmonising EU instruments. The last draft of a ‘Fifth Directive on Company Law’ dates back to 1991.138 It is no longer to be adopted, → mn. 44. Such questions concern the structure of the company with rules on the number of organs, their composition and access to membership of these organs including employees’ participation.

Grundmann, European Company Law (2007), margin no 109. Case C-81/09, 21.10.2010, Idryma Typou [2010] ECLI:EU:C:2010:622 para. 40: ‘Although the third recital in the preamble to the First Directive implies that a principle exists that only companies are required to pay, out of their assets, company debts to third parties, that directive does not prescribe a uniform concept of companies limited by shares or otherwise having limited liability that is based on such a principle.’; for details see Möslein, ‘Europäisierung der Haftungsbeschränkung’ NZG 2011 (14), 174; Kindler, ‘Kapitalgesellschaftsrechtliche Durchgriffshaftung und EU-Recht’ in Joost, Oetker and Paschke (eds), Festschrift für Franz Jürgen Säcker zum 70. Geburtstag (2011), 393. 138 Third amendment to the proposal for a Fifth Council Directive based on Article 54 of the EEC Treaty concerning the structure of public limited companies and the powers and obligations of their organs (20.11.1991), [1991] OJ C 321/9; see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 62. 136

137

34

Peter Kindler

Introduction b) Harmonised Accounting Law (Financial Statements and Approved Auditors) A rather dense block is then formed by the two main directives on accounting 96 law: the comprehensive Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports, and Directive 2006/43/EC on the requirements that approved auditors – who, under the 2013 Directive, have to certify the accounts – must satisfy; Directive 2006/43/EC replaced the Eighth Directive 1984/253/ EEC. For a commentary on Directives 2013/34/EU and 2006/43/EC → p. 807 et seq.

3. Establishment and structural changes Besides formation and current business of companies (→ mn. 90 et seq.), four types 97 of structural operations or situations are addressed by European company law in more or less detailed manner:139 – – – –

operations originating in one company only (the establishment of branches and the cross-border conversion in particular); mergers and divisions; takeovers of other companies; groups of companies. The following legal instruments have been adopted:

98

a) Branches and cross-border conversions The cross-border establishment of branches calls for an easing of the disclosure re- 99 quirements for the company itself contained in Art 14 Directive 2017/1132/EU. In order to ensure the protection of persons who deal with companies through the intermediary of branches, only limited measures in respect of disclosure are required in the Member State in which a branch is situated, Recital 16 in the preamble to Directive 2017/1132/EU. Art 28 a et seq. of that Directive140 are aimed at ensuring that only the essentials of the legal situation of the company as a whole are disclosed also in the host country (where the branch is stablished). With respect to the company, this regards the powers of representation, the name and legal form, the winding-up of the company and the insolvency proceedings to which it is subject, furthermore information concerning the branch itself together with a reference to the register of the company of which that branch is part (Recital 16 in the preamble to Directive 2017/1132/EU). The cross-border conversion of a company, defined as an ‘operation whereby a com- 100 pany […] converts the legal form under which it is registered in a departure Member State into a legal form of the destination Member State […] and transfers at least its registered office to the destination Member State, while retaining its legal personality,’ was introduced by Directive 2019/2121/EU on corporate mobility which inserted Arts 86 a et seq. in the Company Law Directive 2017/1132/EU.141 In the eyes of the European legislators (and following the reasoning of the CJEU in ‘Polbud’142), companies exercise Cf Grundmann, European Company Law (2007), margin no 112. These provisions replaced the Eleventh Directive of 1989 concerning disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State (Art 166 Directive 2017/1132/EU). 141 On the amendments introduced by Directive 2019/2121/EU see Teichmann, ‘The Company Law Package – Content and State of Play’, 16 (2019) ECFR 3, 10 et seq; Schmidt, ‘Cross-border Mergers, Divisions and Conversions: Accomplishments and Deficits of the Company Law Package’, 16 (2019) ECFR 222. 142 Case C-106/16, 25.10.2017, Polbud – Wykonawstwo [2017] ECLI:EU:C:2017:804. 139 140

Peter Kindler

35

Introduction their right to establishment by merely transferring their registered office from one Member State to another without any market integration whatsoever in the destination Member State.143 In truth, by means of such an operation the company changes the applicable company law without creating any genuine link to the destination Member State. Thus, a cross-border conversion – in the case of the sole transfer of the registered office from one Member State to another – in substance means to exercise freedom of choice of applicable law and not to exercise freedom of establishment. 144 In truth, Recital 35 to the Mobility Directive (EU) 2019/2121 according to which ‘it is important to counteract ‘shell’ or ‘front’ companies set up for the purpose of evading, circumventing or infringing Union or national law’ is nothing more than lip service.145 The relevant provision (Art 86 m para. 8 Directive 2017/1132/EU) is formulated in a rather generic manner.146 b) Mergers and divisions Mergers and divisions of public limited liability companies in domestic situations were for the first time regulated in the Third and Sixth Directives of 1978/2011 and 1982,147 repealed by Art 166 Directive 2017/1132/EU. These operations are currently addressed by Arts 87 et seq. and 135 et seq. Directive 2017/1132/EU (read with Annex I to that Directive). 102 Cross-border mergers and divisions of (public as well as private) limited liability companies are regulated by Arts 118 et seq.148 and 160 a et seq.149 Directive 2017/1132/EU (read with Annex II to that Directive).150 101

143 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 95; Kurcz and Paizis, ‘Company Law, Connecting Factors and the Digital Age – A New Outlook’, 16 (2019) ECFR 434, 437 et seq ; for a critical evaluation of this type of ‘establishment’ see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 818; on ‘Polbud‘ see Kindler, ‘Unternehmensmobilität nach Polbud: Der grenzüberschreitende Formwechsel in Gestaltungspraxis und Rechtspolitik’ NZG 2018 (21), 1. 144 Mostly legal writers hold the view that, thanks to the CJEU judgments since ‘Centros‘, the freedom of establishment comprises the freedom of choice of applicable company law, e.g. Davies, ‘The Impact of Brexit on Company Law’ Giurisprudenza commerciale, I 46 (2019), 5, 6. Kurcz and Paizis , ‘Company Law, Connecting Factors and the Digital Age – A New Outlook’, 16 (2019) ECFR 434, 437 et seq; but this is not the view of EU legislators, see Directive 2019/2121/EU amending Directive 2017/1132/EU as regards cross-border conversions, mergers and divisions, Recital 3: ‘In the absence of harmonisation of Union law, defining the connecting factor that determines the national law applicable to a company or firm falls, in accordance with Article 54 of the TFEU, within the competence of each Member State.’ (emphasis added). 145 Schollmeyer, ‘Der Gläubigerschutz bei grenzüberschreitenden Umwandlungen nach der neuen Umwandlungsrichtlinie’ ZGR 2020 (49), 62, 87. 146 Art 86 m para. 8 Directive 2017/1132/EU [Pre-conversion certificate]: ‘Member States shall ensure that the competent authority does not issue the pre‐conversion certificate where it is determined in compliance with national law that a cross-border conversion is set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes.’ There are identical provisions related to other cross-border operations: Art 127(8) Directive 2017/1132/EU (cross-border merger), Art 160m(8) Directive 2017/1132/EU (cross-border division); for details see Schön, ‘Missbrauchskontrolle im Europäischen Umweltrecht’ in Hoffmann-Becking and Hommelhoff (eds), Festschrift für Gerhard Krieger zum 70. Geburtstag (2020), 879; Bungert, ‘Das neue Recht der grenzüberschreitenden Spaltungen in der EU’ in Hoffmann-Becking and Hommelhoff (eds), Festschrift für Gerhard Krieger zum 70. Geburtstag (2020), 109, 122 et seq; Bormann and Stelmaszczyk, ‘Grenzüberschreitende Spaltungen und Formwechsel nach dem EU-Company Law Package’, ZIP 2019, 353, 358 et seq; Meruzzi, L’exceptio doli. Dal diritto civile al diritto commerciale (2005). 147 Third Company Law Directive 2011/35/EU regarding the merger of companies (which replaced Directive 78/855/EEC) and Sixth Company Law Directive 82/891/EEC regarding the division of companies. 148 Arts 118 et seq replaced Directive 2005/56/EC on cross-border mergers.

36

Peter Kindler

Introduction The essential mechanisms of protection are in both cases: the board has to inform 103 the shareholders about the transaction as a whole in a draft terms of the operation and a report specifying all relevant effects; the draft terms and the report have to be examined by an impartial expert; the power to decide is exclusively vested in the shareholders’ meeting of the companies involved. In addition, the creditors have the right to obtain adequate safeguards. c) Takeover bids According to its Recital 2, the Takeover Directive (2004/25/EC) is aiming at the 104 protection of the interests of holders of the securities of companies governed by the law of a Member State when those companies are the subject of takeover bids or of changes of control and at least some of their securities are admitted to trading on a regulated market in a Member State. For details see commentary on the Takeover Directive (below, → p. 975 et seq.) d) Groups of companies (i) Overview Corporate groups are the subject of the 1984 pre-draft (for a Ninth Directive) 105 not yet crowned with success.151 Based on the Informal Company Law Expert Group’s ‘Report on the recognition of the interest of the group’ (2016) EU legislators are assessing the chances for harmonisation in this field.152 In line with the ‘share holder value’ approach (→ mn. 1 et seq.), a few visionary scholars are defining the law of groups of companies as ‘enabling’ law and no longer as a set of rules aiming at the protection of minority shareholders and creditors of the controlled entity.153 In the light of the protective standards set by Art 50(2)(g) TFEU and the existing legal instruments in EU law (→ mn. 106 et seq.), this concept does, however, not seem to describe more than a neo-liberal slogan. Currently there are several branches of European law that deal with groups of 106 companies. Formal and substantive control concepts – in order to identify a group of companies – can be distinguished. The legislative activity of the European Union regards, inter alia: – – –

consolidated financial reporting, transparency requirements in capital markets, company law.

149 Arts 160 a et seq were inserted by Directive 2019/2121/EU on cross-border conversions, mergers and divisions. 150 On the amendments brought about by Directive 2019/2121/EU see Teichmann, ‘The Company Law Package – Content and State of Play’, 16 (2019) ECFR 3, 8 et seq. 151 Commission doc. III/1639/84; for details on the (planned) European law of groups of companies see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 63; Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed. 2017), § 12 margin no 1 et seq. 152 Bayer and Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2016/17’ BB 2017 (72), 2114, 2119 et seq; Fleischer, ‘Europäisches Konzernrecht: Entwicklungslinien und Tendenzen’ ZGR 2017 (46), 1; on national law related to groups of companies see Gerner-Beuerle, Mucciarelli, Schuster and Siems, The Private International Law of Companies in Europe (2019), table 4.1.2, 57 et seq. 153 Teichmann, ‘Corporate Groups within the Legal Framework of the European Union: The Group-Related Aspects of the SUP Proposal and the EU Freedom of Establishment‘, 12 (2015) EFCR 202, 212 et seq, with further references.

Peter Kindler

37

Introduction (ii) Financial reporting The most elaborated definitions of parent-subsidiary relations can be found in the field of consolidated financial reporting. In many cases and for a series of national jurisdictions, these provisions (Arts 21 et seq. Directive 2013/34/EU which replaced the Seventh Directive 83/349/EEC on consolidated financial statements) have served as a model for other branches of the law that operate with the notion of ‘control’ such as capital markets law and insolvency law.154 108 With respect to group accounts, one can distinguish two types of ‘control’: formal control which is based on certain legal situations (such as voting rights or the right to appoint directors) and substantive (or actual) control which is based on the mere fact of dominant – or decisive – influence.155 The first concept (formal control) is legal, the second one (actual/substantive control) is economic.156 The first concept prevails in Anglo-American company law, the second in continental Europe. In legal literature, the differences between the two concepts have been happily described as follows: 107

‘Most of the Continental Member States favour a so-called ‘economic’ definition of the group, the basic idea of which is that consolidated accounts should reflect the economic unit which the group constitutes. Under this approach, the ultimate factor which defines a group is the unity of decision making: where anyone has the power to impose his domination over another entity, a group exists. As it aims directly to reflect the economic reality, which is by nature complex and varying, this approach is ambitious. This emerges when one tries to translate it into applicable legal provisions, and the subjectivity of its very basis inevitably creates some difficulties. In fact, the underlying statement that control is revealed in practice by concerted action as one undertaking effectively dominates another, has hitherto defeated strict and easily manageable legal definitions: it has usually resulted either in subjective criteria, the disadvantages of which are both the difficulty of verification and unpredictability, or, in its most sophisticated formulation, in a system of legal presumptions. The other approach to defining a group, supported by the ‘Anglo-Saxon’ world emphasizes the legal links within a group. It does not pay much attention to power games, or to whether any domination is or is not actually exercised over another undertaking; it concentrates rather on the right to exercise control and involves checking that the legal means to ensure a power of control exist. Following this line results in broadly opposite merits to those of the ‘economic’ approach: it leads to a definition which is purely objective and thus less subject to vagaries of interpretation, and it avoids any grey zone where the domination is probably but not ascertainable. In contrast, it fails to take account – and maybe even falsely takes account – of certain realities; that control over another undertaking can indeed be organized outside any formal, legal relationship, or conversely that in spite of the existence of rights giving rise to control, it is not in fact actually exercised.’157

109

As to terminology, it seems most convincing to consider ‘controlling influence’ as the superordinate concept that covers both formal and actual/substantive control. This is also the approach of the authors of the 1984 pre-draft of a Ninth Directive on Corporate Groups.158 154 Teichmann, ‘Corporate Groups within the Legal Framework of the European Union: The Group-Related Aspects of the SUP Proposal and the EU Freedom of Establishment‘, 12 (2015) EFCR 202. 155 Hopt, ‘Legal Elements and Policy Decisions in Regulating Groups of Companies’ in Schmitthoff and Wooldridge (eds), Groups of Companies (1991), 81 et seq, at 92 :’The decision of the Community lawmakers was finally to adopt a formal concept of control and dependency. However it is well known that enterprises may fall just slightly below the threshold required by such vriteria and may thus avoid the regulation. The Seventh EC Directive has taken account of the latter fact by allowing member states to apply in addition a substantive criterion, namely actual control or dependency where the parent has a participating interest in the subsidiary.’criterion, namely actual control or dependency where the parent has a participating interest in the subsidiary.’); emphasis added. 156 Andenæs and Wooldrigde, European Comparative Company Law (2009), 450. 157 Petite, ‘The Conditions for Consolidation under the Seventh Company Law Directive’, 21 (1984) Common Market Law Review 81-121 (at 85-86) (emphasis added).

38

Peter Kindler

Introduction The same is true for Chapter 6 (consolidated financial statements and reports; 110 Arts 21 et seq.) Financial Statements Directive (2013/34/EU) (which replaced the Seventh Directive on Consolidated Financial Statements (83/349/EEC)). Art 22 Financial Statements Directive uses formal and substantive criteria to define the conditions for the preparation of consolidated accounts. The definition of ‘parent undertaking’ by Art 22(1) Financial Statements Directive 111 follows the traditional English control concept and is compulsory for all member states; Arts 2(14), 56 et seq. EIR extends this concept to European international insolvency law.159 Art 22(2) Financial Statements Directive is optional for the EU member states and follows the broader German concept of the mere possibility to exercise controlling influence (as put down in Section 17 German Public Limited Liability Company Act (AktG).160 Furthermore, Art 22(2) of the Financial Statements Directive is in line with IAS 27.161 (iii) Transparency requirements in capital markets As pointed out above (para. 63), capital markets law is one of the neighbouring branches of company law. Transparency requirements for capital markets are regulated by Directive 2004/109/EC of 15 December 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (Directive Transparency II). The overall aim of the provisions of that Directive is ‘to clarify who actually exercises influence over an issuer’ (Preamble, Recital 20).162 For the purposes of the Directive Transparency II the definition of ‘controlled undertaking’ is layed down in Art 2 lit. f. This definition uses formal criteria – (1) majority of the voting rights, (2) right to appoint or remove a majority of the members of the administrative, management or supervisory body, (3) agreement-based control of the majority of the shareholders' or members' voting rights – as well as substantive criteria, i.e. the power to exercise dominant influence or control over the undertaking. It is somewhat narrower than the one adopted in the field of accounting (Directive 2013/34/EU), → mn. 111. In short, ‘dominant influence’ in a broad, economic sense and ‘control’ based on formal links between companies are both deemed to justify specific duties as to accounting, transparency and corporate insolvency. The notion of parent company according to Art 22 of the Financial Statements Directive – also read with Art 2(14) EIR –

158 Explanatory Note, Commission doc. III/1639/84, 25: The circumstances referred to in Article 2 (i.e. control based on legal links within a group) cover only some of the situations where a company may be subject to the influence of an undertaking; they represent the essentials. It is nonetheless evident that there are numerous other circumstances that enable an undertaking to exercise a decisive influence on the management body of a company.’ (emphasis added). 159 Kindler, ‘Internationales Insolvenzrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8 th edn, 2021), Art 2 EIR margin no 33 et seq. 160 Section 17 German Public Limited Liability Company Act. Controlled and controlling Enterprises. (1) Legally separate enterprises over which another enterprise (controlling enterprise) is able to exert, directly or indirectly, a controlling influence, shall constitute controlled enterprises. (2) A majority owned enterprise shall be presumed to be controlled by the enterprise with a majority shareholding in it. 161 Kindler, ‘§ 290 HGB’ in Canaris, Schilling and Ulmer (eds), Staub, Großkommentar zum HGB (German commercial code) (6th edn, de Gruyter 2021), margin no 2; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed. 2019), § 9 margin no 43. 162 Kindler, ‘EU-ausländische Beteiligungskonsortien im Visier der BaFin Unternehmen, Markt und Verantwortung: Festschrift für Klaus J. Hopt zum 70. Geburtstag, Vol. 2 (2010), 2081, 2083, 2088.

Peter Kindler

39

112

113

114

115

Introduction is congruent with Art 2 f of the Directive Transparency II (2004/109/EC), in so far as being a parent company is based on – – – – 116

the majority of voting rights (Art 22(1 a)), the right to appoint board members (Art 22(1 b)), the control of voting rights pursuant to shareholder agreements (Art 22(1 d bb)), the de facto power to exercise dominant influence or control (Art 22(2 a)).

The Directives on Financial Statements and Transparency II thus combine the formal concept of control (Art 22(1) – Art 2 f (i), (ii) and (iii)) and the substantive concept of dominant influence (Art 22(2) – Art 2 f (iv)).163 (iv) The preliminary draft of a Group Law Directive

As far as company law in a narrower sense is concerned, the efforts of the European Union have not gone beyond the preliminary draft of a directive on groups of companies (Ninth Directive or Group Law Directive) of 1984,164 already mentioned above → mn. 105 et seq. Nevertheless this preliminary draft of the EU Commission is to be considered an important step in the history of European law of corporate groups. Basic concepts of the 1984 preliminary draft were already existent in EU Company Law or have been adopted by subsequently enacted EU law instruments.165 118 This is especially true as regards the notion of ‘control’ (Art 2 of the pre-draft 1984) which has been codified before in the Seventh Directive (1983) (now Art 22 Financial Statements Directive 2013/34/EU) and afterwards in the Directive Transparency II (2004) (→ mn. 107 et seq., 113 et seq.). The relevant articles of the 1984 preliminary draft provide (emphasis added):166 117

SECTION 2 Definitions Article 2 1. For the purposes of this Directive, a subsidiary undertaking is one in which another undertaking (the parent undertaking): a) has a majority of the shareholders’ or members’ voting rights, or b) has the right to appoint or remove a majority of the members of the administrative, management or supervisory body, and is at the same time a shareholder or member, or c) is a shareholder or member and a majority of the members of the administrative, management or supervisory body of that undertaking (a subsidiary undertaking) who have held office during a financial year, have been appointed solely as a result of the exercise of its voting rights or

163 Hopt, ‘Legal Elements and Policy Decisions in Regulating Groups of Companies’ in Schmitthoff and Wooldridge (eds), Groups of Companies (1991), 81 et seq, at 92. 164 Proposal for a ninth Directive pursuant to article 54 (3) of the Treaty relating to links between undertakings, and in particular to groups; see Wooldridge, European Comparative Company Law (2009), 32-33 (on the pre-draft of a Ninth Directive, DOC Nr. III/1639/84); German version: ZGR 1985 (14), 444 et seq and in Lutter (ed), Europäisches Unternehmensrecht (4th edn, 1996), 244, the pre-draft is published also in Le Società 1987, 1326-1333 (in Italian) with the Explanatory Note of the Commission in Italian (relazione, 1308-1326); French version: Commission Droit et Vie d’Affaires, Modes des rapprochement structurelle des entreprises, 1986; an earlier English version is published in Böhlhoff/Budde, 6 (1984) Journal of Comparative Business and Capital Market Law 163 et seq, 181 et seq; see Haar, ‘Corporate Group Law’ in Basedow, Hopt, Zimmermann and Stier (eds) Max Planck Encyclopedia of European Private Law, Vol. 1 (2011). 165 Teichmann, ‘Europäisches Konzernrecht: Vom Schutzrecht zum Enabling Law’ Die Aktiengesellschaft (2013), 184, 186. 166 Commission Doc. III/1639/84-EN.

40

Peter Kindler

Introduction d) is a shareholder or member and controls alone, pursuant to an agreement with other shareholders or members of that undertaking (a subsidiary undertaking), a majority of shareholders' or members' voting rights in that undertaking. 2. For the purposes of applying paragraph 1, the voting rights and the rights of appointment or removal of any other subsidiary undertaking as well as those of any person acting in his own name but on behalf of the parent undertaking or another subsidiary undertaking, must be added to those of the parent undertaking. 3. (…) 4. (…) SECTION 4 Protection of a company subject to the influence of an undertaking Article 7 Where a company is a subsidiary undertaking within the meaning of Article 2, its management body shall each year prepare a special report. (…) Article 9 1. Any undertaking which conducts itself towards a company as a de facto member of the management body shall be liable to the company for any damage resulting from such interference and attributable to mismanagement, under the same conditions as if the undertaking were a member of the management body of the company and consequently obliged to ensure that the interests of the company are safeguarded. 2. For the purposes of paragraph 1, any undertaking which directly or indirectly exercises a decisive influence over decision-making by the management body of a company shall be regarded as a de facto member of the management body of that company. 3. (…)

This pre-draft was largely discussed by legal writers,167 but it was never adopted by 119 the full Commission.168 As to the main reason of that failure, Andenæs/Wooldrige point out: ‘the proposal was probably too much influenced by German law to prove widely acceptance.’169

This analysis seems inaccurate. It is true that the draft is close to the German law 120 of groups (Konzernrecht) insofar as it follows the distinction between groups created by control contracts (Vertragskonzerne, Sections 291 et seq. AktG) and de facto groups (faktische Konzerne, Sections 311 et seq. AktG). But as far as the relevant issues of are concerned, Art 2 when defining the ‘subsidiary undertaking’ follows largely the concepts used in the Directive 83/349/EEC on consolidated accounts (now Art 22 Directive 2013/34/EU), inspired by English law, and not German domestic law.170 It is 167 Böhlhoff and Budde, ‘Company Groups – the EEC Proposal for a ninth Directive in the light of the legal situation in the Federal Republic of Germany’, 6 (1984) Journal of Comparative Business & Capital Market Law 163 et seq; Farmery, ‘The EC Draft Proposal For a Ninth Company Law Directive on Groups: A Business Viewpoint’, 7 (1986) Business Law Review 88 et seq; Immenga, ‘Lmmenga, eq; Review, For a Ninth Company Law Di La proposition d’une Directive de la Commission de la C.E.E.’ Giurisprudenza Commerciale, I 14 (1986), 846-856; Pederzini, Percorsi di diritto societario europeo (2 nd edn, 2011), 66-67; Mustaki and Engammare, Droit europén des sociétés (2009), 315-319; Wymeersch and Kruithof, The Law of Groups of Companies – an International Bibliography (1991); Habersack and Verse, Europäisches Gesellschaftsrecht (4th ed. 2011), 70 et seq, 85 et seq; Hommelhoff, ‘Zum revidierten Entwurf einer Konzernrechtsrichtlinie’, in Goerdeler, Hommelhoff, Lutter, Wiedemann (eds), Festschrift für Hans-Joachim Fleck zum 70. Geburtstag (1988), 125 et seq; Immenga, ‘Abhängige Unternehmen und Konzerne im Europäischen Gemeinschaftsrecht’ RabelsZ 1984 (48), 48 et seq; Lutter, ‘Stand und Entwticklung des Konzernrechts in Europa’ ZGR 1987 (16), 324 et seq; Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 12 margin no 1 et seq. 168 Bartman, ‘Of Groups and Ostriches (Editorial)’, 4 (2007) European Company Law 190, referring to the European Commission’s Action Plan 2003; Gower and Davies, Principles of Modern Company Law (9th edn, 2012), 246 (margin nos 9-19). 169 Andenæs and Wooldridge, European Comparative Company Law (2009), 32.

Peter Kindler

41

Introduction representative for the common core of European company law as far as the notion of control is concerned. In this respect the Explanatory Note to the pre-draft points out (emphasis added): ‘The subordination of a company to an undertaking in such a way that the latter can exercise a decisive influence on the management of that company is a concept of fundamental importance to this Directive. Article 2 seeks to define this complex phenomenon principally for the purposes of the application of Section 4 of this Directive, but instead of giving a general definition such as appears in several national legal systems, the present directive restricts itself to enumerating, in close conformity with the Seventh directive, the cases which are of special importance because of the possibility that situations of conflict might arise. The power of control may be, and most often is, based on the majority of the voting rights (subparagraph (a)). (…).’171

121

122

123

124

125

126

At this point, the Explanatory Note makes clear that being subject to ‘decisive influence’ based on ‘power of control’ is the key prerequisite of a ‘subsidiary undertaking’. As to the consequences of ‘decisive influence’, the pre-draft restricts itself to special information duties and liability as a de facto director: As to the information duties, where a company is a ‘subsidiary undertaking’ within the meaning of Art 2, its management body shall each year prepare a special report (Art 7(1)). As to liability as the second consequence of ‘decisive influence’, Section 4 regarding the protection of a company subject to the influence of an undertaking (Art 6 to 12) is highly relevant for the European ‘control’ concept. Under Section 4 there is merely a de facto linkage between two or more undertakings, and no control agreement has been stipulated. The key term here is the ‘de facto member of the management body’ as defined in Art 9. Any undertaking which directly or indirectly exercises a ‘decisive influence’ over decision-making by the management body of the company shall be regarded as a de facto member of the management body of that company (Art 9(2)). Any undertaking which conducts itself towards a company as a de facto member of the management body shall be liable to the company for any damage resulting from such interference (Art 9(1)). This is close to French law.172 Furthermore, the responsibility linked to decisive influence on the management recalls the shadow director according to UK law. Under UK law a shadow director is a person, not formally appointed as a director, but in accordance with whose directions or instructions the directors of a company are accustomed to act (Section 251 Companies Act 2006). The fifth Section of the 1984 pre-draft (Arts 13 to 32) regulates the ‘control contract instituting a vertical group’, the sixth Section (Arts 33 to 37 a) deals with the ‘unilateral declaration instituting a vertical group’ which is close to the ‘integrated companies (Eingliederung)‘ as defined in Section 319 et seq. of the German AktG. In short: As far as the definition of subsidiary (Art 2) and the responsibility of the de facto director in case of decisive influence (Art 9) are concerned, there is however no German influence and the pre-draft can be regarded as representative of the common core of European law governing groups of companies. The Explanatory Note of the Commission to the pre-draft of a Directive on Groups of Companies (→ mn. 117) makes clear that Art 2 not only defines the subsidiary 170 Explanatory Note, Commission doc. III/1639/84, 7; for an introduction to German law on groups of companies see Vicari and Schall, Company Laws of the EU (2020), 199, 380 et seq. 171 Explanatory Note, Commission doc. III/1639/84, 7. 172 Immenga, ‘L’harmonisation du droit des groupes de sociétés. La proposition d’une Directive de la Commission de la C.E.E.’ Giurisprudenza commerciale, I 14 (1986), 846-856, at 853: ‘Ce point de départ se trouve proche du droit de sociétés français.’ (‘This starting point is close to French company law.’).

42

Peter Kindler

Introduction undertaking, but at the same time gives four examples for the notion of ‘decisive influence’. That notion is not mentioned in Art 2 itself but in Art 9(2) where the draft defines the de facto director. The four examples of ‘decisive influence’ defined by Art 2 are considered as situations where the parent undertaking has ‘power of control’ (see once more → mn. 117). This paragraph of the Explanatory Note makes clear two things: (1) decisive influence 127 is a complex phenomenon, of which Art 2 defines only some specific cases of special importance, far from providing an exhaustive definition. (2) In these specific cases the parent undertaking has power of control. As far as ‘decisive influence’ (Art 9(2)) as a trigger for liability of an undertaking that 128 acts as a de facto director is concerned, it is not necessary that that undertaking controls the company within the meaning of Art 2(1) of the pre-draft: ‘The company referred to in Article 9 need not fall within the criteria laid down in Article 2.’ 173

As far as responsibility (Art 9) is concerned, the subsidiary need not depend from 129 the parent company as defined by the notion of formal control under Art 2 of the pre-draft.174 (v) Conclusion Within the 1984 pre-draft of a Group Law Directive, there are two different concepts 130 that characterize a parent-subsidiary relation: – –

certain formal situations of ‘power of control’ (Art 2) as a trigger for information duties. the economic concept of ‘decisive influence’ (Art 9) as a trigger for liability.

Also the Financial Statements Directive and the Directive Transparency II combine 131 the formal concept of control and the substantive concept of dominant influence (→ mn. 105 et seq.). In the eyes of the authors of the 1984 preliminary draft of a directive on corporate 132 groups there is a clear hierarchy between the two notions: Decisive influence is the superordinate concept. It comprises formal control (Art 2(1)) and substantive control. Who is in formal control (because in possession of the majority of the voting rights etc.), always at the same time has decisive influence as defined in Art 9(2) of the pre-draft. On the other hand, decisive influence can also be based on other, merely economic circumstances which do not at the same time indicate formal control. This is what can be defined as substantive or actual control.175 This becomes clear in the Explanatory Note: ‘The circumstances referred to in Article 2 cover only some of the situations where a company may be subject to the influence of an undertaking; they represent the essentials. It is nonetheless evident that there are numerous other circumstances that enable an undertaking to exercise a decisive influence on the management body of a company.’176 (emphasis added)

In sum, the European ‘control concept’ is a catch-all notion that covers legal and 133 economic tools to exert decisive influence over a company. Explanatory Note (on Article 9 of the pre-draft), Commission doc. III/1639/84, 25. Immenga, ‘L’harmonisation du droit des groupes de sociétés. La proposition d’une Directive de la Commission de la C.E.E.’ Giurisprudenza Commerciale, I 14 (1986), 846, at 852-853. 175 Hopt, ‘Legal Elements and Policy Decisions in Regulating Groups of Companies’ in Schmitthoff and Wooldridge (eds), Groups of Companies (1991), 81 et seq, at 92. 176 Explanatory Note (on Article 9 of the pre-draft), Commission doc. III/1639/84, 25. 173

174

Peter Kindler

43

Introduction

III. Current Legal Policy and Recent Legislation 1. Diversity in the laws governing small corporations and the state of EU legal policy in the area of corporate law a) Starting point All EU Member States regulate public limited liability companies (Aktiengesellschaft, société anonyme, etc.)177 in their respective national laws and most of them regulate the private limited company (Gesellschaft mit beschränkter Haftung, société à responsabilité limitée, etc.)178 as well.179 The latter is – as a small corporation – characterised by a lesser degree of stringency in relation to form, a greater degree of contractual freedom and the ineligibility to be traded on an exchange. On the whole, important segments of the organisational rights within large corporations have remained part of national corporate laws, not to mention laws regulating the private limited company and partnerships. 135 The European Commission apparently wants to change this. It has obtained a comprehensive report on the issue (Report of the Reflection Group on the Future of EU Company Law, April 2011,180) and has issued a Green Paper on the core issues of corporate law dated 5 April 2011.181 However, caution is warranted if primarily for the reason that the European financial and capital markets, which must be regulated at the European level due to the international interrelations inherent in the system, are not involved here. By contrast, the goal of European corporate law is solely to ensure the required degree of shareholder and creditor protection (Art 50(2)(g) TFEU) and is warranted to that extent. Of course, in many cases national regulations would be more appropriate for mid-sized and small enterprises (SME). This follows from the principle of subsidiarity (Art 5 TFEU).182 134

b) Low degree of ‘Europeanization’ of the small corporation 136

Not all EU Directives on company law are referred to small companies. As regards the main legal instrument of EU Company Law, the Directive 2017/1132/EU, important sections are restricted to the public limited liability company. This is true for the provisions relating to incorporation (Arts 2 to 6), capital maintenance and alteration (Arts 44 to 86), internal mergers (Arts 87 to 117) and divisions (Arts 135 to 159). Furthermore, also the Directives on takeover bids (2004/25/EC) and on the exercise of certain rights of shareholders in listed companies (2007/36/EC) apply to public limited liability companies only. See Directive 2017/1132/EU, Annex II. See Directive 2017/1132/EU, Annex I. 179 Cf table setting out an overview of corporate forms represented in the EU in Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 9 margin no 60; Directive 2017/1132/EU, Annex II. 180 Report of the Reflection Group On the Future of EU Company Law, 5 April 2011, accessible at http:/ /ec.europa.eu/internal_market/company/docs/modern/reflectiongroup_report_en. pdf; see Bachmann, ‘Der “Europäische Corporate Governance-Rahmen” – Zum Grünbuch 2011 der Europäischen Kommission’ Zeitschrift für Wirtschafts- und Bankrecht (WM) 2011, 1301 et seq; Lenoir and Conac, ‘Rapport du groupe de réflexion sur le futur du droit européen des sociétés: vers un changement de cap?’ Recueil Dalloz 2011, 1808; Chiapetta and Tombari, ‘Perspectives on Group Corporate Governance and European Company Law’, 9 (2012), 261; Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 7 margin nos 113 et seq; Bayer and Schmidt ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2011/12’ BB 2013 (68), 3, 13 et seq. 181 Green Paper: The EU corporate governance framework, Brussels, 5.4.2011, COM(2011) 164 final. 182 Hopt, ‘Europäisches Gesellschaftsrecht: Quo Vadis?’ EuZW 2012, 481, 482. 177

178

44

Peter Kindler

Introduction The private limited liability company is addressed to a minor degree. As regards Directive 2017/1132/EU, several sections are referred to the public limited liability and the private limited liability company at the same time. This is true for the provisions relating to nullity of the company and validity of its obligations (Arts 7 to 12), the online procedures (formation, registration and filing), disclosure and registers (Arts 13 to 43), cross-border conversion of companies (Arts 86 a to 86 t) and cross-border mergers of companies (Arts 118 to 134). Furthermore, also the Directive 2013/34/EU on annual financial statements and the Directive on single-member private limited liability companies (2009/102/EC) are primarily directed at small corporations (Arts 1, 6). The European legislative harmonisation programme has yet to address the small corporation as regards formation rules and capital or rules related to internal mergers and divisions (→ mn. 76 et seq.). Based on the above analysis, it should be apparent that large segments – if not the core – of laws affecting small corporations have not been ‘europeanised’ to date. 183 This relates to central issues such as corporate capital, which is why there is no statutory minimum capital at all in the United Kingdom or France, whereas other legal systems impose requirements in this regard which may definitely represent barriers to access for under-capitalised entrepreneurs (for example the minimum capital requirements set out in Section 5(1) of the German law pertaining to private limited liability companies [GmbHG]: EUR 25,000). Laws regulating small corporations are similarly characterised by diversity in relation to formation rules. In this regard, significant differences exist as regards minimum contents of the company statutes or controls related to the use of in-kind contributions when raising capital. The same applies to membership rights, where mandatory statutory limitations on assignability may be found in some cases as well as standardisation in the maximum number of shareholders.184 Furthermore, the implementing rules related to representation and disclosure (i.e. the unlimited power of representation of the executive bodies and to disclosure in the general, commercial or companies’ register; Directive 2017/1132/EU Title I Chapter II Section 2, Chapter III) provide a certain degree of minimum protection of legitimate expectations in case of cross-border transactions. However, harmonised basic principles regarding capital requirements or capital maintenance are completely absent.185 Similarly, the attributes of membership in a small corporation are regulated differently at the national level. It is highly controversial whether and in what form the secondary law-based harmonisation of private limited liability companies should be continued.186 In addition, a gradual convergence of the domestic laws relating to private limited liability companies (not linked to EU directives in this field) may be noted due to increased competitive pressures and this in the form of downward spiral (‘race to the 183 Likewise the assessment in Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed. 2017), § 9 margin no 52 et seq. 184 For more information, see Lutter, ‘Limited Liability Company’ in Conard and Vagts (eds), International Encyclopedia of Comparative Law, Vol. XIII/1 (2006); identical ‘Die Entwicklung der GmbH in Europa und in der Welt’ in Lutter, Ulmer and Zöllner (eds), Festschrift 100 Jahre GmbH-Gesetz (1992), 49 et seq. 185 For the public limited liability company see Art 44 et seq Directive 2017/1132/EU. 186 Kindler, The Single-Member Limited Liability Company (SUP) – A Necessary Reform of EU Law on Business Organizations? (2016); Bachmann, Eidenmüller, Engert, Fleischer and Schön (eds), Regulating the Closed Corporation (2013).

Peter Kindler

45

137

138

139

140

141

142 143 144 145

Introduction bottom’), → mn. 2. For example, this may be seen in the downward adjustment of corporate capital. French law may serve as an example here where the minimum capital requirements for the SARL were abolished in 2003 with a view to the English Limited and an example may be found in Germany where the 2008 corporate reform introduced the ‘Unternehmergesellschaft’ [Entrepreneurial Company] which may be formed with minimum capital of only one euro.187 The initiatives to create a European private company (→ mn. 173) or a European single-member company (→ mn. 174) are causing additional pressure on national legislators. c) State of EU legal policy European corporate law has regained momentum since the turn of the last century after the harmonisation process related to corporate laws within the EU had reached a certain degree of stagnation188 in the 1990’s.189 Since 2001, the primary results of the harmonisation process have been the following: The European Company ( SE) in 2001, the SCE in 2003, the Takeover Directive (2004/25/EC) and Recommendations on board compensation in 14 December 2004,190 Recommendations of 14 February 2005 related to non-executive directors and committees191 as well as the Cross-Border Merger Directive in 2005, the 2006 Statutory Audit Directive and the reform of accounting rules in 2006 (Accounting Directive, Consolidated Accounts Directive), 192 the Shareholders’ Rights Directive 2007/36/EC, the proposal for an SPE in 2008, two additional recommendations regarding compensation in 2009,193 the Green Paper on corporate governance for financial institutions in 2010,194 the Directive to link company registers in 2012 (‘BRIS’_Directive 2012/17/EU)195 and furthermore the 2011 Green Paper on a general corporate governance framework (→ mn. 135). 147 The legislation and measures referred to above are based in large part on the Action Plan ‘Modernisation of Company Law and Enhancement of Corporate Governance in the European Union’ dated 21 May 2003 (‘Action Plan 2003’)196 in which the 146

187 Cf on the entire issue Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed. 2017), § 7 margin no 69; Schmidt, ‘The New Unternehmergesellschaft (Entrepreneurial Company) and the Limited: A Comparison’, 9 (2008) German Law Journal 1093. 188 For more detailed information see, Bayer and J. Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das europäische Unternehmensrecht: Eine Bilanz von 1968 bis zur Gegenwart’ in Bayer and Habersack (eds), Aktienrecht im Wandel, Vol. 1 (2007), Ch. 18 margin no 11 et seq. 189 On the following issue, cf Bayer and Lutter/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 18 margin no 1 et seq. 190 COMMISSION RECOMMENDATION of 14 December 2004 fostering an appropriate regime for the remuneration of directors of listed companies (2004/913/EC); Lutter, ‘The Commission Recommendations of 14 December 2004 and 15 February 2005 and their implementation in Germany’, in Tison, de Wulf, van der Elst and Steennot (eds), Perspectives in Company Law and Financial Regulation – Essays in Honour of Eddy Wymeersch (2009), 132 et seq. 191 COMMISSION RECOMMENDATION of 15 February 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board (2005/162/EC); Lutter, ‘The Commission Recommendations of 14 December 2004 and 15 February 2005 and their implementation in Germany’, in Tison, de Wulf, van der Elst and Steennot (eds), Perspectives in Company Law and Financial Regulation – Essays in Honour of Eddy Wymeersch (2009), 132 et seq. 192 DIRECTIVE 2006/43/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/ 660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC. 193 Commission Recommendation of 30 April 2009 on remuneration policies in the financial services sector (Text with EEA relevance) (2009/384/EC); Commission Recommendation of 30 April 2009 complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies (2009/385/EC). 194 COM(2010) 284.

46

Peter Kindler

Introduction Commission set out a comprehensive and remarkably ambitious programme of reform steps.

2. The 2003 EU Action Plan on the modernisation of company law and improvement of corporate governance a) Overview The core elements of the Action Plan 2003197 are based on the recommendations 148 of the ‘High Level Group of Company Law Experts’ (Winter Group). The expert group’s198 final report, submitted on 4 November 2002, contained a comprehensive list of recommendations for the further development of European corporate law, in particular in the area of company management (corporate governance) as well as with regard to capital raising and maintenance, corporate groups, restructuring and European legal entity forms. The intended purpose of the Action Plan 2003, developed on the basis of this report, is to increase the global efficiency and competitiveness of EU enterprises, to bolster shareholders’ rights and to improve the protection of third parties. 199 From a legal policy standpoint, it is significant that at the same time the Action Plan 2003 represented the final farewell to the original plan for ‘full harmonisation’ in the realm of corporate law.200 A few individual elements which are of interest for purposes of comparative legal analysis, especially with respect to the core elements of laws related to small corporations, will be addressed below. b) Shareholders’ Right to choose between monistic and dualistic management structure The first of these individual elements is the recommendation to introduce a share- 149 holders’ right to choose between a monistic and a dualistic system in the management structure of corporations (→ mn. 25, 40, 45, 46).201 This proposal cannot be assessed in detail in this commentary.202

195 Directive 2012/17/EU and Commission Implementing Regulation (EU) 2020/2244 set out rules on the system of interconnection of business registers (‘BRIS’). BRIS is operational since 8 June 2017. It allows EU-wide electronic access to company information and documents stored in Member States’ business registers via the European e-Justice Portal. BRIS also enables business registers to exchange between themselves notifications on cross-border operations and on branches. 196 COM(2003) 284. 197 Communication from the Commission to the Council and the European Parliament. Modernisation of Company Law and Enhancement of Corporate Governance in the European Union – Action Plan, 21 May 2003, COM(2003) 284; on this issue, see Habersack, ‘Europäisches Gesellschaftsrecht im Wandel – Bemerkungen zum Aktionsplan der EG-Kommission betreffend die Modernisierung des Gesellschaftsrechts und die Verbesserung der Corporate Governance in der Europäischen Union’ NZG 2004 (7), 1 et seq, Habersack, ‘Das Aktiengesetz und das Europäische Recht’ ZIP 2006, 445, 447 et seq; Hopt, ‘Europäisches Gesellschaftsrecht und deutsche Unternehmensverfassung – Aktionsplan und Interpendenzen’ ZIP 2005, 461; Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th edn, 2017), § 3 margin no 70, § 13 margin no 4. 198 Final Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe dated 4 November 2002, accessible at ec.europa.eu/. 199 Action Plan, COM(2003) 284, Introduction (3). 200 Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th edn, 2017), § 5 margin no 43, § 13 margin no 4. 201 Action Plan, COM(2003) 284, 3.1.3 (18 et seq) and Annex 1 (29). 202 For a detailed analysis cf Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 95 et seq.

Peter Kindler

47

Introduction c) Capital maintenance and capital alterations 150

A proposed Directive on simplifying the 1976 Capital Directive (codified in Arts 44 et seq. Directive 2017/1132/EU))203 based on the Action Plan 2003, contained general rules, i.e. rules independent of an acquisition, for squeeze-outs and sell-outs (Art 39 a, 39 b). However, the Commission dropped the proposals following opposition in the European Parliament and as part of the consultation on the Action Plan 2003. Nevertheless, the result of the Action Plan 2003 in this realm was amending Directive 2006/68/EC which contained a significant easing of the rules regarding the review of in-kind contributions, the acquisition of own shares, advance payments or collateral, as applicable, when acquiring own shares (financial assistance).204

3. Reform initiative 2011/12 a) The EU Green Paper ‘European corporate governance framework’ 151

Following on its sector-specific Green Paper on ‘Corporate Governance in Financial Institutions and Remuneration Policies205’, the Commission presented a comprehensive Green Paper entitled ‘European Corporate Governance Framework’206 on 5 April 2011. In light of lessons learned from the financial crisis 2008/09, its intent is to improve management not only for financial institutions but that of European enterprises in general. The Green Paper addresses four topics: (1) General aspects (including the usefulness of a distinction based on company size; measures applicable to non-listed enterprises as well), (2) Organisational structure (including the creation of professional, international and gender-based diversity; mandate ceilings; regular external evaluation; disclosure of remuneration and ‘say on pay’; improvement of risk management), (3) Shareholder protection (including measures directed at asset managers and intended to simplify collaboration on the part of shareholders; a legal framework for protecting minority shareholders; promotion of equity participation on the part of employees) and (4) the ‘comply or explain’ principle (including an obligation to explain deviations in detail and, where applicable, alternative solutions chosen; review by supervisory authorities). The 2011 Green Paper was subject to wide discussion.207 b) ‘Reflection Group’ and Action Plan 2012

152

During 2011 – almost eight years following the Action Plan 2003 on corporate governance, discussed above (para. 148 et seq.) – the EU Commission initiated a new phase in legal harmonisation in the realm of corporate law. To this end, the Commission engaged 203 Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Council Directive 77/91/EEC, as regards the formation of public limited liability companies and the maintenance and alteration of their capital, COM(2004) 730. 204 For details see Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 19 margin no 6. 205 COM(2010) 284; see Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 13 margin no 11; Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2010/11’ BB 2012 (67), 3, 8, et seq; Bayer and Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2011/12’ BB 2013 (68), 3, 9. 206 Green Paper European Corporate Governance Framework, COM (2011) 164. Overview in Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th edn, 2017), § 5 margin no 61; § 7 margin no 114. 207 Cf e.g. Tomasic, ‘Corporate Governance Reforms in the EU’, 8 (2011) European Company Law (ECL) 142; Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 22 et seq; Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th edn, 2017), § 13 margin no 11.

48

Peter Kindler

Introduction a ‘Reflection Group On the Future of EU Company Law’ at the end of 2010 which quickly submitted a report208 containing extensive recommendations for legislative measures in April 2011 (→ mn. 135). A consultation on the future of European corporate law based on this report was concluded in May 2012.209 In 2020 it seems – nearly two decades after the High Level Group of Company Law Experts report of 2002 and the Commission’s Action Plan of May 2003 – that a new law on corporations is in store for us from Brussels.210 In substance, the 2011 Reflection Group report addresses three general issues: 153 (1) Cross-border mobility, transparency and EU legal entity forms (rule on cross-border transfer of registered office expected in the near future, improvement of cross-border transparency, creation of additional European legal entity forms), (2) The long-term survivability of enterprises (including goal of sustainable business management, improvements in risk management, promotion of long-term commitment on the part of shareholders, measures related to institutional investors, additional improvements related to the exercise of shareholder voting rights, mechanisms for identifying the shareholders by the company, evaluation of the legal instrument of independent board members, in general a ‘neutral position related to co-determination’ on the part of the European legislature, free selection of management structures at least in the case of non-listed companies, additional simplification measures specifically related to SME) and (3) Rules related to corporate groups (recognition of a ‘group interest’, creation of a simplified single-member company to be used as the basis for a corporate group, problems of transparency related to corporate groups). At the same time, the Reflection Group welcomed the competing scientific project for a European Model Company Act (EMCA).211 Taking into account the Reflection Group’s findings, the European Commission pub- 154 lished an additional Action Plan on European Company Law and Corporate Governance (Action Plan 2012) based on the foregoing 2003 Action Plan on 12 December 2012.212 The 2012 Action Plan lists 16 initiatives,213 all of them in the light of the two main aims of European company law: free mobility of enterprises and shareholder protection. The 2012 Action Plan highlights the following key areas:

208 Report of the Reflection Group On the Future of EU Company Law, 5 April 2011, accessible at http://ec.europa.eu/internal_market/company/docs/modern/reflectiongroup_report_en. pdf. 209 Cf EuZW 2012, 203; see the ‘FEEDBACK STATEMENT – SUMMARY OF RESPONSES TO THE PUBLIC CONSULTATION ON THE FUTURE OF EUROPEAN COMPANY LAW’ accessible at http:// ec.europa.eu/internal_market/consultations/docs/2012/companylaw/feedback_statement_en.pdf. 210 Hopt, ‘Europäisches Gesellschaftsrecht: Quo Vadis?’ EuZW 2012, 481, 482. 211 For additional information, see Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 12 margin no 33 et seq with additional citations; current information on the EMCA project website: http://www.asb.dk/emca/; see also, e.g. Krüger Andersen, ‘The European Model Company Act (EMCA): A new way forward’ , in Bernitz and Ringe (eds), Company Law and Economic Protectionism – New Challenges to European Integration (2011), Part IV. 212 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Action plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies, Brussels, 12.12.2012, COM (2012) 740/2; for a survey see Bayer and Schmidt, ‘BB-Gesetzgebungsund Rechtsprechungsreport zum Europäischen Unternehmensrecht 2011/12’ BB 2013 (68), 3, 12 et seq; Former Reflection Group on the Future of EU Company Law, ‘Response to the European Commission‘s Action Plan on Company Law and Corporate Governance’, 10 (2013) ECFR 304; Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, (6th ed. 2017), § 13 margin no 14. 213 Hopt, ‘Europäisches Gesellschaftsrecht im Lichte des Aktionsplans der Europäischen Kommission vom Dezember 2012’ ZGR 2013 (42), 165, 166.

Peter Kindler

49

Introduction – – – – – – – 155 156

157

158

159

160 161

European company forms, cross-border merger, transfer of seat (cross-border conversion) and division of companies, company finances, corporate governance, shareholders, in particular institutional shareholders, controlling shareholders and company groups, the position of other stakeholders, in particular employee share ownership.

In the following paragraphs, only some of the most important legislative measures of the EU since 2012 based on the Action Plan 2012 are mentioned. In 2012, Directive 2012/17/EU and – later – the Commission Implementing Regulation (EU) 2020/2244 set out rules on the system of interconnection of business registers (‘BRIS’). BRIS is operational since 8 June 2017. It allows EU-wide electronic access to company information and documents stored in Member States’ business registers via the European e-Justice Portal. BRIS also enables business registers to exchange between themselves notifications on cross-border operations and on branches. For details see Art 22 Directive 2017/1132/EU. Again in 2012, the Commission submitted a proposal for a directive on improving the gender balance among non-executive directors of companies listed on stock exchanges, not yet crowned with success.214 In 2017, the Shareholders rights Directive 2007/36/EC (→ mn. 136) was amended by Directive 2017/828/EU, which aims to encourage more long-term engagement of shareholders. In addition, the 2018 Commission Implementing Regulation (EU) 2018/1212 layed down minimum requirements as regards shareholder identification, the transmission of information and the facilitation of the exercise of shareholders rights. Again in 2017, a large part of EU company law was codified in a single Directive – the Directive 2017/1132 relating to certain aspects of company law (see Art 166 of that Directive). The Commission’s idea behind the codification was to improve transparency of this branch of the law for its citizens. This idea was put into practice only to a limited extent.215 It is hardly understandable why two important directives were left out: This regards, firstly, the Directive 2009/102/EC on single-member private limited liability companies, being this type of company rather frequent in practice.216 Secondly, skipping the Directive 2007/36/EC on shareholders‘ rights in listed companies217 cannot convince; this directive is closely linked to general aspects of corporate law as regulated in Title I of the Directive 2017/1132/EU. As pointed out above (para. 76 et seq.), the focus on public companies seems far too narrow. Two further steps were undertaken in the fields of digitalization and of intra-EU mobility of companies (‘Company Law Package 2018’).218 The Directive 2019/1151/EU of 20 June 2019 covers provisions on the use of digital tools and pro214 Proposal for a Directive of the European Parliament and of the Council on improving the gender balance among non-executive directors of companies listed on stock exchanges and related measures, COM(2012) 614; Papadima, ‘Recent Developments regarding Gender Balance on EU Corporate Boards’, 12 (2015) ECL 245; Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 13 margin no 60. 215 Kindler, ‘Transparenz und Nachhaltigkeit. Transparenz und Mobilität: konfligierende Regelungsziele im Europäischen Gesellschaftsrecht?’ Deutsche Notar-Zeitschrift-Sonderheft zum 29. Deutschen Notartag (Berlin 2016) (DNotZ) 2016 (75), 75, 76 et seq. 216 Text and commentary below at → p. 833 et seq. 217 Text and commentary below at → p. 855 et seq.

50

Peter Kindler

Introduction cesses in company law including the online formation of companies.219 Member States need to transpose this Directive by 1 August 2022. The Directive 2019/2121/EU of 27 November 2019 lays down new rules on cross-border conversions and divisions and amends the rules on cross-border mergers (‘Mobility Directive’).220 Member States need to transpose this Directive by 31 January 2023. This new set of rules will enable companies to use digital tools in company law procedures and to restructure and move cross-border, while providing certain safeguards against fraud and to protect stakeholders. The two 2019 Directives revise and complement Directive 2017/1132. Another initiative regarding insolvency law has significant impact on directors’ duties 162 and capital maintenance in the crisis of companies: On 20 June 2019 the Directive 2019/1023/EU on preventive restructuring frameworks was enacted (→ mn. 64 et seq.).221 Pursuant to Art 19 of that Directive (‘Duties of directors where there is a likelihood of insolvency’), Member States shall ensure that, where there is a likelihood of insolvency, directors, have due regard, as a minimum, to the following: (a) the interests of creditors, equity holders and other stakeholders; (b) the need to take steps to avoid insolvency; and (c) the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business. It is obvious that this provision is in contrast to directors’ duties to file for the 163 opening of insolvency proceedings at an early stage under domestic law. 222 An even deeper impact on European company law is connected with a series of 164 significant insolvency-related modifications in the field of capital maintenance of the public limited liability company (Title I Chapter IV of the Directive 2017/1132/EU relating to certain aspects of company law). Several protective rules of capital maintenance are cut back drastically in order not to endanger the adoption and the implementation of preventive restructuring frameworks provided for in Directive 2019/1023/EU. Thus, under Art 84(4) Directive 2017/1132/EU – as amended by Directive 165 2019/1023/EU on preventive restructuring frameworks – Member States shall derogate, to the extent and for the period that such derogations are necessary for the establish218 Kumpan and Pauschinger, Entwicklung des europäischen Gesellschaftsrechts’ EuZW 2019, 357, 359 et seq; Bayer and Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/19 – Teil I: Company Law Package’ BB 2019 (74), 1922. 219 See Kindler and Jobst, ‘Die Online-Gründung nach dem Company Law Package – Chancen und Risiken bei der Umsetzung ins deutsche Recht’ (2019) 72 Der Betrieb, 1550; Kindler and Jobst, ‘Costituzione di società ed identificazione elettronica: il company law package e la sua attuazione nell’ordinamento tedesco ed in quello italiano’ Le nuove leggi civili commentate 42 (2019), 1557; as to its transposition in Germany see Kindler, ‘Digitales Gesellschafts- und Registerrecht 2022 – Das Gesetz zur Umsetzung der Digitalisierungsrichtlinie auf der Zielgeraden ‘, in Der Betrieb no 9 of 1 March 2021, M4-M6 (DB1358587). 220 On the Directive 2019/2121/EU on cross-border conversions, mergers and divisions see Stelmaszczyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’ GmbH-Rundschau 2020 (111), 61; J. Schmidt, ‘Cross-border Mergers, Divisions and Conversions: Accomplishments and Deficits of the Company Law Package’, 16 (2019) ECFR 222. 221 Directive 2019/1023/EU on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt; on directors’ duties see Korch, ‘Sanierungsverantwortung von Geschäftsleitern – Krisenpflichten im Lichte des Art 19 der Restrukturierungsrichtlinie’ ZGR 2019 (48), 1050; Bayer and Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/19 –Teil II’ BB 2019 (74), 2178, 2185. 222 Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 108 et seq; see for example Art L631-4 Code de commerce (France), Section 15 a Insolvenzordnung (Germany).

Peter Kindler

51

Introduction ment of the preventive restructuring frameworks, (1) from the directors’ duty to call a general meeting of shareholders in the case of a serious loss of the subscribed capital (Art 58(1)), (2) from the shareholders’ decision on the increase of capital (Art 68), (3) from the shareholders’ right of pre-emption in case of increase in capital by consideration in cash (Art 72), and (4) from the shareholders’ decision on the reduction of capital (Arts 73 et seq.).

4. Supranational entities created (or planned) by the EU a) European Economic Interest Grouping (EEIG) Council Regulation (EEC) No 2137/85 created the European Economic Interest Grouping (EEIG). It is designed to make it easier for companies or natural persons from different EU Member States to do business together, or to form consortia. The EEIG’s activities must be ancillary to those of its members, and, as with a partnership, any profit or loss it makes is attributed to its members. 167 Regulation (EEC) No 2137/1985 is not treated Article by Article in this Commentary, being this legal form only of marginal economic relevance within the EU. As of 9 January 2020, only 2.654 EEIGs were registered within the EU Member States. 223 166

b) European Company (Societas Europaea – SE) Among the supranational entities created by the EU, the European Company (Societas Europaea – SE) is the flagship. It is based on Council Regulation (EC) No 2157/2001 on the Statute for a European company (SE). According to ETUI, as of 25 July 2020 all in all 3.296 SE were registered within the EU Member States. 224 Important companies have chosen SE as their legal form (e.g. Airbus, Allianz, BASF, Deutsche Börse, E.ON, Fresenius, Louis Vuitton, Puma, MAN, Porsche, SAP, Schneider Electric, Vapiano, Tesla Manufacturing Brandenburg). 169 Still the SE’s relevance in European legal day-to-day life is modest, compared to the companies governed by national law based on EU company law directives. This is why the SE is not treated Article by Article in this Commentary.225 The Regulation provides four ways of forming a European Company (Art 2): 168

– – – – 170

by merger of national companies from different Member States, by the formation of a holding SE between companies (or other entities) in different Member States, by the creation of an SE subsidiary of a national company, by the conversion of a national company into an SE.

According to Art 9 of its Statute, the SE is subject to a variety of legal rules, which makes its operation somewhat complicated. In order to illustrate the complexity of the question of applicable law in the SE, Art 9 of its Statute is reproduced in full:

223 Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2019/20’ BB 2020 (75), 1794. 224 See the European Trade Unions Institute’s database at http://ecdb.worker-participation.eu/; Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2019/20’ BB 2020 (75), 1794. 225 For details see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 74 et seq (with further references).

52

Peter Kindler

Introduction Article 9 Council Regulation (EC) No 2157/2001 1. An SE shall be governed: (a) by this Regulation, (b) where expressly authorised by this Regulation, by the provisions of its statutes or (c) in the case of matters not regulated by this Regulation or, where matters are partly regulated by it, of those aspects not covered by it, by: (i) the provisions of laws adopted by Member States in implementation of Community measures relating specifically to SEs; (ii) the provisions of Member States' laws which would apply to a public limited-liability company formed in accordance with the law of the Member State in which the SE has its registered office; (iii) the provisions of its statutes, in the same way as for a public limited-liability company formed in accordance with the law of the Member State in which the SE has its registered office. 2. […] 3. […]

The SE must have a minimum subscribed capital of €120,000 as per Art 4(2) of the 171 regulation, subject to the provision that where a Member State requires a larger capital for companies exercising certain types of activities, the same requirement will also apply to an SE with its registered office in that Member State (Art 4(3)). The registered office of the SE designated in the statutes must be the place where it has its central administration, that is to say its true centre of operations. The SE may transfer its registered office within the European Economic Area without dissolving the company in one member state in order to form a new one in another member state; however, such a transfer is subject to the provisions of Art 8 of the Regulation which require, inter alia, the drawing up of a transfer proposal, a report justifying the legal and economic aspects of the transfer and the issuing, by the competent authority in the member state in which the SE is registered, of a certificate attesting to the completion of the required acts and formalities. In response to the COVID-19 crisis, Council Regulation (EU) 2020/699 on temporary measures concerning the general meetings of European companies (SEs) and of European Cooperative Societies (SCEs), which entered into force on May 28, 2020, enables SEs, by way of derogation from Art 54 SE Regulation, to hold their general meetings in 2020 within twelve months of the end of the financial year, provided that the meeting is held by December 31, 2020. c) European Cooperative Society (Societas Cooperativa Europaea – SCE) The European Cooperative Society is a European cooperative type of company, estab- 172 lished with Regulation (EC) No 1435/2003. It has nearly no relevance in economic life; as of 25 August 2018 only 42 SCEs were registered in the EU.226 The SCE is not treated Article by Article in this Commentary.227 d) European private company (SPE) At present, the future fate of the European private company (Societas Privata 173 Europaea – SPE) is an open question. The Commission draft228 of 2008 was met with 226 Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2019/20’ BB 2020 (75), 1794; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 90. 227 For details see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 90 et seq. 228 Proposal for a Council Regulation on the Statute for a European private company, 25 June 2008, COM (2008) 396; see citations in Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 47 margin no 2 et seq.

Peter Kindler

53

Introduction reservations on the part of many Member States due to its extremely liberal line and the European Parliament229 likewise had already proposed an entire series of modifications in 2009. After proposed compromises from the French (2008), Czech (start of 2009) and Swedish Council presidencies (end of 2009) had failed,230 the Hungarian Council presidency next used its best efforts during the first half of 2011 to reach consensus. The final of its total of three proposed compromises appeared particularly promising.231 However, when a Council vote was held on 30 May 2011, Germany and Sweden voted against this proposed compromise based on concerns particularly regarding employees’ participation.232 In addition to this central issue (→ mn. 48 et seq.), other points in dispute regard corporate domicile (in particular in cases of a split between the registered office and where the actual administrative offices are located),233 cross-border elements and minimum capitalisation.234 As it seems, the SPE project could be ‘reanimated’ thanks to a German-French Working group on a ‘Société Européenne Simplifiée’.235 e) Single-membered Company (SUP) The stranded project of a single-membered company (Societas Unius Personae – SUP)236 has been abandoned by the European Commission. 237 An important element of this project, the online formation of companies in the EU, has ‘survived’ as Arts 13 b et seq. Company Law Directive 2017/1132/EU.238 175 The Commission had good reason to abandon the project.239 The text had two serious weaknesses, namely the online formation with an unsafe proof of identity (Art 174

229 European Parliament Resolution dated 10 March 2009 on the Proposal for a Council Regulation on the Statute for a European private company, AB1EU dated 1 April 2010, C 87/E300; see Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, (6th edn, 2017), § 47 margin no 6 et seq. 230 Individual citations in Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2010/2011’ BB 2012 (67), 3. 231 Docs. 8084/11, 9713/11 and 10611/11; see the extensive discussion of the 3 rd Hungarian proposal for a compromise in Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th edn, 2017), § 47 (with citations to now very comprehensive literature on the topic of the SPE); for details see Roth and Kindler, The Spirit of Corporate Law: Core Principles of Corporate Law in Continental Europe (2013), 23 et seq; Hirte, The European Private Company – Societas Privata Europaea (SPE) (2013). 232 Cf Doc. 10547/11, 9; see Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 47 margin no 6; a final attempt to place the SPE on the agenda of he extraordinary Council meeting of 27 June 2011 failed as well (Doc. 11786/11) due to German opposition; Hellwig and Behme, ‘Die deutsche Unternehmensmitbestimmung im Visier von Brüssel?’ Die Aktiengesellschaft (AG) 2011, 740, 741. 233 The EP stated its opposition to a split domicile in its initiative report 2012: P7_TA-PROV (20120019) European Parliament: Plenary session document A7-0008/2012 dated 9 January 2012. Report with recommendations to the Commission on a 14th company law directive on the cross-border transfer of company seats 2011/2046 (INI), 5, Recitial H of the draft resolution, text accessible at http://www.europarl .europa.eu/sides/getDoc.do?type=REPORT&reference=A7-2012-0008&language=DE. 234 For a scientific overall assessment of the EPC project and specific suggestions for its further development, see Bachmann in Bachmann, Eidenmüller, Engert, Fleischer and Schön (eds), Regulating the Closed Corporation (2013). 235 Teichmann and Götz, ‘Metamorphosen des Europäischen Gesellschaftsrechts: SUP, Company Law Package und SPE 2.0’ ZEuP 2019 (27), 260, 285 et seq; Bayer and Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/19 – Teil II’ BB 2019 (74), 2178, 2183. 236 Proposal for a Directive on single-member private limited liability companies, COM(2014) 212; for a critical assessment of this project see Kindler, The Single-Member Limited Liability Company (SUP) – A Necessary Reform of EU Law on Business Organizations? (2016). 237 OJ 4.7.2018, C 233/7; Bayer and Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2017/18’ BB 2018 (73), 2562, 2566. 238 See Conac, ‘Start-up Europe: la proposition de directive du 25 avril 2018 sur la digitalisation du droit des sociétés’, Revue des sociétés 2019, 31, 33: ‘une victoire posthume’.

54

Peter Kindler

Introduction 14(3)) and the insufficient protection of creditors as far as capital maintenance is concerned (Art 18). To these are added the missed parallelism with applicable insolvency law (Art 7 EIR) because of the adoption of the incorporation theory as a connecting factor (Art 7(4) General Approach SUP240) and – from a German perspective – the risk that the SUP be used as a tool for avoiding codetermination. The contorted concept of a single-share company whose one share can belong to several persons (Art 15(3)) seems insufficiently thought through and misleading in respect to the indication of the legal form (Art 7(3) SUP directive). The SUP is largely unsuitable as a building block for corporate groups due to the non-regulation of the single-member’s right to issue instructions (deletion of Art 23 SUP directive in the General Approach) and of directors’ liability (Art 22): as long as the right to issue instructions follows the non-harmonised laws of the member state in which the SUP is registered (Art 7(4) (b)) and its exercise is possible only under the Damocles’ sword of liability under national law, group parent companies have little incentive to run their subsidiaries in other EU countries as SUPs. Finally, the lack of regulation as regards cash-pooling negatively affects the usability of the SUP as a group company. All in all, the proposed SUP not only seemed unnecessary. The reform plans would have lead to a backlash in several aspects.

C. The Institutional Framework of European Company Law I. The Interaction between EU and Member States’ Law In fields where European company law exists there are always two legal orders to be 176 applied concurrently: company law set at EU level and company law set by the Member States’ legislature, and as to the latter there is still the PIL question which national company law applies (→ mn. 4, 66).241

1. The EU Level a) Primary Law of the European Union (Treaty Law) At EU level company law-related rules can be found in the form of the fundamental 177 freedoms of the TFEU. In this regard, the freedom of establishment (Arts 49, 54 TFEU), on the one hand, deals with operations concerning the company as a whole: formation and structural change (branches, subsidiaries, cross-border conversions, mergers and divisions, takeovers, etc.; → mn. 90 et seq.). The free movement of capital (Art 63 et seq. TFEU), on the other hand, is important mainly for the issue of securities and the trade in them, i.e. for capital markets law as one of the neighbouring areas of European company law (→ mn. 63). In ’Idryma‘, the CJEU has described the relation between the two fundamental freedoms as follows:242 47 Provisions of national law which apply to the possession by nationals of one Member State of holdings in the capital of a company established in another Member State allowing them to exert a

239 As to its deficiencies see Kindler, The Single-Member Limited Liability Company (SUP) – A Necessary Reform of EU Law on Business Organizations? (2016), 51. 240 For the text of the General Approach see Kindler, The single-member limited liability company (SUP) – A necessary reform of EU law on business organizations? (2016), 83 et seq. 241 Grundmann, European Company Law (2007), margin no 15; on the institutional framework of European company law see also Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 3, 13 et seq.

Peter Kindler

55

Introduction definite influence on the company’s decisions and to determine its activities fall within the ambit ratione materiae of Article 49 TFEU on freedom of establishment (…). 48 Article 63 TFEU on the free movement of capital covers in particular direct investments in the form of participation in an undertaking through the holding of shares which confers the possibility of participating effectively in its management and control, and also portfolio investments, that is to say, the acquisition of securities on the capital market solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking (…). 49 National legislation not intended to apply only to those shareholdings which enable the holder to have a definite influence on a company’s decisions and to determine its activities but which applies irrespective of the size of the holding which the shareholder has in a company may fall within the ambit of both Article 49 TFEU and Article 63 TFEU (…).

178

Since the ‘Centros‘ case (1999),243 the CJEU case-law related to EU letterbox companies (‘brass-plate companies’244) – i.e. a company registered in Member State A without any real connection to that State, but with a branch in Member State B – has systematically [mis]used the freedom of establishment under the TFEU as a tool to push back domestic company law and PIL rules of the ‘real seat’ Member States according to which such companies were inexistent or qualified as partnerships.245 Introducing cross-border conversion (→ mn. 100, 161), the EU legislators have approved this approach. b) Secondary Law of the European Union (Legislation)

179

At EU level company law-related rules are primarily found in the form of secondary legislation within the meaning of Art 288 TFEU: directives which only ‘harmonise’ national laws (without rendering them completely uniform) and regulations which contain core rules for supranational types of company (→ mn. 166 et seq.).

2. The Member States’ level 180

Primarily, as far as company law is concerned the European legislator adopts directives. Unlike regulations, directives are not directly applicable in national legal practice, for instance before national courts (second and third paragraphs of Art 288 TFEU). They have to be transposed into national laws. This is why, apart from the regulations regarding legal forms at EU level (→ mn. 166 et seq.), the bulk of ‘European’ company law is domestic law enacted by the Member States as transposition of EU directives. 246 Since these bodies of domestic law have to be interpreted in conformity with the

242 Case C-81/09, 21.10.2010, Idryma Typou [2010] ECLI:EU:C:2010:622 paras 47 et seq; for an assessment of this judment see Möslein, ‘Europäisierung der Haftungsbeschränkung’ NZG 2011 (14), 183; Kindler, ‘Kapitalgesellschaftsrechtliche Durchgriffshaftung und EU-Recht’ in Joost, Oetker and Paschke (eds), Festschrift für Franz Jürgen Säcker zum 70. Geburtstag (2011), 393; Case C-196/04, 12.09.2006, Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECLI:EU:C:2006:544, para. 31; Case C-31/11, 19.07.2012, Marianne Scheunemann [2012] ECLI:EU:C:2012:481, para. 23. 243 Case C-212/97, 09.03.1999, Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECLI:EU:C:1999:126 para. 36. 244 See Court of Justice of the European Union, Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 84. 245 For a critical review of this line of case-law, see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 117 et seq; Davies, ‘The Impact of Brexit on Company Law’ Giurisprudenza commerciale, I 46 (2019), 5, 6: ‘… is well known, in the area of company law the main impact of freedom of establishment under the Treaty has resulted from the CJEU‘s interpretation of that freedom to require Member States to recognise a company validly incorporated in another Member State, even though that company carries on no operations in the state of incorporation‘. 246 For references of specific national transposition acts see: https://eur-lex.europa.eu/collection/n-law/.

56

Peter Kindler

Introduction underlying directives (Art 4 para. 3 subpara 2 TEU – principle of loyalty),247 European company law is therefore always to be viewed as a two-level-system.248

II. Impact of the TFEU in the Field of EU Company Law 1. EU conform interpretation of national law; primacy of application of EU law As pointed out above (→ mn. 177, 179 et seq.), at EU level, the legal sources of 181 European company law can be identified as the fundamental freedoms and the EU directives and regulations (second and third paragraphs of Art 288 TFEU). Therefore – as in other fields of European private law – general institutions of European law related to these three categories of sources of EU law apply. This concerns both levels: central (European) one and also the decentralised one, i.e. national rule-making. At the first (EU) level it has to be determined, by enacting and interpreting EU law, 182 which specific EU rules are imposed on the Member States, e.g. to provide for a minimum capital of EUR 25,000 in order for a public limited liability company to be incorporated (Art 45(1) Directive 2017/1132/EU) or to provide for ‘appropriate penalties’ in the case of failure to disclose certain accounting documents (Art 27 Directive 2017/1132/EU) etc. At the second (national) level this result – found at the first level (EU law) – has 183 to be implemented in national legal practice. In this regard, a two-step mechanism has been established by the case-law of the CJEU:249 (1) Step one consists in the EU conform interpretation of national law (Art 4 para. 3 subpara 2 TEU – principle of loyalty; → mn. 180).250 (2) If such interpretation fails, in step two the fundamental freedoms (→ mn. 177 et seq.) and the secondary EU law (→ mn. 179) render national law inapplicable insofar as it is contrary to EU law (primacy of application of EU law).251

2. The Legal Basis for (secondary) European company law a) Principle of Conferral European company law – according to the first paragraph of Art 5 TEU – has to be 184 enacted on the basis of restricted single competences defined in the TFEU (‘principle of conferral’). The directives in our field are based on Art 50 TFEU which is the legal basis for the EU competence to act in the area of company law. In particular, Art 50(2) (g) TFEU provides for progressive abolition of restrictions on freedom of establishment as regards the conditions for setting-up subsidiaries. In the early years of the EEC, the question was disputed whether this rule was a legal 185 basis only for measures which facilitated establishment.252 This narrow approach would 247 Case C-14/83, 10.04.1984, Von Colson und Kamann v Land Nordrhein-Westfalen [1984] ECLI:EU: C:1984:153, paras 26 (settled case-law ever since); as to company law, see Case C-106/89, 13.11.1990, Marleasing v Comercial Internacional de Alimentación [1990] ECLI:EU:C:1990:395, para. 8 (‘[…] in applying national law, whether the provisions in question were adopted before or after the directive, the national court called upon to interpret it is required to do so, as far as possible, in the light of the wording and the purpose of the directive in order to achieve the result pursued by the latter and thereby comply with the third paragraph of Article [288 TFEU].’). 248 Grundmann, European Company Law (2007), margin no 19 et seq. 249 Grundmann, European Company Law (2007), margin no 96. 250 Case C-106/89, 13.11.1990, Marleasing v Comercial Internacional de Alimentación [1990] ECLI:EU: C:1990:395, para. 8; Grundmann, European Company Law (2007), margin no 96. 251 Case C-399/11, 26.02.2013, Melloni [2013] ECLI:EU:2013:107, paras 59 et seq.

Peter Kindler

57

Introduction exclude most of the rules of substantive company law that regulate the legal relationship between and within the various corporate constituencies such as shareholders, directors, creditors and the company itself. Example:

186

A rule which states that the power of representation is, in principle, unlimited (Art 9 Directive 2017/1132/EU) does not necessarily facilitate the establishment of a company in another Member State.

According to the opposite view, any rule can be based on Art 50(2)(g) TFEU if it protects shareholders or third parties and facilitates integration, i.e. if it helps to exercise any fundamental freedom. It is, for instance, sufficient that the conclusion of cross-border contracts of the company is facilitated. Today this broad interpretation is commonly accepted.253 Otherwise, the CJEU would have had to declare void many directives for lack of legal basis because the rules contained in the directives potentially may well facilitate cross-border activity of the company but do not really concern its establishment in another Member State.254 All important decisions taken on the 1968 First Directive on disclosure (incorporated in Directive 2017/1132/EU Title I Chapter I, Chapter II Section 2, Chapter III Section 1) made that clear: for instance in ‘Daihatsu’ the Court held that Art 50(2)(g) TFEU had to be interpreted broadly covering all activities of the EU including the approximation of national laws to the extent required for the functioning of the common market.255 b) The Influence of Majority Requirements

187

At times it seems that the Commission makes in some respect ‘tactical choices’ as regards the legal basis of a (proposed) instrument. In fact, the 2014 proposal of a single-member company (which was later abandoned, → mn. 174) was based on Art 50(2)(g) TFEU. This – at first sight – seemed to be the correct legal basis: the SUP proposal was meant to amend the existing Directive 2009/102/EC on single-membered companies. But probably the Commission had second thoughts.256 It is noteworthy that the Commission proposal for a single-member company relied on Art 50(2)(g) TFEU which would enable a majority decision of the European Council (Art 293, 294 (8) TFEU). The Legal Service of the Council of the European Union has approved this choice of the legal basis in an opinion dated 17 October 2014.257 For the other European company forms, however, the ‘flexibility clause’ of Art 352 TFEU was chosen as a legal basis258 which requires unanimity on the Council for the enactment of the legislation.259 252 Rodiére, ‘L’harmonisation des legislations européennes dans le cadre de la C.E.E.’ Revue trimestrielle de droit européen 1 (1965), 336, 342-350; Scholten, ‘Company Law in Europe’, 4 (1967) CMLR 377, 382. 253 Grundmann, European Company Law (2007), margin no 98. 254 For instance: Case C-367/96, 12.05.1998, Kefalas and others v Elliniko Dimosio and Organismos Oikonomikis Anasygkrotisis Epicheiriseon [1998] ECLI:EU:C:1998:222, para. 20 et seq (the requirement that the shareholders‘ meeting has to decide on capital increases does not really facilitate establishment but it is plausible that it may foster shareholder confidence, potentially also that of foreign shareholders); also Case C-97/96, 04.12.1997, Verband deutscher Daihatsu-Händler v Daihatsu Deutschland [1997] ECLI:EU: C:1997:581. 255 Case C-97/96, 04.12.1997, Verband deutscher Daihatsu-Händler v Daihatsu Deutschland [1997] ECLI:EU:C:1997:581, para. 18. 256 Kindler, The single-member limited liability company (SUP) – A necessary reform of EU law on business organizations? (2016), margin no 136, 46; Kindler, ‘Die Einpersonen-Kapitalgesellschaft als Konzernbaustein – Bemerkungen zum Kompromissvorschlag der italienischen Ratspräsidentschaft für eine Societas Unius Personae (SUP)’ ZHR 2015 (179), 330, 378 et seq. 257 Council of the European Union, opinion of the Legal Service of 17.10.2014, file no 14423/14, margin no 25 et seq. 258 Cf Habersack and Verse, Europäisches Gesellschaftsrecht (4 th edn, 2011), § 13 margin no 3 on the SE.

58

Peter Kindler

Introduction Art 352 TFEU would have been the proper legal basis for the adoption of the SUP 188 directive, given that this legislative act too, in substance, would have introduced a new legal form. This is reflected in the specific name (‘SUP’) but also, for instance, in the fact that the conversion of a private limited liability company (Gesellschaft mit beschränkter Haftung, société à responsabilité limitée, etc.) into an SUP and vice versa classifies as a change of the legal form in the technical sense (Art 9 SUP directive proposal), and finally in the proposal’s regulatory density.260 The parallels with the proposal for a common European sales law (CESL) – withdrawn on 14 December 2014 – are obvious: With the SUP, the EU would have created a 28th regime and not just commited the Member States to the harmonisation of the existing rules.

3. The interpretation of European (secondary) company law In principle, the methods of interpretation of EU law apply identically to the Treaties (TEU, TFEU) and secondary law (directives and regulations). However, there are differences as to the individual methods. Of course, interpretation in conformity with primary law is an issue only for secondary law.261 Moreover, the parts of primary law which are relevant for European company law, i.e. the fundamental freedoms pushing back national law, have always to be interpreted in opposition to national law possibly contrary to EU law. This is different for secondary law. In this respect, the two-step mechanism applies (→ mn. 183). In this regard, the most important point in interpreting EU law is that the terms used have to be interpreted in an autonomous way, i.e. the content of these terms can be different from that which would be expected under national law. Thus, for instance, the concept of ‘true and fair view’ in accounting law is European, not English (though derived from UK law; → mn. 23). The same is true for the ‘control’ concept in the law of groups of companies (→ mn. 111 et seq.). EU law interpretation, in tendency, is also particularly open to teleological (policy) arguments drawn from the Recitals of the legal instrument in question.262 Because of the preliminary reference procedure (Art 267 TFEU), autonomy and uniformity of interpretation are also assured institutionally.

259 The SCE regulation also, with the approval of the CJEU, relied on Art 308 EC (today Art 352 TFEU); the CJEU however explicitly ruled out an enactment as a directive: CJEU of 05.02.2002, Case C-436/03, 02.05.2006, European Parliament v Council of the European Union [2006] ECLI:EU:C:2006:277, para. 44; on this Lutter, Bayer and Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, (6th edn, 2017), § 47 margin no 93 et seq; Malberti, ‘La proposta di direttiva sulla Societas Unius Personae: Una nuova strategia per l’armonizzazione del diritto societario europeo?’ Rivista delle società 4 (2014), 848, 853 et seq. 260 Convincing in so far opinion no 58/2014 of the commercial law committee of the German Lawyers’ Association, marginal nos. 4-9; different however the opinion of the Legal Service of the EU Commission, Council of the European Union, opinion of the Legal Service of 17.10.2014, file no 14423/14, margin no 25 et seq. 261 Bleckmann, ‘Zu den Auslegungsmethoden des Europäischen Gerichtshofs’ NJW 1982, 1177, 1178; Grundmann, European Company Law (2007), margin no 102. 262 Grundmann, European Company Law (2007), margin no 102; Case C-107/84, 11.07.1985, Commission v Germany [1985] ECLI:EU:C:1985:332 (para. 12: ‘in the event of ‘conclusive factors… interpretation which goes beyond the actual wording’); similar, invoking effet utile: Case C-14/83, 10.04.1984, Von Colson und Kamann v Land Nordrhein-Westfalen [1984] ECLI:EU:C:1984:153, para. 26.

Peter Kindler

59

189

190

191 192

Introduction

III. EU Law Monitoring National Law 1. EU law rendering national law inapplicable via its fundamental freedoms a) Freedom of establishment and of capital movements as the fundamental freedoms governing company law 193

EU Treaty law governs EU company law situations via the two freedoms of establishment and of capital movements (→ mn. 177 et seq.). Like the other freedoms, these two freedoms render national law inapplicable according to the mechanism and the conditions named below. Example:263 ‘It is contrary to Articles [49 TFEU and 54 TFEU] for national legislation such as the [Dutch] Wet op de Formeel Buitenlandse Vennootschappen to impose on the exercise of freedom of secondary establishment in that State by a company formed in accordance with the law of another Member State certain conditions provided for in domestic company law in respect of company formation relating to minimum capital and directors' liability.’

b) Conditions of application and effects The freedoms of establishment (Arts 49 et seq. TFEU) and of capital movements (Arts 63 et seq. TFEU) converge insofar as they apply to domestic private law, for instance company law.264 They push back national law that is contrary to these freedoms (→ mn. 178, 193). 195 The basic mechanism, consisting of three steps, is the same for all freedoms. Under Arts 49, 54 TFEU, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State are prohibited. Freedom of establishment includes the setting-up of agencies, branches or subsidiaries by nationals265 of any Member State established in the territory of any Member State in order to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms, under the conditions laid down for its own nationals by the law of the country where such establishment is effected (non-discrimination principle). 196 Furthermore, according to settled case-law of the CJEU, the fundamental freedoms comprise the prohibition of restrictions. Since the CJEU decisions in ‘Kraus’ and in ‘Gebhard’, national rules liable to hinder or make less attractive the exercise of fundamental freedoms (i.e. the cross-border capital flows or cross-border establishment) must, if they are to be justified, fulfil four conditions: they must be applied in a non-discriminatory manner; they must be justified by imperative requirements in the public interest; they must be suitable for securing the attainment of the objective which they pursue, and they must not go beyond what is necessary in order to attain it.266 194

263 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 143. 264 A national minimum capital requirement has been declared to be inapplicable on the basis of freedom of establishment by: Case C-212/97, 09.03.1999, Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECLI:EU:C:1999:126; and then case Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 141. 265 Pursuant to Art 54 margin no 1 TFEU, companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union shall, for the purposes of Arts 49 et seq, be treated in the same way as natural persons who are nationals of Member States. 266 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 133.

60

Peter Kindler

Introduction In step one, such national rules have to be tested against the fundamental freedoms, 197 (1) if they have any discriminatory effect and, (2) if there is non, if a cross-border operation is rendered less attractive (even if the rules hits domestic players in the same way, including hitting them equally hard).267 In a second step, it has to be asked whether such restrictions can be justified by 198 imperative requirements in the public interest, which need to have considerable weight and have been handled in the CJEU‘s case-law very restrictively (Arts 52, 65 TFEU). 268 On a third level, the question has to be asked whether there are different standards 199 as to justification when there is a harmonising measure for the problem treated. 269

2. EU law rendering national law inapplicable via directives a) Full harmonisation vs. minimum harmonisation In order to establish if a national provision is contrary to an EU directive, it has to be 200 clarified beforehand whether the directive in question is aiming at full harmonisation – by defining a maximum standard of protection (→ mn. 148) – or at minimum harmonisation, i.e. admitting more stringent national rules. The question whether directives not only establish a minimum level which has to be matched in national law practice, but also a maximum level which national law may not exceed has been discussed for European company law with particular intensity.270 At times, single provisions of a directive admit more stringent national law271 whereas others don’t address the problem or even admit less stringent national law.272 Examples for more stringent national law:

– – – –

Disclosure obligations exceeding the requirements defined by Art 30 Directive 2017/1132/EU, 273 a minimum capital of public limited liability companies exceeding EUR 50 000 as required by Art 45(1) Directive 2017/1132/EU,274 national case-law on hidden contributions in kind (verdeckte Sacheinlage) exceeding the safeguards as regards statutory capital defined by Arts 49 to 55 Directive 2017/1132/EU, 275 national law granting a right of pre-emption to shareholders in the event of an increase in capital by consideration in kind exceeding Art 72(1) Directive 2017/1132/EU on increase in capital by consideration in cash.276

267 Grundmann, European Company Law (2007), margin no 149; Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512 para. 133 (settled case-law); this is virtually undisputed for the fundamental freedoms dealing with movement, such as the freedom of capital movements. In the area of freedom of establishment the groundbreaking decisions were: Case C-19/92, 31.03.1993, Kraus v Land Baden-Württemberg [1993] ECLI:EU:C:1993:125, para. 32; Case C 53/94, 30.11.1995, Gebhard v Consiglio dell’Ordine degli Avvocati e Procuratori di Milano [1995] ECLI:EU:C:1995:411, para. 37. 268 As to the justification of restrictions see Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, paras 133 et seq. 269 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 73 (‚Thirdly, several of the provisions of the WFBV do not fall within the scope of the Eleventh Directive. […] Those provisions must therefore be considered in the light of Articles 43 EC and 48 EC. ‘), 106 et seq. 270 Grundmann, European Company Law (2007), margin no 151. 271 Arts 30(2), 45(1), 49(1) Directive 2017/1132/EU. 272 Arts 9(1) subpara 2; 49(4) and (5), 50 Directive 2017/1132/EU. 273 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 69; Case C-453/04, 01.06.2006, Innoventif Limited [2006] ECLI:EU:C: 2006:361, para. 33 et seq; Case C-469/19, Case C-469/19, Request for a preliminary ruling from the BGH lodged on 19 June 2019, All in One Star Ltd, OJ C 328/15, BGH 14.05.2019 – II ZB 25/17, NZG 2019 (22), 775; see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 905 a. 274 Pursuant to Section 7 German Law pertaining to public limited liability companies (AktG), the minimum nominal amount of the share capital is fifty thousand euros.

Peter Kindler

61

Introduction 201

In case of a possible contrast between national and EU law, the question is which national rules can be considered to be more stringent, i.e. which national rules exceed the standard set by the directive.277 These are rules which establish a higher level of protection than the protective standards offered by the directive. In this regard, it is to be asked which corporate constituencies (minority shareholders, employees, creditors, other third parties who deal with companies etc.) are the addressees of protection – a question normally to be answered by looking at the recitals. In company law an answer sometimes is difficult because different constituencies with conflicting interests can be addressed at the same time. Example:

202

A national rule of law granting a right of pre-emption to shareholders in the event of an increase in capital by consideration in kind (Art 72 Directive 2017/1132/EU) and subjecting the legality of a decision withdrawing that right of pre-emption to a substantive judicial review protects the company’s minority shareholders, but at the same time goes to the detriment of the company’s creditors because it complicates the increase in capital.278

In case of conflicting interests – e.g. of minority shareholders and creditors – it is simplistic to say that national law is in line with the directive because it is consistent with just one of the aims of the directive.279 For instance Title I Ch. IV of Directive 2017/1132/EU is intended to ensure minimum equivalent protection for both shareholders and creditors of public limited liability companies.280 As regards this set of rules, a national provision protecting only one of the two constituencies – the minority shareholders or the creditors – is not automatically in line with the directive. b) Direct effect

203

Insofar as secondary EU law renders national law inapplicable (→ mn. 183, 193 et seq.) it has direct effect also if it is contained in directives.281 This flows from the CJEU‘s decision in ‘Marleasing’: There, the Court not only asked the national court to exploit all margins of interpretation possible under national law in order to bring it into line

275 BGH 15.01.1990 – II ZR 164/88, NJW 1990, 982; Kindler, ‘Verdeckte Sacheinlage und Kapitalschutzrichtlinie – Zur Umwandlung von Geldkrediten in Nennkapital der AG’ in Ebenroth, Hesselberger and Rinne (eds), Verantwortung und Gestaltung: Festschrift für Karlheinz Boujong zum 65. Geburtstag (1996), 299 et seq; Burmeister, Rosengarten and Klein, The German Limited Liability Company (8 th ed. 2015), margin no 60 et seq. 276 Case C-42/95, 19.11.1996, Siemens v Henry Nold [1996] ECLI:EU:C:1996:444, para. 13 et seq; for an in depth analysis of this judgment see Kindler, ‘Bezugsrechtsausschluss und unternehmerisches Ermessen nach deutschem und europäischem Recht’ ZGR 1998 (27), 35. 277 Grundmann, European Company Law (2007), margin no 152. 278 Kindler, ‘Bezugsrechtsausschluss und unternehmerisches Ermessen nach deutschem und europäischem Recht’ ZGR 1998 (27), 35, 44 et seq. 279 Cf Case C-42/95, 19.11.1996, Siemens v Henry Nold [1996] ECLI:EU:C:1996:444, para. 19: ‘In addition, a national rule extending the principle that shareholders should have a right of pre-emption to increases in capital by consideration in kind, while providing for the possibility of restricting or withdrawing that right in certain circumstances, is consistent with one of the aims of [Title I Ch. IV Directive 2017/1132/EU], namely that of ensuring more effective protection for shareholders.’, emphasis added. 280 Case C-42/95, 19.11.1996, Siemens v Henry Nold [1996] ECLI:EU:C:1996:444, para. 13; different approach (no reference to credtitors) in Case C-101/08, 15.10.2009, Audiolux SA e.a v Groupe Bruxelles Lambert SA (GBL) [2009] ECLI:EU:C:2009:626, para. 39: ‘That directive seeks only to ensure a minimum level of protection for shareholders…’, emphasis added. 281 Grundmann, European Company Law (2007), margin no 157.

62

Peter Kindler

Introduction with the directive (→ mn. 189 et seq.). It also decided that a directive ‘precludes the interpretation of provisions of national law […] in such a manner that the nullity of a public limited company may be ordered on grounds other than those exhaustively listed in […] the directive in question’.282

282 Case C-106/89 Marleasing v Comercial Internacional de Alimentación [1990] ECLI:EU:C:1990:395, para. 9.

Peter Kindler

63

DIRECTIVE (EU) 2017/1132 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 June 2017 relating to certain aspects of company law (codification)

TITLE I GENERAL PROVISIONS AND THE ESTABLISHMENT AND FUNCTIONING OF LIMITED LIABILITY COMPANIES CHAPTER I SUBJECT MATTER Article 1 Subject matter This Directive lays down measures concerning the following: — the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, — the coordination of safeguards which, for the protection of the interests of members and third parties, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty, in respect of disclosure, the validity of obligations entered into by, and the nullity of, companies limited by shares or otherwise having limited liability, with a view to making such safeguards equivalent, — the rules on online formation of companies, on online registration of branches and on online filing of documents and information by companies and branches, — the disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State, — mergers of public limited liability companies, — cross-border conversions, cross-border mergers and cross-border divisions of limited liability companies, — the division of public limited liability companies. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Goal of the codification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The single subject matters addressed by CD (EU) 2017/1132 . . . . . . . . . . . . . . . . 1. Formation of public limited liability companies; maintenance and alteration of their capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Disclosure, validity of obligations and the nullity of companies limited by shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Online formation of companies and registration of branches; online filing of documents and information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Disclosure requirements in respect of branches . . . . . . . . . . . . . . . . . . . . . . . . . . .

Peter Kindler

1 1 3 4 5 6 7 9

65

Art 1 Subject matter 5. Internal mergers of public limited liability companies . . . . . . . . . . . . . . . . . . . . 6. Cross-border conversions, cross-border mergers and cross-border divisions of limited liability companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Internal division of public limited liability companies . . . . . . . . . . . . . . . . . . . .

10 11 13

I. General Features 1. Overview Defining its ‘subject matter’, Art 1 lists the contents of CD (EU) 2017/1132. Since its enactment, it was amended two times, i.e. by Art 1 Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions and by Art 1 Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law. 2 Art 1 makes clear which pre-existing Directives were codified in the present ‘Company Law Directive’ initially in 2017 and which subsequent Directives were incorporated at a later stage. All in all, eight Directives covering various subject matters were included in the Company Law Directive without any substantial change to their contents. 1

2. Goal of the codification 3

The codification of pre-existing Directives was enacted in the ‘interests of clarity and rationality’ (Recital no 1). Yet the present Directive is an imperfect, partial codification of EU-Corporate Law. As pointed out above (→ Introduction mn. 159), it is hardly understandable why two important directives were left out (Directive 2009/102/EC on single-member private limited liability companies; Directive 2007/36/EC on shareholders’ rights in listed companies).

II. The single subject matters addressed by CD (EU) 2017/1132 4

The single subject matters addressed by CD (EU) 2017/1132 are named following seven indents the first four of which refer to general aspects regarding the establishment and functioning of limited liability companies (Title I of the Directive), whereas the following three indents refer to specific operations regarding the structure of companies (Title II of the Directive on conversions, mergers and divisions of limited liability companies).

1. Formation of public limited liability companies; maintenance and alteration of their capital 5

The first indent of Art 1 of the Directive refers to safeguards for the protection of the interests of members and others, in respect of the formation of public limited liability companies (Annex I) and the maintenance and alteration of their capital. This indent relates to the former Directive 2012/30/EU concerning the formation of public limited liability companies and the maintenance and alteration of their capital, now codified in Arts 2-6, 44-86 of the present Directive.

66

Peter Kindler

Art 1

TITLE I GENERAL PROVISIONS

2. Disclosure, validity of obligations and the nullity of companies limited by shares The second indent of Art 1 of the Directive refers to disclosure, the validity of 6 obligations entered into by, and the nullity of, companies limited by shares or otherwise having limited liability (Annex II). This indent relates to the former disclosure directive (2009/101/EC), now codified in Arts 7-28 of the present Directive.

3. Online formation of companies and registration of branches; online filing of documents and information The third indent of Art 1 of the Directive refers to online formation of companies, 7 online registration of branches and online filing of documents and information by companies and branches. This indent was inserted by Art 1 of the Digitalization Directive (EU) 2019/1151; it relates to Arts 13-13 j, 16-20, 22, 24, 28 a, 28 b, 28 c, 30 a, 31, 161, 162 a, 163 and Annex IIA of the present Directive. These provisions apply to companies within the meaning of Annex II of the Directive. 8 However, due to the opt-out solution provided for in Art 13 g para. 1 sent. 2 of the Company Law Directive as amended by the Digitalization Directive, the national legislator is free to create the option of online formation for private companies only.

4. Disclosure requirements in respect of branches The fourth indent of Art 1 of the Directive refers to disclosure requirements in 9 respect of branches opened in a Member State by certain types of company governed by the law of another State. All companies listed in Annex II are subject to these disclosure requirements. The indent relates to the former Directive 89/666/EEC concerning disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State, now codified in Arts 20, 29-42, 161 of the present Directive.

5. Internal mergers of public limited liability companies The fifth indent of Art 1 of the Directive refers to internal mergers of public limited 10 liability companies (Annex I). The indent relates to the former Directive 2011/35/EU concerning mergers of public limited liability companies, now codified in Arts 87-117 of the present Directive.

6. Cross-border conversions, cross-border mergers and cross-border divisions of limited liability companies The sixth indent of Art 1 of the Directive refers to corporate mobility, i.e. cross-bor- 11 der conversions, cross-border mergers and cross-border divisions of limited liability companies (Annex II). This indent was amended by Art 1 of the Mobility Directive (EU) 2019/1123; it relates to that Directive as well as to the former Directive 2005/56/EC on cross-border mergers of limited liability companies. Corporate mobility is dealt with in Arts 86a-86 t, 118-134, 160a-160 u. In the absence of harmonisation of Union law, defining the connecting factor that 12 determines the national law applicable to a company or firm falls within the competence of each Member State (Recital no 3 Mobility Directive [EU] 2019/1123). By consequence, questions of private international law related to the cross-border operations covered by the Directive are, in principle, governed by domestic conflict-of-laws rules (→ Introduction mn. 66 et seq.). As an exception to this principle, one of the most inPeter Kindler

67

Art 2 Scope ventive conflict-of-law rules that secondary law of the European Union has come up with, can be discovered at a hidden place in the (amended) Company Law Directive. Article 160 q of the Directive assigns the determination of the effective date of a cross-border division to the law of the departure Member State. The provision appears as an attempted clearance of the complicated brushwood of the registration steps of a cross-border division of a company.1

7. Internal division of public limited liability companies 13

The seventh indent of Art 1 of the Directive refers to the internal division of public limited liability companies (Annex I). The indent relates to the former Directive 82/891/EEC concerning the division of public limited liability companies, now codified in Arts 135–160 of the present Directive.

CHAPTER II INCORPORATION AND NULITY OF THE COMPANY AND VALIDITY OF ITS OBLIGATIONS Section 1 Incorporation of the public liability company Article 2 Scope 1. The coordination measures prescribed by this Section shall apply to the provisions laid down by law, regulation or administrative action in Member States relating to the types of company listed in Annex I.The name for any company of the types listed in Annex I shall comprise or be accompanied by a description which is distinct from the description required of other types of companies. 2. Member States may decide not to apply this Section to investment companies with variable capital and to cooperatives incorporated as one of the types of company listed in Annex I. In so far as the laws of the Member States make use of this option, they shall require such companies to include the words ‘investment company with variable capital’, or ‘cooperative’ in all documents indicated in Article 26. The term ‘investment company with variable capital’, within the meaning of this Directive, means only those companies: — the exclusive object of which is to invest their funds in various stocks and shares, land or other assets with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their assets, — which offer their own shares for subscription by the public, and — the statutes of which provide that, within the limits of a minimum and maximum capital, they may at any time issue, redeem or resell their shares.

1 Schollmeyer ‘Wirksamkeit einer inländischen Registereintragung nach ausländischem Recht: Kann das neue Spaltungsrecht funktionieren?‘ Praxis des internationalen Privat- und Verfahrensrechts (IPRax) 2020, 297.

68

Jan P. Brosius

Art 2 Scope ventive conflict-of-law rules that secondary law of the European Union has come up with, can be discovered at a hidden place in the (amended) Company Law Directive. Article 160 q of the Directive assigns the determination of the effective date of a cross-border division to the law of the departure Member State. The provision appears as an attempted clearance of the complicated brushwood of the registration steps of a cross-border division of a company.1

7. Internal division of public limited liability companies 13

The seventh indent of Art 1 of the Directive refers to the internal division of public limited liability companies (Annex I). The indent relates to the former Directive 82/891/EEC concerning the division of public limited liability companies, now codified in Arts 135–160 of the present Directive.

CHAPTER II INCORPORATION AND NULITY OF THE COMPANY AND VALIDITY OF ITS OBLIGATIONS Section 1 Incorporation of the public liability company Article 2 Scope 1. The coordination measures prescribed by this Section shall apply to the provisions laid down by law, regulation or administrative action in Member States relating to the types of company listed in Annex I.The name for any company of the types listed in Annex I shall comprise or be accompanied by a description which is distinct from the description required of other types of companies. 2. Member States may decide not to apply this Section to investment companies with variable capital and to cooperatives incorporated as one of the types of company listed in Annex I. In so far as the laws of the Member States make use of this option, they shall require such companies to include the words ‘investment company with variable capital’, or ‘cooperative’ in all documents indicated in Article 26. The term ‘investment company with variable capital’, within the meaning of this Directive, means only those companies: — the exclusive object of which is to invest their funds in various stocks and shares, land or other assets with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their assets, — which offer their own shares for subscription by the public, and — the statutes of which provide that, within the limits of a minimum and maximum capital, they may at any time issue, redeem or resell their shares.

1 Schollmeyer ‘Wirksamkeit einer inländischen Registereintragung nach ausländischem Recht: Kann das neue Spaltungsrecht funktionieren?‘ Praxis des internationalen Privat- und Verfahrensrechts (IPRax) 2020, 297.

68

Jan P. Brosius

Art 2

TITLE I GENERAL PROVISIONS I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Company Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Name of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 8 10

I. Overview Article 2 limits the scope of Title 1, Chapter II, Section 1 of the Directive, i.e. 1 the provisions regarding the “incorporation of the public liability Company”, to public limited liability companies and, in connection with Annex I, states each type of company existing in the current 27 Member States – and, until 31 December 2020 also the United Kingdom1 – it applies to. The provision stipulates requirements for the naming of such companies and entitles Member States to exclude investment companies with variable capital and cooperatives from the scope of Section 1.

II. Historical Background Like its counterpart, the corresponding provisions laid down in Article 44, Article 2 2 derives from Article 1 of the Second Directive2 (cf. Art 1 of Directive 2012/30/EU), which limited the scope of the Second Directive to public limited liability companies. As the provisions of the Second Directive have been codified in two separate sections of the Directive, i.e. Title 1, Chapter II, Section 1 on the one hand and Title 1, Chapter IV on the other hand, successor provisions of Article 1 of the Second Directive can be found in Article 2 as well as Article 44, which limits the scope of Chapter IV.

III. Scope of Company Types The scope of Chapter II, Section 1 regarding the “incorporation of the public liability 3 Company” is limited to public limited liability companies as exhaustively listed in Annex I to the Directive and Annex XXII No. 1 (b) to the EEA Agreement. As a distinction between private and public limited liability companies had not been common all over Europe, some Member States faced the difficult task to distinguish and define such public limited liability companies in the legislative process.3 Accordingly, Chapter II, Section 1 of the Directive applies to the following types of 4 companies within the European Union: the société anonyme/naamloze vennootschap under Belgian Law, the акционерно дружество under Bulgarian Law, the akciová společnost under the laws of the Czech Republic, the aktieselskab under Danish Law, Cf. Kindler, → Introduction mn. 78 et seqq. Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by its last version Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Foreword Art 44 mn. 7 et seqq. 3 Cf. Schmitthoff, 15 CMLR (1978), 43. 1

2

Jan P. Brosius

69

Art 2 Scope the Aktiengesellschaft under German Law, the aktsiaselts under Estonian Law, the cuideachta phoiblí faoi theorainn scaireanna/public company limited by shares and the cuideachta phoiblí faoi theorainn ráthaíochta agus a bhfuil scairchaipiteal aici/public company limited by guarantee and having a share capital under Irish Law, the ανώνυμη εταιρεία under Greek Law, the sociedad anónima under Spanish Law, the société anonyme under French Law, the dioničko društvo under the laws of Croatia, the società per azioni under Italian Law, the δημόσιες εταιρείες περιορισμένης ευθύνης με μετοχές and δημόσιες εταιρείες περιορισμένης ευθύνης με εγγύηση που διαθέτουν μετοχικό κεφάλαιο under Cyprian Law, the akciju sabiedrība under Latvian Law, the akcinė bendrovė under Lithuanian Law, the société anonyme under Luxembourgian Law, the nyilvánosan működő részvénytársaság under Hungarian Law, the kumpanija pubblika ta' responsabbiltà limitata/public limited liability company under Maltese Law, the naamloze vennootschap under the laws of the Netherlands, the Aktiengesellschaft under Austrian Law, the spółka akcyjna under Polish Law, the sociedade anónima under Portuguese Law, the societate pe acțiuni under Romanian Law, the delniška družba under Slovenian Law, the akciová spoločnost' under Slovakian Law, the julkinen osakeyhtiö/publikt aktiebolag under Finish Law, the publikt aktiebolag under Swedish Law, and, until and including 31 December 2020, the public company limited by shares and public company limited by guarantee and having a share capital under the laws of the United Kingdom (cf. → mn. 1). 5 In respect of the European Economic Area Section 1 applies to the hlutafélag under Icelandic Law, the Aktiengesellschaft under Lichtensteinian Law and the Allmennaksjeselskap under Norwegian Law. 6 In principle, the scope of Section 1 and, beyond that, all provisions derived from the Second Directive are limited to the aforementioned types of companies. Note however, that other types of companies may still be affected by such provisions laid down in the Directive (→ Art 44 mn. 6, Art. 67 mn. 7). 7 In its first proposal for a Second Directive the Commission stated that two reasons led to the restriction to public limited liability companies.4 First, they represent the economically most important type of company and their activities usually cross national boundaries.5 Secondly, they represent the legally most sophisticated type of company. Thus, the coordination of public limited liability companies was of greater priority, but was also intended to be, mutatis mutandis, a solid basis for the harmonisation of other types of companies.6 Consistently, the second recital of the preamble of the Directive states that the desired coordination as provided for in point (g) of Article 50 (2) of the Treaty and in the General Programme for the abolition of restrictions on freedom of establishment was especially important in relation to public limited liability companies “because their activities predominate in the economy of the Member States and frequently extend beyond their national boundaries.”

IV. Name of the Company 8

Subparagraph 2 of Article 2 (1) provides that the name for the respective type of company (→ mn. 4) shall comprise or be accompanied by a description which is distinct from the description required of other types of companies. The required description 4 See COM (70) 232 final; see also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 189 et seqq. 5 See also Schwarz, Europäisches Gesellschaftsrecht, para. 573. 6 OJ No C 48, 24.04.1970, p. 8.

70

Jan P. Brosius

Art 2

TITLE I GENERAL PROVISIONS

serves the protection of creditors and legal transactions in general. It gives an indication of the company’s legal form and, thus, of its legal position. Most importantly, it indicates the representation of the company and its limitation of liability. The position of the required description within the company’s name may be chosen 9 arbitrarily. It does not necessarily have to take the form of a suffix or a prefix. Also, Article 2 does not require that the description includes the name of the type of company as listed above under → mn. 4 or a generally comprehensible abbreviation of that name. 7 This follows from point (a) of Article 3 pursuant to which the statutes or the instrument of incorporation shall always state not only the name of the company but also its type (→ Art 3 mn. 5). The abstinence from an unambiguous clarification of the company’s type in the company’s name that would identify and not only distinguish the respective type of company from others certainly limits the protection afforded to foreign market participants.

V. Exceptions Member States may exclude “investment companies with variable capital” and “cooperatives” incorporated as one of the types of company listed under → mn. 4 from the scope of the Title 1, Chapter II, Section 1 of the Directive.8 Subparagraph 2 of Article 2 (2) provides for a legal definition of the expression “investment company with variable capital” stating its three distinctive characteristics. First, the company’s exclusive object is to invest their funds (i) in certain classes of assets, i.e. various stocks and shares, land or other assets and (ii) with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of such assets. Secondly, the company has to offer its own shares for subscription by the public. Thirdly, the company’s statutes have to provide that, within the limits of a minimum and maximum capital, they may at any time issue, redeem or resell their shares. This definition applies to the entire Directive; it is directly relevant, however, only for the provision stipulated in Article 44 (→ Art 44 mn. 8). The Commission pointed out that the requirements chosen to define the investment company with variable capital were meant to avoid any confusion with such companies that aim to influence or supervise the management of the companies they are invested in as especially such type of companies – in the interests of shareholders and creditors – required the regulation by the provisions of the Second Directive.9 The rationale behind the exception for investment companies with variable capital is that such companies are subject to individual regulations specifically designed for the characteristics of such companies without contradicting their activities or ignoring the specific risks arising from such activities. The safeguards of the provisions laid down in Title 1, Chapter II, Section 1 of the Directive (formerly Articles 1 through 5 of the Second Directive 2012/30/EU) are replaced by individual safeguards better suited to investment companies with variable capital.10 As the Commission pointed out, Member States are allowed to provide for individual rules on investment companies with variable capital in national law until further harmonisation is achieved by means of a separate directive.11 In fact, open-ended See also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 11. See also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 190 et seq. 9 OJ No C 48, 24.4.1970, p. 9. 10 OJ No C 48, 24.4.1970, p. 9. 7

8

Jan P. Brosius

71

10

11

12

13

Art 2 Scope investment companies are subject to the UCITS Directive 85/611/EEC 12 and its successor Directive 2009/65/EC.13 Closed-ended investment companies, i.e. investment companies with a fixed capital, on the other hand, are subject to the provisions of the Directive (cf. → Art 56 mn. 15 et seqq.).14 14 There is an understanding that the exception for cooperatives, which has not been subject to the Commission’s first proposals, has been implemented as a response to requirements under French and Italian Law.15 The burden of contributing and maintaining a minimum capital was not to be imposed on small cooperatives.16 15 Article 2 does not provide for a legal definition of “cooperatives” and neither do Article 44 (→ Art 44 mn. 8 et seqq.), Article 87 (which also refers to cooperatives incorporated as public limited liability companies → Art 87 mn. 18) and Article 120 (which refers to the cooperative society → Art 120 mn. 6 et seqq.). Thus, the Directive provides Member States with wide discretion to adapt the scope of the exception granted under subparagraph 2. However, the principle of effet utile requires a common basic understanding of this key criterion. Obviously, the decisive feature of such respective public limited liability companies is their pursuit of a cooperative purpose.17 However, this true acknowledgement is of little help defining cooperative. A more accurate understanding and definition of a cooperative can be derived from Council Regulation (EC) No 1435/200318 pursuant to which “cooperatives are primarily groups of persons or legal entities with particular operating principles that are different from those of other economic agents. These include the principles of democratic structure and control and the distribution of the net profit for the financial year on an equitable basis.19 […] Members may consist wholly or partly of customers, employees or suppliers […]. In some circumstances cooperatives may also have among their members a specified proportion of investor members who do not use their services, or of third parties who benefit by their activities or carry out work on their behalf.”20 A cooperative “should have as its principal object the satisfaction of its members’ needs and/or the development of their economic and/or social activities”.21 “Its activities should be conducted for the OJ No C 48, 24.4.1970, p. 9. Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ No L 375, 31.12.1985, p. 3. 13 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ L 302, 17.11.2009, p. 32–96. 14 OJ No C 48, 24.4.1970, p. 9. 15 Edwards, EC Company Law, p. 54; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 17; Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p. 136. 16 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 17; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 190 f.; Mülbert, FS Lutter, 2000, p. 535, 548 et seq.; see also Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p. 136. 17 Mülbert, FS Lutter, 2000, p. 535, 548. 18 Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ No L 207, 18.8.2003, p.1; see also Council Directive 2003/72/EC of 22 July 2003 supplementing the Statute for a European Cooperative Society with regard to the involvement of employees, OJ No. 207, 18.8.2003, p. 25. 19 Recital 7 of the preamble of Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ No L 207, 18.8.2003, p. 2. 20 Recital 9 of the preamble of Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ No L 207, 18.8.2003, p. 2. 21 Recital 10 of the preamble of Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ No L 207, 18.8.2003, p. 2. 11 12

72

Jan P. Brosius

Art 3

TITLE I GENERAL PROVISIONS

mutual benefit of the members so that each member benefits from the activities of the [cooperative] in accordance with his/her participation”.22 Thus, ideally, a cooperative does not pursue profit maximization in its own materialistic interest.23 It is founded on rather altruistic motives.24 Typical examples are procurement companies.25 For the purpose of creditor protection26 and the protection of legal transactions in 16 general, if and to the extend Member States make use of the exceptions provided for under the second paragraph, they must require such companies to include the words ‘investment company with variable capital’, or ‘cooperative’27 in all documents indicated in → Art 26, i.e. in all letters and order forms, whether they are in paper form or use any other medium. Differently from the requirements stipulated in the second subparagraph of Article 2 (1) regarding the name of the company (→ mn. 8 et seq.), the Directive defines the actual wording of the required affix. In the light of Article 26 (3) (→ Art 26 mn. 4), pursuant to which Member States 17 shall prescribe that company websites are to contain at least the particulars mentioned in Article 26 (1), and to fully serve the purpose of the provision, the company websites are to contain such detailed name affix as well.28 Article 2 does not provide for an exception for banks. If constituted in the form of 18 public limited liability companies they fall within the scope of the Title 1, Chapter II, Section 1 of the Directive (→ Art 44 mn. 15 for further details). 29

Article 3 Compulsory information to be provided in the statutes or instruments of incorporation The statutes or the instrument of incorporation of a company shall always give at least the following information: (a) the type and name of the company; (b) the objects of the company; (c) where the company has no authorised capital, the amount of the subscribed capital; (d) where the company has an authorised capital, the amount thereof and also the amount of the capital subscribed at the time the company is incorporated or is authorised to commence business, and at the time of any change in the authorised capital, without prejudice to Article 14(e);

22 Recital 10 of the preamble of Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ No L 207, 18.8.2003, p. 2. 23 Mülbert, FS Lutter, 2000, p. 535, 554; Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p.103. 24 Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p. 9. 25 Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p. 9. 26 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 17; Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p.135; Niessen, AG 1970, 281, 282. 27 Respectively the terms used in the different language versions. 28 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 17. 29 See also Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 19 et seqq.

Jan P. Brosius

73

Art 3 Compulsory information to be provided in the statutes or instruments of incorporation (e) in so far as they are not legally determined, the rules governing the number of, and the procedure for, appointing members of the bodies responsible for representing the company vis-à-vis third parties, administration, management, supervision or control of the company and the allocation of powers among those bodies; (f) the duration of the company, except where this is indefinite. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The statutes or the instrument of incorporation of the company . . . . . . . . . 2. Information to be provided . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The type and name of the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The objects of the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) The amount of the subscribed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) The amount of the authorised capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Information regarding the company’s bodies and its members . . . . . . . . . . . f) The duration of the company, except where this is indefinite . . . . . . . . . . . . V. Legal Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Direct application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 4 5 5 6 7 8 9 13 14 15 16

I. Overview 1

Article 3 – together with Article 4 – specifies the minimum content of the statutes or – if it constitutes a separate act – the instrument of incorporation of the company. 1 Both provisions complement the provisions in Chapter II, Section 2 and Chapter III which derive from the First Directive 2009/101/EC2 and which, inter alia, prescribe the methods of disclosure legally available (cf. → Foreword to Arts 7-12 mn. 1 et seqq.). 3 In particular, Article 3 has to be placed into context with → Art 11 (former Article 12 of Directive 2009/101/EC) pursuant to which the nullity of the company may, inter alia, be ordered where the instrument of constitution or the statutes do not state the name of the company, the amount of the individual subscriptions of capital, the total amount of the capital subscribed or the objects of the company (cf. → Art 11 mn. 7). Insofar, Article 3 provides for the complementary legal obligation.4

II. Purpose 2

The Commission considered the informative value of the statutes or the instrument of incorporation of the company and the requirements stipulated in Articles 3 and 4 as a fundamental guarantee for the protection of any party involved in the formation of the company and its statutes and any third party carrying on negotiations with the company.5 OJ No C 48, 24.4.1970, p. 9. Directive 2009/101/EC of the European Parliament and the council of 16 September 2009 on coordination of safeguards which, for the protection of the interests of members and third parties, are required by Member States of companies within the meaning of the second paragraph of Article 48 of the Treaty, with a view to making such safeguards equivalent, OJ No L 258, 1.10.2009, p. 11. 3 See also Schwarz, Europäisches Gesellschaftsrecht, para. 575; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 195. 4 See also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 10. 1 2

74

Jan P. Brosius

Art 3

TITLE I GENERAL PROVISIONS

III. Historical Background Article 3 derives from the Second Directive6 (cf. Art 2 of Directive 2012/30/EU). 3 It was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976. Its material content has not been amended since.

IV. Scope 1. The statutes or the instrument of incorporation of the company The minimum content listed in points (a) to (f) has to appear either in the statutes 4 or in the instrument of incorporation of the company. At first, the Commission took a different approach. In its first proposal it strictly distinguished between the information that had to appear in the statutes as laid down in the proposed Article 2 and the information that had to appear in the instrument of incorporation as laid down in the proposed Article 3. The Commission stated that it had preferred to make such distinction in case the two documents may constitute separate acts. This would simplify the application of the provision laid down in point (c) of Article 14 (1) of the First Directive 68/151/EEC7 (cf. former Article 2 (1) of Directive 2009/101/EC; → Art 14 mn. 3) pursuant to which after every amendment of the instrument of constitution or of the statutes, the complete text of the instrument or statutes as amended to date has to be disclosed, as it does not stipulate the content of such document.8 However, this purpose of simplification and practicability is even better fulfilled by the flexibility granted in the adopted version.

2. Information to be provided a) The type and name of the company The statutes or the instrument of incorporation of the company have to state the 5 name and – additionally – the type of the company. The type of the company cannot necessarily be derived from the name of the company. Article 2 only requires that the name of the company shall comprise or be accompanied by a description which is distinct from the description required of other types of companies (→ Art 2, mn. 8). 9 OJ No C 48, 24.4.1970, p. 9. Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by its last version Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Foreword Art 44 mn. 7 et seqq. 7 First Council Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community, OJ No L 65, 14.3.1968, p. 8–12. 8 OJ No C 48, 24.4.1970, p. 9. 9 See also Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 21; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 11. 5 6

Jan P. Brosius

75

Art 3 Compulsory information to be provided in the statutes or instruments of incorporation This distinction to be made does not require the citation of the type of company or an abbreviation or acronym as an element of the company’s name that would accurately and comprehensibly indicate the company’s legal form. Hence, the company’s name does not necessarily enable a third person to identify the type of company. Therefore, it has to be ensured that the statutes or the instrument of incorporation of the company make such identification of the type of the company possible. In this regard, the statutes or the instrument of incorporation of the company have to cite the full name of the type of company. A generally comprehensible abbreviation or acronym of the type is not sufficient, unless national law explicitly provides for a legally equivalent abbreviation or acronym. b) The objects of the company 6

Pursuant to point (b) the statutes or the instrument of incorporation of the company have to state the objects of the company. The statutes thereby indicate and make public the core of the company’s business activities. The determination of the company’s objects is of special relevance to those Member States that made use of the option provided for in the second subparagraph of Article 9 (1) that allows Member States to provide that the company shall not be bound to an act where such acts are outside the objects of the company, if it proves that the third party knew that the act was outside those objects or could not in view of the circumstances have been unaware of it (→ Art 9 mn. 15).10 c) The amount of the subscribed capital

7

Pursuant to point (c) the statutes or the instrument of incorporation of the company have to state the amount of subscribed capital. As follows from Article 45, Member States must provide for a minimum capital to be subscribed in the amount of not less than EUR 25.000,00 (→ Art 45 mn. 5 et seqq.).11 The amount of subscribed capital indicates, at least to a certain degree and in a close timely correlation with the company’s formation, the company’s creditworthiness (→ Art 45 mn. 10). Hence, making the amount of subscribed capital publicly available is in the special interest of creditors.12 d) The amount of the authorised capital

8

Where the statutes or the instrument of incorporation have authorised an increase in the subscribed capital up to a certain amount in accordance with Article 68 (2) (cf. → Art 68 mn. 27 et seqq.), the statutes or the instrument of incorporation of the company have to state not only the amount of the capital currently subscribed but also the amount of such authorised capital and the amount of the subscribed capital at the time of any change in the authorised capital. Point (d) makes an explicit reference to point (e) of Article 14 (former Article 2 of Directive 2009/101/EC) pursuant to which Member States shall ensure that at least once a year the company discloses the amount of the capital subscribed, where the instrument of constitution or the statutes mention an authorised capital, unless any increase in the capital subscribed necessitates an amendment of the statutes (→ Art 14 mn. 7). The two provisions apply in parallel.

10 See Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 11; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 20 para. 22, Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 258, Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994 p. 119, 198, Niessen AG 1970, 281, 283. 11 See also Schwarz, Europäisches Gesellschaftsrecht, para. 576. 12 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 12.

76

Jan P. Brosius

Art 3

TITLE I GENERAL PROVISIONS

e) Information regarding the company’s bodies and its members Pursuant to point (e) the statutes or the instrument of incorporation of the company 9 have to state the rules governing the number of, and the procedure for, appointing members of the bodies responsible for representing the company with regard to third parties, administration, management, supervision or control of the company and the allocation of powers among those bodies, in so far as they are not legally determined by national law. Arguably, the reason behind this regulation is the lack of harmonisation of the inner structure of public limited liability companies on a European level.13 The provision aims to provide for minimum protection of creditors and (transnational) legal relations in general by means of transparency.14 Against this background, doubts must be raised about the effectiveness of this provision as specifications that are legally determined by national law are exempted from the publication obligation. Such an approach implicitly assumes that the practitioner which is aimed to be protected has full knowledge of the respective national law, whereas the disclosure and publication obligations provided for in the Directive should rather be designed to protect those who are not fully aware of the regulations in national law. Some questions have been raised in respect of the interpretation and application of 10 certain elements of point (e). Correctly, it is argued that the scope of the expression “bodies responsible for supervision or control of the company” is restricted to the respective corporate bodies in two-tier board structures as the German “Aufsichtsrat”, French “conseil de surveillance” or Dutch “raad van commissarissen.” In this respect, the provision does not refer to (external) auditors.15 This follows from the very wording of the provision. It is argued that the Council also issued a respective statement in the minutes of the relevant session.16 Yet, the minutes may not be made use of for the interpretation of Article 3 (→ Foreword Art 44 mn. 53). Further, with respect to the allocation of powers, it follows from its purpose that the 11 provision only refers to the actual allocation of such powers, not to a reservation of (supervisory) approval.17 Further, with respect to the wording of the Commission’s first proposal, the European Economic and Social Committee had expressed some concerns that the provision may hinder the allocation of powers within the management or supervisory body to be laid down in the body’s rules of procedure. It had pointed out that such allocation usually only makes sense after the commencement of business operations and companies should be permitted to provide for respective provisions within a body’s rules of procedure.18 Against this background and with a view to the very wording of the provision in its adopted version, it must also be held that it only addresses the allocation among the bodies, not the allocation within each single body. In Member States that have adopted a one-tire management structure and, for instance, distinguish between executive and non-executive directors, it must be considered whether each of the two types qualifies as an individual body of the company within the meaning of point (e).19 Although, the provision makes a clear distinction between management and 13 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 24; Habersack/ Verse, Europäisches Gesellschaftsrecht, § 6 para. 13. 14 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 24; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, vol. 1 1994, p. 119, 199. 15 I.e. auditors, Abschlussprüfer, expert comtable, commissaire etc. 16 Edwards, EC Company Law, p. 58. 17 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 26; Habersack/ Verse, Europäisches Gesellschaftsrecht, § 6 para 13; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungsund Spaltungsrichtlinie der EG in das nationale Recht, 2004, p. 41 et seqq.; Schwarz, Europäisches Gesellschaftsrecht, para. 576. 18 Opinion of the European Economic and Social Committee, OJ No c 88, 6.9.1971, p. 2.

Jan P. Brosius

77

Art 3 Compulsory information to be provided in the statutes or instruments of incorporation supervision, it appears that the company’s bodies rather refers to the company’s different boards as well as the general meeting but not to certain categories of their members. 20 12 There is some dispute, however, about how to interpret the provision with respect to the rules governing the number of and the procedure for appointing members of the company’s bodies. First, it is subject to discussion whether the statement on the rules governing the number of the members of the company’s bodies requires the reference to a precise number or rather a minimum and a maximum number. The latter is true. 21 Further, there is a controversy as to whether a provision in the statutes that authorises a company’s body to determine the number of its own members or the members of other bodies of the company is consistent with the requirements stipulated in Article 2.22 Whereas the German wording23 may suggest it is not permitted to delegate such power, it is argued that with respect to the English24 and the French25 wording as well as the history and the ratio of the provision, a delegation can be considered consistent with the provisions derived from Second Directive.26 It appears that the latter is true.27 In this respect, adequate protection is provided by the provisions derived from the First Directive as the accurate number of members of the bodies is subject to point (d) of Article 14 (former Article 2 of Directive 2009/101/EC) which obligates Member States to take the measures required to ensure compulsory disclosure by the company of the appointment, termination of office and particulars of the persons who either as a body constituted pursuant to law or as members of any such body are authorised to represent the company or take part in the administration, supervision or control of the company(→ Art 14 mn. 4 et seqq.).28 f) The duration of the company, except where this is indefinite 13

Lastly, pursuant to point (f) the statutes or the instrument of incorporation of the company have to state the duration of the company. However, if the duration of the company is indefinite this does not have to be indicated. Apparently, in this case the European legislature did not see any need for any additional information to be published in the statutes or the instrument of incorporation of the company.

19 See Edwards, EC Company Law, p. 58; Morse [1977] E.L.Rev 12, 126, 127 et seq.; Wooldrige [1978], Acta Juridica, 327, 335 et seq. 20 See also Edwards, EC Company Law, p. 58; Morse [1977] E.L.Rev 12, 126, 127 et seq.; Wooldrige [1978], Acta Juridica, 327, 335 et seq. 21 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 26; Habersack/ Verse, Europäisches Gesellschaftsrecht, § 6 para. 14; Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 259. 22 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 26 with further references in para. 57; Schwarz DStR 2002, 1306. 23 “Bestimmungen, welche die Zahl […] festlegen”. 24 “rules governing the number”. 25 “les règles qui déterminent le nombre”. 26 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 26; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 14; BGH, NZG 2002, 817, 818 („Sachsenmilch IV“), Hüffer NJW 1979, 1065, 1066; Schäfer ZGR 2003, 147, 158ff; Schwarz DStR 2002, 1306, 1308 et seqq. 27 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 26; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 13. 28 Schwarz, DStR 2002, 1306, 1308.

78

Jan P. Brosius

Art 4

TITLE I GENERAL PROVISIONS

V. Legal Consequences In its first proposal, the Commission expressly pointed out that it is to the discretion 14 of each Member State if sanctions are to be imposed for the event that disclosures pursuant to Article 2 are not or incorrectly made.29 For the purpose of effectiveness (cf. → Foreword Art 44 mn. 62 et seq.) such imposition of sanctions or comparable legal consequences by the Member States are indispensable.

VI. Minimum Provision Article 3 and 4 prescribe an irreducible minimum of information to be published.30 15 Member States may provide for further and stricter requirements. 31

VII. Direct application Article 3 is unconditional and sufficiently precise to fulfil the requirements of a direct 16 application (cf. → Foreword Art 44 mn. 64).

Article 4 Compulsory information to be provided in the statutes or instruments of incorporation or separate documents The following information at least shall appear in either the statutes or the instrument of incorporation or a separate document published in accordance with the procedure laid down in the laws of each Member State in accordance with Article 16: (a) the registered office; (b) the nominal value of the shares subscribed and, at least once a year, the number thereof; (c) the number of shares subscribed without stating the nominal value, where such shares may be issued under national law; (d) the special conditions, if any, limiting the transfer of shares; (e) where there are several classes of shares, the information referred to in points (b), (c) and (d) for each class and the rights attaching to the shares of each class; (f) whether the shares are registered or bearer, where national law provides for both types, and any provisions relating to the conversion of such shares unless the procedure is laid down by law; (g) the amount of the subscribed capital paid up at the time the company is incorporated or is authorised to commence business; (h) the nominal value of the shares or, where there is no nominal value, the number of shares issued for a consideration other than in cash, together with the nature of the consideration and the name of the person providing the consideration;

OJ No C 48, 24.4.1970, p. 9. Edwards, EC Company Law, p. 57. 31 Also see explicit wording “at least”. 29 30

Jan P. Brosius

79

Art 4 Compulsory information to be provided in the statutes or instruments (i) the identity of the natural or legal persons or companies or firms by which or in whose name the statutes or the instrument of incorporation, or where the company was not formed at the same time, the drafts of those documents, have been signed; (j) the total amount, or at least an estimate, of all the costs payable by the company or chargeable to it by reason of its formation and, where appropriate, before the company is authorised to commence business; (k) any special advantage granted, at the time the company is formed or up to the time it receives authorisation to commence business, to anyone who has taken part in the formation of the company or in transactions leading to the grant of such authorisation. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Material Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Separate document . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Information to be provided . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Legal Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 5 7 16 17 18

I. Overview 1

Article 4 – together with Article 3 – specifies the minimum content of the statutes or – if it constitutes a separate act – the instrument of incorporation of the company. 1 Article 4, however, also provides for the possibility to publish the information required in a separate document which has to be published in accordance with Article 16 of the Directive.

II. Purpose 2

The obligation to publish the information as requested by Articles 3 and 4 is considered to be a fundamental guarantee for the protection of any party involved in the formation of the company and its statutes and any third party carrying on negotiations with the company.2

III. Historical Background 3

Article 4 derived from the Second Directive3 (cf. Art 3 of Directive 2012/30/EU). It was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976. Its material content has not been amended since.

IV. Material Scope 4

The publication obligation pursuant to Article 4 complements the requirements stated in Article 3. It stipulates a number of further facts to be disclosed, the legal descrip1 2

80

See OJ No C 48, 24.4.1970, p. 9. OJ No C 48, 24.4.1970, p. 9.

Jan P. Brosius

Art 4

TITLE I GENERAL PROVISIONS

tion of which is mostly straightforward. Both, Articles 3 and 4, complement particularly the provisions in Chapter III which derived from the First Directive 2009/101/EC 4 and, inter alia, prescribe the methods of disclosure legally available (cf. → Art 13 et seqq.).

1. Separate document The information to be disclosed pursuant to Article 4 does not necessarily have to 5 appear in the statutes or the instrument of incorporation (→ Art 3 mn. 4 et seqq.), it may also be disclosed in a separate document published in accordance with the procedure laid down in the laws of each Member State in accordance with Article 16 (former Article 3 of Directive 2009/101/EC), pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means. (cf. → Art 16 mn. 6 et seq.). It is argued that the option to publish the requested information in a separate 6 document has been negotiated by the German delegation.5 Its purpose is to avoid to overload the statutes with information that is of less or rather temporary importance as, for instance, the identity of the founders or the costs of incorporation payable by the company.6

2. Information to be provided First, the registered office has to be published. The obligation does not apply to 7 national or international branches. Point (a) has to be placed into context with point (g) of Article 14 pursuant to which any change of the registered office of the company has to be disclosed in accordance with the Directive (cf. → Art 14 mn. 13) and point (b) of Article 26 pursuant to which the location of the company’s registered office has to be stated in its letters and order forms (cf. → Art 26 mn. 2). Further, the nominal value of the company’s subscribed shares has to be published 8 and, at least once a year, the number thereof, point (b), and, where such shares exist under national law, the number of shares subscribed without stating the nominal value, point (c). If several classes of shares exist (for the nature of classes of shares see → Art 68 mn. 16 et seqq.), such information has to be published for each class of shares separately together with the respective rights attaching to the shares of each existing class of shares, point (e). 3 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by its last version Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, → Foreword Art 44 mn. 7 et seqq. 4 Directive 2009/101/EC of the European Parliament and of the Council of 16 September 2009 on coordination of safeguards which, for the protection of the interests of members and third parties, are required by Member States of companies within the meaning of the second paragraph of Article 48 of the Treaty, with a view to making such safeguards equivalent, OJ No L 258, 1.10.2009, p. 11–19. 5 Edwards, EC Company Law, p. 59. 6 Edwards, EC Company Law, p. 59.

Jan P. Brosius

81

Art 4 Compulsory information to be provided in the statutes or instruments 9

10

11

12

13

14

15

Next, any special conditions limiting the transfer of shares have to be published, point (d). This, however, does not apply to provisions or agreements outside the statutes that do not effectively limit the transfer of shares but only result in secondary claims ( e.g. compensation claims), such as, for instance, shareholder agreements providing for the requirement of consent to the transfer of shares. If several classes of shares exist, such information has to be published for each class of shares, point (e). Where the national law provides for such distinction, it has to be stated whether the existing shares are bearer shares or registered shares. Moreover, any provisions relating to the conversion of such shares has to be published unless the procedure is laid down by law, point (f). Next, the relevant document chosen for the publication has to state the amount of the subscribed capital paid up at the time the company is incorporated or, if applicable, authorised to commence business, point (g). With respect to the formation and any subsequent increase in capital the nominal value or the number of shares issued for a consideration in kind (→ Art 48 mn. 4 et seqq.), respectively, has to be published, together with the nature of such consideration and the name of the person providing the consideration, point (h). Further, the identity of the founders, i.e. “the natural or legal persons or companies or firms by which or in whose name the statutes or the instrument of incorporation, or where the company was not formed at the same time, the drafts of those documents, have been signed” have to be published, point (i). In this respect the Commission has stated that the only relevant problem arising in the context of the minimum content of the statutes and the instruments of incorporation was the definition of the company’s founders.7 In the opinion of the Commission it wouldn’t have made sense to use a term of such material importance without making sure it is interpreted the same way in all Member States. According to the Commission, there is a potential to mislead as the laws of the initial Member States, prior to the adoption of the Second Directive, had applied two different definitions. One refers to the participation in the establishment, the other to the role as a founder. In the opinion of the Commission the most objective and reliable reference would be the act of signing the statutes or the instrument of incorporation.8 The Commission also pointed out that it had not overseen the issue of the founder’s personal liability. The Commission, however, had intended to deal with the issue rather in the context of director’s liability.9 Next, the total amount, or where the precise amount is not yet known, at least an estimate, of all the costs payable by the company or chargeable to it by reason of its formation and, where such authorisation is required under national law, before the company is authorised to commence business has to be stated, point (j). Finally, any special advantage granted to anyone who has taken part in the formation of the company or in transactions leading to the grant of such authorisation has to be stated, point (k). A special advantage is any right other than a membership right directly or indirectly granted by the company to a shareholder or any third party without consideration or for an inadequately low consideration. Article 4 requires that the advantage has to be granted at the time the company is formed or up to the time it receives authorisation to commence business and that the recipient of such advantage has taken part in the formation of the company or in transactions leading to the grant of such authorisation. Such requirements are intended to establish an irrebuttable presumption 7 Reference is to be made to Art 12 (b) (v) and (vi) of the First Directive which speaks of “founder members”. 8 OJ No C 48, 24.4.1970, p. 9. 9 OJ No C 48, 24.4.1970, p. 9.

82

Jan P. Brosius

Art 5

TITLE I GENERAL PROVISIONS

that the special advantage was granted by reason of the company’s formation. Inter alia such advantages may particularly be a revenue or profit share, rights of use or exclusivity rights. Advantages granted subsequently have to be considered primarily in the light of the provisions on capital maintenance (cf. Chapter IV).

V. Legal Consequences In its first proposal, the Commission expressly pointed out that it is to the discretion 16 of each Member State if sanctions are to be imposed for the event that disclosures pursuant to Article 4 are not or incorrectly made.10 For the purpose of effectiveness (→ Foreword Art 44 mn. 62 et seq.) such imposition of sanctions or comparable legal consequences by the Member States are indispensable.

VI. Minimum Provision Article 3 and 4 prescribe an irreducible minimum of information to be published.11 17 Member States may provide for further and stricter requirements. 12

VII. Direct Application Article 4 is unconditional and sufficiently precise to fulfil the requirements of a direct 18 application (→ Foreword Art 44 mn. 64).

Article 5 Authorisation for commencing business 1. Where the laws of a Member State prescribe that a company may not commence business without authorisation, they shall also make provision for responsibility for liabilities incurred by or on behalf of the company during the period before such authorisation is granted or refused. 2. Paragraph 1 shall not apply to liabilities under contracts concluded by the company conditionally upon its being granted authorisation to commence business. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Direct application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 7 8

I. Historical Background Article 5 derived from the Second Directive1 (cf. Art 4 of Directive 2012/30/EU). It 1 was implemented in the Second Directive 77/91/EEC as initially adopted 13 December 1976. Its material content has not been amended since. OJ No C 48, 24.4.1970, p. 9. Edwards, EC Company Law, p. 57. 12 Also see the explicit wording “at least”. 10 11

Jan P. Brosius

83

Art 5 Authorisation for commencing business

II. Purpose 2

Article 5 aims at protecting creditors and, as a legal reflex, ensures the compliance of national laws.

III. Scope Where the laws of a Member State provide that a company may not commence business without authorisation, such Member State is obliged to also provide for rules regarding the responsibility for liabilities incurred by or on behalf of the company during the period before such authorisation is granted or refused. 4 Inter alia and prominently, this is the case in the former Member State United Kingdom. Pursuant to section 761 para. 1 of the Companies Act 2006 a public company must not do business or exercise any borrowing powers unless the registrar has issued it with a “trading certificate”. The respective legal consequences of doing business without a trading certificate are subject to section 767 of the Companies Act 2006. 5 A pending authorisation does not prevent the company from acquiring legal personality.2 Accordingly, Article 5 refers to the period from the company’s formation until the authorisation is granted or refused. Any incident at a point in time before the company is formed is subject to Article 7 (2) (former Article 8 Directive 2009/101/EC), 3 pursuant to which, unless otherwise agreed, the persons who acted shall, without limit, be jointly and severally liable thereof, if, before a company being formed has acquired legal personality, action has been carried out in its name and the company does not assume the obligations arising from such action (cf. → Art 7 mn. 3 et seq.). 6 As the company acquires legal personality irrespective of any authorisation granted (→ mn. 5), national laws must provide that at least the company itself must be responsible for its liabilities.4 Aside from that, it seems likely to comply with the provisions laid down in Article 5 by providing for liability of any person who acted and carried out the action in the name or on behalf of the company. 3

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by its last version Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Foreword Art 44 mn. 7 et seqq. 2 See also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6, para. 16; Schwarz, Europäisches Gesellschaftsrecht, para. 579. 3 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 32; Habersack/ Verse, Europäisches Gesellschaftsrecht, § 6, para. 15; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 212; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale Recht, 2004, p. 39; Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, 2001, p. 128. 4 See also Habersack/Verse, Europäisches Gesellschaftsrecht, para. 16.

84

Jan P. Brosius

Art 6

TITLE I GENERAL PROVISIONS

IV. Exception Article 5 (2) makes an exception for liabilities under contracts concluded by the 7 company conditionally upon its being granted authorisation to commence business. Such exception is justified as in case authorisation is refused the contracts become ineffective or rather not effective at all. At the same time the exception allows the persons acting on behalf of the company to make any provision and take the necessary precautions to allow the company to commence business operations as soon as the required authorisation is granted.

V. Direct application Article 5 is not sufficiently precise to fulfil the requirements of a direct application 8 (→ Foreword Art 44 mn. 64).

Article 6 Multiple-member companies 1. Where the laws of a Member State require a company to be formed by more than one member, the fact that all the shares are held by one person or that the number of members has fallen below the legal minimum after incorporation of the company shall not lead to the automatic dissolution of the company. 2. If, in the cases referred to in paragraph 1, the laws of a Member State permit the company to be wound up by order of the court, the judge having jurisdiction shall be able to give the company sufficient time to regularise its position. 3. Where a winding-up order as referred to in paragraph 2 is made, the company shall enter into liquidation. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Material scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Direct Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 4 5 9 10

I. Overview Article 6 provides that where a Member State requires a company to have a minimum 1 amount of shareholders, falling below such threshold may not lead to the automatic dissolution of the company. In such case, national law must provide for the requirement of a court’s decision leading to the liquidation of the respective company. Systematically, Article 6 has to be placed into context with Article 11 (former Article 2 12 of Directive 2009/101/EC) pursuant to which, the nullity of a company may only either be ordered by decision of a court of law (cf. point (a)) or be ordered on limited enumerated grounds (cf. point (b)) including the case that, contrary to the national law governing the company, the number of founder members is less than two (→ Art 11 mn. 10).1 Also, Article 6 must be read in conjunction with Directive 2009/102/EC 2 which lays down provisions on single-member companies.

Jan P. Brosius

85

Art 6 Multiple-member companies

II. Historical Background 3

Article 6 derives from the Second Directive3 (cf. Article 5 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted 13 December 1976. Its material content has not been substantially amended since.

III. Purpose 4

Article 6 aims to protect shareholders and creditors. It seeks to provide legal certainty and the protection of legitimate expectations.

IV. Material scope It appears from Article 6 of the Directive as well as Articles 2 and 6 of Directive 2009/102/EC that European Law assumes that the laws of most Member States allow for single-member companies.4 However, Member States may also require a company to have at least two5 or a minimum of even more shareholders,6 although at least the latter seems to be a relic of the past. For Instance, Article L225-1 of the French Code du Commerce in its former version7 required that the number of members of companies whose shares are admitted to trading on a regulated market or on a multilateral trading facility may not be less than seven.8 6 Where this is the case, Article 6 obliges Member States to guarantee that a company that no longer complies with the requirements in regard to the minimum number of shareholders is not automatically dissolved. It is argued that Article 6 also applies where the laws of a Member State allows for single-member companies and its only member ceases to be a shareholder which results in the creation of a non-member company. 9 While it is worth considering to treat such situation legally not any different from the situation described above, according to the provision’s clear and unambiguous wording this scenario does not fall within the scope of Article 6. 5

See also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 17. Directive 2009/102/EC of the European Parliament and of the Council of 16 September 2009 in the area of company law on single-member private limited liability companies, OJ No L 258, 1.10.2009, p. 20–25. 3 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by its last version Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Foreword Art 44 mn. 7 et seqq. 4 See also Schwarz, Europäisches Gesellschaftsrecht, para. 580, see also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 214. 5 See point (b) of Article 11. 6 Incorrect in this respect Wooldridge, Company Law in the UK and the EC, p. 27. 7 Article L225-1 of the French Code du Commerce has been amended by Ordinance No. 2020-1142 of September 16, 2020; as of 1 January 2021 Article L225-1 of the French Code du Commerce contains only the general requirement that “elle est constituée entre deux associés ou plus.” 8 “Le nombre des associés ne peut être inférieur à sept”. 9 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 17. 1

2

86

Jan P. Brosius

Foreword to Arts 7-12

TITLE I GENERAL PROVISIONS

Article 6 only prohibits the automatic dissolution, i.e. a dissolution ipso iure. Pur- 7 suant to its second paragraph Member States are not precluded from permitting the company to be wound up by order of the court, provided, however, the judge having jurisdiction is legally able to give the company sufficient time to regularise its position. Whereas the Commission’s proposal provided that the court would need to be able to set a grace period of at least 6 months,10 the Directive does not stipulate a fixed period of time. Just as little does it set out or define the conditions under which the time given is to be considered sufficient.11 Such determination shall neither be at the discretion of the national legislature. It is at the discretion of the national court competent in each individual case to set the criteria for the determination of the adequate time period in each individual case. Paragraph 3 clarifies that where a court order to wind up the company is made it shall 8 enter into liquidation. The provision seeks to ensure the proper conduct of liquidation proceedings.

V. Minimum Provision Article 6 stipulates the minimum restriction to be transposed into national law. 9 Member States may provide for stricter rules.

VI. Direct Effect Article 6 (1) is unconditional and sufficiently precise to fulfil the requirements 10 of a direct application (cf. → Foreword Art 44 mn. 64). The same does not apply to Article 6 (2) and (3).

Section 2 Nullity of the limited liability company and validity of its obligations Foreword to Arts 7-12 I. Legislative History and Aims of the Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. First Directive 68/151/EEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Amending Directive 2003/58/EC – Electronic Register . . . . . . . . . . . . . . . . . . . 3. Codification 2009/101/EC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Amending Directive 2012/17/EU – Connection of the European registers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Consolidation Directive 2017/1132/EU – Unification of company directives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Amendment Directive 2019/1151/EU – Company Law Package . . . . . . . . . . II. The Immersion of the Disclosure Directive within the Company Law Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Validity of obligations entered into by a company . . . . . . . . . . . . . . . . . . . . . . . . . 3. Nullity of the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Online formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 3 4 5 6 7 12 16 17 18 20 21

OJ No C 48, 24.4.1970, p. 18. See also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 214. 10 11

Alexander Schall and David Günther

87

Foreword to Arts 7-12

I. Legislative History and Aims of the Directive 1. First Directive 68/151/EEC The European Commission passed the First Directive in the area of private law, Directive 68/151/EEC – also known as the Disclosure Directive – on the 9 th of March, 1968. Since the first proposal, the negotiations between the then six Member States had taken four years.1 It has proven strenuous to find common ground regarding key parts of the third-party protection and enhancement of the single market.2 In the end, the regulatory scope was three-fold: it (1) laid the foundation for a unified register and publication system, (2) determined the extent of the power to represent a company, and (3) restricted the grounds of nullity of a company. As such, only ten years after the Treaties of Rome, the First Directive in the whole of the area of private law established the EU lawmaking policy of an information model.3 2 The access to important and reliable company information which this Directive establishes enables business partners, (potential) creditors and every other stakeholder from the general public to come to a sound business decision in dealings with the company. Furthermore, the unrestricted power to represent and the narrowing of the grounds of nullity promote commercial certainty in that they ensure a contractual partner can rely on his binding agreement with the company, notwithstanding any procedural irregularities that may have occurred in the process of incorporation or appointment of the directors and that he cannot know. However, the purpose of the directive to protect the third party that engages in cross border trade establishes only a minimum level of protection.4 National regulations can further determine information to be disclosed5 or establish a higher protection level in restricting the grounds of nullity6. Jurisdictions may limit the effect of procedural irregularities affecting the process of incorporation or the appointment of directors by national laws, for example via the doctrines of “faktische Gesellschaft” or “faktisches Organ” in Germany or via the certificate of incorporation that provides conclusive evidence that the company is lawfully erected under sec. 25(4) of the Irish Companies Act 2014 or sec. 15(4) CA 2006 of the English Companies act 2006. The development of electronic communication systems and the need of the alignment and consolidation with other Directives eventually led to four significant amendments to Directive 68/151/EEC. 1

2. Amending Directive 2003/58/EC – Electronic Register 3

The accession of further Member States7 increased the territory and the included national legislations of the single market. The European Commission instated the expert commission “Simpler Legislation for the Internal Market (SLIM)” in order to simplify The first proposal dates back to the 21st of February 1964, OJ 1964 L194/3245; Opinions OJ 1964 No 194/3248 (Economic and Social Council) and 1966 No 96/1519 (European Parliament). 2 Cf. Recital No. 2, 3, 7, 9, 10 of the (codified) directive 2009/101/EC; Habersack and Verse, § 5 margin no. 2; Kalss and Klampfl, margin no. 205. 3 Detailed to the Information model in the First Directive Grundmann, § 9 margin no. 1; Kalss and Klampfl, margin no. 205; general monographic Grohmann, Das Informationsmodell im europäischen Gesellschaftsrecht (2006). 4 Cf. to maximum or minimum protection level of the directive in Habersack and Verse, § 5 margin no. 7. 5 Grundmann, § 9 margin no. 20; Habersack and Verse, § 5 margin no. 7. 6 Grundmann, § 9 margin no. 13; Habersack and Verse, § 5 margin no. 41; Chapter 4: Nullity of the company. 7 Especially the recent extension to the EEA Member States with effect for Iceland, Norway, Finland, Austria from 1st of January 1994 and for Liechtenstein from 1st of January 1995. 1

88

Alexander Schall and David Günther

TITLE I GENERAL PROVISIONS

Foreword to Arts 7-12

laws and make them more effective.8 Following its recommendations, the amendment aimed to simplify and modernize the First Directive.9 Therefore companies shall now file their documents electronically10 (Art 16 para. 2 subpara 2).11 Further, the publication (Art 16 para. 3 and Art 18) and the access shall be possible electronically (Art 16 a para. 1). Documents can be filed in any language of the Community (Art 21 para. 1). However, the conversion from a paper-bound system to an electronic system presented a challenge for some Member States and delayed the complete instalment until 2007. 12

3. Codification 2009/101/EC In 2009, the Directive was recast due to the numerous and significant amendments, 13 4 which partly resulted in a different count of paragraphs.

4. Amending Directive 2012/17/EU – Connection of the European registers The free movement of companies,14 cross-border transformations,15 and a unified 5 taxation of transnational companies created the need to identify companies within the EU and grant EU-wide access to company information. Therefore, the aim of this amendment was to improve the availability of company information in a cross-border context.16 The previous voluntary cooperation was deemed insufficient.17 Every company is now assigned an index number for the intra-register usage. The portal provides central access to the respective national register. The Member States have the obligation to update an alteration within 21 days (Art 15 para. 1). The E-Justice-portal also gives a notification about the legal force of the information in the respective member state (Art 17 para. 1).

5. Consolidation Directive 2017/1132/EU – Unification of company directives In 2017 the first directive was transposed into the Company Law Directive together 6 with five other directives18 without substantive changes (including the recitals). The amendments were limited to a new numbering of the Articles made necessary by the consolidation. All directives had previously been the subject of several and substantial amendments, so that the consolidation was intended to simplify and clarify them.19 In

8 Recommendations by the Company Law Slim Working Group on the simplification of the first and second Company Law directives (http://ec.europa.eu/internal_market/company/docs/official/6037en.pd f). Reprinted in German in ZIP 1999, 194 ff. 9 Recital No. 3 of the Directive 2003/58/EC. 10 Electronic means is defined in Art 16 para. 2 Directive 1132/17/EU. 11 The following numeration of the paragraphs is based on the codified Directive 2019/1151/EU. 12 Cf. Seibert and Decker, DB 2006, 2446: described the change as the “Big Bang”. 13 Recital No. 1 of the codified directive 2009/101/EC. 14 Cf. ECJ – freedom of establishment: C-212/97 Centros Ltd v Erhvervs-og Selskabsstyrelsen, [1999] ECR I-1459; C-208/00 Überseering BV v Nordic Construction GmbH, [2002] ECR I-9919; C-167/01 Kamer van Koophandel v Inspire Art Ltd, [2003] ECR I-10155. 15 Regulated in Directive 2005/56/EC requires cooperation of registers; cf. Recital No. 3 of the Directive 2012/17/EU. 16 Recital No. 23 of the Directive 2017/1132/EU. 17 Recital No. 4 at the end of the Directive 2012/17/EC. 18 Directive 2012/30/EU (Capital Directive), Directive 2011/35/EU (Merger Directive), Directive 82/891/EEC (Demerger Directive), Directive 2005/56/EC (Cross-Border Merger Directive) and Directive 89/666/EEC (Branch Directive). 19 Recital No. 1 of the directive 2017/1132/EU.

Alexander Schall and David Günther

89

Foreword to Arts 7-12 addition, the consolidation in one directive should save the citizen a time-consuming search in different directives.20

6. Amendment Directive 2019/1151/EU – Company Law Package 7

8

9

10

11

The Company Law Package was drafted in a very short time due to the upcoming European Council elections. It consists of two parts: the digitalisation directive 2019/115121 and the mobility directive 2019/212122. The mobility directive concerns cross-border transformations, mergers and divisions. It was drafted in light of the seminal judgement CJEU C-106/16 Polbud23 and has no direct impact on the part of the Directive that corresponds with the former disclosure directive and is commented in the following. The digitalisation directive shall enhance “the use of digital tools and processes in company law”. The main key was the introduction of online formation of limited liability companies. In this context, full online formation means that it is not necessary to appear in person in the respective country before an authorised examiner (Art 13 g para. 1). Nevertheless, national law may provide for the retention of a notary or any other official examination body (Art 13 g para. 4 lit c). The incorporation can be carried out by natural or legal persons. Due to the different extent of information in the national registers, the formation by foreign companies can render the examination in the formation process more complicated.24 The online foundation is only intended to create a further possibility and not to replace any of the foundation possibilities existing in the member states. In principle, the directive prescribes online formation for all companies with limited liability. But it contains an opt-out clause for listed companies for the member states (Art 13 g para. 1 subpara 2). The overall objective of the directive is to strengthen the internal market through the cross-border formation of the companies irrespective of the place of domicile of the founders.25 In addition, the functionality and informative value of the register is also enhanced by the online deposit of documents and the registration of branch offices. The directive entered into force on 31.7.2019 and has an implementation period until 1.8.2021. Member States may request the extension of the time limit by up to one year (Art 3 para. 2).

II. The Immersion of the Disclosure Directive within the Company Law Directive 12

The parts corresponding to the former disclosure directive are all placed within TITLE I – GENERAL PROVISIONS AND THE ESTABLISHMENT AND FUNCTIONING OF LIMITED LIABILITY COMPANIES of the Company Law Directive. We can distinguish two main parts. Cf. Explanation of the COM(2015), 616, p. 2. Directive (EU) 2019/1151 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law. 22 Directive (EU) 2019/2121 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions. 23 See the annotations by d‘Avout, Receuil Dalloz, 2017, 2512; Mucha and Olpustil, ECFR 2018, 270; Kindler, NZG 2018, 1; Teichmann and Knaier, GmbHR 2017, 1314; Bayer and Schmidt, ZIP 2017, 2225; Paefgen, WM 2018, 981 (part I) and 1029 (part II); Kieninger, NJW 2017, 3624; Schall, ZfPW 2018, 176. 24 Bormann and Stelmaszczyk, NZG 2019, 601 et seq. 25 Recital No. 2 and 3 of the Directive 2019/1151/EU. 20

21

90

Alexander Schall and David Günther

TITLE I GENERAL PROVISIONS

Foreword to Arts 7-12

The first part is now Section 2 “Nullity of the limited liability company and validity 13 of its obligations” of Chapter II “Incorporation and nullity of the company and validity of its obligations” (section 1 of that chapter reflects parts of the former second or capital directive and only concerns public companies). This first part consists of Articles 7–12. The second part is the first section “Disclosure and interconnection of central, com- 14 mercial and companies registers” of chapter 3 “Nullity of the limited liability company and validity of its obligations” (the ensuing sections concern the disclosure requirements under the former directive on branches). The provisions transferring the old disclosure directive are Arts 13 and 14–28. The additional provisions introduced by the Digitalisation Directive 2019/1151, i.e. Arts 13 a–13 j, have been squeezed in between Arts 13 and 14. 15 The main content of these provisions is subdivided as follows.

1. Scope Art 7 para. 1 and Art 13 enumerate the types of companies in the respective member 16 states subject to this directive. By splitting the articles of the publication Directive into several sections, Art 7 and 13 now each contain a list of the types of the addressed companies. However, this did not include a change of substance.

2. Validity of obligations entered into by a company The purpose of Art 7 para. 2–Art 9, insofar corresponding to that of the disclosure 17 under Arts 14-28, is to enhance commercial certainty. The provisions aim to ensure that the third party can be confident to enter into transactions with a company within the Single Market. While this chapter refers to the power to represent a company before and after incorporation, Art 10-12 regulate the nullity or validity of a company. The purpose of both sets of instruments is to reduce the danger of entering into an agreement that has no counterparty because the company is either inexistent or cannot be bound by the acts of the agents. Thus Arts 8-10 address three key areas: formation stage of the company (Art 7 para. 2), appointment of the organs (Art 8), and extent of the power to represent (Art 9).

3. Nullity of the company Arts 10-12 shall ensure the third party that entered into a binding agreement with a 18 registered company can rely on the stability of that contract and will not be surprised by any argument “out of the blue” that the company is a nullity for some internal irregularity that no third party could ever be aware of. This was a persistent danger in early company laws because the basis of all modern companies is the company agreements, i.e. a private contract that can suffer from the usual reasons of nullity under general private law. Historically, the Member States had very different doctrinal foundations and legal regulations regarding nullity of companies in place.26 To protect the creditors and enhance the trust in the existence of the company, the regulations shall prevent 27 “out-of-the blue” nullity (through a mandatory official examination) (Art 10), reduce the cases of nullity (Art 11), and organizes the effects (Art 12).

26 Drury, ‘Nullity of Companies’ in Drury/Xuereb (eds), European Company Laws: a Comparative Approach (1991), 247-278; Kalss and Kampfl, margin no. 251; Habersack and Verse, § 5 margin no. 41. 27 Grundmann, § 8 margin no. 8; Lutter, Bayer and J. Schmidt, EuropUR, § 19 margin no. 83; Habersack and Verse, § 5 margin no. 42; Kalss and Kampfl, margin no. 252.

Alexander Schall and David Günther

91

Art 7 General provisions and joint and several liability 19

The scope of this chapter is to regulate the company itself and not to establish any kind of good faith provision. Therefor all articles require the existence of the company. 28

4. Disclosure 20

Art 14-28 concerns the “disclosure” of the company information. The Directive convergences the disclosure on three levels: (1) the requirements of the register itself (means of disclosure, Art 16 para. 1-4); (2) minimum extent of information to file (items of disclosure, Art 14 para. 1 lit. a-k); and (3) effects of the publication toward third parties (effects of disclosure, Art 16 para. 5-6). With regard to Europe-wide access and use of the register, this section now also contains articles on the interconnection of the registers of the Member States (Art 17-18) and the online formation (Art 13 g and Art 13 h) and filing of company documents (Art 13 j).

5. Online formation 21

Arts 13 a–13 j introduce the option for online formation of companies within the EU. In all Member States, this option must at least be offered with respect to private companies.

Article 7 General provisions and joint and several liability 1. The coordination measures prescribed by this Section shall apply to the laws, regulations and administrative provisions of the Member States relating to the types of company listed in Annex II. 2. If, before a company being formed has acquired legal personality, action has been carried out in its name and the company does not assume the obligations arising from such action, the persons who acted shall, without limit, be jointly and severally liable therefor, unless otherwise agreed. I. Overview Article 7 para. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Scope of the Addressed Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Overview Article 7 para. 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Underlying National Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Specification of the Pre-Incorporation Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Examples of Member State Laws Regulating the Pre-Incorporation Period . .

1 2 3 5 6 7

I. Overview Article 7 para. 1 1

Art 7 para. 1 refers to Annex II of the Directive for the scope of the companies covered. Only companies incorporated with limited liability are subject to regulation because the partnership’s higher level of dependency on the member state law made unified regulation more complicated.1 The Directive identifies limited liability companies as main actors in the single market;2 these companies must be correctly identified and therefore have got to disclose certain key information. The reason are the dangers posed by separate legal personality and limited liability.3 Disclosure can be understood as the Cf. ECJ, case 136/87 Ubbink Isolatie BV, [1988] ECR 4665. Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 10; Einmahl, AG 1969, 132. 2 Recital No. 1 of the Directive 68/151/EEC. 3 Recital No. 2 of the Directive 68/151/EEC. 28

1

92

Alexander Schall and David Günther

TITLE I GENERAL PROVISIONS

Art 7

“quid pro quo” of limited liability.4 Nevertheless, hybrids like the German GmbH & Co KG – a limited partnership where the only fully liable partners are companies with limited liability – are not covered by the Directive which defines the scope by looking on the form, not the substance.

II. Scope of the Addressed Companies The Directive does not define “companies incorporated with limited liability”; as a 2 consequence, to avoid uncertainty about which companies are addressed, Annex I and Annex II enumerate the companies in every Member State covered by this directive. Annex I only covers the public limited company, while Annex II covers all public and private companies. Based on Art 9 para. 1 lit c ii SE-Reg, the national transformation rules apply to the SE as well. From the time the directive became applicable in 1968, the former EEC with six members has transformed into the EU with 28 Member States. In the newly acceded Member States, the directive became law as part of the acquis communautaire. As a consequence, every Act of Accession requires an amendment to Annex I and Annex II add the companies in the new Member State.

III. Overview Article 7 para. 2 Art 7 para. 2 assures that the third party always enters into an agreement with an 3 existing person in order to obtain a creditor during the whole formation process of the company. It addresses a key problem of private law. The basic situation is as follows. If an agent acts on behalf of a non-existent person, that person cannot be bound. Nor will the agent, because he did not act on his own behalf. General private law may or may not contain answers to that. For example, under German law, the agent acting as “falsus procurator” may be held liable (§ 179 BGB). Such liabilities could be stretched by way of analogy to cover agents acting for non-existing (legal) persons, too. But company law will often deviate from general private law and be even more restrictive. For example, jurisdictions adhering to a minimum capital concept will wish to prevent any premature diminution of the assets covering the subscribed capital prior to registration. Therefore, many company laws prevent binding contracts with future companies also by barring the assumption of such contracts at a later stage. The role of Art 7 para. 2 is to provide minimum protection against the perils of this. 4 If the company is not obliged by the contract, the third party shall at least be able to proceed against the person acting in the name of the company. The acting persons are liable as fall-back option5 if the company does not assume the obligations.6 If there are more members acting together, they will be jointly and severally liable for the incurred debts, unless agreed otherwise (Art 7 para. 2 at the end). This shifts the risk of the failure to bind the company from the third party to the person or persons acting in the name of the company. It increases the pressure on the founders and representatives to complete the formation process.

Rickford, ECFR 2004, 391, 402. Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 50. 6 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 50; Habersack and Verse, § 5 margin no. 26. 4 5

Alexander Schall and David Günther

93

Art 7 General provisions and joint and several liability

IV. Underlying National Law 5

Although the Directive is based on German and Italian law, it does not order the Member States to adopt a similar formation concept.7 There are especially no provisions regarding the moment of the legal existence of the company, a “pre-incorporated company” (similar to the German Vorgesellschaft), or the allocation of the liability between the company and its representatives.8 Art 7 para. 2 merely prescribes a liability provision9 as minimum protection during that time span. Since the only aim of this liability is to secure the existence of a counter party before incorporation, it ceases to apply if the liabilities are “assumed” by the incorporated company. As to the great variety of possible constructions to this end, see below V.

V. Specification of the Pre-Incorporation Period 6

The Directive does not state precisely the time span of the pre-incorporation period. This allows the possibility of a differentiation between acting for a future company at a time when the incorporation is only vaguely intended and acting for an already “preincorporated company” the formation agreement of which has already been concluded. The explicit German pre-incorporation liability under § 11 II GmbHG/ § 41 AktG is said to cover only the latter case.10 Contracts concluded in the name of a future company prior to the notarisation of the company agreement are dealt with by different means (sub V). However, the arguments on this matter are inextricably intertwined with the overall treatment of the incorporation period that has been fundamentally changed by German Courts and doctrine. These aspects cannot claim validity within the framework of Art 7(2) that aims to provide encompassing protection of the counter parties, if at minimum level. The need for protection of these third parties is surely the same before and after the conclusion of the company agreement.11 Therefore, it is to be approved that the vast majority of commentators support the most extensive understanding so to include any company name.12

VI. Examples of Member State Laws Regulating the PreIncorporation Period 7

To start with a former Member state: English law is very restrictive with respect to pre-incorporation contracts. It absolutely prohibits the assumption of any pre-incorporation contracts by the company. The counterparty is required to conclude a new contract,13 and otherwise restricted to a right to sue the person acting on behalf of the future company under sec. 51 CA 2006.

Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 57; Habersack and Verse, § 5 margin no. 26. Habersack and Verse, § 5 margin no. 26; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 57. 9 Kalss and Kampfl, margin no. 244; Kalss, ZHR 155 (2002), 134; Habersack and Verse, § 5 margin no. 26; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 57. 10 BGHZ 91, 148; Fastrich in Baumbach and Hueck, GmbHG (22 nd ed., 2019), § 11 para. 50. 11 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 58. 12 Grundmann, § 8 margin no. 19; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 58; Habersack and Verse, § 5 margin no. 27; Kalss and Kampfl, margin no. 244. 13 Birds, Annotated Companies Legislation (3rd ed., 2013), para. 4.51.02; Schall, Companies Act (2014), sec. 43-52, para. 7. 7

8

94

Alexander Schall and David Günther

TITLE I GENERAL PROVISIONS

Art 7

Compared to English law, Irish law is more flexible. It allows the assumption of preincorporation contracts by the company via ratification under sec. 45(1) and (2) CA 2014. The personal liability of the agent ceases with that ratification, § 45(3) CA 2014. This translates the requirements under Art 7 para. 2 practically one on one. The situation under German law is far more complex. It provides an illuminating example of the interaction between the Company Law Directive and national law, and will therefore be set out in detail. For starters, the liability of the acting person under Art 7 para. 2 is expressly stated in the German Codes (§ 11 II GmbHG; § 41 I 2 AktG). These provisions that once were the signposts for Art 7 para. 2 are still valid law and therefore readily applicable. However, fundamental doctrinal shifts in the course of the 20th century led to a legal situation where these liability provisions have lost their former important role in the pre-incorporation period completely. Under today’s regime, they have become superfluous from both the national and the European perspective so that they would not have to be codified any more. Conversely, the current German law on the preincorporation period is not even a bit reflected in Art 7 of the Directive. It is totally different, though as will be shown below it complies nevertheless with the requirements of para. 2. Today, the legal regime during pre-incorporation period follows a generally accepted two-fold approach in Germany:14 Before registration, there is a Vorgesellschaft that comes into existence with notarisation of the company agreement. Prior to that notarisation, there may already exist a Vorgründungsgesellschaft. In detail: Upon notarisation of the company formation agreement, the future company is “erected” (“errichtet”, cf. § 29 AktG). That is to say it comes to legal life in the guise of a so-called Vorgesellschaft (= “pre-company”). All rights are acquired and liabilities incurred on behalf of that Vorgesellschaft. It is a legal person of another kind (sui generis) that shares most features of the later company, apart from the limited liability of the shareholders. Therefore, the Vorgesellschaft is basically identical with the future company into which it will turn automatically upon registration. This conversion takes place by operation of law. As a consequence, all contracts of the Vorgesellschaft continue with the incorporated company. There is no need for an explicit assumption, nor is there a possibility of rejection by the company. As far as this automatic succession works, it renders any liability provision under Art 7 para. 2 unnecessary. The background of this construction is that no more prohibition to burden the company with debts prior to registration (so-called “Vorbelastungsverbot”) prevails under German law. The protection of the subscribed capital against losses prior to registration is instead achieved via the case law rules of the Unterbilanzhaftung. These rules oblige the founders to make additional contributions in order to replenish the capital yard stick if it has been undercut by losses prior to registration.15 The founders may reduce this liability by abstaining from registration and liquidating the Vorgesellschaft. In that case, they will only have to cover the debts as far as they exceed the assets of the Vorgesellschaft (= Verlustdeckungshaftung) 16 instead of paying up the subscribed capital again. Prior to the notarisation however, a completely different set of rules applies. For starters, and somewhat surprisingly, the pre-incorporation liability of agents acting for the future company under § 11 II GmbHG, § 41 I 2 AktG only covers the period between 14 Cf. to the following Schall and Machunsky in Vicari and Schall (eds), Company Laws of the EU (2020), Part 2, Chapter 2, mn. 50 et seq. 15 Schall and Machunsky in Vicari and Schall (eds), Company Laws of the EU (2020), Part 2, Chapter 2, mn. 51. 16 Schall and Machunsky in Vicari and Schall (eds), Company Laws of the EU (2020), Part 2, Chapter 2, mn. 51.

Alexander Schall and David Günther

95

8

9

10

11

12

Art 8 Effects of disclosure with respect to third parties conclusion of the company agreement and registration.17 The provisions do not apply before the company is “erected” by notarisation of the company agreement. At this point, German law appears to lag behind the minimum protection required by Art 7 para. 2 (see above). But at the end of the day, this deviation is irrelevant because full personal liability of the acting agents (plus the other, non-acting founders) is achieved in an alternative way as follows: 13 As long as the company is not erected yet, legal acts in the name of the future company cannot be attached to that company nor to the Vorgesellschaft because both are still inexistent. Instead, there is a so-called “Vorgründungsgesellschaft” at work, i.e. a special kind of partnership for the purpose to incorporate the future company. Any rights that are acquired and liabilities that are incurred “on behalf of the future company” will at law be attributed to this Vorgründungsgesellschaft.18 The partners will be jointly and severally liable for the debts under § 128 HGB. That rule will apply directly or by way of analogy, depending on whether the Vorgründungsgesellschaft is a commercial partnership (OHG) under §§ 105 et seq HGB or a private law partnership (BGB-Gesellschaft) under §§ 705 et seq. BGB. There will be no automatic transition from the partnership to the company. Rather, all assets and liabilities have to be transferred either to the company (after registration) or to the Vorgesellschaft (after notarisation of the company agreement). This can be achieved by way of a contribution in kind, either piecemeal or in one universal act of succession. The latter option can be achieved by all partners ceding their “shares” in the partnership simultaneously to the company/Vorgesellschaft. 14 It follows that, contrary to the situation in the Vorgesellschaft, the obligations incurred in the name of the future company prior to notarisation are not attached to the company upon registration automatically ex lege. However, if the company chooses not to assume the debts, the liability required by Art 7 para. 2 will be granted via the full personal liability of the partners of the Vorgründungsgesellschaft. This even exceeds the minimum protection by the Directive because all founders are partners of the Vorgründungsgesellschaft. Therefore, all incorporators will become jointly liable for any debts, whether or not they entered into the contracts themselves. By contrast, Art 7 para. 2 only demands the liability of the persons who actually acted in the name of the future company.

Article 8 Effects of disclosure with respect to third parties Completion of the formalities of disclosure of the particulars concerning the persons who, as an organ of the company, are authorised to represent it, shall constitute a bar to any irregularity in their appointment being relied upon as against third parties, unless the company proves that such third parties had knowledge thereof. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Determination of Irregularities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Lex Specialis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3

I. Overview 1

Art 8 protects third parties from any irregularities in the appointment of the organ. The third party can rely on the state of register even if the organ is not appointed 17 18

96

BGHZ 91, 148. BGHZ 91, 148.

Alexander Schall and David Günther

Art 9

TITLE I GENERAL PROVISIONS

effectively, unless the company can prove the third party knew about the failure of appointment. The process of an appointment normally takes place exclusively within the company. The third party cannot assess the effectiveness of the appointment from the outside. Art 8 removes the uncertainty for the third party and binds the company from the moment of completion of disclosure. With a view to Art 16, the provision would not really have been necessary (see sub III), so much the more since the practically relevant issue in this context are the restrictions on the power to bind the company that are dealt with by Art 9.

II. Determination of Irregularities The determination of irregularities remains the exclusive domain of the Member 2 State law. Conversely, Member State law can also render the appointment effective despite a failure in the appointment process, as e.g. Ireland does in sec. 135 CA 2014. German Courts achieve that outcome by applying the doctrine of “faktisches Organ” (= “de facto organ”)1. If the appointment is effective notwithstanding the flawed procedure, Art 8 is neither applicable nor needed.2

III. Lex Specialis Since the third party can always invoke the publication against the company (Art 16 3 para. 4 and 5), Art 8 is lex specialis with only declaratory function.3 It follows that all the principles of these provisions apply here as well, e.g. the option of the third party to invoke the true legal situation.

Article 9 Acts of the organs of a company and its representation 1. Acts done by the organs of the company shall be binding upon it even if those acts are not within the objects of the company, unless such acts exceed the powers that the law confers or allows to be conferred on those organs. However, Member States may provide that the company shall not be bound where such acts are outside the objects of the company, if it proves that the third party knew that the act was outside those objects or could not in view of the circumstances have been unaware of it. Disclosure of the statutes shall not of itself be sufficient proof thereof. 2. The limits on the powers of the organs of the company, arising under the statutes or from a decision of the competent organs, may not be relied on as against third parties, even if they have been disclosed. 3. If national law provides that authority to represent a company may, in derogation from the legal rules governing the subject, be conferred by the statutes on a single person or on several persons acting jointly, that law may provide that such a provision in the statutes may be relied on as against third parties on condition that it relates to the general power of representation; the question whether such a provision

Cf. e.g. BGH NZG 2005, 755; NZG 2008, 468. Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 64; Habersack and Verse, § 5 margin no. 29. 3 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 63; Habersack and Verse, § 5 margin no. 28. 1

2

Alexander Schall and David Günther

97

Art 9 Acts of the organs of a company and its representation in the statutes can be relied on as against third parties shall be governed by Article 16. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Organs of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Third Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Unrestricted Power to Bind the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Restrictions via the objects (Art 9 para. 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. “Unrestrictable” power to bind the company (Art 9 para. 2) – objective and subjective limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exception for abuse of power of representation . . . . . . . . . . . . . . . . . . . . . . . . . . b) Conflict of interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Personal Allocation of Power of Representation by the Articles (Art 9 para. 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 10 14 15 16 19 21 24

I. Overview Art 9 determines the extent of the power to represent the company. It aims to prevent any internal restrictions on the authority of the management organ from invalidating contracts with third parties. This regulation had a huge and important harmonization effect.1 Before this Directive, the system of representation differed fundamentally within the EU. The main “opponents” were the German ‘organ theory’ (with similarities to the Danish and Dutch systems) which understands the acts of an organ as the acts of the company itself. The “organs” virtually serve as mind, eyes, ears and mouth of the company. As such, they are the bearers of a primeval power of representation from which all other authority to bind the company via contracts etc. must be, and will be derived. Opposed to this approach were the French and Italian ‘mandate theory’, in which the administrator acts on behalf of the company.2 English law follows a similar concept that is, inter alia, the doctrinal foundation of the “ultra-vires doctrine” which basically says that a company can only execute legal acts within the scope of its objects. The strict differentiation between the internal power to conduct the business of the company (“Geschäftsführung”) and the external power to represent the company vis-à-vis third parties (“Außenvertretung”) was unknown in Member States following the “mandate theory”.3 In those jurisdictions, the power to represent the company followed the general law of agency. As a consequence, the power to represent the company would automatically be restricted to acts within its the purpose or by restrictions in the articles.4 2 The Directive opted for the German principle of the unrestricted and “unrestrictable” power to represent the company (= “unbeschränkte und unbeschränkbare Vertretungsmacht”) because it seemed better suited for third-party protection. 5 In particular, it overcame the “ultra-vires-doctrine” (see sub IV.1.). This doctrine posed significant dangers for commercial certainty because the company could not be held to any legal effect from an act done ultra vires. To give a striking example: In 19th century England, companies would often embark on banking as a side business (often more lucrative then their main business, e.g. agriculture). However, if the banking activities 1

Habersack and Verse, § 5 margin no. 30. Habersack and Verse, § 5 margin no. 30; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 63; Kalss and Kampfl, margin no. 246; Grundmann, § 8 margin no. 23. 3 Habersack and Verse, § 5 margin no. 30; Grundmann, § 8 margin no. 23. 4 Grundmann, § 8 margin no. 23; Habersack and Verse, § 5 margin no. 31; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 73. 5 Grundmann, § 8 margin no. 24. 1

2

98

Alexander Schall and David Günther

TITLE I GENERAL PROVISIONS

Art 9

were ultra vires, no liabilities could arise from it. Not only would any contracts for deposits on the accounts of such amateur banks be invalid. Arguably, there could not even lie a restitution claim in unjust enrichment for the money so received because the deposit was accepted “ultra vires” of the company and no legal consequences at all could arise from that act for the company.6 Despite the important harmonisation achieved by Directive in favour of legal certain- 3 ty, the allocation of power of representation to the organs still follows different rules and doctrinal principles in the national laws of the Member States. It can be attributed to the board as collective body as well as to the members of the board, individually or jointly or in other combinations (sub II). The Directive makes no provision for that. It only deals with a specific situation that arises if the national law of a Member State allows the articles to modify the general default rules of representation (Art 9 para. 3, in more detail → mn. 25).

II. Organs of the Company Art 9 only concerns the powers of the “organs of the company” to represent and bind the company. This is the primeval power to act “as mouth and ears” of the artificial legal person that originates from company law (sub I). It does not relate to any subsequently granted authority under general private law to enter into contracts on behalf of the company, as officers of the lower levels of management as well as shop assistants may have.7 Irrespective of the questions (a) whether jurisdictions follow the organ theory of the mandate theory, (b) whether, doctrinally speaking, the power of representation is attributed by the law or by the shareholders, and (c) whether the power is attributed to a board collectively or to individual persons, there will always be one first level of original representation. The addressee of it is the “organ” in the sense of Art 9. As said, the Member States are free to allocate the power of representation within the company. It can be attached to the board of directors as collective body, but also to individual persons, e.g. the directors, who may be empowered to represent the company jointly or individually or in specific combinations. Save para. 3, Art 9 is agnostic to the various options of company representation. It only states that irrespective of how and to whom these powers are allocated as “organ”, they cannot be limited by the objects (para. 1) nor the articles (para. 2). Against this background, the term “organ” in Art 9 refers to any constituency that is endowed with the power of representation under national law. That may be the board (as collective organ) or individual persons, e.g. the directors who will often be members of a board. That situation is also reflected in Art 14 lit. d (i) that speaks of “the appointment, termination of office and particulars of the persons who either as a body constituted pursuant to law or as members of any such body”. Under the old Art 10 of Directive 2009/101/EC, the meaning of “organ” had been less clear. The text distinguished between the power of the organ (para. 1 and 2) and the power conferred on “on a single person or on several persons acting jointly” (para. 3). That seemed to suggest that only collective bodies, but not individual persons were viewed as “organs” by the old Directive. However, this misleading distinction has been abandoned in the new Art 9. As a result, it is now beyond doubt that individual directors 6 See the illuminating example of the seminal, if in parts overruled English case Sinclair v Brougham [1914] AC 39 – where by the way a little backdoor was opened by allowing the creditors at least to trace into the proceeds of their lost deposits under trust law. 7 Cf. Schall, Companies Act (2014), sec. 40 para. 8-9.

Alexander Schall and David Günther

99

4

5

6

7

Art 9 Acts of the organs of a company and its representation upon whom the company law of a Member State confers power of representation are “organs” in the sense of Art 9, too. Art 14 lit. d (i) confirms this view. 8 Since the term “organ” of the new Directive now covers both the collective body and the members of it, the scope of the protection under Art 9 may be extended. This refers mainly to jurisdictions that attach the primary power of representation to the board as collective organ. For example, under English and Irish law, the board will normally represent the company as collective body. However, the power to bind the company in the context of the day-to-day running of the business will usually lie with individual board members, the managing directors (as opposed to the non-executive directors mainly charged with supervision). The managing directors authorised in accordance the general law of agency. From a doctrinal perspective, this is not the primary power of representation (that is attached to the board only) but a secondary, derivate power. Under the old text of the Directive it could be argued that the scope of the “secondary” powers of representation by individual board members were not protected under Art 9. Therefore, any internal restrictions might have been held against third parties. Protection would have been down to national concepts like e.g. “apparent” or “ostensible” authority. This result would have caused a severe inroad to the protective aim of the Directive. Under the current version, with “organs” meaning both the collective body and the members of it, any sub-delegation of the primary power to bind the company to the individual members of the organ that are permissible under national company law still lies within the protection afforded by Art 9. This is for example the case of the authority granted to managing directors in Ireland or the authorisation of individual members from their midst by the collective body of the Vorstand under § 78 IV AktG (on this, see also sub V.). That being so, it follows that such authorisations must be notified to the registrar under Art 14 lit. d)(i) (see comments to Art 14). 9 Finally, it should be noted that in some jurisdictions, the representing organ under national law might even be the shareholder meeting. While barred from any representation vis-à-vis third parties in some jurisdictions like e.g. Germany, it has some exceptional powers in others, for example in England under the unanimous consent doctrine (“Re Duomatic principle”) or in case the board is deadlocked. However, Art 9 does not address such exceptional representation powers. It would only apply to the shareholder meeting if that was the primary organ of company representation – which is unheard of in Europe.

III. Third Party 10

The meaning of “third party” under Art 9 has become subject to some doubt. Prima facie, it simply describes the other party of any contract or transaction with the company. However, this was contested in a line of English cases that excluded “insiders” from the protection under the English provisions implementing Art 7 para. 2 (today: ssec. 39, 40 CA 2006) and argued that this restrictive approach was still in line with the Directive. In EIC Services v Phipps,8 a shareholder who had wrongly been allocated bonus shares was not allowed to invoke the unlimited power of representation. In Smith v Henniker-Major,9 reliance on the provision was denied to the very director who, as chairman, had himself caused the irregularity, namely a board resolution taken in an inquorate meeting. In Smith v Henniker-Major however, the Court of Appeal did not apply the insider argument to exclude directors “qua officio”. Despite expressing some 8 9

100

[2004] EWCA Civ. 1069. [2002] EWCA Civ. 762, para. 110 (per LJ Cranwarth) and para. 128 et se (per LJ Schiemann).

Alexander Schall and David Günther

TITLE I GENERAL PROVISIONS

Art 9

sympathy for that approach, the Court left the issue open. The case was rather decided on the more specific argument that neither the English provision nor the underlying Directive aimed to protect parties against their own mistakes.10 The non-application of Art 9 in favour of insiders had been approved by learned 11 writers. According to one view, it is even said to follow directly from the text. “Third party” is understood as an external person (“outsider”), opposed to directors and shareholders that are attributed to the company as “insiders”.11 However, the better view is not to restrict the notion of third party at all.12 First, the 12 aim of the Directive would be undermined by any such restriction because third parties could suffer indirect damage. The “insiders” may well enter into further transactions to pass on the asset they acquired from the company.13 If the internal restrictions nullified the transaction with the “insider”, they may invalidate the ensuing transactions as well. This would run a coach and horses through commercial certainty, particularly in jurisdictions that follow the rule of “nemo dat quod non habet”. Second, any insider restriction raises difficult follow-up issues: First, how should 13 it be applied in “mixed contracts”, for example where issuer, banks (outsiders) and blockholders (insiders) agree on which shares to float in an IPO? Since that contract could hardly be half-valid, half-invalid, the insider exception would – again – cause harm to outsiders. Second, should the insider exception cover all kinds of transactions, or would it not rather have to be restricted to legal acts arising from the internal relations within the company (“causa societatis”), like e.g. appointments of directors, remuneration agreements, dividend payments? Finally: Should third parties dealing with insiders be allowed to rely on internal restrictions if they work in their favour?14

IV. Unrestricted Power to Bind the Company Art 9 para. 1 subpara. 1 declares the principle of the unrestricted power to bind 14 the company. This general rule defines the boundaries in interaction with the national laws of the power of representation. The directive does not expressly prescribe the scope of the power that is granted to the organs under the laws of the Member States, but ensures the organs can always bind the company to the widest extent that these national laws allow. An internal restriction based on the statute or a company resolution does not limit the power to bind the company with respect to third parties. Third parties can always rely on the power to bind the company under the respective national law being unrestricted by internal measures. However, other restrictions than the ultra vires doctrine can still be imposed by the laws of the Member States. For example, the external validity of extra-ordinary company transactions like mergers, demergers, complete transfers of the company’s assets etc.15 may be dependent on compliance with internal approval requirements (normally by the GM). 10 Smith v Henniker-Major [2002] EWCA Civ. 762, para. 109 – 110 (per LJ Cranwarth) and para. 125 et seq. (per LJ Schiemann); Schall, Companies Act (2014), sec. 40 para. 60 – 62. 11 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 71; Habersack and Verse, § 5 margin no. 33; in the same vein, but more carefully Fleischer, NZG 2005, 529, 534-5 who assumes that the Directive (implicitly) allows insider restrictions by the national laws of the Member states (“Bereichsausnahme für ‘Gesellschafts-Insider’”). 12 Payne, ECFR 2005, 235, 242 et seq. 13 As to this argument, Schall, Companies Act (2014), sec. 40 para. 62. 14 In favour of this view Smith v Henniker-Major [2002] EWCA Civ. 762, para. 117 (per LJ Schiemann): “It was not, in my judgement, intended to prevent a third party from relying on those limits.” For the opposing view Schall, Companies Act (2014), sec. 40 para. 63.

Alexander Schall and David Günther

101

Art 9 Acts of the organs of a company and its representation 1. Restrictions via the objects (Art 9 para. 1) 15

The Directive first addresses restrictions via the objects of the company (Art 9 para. 1). As a general rule, the objects of the company do not limit the power to represent it. This abolishes the British ultra-vires-doctrine as well as the Romance notion of spécialité statuaire. However, the Member States could still implement the exception that the company is not bound if the third party knew or “could not in view of the circumstances have been unaware” of the restriction by the objects of the company. This option is again restricted by the ensuing provision that a mere publication of the articles is not sufficient to prove the knowledge (Art 9 para. 1 subpara. 2). This is designed to bar any doctrine of “constructive knowledge” relating to the content of the published company documents. The directive does not impose any onus on the third party to do research. Nevertheless, deviating from Art 16 para. 6 subpara 1, Art 9 restricts the protection of third parties beyond actual knowledge (“could not […] have been unaware”).16 The wording suggests that the unawareness is only relevant if it was based on gross negligence.17 This is in line with the overall purpose of the directive.

2. “Unrestrictable” power to bind the company (Art 9 para. 2) – objective and subjective limits The power to bind the company vis a vis third parties cannot be restricted by the company through a resolution or via the articles, even if published. As a general rule, such restrictions can only be binding for the organs with internal effect. Their violation may trigger liability claims for breach of directors’ duties or justify a dismissal for good cause, but it does not invalidate the contract with the third party. However, there are limits of this rule in cases of abuse and conflicts of interest (see below, sub a) and b)). 17 As Art 9 para. 3 shows, the Directive understands any kind of restriction of the power as a “limit” (sub IV.). This deviates from the German taxanomy. Under German law, powers of representation are only protected against “objective limits” concerning the substantive scope of the authority (cf. § 82 I AktG; § 35 I GmbHG). Common examples are the complete exclusion of certain activities like “trading in derivatives” and, more widespread, procedural restrictions that usually come in the form of approval requirements (by the GM, by certain shareholders, etc.) to selected transactions like granting securities, taking up loans or buying or selling land, normally only beyond certain thresholds. By contrast, Art 9 is also concerned with personal, i.e. “subjective limits” that relate to the way that the persons representing the company may make use of the power to bind the company. A basic example for this is the question whether the members of the management organ may act on their own or only jointly. That being so, procedural requirements for board meeting may amount to restrictions of the power to bind the company under Art 9.18 18 For example, the board of directors is the (collective) organ that represents English and Irish companies. The power of representation is not endowed on the board members in person, neither individually nor jointly.19 As a consequence, irregular board meetings (inquorate board; incorrect invitation; insufficient majority) would limit the 16

15 For an overview, cf. each chapter 8 ‘“Extra-ordinary corporate transactions: Liquidation and winding up” of the 8 country reports’ in: Vicari and Schall (eds), Company Laws of the EU (2020). 16 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 73. 17 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 73; Kalss and Kampfl, margin no. 246; Grundmann, § 8 margin no. 28, 29. 18 Smith v Henniker-Major [2002] EWCA Civ. 762; Payne, ECFR 2005, 235 et seq. 19 As to England, Schall, Companies Act (2014), sec. 40 para. 6 et seq.

102

Alexander Schall and David Günther

TITLE I GENERAL PROVISIONS

Art 9

power of representation by the collective organ. This would not be an objective restriction relating to the subject matter of the transaction, but a subjective restriction because it concerns the way in which the organ or the members of the organ who represent the company have to act. Art 9 para. 2 provides full protection against such subjective limits, too. This is of course without prejudice to the various options of the Member States to allocate these personal powers under their domestic laws. For example, in German the basic legal rule is joint representation by all members of the organ wherever a company has more than one director (§ 35 II 1 GmbHG; § 78 I 1 AktG). As said above, the legal allocation of powers is not addressed by Art. 9. However, as soon as the Member States allow that the articles may provide for deviations from the legal default rule, this deviation may amount to a restriction in the sense of Art 9 – and must then be legitimised under Art 9 para. 3 (→ mn. 25). a) Exception for abuse of power of representation The mere wording of Art 9 para. 2 does not include any mala fide exception. 19 By contrast, the laws of many Member States contain such exceptions in one way or another. This led to discussions whether and to what extent these exceptions are still acceptable under the Directive. According to one view, they are not restricted at all by the Directive since it does not protect mala fide parties from the outset. 20 This view may offer a clear solution. It is however doubtful because the scope of protection by the Directive cannot be determined by the varying MS definitions of mala fide. For example, under a constructive notice doctrine every third party would be deemed to know restrictions contained in the articles and the protection under Art 9 para. 2 would become meaningless.21 The better starting point is the general competence of the MS to deal with abuse of law. The European regulator deliberately left the issue of abuse of the power to bind the company to the national jurisdictions.22 Thus, the MS may generally design abuse exceptions each to their own. But in doing so, they must not undermine the protection offered by the Directive. These principles can be tested with respect to German law where the concept of unre- 20 stricted powers of representation originated. Soon, it raised the question for restrictions on grounds of abuse.23 The first exception was accepted in cases of “collusion”.24 This describes a situation where the agent and third party deliberately collaborate to the detriment of the company. This case of abuse is generally accepted. It nullifies the contract for immorality under § 138 BGB and raises no doubts under European law. However, the doctrine of abuse of power of representation became extended to other cases that are more controversial, both under domestic law and the Directive. In a nutshell, German Courts will deny the validity of the representation if the agent acted to the detriment of the company and the other party either knew that or should have known that because it was evident.25 Most commentators assume that this still in line with European law.26 The problem is however that the BGH applies a two-fold test: An agent 20 Grundmann, § 8 margin no. 33; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 77; Habersack and Verse, § 5 margin no. 33; Kalss and Kampfl, margin no. 249; Schwarz, margin no. 356. 21 This point is also accepted by Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 77 who therefore advocate a restricted concept of mala fide that they see in line the German approach of “evidence” in line with. But this may not be so, see below in the text. 22 Cf. Fleischer, NZG 2005, 534; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 77; Edwards, S. 39 et seq.; Schall in Vicari and Schall (eds), Company Laws of the EU (2020), Part 2 Chapter 3, mn. 234. 23 Cf. Schall in Vicari and Schall (eds), Company Laws of the EU (2020), Part 2 Chapter 3, mn. 233 et seq. 24 RGZ 136, 359, 360; BGH NZG 2018, 389; Schall in Vicari and Schall (eds), Company Laws of the EU (2020), Part 2 Chapter 3, mn. 233.

Alexander Schall and David Günther

103

Art 9 Acts of the organs of a company and its representation acts to the detriment of the company either if he causes actual damage or if he “objectively transgresses internal restrictions”. In practice, this issue may e.g. become relevant as a consequence of due diligence procedures. It follows from the jurisdiction of the BGH that reliance on the power of representation is already barred where it is “evident” for the other party that the director has overstepped internal restrictions. This arguably violates the Directive because it directly contradicts and undermines the basic rule of Art 9 para. 2 which states the irrelevance of any internal restrictions.27 To fall within the legitimate scope of an exception for abuse under national law, such concepts should therefore not be based solely on the violation of internal restrictions and the other party’s actual or constructive knowledge thereof. Organs that overstep internal restrictions may as well do so by mistake. Or they may act intentionally, but bona fide in the interest of the company, committing an “efficient breach” to save time and/or money. That is why “abuse” under national law should only cover malicious cases. Following this view, the German abuse concept should be cut back to cases where the organs transgress their powers in order to cause harm to the company and this fact is evident for the other party. b) Conflict of interest The Directive does not address situations where the decision of the organ bears a conflict of interest or could lead to a self-dealing. Similar to the issue of “abuse of power”, most Member States already regulated and restricted the power to represent the company in such a situation.28 In the case Rabobank,29 the ECJ had to decide whether the Dutch Art. 2:256 BW, similar to the German § 181 BGB,30 was in accordance with the directive on this issue. Art. 2:256 BW negates the power to represent when the acting organ has a conflict of interest. 22 The ECJ ruled that “[...]it is clear from both the wording and the subject matter of that article [the current Art 9 para. 1] that it concerns the limits on a company's powers as allocated by law to the various organs of the company and is not intended to coordinate the national laws applicable. Moreover, the rules governing enforceability to be derived from this provision relate to the powers which the law, to which third parties can refer, grants or allows to be granted to the company organ, and not to the question whether a third party was aware of a conflict of interests or could not have been unaware of it in the circumstances of the case.”31 And subsequently decided ”[…] a conflict of interests with the company fall outside the normative framework of the First Directive and are matters for the national legislature”32. 23 Some scholars criticized the decision because third parties do not necessarily have any knowledge of the “invisible” conflict of interest. This would contradict the purpose of the directive to relieve the third party from fathoming the legal situation.33 However, conflicts of interest between agent and principal are a general problem of agency law and 21

25 BGH NZG 2006, 626-627; Schall in Vicari and Schall (eds), Company Laws of the EU (2020), Part 2 Chapter 3, mn. 233. 26 Grundmann, § 8 margin no. 33; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 77; Habersack and Verse, § 5 margin no. 33; Kalss and Kampfl, margin no. 249; Fleischer, NZG 2005, 534; Kindler, FS Lutter, S. 487 et seq (as to Italian Law). 27 Schall in Vicari and Schall (eds), Company Laws of the EU (2020), Part 2 Chapter 3, mn. 235. 28 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 78. 29 ECJ, case C-104/96 Coöperatieve Rabobank BA [1997] ECR I-7219. 30 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 78; Habersack and Verse, § 5 margin no. 35. 31 Paras 22–24. 32 Para. 28. 33 Grundmann, § 7 margin no. 226; Meilicke, DB 1999, 785.

104

Alexander Schall and David Günther

TITLE I GENERAL PROVISIONS

Art 9

as such beyond the scope of the Directive, even though these situations may often occur in connection with companies.

V. Personal Allocation of Power of Representation by the Articles (Art 9 para. 3) As pointed out above, Member States are free to endow the individual members of 24 the organ with the powers to bind the company according to their unfettered discretion. There are no harmonised rules in place. Therefore, the Member States can allocate the full power of representation to some or all members, either individually or jointly in interaction with some or all other members of the organ. They may as well give the companies the option to decide on the personal structure of the power of representation for themselves.34 Most Member States opted for the latter.35 In this context, Art 9 para. 3 regulates a very peculiar situation. The background 25 of the rule in para. 3 is that such powers under the articles may be construed as a (subjective) restriction of the power of representation under general company law (see also above, II.2.). Assume for example that the company law of a Member State granted full power of representation individually to each member of the management organ as a basic rule.36 If the articles deviated from that rule and ordered joint representation by all board members or individual representation only by selected board members, this would be viewed as a “limit” on the power of representation that arises under the articles. Under Art 9 para. 2, such limits would be absolutely prohibited. To facilitate them nevertheless, the Directive explicitly permits them in Art 9 para. 3. This is only required because the Directive does not adopt the German taxonomy according to which such subjective restrictions do not constitute “limits” on the power to represent from the outset because they do not limit the content of the power in substance. Under Art 9 para. 3, only two structures are permissible. The articles may allow the 26 allocation of the power to one person alone or to some persons jointly. However, it must be borne in mind that an exception from Art 9 para. 2 will only be necessary, and Art 9 para. 3 therefore will only apply if the provisions in the articles restrict the basic rules in places under general law. This is however not the case in Germany because the basic legal rule in all companies is joint representation by all appointed directors (Geschäftsführer) of private companies under § 35 II GmbHG or all members of the management board (Vorstand) of public companies under § 78 II 1 AktG. Joint representation by all persons in charge is the most restricted way to allocate the power of representation to a collective body or a multitude of persons because it always requires unanimity. This even excludes majority decisions of the board. That is why the permissible deviations from this rule via the articles37 will automatically extend the general rule, and not restrict it further. Therefore, Art 9 para. 2 and 3 are not applicable and any alternative allocation of the power of representation under the articles that is permitted in Germany will be in line with the Directive.38 34 Grundmann, § 8 margin no. 33; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 77; Habersack and Verse, § 5 margin no. 33; Kalss and Kampfl, margin no. 249; Schwarz, margin no. 356. 35 Schwarz, margin no. 346; Fischer-Zernin, p. 243 et seq; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 80. 36 In Germany, this is the default rule for partners in a commercial partnership, § 125 I HGB, but not for companies. 37 Namely the provision of authority of the supervisory board to empower individual directors to represent the company alone or together with a “Prokurist” (i.e. a speicifically authorised officer) under § 78 III 2 AktG.

Alexander Schall and David Günther

105

Art 11 Conditions for nullity of a company 27

By the same token, it is not a restriction but an extension of the power if members of the management board jointly representing the company make use of their option under § 78 IV AktG to authorise individual members from their midst to execute certain transactions or certain kinds of transactions. This board decision will therefore be valid against third parties regardless of the rule in Art 9 para. 2 (“limits … arising … from a decision of the competent organs”) – provided of course that the registration requirement under § 81 AktG – implementing Art 14 lit. d)(i) – is complied with.

Article 10 Drawing up and certification of the instrument of constitution and the company statutes in due legal form In all Member States whose laws do not provide for preventive administrative or judicial control, at the time of formation of a company, the instrument of constitution, the company statutes and any amendments to those documents shall be drawn up and certified in due legal form.

I. Overview 1

As mentioned above, the directive does not unify the formation process. Art 10 only introduces in the respective Member State law a minimum standard of official examination.

II. Minimum Standard of Official Examination 2

As an effect of Art 10, in all Member States the formation process is either governed by an administrative or judicial control or, at least, if no such control in place, the company statutes and any documents shall be drawn up and certified in due legal form. Also the latter official certification cannot be issued without a diligent examination and the right to reject a faulty application.1

Article 11 Conditions for nullity of a company The laws of the Member States may not provide for the nullity of companies otherwise than in accordance with the following provisions: (a) nullity must be ordered by decision of a court of law; (b) nullity may be ordered only on the grounds: (i) that no instrument of constitution was executed or that the rules of preventive control or the requisite legal formalities were not complied with; (ii) that the objects of the company are unlawful or contrary to public policy;

38 Prevailing opinion, Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 80; Habersack and Verse, § 5 margin no. 33. 1 Grundmann, § 8 margin no. 10.

106

Alexander Schall and David Günther

Art 11

TITLE I GENERAL PROVISIONS

(iii) that the instrument of constitution or the statutes do not state the name of the company, the amount of the individual subscriptions of capital, the total amount of the capital subscribed or the objects of the company; (iv) of failure to comply with provisions of national law concerning the minimum amount of capital to be paid up; (v) of the incapacity of all the founder members; (vi) that, contrary to the national law governing the company, the number of founder members is less than two. Apart from the grounds of nullity referred to in the first paragraph, a company shall not be subject to any cause of non-existence, absolute nullity, relative nullity or declaration of nullity.

I. Overview Art 11 shall restrict nullity to the enumerated grounds. No other grounds can cause 1 any kind of absolute or relative nullity, or inexistence.1 The harmonisation under Art 11 was necessary in light of the widely varying legal concepts of nullity within Europe.2

II. Grounds for Nullity The finding of nullity can only be pronounced by a court of law (Art 11 lit a). This should provide clarity and delegates the decision to an independent authority with a warranted correctness. To avoid a state of uncertainty, if allowed by the law of the member state, a challenge of the decision has to be decided by the court within six months (Art 12 para. 1). Art 11 lit b enumerates six grounds for nullity. The enumeration is exhaustive. 3 The Member States cannot implement further grounds for nullity, but they are not required to implement any or all grounds in the national law.4 The catalogue includes two formal (sublit i and iii) and four substantive (sublit ii, iv, v und vi) law clauses5: Sublit i causes nullity if the instrument of constitution was not executed or the minimum standard of legal examination was not complied with (Art 10). Sublit ii causes nullity if the objects are unlawful or contrary to the public policy. The ECJ ruled in the case Marleasing6 that the ordre public exception7 refers only to the “instrument of incorporation or the articles of association”8 of the company. The 1 Grundmann, § 8 margin no. 13; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 8; Habersack and Verse, § 5 margin no. 40; Kalss and Kampfl, margin no. 253. 2 Drury, ‘Nullity of Companies’ in Drury and Xuereb (eds), European Company Laws: a Comparative Approach, 1991, 247–278; Kalss and Kampfl, margin no. 251; Habersack and Verse, § 5 margin no. 41. 3 Grundmann, § 8 margin no. 13; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 87; Habersack and Verse, § 5 margin no. 40; Kalss and Kampfl, margin no. 253. 4 Grundmann, § 8 margin no. 13; Grundmann, § 8 margin no. 13; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 87; Habersack and Verse, § 5 margin no. 40; Kalss and Kampfl, margin no. 253; van Ommeslaghe, CDE 1969, 655; Lutter, EuR 1969, 18. 5 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 88; Fischer-Zernin, p. 160; Schwarz, p. 362. 6 ECJ, case C-106/89 Marleasing SA v La Comercial Internacional de Alimentacion SA [1990] ECR I-4135. 7 Grundmann, § 8 margin no. 14; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 88; Kalss and Kampfl, margin no. 253. 8 Para. 11 at the end.

Alexander Schall and David Günther

107

2

3

4 5 6

Art 12 Consequences of nullity

7 8 9 10

company must not operate a business in conflict with the law. It is not however sufficient that the members or organs or the “activity actually pursued by it [the company]” 9 breach the law. If not interpreted strictly, the nullity would be extended grossly in contrast to the purpose to reduce the ground for nullity.10 A doubtful example for the application of this rule is the quashing of the registration of the company “Lindi St. Claire (personal services) Ltd” for pursuit of the immoral – though not illegal – business of prostitution by the English High Court of Justice (Queen’s Bench) on application of the Attorney-General of the UK.11 The rule in the UK was and still is that “a company may not be formed for an unlawful purpose” (sec. 7(2) CA 2006). While the notion of unlawfulness encompassed the immorality of prostitution, it is not clear whether this business was openly stated in the objects that could be formulated in a very meaningless way (“general commercial company”) back then and are even rendered superfluous under sec. 31(1) CA 2006. Arguably, the purpose of prostitution could (and maybe even should) have been inferred directly from the term “personal services” in connection with the personal name, since Marian June Akin aka “Lindi St. Claire” was a well-known campaigner for prostitute’s rights at that time. That being so, the UK may have been wrongly criticised for recognising nullity beyond the Directive. 12 But be that as it may. In light of the “Lindi St. Clair Ltd”-case, the Marleasing decision is not persuasive. Bearing in mind that the objects are but the expression of the “purpose” of a company, the pursuit of an unlawful purpose as main business activity should suffice as ground for nullity, even if it is not openly declared in the objects. Sublit iii causes nullity if the statute or the instrument of constitution does not state key particulars, such as name, objects, and certain capital information. Sublit iv causes nullity if the company does not comply with the national law requirements of the minimum payment on the company capital. Sublit v causes nullity if all founders are incapable. In the discussions, founding by minors was especially feared.13 Sublit vi causes nullity if, contrary to the applicable national law, the founder is only one person. However, Art 11 para. 1 of the Twelfth Directive now allows the one-person founding of the Private Limited Company. Therefore, the Member States can only prohibit and impose nullity for the one-person founding of the Public Limited Company.14 However more and more Member States do not use this provision and allow the one-person founding.15

Article 12 Consequences of nullity 1. The question whether a decision of nullity pronounced by a court of law may be relied on as against third parties shall be governed by Article 16. Where the national

Para. 10. Cf. Para. 11; Grundmann, § 8 margin no. 14; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 88; Habersack and Verse, § 5 margin no. 41. 11 R v Registrar of Companies, ex parte A-G [1991] BCLC 476. 12 Cf. e.g. Bock, Der Harmonisierungserfolg der Publizitätsrichtlinie, 2016, pp 373 et seq. However, it is true to say that this nullification should have led to a liquidation procedure. 13 Einmahl, AG 1969, 212; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 88. 14 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 88. 15 For an overview and a chronological development in the Member States, see Lutter, Bayer and Schmidt, EuropUR, § 29 margin no. 8. 9

10

108

Alexander Schall and David Günther

Art 12

TITLE I GENERAL PROVISIONS

law entitles a third party to challenge the decision, he may do so only within six months of public notice of the decision of the court being given. 2. Nullity shall entail the winding-up of the company, as may dissolution. 3. Nullity shall not of itself affect the validity of any commitments entered into by or with the company, without prejudice to the consequences of the company's being wound up. 4. The laws of each Member State may make provision for the consequences of nullity as between members of the company. 5. Holders of shares in the capital of a company shall remain obliged to pay up the capital agreed to be subscribed by them but which has not been paid up, to the extent that commitments entered into with creditors so require.

I. Overview Art 12 harmonizes the process and the effects of the nullity of a company. The 1 purpose is to withdraw the company from the market while maintaining its obligations to third parties. It should be noted that, like all Directive provisions, the rules of Art 12 are not directly applicable. They need to be implemented by the Member States. In general, non-compliance by the Member States will not be an issue.1 This may possibly have been different with the English law on “quashing the registration” (see above, notes to Art 12). Apparently, English law did not provide for an orderly winding up and liquidation procedure in these cases.2 However, Brexit has taken this issue off the agenda.

II. Effects of Nullity A nullity pronounced by a court of law3 entails ex nunc4 the winding up of the 2 company (Art 12 para. 2). The company exists until dissolution. However, the overall corporate objective changes from generating cash as going concern to winding up its business.5 The winding up is governed by the national law.6 The nullity and the resulting winding up do not affect the validity of already entered commitments to third parties (Art 12 para. 3). Furthermore, the shareholders still remain liable to pay the subscribed, but not paid-up capital, if these payments are necessary to fulfil the obligations to third parties (Art 12 para. 4). Beyond that, the Member States regulate the effects of the nullity between the shareholders (Art 12 para. 5), and they may do so according to their unfettered discretion.

1 Cf. e.g. each chapter 8 ‘“Extra-ordinary corporate transactions: Liquidation and winding up” of the 8 country reports’ in: Vicari and Schall (eds), Company Laws of the EU (2020). 2 Birds, Annotated Companies Legislation (3rd ed., 2013), para. 2.15.07. 3 See Art 11 lit a. 4 Grundmann, § 8 margin no. 16; Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 90; Habersack and Verse, § 5 margin no. 41; Kalss and Kampfl, margin no. 254. 5 Lutter, Bayer and Schmidt, EuropUR, § 19 margin no. 90; Habersack and Verse, § 5 margin no. 41. 6 See e.g. the chapter 8 ‘“Extra-ordinary corporate transactions: Liquidation and winding up” of the 8 country reports’ in: Vicari and Schall (eds), Company Laws of the EU (2020).

Alexander Schall and David Günther

109

Art 13 Scope

CHAPTER III ONLINE PROCEDURES (FORMATION, REGISTRATION AND FILING), DISCLOSURE AND REGISTERS Section 1 General provisions Foreword to Arts 13-28 1

Art 13 has been amended and Arts 13 a–13 j have been newly introduced by the “Digitalisation Directive” 2019/1151. Together with Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions – which also forms part of the Company Law Package 20181 – the Digitalisation Directive is one pillar of the Regulation (EU) 2018/1724 of the European Parliament and the of the Council of the of 2 October 2018 establishing a single digital gateway to provide access to information, to procedures and to assistance and problem-solving services and amending Regulation (EU) No 1024/2012 (“Single Digital Gateway Directive”) which intends to facilitate online access to information, administrative procedures and assistance services that citizens and businesses need to get active in another EU country.2 The centerpiece of the rules of the Digitalisation Directive is the new online formation of companies under Art 13 g where the regulatory background will be accounted for in detail. All other provisions and rules are built around this new and important harmonisation instrument, starting with the reshaped provision of Art 13 on the scope of the subsequent measures.

Article 13 Scope The coordination measures prescribed by this Section and by Section 1A shall apply to the laws, regulations and administrative provisions of the Member States relating to the types of companies listed in Annex II and, where specified, to the types of companies listed in Annexes I and IIA. 1 For a general overview of the companies addressed, see→ Art 7. In principle, the

companies from Annex II are included in this section, i.e. companies with limited liability; however, certain parts may be specified to the companies from Annex I (i.e. certain types of public companies) and Annex IIA (i.e. certain types of private companies). Particularly important is the member states' right to restrict the online formation to companies according to Annex IIA. This allows for the exclusion of the application to public companies.

1 2

110

See Introduction para. 161 for further information on the Company Law Package 2018. Cf → Art 13 g.

Alexander Schall, David Günther and Michael Lamsa

Art 13 b

TITLE I GENERAL PROVISIONS

Article 13 a Definitions For the purposes of this Chapter: (1) ‘electronic identification means’ means an electronic identification means as defined in point (2) of Article 3 of Regulation (EU) No 910/2014 of the European Parliament and of the Council(1) (2) ‘electronic identification scheme’ means an electronic identification scheme as defined in point (4) of Article 3 of Regulation (EU) No 910/2014; (3) ‘electronic means’ means electronic equipment used for the processing, including digital compression, and the storage of data, and through which information is initially sent and received at its destination; that information being entirely transmitted, conveyed and received in a manner to be determined by Member States; (4) ‘formation’ means the whole process of establishing a company in accordance with national law, including the drawing up of the company’s instrument of constitution and all the necessary steps for the entry of the company in the register; (5) ‘registration of a branch’ means a process leading to disclosure of documents and information relating to a branch newly opened in a Member State; (6) ‘template’ means a model for the instrument of constitution of a company which is drawn up by Member States in compliance with national law and is used for the online formation of a company in accordance with Article 13 g. Art 13 a defines certain terms for use in this chapter. This includes in lit. (1)-(3) terms 1 from the electronic register procedure and in lit. (4)-(6) terms for the (online) company formation or registration of branches. An electronic identification means as defined in point (2) of Article 3 of Regulation 2 (EU) No 910/2014 means a material and/or immaterial unit containing person identification data which is used for authentication for an online service, e.g. an electronic identity card. An electronic identification scheme as defined in point (4) of Article 3 of Regu- 3 lation (EU) No 910/2014 means a system for electronic identification under which electronic identification means are issued to natural or legal persons, or natural persons representing legal persons, e.g. the online identity card function of the identity card.

Article 13 b Recognition of identification means for the purposes of online procedures 1. Member States shall ensure that the following electronic identification means can be used by applicants who are Union citizens in the online procedures referred to in this Chapter: (a) an electronic identification means issued under an electronic identification scheme approved by their own Member State;

(1) Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC (OJ L 257, 28.8.2014, p. 73).

Alexander Schall, David Günther and Michael Lamsa

111

Art 13 b Recognition of identification means for the purposes of online procedures (b) an electronic identification means issued in another Member State and recognised for the purpose of cross-border authentication in accordance with Article 6 of Regulation (EU) No 910/2014. 2. Member States may refuse to recognise electronic identification means where the assurance levels of those electronic identification means do not comply with the conditions set out in Article 6(1) of Regulation (EU) No 910/2014. 3. All identification means recognised by Member States shall be made publicly available. 4. Where justified by reason of the public interest in preventing identity misuse or alteration, Member States may, for the purposes of verifying an applicant’s identity, take measures which could require the physical presence of that applicant before any authority or person or body mandated under national law to deal with any aspect of the online procedures referred to in this Chapter, including the drawing up of the instrument of constitution of a company. Member States shall ensure that the physical presence of an applicant may only be required on a case-by-case basis where there are reasons to suspect identity falsification, and that any other steps of the procedure can be completed online. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Citizen of the European Union as Applicant (para. 1) . . . . . . . . . . . . . . . . . . . . . . . . III. Means of Identification (para. 1 to 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Personal Presence as Exception (para. 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 6

I. Overview 1

Art 13 b obliges the member states to implement certain electronic identification means in order to ensure the identity of the persons entering the register and create the basis for the online procedures.

II. Citizen of the European Union as Applicant (para. 1) 2

An essential point is the restriction of applicants to Union citizens. Therefore, applicants from third countries do not need to be provided with the electronic identification procedure (Art 13 b para. 1).

III. Means of Identification (para. 1 to 3) 3

With respect to the electronic identification means the Directive makes use of the procedures set out in Regulation (EU) No 910/2014 (also known as the eIDAS (electronic Identification, Authentication and trust Services)) which aims to strengthen the protection of citizens' confidence in online transactions and provides the legal framework for certain electronic identification systems.1 For the purpose of online procedures under the Directive there are, in principle, two different types of means of identification available to the Union citizen: (i) he may use the electronic means of identification provided by the Member State in which he wishes to form the company (para. 1 lit. (a)) or (ii) he may use the means of identification provided by another Member State which has 1

112

Cf. Recital No. 2 EU) No 910/2014.

Alexander Schall, David Günther and Michael Lamsa

TITLE I GENERAL PROVISIONS

Art 13 b

been recognised for cross-border authentication in accordance with Article 6 of Regulation (EU) No 910/2014 (para. 1 lit. (b)).2 In order to prevent the particular risks of abuse of the online formation of companies, 4 Art 13 b para. 2 allows member states to refuse electronic means which do not meet the requirements of Article 6 para. 1 of Regulation (EU) No 910/2014. Art 6 allows in particular the rejection of another foreign electronic means if it does not meet the security standard of the national electronic means of identification. Nevertheless, considerable doubts remain as to whether the eIDAS procedure is capa- 5 ble of ensuring a sufficient level of security. However, these concerns relate in principle to the electronic procedure and not to the security of the data transmission. 3

IV. Personal Presence as Exception (para. 4) Where justified by reason of the public interest in preventing identity misuse or alter- 6 ation, the actual presence of the applicant before any person involved in the online procedure under national law may be required. The Member States are free to determine who in the process of the online formation shall be responsible to determine whether such prerequisite is met. The proposal of the European Commission allowed for the possibility of personal appearance only in case of genuine suspicion of fraud based on reasonable grounds. On the one hand, the wording used in Art 13 b para. 4 is broader as not only fraud falls within the scope of application. On the other hand, it is narrower as it targets identity misuse or alteration (which, in turn, is generally part of fraudulent actions). It would have been favorable to refer more generally to overriding reasons relating to the public interest as done in Art 6 para. 3 of Regulation (EU) 2018/1724 of the European Parliament and of the Council of 2 October 2018 establishing a single digital gateway to provide access to information, to procedures and to assistance and problemsolving services and amending Regulation (EU) No 1024/2012 (“Single Digital Gateway Regulation”) which is considered in Recital 9 of this Directive to be supplementary.4 In case it is made use of the requirement of physical presence of the applicant, it must be guaranteed that – except for the identification of the applicant – all other steps of the online procedure can be complete online. The provision aims to strike a balance between the interest of preserving the online only procedure and the control of the correctness of the register. The limitation to individual case examination prevents the circumvention of the online only process by a fundamental examination of foreign applicants. In addition to Art 13 b para. 4, Art 13 g para. 8 allows for the request of physical pres- 7 ence of an applicant where justified by reason of public interest in ensuring compliance with the rules on legal capacity and on the authority of applicants to represent a company.

2 Overview of pre-notified and notified eID schemes under eIDAS: https://ec.europa.eu/cefdigital/wiki/ display/EIDCOMMUNITY/Overview+of+pre-notified+and+notified+eID+schemes+under+eIDAS. 3 Kindler/Jobst, DB 2019, 1550. 4 Opinion Bundesnotarkammer dated 18 June 2018, page 10 (https://www.bmjv.de/SharedDocs/Gesetzg ebungsverfahren/Stellungnahmen/2018/Downloads/06182018_Stellungnahme_Bundesnotarkammer_Dig italisierungs-und-UmwandlungsRL.pdf;jsessionid=D71DE0EE79BD2B59D2D3C9F1819FDE42.1_cid324 ?__blob=publicationFile&v=3).

Alexander Schall, David Günther and Michael Lamsa

113

Art 13 d Fees for online procedures

Article 13 c General provisions on online procedures 1. This Directive shall be without prejudice to national laws that, in accordance with Member States’ legal systems and legal traditions, designate any authority or person or body mandated under national law to deal with any aspect of online formation of companies, online registration of branches and online filing of documents and information. 2. This Directive shall also be without prejudice to the procedures and requirements laid down by national law, including those relating to legal procedures for the drawing up of instruments of constitution, provided that online formation of a company, as referred to in Article 13 g, and online registration of a branch, as referred to in Article 28 a, as well as online filing of documents and information, as referred to in Articles 13 j and 28 b, is possible. 3. The requirements under applicable national law concerning the authenticity, accuracy, reliability, trustworthiness and the appropriate legal form of documents or information that are submitted shall remain unaffected by this Directive, provided that online formation, as referred to in Article 13 g, and online registration of a branch, as referred to in Article 28 a, as well as online filing of documents and information, as referred to in Articles 13 j and 28 b, is possible. Art 13 c contains a limitation of the effects of this Directive on existing national regulations on online formation (para. 1) on the one hand and other formation regulations (para. 2 and 3) on the other. These are not to be affected insofar as their content does not conflict with the provisions of the Directive. These provisions should be seen in light with the last sentence of Recital no. 13 pursuant to which matters concerning online procedures which are not regulated in the Digitalisation Directive should continue to be governed by the national laws of the Member States. 2 In particular, the involvement of a notary remains unaffected insofar as the formation is permitted only online, cf Art 13 g para. 4 lit c. 1

Article 13 d Fees for online procedures 1. Member States shall ensure that the rules on fees applicable to the online procedures referred to in this Chapter are transparent and are applied in a non-discriminatory manner. 2. Any fees for online procedures charged by the registers referred to in Article 16 shall not exceed the recovery of the costs of providing such services. 1

Art 13 d limits the extent to which member states may charge fees for the online procedures of this chapter. These fees shall not exceed the administrative costs. Furthermore, they must be transparent and non-discriminatory (for use from other member states). However, flat-rate amounts may be charged provided that the Member State checks at regular intervals that such charges continue not to exceed the average cost of the services in question.1

1

114

Case C-188/95, 2.12.1997, Fantask, para. 5, 29 and 34; Recital No. 13 of the directive 2019/1151/EU.

Alexander Schall, David Günther and Michael Lamsa

Art 13 f

TITLE I GENERAL PROVISIONS

Article 13 e Payments Where the completion of a procedure laid down in this Chapter requires a payment, Member States shall ensure that that payment can be made by means of a widely available online payment service that can be used for cross-border payments, that permits identification of the person that made the payment and is provided by a financial institution or payment service provider established in a Member State. Art 13 e is intended to ensure that an online formation can also be paid for online. 1 Therefore, the possibility of payment by credit cards and bank transfer shall be available.

Article 13 f Information requirements Member States shall ensure that concise and user-friendly information, provided free of charge and at least in a language broadly understood by the largest possible number of cross-border users, is made available on registration portals or websites that are accessible by means of the Single Digital Gateway to assist in the formation of companies and the registration of branches. The information shall cover at least the following: (a) rules on the formation of companies, including online procedures referred to in Articles 13 g and 13 j, and requirements relating to the use of templates and to other formation documents, identification of persons, the use of languages and to applicable fees; (b) rules on the registration of branches, including online procedures referred to in Articles 28 a and 28 b, and requirements relating to registration documents, identification of persons and the use of languages; (c) an outline of the applicable rules on becoming a member of the administrative body, the management body or the supervisory body of a company, including of the rules on disqualification of directors, and on the authorities or bodies responsible for keeping information about disqualified directors; (d) an outline of the powers and responsibilities of the administrative body, the management body and the supervisory body of a company, including the authority to represent a company in dealings with third parties. Art 13 f contains the obligation of the member states to inform users in an under- 1 standable way with respect to the online formation process. In contrast to the proposal of the European Commission for the Digitalization Directive, the scope of information to be provided is reduced to the possibilities and requirements of online formation (lit a), registration of branches (lit b), and the rights and obligations of company bodies and administrative members (lit c and lit d). However, there is no obligation for a Member State to provide information on the legal effects and consequences of registrations under its national law.

Alexander Schall, David Günther and Michael Lamsa

115

Art 13 g Online formation of companies

Section 1 A Online formation, online filing and disclosure Article 13 g Online formation of companies 1. Member States shall ensure that the online formation of companies may be carried out fully online without the necessity for the applicants to appear in person before any authority or person or body mandated under national law to deal with any aspect of the online formation of companies, including drawing up the instrument of constitution of a company, subject to the provisions laid down in Article 13b(4) and paragraph (8) of this Article. However, Member States may decide not to provide for online formation procedures for types of companies other than those listed in Annex IIA. 2. Member States shall lay down detailed rules for the online formation of companies, including rules on the use of templates as referred to in Article 13 h, and on the documents and information required for the formation of a company. As part of those rules, Member States shall ensure that such online formation may be carried out by submitting documents or information in electronic form, including electronic copies of the documents and information referred to in Article 16a(4). 3. The rules referred to in paragraph 2 shall at least provide for the following: (a) the procedures to ensure that the applicants have the necessary legal capacity and have authority to represent the company; (b) the means to verify the identity of the applicants in accordance with Article 13 b; (c) the requirements for the applicants to use trust services referred to in Regulation (EU) No 910/2014; (d) the procedures to verify the legality of the object of the company, insofar as such checks are provided for under national law; (e) the procedures to verify the legality of the name of the company, insofar as such checks are provided for under national law; (f) the procedures to verify the appointment of directors. 4. The rules referred to in paragraph 2 may, in particular, also provide for the following: (a) the procedures to ensure the legality of the company instruments of constitution, including verifying the correct use of templates; (b) the consequences of the disqualification of a director by the competent authority in any Member State; (c) the role of a notary or any other person or body mandated under national law to deal with any aspect of the online formation of a company; (d) the exclusion of online formation in cases where the share capital of the company is paid by way of contributions in kind. 5. Member States shall not make the online formation of a company conditional on obtaining a licence or authorisation before the company is registered, unless such a condition is indispensable for the proper oversight laid down in national law of certain activities. 6. Member States shall ensure that where the payment of share capital is required as part of the procedure to form a company, such payment can be made online, in accordance with Article 13 e, to a bank account of a bank operating in the Union. In 116

Alexander Schall, David Günther and Michael Lamsa

Art 13 g

TITLE I GENERAL PROVISIONS

addition, Member States shall ensure that proof of such payments can also be provided online. 7. Member States shall ensure that the online formation is completed within five working days where a company is formed exclusively by natural persons who use the templates referred to in Article 13 h, or within ten working days in other cases, from the later of the following: (a) the date of the completion of all formalities required for the online formation, including the receipt of all documents and information, which comply with national law, by an authority or a person or body mandated under national law to deal with any aspect of the formation of a company; (b) the date of the payment of a registration fee, the payment in cash for share capital, or the payment for the share capital by way of a contribution in kind, as provided for under national law. Where it is not possible to complete the procedure within the deadlines referred to in this paragraph, Member States shall ensure that the applicant is notified of the reasons for the delay. 8. Where justified by reason of the public interest in ensuring compliance with the rules on legal capacity and on the authority of applicants to represent a company, any authority or person or body mandated under national law to deal with any aspect of the online formation of a company, including the drawing up of the instrument of constitution, may request the physical presence of the applicant. Member States shall ensure that, in such cases, the physical presence of an applicant may only be required on a case-by-case basis where there are reasons to suspect non-compliance with the rules referred to in point (a) of paragraph 3. Member States shall ensure that any other steps of the procedure can nonetheless be completed online. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Addressed Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Necessary Regulation Points for the Online Formation . . . . . . . . . . . . . . . . . . . . . . IV. Further Simplification of the Online Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Physical Presence in Individual Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 7 12 14

I. Overview Art 13 g establishes the basic rule that a formation must be possible completely online 1 without the appearance of the applicant in person before a participating body. It is the centrepiece of the rules on online formation. They were newly introduced by the “Digitalisation Directive” 2019/1151. It builds on the Single Digital Gateway under Regulation (EU) 2018/1724 and adds specific, corporate-related rules, particularly to allow onlineformation. The new rules play a very special role in the wider framework of European harmonisation. Together with the “Mobility Directive” 2019/2121, they can be understood as keystone after a long history of regulatory efforts to facilitate corporate mobility in the Single Market. It is well known that after a strong kick off in the “First Directive”, the harmonisation of European company laws slowed down gradually and shifted focus to the capital markets before being revigorated by Directives 2019/2121 (mobility) and 2019/1151 (digitalisation). For starters, the uniform capital requirements of the “Second Directive” only applied to public companies. The “Fifth Directive” on corporate governance and the “Ninth Directive” on group law never matured. Over time, European company law turned to the harmonisation of capital markets. Namely the Directives on

Alexander Schall, David Günther and Michael Lamsa

117

Art 13 g Online formation of companies shareholder rights addressed solely listed companies. This development had started with the Thirteenth Directive on takeover law. At about the same time, the Centros-jurisdiction of the ECJ1 opened the floor for regulatory competition in Europe.2 As a consequence, most Member States deregulated their company laws. The most important and visible effect was that minimum capital did not serve any longer as mandatory entry barrier to limited liability in Continental jurisdictions.3 This was well in line with the spirit of the Treaties. There was a case to be made that high minimum capital requirements would impede the market entry, particularly for businesses from less wealthy Member States.4 However, not all impediments were abolished in the aftermath of Centros. Particularly, Austria went into the opposite direction and levelled even up its minimum capital. Germany, while introducing limited liability without minimum capital via the new Unternehmergesellschaft (UG), still adhered to mandatory notarisation of the formation. The EU aimed at overcoming the remaining national hurdles, first by the SPE (Societas Privata Europaea) and, after that had failed, by the SUP (Societas Unius Personae). 5 The SUP was supposed to force Member States make limited liability available without minimum capital and by a simple online formation procedure. However, the times changed during the legislative process, inter alia due to the “Panama papers”. Light was shed on the massive scope of tax evasion and money laundering by use of letter box companies and other artificial corporate structures. As a consequence, the SUP came under fire and was eventually given up. Instead, the Digitalisation Directive 2019/1151 now only provides for a mandatory online formation procedure (Art 13 g para. 4. lit. c) – which it extends to multi-person formations.6 The mandatory online formation however comes with a Member State option to pertain the involvement of notaries – of which Germany is expected to make use, regarding the traditional central role of notaries as gate keepers who assure lawfulness and seriousness of the formation process.7 It attempts to strike a fine balance between the need to facilitate trading in the Single Market and the necessary control of corporations by the Member States. To quote the Recital (15): “… It should be possible to carry out online formation with the submission of documents or information in electronic form, without prejudice to Member States’ material and procedural requirements, including those relating to legal procedures for drawing up instruments of constitution, and to the authenticity, accuracy, reliability, trustworthiness and appropriate legal form of documents or information that are submitted. However, those material and procedural requirements should not make online procedures, in particular those for the online formation of a company and online registration of a branch, impossible …” 1 ECJ C-212/97 Centros; cf. Schall, ‘European Framwork for the Mobility of Companies’, in Van Hulle/ Gesell (eds), European Corporate Law, 2006, pp. 3–24. 2 John Armour, ‘Who Should Make Corporate Law? EC Legislation versus Regulatory Competition‘, Current Legal Problems, Vol. 58, Issue 1, 2005, pp. 369–413; Deakin, ‘Regulatory Competition Versus Harmonisation in European Company Law’, in Esty/Geradin (eds), Regulatory Competition and Economic Integration: Comparative Perspectives, 200; Deakin, ‘Two Types of Regulatory Competition: Competitive Federalism Versus Reflexive Harmonisation. A Law and Economics Perspective on Centros’ (1999) 2 CYELS 231; Stefano Lombardo, Regulatory Competition in European Company Law. Where do we stand twenty years after Centros?, ECGI Law Working paper n° 452/2019. 3 This was achieved by skippjng (e.g. France; Netherlands) or lowering (e.g. Spain) the minimum capital, or by introducing new alternatives without minimum capital (e.g. Germany, Italy). 4 Schall, Kapitalgesellschaftsrechtlicher Gläubibgerschutz, 2009, pp. 66–73. 5 Cf. e.g. Conac, ECFR 2015, 139–176. 6 Lieder, NZG 2020, 81, 85. 7 See Lieder, NZG 2020, 81, 83–84 (advocating online-notarisation by use of online meeting tools); id., NZG 2018, 1081, 1987; cf. further Wicke, ZIP 2014, 1414, 1415; Hommelhoff in Lutter/Koch (eds), Societas Unius Personae (SUP), 2015, 69, at p. 79 et seq.

118

Alexander Schall, David Günther and Michael Lamsa

TITLE I GENERAL PROVISIONS

Art 13 g

II. Addressed Companies The scope of application of the online formation of a company basically refers to all companies listed in Annex II (Art 13 in conjunction with Art 13 g para. 1). This basically includes all companies, private and public. However, according to Art 13 g para. 1 subpara. 2, Member States have the option "not to offer procedures for the online formation of companies other than those listed in Annex IIA". This new Annex basically contains all private companies of the member states and their variants, e.g. the French S.á r.l., the Dutch B.V. or the German GmbH including the UG. It follows that the directive provides the national legislator with an opt-out option for all types of public companies. It is largely expected that the member states will make use of this,8 last but not least due to the extensive organizational structures in the two-board system.9 In addition, the possibility of online formation is open to all companies within the scope of the Directive, regardless of the purpose and objective pursued by the company. The Directive does not impose any requirements on the person submitting the application. Therefore, both one-person and multi-person formations are generally covered. However, the Directive does not force Member States to allow formations carried out by an authorized representative.10 This might have been different under the draft version put forward by the Commission. That proposal had explicitly mentioned the possibility that the formation could be carried out by an authorized representative.11 Arguably, this casual remark in a subordinated clause would not have obliged the Member States to allow representation in online formations either. But be that as it may. After criticism emerged that there was no need for representation of natural persons in the process of an online registration, the relevant wording was dropped. Therefore, the decision whether or not to allow representation in the formation process is now doubtlessly left to Member States. In Germany, while one draft enactment initiated by Nordrhein-Westfalen opted for allowing representation in online formations,12 the majority of legal writers are strongly opposed to admitting any such representation when implementing the directive.13 In addition, the admissibility of the formation by legal entities had been the subject of intensive discussion during the legislative procedure.14 A test phase only for natural persons had also been proposed.15 Ultimately, however, no decision to impose any such restrictions was taken. To the contrary, the aim to facilitate the online formation of companies as far as possible points into the opposite direction, i.e. to include legal entities. This applies all the more so as the other requirements in para. 3 are directed at a natural person.16 Accordingly, it is generally assumed that the directive admits legal entities as incorporators in online formations17 and that, as a consequence, Member Bormann/Stelmaszczyk, NZG 2019, 602. Cf. Recital No. 15 of the Directive 2019/1151/EU. 10 Lieder, NZG 2020, 81, 85–86; id, NZG 2018, 1081, 1084 f.; Bormann/Stelmaszczyk, NZG 2019, 601, 606; Kindler/Jobst, DB 2019, 1550, 1554. 11 Art 13 f Abs. 1 of the Commision’s draft (COM(2108) 239 final) used to read: “… registration of companies may be carried out fully online without the necessity for the applicants, or their representatives, to appear …”. 12 Bundesratsdrucksache 611/19, 16 – 17. 13 Lieder, NZG 2020, 81, 85–86; id, NZG 2018, 1081, 1084 f.; Bormann/Stelmaszczyk, NZG 2019, 601, 606; Kindler/Jobst, DB 2019, 1550, 1554. 14 Bormann/Stelmaszczyk, NZG 2019, 602. 15 Lieder, NZG 2018, 1081; Knaier, GmbHR 2018, 563; Teichmann, ZIP 2018, 2457; Wachter, GmbH-StB 2018, 219; DNotV Statement, p. 4 ff.; Bundesrat BR-Drs. 163/18, 5 et seq. 16 In particular the examination of legal capacity and capacity to contract Lieder, ZIP 2018, 1081, 1083 and id, NZG 2020, 81, 85. 8

9

Alexander Schall, David Günther and Michael Lamsa

119

2

3 4

5

Art 13 g Online formation of companies States will not be allowed to exclude them.18 However, with a view to the previous discussions, the entitlement of legal entities to online formation should better have been made explicit in the Directive or at least in the recitals in order to avoid juridical debates. 6 One point of criticism of the extension to legal persons is the difficult test of their existence under the right of representation in foreign companies.19 The interconnection of the registers did not result in complete harmonisation with regard to the scope of the register and the publicity effects. As a result, the scope of information differs between the member states. While Germany, Italy, Austria and Spain have an extensive register, the required information cannot be obtained reliably from the registers of Ireland, Malta or Cyprus.20 That being so, the Member States will have to implement the Directive with due care and protect commercial certainty by securing the reliability and trustworthiness of company registers. For example, it is proposed that Member States insist on the submission of originals or certified hard copies as far as permissible under Art 13 c para. 3 as well as presence requirements in order to verify the existence and representation of companies taking part in the online formation.21

III. Necessary Regulation Points for the Online Formation Article 13 g para. 2 requires member states to enact the provisions necessary for online formation. This includes the submission of the necessary information and documents. Art 13 g para. 3 lists the minimum content to be regulated. Art 13 g para. 4, on the other hand, contains the content that is open to discretion. 8 The enumeration in Art 13 g para. 3 aims at the minimum content for the implementation of the online formation. This includes the effective representation and identification for the formation of an effective company. 9 The enumeration in para. 4, on the other hand, takes up certain national regulation points that could conflict with the online formation. In particular, it permits the inclusion of a notary in Art 13 g para. 4 lit c in the online formation procedure. This option is of particular importance for countries like e.g. Germany that attribute a central gate keeper and consultant functions within the formation process to notaries. It is widely expected (and advised) that Germany will introduce online notarisation22 that may for example provide for the use of video conference and online meeting tools23 in order to establish a direct personal contact to facilitate personal guidance and consultation by the notary as well as the verification of the identity of the incorporators beyond the permissible presence requirements under Art 13 b para. 4 and Art 13 g para. 8. 10 Due to the special need for examination and registration as well as compliance with form requirements (e.g. notarization requirement for the contribution of real property or shares), formation by way of contributions in kind may be fully exempted from online formations (Art 13 g para. 4 lit. d). Unfortunately, Art 13 g para. 2 to 4 do not provide any information to which exact extent Member States are authorized to implement measures in order to verify the authenticity of documents. 7

17 Lieder, NZG 2020, 81, 85; Bormann/Stelmaszczyk, NZG 2019, 601, 604–5; Kindler/Jobst, DB 2019, 1550, 1553. 18 Lieder NZG 2020, 81, 85. 19 Cf. e.g. Lieder, NZG 2020, 81, 85. See also → Art 14 mn. 7 et seq. 20 Bormann/Stelmaszczyk, NZG 2019, 601, 604. 21 Lieder, NZG 2020, 81, 85. 22 Cf. Lieder, NZG 2020, 81, 83–84. 23 Cf. Recital 15 of the Digitalisation Directive.

120

Alexander Schall, David Günther and Michael Lamsa

TITLE I GENERAL PROVISIONS

Art 13 h

The competent authority of the Member State dealing with the online process should 11 be enabled to communicate with the applicant with video-conferences or other online means that provide a real-time audio-visual connection.24

IV. Further Simplification of the Online Formation The online formation should also be made possible by online payment, Art 13 g 12 para. 6. In addition, a standard period of five days is to be observed for the online formation 13 of natural persons using the templates, and 10 days in all other cases.

V. Physical Presence in Individual Cases As in the case of online identification (Art 13 b para. 4), pursuant to Art 13 g papa 8 a 14 personal appearance of the applicant may be required in individual cases to verify the legal capacity and/or the power of representation of the applicant. However, this could only be done on a case-by-case basis in case of reasonable doubt and public interest. Furthermore, the further online procedure must not be affected.

Article 13 h Templates for online formation of companies 1. Member States shall make templates available, for the types of companies listed in Annex IIA, on registration portals or websites that are accessible by means of the Single Digital Gateway. Member States may also make templates available online for the formation of other types of companies. 2. Member States shall ensure that the templates, referred to in paragraph 1 of this Article, may be used by applicants as part of the online formation procedure referred to in Article 13 g. Where those templates are used by applicants in compliance with the rules referred to in point (a) of Article 13g(4), the requirement to have the company instruments of constitution drawn up and certified in due legal form where preventive administrative or judicial control is not provided for, as laid down in Article 10, shall be deemed to have been fulfilled. This Directive shall not affect any requirement under national law to have the drawing up of instruments of constitution done in due legal form, as long as the online formation referred to in Article 13 g is possible. 3. Member States shall at least make the templates available in an official Union language broadly understood by the largest possible number of cross-border users. The availability of templates in languages other than the official language or languages of the Member State concerned shall be for information purposes only, unless that Member State decides that it is also possible to form a company with templates in such other languages. 4. The content of the templates shall be governed by national law.

24

Cf. Recital 13 of the Digitalisation Directive.

Alexander Schall, David Günther and Michael Lamsa

121

Art 13 h Templates for online formation of companies I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Use of Templates (para. 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Relationship with Art 10 (para. 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Language of the Template (para. 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 5 6

I. Overview Art 13 h is intended to ease the online formation for the applicant. Functionally it is an auxiliary norm to Art 13 g. For this purpose, the member states provide templates for the formation of a company. Those templates must be comprehensible and allow the user to choose from various options according to his needs.1 2 Art 13 h para. 1 states the obligation to provide templates. Art 13 h para. 2 regulates the relationship to the form requirement under Art 10. Art 13 h para. 3 contains provisions concerning the language of the templates. Art 13 h para. 4 clarifies that the Member States are competent for the content of the templates. 1

II. Use of Templates (para. 1) With respect to the private companies referred to in Annex IIA a Member State to provide templates on the online registration portals; however, with respect to other types of companies forming part of Annex II (see Art 13) there is no obligation to provide templates. 4 Although the templates provided by a Member State shall be accompanied with additional information (see Art 13 g para. 2 and Art 13 f lit. a) the Directive does not generally stipulate a requirement for the involvement of an advisor (e.g. notary or lawyer) to the applicant when establishing a company in the online procedure by making use of a template. It is however questionable whether a Member State can provide the necessary number of templates (including additional choices for certain set of clauses) to cater for the various different and complex situations an applicant could face when establishing a company (number of shareholders; size of shareholdings; joint venture; strong or weak minority shareholder etc.). There are fears that, for economic reasons, a Member state will limit itself to only a few templates. In addition, it is questionable whether an applicant without specific legal knowledge is in a position to choose from various templates and/or alternative clauses in a template. On the other hand, it must not be overlooked that online formations have worked sufficiently well for a long time in a number of (former) MS. The online formation itself is only an additional option that the founder(s) can take or leave as they think fit when setting up a company. 3

III. Relationship with Art 10 (para. 2) 5

The main purpose of Art 13 h para. 2 is the fiction (“shall be deemed”) that online formations do not infringe Art 10 even though they do not provide for either preventive administrative or judicial control or public certification of the instrument of incorporation and statutes – like is e.g. the case in Estonia.2 The formation with templates will not relieve from the other requirements for online formations. Moreover, the involvement of a notary according to Art 13 g para. 4 lit. c does not preclude this provision, i.e. Member 1 2

122

Recital No. 18 of the directive 2019/1151/EU. Bormann/Stelmaszczyk, NZG 2019, 602.

Alexander Schall, David Günther and Michael Lamsa

TITLE I GENERAL PROVISIONS

Art 13 i

States are still allowed to provide for the notarization requirement even if templates are used by the applicant.

IV. Language of the Template (para. 3) There is no doubt that the template can always be drafted in the official language of a 6 Member State. In addition, according to Art 13 h para. 3, the template must also be made available in the most commonly used language for the purpose of utilisation. Even after the Brexit, this can still only mean publication in English. In case templates are made available in language that is not an official language in the Member State, it depends on the Member State whether templates in such language shall be for information purposes only or whether it is possible to form a company with templates in such language.

Article 13 i Disqualified directors 1. Member States shall ensure that they have rules on disqualification of directors. Those rules shall include providing for the possibility to take into account any disqualification that is in force, or information relevant for disqualification, in another Member State. For the purpose of this Article, directors shall at least include the persons referred to in point (i) of Article 14(d). 2. Member States may require that persons applying to become directors declare whether they are aware of any circumstances which could lead to a disqualification in the Member State concerned. Member States may refuse the appointment of a person as a director of a company where that person is currently disqualified from acting as a director in another Member State. 3. Member States shall ensure that they are able to reply to a request from another Member State for information relevant for the disqualification of directors under the law of the Member State replying to the request. 4. In order to reply to a request referred to in paragraph 3 of this Article, Member States shall at least make the necessary arrangements to ensure that they are able to provide without delay information on whether a given person is disqualified or is recorded in any of their registers that contain information relevant for disqualification of directors, by means of the system referred to in Article 22. Member States may also exchange further information, such as on the period and grounds of disqualification. Such exchange shall be governed by national law. 5. The Commission shall lay down detailed arrangements and technical details for the exchange of the information referred to in paragraph 4 of this Article, by means of the implementing acts referred to in Article 24. 6. Paragraphs 1 to 5 of this Article shall apply mutatis mutandis where a company files information concerning the appointment of a new director in the register referred to in Article 16. 7. The personal data of persons referred to in this Article shall be processed in accordance with Regulation (EU) 2016/679 and national law, in order to enable the authority or the person or body mandated under national law to assess necessary information relating to the disqualification of a person as a director, with a view to preventing fraudulent or other abusive behaviour and ensuring that all persons interacting with companies or branches are protected. Alexander Schall, David Günther and Michael Lamsa

123

Art 13 j Online filing of company documents and information Member States shall ensure that the registers referred to in Article 16, authorities or persons or bodies mandated under national law to deal with any aspect of online procedures do not store personal data transmitted for the purposes of this Article any longer than is necessary, and in any event no longer than any personal data related to the formation of a company, the registration of a branch or a filing by a company or branch are stored. 1

Art 13 i is intended to make the Europe-wide data exchange to disqualified directors. In the foreground is to prevent a disqualified director from performing a managing activity again by way of the detour of founding a letterbox company in a other member state. However, it is up to the Member States to decide whether to refuse to act as a director on the grounds of disqualification in another Member State (Art 13 i para. 2 subpara. 2). Moreover, they are obliged to draw up their own provisions for disqualification (Art 13 i para. 1). Point (15.2) Commission Implementing Regulation (EU) 2020/2244 details the methods of exchange of information between the registers.1

Article 13 j Online filing of company documents and information 1. Member States shall ensure that documents and information referred to in Article 14, including any modification thereof, can be filed online with the register within the time limit provided by the laws of the Member State where the company is registered. Member States shall ensure that such filing can be completed online in its entirety without the necessity for an applicant to appear in person before any authority or person or body mandated under national law to deal with the online filing, subject to the provisions laid down in Article 13b(4) and, where applicable, Article 13g(8). 2. Member States shall ensure that the origin and integrity of the documents filed online may be verified electronically. 3. Member States may require that certain companies or that all companies file certain or all of the documents and information referred to in paragraph 1 online. 4. Article 13 g (2) to (5) shall apply mutatis mutandis to online filing of documents and information. 5. Member States may continue to allow forms of filing other than those referred to in paragraph 1, including by electronic or by paper means, by companies, by notaries or by any other persons or bodies mandated under national law to deal with such forms of filing. 1

Art 13 j further strengthens the online register by allowing the online filing of all company documents. This includes both the documents for the online formation and subsequently all other documents in the existence of the company. The legal transactions or resolutions on which the respective document is based are not included because they are viewed as an internal decision-making process.1 The regulation applies to all EU corporations listed in Annex II, i.e. for all listed and non-listed. With regard to the content of the regulation, Art 13 j para. 4 refers to Article 13 g para. 2 to 5 for application in this case. As the proposal of the European Commission did not contain such a provision, it For a systematic overview J. Schmidt, ZIP 2021, 112, 120. Bormann/Stelmaszczyk, NZG 2019, 611; Lieder, NZG 2018, 1019; Teichmann, ZIP 2018, 2461; Noack, DB 2018, 1324; Bock, DNotZ 2018, 650. 1

1

124

Alexander Schall, David Günther and Michael Lamsa

Art 14

TITLE I GENERAL PROVISIONS

was criticized that in contrast to the procedures for online formation the procedures for online filings did not provide for the possibility to involve notaries. Against this background, Art 13 j para. 4 was introduced. It is, therefore, also possible for notaries to be involved in the further submission of company documents, Art 13 g para. 4 lit. c.

Article 14 Documents and particulars to be disclosed by companies Member States shall take the measures required to ensure compulsory disclosure by companies of at least the following documents and particulars: (a) the instrument of constitution, and the statutes if they are contained in a separate instrument; (b) any amendments to the instruments referred to in point (a), including any extension of the duration of the company; (c) after every amendment of the instrument of constitution or of the statutes, the complete text of the instrument or statutes as amended to date; (d) the appointment, termination of office and particulars of the persons who either as a body constituted pursuant to law or as members of any such body: (i) are authorised to represent the company in dealings with third parties and in legal proceedings; it shall be apparent from the disclosure whether the persons authorised to represent the company may do so alone or are required to act jointly; (ii) take part in the administration, supervision or control of the company; (e) at least once a year, the amount of the capital subscribed, where the instrument of constitution or the statutes mention an authorised capital, unless any increase in the capital subscribed necessitates an amendment of the statutes; (f) the accounting documents for each financial year which are required to be published in accordance with Council Directives 86/635/EEC(1) and 91/674/EEC(2) and Directive 2013/34/EU of the European Parliament and of the Council (3); (g) any change of the registered office of the company; (h) the winding-up of the company; (i) any declaration of nullity of the company by the courts; (j) the appointment of liquidators, particulars concerning them, and their respective powers, unless such powers are expressly and exclusively derived from law or from the statutes of the company; (k) any termination of a liquidation and, in Member States where striking off the register entails legal consequences, the fact of any such striking off. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Important Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Lit a) instrument of constitution, including the statutes lit b) amendments lit c) consolidated form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3

(1) Council Directive 86/635/EEC of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions (OJ L 372, 31.12.1986, p. 1). (2) Council Directive 91/674/EEC of 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings (OJ L 374, 31.12.1991, p. 7). (3) Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC (OJ L 182, 29.6.2013, p. 19).

Alexander Schall, David Günther and Michael Lamsa

125

Art 14 Documents and particulars to be disclosed by companies 2. 3. 4. 5. 6.

Lit d) members of the body . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lit e) capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lit f) accounting documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lit g) change of the company seat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lit h-k) winding up, nullity, termination of the liquidation . . . . . . . . . . . . . . .

4 7 8 13 14

I. Overview 1

Art 14 contains a non-exhaustive list of items to be disclosed (“at least”). Other European legislation, especially for public limited companies, can provide for further publication duties.1 This contrasts with the Directive’s disclosure rules for branches in other Member States that follow the principle of full harmonisation.2 In a synopsis, the register displays the organizational structure of the company including the liability system and the power to represent. Reliance of third parties on the so disclosed information is protected in the peculiar manner specified by Art 16 para. 5 and 6.

II. Important Items 2

In excerpts, important items are:

1. Lit a) instrument of constitution, including the statutes lit b) amendments lit c) consolidated form 3

The register shall always state and keep the current version of the instrument of constitution and, if separate, the statutes, available for the public. A specific content of the instrument of constitution or the statutes is not given by the First Directive. The Second Directive constitutes a minimum content for the Public Limited Company. 3

2. Lit d) members of the body Likewise to the instrument of constitution, the register shall always name the current members of the body including any change due to appointment or termination. Covered are only the members pursuant to law, who have either the power to represent or have a controlling capacity. The latter shall involve the controlling bodies in a dual board system.4 Not named and, therefore, not included are voluntarily formed bodies5 and auditors.6 5 Additionally, it has to be reported whether the body member can represent the company solely, only in cooperation with the other board members, or a combination of both. The ECJ decision Haaga confirms that the disclosure duty exists even though the power of representation is directly allocated by the national law.7 The effet utile commends this interpretation in order to enhance trading in what has become the Single Market. Otherwise, a foreign third party would have to know the national representation laws. 4

1 Lieder, NZG 2020, 81, 88 with reference to Recital 19; Schurr, EuZW 2019, 772, 773; For an overview see Habersack/Verse, § 5 margin no. 14; Grundmann, § 9 margin no. 20. 2 ECJ C-167/01 Inspire Art, at para. 65 et seq. 3 With the amendments of the Second directive Grundmann, § 9 margin no. 22 et seq. 4 Lutter/Bayer/Schmidt, EuropUR, § 19 margin no. 14. 5 Grundmann, § 9 margin no. 23; Habersack/Verse, § 5 margin no. 44. 6 Grundmann, § 9 margin no. 20. 7 ECJ, Case 32/74 Friedrich Haaga GmbH [1974] ECR 1201.

126

Alexander Schall, David Günther and Michael Lamsa

TITLE I GENERAL PROVISIONS

Art 14

However, the wording of lit d) leaves a lacuna of considerable practical relevance. It 6 was presumably drafted with a view to the German system of a separate organ competence of Außenvertretung that lies directly with the members of the board (solely or jointly). As a consequence, the provision merely requires additional information whether the “the persons authorised to represent the company may do so alone or are required to act jointly”. Therefore, the text does not address jurisdictions where the company is represented by the board of directors as collective body – as is the case in jurisdictions that do not single out the power to bind the company from the general competence to conduct the affairs of the company that will often be attributed to the board of directors as collective body (last but not least, this is the case in the German stock corporation, too, cf. § 77 AktG). If the primeval power to bind the company is attributed to the board (instead of directly to its members), any individual powers of attourney granted to the directors are sub-delegated. They are only secondary powers that are derived from the original authority to represent the company. The original “organic” authority lies with the board and cannot not be passed on or even overridden by delegation. Representation by the board as collective body is therefore fundamentally different from a concept that attributes the original authority to bind the company directly to individual board members by way of joint or sole representation, as is the case in Germany.8 This difference is often mistaken, with the effect that England has been constantly, but not necessarily rightly, criticised for non-compliance with European law by German writers.9 The truth is that in jurisdictions with a board representation rule, the power to bind the company is conditional on the board acting as a collective body. The board must decide on the respective transaction by a board resolution with the necessary majority in a duly convened board meeting. This is not covered by lit d from the outset because in jurisdictions that have adopted an exclusive concept of board representation, there are no individual “persons authorised to represent the company” at all. Only the board, not the member, qualifies as “organ” that is empowered to represent the company. In particular, representation by the board must not be mistaken with joint representation by the board members because (a) it allows majority decisions by the directors and (b) it requires decision making in duly convened board meetings. That being so, lit d makes no explicit provision for MS to disclose representation by the board as collective body in the register. It follows that the parsimonious English registration system does or rather did not violate the Directive. This is somewhat surprising and misfortunate. It certainly undermines the spirit of the Haaga case.10 On the other hand, it has to be said that, contrary to Haaga, it is not the traditional function of commercial registers to inform on the black letter of the law, e.g. by inserting a standard clause like “English companies are normally represented by the board”. Such clauses would deliver superficial and potentially deceptive information and lead to an “effet inutile”, while more accurate details on the requirements of lawful board representation would be difficult to report in a commercial register and certainly raise much more complicated issues than does clear-cut disclosure on whether directors have sole or joint powers of representation under the articles.

Schall in Schall, Companies Act, 2014, p. 40 margin no. 7. See for example Bock, Der Harmonisierungserfolg der Publizitätsrichtlinie, 2016, pp. 266 et seq. While Brexit has resolved the issues with a view to the UK, similar arguments might still be raised against Ireland. 10 ECJ, case 32/74 Friedrich Haaga GmbH [1974] ECR 1201. 8

9

Alexander Schall, David Günther and Michael Lamsa

127

Art 14 Documents and particulars to be disclosed by companies 3. Lit e) capital 7

The Directive does not prescribe or detail the disclosure of capital. To avoid a deception the Directive demands only as a minimum, if the company has authorized capital and the authorization does not lead necessarily to an amendment of the statutes (since every amendment already has to be published in accordance with lit a – lit c), the (at least) yearly disclosure of the subscribed capital.

4. Lit f) accounting documents 8

9

10

11

12

The publication of the accounting documents was the most controversial item of disclosure in the discussions.11 This disclosure inflicts contradictory interests. While it enables the creditors to estimate the value of their claims based on the financial standing of the company, it could weaken the company`s negotiation level and even expose company secrets. In the end, the opinion prevailed to impose the duty on the company in order to establish the European Information doctrine to protect the third parties. 12 Art 2 lit f) refers for the concrete accounting documents to the specific directive. Foremost the Fourth Directive (78/660/EEC) is applicable, with the Seventh Directive (83/349/EEC) providing particulars for the group and the Special Directive for banks and insurance companies (91/674 EEC). Important regulations in the light of third-party protection of the Fourth Directive are the inclusion of atypical partnerships and the repeal of the exception for the Private Limited Company.13 Small (micro entities) and medium sized companies are beneficiaries of liberation to only file an annual account to a national agency and transfer it to the register (Art 47-50 of the Directive 78/660/EEC). To review the documents and to state responsibility, the particulars of the auditor, the auditing report, and the appropriation and distribution of profits have also to be published (Art 51 of the Directive 78/660/EEC). The aforementioned conflict between the company and the third party was in question in the Springer14 und Danzer15 cases. The ECJ upheld the legislative solution in favour of the third party and ruled that Art 2 lit f) does not infract the freedom of property, speech, occupation, the principle of equal treatment, or the protection of personal data. In Germany and France, the two Member States that have historically been the main opponents to the full disclosure of accounting documents, companies in most cases did not fulfil their disclosure duties until the late 2000 s. First in 1997, the ECJ decision Daihatsu16 set forth an extension of the persons entitled to pursue proceedings based on the breach of the disclosing duty to include everyone. The national transformation act of the amendment in Germany (EHUG) introduced an official proceeding with a mandatory verifying and reporting obligation.17

Grundmann, § 9 margin no. 30, Edwards, EC Company Law, 19, 22 et seq. Grundmann, § 9 margin no. 30. 13 Grundmann, § 9 margin no. 27 et seq. 14 Joined cases C-435/02 and C-103/03 Axel Springer AG v Zeitungsverlag Niederrhein GmbH & Co Essen KG and Hans-Jürgen Weske [2004] ECR I-8663 [49]. 15 CFI, T-47/02 Danzer and Danzer v Council [2006], E.C.R. II-1779. 16 ECJ, Case C-97/96 Verband deutscher Daihatsu-Händler v Daihatsu Deutschland [1997] ECR I-6843. 17 §§ 329 para. I and IV, 335. For the increased percentage of disclosing companies, cf. Schlauß, DB 2011, 806. 11 12

128

Alexander Schall, David Günther and Michael Lamsa

TITLE I GENERAL PROVISIONS

Art 16

5. Lit g) change of the company seat The company has to disclose every change of its registered seat. The location of the 13 seat is of paramount importance for the creditors in regard to evaluating the credibility of the company and to enforcing their claims. To always display this information – as mentioned above – the (current) seat has to be indicated on every business correspondence (Art 26 lit b). For the Public Limited Company, the seat is part of the statutes under lit a) and as a consequence a change of the seat leads to a change of the statute and has to be disclosed pursuant to Art 14 lit b) and c).

6. Lit h-k) winding up, nullity, termination of the liquidation The fact of winding up (lit h), the pronunciation of nullity by the court (lit i), termi- 14 nation of liquidation or striking off the register (lit k), and in case of an appointment of a liquidator, the particulars and his power to represent, if divergent to the law, have to be disclosed. All this information is of fundamental interest for the creditors since their claims may be endangered.

Article 15 Changes in documents and particulars 1. Member States shall take the measures required to ensure that any changes in the documents and particulars referred to in Article 14 are entered in the competent register referred to in the first subparagraph of Article 16(1) and are disclosed, in accordance with Article 16(3) and (5), normally within 21 days of receipt of the complete documentation regarding those changes including, if applicable, the legality check as required under national law for entry in the file. 2. Paragraph 1 shall not apply to the accounting documents referred to in Article 14(f). Art 15 establishes a time limit of 21 days from the complete submission of documents 1 to disclosure. The aim is to achieve the fastest possible disclosure of the submitted documents. Exceptions are accounting documents for the financial year and delays by force majeur.1

Article 16 Disclosure in the register 1. In each Member State, a file shall be opened in a central, commercial or companies register (‘the register’), for each of the companies registered therein. Member States shall ensure that companies have a European unique identifier (‘EUID’), referred to in point (8) of the Annex to Commission Implementing Regulation (EU) 2015/884CCC(1), allowing them to be unequivocally identified in communications between registers through the system of interconnection of registers established in accordance with Article 22 (‘the system of interconnection of registers’). Recital No. 33 of the directive 2019/1151/EU. Commission Implementing Regulation (EU) 2015/884 of 8 June 2015 establishing technical specifications and procedures required for the system of interconnection of registers established by Directive 2009/101/EC of the European Parliament and of the Council (OJ L 144, 10.6.2015, p. 1). 1

(1)

Alexander Schall, David Günther and Michael Lamsa

129

Art 16 Disclosure in the register That unique identifier shall comprise, at least, elements making it possible to identify the Member State of the register, the domestic register of origin and the company number in that register and, where appropriate, features to avoid identification errors. 2. All documents and information that are required to be disclosed pursuant to Article 14 shall be kept in the file referred to in paragraph 1 of this Article, or entered directly in the register, and the subject matter of the entries in the register shall be recorded in the file. All documents and information referred to in Article 14, irrespective of the means by which they are filed, shall be kept in the file in the register or entered directly into it in electronic form. Member States shall ensure that all documents and information that are filed by paper means are converted by the register to electronic form as quickly as possible. Member States shall ensure that documents and information referred to in Article 14 that were filed by paper means before 31 December 2006 are converted into electronic form by the register upon receipt of an application for disclosure by electronic means. 3. Member States shall ensure that the disclosure of the documents and information referred to in Article 14 is effected by making them publicly available in the register. In addition, Member States may also require that some or all of those documents and information are published in a national gazette designated for that purpose, or by equally effective means. Those means shall entail at least the use of a system whereby the documents or information published can be accessed in chronological order through a central electronic platform. In such cases, the register shall ensure that those documents and information are sent electronically by the register to the national gazette or to a central electronic platform. 4. Member States shall take the necessary measures to avoid any discrepancy between what is in the register and in the file. Member States that require the publication of documents and information in a national gazette or on a central electronic platform shall take the necessary measures to avoid any discrepancy between what is disclosed in accordance with paragraph 3 and what is published in the gazette or on the platform. In cases of any discrepancies under this Article, the documents and information made available in the register shall prevail. 5. The documents and information referred to in Article 14 may be relied on by the company as against third parties only after they have been disclosed in accordance with paragraph 3 of this Article, unless the company proves that the third parties had knowledge thereof. However, with regard to transactions taking place before the sixteenth day following the disclosure, the documents and information shall not be relied on as against third parties who prove that it was impossible for them to have had knowledge thereof. Third parties may always rely on any documents and information in respect of which the disclosure formalities have not yet been completed, save where non-disclosure causes such documents or information to have no effect. 6. Member States shall ensure that all documents and information submitted as part of the formation of a company, the registration of a branch, or a filing by a company or a branch, is stored by the registers in a machine-readable and searchable format or as structured data;

130

Alexander Schall, David Günther and Michael Lamsa

Art 16

TITLE I GENERAL PROVISIONS I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. European Unique Identifier (EUID) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Publication (Art 16 para. 3 and 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Effects of disclosure (Art 16 para. 5 and 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 6 8

I. Overview Art 16 outlines the means of the disclosure, requirements of the register and the 1 effects of publication. The register is now the central instrument for company disclosure. The role of the Gazette has been diminished by the Digitalisation Directive – including a consequent reshaping of the rules on third party protection in para. 5 and 6.1 The registrar collects the information from the companies and provides them to the public. 2 The register establishes a file on every company. All disclosed information has either 2 to be kept in the file or to be entered into the register. Keeping information in the file and entering it directly into the register are equal options.3 The organisation of the register, nemeyl the question whether there is a central or a decentralized commercial or company register, can be decided by the Member States.4 Since the 1st of January 2007 (and the end of the transformation term for the amendment Directive), all documents and particulars can be entered electronically.5 Member States can also require that the electronic filing is mandatory.6 The starting date for the new E-Justice-portal was the 8th of June 2017. Art 16 para. 5 and 6 state the protection of third parties who rely on the disclosed 3 information. This provision is of utmost practical importance. The Digitalisation Directive has reshaped the concept of third-party-protection due to the diminished role of the Gazette. However, it is doubtful whether the current approach chosen by the European regulator lives up to the commercial needs of cross-border trade within the Single Market.7

II. European Unique Identifier (EUID) The European unique identifier (EUID) has to be seen in context of the system 4 of interconnection of registers pursuant to Art 22 para. 2. The interoperability and exchange of information between the registers of the Member States is accomplished by the European central platform (Art 22 para. 1), which is one of the three pillars of the system of interconnection of registers. On the basis of EUIDs, the platform is capable of distributing information from each of the Member States’ registers to the competent registers of other Member States in a standard message format and in the relevant language Lieder, NZG 2020, 81, 87. Since register and publication proclaim the original documents and particulars, they are called “primary publication means”. Copies of the register and certain company information on the company correspondence also state information from the register, but only refer indirectly to the original documents, which is why they are called “secondary publication means”. As to this distinction see Habersack/Verse, § 5 margin no. 14; with another emphasis Grundmann, § 9 margin no. 36 et seq. 3 Apfelbaum, DNotZ 2008, 713; Lutter/Bayer/Schmidt, EuropUR, § 19 margin no. 14; Lutter, EuR 1969, 4; Kalss/Kampfl, margin no. 221; J. Schmidt, NZG 2006, 899. 4 Cf. Lutter/Bayer/Schmidt, EuropUR, § 19 margin no. 13; Kalss/Kampfl, margin no. 221. For an overview of the organization of the register in the EC before the Directive see Holzborn/Israel, NJW 2003, 314. 5 Cf. Art 16 a para. 1. 6 So implemented in the German regulation in § 12 HGB. 7 Lieder, NZG 2020, 81, 87; see → mn. 8 et seq. 1

2

Alexander Schall, David Günther and Michael Lamsa

131

Art 16 Disclosure in the register version.8 In principle, the EUID is intended to be only used for communication between registers through the system of interconnection of registers. Therefore, companies and branches are not obliged to include the unique identifier in the company letters or order forms pursuant Art 26 and 35 and the EUID does not replace register numbers allocated by a register of Member State.9 5 With regard tot he further elaboration of the EUID Art 16 para. 1 refers to point (8) of the Annex to Commission Implementing Regulation (EU) 2015/884. However, in the meantime Commission Implementing Regulation (EU) 2015/884 has been repealed by Art 2 para. 1 of Commisson Impelementing Regulation (EU) 2020/2244. Pursant to Art 2 para. 2 of Commisson Impelementing Regulation (EU) 2020/2244 all references to the repealed Commission Implementing Regulation (EU) 2015/884 shall be construed as references to Commisson Impelementing Regulation (EU) 2020/2244. Pursuant to point (8) of the Annex to Commission Implementing Regulation (EU) 2020/2244 the EUID has to be composed as follows: (a) a mandatory country code with elements making it possible to identify the Member State of the register, (b) a mandatory register identifier with elements making it possible to identify the domestic register of origin of the company and of the branch respectively, (c) a mandatory registration number which refers to the registration number of the company/branch in the domestic register of origin and (d) an optional verification digit with elements making it possible to avoid identification errors. An example for an EUOD is „DED2601V.HRB140475“ (with DE for Germany as relevant Member State, D2601V as identifier for the commercial register of the local court of Munich and HRB140475 for the registration number).10

III. Publication (Art 16 para. 3 and 4) Art 16 para. 3 and 4 deal with the tools of disclosure. Deviating from the law prior to the Digitalisation Directive, the primary medium for publication is now the register. 11 The Gazette is not the central disclosure tool any more. All documents and particulars shall be disclosed by publication in the register. Disclosing information through a national Gazette is now only an option that exists besides the register. 7 Since the Gazette remains an admissible publication tool, the rules of Art 16 para. 4 (formerly Art 16 para. 7) still oblige the MS to avoid discrepancies between Gazette and register. However, the reference point for the protection of third parties under para. 5 has been shifted from the information published in Gazette to that disclosed in the register. As a consequence of that shift, the specific protection in case of discrepancies between the publication in the Gazette and the content of the register that had formerly been granted by the old para. 7 subpara. 2 has been skipped. That provision, while barring the company from invoking the disclosure in the Gazette, allowed third parties to rely on it (“However, in cases of discrepancy, the text disclosed in accordance with paragraph 5 may not be relied on as against third parties; such third parties may nevertheless rely thereon, unless the company proves that they had knowledge of the texts deposited in the file or entered in the register.”) With the register elevated to the primary source of disclosure and the Gazette downgraded to an optional, subordinated disclosure tool, there is no more case for privileging reliance on the Gazette instead of the register in the case of a discrepancy. Instead, the new subpara. 3 of Art 16 para. 4 6

Cf. Recital 9 of Directive 2012/17/EU. Cf. Recital 14 of Directive 2012/17/EU. 10 Example taken from BeckOGK/Beurskens, 1.1.2020, HGB § 9 b para. 5. 11 Lieder, NZG 2020, 81, 87. 8

9

132

Alexander Schall, David Günther and Michael Lamsa

TITLE I GENERAL PROVISIONS

Art 16

(formerly para. 7) now states the primacy of the register in case of discrepancies: “In cases of any discrepancies under this Article, the documents and information made available in the register shall prevail.”

IV. Effects of disclosure (Art 16 para. 5 and 6) Art 16 para. 5 and 6 protect the reliance of third parties on the disclosure in the register in a peculiarly restricted manner. Third parties cannot positively rely on the facts and data disclosed in the register. But the company is barred from invoking those facts unless they have been duly disclosed. This effect can be circumscribed as follows: The Directive does not protect trust in the “talking” of the register, but trust in its silence. The difference between “positive” trust in the existence of the disclosed facts (“talking of the register”) and “negative” trust in the absence of facts to be disclosed (“silence of the register”) can be demonstrated by the following example: If the register shows that company X currently has three directors, A, B and C, the register does not guarantee that A, B and C actually are the directors of the company. If C has never been appointed and was just entered into the register by mistake, Art 16 para. 5 does not offer any protection. Third parties are only protected against companies holding undisclosed facts against them. That is to say: If a third party entered into a transaction with A, B and C as joint representatives acting for X, it is not possible for the company to object the transaction because the newly appointed director D has not been duly involved. This is because the appointment of a director must be disclosed under Art 14 lit d. As long as that disclosure is not duly effected, the appointment cannot be held against third parties under Art 16 para. 5. The third party can rely on the silence of the register. This rule is mirrored in the German provision of § 15 I HGB where the principle is generally known as the “negative Publizität des Handelsregisters” (= negative effect of disclosure in the commercial register).12 This diminished “negative” effect can only be understood in contrast with the counterexample of the German Grundbuch (= land register). The reliability of the Grundbuch is valued so high that German law endows disclosure of data in the Grundbuch with a “positive” effect (“positive Publizität des Grundbuchs”), i.e. third parties can positively rely on the content (= “the talking”) of the Grundbuch even if the disclosed data are wrong (§ 892 BGB). The reliability of the commercial register had been deemed lower, and thus § 15 I HGB was restricted to only protect “negative” trust in the “silence” of the register. There is also another reason that justifies the different levels of protection for Grundbuch and Handelsregister in the eyes of German lawyers: positive reliance on wrong entries in the Grundbuch can only ever lead to restricted damage, at most the loss of a piece of land (valuable as that may be) in a bona fide purchase for value under § 892 BGB. Moreover, this loss would be compensated by an enrichment claim to the purchase price under § 816 I 1 BGB. By contrast, positive reliance on wrong entries into the German commercial register (that inter alia contains the names of fully liable partners of partnerships and the persons with powers of attourney to bind companies or merchants) might lead to unrestricted personal liability and ruin people without any guarantee of compensation. Such serious consequences cannot be justified vis-à-vis completely innocent people who have caused the wrong entry in no way. That is why German lawyers, following the groundbreaking work of Claus Wilhelm Canaris,13 assume that any legal doctrine or 12 On the following see Denkschrift zu dem Entwurf eines Handelsgesetzbuches und eines Einführungsgesetzes, 1897, p. 211–212; Schall in Heidel/Schall (eds), HGB, 3rd edn. 2019, § 15 margin no. 1.

Alexander Schall, David Günther and Michael Lamsa

133

8

9

10

11

Art 16 Disclosure in the register

12

13

14

15

tool or remedy that provides protection of trust between parties must be attributable to the conduct of the party that is held responsible. While wrong entries into registers be caused by various reasons that may be within or beyond the responsibility of the company, it is always possible to hold companies responsible for the omission of disclosure. That is how the merely negative effect of § 15 I HGB is justified. The same is true for Art 16 para. 5. Against this background, it can be understood why positive reliance in the (wrong) fact had only been protected under the old Art 16 para. 7 subpara. 2 in the extremely rare case of a discrepancy between the registration and a wrongful publication in the Gazette.14 As said above, this rule has been dropped by the Digitalisation Directive because the registration has been promoted to primary instrument of disclosure and reference point for the protection of third parties. As a result, the new Art 16 para. 5 now only contains the restricted principle of protection of trust in the silence of the register. However, this decision of the European regulator has been criticised.15 And there is some truth to that. The protection of “negative reliance” under Art 16 para. 5 does not suffice for commercial needs within the Single Market. Disclosure under Art 14 purports to inform the general public in a reliable way on the essentials of the companies they are dealing with. Without granting positive reliance on the disclosed facts, this purpose cannot be achieved appropriately. If third parties are not able to positively rely on the registered directors A, B and C actually being the directors of company X, they will always have to dig deep into the documents of the company in order to verify the validity of a transaction, in particular insofar as the power to bind the company is at stake. Appointments of directors are typically based on shareholder resolutions that must be carried by the majority of shareholders who must actually hold the shares and, in case of corporate shareholders, have to be duly represented by their directors who have been validly appointed … etc. This certainly frustrates the aim of the disclosure provisions. It must however be added that a future shift to protection of positive reliance would have to introduce the necessary element of attribution that is generally accepted, if unwritten, under the German § 15 III HGB and explicitly codified in the Austrian provision § 15 III UGB.16 The protection under Art 16 para. 5 can be waived by the third party who can always rely on and invoke the true legal situation, even when the process of disclosure is not yet completed (Art 16 para. 5 subpara. 3). This is of course under the proviso that the legal existence of the particulars relied upon, albeit not yet entered into the register, are not conditional on registration – which German lawyers would call a “konstitutive Eintragung” as opposed to a “deklaratorische Eintragung”. Similarly, due to the directive`s purpose to protect the third party, an unsuccessful disclosure has no negative effect for the third party.17 In contrast, only after the publication will the company be able to invoke documents and particulars – in most cases the true legal situation – against third parties, with the exception that the company can always prove that the third party had knowledge of the

Canaris, Die Vertrauenshaftung im deutschen Privatrecht, 1971. But note that in Germany, the protection of reliance on wrongful disclosure has been extended beyond discrepancies by § 15 III HGB, cf. Schall in Heidel/Schall (eds), HGB, 3rd edn. 2019, § 15 margin no. 72 et seq. 15 Lieder, NZG 2020, 81, 87–88. 16 Lieder, NZG 2020, 81, 87 and 89, arguing that Germany should not take back the protection of positive trust under § 15 III HGB merely because the European basis of this rule, the old Art 16 para. 7, has been skipped. 17 Grundmann, § 9 margin no. 46. 13

14

134

Alexander Schall, David Günther and Michael Lamsa

TITLE I GENERAL PROVISIONS

Art 16 a

divergent legal situation (Art 16 para. 5 subpara. 1). But only constitutive knowledge of the true legal situation costs the third party the right to invoke the state of the register. 18 Finally, there is the counter-exception of the grace period under Art 16 para. 6. In 16 the following fifteen days after publication, the company cannot invoke the publication, if the third party can prove access to the register was impossible for them (Art 16 para. 5 subpara. 2). The instalment of the electronic register in all Member States and the dissemination of the internet connection reduced this to very few instances. 19 However, there is some practical justification for the rule in the context of the signing and closing of transactions where there will always be a point in time when the checks must be completed come to an end.

Article 16 a Access to disclosed information 1. Member States shall ensure that copies of all or any part of the documents and information, referred to in Article 14, may be obtained from the register on application, and that such an application may be submitted to the register by either paper or electronic means. However, Member States may decide that certain types or parts of the documents and information, which were filed by paper means on or before 31 December 2006, cannot be obtained by electronic means where a specified period has elapsed between the date of filing and the date of the application. Such a specified period shall not be less than 10 years. 2. The price of obtaining a copy of all or any part of the documents and information referred to in Article 14, whether by paper or electronic means, shall not exceed the administrative costs thereof, including the costs of development and maintenance of registers. 3. Electronic and paper copies supplied to an applicant shall be certified as ‘true copies’ unless the applicant dispenses with such certification. 4. Member States shall ensure that electronic copies and extracts of the documents and information provided by the register have been authenticated by means of trust services referred to in Regulation (EU) No 910/2014, in order to guarantee that the electronic copies or extracts have been provided by the register and that their content is a true copy of the document held by the register or that it is consistent with the information contained therein. The provisions of Art 16 a para. 1 through 4 used to be part of Art 16 (paras 3 and 4). 1 They were moved from Art 16 to Art 16 a and slightly by the Digitalisation Directive, in particular Art 16 a para. 4. By application, a copy (in paper or electronic form) of the whole or partial text must 2 be obtainable (Art 16 a para. 4). Everyone is entitled to the application. Despite no explicit regulation in the directive, a confinement to a certain personal group, or the requirement of already existing business connections,1 or a reasonable interest, would contrast the directive`s purpose.2 A fee can be charged for the copy, but must not exceed the administrative cost (Art 16 a para. 2). A flat-rate amount should be possible. 3

Cf. Lutter/Bayer/Schmidt, EuropUR, § 19 margin no. 44. Lutter/Bayer/Schmidt, EuropUR, § 19 margin no. 44. 1 ECJ case C-97/96 Verband deutscher Daihatsu-Händler v Daihatsu Deutschland [1997] ECR I-6843. 18

19

Alexander Schall, David Günther and Michael Lamsa

135

Art 18 Availability of electronic copies of documents and particulars

Article 17 Up-to-date information on national law with regard to the rights of third parties 1. Member States shall ensure that up-to-date information is made available explaining the provisions of national law pursuant to which third parties may rely on information and each type of document referred to in Article 14, in accordance with Article 16(3), (4) and (5). 2. Member States shall provide the information required for publication on the European e-Justice portal (‘the portal’) in accordance with the portal's rules and technical requirements. 3. The Commission shall publish that information on the portal in all the official languages of the Union. Art 17 para. 1 obliges the member states to inform about the up-to-date regulations, which are based on the publicity standards Art 14 and Art 16 (para. 3-5) and which regulate the protection of the confidence of third parties. 2 Art 17 para. 2 and 3 deal with the European e-Justice portal.1 In principle, the portal serves as the single European electronic access point for legal information, judicial and administrative institutions. However, pursuant to Art 22 para. 4 a Member State as well as the Commission is entitled establish further access points to the system of interconnection of registers. 1

Article 18 Availability of electronic copies of documents and particulars 1. Electronic copies of the documents and information referred to in Article 14 shall also be made publicly available through the system of interconnection of registers. Member States may also make available documents and information referred to in Article 14 for types of companies other than those listed in Annex II. 2. Member States shall ensure that the documents and particulars referred to in Article 14 are available through the system of interconnection of registers in a standard message format and accessible by electronic means. Member States shall also ensure that minimum standards for the security of data transmission are respected. 3. The Commission shall provide a search service in all the official languages of the Union in respect of companies registered in the Member States, in order to make available through the portal: (a) the documents and information referred to in Article 14, including for types of companies other than those listed in Annex II, where such documents are made available by Member States; (aa) the documents and information referred to in Articles 86 g, 86 n, 86 p, 123, 127 a, 130, 160 g, 160 n and 160 p; (b) the explanatory labels, available in all the official languages of the Union, listing those particulars and the types of those documents. 2 Grundmann, § 9 margin no. 39; Lutter/Bayer/Schmidt, EuropUR, § 19 margin no. 14; Kalss/Kampfl, margin no. 224; Noack, BB 2001, 1263. 3 Cf. → Art 13 d mn. 1. 1 Cf. → Art 22-25 mn. 2 et seq.

136

Alexander Schall, David Günther and Michael Lamsa

TITLE I GENERAL PROVISIONS

Art 19

Art 18 requires the member states to provide electronic copies of the documents 1 referred to in Art 14 also through the system of interconnection of registers. In addition to the register (see Art 16), the portal offers an alternative way to access the information and documents. In particular, it offers a search service in all official languages of the Union in respect to companies registered in the Member States.

Article 19 Fees chargeable for documents and information 1. The fees charged for obtaining documents and information referred to in Article 14 through the system of interconnection of registers shall not exceed the administrative costs thereof, including the costs of development and maintenance of registers. 2. Member States shall ensure that at least the following information and documents are available free of charge through the system of interconnection of registers: (a) (b) (c) (d) (e) (f) (g)

(h)

the name or names and legal form of the company; the registered office of the company and the Member State where it is registered; the registration number of the company and its EUID; details of the company website, where such details are recorded in the national register; the status of the company, such as when it is closed, struck off the register, wound up, dissolved, economically active or inactive as defined in national law and where recorded in the national registers; the object of the company, where it is recorded in the national register; the particulars of any persons who either as a body or as members of any such body are currently authorised by the company to represent it in dealing with third parties and in legal proceedings and information as to whether the persons authorised to represent the company may do so alone or are required to act jointly; information on any branches opened by the company in another Member State including the name, registration number, EUID and the Member State where the branch is registered.

3. The exchange of any information through the system of interconnection of registers shall be free of charge for the registers. 4. Member States may decide that the information referred to in points (d) and (f) is to be made available free of charge only for the authorities of other Member States. Art 19 contains provisions on the fees charged by the Member States for retrieving 1 data from the register. Art para. 1 contains the general principle that the register may not set fees higher than the administrative costs.1 Furthermore, the company information listed in Art 19 lit. a)-h) are always free of charge. As a whole, the free information shall provide the essential company information for identification and business activities. Art 19 para. 2 is only a minimum regulation in this respect and allows the member states to provide additional company information without charge.

1

Cf. → Art 13 mn. 1 regarding possibility to charge flat-rate amounts.

Alexander Schall, David Günther and Michael Lamsa

137

Art 21 Language of disclosure and translation of documents and particulars to be disclosed 2

Furthermore, Art 19 para. 3 requires national registers to exchange information free of charge. This is also intended to prevent the commercialisation of the register and the exchange of information from being inhibited.

Article 20 Information on the opening and termination of winding-up or insolvency proceedings and on striking-off of a company from the register 1. The register of a company shall, through the system of interconnection of registers, make available, without delay, the information on the opening and termination of any winding-up or insolvency proceedings of the company and on the striking-off of the company from the register, if this entails legal consequences in the Member State of the register of the company. 2. The register of the branch shall, through the system of interconnection of registers, ensure receipt, without delay, of the information referred to in paragraph 1. Article 20 extends the information accessible in the register to include opening and termination of winding-up or insolvency proceedings and on striking-off of a company from the register. While Art 14 para. 2 (h) and (k) contains the obligation of the company to publish the relevant winding up and liquidation documents, Art 20 addresses the Member States to inform about the further procedure in the register without delay. 2 The information transmitted pursuant to Art 20 para. 1 will enable a foreign register to examine the consequences for the companies or branches registered there and to take appropriate action if necessary. For example, after a company has been deleted from its home register, it will be necessary to delete its (still) registered branches. 1

Article 21 Language of disclosure and translation of documents and particulars to be disclosed 1. Documents and particulars to be disclosed pursuant to Article 14 shall be drawn up and filed in one of the languages permitted by the language rules applicable in the Member State in which the file referred to in Article 16(1) is opened. 2. In addition to the compulsory disclosure referred to in Article 16, Member States shall allow translations of documents and particulars referred to in Article 14 to be disclosed voluntarily in accordance with Article 16 in any official language(s) of the Union. Member States may prescribe that the translation of such documents and particulars be certified. Member States shall take the necessary measures to facilitate access by third parties to the translations voluntarily disclosed. 3. In addition to the compulsory disclosure referred to in Article 16, and to the voluntary disclosure provided for under paragraph 2 of this Article, Member States may allow the documents and particulars concerned to be disclosed, in accordance with Article 16, in any other language(s). Member States may prescribe that the translation of such documents and particulars be certified.

138

Alexander Schall, David Günther and Michael Lamsa

TITLE I GENERAL PROVISIONS

Art 23

4. In cases of discrepancy between the documents and particulars disclosed in the official languages of the register and the translation voluntarily disclosed, the latter may not be relied upon as against third parties. Third parties may nevertheless rely on the translations voluntarily disclosed, unless the company proves that the third parties had knowledge of the version which was the subject of the compulsory disclosure. The amendment 2003/58/EC also now allows companies to file documents in any 1 other language of the EU and to add voluntarily a translation (Art 21 para. 1). If the original document and the translation differ, the third party can rely on the translation, unless the company can prove the third party had knowledge of the content of the original document (Art 21 para. 4).

Article 22 System of interconnection of registers 1. A European central platform (‘the platform’) shall be established. 2. The system of interconnection of registers shall be composed of: — the registers of Member States, — the platform, — the portal serving as the European electronic access point. 3. Member States shall ensure the interoperability of their registers within the system of interconnection of registers via the platform. 4. Member States may establish optional access points to the system of interconnection of registers. They shall notify the Commission without undue delay of the establishment of such access points and of any significant changes to their operation. The Commission may also establish optional access points to the system of interconnection of registers. Such access points shall consist of systems developed and operated by the Commission or other Union institutions, bodies, offices or agencies in order to perform their administrative functions or to comply with provisions of Union law. The Commission shall notify the Member States without undue delay of the establishment of such access points and of any significant changes to their operation. 5. Access to information from the system of interconnection of registers shall be provided through the portal and through the optional access points established by the Member States and by the Commission. 6. The establishment of the system of interconnection of registers shall not affect existing bilateral agreements concluded between Member States concerning the exchange of information on companies.

Article 23 Development and operation of the platform 1. The Commission shall decide to develop and/or operate the platform either by its own means or through a third party. If the Commission decides to develop and/or operate the platform through a third party, the choice of the third party and the enforcement by the Commission of

Alexander Schall, David Günther and Michael Lamsa

139

Art 24 Implementing acts the agreement concluded with that third party shall be done in accordance with Regulation (EU, Euratom) No 966/2012. 2. If the Commission decides to develop the platform through a third party, it shall, by means of implementing acts, establish the technical specifications for the purpose of the public procurement procedure and the duration of the agreement to be concluded with that third party. 3. If the Commission decides to operate the platform through a third party, it shall, by means of implementing acts, adopt detailed rules on the operational management of the platform. The operational management of the platform shall include, in particular: — the supervision of the functioning of the platform, — the security and protection of data distributed and exchanged using the platform, — the coordination of relations between Member States' registers and the third party. The supervision of the functioning of the platform shall be carried out by the Commission. 4. The implementing acts referred to in paragraphs 2 and 3 shall be adopted in accordance with the examination procedure referred to in Article 164(2).

Article 24 Implementing acts By means of implementing acts, the Commission shall adopt the following: (a) the technical specification defining the methods of communication by electronic means for the purpose of the system of interconnection of registers; (b) the technical specification of the communication protocols; (c) the technical measures ensuring the minimum information technology security standards for communication and distribution of information within the system of interconnection of registers; (d) the technical specification defining the methods of exchange of information between the register of the company and the register of the branch as referred to in Articles 20, 28 a, 28 c, 30 a and 34; (e) the detailed list of data to be transmitted for the purpose of exchanging information between registers, as referred to in Articles 20, 28 a, 28 c, 30 a and 34; (ea) the detailed list of data to be transmitted for the purpose of exchanging information between registers and for the purposes of disclosure, as referred to in Articles 86 g, 86 n, 86 p, 123, 127 a, 130, 160 g, 160 n and 160 p; (f) the technical specification defining the structure of the standard message format for the purpose of the exchange of information between the registers, the platform and the portal; (g) the technical specification defining the set of the data necessary for the platform to perform its functions as well as the method of storage, use and protection of such data; (h) the technical specification defining the structure and use of the unique identifier for communication between registers; (i) the specification defining the technical methods of operation of the system of interconnection of registers as regards the distribution and exchange of in140

Alexander Schall, David Günther and Michael Lamsa

Art 25

TITLE I GENERAL PROVISIONS

(j) (k) (l) (m) (n) (o)

formation, and the specification defining the information technology services, provided by the platform, ensuring the delivery of messages in the relevant language version; the harmonised criteria for the search service provided by the portal; the payment modalities, taking into account available payment facilities such as online payment; the details of the explanatory labels listing the particulars and the types of documents referred to in Article 14; the technical conditions of availability of services provided by the system of interconnection of registers; the procedure and technical requirements for the connection of the optional access points to the platform as referred to in Article 22; the detailed arrangements for and technical details of the exchange between registers of the information referred to in Article 13 i.

Those implementing acts shall be adopted in accordance with the examination procedure referred to in Article 164(2). The Commission shall adopt the implementing acts pursuant to points (d), (e), (n) and (o) by 1 February 2021. The Commission shall adopt the implementing acts referred to in point (ea) by 2 July 2021.

Article 25 Financing 1. The establishment and future development of the platform and the adjustments to the portal resulting from this Directive shall be financed from the general budget of the Union. 2. The maintenance and functioning of the platform shall be financed from the general budget of the Union and may be co-financed by fees for access to the system of interconnection of registers charged to its individual users. Nothing in this paragraph shall affect fees at the national level. 3. By means of delegated acts and in accordance with Article 163, the Commission may adopt rules on whether to co-finance the platform by charging fees, and, in that case, the amount of the fees charged to individual users in accordance with paragraph 2 of this Article. 4. Any fees imposed in accordance with paragraph 2 of this Article shall be without prejudice to the fees, if any, charged by Member States for obtaining documents and particulars as referred to in Article 19(1). 5. Any fees imposed in accordance with paragraph 2 of this Article shall not be charged for obtaining the particulars referred to in Article 19(2)(a), (b) and (c). 6. Each Member State shall bear the costs of adjusting its domestic registers, as well as their maintenance and functioning costs resulting from this Directive. The Arts 22-25 concern the structural (Art 22), operational (Art 23), legal (Art 24) 1 and financial (Art 25) organisation of the Europen central platform that shall interconnect the national registers. In order to meet the increased need for cross-border access to company informa- 2 tion, the common system of interconnection of registers was introduced by Directive 2012/17/EU of the European Parliament and of the Council of 13 June 2012 amending Council Directive 89/666/EEC and Directives 2005/56/EC and 2009/101/EC of the Alexander Schall, David Günther and Michael Lamsa

141

Art 26 Information on letters and order forms European Parliament and of the Council as regards the interconnection of central, commercial and companies registers which now forms part of the Directive. The (i) registers of the Member States (see Art 16 para. 1), (ii) the European central platform (see Art 22 para. 1) and (iii) the European e-Justice portal (see Art 17 para. 2) together form the European system of interconnection of registers which also referred to as Business Registers Interconnection System (BRIS). In contrast to a centralized European register database cross-border access to information regarding companies of the Member States can be achieved by the system of interconnection of registers in a minimal invasive way,1 which, in turn, results in higher effort regarding the coordination of national systems having varying technical characteristics.2 3 Based on Art 24 the Commission adopted the Commission Implementing Regulation (EU) 2020/2244 of 17 December 2020 laid down technical specifications and procedures required for the system of interconnection of registers which were inital established by Directive 2009/101/EC of the European Parliament and of the Council together with Commission Implementing Regulation (EU) 2015/884. 4 In addition to the mandatory requirements of the Directive, more extensive bilateral exchanges of information between several Member States are still possible. Furthermore, the Directive explicitly leaves open the option of third countries participating in the system of interconnected registers.3

Article 26 Information on letters and order forms Member States shall prescribe that letters and order forms, whether they are in paper form or use any other medium, are to state the following particulars: (a) the information necessary in order to identify the register in which the file referred to in Article 16 is kept, together with the number of the company in that register; (b) the legal form of the company, the location of its registered office and, where appropriate, the fact that the company is being wound up. Where, in those documents, mention is made of the capital of the company, the reference shall be to the capital subscribed and paid up. Member States shall prescribe that company websites are to contain at least the particulars referred to in the first paragraph and, if applicable, a reference to the capital subscribed and paid up.

I. Overview 1

In order to identify the company and enable the third party to obtain a copy of the complete company information, letters and order forms have to quote certain particulars.

Cf. Recital 26 of the Directive. Cf. Recital 36 of the Directive. 3 Cf. Recital 38 of the Directive.

1

2

142

Alexander Schall, David Günther and Michael Lamsa

Art 28

TITLE I GENERAL PROVISIONS

II. Particulars in Letters, Order Forms and on the Company Website The particulars to be quoted are: register, register number, legal form, seat, and if the 2 referenced company is winding up. In regard to company capital, the Member States could not reach an agreement and, as a consequence, company capital was omitted.1 Only a compromise intended to avoid a deception was incorporated in the law; if the company publishes the capital, the entire capital system (subscribed and paid capital) has to be disclosed. This duty only applies to the formal business correspondence, excluded are other 3 company documents and bills.2 An extension to all company documents was discussed, but eventually dropped due to the immense expense for the company.3 The amendment 2003/58/EC extended the obligations to all communication media 4 (paper, fax, electronic).4 Furthermore a potential5 company website has, at least, to state the aforementioned particulars (Art 5 s 3).

Article 27 Persons carrying out disclosure formalities Each Member State shall determine by which persons the disclosure formalities are to be carried out. The responsible person within the company is not specified by the directive. The 1 Member States have to determine a concrete person or relinquish the decision to the company.

Article 28 Penalties Member States shall provide for appropriate penalties at least in the case of: (a) failure to disclose accounting documents as required by Article 14(f); (b) omission from commercial documents or from any company website of the compulsory particulars provided for in Article 26. Art 28 aims to enhance the publication of the accounting documents (lit a) and the 1 particulars in in letters, order forms and on the company website (lit b) by imposing penalties for not disclosing all the documents.1

1 Grundmann, § 9 margin no. 44; Lutter/Bayer/Schmidt, EuropUR, § 19 margin no. 25; Edwards, S. 24; Einmahl, AG 1969, 134. 2 Grundmann, § 9 margin no. 44; Einmahl, AG 1969, 134. 3 Grundmann, § 9 margin no. 44. 4 Cf. the amended wording in Art 5: „Member States shall prescribe that letters and order forms, whether they are in paper form or use any other medium, […]“. 5 Despite the misleading wording, no duty of the company to set up a website is intended; Schemman, GPR 2004, 93; Kalss/Kampfl, margin no. 224. 1 Cf. above Art 14 lit. f for the necessary threshold of the appropriate penalty.

Alexander Schall, David Günther and Michael Lamsa

143

Foreword to Arts 28a-42

Section 2 Registration and disclosure rules applicable to branches of companies from other Member States Foreword to Arts 28a-42 I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Goal of Arts 28a-42 Company Law Directive; exhaustive nature . . . . . . . . . 2. Legislative history . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Scope of application (Arts 29, 36 and 42) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Disclosure Requirements in a Nutshell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Means and effects of disclosure (Arts 29 and 35, 36 and 39) . . . . . . . . . . . . . . 2. Items to be disclosed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Branches of companies from another member state . . . . . . . . . . . . . . . . . . . . . b) Branches of companies from third countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 6 11 15 15 20 20 25

I. General Features 1. Goal of Arts 28a-42 Company Law Directive; exhaustive nature The goal of Arts 28a-42 of the Directive is twofold: (1) To ensure the protection of persons who deal with companies through the intermediary of branches, measures in respect of disclosure are required in the Member State in which a branch is situated (Recital 16 of the preamble of the Company Law Directive). (2) Since the opening of a branch, like the creation of a subsidiary, is one of the possibilities currently open to companies in the exercise of their right of establishment in another Member State (Recital 14 of the preamble of the Company Law Directive), the cross-border establishment of branches – instead of creating subsidiaries – calls for an adaption of the general disclosure rules contained in Chapter III Section 1 of the Company Law Directive (Art 13 et seq). 2 While it is true that the branch in principle still follows the law governing the primary establishment, Arts 28a-42 (Chapter III Sections 1-3 of the Company Law Directive), however, are aimed at ensuring that the situation of the company as a whole is disclosed, yet only in certain respects,1 also in the host country (where the branch is established): This general goal of the provisions related to branches is emphasized by Recital 16 of the Preamble to the Company Law Directive. 3 In 2003, the Court of Justice of the European Union has ruled in ‘Inspire Art’ that the disclosure rules related to branches of EU companies (Chapter III Section 2 of the Directive, Arts 28a-36) are meant to be exhaustive.2 On the other hand, in 2006 the Court has established in ‘innoventif ’, by virtue of an argumentum a maiore ad minus, that the duty to disclose the share capital, although not mentioned in Art 30, is not contrary to the Directive if this particular is at the same time part of the instrument of constitution. In fact, Member States may provide for the full disclosure of the instrument of constitution under Art 30(2)(b) of the Directive.3 1

1 In this regard see Recital 18 of the Preamble of the Company Law Directive: “Such disclosure, with the exception of the powers of representation, the name and legal form, and the winding- up of the company and the insolvency proceedings to which it is subject, can be confined to information concerning a branch itself together with a reference to the register of the company […], emphasis added. 2 See Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 69; as to branches of third country companies, Art 37 (‘at least’) makes clear that the Directive defines only a minimum standard.

144

Peter Kindler

Foreword to Arts 28a-42

TITLE I GENERAL PROVISIONS

In addition, in ‘All in One Star’ the Court will have to decide, upon request of a 4 preliminary ruling from the German Bundesgerichtshof,4 if Art 30 of the Directive (EU) 2017/1132 precludes a national provision under which, when applying for a branch of a limited liability company with registered office in another Member State to be entered in the commercial register, the managing director of the company has to provide an assurance that there is no barrier to his personal appointment under national law. The request addresses barriers in the form of a prohibition, ordered by a court or public authority, on practising the managing director’s profession or trade, corresponding in whole or in part with the object of the company, or in the form of a final conviction for certain criminal offences. Such a requirement under national law might be contrary to the exhaustive list5 of items to disclose under Art 30 of the Directive. According to Recital 14 of the Company Law Directive, the opening of a branch, like 5 the creation of a subsidiary, is one of the possibilities currently open to EU companies in the exercise of their right of establishment in another Member State. EU companies operating through a branch are entitled to pursue their activities under the same conditions as those which apply to subsidiaries.6 Especially in the financial industry, branches are often preferred to subsidiaries, due to the underlying ‘principle of single authorisation’ and the ‘European passport’ as laid down in Arts 33 et seq CD 2013/36/EU (CRD V) and Art 35 CD 2014/65/EU (MiFID II).7 Unsurprisingly, the ECJ case-law related to the freedom of establishment of EU letterbox companies (‘brass-plate companies’8) – i.e. a company registered in Member State A without any real connection to that State, but with a branch in Member State B – is based on the fact that the company’s creditors are protected by measures in respect of disclosure required in the Member State in which the branch is situated (Recital 16).9

2. Legislative history Arts 28a-42 Company Law Directive had their predecessors in the provisions laid 6 down in the Eleventh Directive 89/666/EEC10 (repealed by Art 166 Company Law 3 Case C-453/04, 1.6.2006, Innoventif Limited [2006] ECLI:EU:C:2006:361, para. 33 et seq; BGH 14.5.2019 – II ZB 25/17, NZG 2019, 775 margin no 23. 4 Case C-469/19, Request for a preliminary ruling from the BGH lodged on 19 June 2019, All in One Star Ltd, OJ, C 328/15; BGH 14.5.2019 – II ZB 25/17, NZG 2019 (22), 775; see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2020), margin no 905 a; also de Raet, ‘Urteilsanmerkung zum BGH-Beschluss v. 14.5.2019 – II ZB 25/17 – EuGH-Vorlage zur Handelsregistereintragung der Zweigniederlassung einer Gesellschaft mit beschränkter Haftung mit Sitz in anderem EU-Mitgliedstaat’ EWiR 2019, 485; Stelmaszczyk, ‘Unionsrechtskonformität der Geschäftsführerversicherung bei der Anmeldung von Zweigniederlassungen’ EuZW 2019, 819; OtteGräbener, ‘Anforderungen an die Anmeldung der Zweigniederlassung einer Limited zur Eintragung in das Handelsregister auf dem Prüfstand des EuGH’ NZG 2019 (22), 934. 5 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, paras 69, 70. 6 Case C-18/11, 06.09.2012, Philipps Electronics UK Ltd., ECLI:EU:C:2012:532, para. 14. 7 See, for example, Zetsche in Lehmann and Kumpan (eds), Financial Services Law (2019), Art. 35 MIFID II mn. 5 et seq (p. 230 et seq); eba.europa.eu. 8 See Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 84. 9 Case C-212/97, 9.3.1999, Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECLI:EU:C:1999:126, para. 36; Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 135; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2020), margin nos 530, 881. 10 Directive 89/666/EEC of the European Council of 21 December 1989 on disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State [1989] OJ, L 395/36.

Peter Kindler

145

Foreword to Arts 28a-42

7

8 9

10

Directive). A first draft for the Eleventh Directive on disclosure requirements in respect of branches was presented by the Comission in July 1986.11 Taking into account the opinions of the European Parliament and of the Economic and Social Committee, a modified proposal was elaborated in 198812 which later became the said Eleventh Directive. At a later stage, in 1998 the SLIM team13 proposed that, in the case of cross-border establishment in the Community, a “home state” principle should be implemented.14 No additional filing requirements should exist in the host state. All necessary company information should be retrievable from the electronic database held in the company register in the company’s home state. A directive should specify the minimum data to be processed in the home state. Host states would not be able to impose additional disclosure requirements. If necessary, the information should be translated into the language of the host state. In the end, the Commission did not follow these recommendations; quite to the contrary, the provisions contained in the Directive 89/666/EEC became part of the Company Law Directive 2017. Important ECJ case-law relates to that previous directive;15 it is still meaningful for the interpretation of Arts 28a-42 of the Company Law Directive. As to the national transposition of the Eleventh Directive in the Member States, the following examples may suffice: – France: Art 55 Décret n°84-406 du 30 mai 1984 relatif au registre du commerce et des sociétés (Décret Numéro 92-521 du 16/06/1992 relatif à la mise en harmonie du décret Numéro 84-406 du 30/05/1984 relatif au registre du commerce et des sociétés avec la onzième directive du Conseil des Communautés européennes du 21/12/1989, Journal Officiel du 17/06/1992 Page 7894), – Germany: Section 13 d et seq Commercial Code (HGB) (Gesetz zur Durchführung der Elften gesellschaftsrechtlichen Vorschriften vom 22/07/1993, Bundesgesetzblatt Teil I Nr. 39 vom 29/07/1993 Seite 1282), – Italy: Art 2507 et seq Codice civile (Decreto-legge del 29/12/1992 n. 516, attuazione della direttiva 89/666/CEE relativa alla pubblicità delle succursali create in uno Stato membro da taluni tipi di Società soggette al diritto di un altro Stato, Supplemento ordinario n. 138 alla Gazzetta Ufficiale – Serie generale – del 31/12/1992 n. 306, – Spain: Art 295 et seq Real Decreto 1784/1996 de 19 de Julio, por el que se aprueba el Reglamento del Registro Mercantil, – United Kingdom: The Oversea Companies and Credit and Financial Institutions (Branch Disclosure) Regulations 1992, UK Statutory Instruments1992 No. 3179. – For further references see: https://eur-lex.europa.eu/collection/n-law/mne.html?loca le=en. (CELEX 3A31989L0666) In their original version Arts 29-42 Company Law Directive (2017) were nearly identical to the Eleventh Directive of 1989; the ‘codification’ within the Company Law Directive took place merely for the sake of clarity and rationality (Recital 1 of the preamble of the Company Law Directive). Substantial amendments to Arts 29-42 Company Law Directive were introduced by virtue of the 2019 Directive on digital tools in company

OJ, C 203/12. As to its creation see SEC(1998)1944, “Simpler Legislation for the Single Market (SLIM)”. 13 As to its creation see SEC(1998)1944, “Simpler Legislation for the Single Market (SLIM)”. 14 COMMISSION OF THE EUROPEAN COMMUNITIES, Brussels, 4.2.2000 COM(2000) 56 final: REPORT FROM THE COMMISSION RESULTS OF THE FOURTH PHASE OF SLIM, Annex 1, 12 at 1.3. 15 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512; Case C-453/04, 1.6.2006, Innoventif Limited [2006] ECLI:EU:C:2006:361. 11 12

146

Peter Kindler

Foreword to Arts 28a-42

TITLE I GENERAL PROVISIONS

law,16 such as, inter alia, the online registration of branches (Art 28 a) and the online filing of documents and information for branches (Art 28 b).

3. Scope of application (Arts 29, 36 and 42) Arts 28a-42 apply to all types of company listed in Annex II, which is governed by the law of another Member State (Art 29) or any third state company which is of a legal form comparable with the types of company listed in Annex II, (Art 36). Moreover, the Directive only applies if the branch is created across borders in a Member State. Systematically, Chapter III Section 2 (Arts 28a-35) applies to companies governed by the law of another Member State, whereas Chapter III Section 3 (Arts 36-39) applies to companies governed by the law of a third state, providing for somewhat more demanding duties of disclosure. Finally, Chapter III Section 4 (Arts 40-42) addresses application and implementing arrangements such as penalties, the persons carrying out disclosure formalities and several exemptions to provisions on disclosure of accounting documents for branches. With respect to the concept of a branch, accepting inter-instrumental interpretation,17 the case-law of the ECJ on Art 7(5) of the EU Regulation on Jurisdiction and Enforcement (“Bussels Ia”) should be pertinent: the Court requires organisational independence (assets and personnel) and a permanent establishment acting with the public which, moreover, acts on the account of the primary establishment (absence of legal independence) and is authorised to do so.18 The rules on disclosure do not apply to branches of credit or financial institutions and undertakings (Art 42(1) and (2) respectively). Arts 28a-42 apply to the 27 Member States of the European Union as well as to the three additional Member States of the European Economic Area (Iceland, Liechtenstein or Norway) and the UK as far as the transitory legislation after Brexit (Kindler → Introduction mn. 78 et seq.) disposes so. From a UK perspective, the relevant statutory provisions are laid down in the European Union (Withdrawal) Act 2018 and the European Union (Withdrawal Agreement) Act 2020 which saved the effect of the European Communities Act 1972 (ECA 1972) during the implementation period and formally ratified and incorporated the Withdrawal Agreement into domestic law after the United Kingdom formally left the European Union.

16 Directive 2019/1151/EU of the European Parliament and of the Council of 20 June 2019 amending Directive 2017/1132/EU as regards the use of digital tools and processes in company law [2019] OJ, L 186/80; see Kindler and Jobst, ‘Die Online-Gründung nach dem Company Law Package – Chancen und Risiken bei der Umsetzung ins deutsche Recht’ DB 2019 (72), 1550; Kindler and Jobst, ’Costituzione di società ed identificazione elettronica: il company law package e la sua attuazione nell’ordinamento tedesco ed in quello italiano’ Le nuove leggi civili commentate 57 (2019), 1557; Kindler and Jobst, ‘constitución de sociedad e identificación electrónica: el company law package y su aplicación en los ordenamientos alemán e italiano‘, Cuadernos de Derecho y Comercio, junio 2020, núm. 73, p. 13 et seq. 17 In favour of system as a criterion of interpretation in European company law: Case C-104/96, 16.12.1997, Coöperative Rabobank “Vecht en Plassengebied” BA v Erik Aarnoud Minderhoud [1997] ECLI: EU:C:1997:610, para. 25 et seq. 18 Case 33/78, 22.11.1978, Somafer SA v Saar-Ferngas AG [1978] ECLI:EU:C:1978:205, para. 12; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2020), margin no 44.

Peter Kindler

147

11

12

13

14

Foreword to Arts 28a-42

II. The Disclosure Requirements in a Nutshell 1. Means and effects of disclosure (Arts 29 and 35, 36 and 39) 15

16

17

18

19

The primary means of disclosure is, like in Chapter III Section 1 of the Company Law Directive, again the register (including, obviously, the records). It provides extensive information. Just like within the context of Chapter III Section 1 (Art 14 et seq) the register itself has to be distinguished from the secondary means of disclosure which are aimed at facilitating access to the register (again with the records). These secondary means of disclosure consist in the publication which disperses the contents of the register and the indications on the documents which have to be used at least once in virtually any case of a business transaction (letters or order forms) and which have to name the register. In this regard, the relevant provisions of Chapter III Section 1 – Art 16(1-4) – apply (references in Art 29(1) and 36(1). Thus the duty to publish and the duty to make these indications on letters or order forms (Art 35 and 39) arise with respect to the branch. The entry is to be made in the register of the branch and the contents of this register have to be published. In addition, reference to the register of the branch is to be made on its letters or order forms, i.e., more precisely, to both registers (of the branch and of the company). The rationale of this twofold, yet differentiated duty of disclosure is not to place too great a burden on the company. This is why not all indications pertaining to the company (Art 14 Company Law Directive), though possibly also relevant for the branch, have to be disclosed in the branch’s register (Arts 30, 37 Company Law Directive). Regarding some items only reference has to be made by the means of disclosure of the branch, or not even this. Only a few items of particular importance also for the branch always have to be disclosed in full in its register. As to the effects of disclosure, i.e. positive and negative effects of disclosure, reference has again been made to Chapter III Section 1, namely its Art 16(6-7) read with Arts 29(1) and 36(1) Company Law Directive. In the event of divergence between the two registers, that of the branch takes precedence, see Arts 29(2) and 36(2) Company Law Directive. In general, the opening of a branch coincides with start of operations, which is why the entry of the branch in the register (Art 16(1) of the Directive) has only a declaratory effect.19 This is also a consequence of the fact that the branch is not a legal entity but merely an organisational part of the business run by the company. Thus, the entry in the register merely discloses the existence of the branch. 20

2. Items to be disclosed a) Branches of companies from another member state 20

As to branches of companies from another Member State (Art 36 et seq), the items to be disclosed are listed in Art 30 Company Law Directive. The underlying fundamental distinction is made between the items concerning, on the one hand, the company alone (Art 14 Company Law Directive) and to be disclosed (only) a second time in the branch‘s register (Art 30(2) (a-c) Company Law Directive), and, on the other hand, the 19 BayObLG 11.5.1979 – BReg. 1 Z 21/79, BayObLGZ 1979, 159 (163); Koch, ‘§ 13’ in Staub, Canaris, Habersack and Schäfer (eds), Handelsgesetzbuch. Großkommentar, Vol. 1 (5 th edn, de Gruyter, 2016), margin no 55; RG WarnR (1917) Nr. 152, 233; Großfeld, ‘Internationales Gesellschaftsrecht’ in Staudinger (Sellier-de Gruyter, 1998), margin no 1029. 20 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2020), margin no 905 a.

148

Peter Kindler

Foreword to Arts 28a-42

TITLE I GENERAL PROVISIONS

few items concerning the branch itself (Art 30(1)(a), (b), (e) [second indent] and (h) Company Law Directive, Art (30)(2)(a) [in part] and (d) Company Law Directive. Moreover, the items to be disclosed at any rate which the Directive prescribes (Art 30(1) Company Law Directive) have to be distinguished from those (Art 30(2) Company Law Directive) which Member States may prescribe additionally. The former define the minimum standard of protection of the persons who deal with companies through their branches (Recital 16 read with Art 30(1) Company Law Directive). They concern documents and particulars which are necessary to form a judgment on the (continuing) existence of the company and branch (with the address)21, the persons who have power of representation for the branch, 22 and the accounting documents as the core instrument for judging the economic reliability of the company in question (Art 30(1)(g) Company Law Directive). Moreover access to the more extensive information (in the register of the company) has to be facilitated (Art 30(1)(c) Company Law Directive). The fact that securities granted by the company also have to be disclosed (Art 30(2) (d) Company Law Directive) is of paramount importance in British and Irish company law (which operates by virtue of so-called registers of charges) and makes companies transparent in this core criterion for credit standing. Art 31 of the Directive provides for specific rules on the disclosure of the company. No specific accounts for the branches are needed. The duty to disclose is reduced with respect to branches: Only in cases where accounts have to be drawn up, audited and disclosed under the Financial Statements Directive ([EU] 2013/34) or the Directive on statutory audits of annual accounts and consolidated accounts (2006/43/EC) do these accounts also have to be disclosed in the branch‘s register. In the case of small companies, this may not be necessary, and in that of medium-sized companies only to a limited extent (see Art 3 read with Art 14 of the Financial Statements Directive). The underlying rationale is that partial exemptions on the basis of size should not be frustrated by an unlimited duty to disclose in the register of the branch. As to translation requirements, several items of crucial importance for third parties are treated specifically. This is true for the instruments of constitution, the memorandum and articles of association, the accounts. For these items, which are not exhaustively described by only numeric indications, a translation into another official language (namely that of the country to the branch) can be required for registration and publication (Art 32 Company Law Directive). Where a company has opened more than one branch in a Member State, the disclosure referred to in Article 30(2)(b) and Article 31 may be made in the register of the branch of the company's choice (Art 33 Company Law Directive).

21

22

23

24

b) Branches of companies from third countries As to branches of companies from third countries (Art 36 et seq), Arts 37 and 38(1) 25 Company Law Directive run parallel to Arts 30 and 31 Company Law Directive, albeit Art 30(1)(a),(b),(f) and (h) of the Directive. See Art 30 (1)(b),(d),(e) and (f) of the Directive. Art 30(1)(e), second indent of the Directive refers to the person with power of attorney who is not a board member and can be only be understood as a rule on disclosure, not one harmonising the power of attorney in the sense that it necessarily has to be unrestricted: on this dispute see Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), margin no 130. Another item is of importance for the extent of power of attorney, and this is the definition of the business field of the branch (Art 30(1)(b) and potentially also the legal type (Art 30(1)(d)). On the trade name, which is also mentioned in the latter provision, see Bokelmann, ‘Die Gründung von Zweigniederlassungen ausländischer Gesellschaften in Deutschland und das deutsche Firmenrecht unter besonderer Berücksichtigung des EWG-Vertrages’ DB 1990, 1021. 21

22

Peter Kindler

149

Art 28 a Online registration of branches that they pertain to branches of limited liability companies from third countries. Only in this respect – i.e. for the items to be disclosed – the regime contained in Art 36 et seq Company Law Directive diverges in part from that contained in Art 29 et seq Company Law Directive. In this respect, Arts 37 and 38(1) Company Law Directive, unlike Art 30 et seq Company Law Directive, contain a series minimum disclosure requirements. As to third country companies, the Directive does not provide for maximum requirements the Member States are free to adopt (as defined in Art 30(2) of the Directive relating to branches of EU companies; → mn. 20 et seq.). 26 The reason for these stricter standards with regard to third country companies is rooted in the fact that it is indeed possible that the third country does not have a register with such an extensive catalogue of items to be disclosed necessarily. This is why the items listed in Art 37 Company Law Directive do not only have to be disclosed again but for the first time; Art 37 Company Law Directive is then also the sole basis of disclosure for these items. In particular, instruments of constitution, the memorandum and articles of association of the company constitute a necessary item for disclosure and it is not up to the Member States to decide in this regard, see Art 30(2)(b) compared to Art 37 (e) of the Directive. 27 The items to be disclosed under Art 37 and Art 30(1) Company Law Directive are the same with a few exceptions (different only Art 37(c), (e) Company Law Directive [at least listed also in Art 30(2)(b)], (f) and (h) [last sentence] Company Law Directive. This is because harmonization, by definition, does not apply in third countries, Art. 288 TFUE). 28 With respect to accounts, Art 38 Company Law Directive is more demanding than Art 31 Company Law Directive. A second disclosure of the accounts is not necessarily sufficient, but only if these accounts are equivalent to accounts drawn up in accordance with the EU standard as defined by the Financial Statements Directive ([EU] 2013/34) or the Directive on statutory audits of annual accounts and consolidated accounts (2006/43/EC). What has been pointed out for Art 32 and 33 Company Law Directive (→ mn. 24) applies again in completely the same way also to branches from third countries (Art 38(2) Company Law Directive).

Article 28 a Online registration of branches 1. Member States shall ensure that the registration in a Member State of a branch of a company that is governed by the law of another Member State may be fully carried out online without the necessity for the applicants to appear in person before any authority or any person or body mandated under national law to deal with any aspect of the application for registration of branches, subject to Article 13b(4) and mutatis mutandis to Article 13g(8). 2. Member States shall lay down detailed rules for the online registration of branches, including rules on the documents and information required to be submitted to a competent authority. As part of those rules, Member States shall ensure that online registration may be carried out by submitting information or documents in electronic form, including electronic copies of the documents and information referred to in Article 16a(4), or by making use of the information or documents previously submitted to a register. 3. The rules referred to in paragraph 2 shall at least provide for the following: (a) the procedure to ensure that the applicants have the necessary legal capacity and that they have authority to represent the company; 150

Peter Kindler and Simon Jobst

TITLE I GENERAL PROVISIONS

Art 28 a

(b) the means for verifying the identity of the person or persons registering the branch or their representatives; (c) the requirements for the applicants to use the trust services referred to in Regulation (EU) No 910/2014. 4. The rules referred to in paragraph 2 may also provide for procedures to do the following: (a) verify the legality of the object of the branch; (b) verify the legality of the name of the branch; (c) verify the legality of the documents and information submitted for the registration of the branch; (d) provide for the role of a notary or any other person or body involved in the process of registration of the branch under the applicable national provisions. 5. Member States may verify the information about the company by means of the system of interconnection of registers when registering a branch of a company established in another Member State. Member States shall not make the online registration of a branch conditional on obtaining any licence or authorisation before the branch is registered, unless such a condition is indispensable for the proper oversight laid down in national law of certain activities. 6. Member States shall ensure that the online registration of a branch is completed within 10 working days of the completion of all formalities, including the receipt of all the necessary documents and information which comply with national law by an authority or a person or body mandated under national law to deal with any aspect of the registration of a branch. Where it is not possible to register a branch within the deadlines referred to in this paragraph, Member States shall ensure that the applicant is notified of the reasons for the delay. 7. Following the registration of a branch of a company established under the laws of another Member State, the register of the Member State where that branch is registered shall notify the Member State where the company is registered that the branch has been registered by means of the system of interconnection of registers. The Member State where the company is registered shall acknowledge receipt of such notification and shall record the information in their register without delay. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Online Registration Procedure (Article 28a(1)-(5)) . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Elimination of the need of physical presence of the applicant . . . . . . . . . . . . . 2. Exception: requirement of physical presence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Optional involvement of a notary (Article 28a(4)(d)) . . . . . . . . . . . . . . . . . . . . . 4. Use of previously submitted documents and information . . . . . . . . . . . . . . . . . 5. Verification of information via the BRIS (Article 28a(5) subpara 1) . . . . . . 6. Licenses and authorisations (Article 28a(5) subpara 2) . . . . . . . . . . . . . . . . . . . III. Duration of the Registration Procedure (Article 28a(6)) . . . . . . . . . . . . . . . . . . . . . IV. Exchange of Information between National Registers (Article 28a(7)) . . . . . . . 1. Duty to inform (Article 28a(7) sentence 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Duty to acknowledge receipt and record (Article 28a(7) sentence 2) . . . . . V. Disqualified Directors: Application of Article 13 i? . . . . . . . . . . . . . . . . . . . . . . . . . . .

Peter Kindler and Simon Jobst

1 1 3 4 5 6 8 10 11 12 14 15 16 17 19

151

Art 28 a Online registration of branches

I. General Features 1. Overview Art 28 a was added by Directive (EU) 2019/1151 on the use of digital tools and processes in company law. The procedure of online registration of branches is modelled on the rules on online formation of companies (Art 13 g). As defined in Art 13 a ‘registration of a branch’ means a process leading to disclosure of documents and information relating to a branch newly opened in a Member State. 2 This provision aims at simplifying the cross-border business activities of companies formed in one Member State and established in the internal market.1 Since complex national regulations on the registration of branches of foreign companies may prevent them from expanding their business, it should be possible for them to open and register branches in another Member State online. In the eyes of the European legislators the online procedure shall also help to cut costs and to speed up the registration procedure. 2 1

2. Scope of application 3

The provisions concerning the online registration of branches apply to all types of company governed by the law of another Member State.3 Unlike the provisions on online formation, which according to Art 13 only apply to companies listed in Annex II (corporations of the Member States4), the new provisions on branches do not contain a corresponding limitation of the scope of application. Art 13 explicitly defines the scope of application only for the measures prescribed by Sections 1 and Section 1A of Chapter III (Art. 13-28).

II. Online Registration Procedure (Article 28a(1)-(5)) 4

Therefore Member States should provide detailed rules for the online registration of branches. Art 28a(2)-(5) determine requirements regarding the contents of the procedure which the national transposition rules must comply with. There are fewer requirements for online registration of branches than for online formation under Art 13 g (for details see commentary on Art 13 g), so that national legislators obtain more leeway with regard to implementation. 5 The creation of rules on the verification of legal capacity and authority to represent the company, the identity of the person and the requirements for the applicants to use the trust services referred to in Regulation (EU) No 910/2014 is mandatory in both procedures. Unlike in the case of online formation under Art 13 g, however, Art 28a(4) does not require the creation of rules on the verification of the legal-

See Recital 28 and 32 of the preamble to Directive 2019/1151/EU. See Recital of the preamble to Directive 2019/1151/EU. 3 Schaal, ‘§ 13d’ in: BeckOGK HGB (2019), margin no 140. 4 For details see → Foreword to Arts 28a-42 mn. 10; → Art 13; Kindler and Jobst, ‘Die Online-Gründung nach dem Company Law Package – Chancen und Risiken bei der Umsetzung ins deutsche Recht’ Der Betrieb (DB) 2019 (72), 1550; Kindler and Jobst, ‘Costituzione di società ed identificazione elettronica: il company law package e la sua attuazione nell’ordinamento tedesco ed in quello italiano’ Le nuove leggi civili commentate 57 (2019), 1557; Kindler and Jobst, ‘constitución de sociedad e identificación electrónica: el company law package y su aplicación en los ordenamientos alemán e italiano‘, Cuadernos de Derecho y Comercio junio 2020, núm. 73, p. 13 et seq.; Lieder, ‘Die Bedeutung des Vertrauensschutzes für die Digitalisierung des Gesellschaftsrechts’ NZG 2020 (23), 81, 83. 5 Lieder, ‘Digitalisierung des Europäischen Unternehmensrechts – Online-Gründung, Online-Einreichung, Online-Zweigniederlassung’ NZG 2018 (21), 1081, 1091. 1

2

152

Peter Kindler and Simon Jobst

TITLE I GENERAL PROVISIONS

Art 28 a

ity of the object of the branch or the legality of its name. If such an examination is provided under national law it may be maintained.6

1. Elimination of the need of physical presence of the applicant In parallel to Art 13g(1), Art 28a(1) establishes the principle that the online registra- 5 tion of branches may be fully carried out online. Pursuant to Art 28a(3)(b) Member States shall lay down detailed rules for the online registration of branches including the means for verifying the identity of the persons registering the branch. As in the case of online formation, also with regard to the registration of branches, the identity of applicants should be verified primarily by the means provided for in the eIDAS Regulation (Regulation (EU) No 910/2014), Art 28a(3)(c) (for details see above, commentaries on Art 13 b and 13 g of the Directive).7 The eIDAS Regulation is based on the principle that each Member State recognizes the identification systems of other Member States or the purposes of cross-border authentication which have been notified to the Commission and published in a specific list (Art 6 eIDAS Regulation). It remains doubtful whether this way of verifying identity is sufficient to ensure the reliability of legal transactions and of register entries.8 To date, there are no uniform standards regarding supervision, security and registration of electronic means of identification.

2. Exception: requirement of physical presence Pursuant to Art 13b(4) Member States may require the physical presence of the ap- 6 plicant before an authority when justified by reason of the public interest in preventing identity misuse or alteration (for details see above, commentary on Art 13 b of the Directive). Additionally Art 28a(1) declares Art 13g(8) mutatis mutandis applicable to the registration of branches allowing to request the physical presence of the applicant to ensure compliance with the rules on legal capacity and on the authority of applicants to represent a company.9 Thus, Art 28 a does not preclude national provisions which, in exceptional cases, re- 7 quire the physical presence of the applicant. However, national provisions which systematically require the physical presence of the applicants are not permitted and have to be abrogated.10

3. Optional involvement of a notary (Article 28a(4)(d)) Art 28a(4)(d) allows national legislators to prescribe the involvement of a notary or 8 ‘any other person or body involved in the process of registration of the branch’. This measure aims primarily to tackle fraud and company hijacking and to provide safeguards for the reliability and trustworthiness of documents and information contained 6 In Germany, the district court in charge of the registration of a branch may consider whether all the requirements, both substantive and formal, have been satisfied, see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th ed., 2021), margin no 937. 7 Conac, ‘Start-up Europe: la proposition de directive du 25 avril 2018 sur la digitalisation du droit des sociétés’ Revue des sociétés 2019, 31 margin no 48. 8 Kindler and Jobst, ‘Die Online-Gründung nach dem Company Law Package – Chancen und Risiken bei der Umsetzung ins deutsche Recht’ DB 2019 (72), 1550, 1551; Kindler and Jobst, ‘Costituzione di società ed identificazione elettronica: il company law package e la sua attuazione nell’ordinamento tedesco ed in quello italiano’ Le nuove leggi civili commentate 57 (2019), 1556, 1562; Kindler, ‘Gesellschaftsrecht im Zeitalter der Digitalisierung’ in Schnauder (ed), Digitalisierung im Gesellschaftsrecht (2018), 39, 54. 9 Kindler and Jobst, ‘Die Online-Gründung nach dem Company Law Package – Chancen und Risiken bei der Umsetzung ins deutsche Recht’ DB 2019 (72), 1550, 1552. 10 Recital 21 of the preamble to Directive 2019/1151/EU.

Peter Kindler and Simon Jobst

153

Art 28 a Online registration of branches within national registers.11 With regard to the purpose of the Directive, it must be clear that no physical presence before the notary can be required. The involvement of the notary must be integrated into the online procedure, for example via a videoconference procedure.12 9 It is expected that those Member States, e.g. Germany, which currently require the involvement of the notary in the registration of branches will also include the participation of the notary in the online procedure.13

4. Use of previously submitted documents and information 10

According to Art 28a(2), applicants must not have to file the documents required for the registration of a branch again, but may refer to the information or documents previously submitted to a register on the occasion of the (online) formation of the company in the state of origin.14 The exchange of information is handled via the system of interconnection of registers (BRIS; Art 22 of the Directive).

5. Verification of information via the BRIS (Article 28a(5) subpara 1) 11

Art 28a(5) allows to verify the information about the company by means of the system of interconnection of registers (BRIS; Art 22 of the Directive) when registering a branch of a company established in another Member State. It remains doubtful whether these measures are sufficient to provide safeguards for the reliability and trustworthiness of national registers. Since the standard of the commercial registers of the Member States has not yet been harmonized, it is only possible to examine the existence of the documents, but not their authenticity.15

6. Licenses and authorisations (Article 28a(5) subpara 2) Pursuant to Art 28a(5) subpara 2 the online registration of a branch may not be made conditional on obtaining any authorisation or licence under national law. This aims to ensure the timely online registration of branches.16 Art 13g(5) contains the same provision for the online formation of companies. 13 However, an exception is made if such condition is indispensable for the proper oversight laid down in national law of certain activities. This concerns primarily particularly sensitive areas – such as the credit and financing sector – in which the rejection of registration may be necessary to protect legal transactions. Where Member States, e.g. Germany17, make banking activities or the provision of financial services subject to a license, prior proof of the licence may still be required for entries in public registers. 18 12

Recital 20 of the preamble to Directive 2019/1151/EU. With regard to online formation Kindler and Jobst, ‘Die Online-Gründung nach dem Company Law Package – Chancen und Risiken bei der Umsetzung ins deutsche Recht’ DB 2019 (72), 1550, 1552. 13 Schaal, ‘§ 13d’ in: BeckOGK HGB (2019), margin no 142. 14 See also Recital 28 of the preamble to Directive 2019/1151/EU. 15 Kindler and Jobst, ‘Die Online-Gründung nach dem Company Law Package – Chancen und Risiken bei der Umsetzung ins deutsche Recht’ DB 2019 (72), 1550, 1553. 16 Recital 17 of the preamble to Directive 2019/1151/EU. 17 See § 43(1) of the German Banking Act (KWG). 18 Lieder, ‘Digitalisierung des Europäischen Unternehmensrechts – Online-Gründung, Online-Einreichung, Online-Zweigniederlassung’ NZG 2018 (21), 1081, 1086. 11

12

154

Peter Kindler and Simon Jobst

TITLE I GENERAL PROVISIONS

Art 28 a

III. Duration of the Registration Procedure (Article 28a(6)) The Directive aims to streamline and accelerate the registration procedure. Therefore 14 Member States shall ensure that the online registration of a branch is completed within 10 working days of the completion of all formalities. If this deadline cannot be met, the Member State shall ensure that the applicant is notified of the reasons for the delay. However, the Directive does not provide for further legal consequences in case of failure to meet the deadline.

IV. Exchange of Information between National Registers (Article 28a(7)) Art 28a(7) supplements the duties of information under Art 28 c: the closure of a 15 branch can only be disclosed in the register in the state of origin of the company if the concerned Member State has also been previously informed of its registration.

1. Duty to inform (Article 28a(7) sentence 1) Pursuant to Art 28a(7) sentence 1 the register of a Member State where a branch of a 16 company is registered informs the Member State where the company is registered that the branch has been registered. The duty to inform the register of the State where the company is registered arises only vis-à-vis a Member State (for details see → Art 28 c mn. 3). The information regarding the registration has to be delivered via the system of interconnection of registers (BRIS; Art 22 of the Directive).

2. Duty to acknowledge receipt and record (Article 28a(7) sentence 2) Under Art 28a(7) sentence 2 the Member States in which the company is registered 17 have the duty to acknowledge receipt of such notification and to record the information without delay in their central register, commercial register or companies register. The Member States in which the company is registered has to deliver the acknowl- 18 edgement of the receipt of the notification via the system of interconnection of registers (BRIS; Art 22 of the Directive) to the Member State where the branch had existed.

V. Disqualified Directors: Application of Article 13 i? In order to increase the reliability of the online formation of companies Art. 13 i de- 19 mands national rules on disqualification of directors (for details see above, commentary on Art 13 i of the Directive). However, the provision is located at the rules on online formation and does not apply to online registration of branches. Thus, the question arises whether Art. 13 i should be applied mutatis mutandis to the 20 registration of branches.19 It can be argued that the interests are similar: in both cases it is possible that directors who are subject to a ban on activities in one Member State may take advantage of the freedoms of the internal market and take up business in another Member State. However, since Art. 28a-28 c sets out detailed provisions on the online registration of branches, it seems as though the question of disqualified managers in respect of the online registration of branches is left to national legislators.20 19 See Stelmaszczyk, ‘Unionsrechtskonformität der Geschäftsführerversicherung bei der Anmeldung von Zweigniederlassungen’ EuZW 2019 (30), 819, 824.

Peter Kindler and Simon Jobst

155

Art 28 b Online filing of documents and information for branches 21

Member States, e.g. Germany21, which currently have rules on disqualified persons in connection with the registration of branches of foreign companies will therefore be allowed to maintain these provisions.22 Upon request of a preliminary ruling from the German Bundesgerichtshof,23 in the case ‘All in One Star’ the European Court of Justice will decide about this issue.

Article 28 b Online filing of documents and information for branches 1. Member States shall ensure that documents and information referred to in Article 30 or any modification thereof may be filed online within the period provided by the laws of the Member State where the branch is established. Member States shall ensure that such filing may be completed online in its entirety without the necessity for the applicants to appear in person before any authority or person or body mandated under national law to deal with the online filing, subject to the provisions laid down in Article 13b(4) and mutatis mutandis in Article 13g(8). 2. Article 28 a (2) to (5) shall apply mutatis mutandis to online filing for branches. 3. Member States may require that certain or all documents and information referred to in paragraph 1 are only filed online. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Online Filing and Filing by other Means . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Elimination of the need of physical presence of the applicant (Article 28b(1) sentence 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Exception: requirement of physical presence (Article 28b(1) sentence 2) 3. Application of the rules regarding the online registration of branches (Art 28a(2)–(5)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. (Partial) duty to file documents online (Article 28b(3)) . . . . . . . . . . . . . . . . . . .

1 1 3 4 4 5 6 7

I. General Features 1. Overview Art 28 a was added by Directive (EU) 2019/1151 on the use of digital tools and processes in company law. The provision is essentially modelled on Article 13 j; for details see above, commentary on Art 13 j of the Directive. 2 In parallel to Art 13 j regarding the online filing of company documents and information, Art 28 b allows the online filing of documents and information for branches. It is a 1

20 Stelmaszczyk, ‘Unionsrechtskonformität der Geschäftsführerversicherung bei der Anmeldung von Zweigniederlassungen’ EuZW 2019 (30), 819, 824; Conac, ‘Start-up Europe: la proposition de directive du 25 avril 2018 sur la digitalisation du droit des sociétés’ Revue des sociétés 2019, 31 margin no 48. 21 According to § 13 e para. 3 German Commercial Code (HGB) legal representatives of foreign corporations cannot register a branch in Germany if they have committed certain offences. Compliance is ensured by requiring applicants to submit a corresponding declaration (‘Straffreiheitserklärung’), see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th ed., 2021), margin no 909 et seq. 22 Stelmaszczyk, ‘Unionsrechtskonformität der Geschäftsführerversicherung bei der Anmeldung von Zweigniederlassungen’ EuZW 2019 (30), 819. 23 Case C-469/19, Request for a preliminary ruling from the BGH lodged on 19 June 2019, All in One Star Ltd, OJ C 328/15; BGH 14.5.2019 – II ZB 25/17, NZG 2019 (22), 775.

156

Peter Kindler and Simon Jobst

TITLE I GENERAL PROVISIONS

Art 28 b

mere procedural provision, which only defines the way in which information is to be transmitted. The documents to be transmitted are defined in other provisions of the Directive (Art 29 and Art 30).

2. Goal The provision ensures that the advantages of the online procedure are not limited to 3 the registration of branches as such. Also branches already registered – under current law or by means of the online procedure – will continue to benefit from the advantages of digitalisation.

II. Online Filing and Filing by other Means 1. Elimination of the need of physical presence of the applicant (Article 28b(1) sentence 1) Pursuant to Art. 28b(1) sentence 1 Member States shall ensure that documents and 4 information may be filed online. This concerns all documents defined in Art 30 of the Directive. In the same way as the initial filing, it must also be possible to submit modifications to the documents online. In principle, it should be possible to file all documents online in its entirety without the necessity for the applicants to appear in person before any authority or person or body mandated under national law to deal with the online filing.

2. Exception: requirement of physical presence (Article 28b(1) sentence 2) However, Art 28b(2) sentence 2 declares the provisions of Art 13b(4) and Art 13g(8) 5 to be applicable mutatis mutandis. Pursuant to Art 13b(4) Member States may require the physical presence of the applicant before an authority when justified by reason of the public interest in preventing identity misuse or alteration (for details see above, commentary on Art 13 b of the Directive). Art 13g(8) allows to request the physical presence of the applicant to ensure compliance with the rules on legal capacity and on the authority of applicants to represent a company.1 Again, national provisions which systematically require the physical presence of the applicants are not permitted and have to be abrogated.2

3. Application of the rules regarding the online registration of branches (Art 28a(2)–(5)) Pursuant to Art. 28b(2) Art 28 a (2) to (5) rules regarding the online registration of 6 branches shall apply mutatis mutandis to online filing for branches. This means in particular that national legislators may prescribe the involvement of a notary also for the online filing of documents. In addition, the submitted information about the branch can be verified by means of the system of interconnection of registers (BRIS; Art 22 of the Directive). The identity of applicants should be verified by the means provided for in the eIDAS Regulation. 1 Kindler and Jobst, ‘Die Online-Gründung nach dem Company Law Package – Chancen und Risiken bei der Umsetzung ins deutsche Recht’ DB 2019 (72), p 1550, 1552; Kindler and Jobst, ‘Costituzione di società ed identificazione elettronica: il company law package e la sua attuazione nell’ordinamento tedesco ed in quello italiano’ Le nuove leggi civili commentate 57 (2019), 1556, 1564. 2 Recital 21 of the preamble to Directive 2019/1151/EU.

Peter Kindler and Simon Jobst

157

Art 28 c Closure of branches 4. (Partial) duty to file documents online (Article 28b(3)) The use of digital technologies is primarily intended to encourage entrepreneurs in their cross-border activities. Thus, their use is generally not obligatory for companies. Member States are free to allow documents and information to be filed by other means, including paper means.3 8 As regards online filing of documents and information for branches, Art 28b(3) makes an exception to this by allowing national legislators to require that certain or all documents and information referred to in paragraph 1 are only filed online. In this case documents and information referred to in Article 30 cannot be submitted by paper means. 7

Article 28 c Closure of branches Member States shall ensure that, upon receipt of the documents and information referred to in point (h) of Article 30(1), the register of a Member State where a branch of a company is registered informs, by means of the system of interconnection of registers, the register of the Member State where the company is registered that its branch has been closed and struck off the register. The register of the Member State of the company shall acknowledge receipt of such notification also by means of that system and shall record the information without delay. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Systematic position and background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Duty to Inform (Article 28 c Sentence 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Duty to Acknowledge Receipt and Record (Article 28 c Sentence 2) . . . . . . . . .

1 1 2 3 7

I. General Features 1. Systematic position and background 1

This Article refers to the compulsory disclosure of documents and particulars provided for by Art 30(1)(h). It was added by Directive (EU) 2019/1151 on the use of digital tools and processes in company law. It is not restricted to online disclosure and this is why its systematic position immediately following Arts 28 a and 28 b is inappropriate. Just like Arts 31, Art 28 c specifies the contents of Art 30; it should have been inserted as Art 31 a. Recital 33 in the preamble to the said Directive explains nothing in this regard: neither the bizarre systematic position nor the rationale of this provision.

2. Goal 2

Art 28 c seeks to make sure that the closure of a branch is disclosed in the register in the state of origin of the company and, at this end, states a duty of the register of a Member State where a branch of a company is registered to inform the register of the Member State where the company is registered about the closure of the branch.

3

158

See Recital 26 of the preamble to Directive 2019/1151/EU.

Peter Kindler

Art 29

TITLE I GENERAL PROVISIONS

II. Duty to Inform (Article 28 c Sentence 1) Pursuant to Art 28 c sentence 1 of the Directive the register of a Member State where a branch of a company is registered informs the register of the Member State where the company is registered that its branch has been closed and struck off the register. It follows from the wording and the systematic position of Art 28 c in Chapter III Section 2 of the Directive that the duty to inform the register of the State where the company is registered arises only vis-à-vis a Member State. It is not quite clear why the Directive (EU) 2019/1151 does not contain a similar provision with regard to third countries. It is obvious that third countries cannot be obliged by EU law to adjourn their central register, commercial register or companies register as regards the closure of a branch of one of ‘their’ companies in a EU Member State. But without information on that fact they do not even have the opportunity to do so, and this is not in the best interest of the public in the Member State where the branch had existed. The duty to inform the state of origin of the company arises upon receipt of the documents and information referred to in Art 30(1)(h). It is up to the Member State where the branch has existed to ensure that the companies deliver the relevant information to the register, by threating with and applying of appropriate penalties in the event of failure to disclose the matters set out in Art 30 (Art 40 of the Directive). The state where the branch had operated has to deliver the information regarding its closure via the system of interconnection of registers (BRIS; Art 22 of the Directive). Thus a prompt and precise information is guaranteed. As regards its contents, the duty to inform is twofold: it covers the fact that the branch has been closed and the subsequent bureaucratic act of striking it off the register.

3

4

5

6

III. Duty to Acknowledge Receipt and Record (Article 28 c Sentence 2) Under Art 28 c sentence 2 of the Directive the Member States in which the company 7 is registered have the duty to acknowledge receipt of such notification (within the meaning of Art 28 c sentence 1) and to record the information without delay in their central register, commercial register or companies register. Thus legal certainty vis-à-vis the Member State of the branch and the public is guaranteed. Again, the Member State of the company has to deliver the acknowledgement of the 8 receipt of the notification (within the meaning of Art 28 c sentence 1) via the system of interconnection of registers (BRIS; Art 22 of the Directive) to the Member State where the branch had existed.

Article 29 Disclosure of documents and particulars relating to a branch 1. Documents and particulars relating to a branch opened in a Member State by a company of a type listed in Annex II, which is governed by the law of another Member State, shall be disclosed pursuant to the law of the Member State of the branch, in accordance with Article 16. 2. Where disclosure requirements in respect of the branch differ from those in respect of the company, the branch's disclosure requirements shall take precedence with regard to transactions carried out with the branch.

Peter Kindler

159

Art 29 Disclosure of documents and particulars relating to a branch 3. The documents and particulars referred to in Article 30(1) shall be made publicly available through the system of interconnection of registers. Article 18 and Article 19(1) shall apply mutatis mutandis. 4. Member States shall ensure that branches have a unique identifier allowing them to be unequivocally identified in communications between registers through the system of interconnection of registers. That unique identifier shall comprise, at least, elements making it possible to identify the Member State of the register, the domestic register of origin and the branch number in that register, and, where appropriate, features to avoid identification errors. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. General Duty to Disclose (Article 29(1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Items to disclose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Branch opened in a Member State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Types of companies addressed and lex societatis . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Disclosure duties and penalties in the event of failure to disclose . . . . . . . . . III. Diverging Disclosure Requirements (Article 29(2)) . . . . . . . . . . . . . . . . . . . . . . . . . . IV. The Publication of Documents and Particulars within the System of Interconnection of Registers (Article 29(3) and (4)) . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 3 4 4 5 7 10 12 14

I. General Features 1. Overview Art 29 Company Law Directive is the fourth Article in Chapter III Section 2 of the Directive as amended by the 2019 Directive on digital tools in company law.1 The said Directive on digital tools inserted Arts 28a-28 c regarding the online registration of branches before Art 29 although the latter provision is the general norm in the field of disclosure requirements related to branches of companies from other Member States. 2 Analyzing the structure of Art 29, there can be identified three regulatory contents: Art 29(1) states the general duty to disclose relevant documents and particulars relating to the branch; Art 29(2) addresses the unlikely situation where disclosure requirements in respect of the branch differ from those in respect of the company; Art 29(3) defines the use of the system of interconnection of registers within the disclosure requirements existing under Chapter III Section 2 of the Directive. 1

2. Background 3

Art 29 Company Law Directive replaces Art 1 of the Eleventh Directive 89/666/EEC on branches (repealed by Art 166 Company Law Directive).

1 Directive 2019/1151/EU of the European Parliament and of the Council of 20 June 2019 amending Directive 2017/1132/EU as regards the use of digital tools and processes in company law, [2019] OJ L 186/80; see Kindler and Jobst, ‘Die Online-Gründung nach dem Company Law Package – Chancen und Risiken bei der Umsetzung ins deutsche Recht’ DB 2019 (72), p 1550; Kindler and Jobst, ’Costituzione di società ed identificazione elettronica: il company law package e la sua attuazione nell’ordinamento tedesco ed in quello italiano’ Le nuove leggi civili commentate 57 (2019), 1557; Kindler and Jobst, ‘constitución de sociedad e identificación electrónica: el company law package y su aplicación en los ordenamientos alemán e italiano‘, Cuadernos de Derecho y Comercio junio 2020, núm. 73, p. 13 et seq.; Lieder, ‘Die Bedeutung des Vertrauensschutzes für die Digitalisierung des Gesellschaftsrechts’ NZG 2020 (23), 81, 83.

160

Peter Kindler

Art 29

TITLE I GENERAL PROVISIONS

II. General Duty to Disclose (Article 29(1)) 1. Items to disclose As far as the items to disclose are concerned, Art 29(1) refers to documents and 4 particulars relating to a branch […]. In this regard, Art 29(1) has to be read with Art 30 of the Directive entitled ‘Documents and particulars to be disclosed’. For details see commentary on Art 30.

2. Branch opened in a Member State The second pre-condition of the disclosure duties under Art 29(1) is that the branch 5 in question is located in a Member State. With respect to the concept of a branch, the law requires organisational independence (assets and personnel) and a permanent establishment acting with the public which, moreover, acts on the account of the primary establishment and is authorised to do so.2 For details see → Foreword to Arts 28a-42 mn. 3. According to Art 288 TFUE the Directive applies to all Member States within 6 the meaning of the Treaty on European Union. There are no exemptions as to single Member States as can be found in other legal instruments of the EU, e.g. Recital 88 to the Insolvency Regulation (EU) 2015/848.

3. Types of companies addressed and lex societatis Art 29(1) refers to any company of a type listed in Annex II of the Directive. The 7 Annex is exhaustive. When applying national law one has to bear in mind that sometimes the relevant 8 transposition laws of the Member States – instead of referring directly to Annex II – define the foreign companies subject to branch related disclosure duties in a rather enigmatic manner, i.e. using domestic terminology and categories: In Germany, the disclosure duties are imposed on ‘Aktiengesellschaften und Gesellschaften mit beschränkter Haftung mit Sitz im Ausland’ (Sec. 13e(1) Commercial Code), i.e. on ‘public limited liability companies and private limited liability companies with registered seat in a foreign country’. In order to find the relevant Member State within the list of Annex II, one has to 9 determine the applicable company law beforehand. In fact, Art 29(1) refers to a company which is governed by the law of another Member State, i.e. not the Member State where the branch is located. Within the EU, the prevailing opinion makes reference to the statutory seat of the company, not the real seat (Kindler → Introduction mn. 66 et seq.). Example: Company A, a società per azioni established under Italian law, has its statutory seat in Milan/Italy. Company A opens a branch in Munich/Germany. Under Art 29(1), company A is governed by Italian law. As to Italy, Annex II of the Directive includes, inter alia, the società per azioni (public company limited by shares). The branch of company A is situated in Germany, a different Member State. By consequence, company A is subject to the German provisions related to disclosure duties of branches of EU companies (Sec 13 et seq Commercial Code [HGB]), based on Art 28 a et seq of the Company Law Directive).

2 Case 33/78, 22.11.1978, Somafer SA v Saar-Ferngas AG [1978] ECLI:EU:C:1978:205, para. 12; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8 th edn, 2021), margin no 44.

Peter Kindler

161

Art 29 Disclosure of documents and particulars relating to a branch 4. Disclosure duties and penalties in the event of failure to disclose As to the fulfilment of the disclosure duties, Art 29(1) refers to Art 16 of the Directive and the relevant transposition laws of the Member State where the branch is located. For details see the commentary on → Art 16. 11 In the event of failure to disclose, the ‘appropriate’ penalties under national law apply (Art 40 of the Directive). 10

III. Diverging Disclosure Requirements (Article 29(2)) Pursuant to Art 29(2) of the Directive, where disclosure requirements in respect of the branch differ from those in respect of the company, the branch's disclosure requirements shall take precedence with regard to transactions carried out with the branch. 13 This rule does not necessarily ensure the protection of persons who deal with companies through the intermediary of branches (Recital 16), since the law of the state where the branch is located prevails also in cases where the law applicable to the company is more favourable to the third party. The rationale of Art 29(2) therefore rather seems to be to ensure foreseeability of the applicable disclosure standards. 12

IV. The Publication of Documents and Particulars within the System of Interconnection of Registers (Article 29(3) and (4)) Under Art 29(3) of the Directive, the documents and particulars referred to in Article 30(1) shall be made publicly available through the system of interconnection of registers. This ‘Business Registers Interconnection System’ (BRIS) is composed of the registers of Member States, a European central platform and a portal serving as the European electronic access point (Arts 16(1), 22 Company Law Directive; Regulation (EU) 2020/2244). By means of the BRIC any person dealing with a company can search for information on companies registered in any EU country, Iceland, Liechtenstein or Norway. In addition, the registers can share information on foreign branches (Art 24(d) of the Directive).3 15 As Art 29(3) also states, Arts 18 and 19(1) of the Directive shall apply mutatis mutandis. This ensures the availability of electronic copies of documents and particulars, and also that the fees charged for obtaining the documents and particulars through the BRIS shall not exceed the administrative costs thereof. 16 Art 29(4) of the Directive pertaining to branches is essentially identical to Art 16(1) subpara 2 pertaining to the company itself. Under Art 29(4) sentence 1, Member States shall ensure that branches have a unique identifier allowing them to be unequivocally identified in communications between registers through the system of interconnection of registers (BRIS). As Recitals 25 and 30 make clear, on the basis of unique identifiers, the ‘platform’, i.e. the core element of the BRIS (Art 22 of the Directive) should be capable of distributing information from each of the Member States' registers to the competent registers of other Member States in a standard message format and in the relevant language version. 17 Under Art 29(4) sentence 2, that unique identifier shall comprise, at least, elements making it possible to identify the Member State of the register, the domestic register 14

3

162

Information is available at https://e-justice.europa.eu/content_find_a_company-489-en.do?clang=en.

Peter Kindler

Art 30

TITLE I GENERAL PROVISIONS

of origin and the branch number in that register, and, where appropriate, features to avoid identification errors.

Article 30 Documents and particulars to be disclosed 1. The compulsory disclosure provided for in Article 29 shall cover the following documents and particulars only: (a) the address of the branch; (b) the activities of the branch; (c) the register in which the company file referred to in Article 16 is kept, together with the registration number in that register; (d) the name and legal form of the company and the name of the branch, if that is different from the name of the company; (e) the appointment, termination of office and particulars of the persons who are authorised to represent the company in dealings with third parties and in legal proceedings: — as a company organ constituted pursuant to law or as members of any such organ, in accordance with the disclosure by the company as provided for in Article 14(d), — as permanent representatives of the company for the activities of the branch, with an indication of the extent of their powers; (f) — the winding-up of the company, the appointment of liquidators, particulars concerning them and their powers and the termination of the liquidation in accordance with disclosure by the company as provided for in Article 14(h), (j) and (k), — insolvency proceedings, arrangements, compositions, or any analogous proceedings to which the company is subject; (g) the accounting documents in accordance with Article 31; (h) the closure of the branch. 2. The Member State in which the branch has been opened may provide for the disclosure, as referred to in Article 29, of (a) the signature of the persons referred to in points (e) and (f) of paragraph 1 of this Article; (b) the instruments of constitution and the memorandum and articles of association if they are contained in a separate instrument, in accordance with points (a), (b) and (c) of Article 14, together with amendments to those documents; (c) an attestation from the register referred to in point (c) of paragraph 1 of this Article relating to the existence of the company; (d) an indication of the securities on the company's property situated in that Member State, provided such disclosure relates to the validity of those securities. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Single Items of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Compulsory items of disclosure (Article 30(1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Address of the branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Activities of the branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Peter Kindler

1 1 4 6 6 6 7

163

Art 30 Documents and particulars to be disclosed c) Register and registration number of the company . . . . . . . . . . . . . . . . . . . . . . . d) Name and legal form of the company; name of the branch . . . . . . . . . . . . . . e) Persons authorised to represent the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Winding-up and insolvency of the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Accounting documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h) Closure of the branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Optional items of disclosure (Article 30(2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Signature of any Person Having the Power to Represent the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Instruments of constitution; memorandum and articles of association . . c) Attestation from the register relating to the existence of the company . . . d) Securities on the company's property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Exhaustive nature of the lists of items of disclosure? . . . . . . . . . . . . . . . . . . . . . . . . .

8 9 13 23 26 27 29 29 30 33 34 36

I. General Features 1. Overview Art 30 defines the ‘documents and particulars’ mentioned in Art 29(1) which are subject to disclosure. For the sake of brevity, these documents and particulars are mostly referred to as ‘items’ in this Commentary. There is a fundamental distinction between compulsory items of disclosure (Article 30(1)) – see below, → mn. 6 et seq – and optional items of disclosure (Article 30(2)) – see below, → mn. 29 et seq. 2 The compulsory or optional character of the single items of disclosure is not referred to the company but to the Member State in which the branch has been opened (see wording of Art 30(2). 3 It is a fundamental question of interpreting Art 30 whether the lists of items to disclose are exhaustive or not (see below, → mn. 36 et seq). In the latter case, national law is free to define further items to disclose such as the share capital of the company in question et al. 1

2. Background Art 30 Company Law Directive replaces Art 2 of the Eleventh Directive 89/666/EEC on branches (repealed by Art 166 Company Law Directive). 5 Similar lists of items to disclose can be found, inter alia, in Arts 3, 4, 14, 26, 30 a, 37, 39 of the Directive. 4

II. The Single Items of Disclosure 1. Compulsory items of disclosure (Article 30(1)) a) Address of the branch 6

Under Art 30(1)(a) the compulsory disclosure covers the address of the branch. This information is supposed to make it easier for persons who deal with companies through the intermediary of branches to take the necessary steps to have service effected on the company.1

1 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 909; see also Kindler, ‘Internationales Gesellschaftsrecht 2009: MoMiG, Trabrennbahn, Cartesio und die Folgen’ IPRax 2009, 189 (200).

164

Peter Kindler

Art 30

TITLE I GENERAL PROVISIONS

b) Activities of the branch Under Art 30(1)(b) the compulsory disclosure covers the activity of the branch. This 7 particular has to refer to the main type of activity of the branch.2 In case the activity of the company is described as ‘conducting commercial activities of any kind’ or similar, then this formula might not be accepted under the law of the Member State in which the branch has been opened.3 It is irrelevant, on the other hand, if the activity of the branch is covered by the ‘objects of the company‘ within the meaning of Arts 3(b) and 9(1) of the Directive.4 c) Register and registration number of the company Under Art 30(1)(c) the compulsory disclosure covers two elements: the register in 8 which the company file referred to in Art 16 of the Directive is kept, together with the registration number in that register. This information is crucial for persons who deal with companies through the intermediary of branches because the compulsory disclosure at the branch (Art 30(1) of the Directive) is far less comprehensive than the disclosure in the main register of the company (Art 14 of the Directive). The disclosure of the register of the company and the relevant number in that register makes it easy for third parties to identify the company and to get access to the entry of the company via the BRIS (Art 22 of the Directive). The same rationale can be found in Art 26(a) as far as letters, order forms and websites are concerned d) Name and legal form of the company; name of the branch Under Art 30(1)(d) the compulsory disclosure covers the name and legal form of the company and the name of the branch, if that is different from the name of the company. The name of the company (Art 3(a) of the Directive) obviously is necessary for identifying it without any doubt, especially within groups of companies with similar names. As to the legal form of the company, its main relevance lies in the field of shareholders’ liability for the debts of the company. While it is true that the Company Law Directive does not provide for limited liability as a feature of the types of company listed in Annexes I or II (Kindler → Introduction mn. 93),5 the legal form mostly indicates the liability regime adopted. It goes without saying that this element is crucial for creditor protection. The same rationale can be found in Art 26(b) as far as letters, order forms and websites are concerned and in Art 3(a) (‘type of the company’). The legal form has to be expressed in the language of the country of origin, in order to enable the register to identify the relevant type of company listed in Annex II (Art 29(1) of the Directive). 6 In order to avoid confusion in this regard, the name of the branch is subject to disclosure only if that is different from the name of the company itself.

2 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 914; see also OLG Frankfurt a. M. 29.12.2005 – 20 W 315/05, NZG 2006, 515 (516); OLG Düsseldorf 21.02.2006 – 3 Wx 210/05, NJW-RR 2006, 1040 (1041). 3 For German law see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 914. 4 OLG Hamm 28.06.2005 – 15 W 159/05, ZIP 2005, 1871. 5 Case C-81/09, 21.10.2010, Idryma Typou, [2010] ECLI:EU:C:2010:622 para. 40; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8 th edn, 2021), margin no 30. 6 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 916.

Peter Kindler

165

9 10

11

12

Art 30 Documents and particulars to be disclosed e) Persons authorised to represent the company 13

14

15

16

17

18

19

20

Art 30(1)(e) completes the publicity regime created by Art 14(d) as far as the representation of the company is concerned. Under Art 30(1)(e) two categories of persons who are authorised to represent the company in dealings with third parties and in legal proceedings are subject to disclosure: those who act as a company organ (first indent) and those who act as permanent representatives of the company for the activities of the branch (second indent). Within both categories the appointment, termination of office and particulars of the said persons are subject to disclosure. In addition, the extent of the powers of the persons authorised to represent the company shall be stated, as well as whether those persons may represent the company alone or are required to act jointly. These particulars are not defined in Art 30(1)(e), but in Art 37(h) of the Directive related to third country companies. There is, however, no reason to assume that the disclosure requirements for EU companies were meant to be less strict than those for companies which are not governed by the law of a Member State.7 As to the first category (first indent), the provision takes into account the distinction between two different regulatory models that can be found in national law: model A is designed in a way that a certain (natural or legal) person is the organ of the company and holds the power to represent the company;8 model B is designed in a way that a collegial body (‘board’) is the organ of the company with power to represent the company and certain (natural or legal) persons are members of that collegial body.9 Art 30(1)(e) covers both situations. In this first category, disclosure takes place ‘in accordance’ with the disclosure by the company as provided for in Art 14(d); for details see above, commentaries on Art 14(d) of the Directive. As to the second category (second indent), the ‘permanent representatives’ are neither an organ of the company nor a member of such organ. Otherwise they would fall under the first category (first indent). In addition, it is made clear that the permanent representatives are representing ‘the company for the activities of the branch’, i.e. they are not representing the branch. The branch is an organisational entity without legal personality (Kindler → Foreword to Arts 29-42 mn. 13). The powers of the permanent representative are not defined by the Directive. Any authorized person under national law can act as such a permanent representative. This is why disclosure covers also the ‘indication of the extent of their powers’. Examples under national law are the German ‘Prokurist’, the Italian ‘Institore’, the French ‘Fondé de pouvoir’ etc. There is no duty under the Directive to appoint a ‘permanent representative’ at all. 10 The company’s activities related to the branch can be run by its managing directors (first category, first indent) as the shareholders and/or the managing directors think fit. As to disqualification of permanent representatives (see Art 13 i of the Directive), Member States are free to apply their rules on directors’ disqualification in order to protect the public.11 This is not a matter of ‘disclosure‘ of the legal situation of the company including the branch, but one of combating fraud in business transactions referred to the See Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019), § 5 margin no 59. Example: the German private company limited by shares (Gesellschaft mit beschränkter Haftung – GmbH). 9 Example: the German public company limited by shares (Aktiengesellschaft – AG). 10 OLG München 14.02.2008 – 31 Wx 67/07, NZG 2008, 342; annotated by Just, EWiR 2009, 145; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 917. 7

8

166

Peter Kindler

Art 30

TITLE I GENERAL PROVISIONS

branch; as such, excluding disqualified persons from a position as permanent representative is not a measure in respect of disclosure (Recital 16) and lies outside the scope of Arts 29-42 of the Directive.12 A person cannot be an organ of the company/member of a company organ (Art 30(e) 21 first indent) and a permanent representative (Art 30(e) second indent) at the same time. In case of such a twin role a person dealing with a company through the intermediary of a branch could have the (inaccurate) impression that the permanent representative has powers that go beyond the powers of a company organ.13 Finally, the permanent representative gives rise to delicate questions of private in- 22 ternational law. While it is commonly accepted that the managing directors’ power to represent the company is governed by the law applicable to the company itself (lex societatis; → Introduction mn. 66 et seq), there is no such rule with respect to the permanent representative. In particular, there is no EU Regulation in this regard; the Regulation Rome I (593/2008/EC) excludes from its material scope ‘the question whether an agent is able to bind a principal […] in relation to a third’, Art 1(2)(g) Rome I. At this point, domestic rules of private international law kick in, e.g. Art 8 of the German Introductory Law to the Civil Code (EGBGB),14 Art 60 Legge 218/1995 (Italian Act on Private International Law) etc.; also the Hague Convention of 14 March 1978 on the Law Applicable to Agency may apply (binding for Argentina, France, the Netherlands and Portugal; https://www.hcch.net/en/instruments/conventions). f) Winding-up and insolvency of the company Under Art 30(1)(f) the compulsory disclosure covers a series of situations related to 23 the winding-up (first indent) and insolvency (second indent) of the company. As to the winding-up of the company, Art 30(1)(f) refers to Art 14(h), (j) and (k), for 24 details see the commentaries on these provisions and on Art 20(1). As to the insolvency of the company, Art 30(1)(f) is in line with Art 20; for details see 25 the commentaries on this provision. g) Accounting documents Under Art 30(1)(g) the compulsory disclosure covers the accounting documents in 26 accordance with Art 31. For details see the comment on Art 31 of the Directive.

11 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 918; Seifert, ‘Kommentar zu AG Westerstede vom 31.10.2000 – 10 AR 99/00’ RIW 2001, 68 (69); concordant also AG Westerstede 31.10.2000 – 10 AR 99/00, RIW 2001, 67 et seq.; KG 18.11.2003 – 1 W 444/02, NJW-RR 2004, 331 (334); differently OLG Oldenburg 28.05.2001 – 5 W 71/0, RIW 2001, 863; LG Cottbus 14.02.2005 – 11 T 1/05, EWiR 2005, 733, annotated by Wachter; Hoger, ‘Offene Rechtsfragen zur Eintragung der inländischen Zweigniederlassung einer Kapitalgesellschaft mit Sitz im Ausland’ NZG 2015, 1219 (1224). 12 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 913, 918. 13 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 918. 14 For details see Kindler and Brüggemann, ‘Die kollisionsrechtliche Anknüpfung kaufmännischer Vollmachten nach Art. 8 EGBGB’ RIW 2018, 473 et seq; in English von Hein, ‘Agency in the Conflict of Laws: A New German Rule’ Rivista di diritto internazionale privato e processuale 54 (2018), 5 et seq.; Kindler, ‘La rappresentanza commerciale nel diritto internazionale privato tedesco‘ in Contaldi et al. (eds), Liber Amicorum Angelo Davì. La vita giuridica internazionale nell'età della globalizzazione (2019), 1017.

Peter Kindler

167

Art 30 Documents and particulars to be disclosed h) Closure of the branch Under Art 30(1)(g) the compulsory disclosure covers the closure of the branch. Further details are pointed out in Art 28 c, see commentaries on that norm. 28 Like the opening of a branch, its closing is a fact, not a legal act. The branch as such has no legal personality (see Art 30(1)(e) indent 2 of the Directive). For the same reason the branch cannot be the object of a winding-up procedure within the meaning of Art 30(1)(f) of the Directive.15 27

2. Optional items of disclosure (Article 30(2)) a) The Signature of any Person Having the Power to Represent the Company 29

Under Art 30(2)(a) the Member State in which the branch has been opened may provide for the disclosure of the signature of the persons referred to in points (e) and (f) of Art 30(1), see above, → mn. 13. b) Instruments of constitution; memorandum and articles of association

Under Art 30(2)(b) the Member State in which the branch has been opened may provide for the disclosure of the instruments of constitution and the memorandum and articles of association (Art 3 of the Directive) if they are contained in a separate instrument, in accordance with points (a), (b) and (c) of Art 14, together with amendments to those documents. The optional disclosure of these documents makes it easier for the public to resort to crucial particulars contained in them such as the objects of the company and its subscribed capital (Art 3(b) and (c)). 31 As regards the language of disclosure and translation of documents to be disclosed, the Member State in which the branch has been opened may stipulate that the documents are to be published in another official language of the Union and that the translations of such documents are to be certified (Art 32 of the Directive). 32 Art 30(2)(b) plays an important role in the debate on the exhaustive character of the list contained in Art 30 (1). In fact, in its ‘innoventif ’ judgment the ECJ held that the duty of a company under the legislation of the Member State in which the branch has been opened to publish the objects of the company as set out in its instrument of constitution (Art 3(b) of the Directive) is in line with European law since, inter alia, Article 30(2)(b) of the Directive expressly authorises Member States to require publication of the instrument of constitution of a foreign company as a whole and of the memorandum and articles of association (argumentum argumentum a maiore ad minus).16 The rule of law in ‘innoventif ’ seems to be that the single items listed in Art 3 can be added to the list in Art 30(2) of the Directive, just like the Member State of the branch thinks fit. For details → mn. 36 et seq. 30

c) Attestation from the register relating to the existence of the company 33

Under Art 30(2)(c) the Member State in which the branch has been opened may provide for the disclosure of an attestation from the register referred to in Art 30(1)(c) relating to the existence of the company. Such attestation makes it easier for the central, commercial or companies register in the Member State in which the branch has been opened to assess the existence of the company seeking disclosure of its branch. 15 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 935. 16 Case C-453/04, 01.06.2006, Innoventif Limited [2006] ECLI:EU:C:2006:361, para. 34.

168

Peter Kindler

Art 30

TITLE I GENERAL PROVISIONS

d) Securities on the company's property Under Art 30(2)(d) the Member State in which the branch has been opened may 34 provide for the disclosure of securities on the company's property situated in that Member State, provided such disclosure relates to the validity of those securities. This item of disclosure aims at transparency as to the assets of the company. It is of core importance in Irish and British company law (Kindler → Foreword to Arts 28a-42 mn. 22). As to the situation of the company’s property in the Member State in which the 35 branch has been set up, inter-instrumental interpretation17 leads to the connecting factors used in Art 2(9) of the Insolvency Regulation (EU) 2015/848.

III. Exhaustive nature of the lists of items of disclosure? The arguments in favour and against the exhaustive nature of the lists of items of disclosure have been pointed out by the German Federal Court of Justice in its request for a preliminary ruling lodged on 19 June 2019 in the matter ‘All in One Star Ltd’ (Case C-469/19).18 On the one hand, in ‘Inspire Art’ (2003) the ECJ has seen the distinction between compulsory and optional items of disclosure as a key argument in favour of an exhaustive nature of the list contained in Art 30(1) of the Directive.19 Furthermore, also the wording of Art 30(1) of the Directive seems to speak in favour of an exhaustive nature of that list (‘The compulsory disclosure … shall cover the following documents and particulars only:…’; emphasis added).20 More in general, a less demanding disclosure standard makes it easier for EU companies to exercise their freedom of establishment, which is one of the goals of Arts 28a-35 of the Directive (Kindler → Foreword to Arts 28a-42 mn. 1). Furthermore, a strong argument in favour of the exhaustive character of the list contained in Art 30(1) of the Directive can be derived from the fact that certain items of disclosure – such as the subscribed capital – are mentioned in Art 37(f) related to companies from third countries, but not in Art 30 (1) related to companies from other Member States; the same is true with respect to Art 14(e) of the Directive related to disclosure in the register of the company.21 Finally, Recital 18 emphasises the subsidiary character of the register of the branch vis-à-vis the register of the company itself. According to Recital 18, the disclosure in the State in which the branch is located (with the exception of the powers of representation, 17 In favour of system as a criterion of interpretation in European company law: Case C-104/96, 16.12.1997, Coöperative Rabobank “Vecht en Plassengebied” BA v Erik Aarnoud Minderhoud [1997] ECLI: EU:C:1997:610, para. 25 et seq. 18 Case C-469/19, Request for a preliminary ruling from the BGH lodged on 19 June 2019, All in One Star Ltd, OJ C 328/15; BGH 14.05.2019 – II ZB 25/17, NZG 2019, 775; see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 905 a; also de Raet, ‘Urteilsanmerkung zum BGH-Beschluss v. 14.05.2019 – II ZB 25/17 – EuGH-Vorlage zur Handelsregistereintragung der Zweigniederlassung einer Gesellschaft mit beschränkter Haftung mit Sitz in anderem EU-Mitgliedstaat’ EWiR 2019, 485; Stelmaszczyk, ‘Unionsrechtskonformität der Geschäftsführerversicherung bei der Anmeldung von Zweigniederlassungen’ EuZW 2019, 819. 19 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, paras 69, 70. 20 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, paras 69, 70. 21 Case C-469/19, Request for a preliminary ruling from the BGH lodged on 19 June 2019, All in One Star Ltd, OJ C 328/15; BGH 14.05.2019 – II ZB 25/17, NZG 2019, 775 margin no 21.

Peter Kindler

169

36

37

38

39

40

41

Art 30 Documents and particulars to be disclosed the name and legal form, and the winding-up of the company and the insolvency proceedings to which it is subject) can be confined to information concerning a branch itself together with a reference to the register of the company of which that branch is part, since under existing Union rules, all information covering the company as such is available in that register (emphasis added).22 Since certain particulars – such as the subscribed capital (Art 14(e) of the Directive) – are available at the register in the company’s country of origin, their additional disclosure in the register of the branch due to national law could be contrary to the rationale of Chapter III Section 2 of the Directive not to hinder the exercise the right to establishment. 42 On the other hand, three years after ‚Inspire Art‘, in ‚innoventif ’ (2006) 23 the ECJ held that national law requiring the publication of the ‘objects’ of the company (Art 3(b) of the Directive) is not contrary to the Directive24 because under Art 30(2)(b) of the Directive the Member State of the branch may provide for the disclosure even of the full version of the instruments of constitution (containing, inter alia, the ‘objects’ of the company, Art 3(b) of the Directive) – argumentum a maiore ad minus).25 The rule of law in ‘innoventif ’ seems to be that the single items listed in Art 3 can be added to the list in Art 30(2) of the Directive, just like the Member State of the branch thinks fit. 26 This is true for the subscribed capital and the objects of the company. 43 Other particulars the company has to declare are rooted outside the material scope of Arts 29 et seq such as the managing director’s assurance that there is no barrier to his personal appointment under national law in the form of a prohibition on practising his profession or trade or in the form of a final conviction for certain criminal offences. 27 This is not a matter of disclosure of the company’s legal situation but a measure in respect of protecting the public in the State of the branch from disqualified managing directors of foreign companies (Art 52 TFEU). In his opinion dated 14 October 2020 in the case ‘All in One Star Ltd’, the Advocate General Szpunar confirmed this narrow interpretation of the disclosure obligations.28 44 In the same opinion, the Advocate General Szpunar held, however, that it is an unjustifiable restriction on the freedom of establishment granted by Article 49 EC and Article 54 TFEU for a Member State to pretend from a director of a foreign EU company the assurance, that he had been instructed about his duty to disclose certain facts vis-à-vis the commercial register by a notary or a similar legal practitioner or a consular officer.29

22 Case C-469/19, Request for a preliminary ruling from the BGH lodged on 19 June 2019, All in One Star Ltd, OJ C 328/15; BGH 14.05.2019 – II ZB 25/17, NZG 2019, 775 margin no 22. 23 Case C-453/04, 01.06.2006, Innoventif Limited [2006] ECLI:EU:C:2006:361, para. 33 et seq. 24 Case C-469/19, Request for a preliminary ruling from the BGH lodged on 19 June 2019, All in One Star Ltd, OJ C 328/15; BGH 14.05.2019 – II ZB 25/17, NZG 2019, 775 margin no 24. 25 Case C-453/04, 01.06.2006, Innoventif Limited [2006] ECLI:EU:C:2006:361, para. 33 et seq. 26 Case C-469/19, Request for a preliminary ruling from the BGH lodged on 19 June 2019, All in One Star Ltd, OJ C 328/15; BGH 14.05.2019 – II ZB 25/17, NZG 2019, 775 margin no 25. 27 See Case C-469/19, Request for a preliminary ruling from the BGH lodged on 19 June 2019, All in One Star Ltd, OJ C 328/15; BGH 14.05.2019 – II ZB 25/17, NZG 2019, 775; see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 905 a; also de Raet, ‘Urteilsanmerkung zum BGH-Beschluss v. 14.05.2019 – II ZB 25/17 – EuGH-Vorlage zur Handelsregistereintragung der Zweigniederlassung einer Gesellschaft mit beschränkter Haftung mit Sitz in anderem EU-Mitgliedstaat’ EWiR 2019, 485; Stelmaszczyk, ‘Unionsrechtskonformität der Geschäftsführerversicherung bei der Anmeldung von Zweigniederlassungen’ EuZW 2019, 819. 28 Case C-469/19, Opinion of the Advocate General Szpunar dated 14 October 2020, paras 53-57. 29 Case C-469/19, Opinion of the Advocate General Szpunar dated 14 October 2020, paras 53-57.

170

Peter Kindler

Art 30 a

TITLE I GENERAL PROVISIONS

Article 30 a Changes to documents and information of the company The Member State where a company is registered shall notify, by means of the system of interconnection of registers, without delay, the Member State where a branch of the company is registered, in the event that a change has been filed with regard to any of the following: (a) (b) (c) (d) (e)

the company’s name; the company’s registered office; the company’s registration number in the register; the company’s legal form; the documents and information referred to in points (d) and (f) of Article 14.

Upon receipt of the notification referred to in the first paragraph of this Article, the register in which the branch is registered shall, by means of the system of interconnection of registers, acknowledge receipt of such notification and shall ensure that the documents and information referred to in Article 30(1) are updated without delay. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview; goals of the provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Contents and the Mechanisms of the Ex Officio Notification . . . . . . . . . . . 1. The single items of the ex officio notification (Article 30 a subpara 1) . . . . a) The company’s name (Art 30 a subpara 1 (a)) . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The company’s registered office (Art 30 a subpara 1 (b)) . . . . . . . . . . . . . . . . c) The company’s registration number in the register (Art 30 a subpara 1 (c)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) The company’s legal form (Art 30 a subpara 1 (d)) . . . . . . . . . . . . . . . . . . . . . . e) Documents and information related to the representatives of the company and to accounting documents Art 30 a subpara 1 (e) . . . . . . . . . . 2. The ex officio notification to the register of the branch and the update of the branch register: procedural steps (Article 30 a subpara 1 and 2) . . . . . .

1 1 3 5 5 5 6 11 12 13 14

I. General Features 1. Overview; goals of the provision Applying the once-only principle,1 Art 30 a subpara 1 shifts the duty to inform the 1 register of the branch about certain changes regarding the legal situation of the company from the company itself to the register in the state of the company; by doing so, the provision disburdens the company from disproportionate bureaucracy related to frequent operations during the life circle of a legal entity. Furthermore, it must be assumed that the registers involved in terms of an ex officio notification of certain changes will be more reliable than the managers of the companies as regards the fulfilment of the said information duties. In some Member States, e.g. Germany, it is commonly known that branch-related disclosure is often neglected by companies. Similar to Art 28 c sentence 2, pursuant to Art 30 a subpara 2 the addressee of the in- 2 formation – in this case the Member State where the branch is located – has to acknowledge its receipt and update its central, commercial or companies register. 2 1 Recital 28 sentence 2 in the preamble to Directive 2019/1151/EU: ‘Applying the once-only principle entails that companies are not asked to submit the same information to public authorities more than once.’.

Peter Kindler

171

Art 30 a Changes to documents and information of the company 2. Background Art 30 a was added by Directive (EU) 2019/1151 on the use of digital tools and processes in company law. It is not restricted to online disclosure. 4 Art 30 a has its counterpart in Art 15 of the Directive related to changes in documents and particulars and their disclosure in the register of the company. According to Art 15(1) of the Directive, Member States shall ensure that any changes in the basic documents and particulars referred to in Art 14 are entered in the register and are disclosed normally within 21 days of receipt of the complete documentation including, if applicable, the legality check as required under national law for entry in the file. 3

II. The Contents and the Mechanisms of the Ex Officio Notification 1. The single items of the ex officio notification (Article 30 a subpara 1) a) The company’s name (Art 30 a subpara 1 (a)) 5

The company’s name is subject to disclosure in the branch register under Art 30(1)(d) of the Directive. The name of the company obviously is necessary for identifying it without any doubt, especially within groups of companies with similar names. b) The company’s registered office (Art 30 a subpara 1 (b))

6

7

8

9

10

The company’s registered office is subject to various disclosure duties, stated, inter alia, in Arts 4(a), 14(g), 26 subpara 1(b). Its location is of crucial importance for the company’s creditors and any other third party. The registered office (or ‘statutory seat’) is a connecting factor for jurisdiction under EU civil procedure law, see Art 63 of the Brussels-Ia-Regulation (EU) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. In addition, at a domestic law level, local jurisdiction is often linked to a company’s registered office. Furthermore, the registered office is presumed to be the centre of main interests (COMI) within the meaning of Art 3 para. 1 EIR (Regulation (EU) 2015/848 on insolvency proceedings). It determines the Member States with jurisdiction to open insolvency proceedings against the company. As far as private international law is concerned, a transfer of the registered office, i.e. a cross-border conversion within the meaning of Art 86 a et seq of the Directive, leads to a change of the applicable company law. In fact, pursuant to Art 86 b no. 2 of the Directive, cross-border conversion means ‘an operation whereby a company […] converts the legal form under which it is registered in a departure Member State into a legal form of the destination Member State […] and transfers at least its registered office to the destination Member State, while retaining its legal personality’.3 The ex officio notification is not extended to changes of the address of the company. This is, at first sight, quite surprising in terms of creditor protection (Recital 16), since this information is crucial for creditors to take the necessary steps to have service effected on the company.4 The deficit is rooted, however, not in Arts 30 or 30 a, but in 2 See the short description of Art 30 a in Recital 28 sentence 6-7 in the preamble to Directive 2019/1151/EU. 3 See the accurate description offered by Stelmaszczyk ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’ GmbHR 2020 (111), 61, 64: ‘… dass die Gesellschaft hierbei lediglich ihr Rechtskleid wechselt’ (that the company merely changes its legal dress‘).

172

Peter Kindler

Art 30 a

TITLE I GENERAL PROVISIONS

Art 14, the general norm on the extent of disclosure duties. The list contained in Art 14 does not contain the address of the company. c) The company’s registration number in the register (Art 30 a subpara 1 (c)) The company’s registration number in the register office is subject to various disclo- 11 sure duties, stated, inter alia, in Arts 30(1)(c), 37(d), 39 of the Directive. The disclosure of the register of the company and the relevant number in that register makes it easy for third parties to identify the company and to get access to the entry of the company via the BRIS (Art 22 of the Directive). d) The company’s legal form (Art 30 a subpara 1 (d)) The company’s legal form is subject to various disclosure duties, stated, inter alia, in 12 Arts 26 subpara 1 (b), 30(1)(d), 36, 37(f), of the Directive. Its main relevance lies in the field of shareholders’ liability for the debts of the company. While it is true that the Company Law Directive does not provide for limited liability as a feature of the types of company listed in Annexes I or II,5 the legal form mostly indicates the liability regime adopted. It goes without saying that this element is crucial for creditor protection (Recital 16). e) Documents and information related to the representatives of the company and to accounting documents Art 30 a subpara 1 (e) Art 30 a subpara 1 (e) refers to Art 14(d) and (f), i.e. to the representatives of the 13 company and to accounting documents of the company. As far as disclosure of these items in the branch register is concerned, see Art 30 para. 1 (e) and (g). For details see commentaries on Arts 14 and 30.

2. The ex officio notification to the register of the branch and the update of the branch register: procedural steps (Article 30 a subpara 1 and 2) Under Art 30 a subpara 1 the Member State where a company is registered shall notify the Member State where a branch of the company is registered of the changes of the company’s legal situation listed in the provision. The notification takes place ex officio, i.e. the company does not have to apply for it. The notification is performed by means of the system of interconnection of registers (BRIS, Art 22). The notification is performed without delay by the Member State where a branch of the company is registered, The next procedural step has to be performed by the register in the Member State in which the branch has been opened. Under Art 30 a subpara 2 that register has to acknowledge the receipt of the notification via the BRIS (Art 22).

4 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 909; Kindler, ‘Internationales Gesellschaftsrecht 2009: MoMiG, Trabrennbahn, Cartesio und die Folgen’ IPRax 2009, 189 (200). 5 Case C-81/09, 21.10.2010, Idryma Typou [2010] ECLI:EU:C:2010:622; Möslein, ’Europäisierung der Haftungsbeschränkung’ NZG 2011, 174; on this Kindler, ‘Kapitalgesellschaftsrechtliche Durchgriffshaftung und EU-Recht’ in Joost, Oetker and Paschke (eds), Festschrift für Franz Jürgen Säcker zum 70. Geburtstag (2011), 393; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 30.

Peter Kindler

173

14

15 16 17

Art 31 Limits on the compulsory disclosure of accounting documents Finally, the Member State of the branch has to update its central, commercial or companies register. In this regard, Art 32 applies (language of disclosure and translation of documents to be disclosed). 19 This mechanism is supposed to safeguard the interests of the company and of any third party dealing with it. As to penalties, the Directive (EU) 2019/1151 on the use of digital tools did not modify Art 40. The reason is probably that, as to the company, Arts 15, 28 of the Directive apply. As far as the registers in the company’s home Member State and in the branch Member State are concerned, the general principles of state liability apply. 18

Article 31 Limits on the compulsory disclosure of accounting documents The compulsory disclosure provided for by Article 30(1)(g) shall be limited to the accounting documents of the company as drawn up, audited and disclosed pursuant to the law of the Member State by which the company is governed in accordance with Directive 2006/43/EC of the European Parliament and of the Council(1) and Directive 2013/34/EU. Member States may provide that the mandatory disclosure of accounting documents referred to in point (g) of Article 30(1) may be considered fulfilled by the disclosure in the register of the Member State in which the company is registered in accordance with point (f) of Article 14. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Limits on the Compulsory Disclosure of Accounting Documents (Article 31 Subpara 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Member States’ Option to Not Provide for Disclosure of Accounting Documents (Article 31 Subpara 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 3 5 10

I. General Features 1. Overview This Article refers to the compulsory disclosure of accounting documents provided for by Art 30(1)(g). Subpara 1 defines certain limits on the range of accounting documents the company has to submit; subpara 2 introduces the Member States’ option to replace the disclosure of accounting documents in the branch state by the disclosure in the company’s state of origin. As regards exemptions to Art 31 for branches opened by credit institutions, financial institutions and insurance companies, see Art 42 of this Directive. 2 According to Recital 19 of the preamble to the company Law Directive, the disclosure in the register of the branch is subsidiary to the disclosure in the register of the state of origin of the company. In the eyes of the European legislators national provisions in respect of the disclosure of accounting documents relating to a branch can no longer be justified following the coordination of national law in respect of the 1

(1) Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (OJ L 157, 9.6.2006, p. 87).

174

Peter Kindler

Art 31

TITLE I GENERAL PROVISIONS

drawing up, audit and disclosure of companies' accounting documents (see Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts and Directive (EU) 2013/34 on the annual financial statements, consolidated financial statements and related reports). It is accordingly sufficient to disclose, in the register of the branch, the accounting documents as audited and disclosed by the company.

2. Background Art 31 subpara 1 Company Law Directive replaces Art 3 of the Eleventh Directive 3 89/666/EEC concerning disclosure requirements in respect of branches (repealed by Art 166 Company Law Directive). Art 31 subpara 2 Company Law Directive was added by Directive (EU) 2019/1151 4 on the use of digital tools and processes in company law. It is not restricted to online disclosure.

II. Limits on the Compulsory Disclosure of Accounting Documents (Article 31 Subpara 1) Under Art 31 subpara 1 of the Directive the compulsory disclosure provided for by Art 30(1)(g) shall be limited to the accounting documents of the company as a whole. Art 31 subpara 1 does not provide for separate accounting documents covering the company’s activity through the branch. This is different as far as the branch of a company from a third country is concerned (Art 38 para. 1 sentence 2 of the Directive). As regards the language of disclosure and translation of accounting documents to be disclosed, the Member State in which the branch has been opened may stipulate that the documents are to be published in another official language of the Union and that the translations of such documents are to be certified (Art 32 of the Directive). In most cases that other official language will be the language of the country in which the branch has been set up; some Member States leave it up to the company to publish the accounting documents in the language of the host country or in English (e.g. Germany, see Sec. 325 a German Commercial Code). Art 31 subpara 1 of the Directive refers to the accounting documents of the company ‘as drawn up, audited and disclosed pursuant to the law of the Member State by which the company is governed’ in accordance with certain EU Directives (Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts and Directive (EU) 2013/34 on the annual financial statements, consolidated financial statements and related reports). By referring to EU standards, Art 31 makes sure the comparability of the accounting documents of the foreign company to accounting documents set up in the host state which is again an EU Member State. The foreign company law defines the form and the contents of the documents subject to disclosure at the branch.1 Since the foreign company law is in line with the said EU directives, the following documents have to be disclosed also in the register of the branch (Art 30 et seq Directive 2013/34/EU read with Art 31 of the Company Law Directive):2

1 Arenas Garçia, ‘Rechnungslegungspflichten der Zweigniederlassung von ausländischen Gesellschaften’ RIW 2000, 590 (595 et seq); Merkt, ‘Der internationale Anwendungsbereich des deutschen Rechnungslegungsrechts’ ZGR 2017, 460 (470 et seq); Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, Beck 2021), margin no 932. 2 The list is subject to the simplifications under Art 31 Directive 2013/34/EU.

Peter Kindler

175

5

6

7

8

Art 32 Language of disclosure and translation of documents to be disclosed – – – – – –

balance sheet profit and loss account notes to the financial statements, management report, audit report, consolidated financial statements and consolidated management reports. 9 The EU standards define only the minimum extent of the disclosure duties. Therefore, if national law in the country of origin of the company provides for disclosure of further documents, these further documents have to be disclose also in the country where the branch has been opened. This rule applies, e.g., to the report of the Supervisory Board (Aufsichtsrat) in the German Public Limited Liability Company (Sec. 325 para. 1 no. 2 German Commercial Code read with Section 171 German Public Limited Liability Company Act – AktG).

III. Member States’ Option to Not Provide for Disclosure of Accounting Documents (Article 31 Subpara 2) Under Art 31 subpara 2 of the Directive the Member States in which the branch has been opened have the option to replace the disclosure of accounting documents in their registers by the disclosure in the company’s state of origin. Member States may provide that the mandatory disclosure of accounting documents referred to by Art 30(1)(g) may be considered fulfilled by the disclosure in the register of the Member State in which the company is registered in accordance with Art 14 (f). In substance, this provision contains the Member States’ option to not provide for disclosure of accounting documents at all in their central register, commercial register or companies register. 11 Art 31 subpara 2 was added by Directive (EU) 2019/1151 on the use of digital tools, but the Recitals in the preamble to that directive do not explain the rationale behind this surprisingly permissive provision. It is true that – using the information regarding the register in which the company file is kept (Art 30(1)(c) of the Directive) – any person who deals with the company through the intermediary of a branch can obtain access to the accounting documents disclosed in the register in the company’s state of origin (Art 14(f) via the BRIS (Art 22 of the Directive; Recital 18). In this case, however, Art 32 does not apply which means that in most cases the accounting documents are available only in the language of the country where the company is registered and not also in the language of the host country (and not even in English). It seems hard to imagine why such a week protection of the public in the host state should be in the interest of the host state itself and induce its legislators to exert the option under Art 31 subpara 2 of the Directive. 10

Article 32 Language of disclosure and translation of documents to be disclosed The Member State in which the branch has been opened may stipulate that the documents referred to in Article 30(2)(b) and Article 31 are to be published in another official language of the Union and that the translations of such documents are to be certified.

176

Peter Kindler

Art 33

TITLE I GENERAL PROVISIONS I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Member States’ Option as regards the Language of the Instruments of Constitution and the Accounting Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 2 4

I. General Features 1. Overview This Article refers to the optional disclosure of the instruments of constitution 1 and to the compulsory disclosure of accounting documents provided for by Art 30(1) (g) read with Art 31. For both categories of documents the Member State in which the branch has been opened may stipulate that the documents are to be published in another official language of the Union and that the translations of such documents are to be certified. The Member States’ option seeks to improve the quality of the information available in the register of the branch.

2. Background Art 32 Company Law Directive replaces Art 4 of the Eleventh Directive 89/666/EEC 2 concerning disclosure requirements in respect of branches (repealed by Art 166 Company Law Directive). Art 32 Company Law Directive applies by analogy with respect to branches of 3 companies from third countries (Art 38(2) of the Directive).

II. The Member States’ Option as regards the Language of the Instruments of Constitution and the Accounting Documents As regards the language of disclosure and translation of accounting documents to be 4 disclosed, the Member State in which the branch has been opened may stipulate that the documents are to be published in another official language of the Union and that the translations of such documents are to be certified (Art 32 of the Directive). In most cases that other official language will be the language of the country in which 5 the branch has been set up; some Member States leave it up to the company to publish the accounting documents in the language of the host country or in English (e.g. Germany, see Sec. 325 a German Commercial Code).

Article 33 Disclosure in cases of multiple branches in a Member State Where a company has opened more than one branch in a Member State, the disclosure referred to in Article 30(2)(b) and Article 31 may be made in the register of the branch of the company's choice. In the case referred to in the first paragraph, compulsory disclosure by the other branches shall cover the particulars of the branch register of which disclosure was made, together with the number of that branch in that register.

Peter Kindler

177

Art 33 Disclosure in cases of multiple branches in a Member State I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Companies’ Choice in favour of One of Several Branch Registers (Article 33 Subpara 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Compulsory Disclosure by the Other Branches (Article 33 Subpara 2) . . . . . .

1 1 2 3 6

I. General Features 1. Overview 1

This Article refers to the optional disclosure of the instruments of constitution and to the compulsory disclosure of accounting documents provided for by Art 30(1)(g) read with Art 31 in case a company has opened more than one branch in a Member State. As regards these particularly burdensome items of disclosure, pursuant to Art 33 subpara 1 the disclosure may be made in the register of the branch of the company's choice. This ‘leading’ register can easily be identified thanks to its disclosure by the other branches (Art 33 subpara 2).

2. Background 2

Art 33 Company Law Directive replaces Art 5 of the Eleventh Directive 89/666/EEC concerning disclosure requirements in respect of branches (repealed by Art 166 Company Law Directive).

II. The Companies’ Choice in favour of One of Several Branch Registers (Article 33 Subpara 1) The company must have opened more than one branch in a Member State. All branches subject to the right to choose must have been entered in the central register, commercial register or companies register of the branch. 4 The company’s right to choose one of several branch registers is restricted to the items of disclosure referred to in Art 30(2)(b) and Art 31. Unlike the instruments of constitution and the accounting documents, all the other items of disclosure listed in Art 30 of the Directive are subject to compulsory disclosure in every branch of the company.1 5 The disclosure referred to in Art 30(2)(b) and Art 31 may be made in the register of the branch of the company's choice (‘leading register’). It is irrelevant when the register of the branch of the company's choice had been opened (i.e. before or after the other branch[es]. 3

III. Compulsory Disclosure by the Other Branches (Article 33 Subpara 2) 6

The ‘leading’ register (→ mn. 5) – chosen by the company for disclosure of instruments of constitution and the accounting documents – can easily be identified thanks to its disclosure by the other branches of the company in the same Member State (Art 33 subpara 2). 1 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 894.

178

Peter Kindler

Art 34

TITLE I GENERAL PROVISIONS

Article 34 Information on the opening and termination of winding-up or insolvency proceedings and on striking-off of the company from the register 1. Article 20 shall apply to the register of the company and to the register of the branch respectively. 2. Member States shall determine the procedure to be followed upon receipt of the information referred to in Article 20(1) and (2). Such procedure shall ensure that, where a company has been dissolved or otherwise struck off the register, its branches are likewise struck off the register without undue delay. 3. The second sentence of paragraph 2 shall not apply to branches of companies that have been struck off the register as a consequence of any change in the legal form of the company concerned, a merger or division, or a cross-border transfer of its registered office. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Application of Article 20 by Analogy (Article 34(1)) . . . . . . . . . . . . . . . . . . . . . . . . . III. Striking-off of the Branch from the Register (Article 34(2) and (3)) . . . . . . . . . 1. Update of the register of the branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Companies that have been struck off the register but which have a ‘legal successor’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 3 6 10 10 11

I. General Features 1. Overview Under Art 20 para. 1 of the Directive, the register of a company shall, through the 1 BRIS (Art 22 of the Directive), make available the information on any winding-up or insolvency proceedings of the company and on the striking-off of the company from the register. Under Art 20 para. 2 of the Directive the register of the branch shall, again through the BRIS, ensure receipt of that information. Art 34 Company Law Directive makes sure that the information on the winding-up 2 or insolvency proceedings and on striking-off of the company from the register (Art 20) is available also in the register of the branch. It establishes a clear connection between the register of a company and the registers of its branches opened in other Member States, consisting of the exchange of information on the opening and termination of any winding-up or insolvency proceedings of the company and on the striking-off of the company from the register, if this entails legal consequences in the Member State of the register of the company (Recital 31 in the preamble of the Directive).

2. Background Art 34(1) Company Law Directive has no predecessor in the Eleventh Directive 3 89/666/EEC on branches (repealed by Art 166 Company Law Directive). Art 34(2) Company Law Directive replaces Art 5a(4) of the Eleventh Directive 4 89/666/EEC on branches as amended by Directive 2012/17/EU of 13 June 2012 as regards the interconnection of central, commercial and companies registers. It was repealed by Art 166 Company Law Directive.

Peter Kindler

179

Art 34 Information on the opening and termination of winding-up or insolvency proceedings 5

Art 34(3) Company Law Directive replaces Art 5a(5) of the Eleventh Directive 89/666/EEC on branches as amended by Directive 2012/17/EU of 13 June 2012 as regards the interconnection of central, commercial and companies registers. It was repealed by Art 166 Company Law Directive.

II. Application of Article 20 by Analogy (Article 34(1)) By referring to Art 20 of the Directive, Art 34(1) makes sure that any information on windig-up or insolevency of the company is also at the disposal of the register of the branch. The communication between the register of the company and the register of the branch (Art 20) is divided in two steps. 7 In step 1 the register of the company (located in Member State A) makes available, through the BRIS (Art 22), without delay, the information on the opening and termination of any winding-up or insolvency proceedings of the company and on the striking-off of the company from the register (Art 20(1) read with Art 34(1) of the Directive). 8 Step 1 takes place only if ‘this’ (winding-up or insolvency) entails legal consequences in the Member State of the register of the company, for details see commentary on Art 20(1). 9 In step 2 the register of the branch (located in Member State B) ensures receipt, again through the BRIS (Art 22), without delay, of the information received in step 1 (Art 20(2) read with Art 34(1) of the Directive). The addressee of such receipt is the register of the company. As to the further steps (Art 34(2) and (3)), see below, para. 10 et seq. 6

III. Striking-off of the Branch from the Register (Article 34(2) and (3)) 1. Update of the register of the branch 10

Under Art 34(2) of the Directive national law shall determine the procedure to be followed upon receipt of the information on winding-up or insolvency of the company referred to in Art 20(1) and (2). Such procedure shall ensure that, where a company has been dissolved or otherwise struck off the register, its branches are likewise struck off the register without undue delay. Thus the register of the branch is always in line with the register of the company (Recital 31). This avoids any confusion of the public arising from contradicting statements of the registers involved as to the existence of one and the same company.

2. Companies that have been struck off the register but which have a ‘legal successor’ 11

In some cases striking the company off the register of the branch would lead the public to the inaccurate conclusion that their contractual (or other legal) relationship with the company had ceased to exist. This is not the case in the situations covered by Art 34(3) Company Law Directive. Under Art 34(3) the obligation to strike the branch off the register (in State B) – laid down in the second sentence of paragraph 2 of Art 34 – shall not apply to branches of companies that have been struck off the register of the company (in State A) as a consequence of any change in the legal form of the company concerned, a merger or division, or a cross- border transfer of its registered office.

180

Peter Kindler

Art 34

TITLE I GENERAL PROVISIONS

As mentioned above (→ mn. 5), Art 34(3) Company Law Directive replaces Art 5a(5) of the Eleventh Directive 89/666/EEC as amended by the BRIS Directive 2012/17/EU. The rationale of Art 34(3) of the Directive is pointed out in Recital 15 of the BRIS Directive 2012/17/EU according to which the obligation to strike the branch off the register should not apply to branches of companies that have been struck off the register but which have a ‘legal successor’, such as in the case of any change in the legal form of the company, a merger or division, or a cross-border transfer of its registered office. In truth, not in all of the four situations listed in Art 34(3) there is a legal successor of the company: (1) Change in the legal form of the company concerned: There is no EU law harmonising the conversion of a company from one legal form to another within the law of one and the same Member State, e.g. the conversion of a Gesellschaft mit beschränkter Haftung (German private limited liability company) into an Aktiengesellschaft (German public limited limited liability company). In this regard national law applies (see also Art 54 of the Directive). Just like in cross-border conversions (Art 86 b para. 2 of the Directive), the company concerned retains its legal personality. Unlike in the case of a merger, there is no transfer of the assets of the company concerned to any other company that could be classified as its ‘legal successor’. It is therefore correct not to strike the company off the register of the branch. Any change in the legal form at a national level is covered by Art 30a(d) of the Directive as far as the branch in another Member State is concerned. (2) Merger of companies: There is EU law harmonising the internal merger of public limited liability companies listed in Annex I (Art 87 et seq. Company Law Directive) and the cross-border merger of limited liability companies listed in Annex II (Art 118 et seq. Company Law Directive). In these cases the companies being acquired or – as the case may be – the merging companies will cease to exist and their assets are transferred to the acquiring company or – as the case may be – the new company as legal successors (Arts 105, 109, 131 of the Company Law Directive). The same consequences of a merger can be observed in national law. Since in these cases the companies do have a legal successor, they must not be stroken off the register of the branch. Art 34(3) applies. (3) Division of companies: There is EU law harmonising the internal division of public limited liability companies listed in Annex I (Art 135 et seq. Company Law Directive) and the cross-border division of limited liability companies listed in Annex II (Art 160 a et seq. Company Law Directive). In these cases the companies being divided or – as the case may be – the companies involved in a division will cease to exist and their assets are transferred to the recipient companies or – as the case may be – the new companies as legal successors (Arts 151, 156, 160 r of the Company Law Directive). The same consequences of a division can be observed in national law. Since in these cases the companies do have a legal successor, they must not be stroken off the register of the branch. Art 34(3) applies (4) Cross-border transfer of a company’s registered office: The Cross- border transfer of a company’s registered office mentioned in Art 34(3) of the Company Law Directive was inserted as ‘cross-border conversion’ in Art 86 a et seq. by Directive (EU) 2019/2121. Example: A German private limited liability company (Gesellschaft mit beschränkter Haftung) is converted into a French private limited liability company (société á responsabilitè limitée); the registered office is transferred from Frankfurt/Germany to Paris/France.

Peter Kindler

181

12

13 14

15

16

17

Art 35 Information on letters and order forms 18

As Art 86 b para. 2 of the Directive makes clear, the company concerned retains its legal personality. Unlike in the case of a merger, there is no transfer of the assets of the company concerned to any other company that could be classified as its ‘legal successor’. It is therefore correct not to strike the company off the register of the branch. Any change in the legal form is covered by Art 30a(d) of the Directive as far as the branch in another Member State is concerned.

Article 35 Information on letters and order forms Member States shall prescribe that letters and order forms used by a branch shall state, in addition to the information prescribed by Article 26, the register in which the file in respect of the branch is kept together with the number of the branch in that register. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Means of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Items to Disclose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The information prescribed by Art 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Register of the branch and number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 3 5 8 8 9

I. General Features 1. Overview This Article refers to the letters and order forms used by a branch as secondary means of disclosure (→ Foreword to Arts 28a-42 mn. 16). Its regulatory content is twofold: (1) As additional particulars of disclosure, these secondary means of disclosure have to indicate the register in which the file in respect of the branch is kept together with the number of the branch in that register. (2) Besides these additional particulars of disclosure, the letters and order forms used by a branch shall state, first of all, the information prescribed by Art 26. 2 The scope of application covers branches of companies from another Member State. As far as branches of companies from third countries are concerned, Art 39 applies. 1

2. Background Art 35 Company Law Directive replaces Art 6 of the Eleventh Directive 89/666/EEC concerning disclosure requirements in respect of branches (repealed by Art 166 Company Law Directive). 4 Recitals 13 and 20 of the Company Law Directive refer, inter alia, to Art 35. 3

II. The Means of Disclosure 5

As regards the means of disclosure, Art 35 refers explicitly to letters (including electronic communication) and order forms, see commentary on Art 26.

182

Peter Kindler

Art 36

TITLE I GENERAL PROVISIONS

Surprisingly, Art 35 does not refer to the company’s website if used by a branch. In 6 this regard, Art 35 seems to fall back behind the standards set by art 26 subpara 2 (according to which company websites are to contain, among other items, the information necessary in order to identify the register in which the file referred to in Art 16 is kept, together with the number of the company in that register). Interpreting Art 35 in the light of the preamble, one has to conclude, however, that 7 the company’s website if used by the branch (or, all the more, if the branch is operating a website of its own) is an additional means of disclosure besides letters and order forms. In the age of the Internet, any website of the company has to be taken into account. In fact, according to Recital 13, in the light of technological developments, it is appropriate to provide a statement of compulsory particulars – like the register in which the file in respect of the branch is kept (including the number of the branch in that register) – be placed on any company website including a website operated by the branch (emphasis added).1

III. Items to Disclose 1. The information prescribed by Art 26 As far as the information prescribed by Art 26 is concerned, see commentary on 8 Art 26.

2. Register of the branch and number Art 35 Company Law Directive mentions the register in which the file in respect of 9 the branch is kept as a compulsory item of disclosure. This register is defined by Art 29(1) read with Art 16 of the Directive. In addition, the letters, order forms and the website must indicate the number of the 10 branch in that register.

Section 3 Disclosure rules applicable to branches of companies from third countries Article 36 Disclosure of documents and particulars relating to a branch 1. Documents and particulars concerning a branch opened in a Member State by a company which is not governed by the law of a Member State but which is of a legal form comparable with the types of company listed in Annex II, shall be disclosed in accordance with the law of the Member State of the branch as laid down in Article 16. 2. Article 29(2) shall apply.

1 Preamble to Directive 2017/1132/EU, Recital 13: “It is appropriate to clarify that the statement of the compulsory particulars set out in this Directive should be included in all company letters and order forms, whether they are in paper form or use any other medium. In the light of technological developments, it is also appropriate to provide that that statement of compulsory particulars be placed on any company website.”

Peter Kindler

183

Art 36 Disclosure of documents and particulars relating to a branch I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. General Duty to Disclose (Article 36(1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Items to disclose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Branch opened in a Member State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Types of companies addressed and lex societatis . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Disclosure duties and penalties in the event of failure to disclose . . . . . . . . . III. Diverging Disclosure Requirements (Article 36(2)) . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 4 5 5 7 9 16 18

I. General Features 1. Overview Art 36 Company Law Directive is the first Article in Chapter III Section 3 of the Directive and is, unlike its counterpart in Art 29, related to companies from third countries. 2 Analysing the structure of Art 36, there can be identified two regulatory contents: Art 36(1) states the general duty to disclose relevant documents and particulars relating to the branch; Art 36(2) addresses the unlikely situation where disclosure requirements in respect of the branch differ from those in respect of the company; in this regard, Art 29(2) applies by analogy. 3 Unlike Art 29(3), Art 36 does not provide for the use of the system of interconnection of registers within the disclosure requirements existing under Chapter III Section 3 of the Directive. That system (‘BRIS’, Art 22 of the Directive) is restricted to intra-Union transactions. 1

2. Background 4

Art 36 Company Law Directive replaces Art 7 of the Eleventh Directive 89/666/EEC on branches (repealed by Art 166 Company Law Directive).

II. General Duty to Disclose (Article 36(1)) 1. Items to disclose As far as the items to disclose are concerned, Art 36(1) refers to documents and particulars concerning a branch […]. The English wording in Art 29(1) is different. Art 29(1) refers to documents and particulars relating to a branch […]. The difference seems due to superficial text editing and reveals no different approach as to the material extension of disclosure. In fact, the French and the German version of Arts 29 and 36 are identical in this regard (‘Les actes et indications concernant les succursales …’; ‘Die Urkunden und Angaben über eine Zweigniederlassung …’). 6 As regards the extension of disclosure, Art 36(1) has to be read with Art 37 of the Directive entitled ‘Documents and particulars to be disclosed’. For details see → Art 37. 5

2. Branch opened in a Member State 7

The second pre-condition of the disclosure duties under Art 36(1) is that the branch in question is located in a Member State. With respect to the concept of a branch, the law requires organisational independence (assets and personnel) and a permanent establishment acting with the public which, moreover, acts on the account of the primary

184

Peter Kindler

Art 36

TITLE I GENERAL PROVISIONS

establishment and is authorised to do so.1 For details see → Foreword to Arts 28a-42 mn. 3. According to Art 288 TFUE the Directive applies to all Member States within 8 the meaning of the Treaty on European Union. There are no exemptions as to single Member States as can be found in other legal instruments of the EU, e.g. Recital 88 to the Insolvency Regulation (EU) 2015/848.

3. Types of companies addressed and lex societatis Art 36(1) refers to any company which is not governed by the law of a Member State 9 but which is of a legal form comparable with the types of company listed in Annex II. In the absence of harmonisation of Union law, defining the connecting factor that 10 determines the national law applicable to a company or firm falls within the competence of each Member State.2 Whether or not a company is governed by the law of a Member State is therefore a question of private international law of the Member State where the branch is located. In this regard, Member States are using different connecting factors. There are Member States which, following the rule of incorporation (Gründungstheorie), look at the registered office, while others, following the real seat theory (Sitztheorie), look at the actual headquarters of the company i.e. where its management resides. In addition, renvoi has to be taken into account.3 For details see → Introduction mn. 66 et seq. From the standpoint of a Member State following the real seat rule, e.g. Germany, the 11 problem of a pseudo-foreign company could arise.4 Example: Company A, an Aktiengesellschaft established under Swiss law, has its statutory seat in Zurich/Switzerland. Its real seat is in Munich/Germany where the management of the company resides. Company A wishes to disclose its Munich establishment as a ‘branch’ in the German commercial register. Under German private international law, Company A is governed by German law because it has its real seat in Germany. From the German standpoint the Swiss Aktiengesellschaft is classified as a German commercial partnership (offene Handelsgesellschaft) that has to be entered into the German commercial register as such and not as the branch of a foreign company.5 It is not a ‘company which is not governed by the law of a Member State’ within the meaning of Art 36(1) of the Directive.

If, according to the PIL rules of the Member State where the branch is located, the 12 company is not governed by the law of a Member State, the next pre-condition for applying Art 36(1) is that the legal form of such third country company is comparable with (one of) the types of company listed in Annex II. This test of comparability has to take into account several features of the company in question:6

1 Case 33/78, 22.11.1978, Somafer SA v Saar-Ferngas AG [1978] ECLI:EU:C:1978:205, para. 12; Kindler, ‚Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Vol. 12 (8 th edn, 2021), margin no 44. m. 2 Recital 3 of the preamble to Directive 2019/2121/EU of 27 November 2019 amending Directive 2017/1132/EU as regards cross-border conversions, mergers and divisions. 3 For an overview on the differing PIL approaches in important jurisdictions see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Vol. 12 (8 th edn, 2021), margin no 508 et seq. 4 For German law see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 914. 5 See BGH 27.10.2008 – II ZR 158/06, NJW 2009, p 289 (Trabrennbahn); Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin nos 5, 358, 477. 6 For details see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 204 et seq.

Peter Kindler

185

Art 37 Compulsory documents and particulars to be disclosed In order to distinguish companies from partnerships (LLP etc) the following features speak in favour of a company: a management system which allows non-shareholders to be a board member (Fremdorganschaft), the exclusion of liability for the debts of the entity, the transferability of the shares, the distribution of profits based on the nominal amount of the participation and not pro capite, safeguards as regards statutory capital. 14 In order to distinguish the public limited liability company (Aktiengesellschaft, sociedad anónima, société anonyme, società per azioni, naamloze vennootschap etc.) from the private limited liability company (Gesellschaft mit beschränkter Haftung, sociedad deresponsabilidad limitada, société à responsabilité limitée, società a responsabilità limitata, besloten vennootschap met beperkte aansprakelijkheid etc.), several features may speak in favour of a public company: mandatory character of the provisions regulating the internal affairs of the company, eligibility for a stock market listing, a two-tier board system, etc. In the light of these features, an LLC organized under the law of an U.S. state would normally be classified as private limited company. 15 The legal terminology used by the law of the third country is a first, rough indication in favour of the corresponding legal form contained in Annex II of Directive (EU) 2017/1132. For example, a Swiss Aktiengesellschaft (public limited liability company) can be classified as public limited liability company within the meaning of Annex II. 13

4. Disclosure duties and penalties in the event of failure to disclose As to the fulfilment of the disclosure duties, Art 36(1) refers to Art 16 of the Directive and the relevant transposition laws of the Member State where the branch is located. For details see → Art 16. 17 In the event of failure to disclose, the ‘appropriate’ penalties under national law apply (Art 40 of the Directive). 16

III. Diverging Disclosure Requirements (Article 36(2)) Pursuant to Art 36(2) read with Art 29(2) of the Directive, where disclosure requirements in respect of the branch differ from those in respect of the company, the branch’s disclosure requirements shall take precedence with regard to transactions carried out with the branch. 19 This rule does not necessarily ensure the protection of persons who deal with companies through the intermediary of branches (Recital 16), since the law of the state where the branch is located prevails also in cases where the law applicable to the company is more favourable to the third party. The rationale of Art 36(2) read with Art 29(2) therefore rather seems to be ensure foreseeability of the applicable disclosure standards. 18

Article 37 Compulsory documents and particulars to be disclosed The compulsory disclosure provided for in Article 36 shall cover at least the following documents and particulars: (a) the address of the branch; (b) the activities of the branch; (c) the law of the State by which the company is governed;

186

Peter Kindler

Art 37

TITLE I GENERAL PROVISIONS

(d) where that law so provides, the register in which the company is entered and the registration number of the company in that register; (e) the instruments of constitution, and memorandum and articles of association if they are contained in a separate instrument, with all amendments to those documents; (f) the legal form of the company, its principal place of business and its object and, at least annually, the amount of subscribed capital if those particulars are not given in the documents referred to in point (e); (g) the name of the company and the name of the branch if that is different from the name of the company; (h) the appointment, termination of office and particulars of the persons who are authorised to represent the company in dealings with third parties and in legal proceedings: — as a company organ constituted pursuant to law or as members of any such organ, — as permanent representatives of the company for the activities of the branch. The extent of the powers of the persons authorised to represent the company shall be stated, as well as whether those persons may represent the company alone or are required to act jointly; (i) — the winding-up of the company and the appointment of liquidators, particulars concerning them and their powers and the termination of the liquidation, — insolvency proceedings, arrangements, compositions or any analogous proceedings to which the company is subject; (j) the accounting documents in accordance with Article 38; (k) the closure of the branch. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Compulsory items of disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Address of the branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Activities of the branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Law of the State by which the company is governed . . . . . . . . . . . . . . . . . . . . . d) Register and registration number of the company . . . . . . . . . . . . . . . . . . . . . . . e) Instruments of constitution; memorandum and articles of association . . f) Legal form of the company and other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Name of the company; name of the branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h) Persons authorised to represent the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . i) Winding-up and insolvency of the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . j) Accounting documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . k) Closure of the branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Directors’ duties and qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 4 6 6 6 7 8 9 12 15 20 23 32 37 38 40

I. General Features 1. Overview Art 37 defines the ‘documents and particulars’ mentioned in Art 36(1) which are 1 subject to disclosure. For the sake of brevity, these documents and particulars are mostly referred to as ‘items’ in this Commentary. Peter Kindler

187

Art 37 Compulsory documents and particulars to be disclosed Unlike Art 30, Art 37 makes no distinction between compulsory items of disclosure and optional items of disclosure. Under Art 37 all items of disclosure are compulsory. The compulsory character of the single items of disclosure is not referred to the company but to the Member State in which the branch has been opened. 3 The list of items to disclose is not exhaustive. Unlike Art 30(1), Art 37 does not contain the word ‘only’. Member States can define further items to disclose because third country companies have no right to establishment within the EU territory;1 this is made clear also by Recital 21 sentence 2 of the preamble to Directive (EU) 2017/1132, according to which for branches opened by companies governed by the law of third countries it is ‘necessary to apply specific provisions that are different from those that apply to the branches of companies governed by the law of other Member States since this Directive does not apply to companies from third countries.’ (emphasis added). 2

2. Background Art 37 Company Law Directive replaces Art 8 of the Eleventh Directive 89/666/EEC on branches (repealed by Art 166 Company Law Directive). 5 Similar lists of items to disclose can be found, inter alia, in Arts 3, 4, 14, 26, 30, 30 a, 39 of the Directive. 4

II. Disclosure 1. Compulsory items of disclosure a) Address of the branch 6

Under Art 37(a) the compulsory disclosure covers the address of the branch. This is in line with the disclosure duties of EU companies (Art 30(1)(a)). This information is supposed to make it easier for persons who deal with companies through the intermediary of branches to take the necessary steps to have service effected on the company. 2 b) Activities of the branch

7

Under Art 37(b) the compulsory disclosure covers the activity of the branch. This is in line with the disclosure duties of EU companies (Art 30(1)(b)). This particular has to refer to the main type of activity of the branch.3 In case the activity of the company is described as ‘conducting commercial activities of any kind’ or similar, then this formula might not be accepted under the law of the Member State in which the branch has been opened.4

1 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 5 margin no 51; Edwards, EC Company Law (1999), 216. 2 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 909; see also Kindler, ‘Internationales Gesellschaftsrecht 2009: MoMiG, Trabrennbahn, Cartesio und die Folgen’ IPRax 2009, 189 (200). 3 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 914; see also OLG Frankfurt a. M. 29.12.2005 – 20 W 315/05, NZG 2006, p 515 (516); OLG Düsseldorf 21.02.2006 – 3 Wx 210/05, NJW-RR 2006, 1040 (1041). 4 For German law see Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 914.

188

Peter Kindler

Art 37

TITLE I GENERAL PROVISIONS

c) Law of the State by which the company is governed The law of the State by which the company is governed (Art 37(c)) has to be 8 determined by the register of the Member State where the branch is located, applying the private international law rules in force in that country, see → Art 36 mn. 9 et seq. d) Register and registration number of the company Art 37(d) has its counterpart in Art 30(1)(c) as far as companies from a third 9 country are concerned. Unlike Art 30(1)(c), Art 37(d) does not refer to the BRIS (Art 22 of the Directive). The compulsory disclosure covers two elements: the register in which the company is entered, together with the registration number in that register. The details of registration are crucial for persons who deal with companies through 10 the intermediary of branches because the compulsory disclosure at the branch (Art 37 of the Directive) might be less comprehensive than the disclosure in the main register of the company. The disclosure of the register of the company and the relevant number in that register makes it possible for third parties to identify the company and to gain access to the entry of the company in its home register. The same rationale can be found in Art 39 as far as letters, order forms and websites are concerned. The disclosure of the register and the registration number of the company is compul- 11 sory only ‘where that law so provides’. In this regard, Art 37(d) refers to the applicable third country company law within the meaning of Art 37(c). The provision is based on the principle ‘Ad impossibilia nemo tenetur’ (nobody is held to the impossible): if the foreign company is not entered in any register in its home country, there can be no duty to disclose any details referred to its registration. e) Instruments of constitution; memorandum and articles of association Under Art 37(e) the Member State in which the branch has been opened has to 12 provide for the disclosure of the instruments of constitution and the memorandum and articles of association of the company if they are contained in a separate instrument, with all amendments of those documents. The compulsory disclosure of these documents makes it easier for the public to resort to crucial particulars contained in them such as the legal form of the company, its principal place of business, its object and the amount of subscribed capital (see Art 3 and 4 of the Directive). In case of an EU company, the disclosure of these documents is optional for the 13 Member States, see Art 30(2)(b). The reason for the different approach in Art 37(e) – compulsory disclosure – is that in third countries there is not necessarily a central, commercial or companies register containing the documents listed in Art 14 of the Directive and as easily accessible as via the BRIS (Arts 18, 22 of the Directive). As regards the language of disclosure and translation of documents to be disclosed, 14 the Member State in which the branch has been opened may stipulate that the documents are to be published in another official language of the Union and that the translations of such documents are to be certified. This follows from Art 32 of the Directive read with Art 38 para. 2 of the Directive. While it is true that Art 38 para. 2 of the Directive seems to refer only to accounting documents, it would be inconsistent to provide for the compulsory character of the duty to produce the instruments of constitution etc. (Art 37(e)) without the duty to produce translations which is the standard in intra-EU situations: Art 32 refers to Art 30(2)(b) [instruments of constitution etc.].

Peter Kindler

189

Art 37 Compulsory documents and particulars to be disclosed f) Legal form of the company and other items 15

16

17

18

19

Art 37(f) lists a series of particulars. They are part of the compulsory disclosure only if not given in the documents referred to in point (e), i.e. in the instruments of constitution or in the memorandum and articles of association. Art 37(f) mentions the legal form of the company, its principal place of business and its object and, at least annually, the amount of subscribed capital. The provision has (in parts) its counterpart in Art 30(1)(d) as regards the legal form of the company. As to the legal form of the company, its main relevance lies in the field of shareholders’ liability for the debts of the company. The legal form mostly indicates the liability regime adopted. It goes without saying that this element is crucial for creditor protection. The legal form has to be expressed in the languages of the Member State of the branch and of the country of origin in order to enable the register to identify the relevant type of company for the comparability test under Art 36 para. 1, see the commentary on Art 36, para. 12 et seq.5 Principal place of business: This particular can help to determine the centre of main interests (COMI) within the meaning of Art 3 para. 1 EIR (Regulation (EU) 2015/848 on insolvency proceedings). It determines the Member State with jurisdiction to open insolvency proceedings against the third country company. It goes without saying that a company with registered office in a third country can have its principal place of business (real seat) in a EU country. As for the rest, the legal importance of this element is rather restricted, see, e.g., Arts 118, 86 a, 160 a Directive (EU) 2017/1132, Art 54 TFEU. Object of the company: This particular may be relevant for the material extent of the power to represent the company (under the common law doctrine of ultra vires) or for assessing the lawfulness of the company (see Arts 9 and 11 of the Directive). Subscribed capital: Finally, pursuant to Art 37(f) the company has to disclose the amount of subscribed capital if this item is not contained in the instruments of constitution or the memorandum and articles of association. The provision relates to Art 14(e) which states the duty of EU companies to disclose, at least annually, the amount of subscribed capital, but only where the instrument of constitution or the statutes mention an authorised capital,6 unless any increase in the capital subscribed necessitates an amendment of the statutes. The same restrictions cannot apply with regard to third country companies. Only if the statutes do not mention an authorised capital or, under the applicable law, any increase in the capital subscribed necessitates an amendment of the statutes, it is not necessary to disclose the subscribed capital once a year. It cannot be excluded that under third country company law the management can increase the capital of the company without authorisation by the shareholders and without an amendment of the statutes. In this case, only a yearly update on the subscribed capital guarantees the protection of creditors (Recital 16). g) Name of the company; name of the branch

Under Art 37(g) the compulsory disclosure covers the name of the company and the name of the branch, if that is different from the name of the company. The provision is identical to Art 30(1)(d) [name of EU companies]. 21 The name of the company (Art 3(a) of the Directive) obviously is necessary for identifying it without any doubt, especially within groups of companies with similar names. 20

5 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 916. 6 Art 68 para. 2 of the Directive.

190

Peter Kindler

Art 37

TITLE I GENERAL PROVISIONS

In order to avoid confusion in this regard, the name of the branch is subject to 22 disclosure only if that is different from the name of the company itself. h) Persons authorised to represent the company Similar to Art 30(1)(e), Art 37(h) completes the publicity regime of the register of the company in its home country as far as the representation of the company is concerned. Under Art 37(h) two categories of persons who are authorised to represent the company in dealings with third parties and in legal proceedings are subject to disclosure: those who act as a company organ (first indent) and those who act as permanent representatives of the company for the activities of the branch (second indent). Within both categories the appointment, termination of office and particulars of the said persons are subject to disclosure. In addition, the extent of the powers of the persons authorised to represent the company shall be stated, as well as whether those persons may represent the company alone or are required to act jointly. In this regard the provision is modelled on Art 14(d)(i) of the Directive. As to the first category (first indent), the provision takes into account the distinction between two different regulatory models that can be found in national law: model A is designed in a way that a certain (natural or legal) person is the organ of the company and holds the power to represent the company;7 model B is designed in a way that a collegial body (‘board’) is the organ of the company with power to represent the company and certain (natural or legal) persons are members of that collegial body.8 Art 37(h) covers both situations. As to the second category (second indent), the ‘permanent representatives’ are neither an organ of the company nor a member of such organ. Otherwise they would fall under the first category (first indent). In addition, it is made clear that the permanent representatives are representing ‘the company for the activities of the branch’, i.e. they are not representing the branch. The branch is an organisational entity without legal personality (see → Foreword to Arts 29-42 mn. 13). The powers of the permanent representative are not defined by the Directive. Any authorized person under national law can act as such a permanent representative. This is why disclosure covers also the ‘indication of the extent of their powers’. Examples under national law are the German ‘Prokurist’, the Italian ‘Institore’, the French ‘Fondé de pouvoir’ etc. There is no duty under the Directive to appoint a ‘permanent representative’ at all. 9 The company’s activities related to the branch can be run by its managing directors (first category, first indent) as the shareholders and/or the managing directors think fit. As to disqualification of permanent representatives (see Art 13 i of the Directive), Member States are free to apply their rules on directors’ disqualification in order to protect the public.10 This is not a matter of ‘disclosure’ of the legal situation of the company including the branch, but one of combating fraud in business transactions referred to the branch; as such, excluding disqualified persons from a position as permanent representative is not a measure in respect of disclosure (Recital 16) and lies outside the scope of Arts 29-42 of the Directive.11 7 Example: the German private company limited by shares (Gesellschaft mit beschränkter Haftung – GmbH). 8 Example: the German public company limited by shares (Aktiengesellschaft – AG). 9 OLG München 14.02.2008 – 31 Wx 67/07, NZG 2008, p. 342; OLG München 14.02.2008 – 31 Wx 67/07, NZG 2008, 342; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 917.

Peter Kindler

191

23

24

25

26

27

28

29

Art 37 Compulsory documents and particulars to be disclosed A person cannot be an organ of the company/member of a company organ (Art 30(e) first indent) and a permanent representative (Art 30(e) second indent) at same time. In case of such a twin role a person dealing with the company through the intermediary of a branch could have the (inaccurate) impression that the permanent representative has powers that go beyond the powers of a company organ.12 31 Finally, the permanent representative gives rise to delicate questions of private international law. While it is commonly accepted that the managing directors’ power to represent the company is governed by the applicable to the company itself (lex societatis; → mn. 8), there is no such rule with respect to the permanent representative. In particular, there is no EU Regulation in this regard; the Regulation Rome I (593/2008/EC) excludes from its material scope ‘the question whether an agent is able to bind a principal […] in relation to a third’, Art 1(2)(g) Rome I. At this point, domestic rules of private international law kick in, e.g. Art 8 of the German Introductory Law to the Civil Code (EGBGB),13 Art 60 Legge 218/1995 (Italian Act on Private International Law) etc.; also the Hague Convention of 14 March 1978 on the Law Applicable to Agency may apply (binding for Argentina, France, the Netherlands and Portugal; https://www.hcch.net/en/ instruments/conventions) 30

i) Winding-up and insolvency of the company Under Art 37(i) of the Directive the compulsory disclosure covers a series of situations related to the winding-up (first indent) and insolvency (second indent) of the company. The provision is similar to Art 30(1)(f) [EU companies]. 33 As to the winding-up of the company, the situations mentioned in Art 37(i) are governed by the applicable third country company law, see Art 36(1). 34 As to the insolvency of the company, the applicable insolvency law is determined by Art 7 et seq. EIR (Regulation (EU) 2015/848 on insolvency proceedings) if the company has its centre of main interests (COMI) in an EU Member State. 35 From the standpoint of an EU Member State whose private international law follows the rule of incorporation (Gründungstheorie) – see commentary on Art 36, para. 10 – such a situation is possible. 32

Example: The ‘Rösti & Hash Browns Aktiengesellschaft’ has its real seat (COMI) in Leipzig/Germany and its statutory seat in Zurich/Switzerland where it is also registered. The company has opened a branch in Amsterdam/Netherlands. Under Netherlands private international law (Art 118 Book 10 NBW) the company is governed by Swiss law. Under Art 7 et seq. EIR (Regulation (EU) 2015/848 on insolvency proceedings) German insolvency law applies.

10 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 918; correctly Seifert, ‘Kommentar zu AG Westerstede vom 31.10.2000 – 10 AR 99/00’ RIW 2001, p. 68 (69); ultimately concordant also AG Westerstede 31.10.2000 – 10 AR 99/00, RIW 2001, p. 67 et seq.; KG 18.11.2003 – 1 W 444/02, NJW-RR 2004, 331 (334); differently OLG Oldenburg 28.05.2001 – 5 W 71/0, RIW 2001, p. 863; LG Cottbus 14.02.2005 – 11 T 1/05, EWiR 2005, p. 733, annotated by Wachter; Hoger, ‘Offene Rechtsfragen zur Eintragung der inländischen Zweigniederlassung einer Kapitalgesellschaft mit Sitz im Ausland’ NZG 2015, 1219 (1224). 11 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Vol. 12 (8th edn, Beck 2021), margin nos 913, 918. 12 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Vol 12 (8th edn, Beck 2021), margin no 918. 13 For details see Kindler and Brüggemann, ‘Die kollisionsrechtliche Anknüpfung kaufmännischer Vollmachten nach Art. 8 EGBGB’ RIW 2018, 473 et seq.; in English: von Hein, ‘Agency in the Conflict of Laws: A New German Rule’ Rivista di diritto internazionale privato e processuale 54 (2018), 5-32.

192

Peter Kindler

Art 38

TITLE I GENERAL PROVISIONS

If the company has its centre of main interests (COMI) in a third country, the 36 applicable insolvency law is determined by the domestic conflict-of-law rules of the Member State where the branch is located (e.g. Section 335 et seq. German Insolvency Code 1994). j) Accounting documents Under Art 37(j) of the Directive the compulsory disclosure covers the accounting 37 documents in accordance with Art 38. For details see the commentary on Art 38 of the Directive. As to branches of EU companies, see Art 30(1)(g) read with Art 31. For details see the comment on Art 31 of the Directive. k) Closure of the branch Under Art 37(k) the compulsory disclosure covers the closure of the branch. As to 38 branches of EU companies, see Art 30(1)(h). Like the opening of a branch, its closing is a fact, not a legal act. The branch as 39 such has no legal personality (see Art 37(h) indent 2 of the Directive: ‘… permanent representatives of the company…’). For the same reason the branch cannot be the object of a winding-up procedure within the meaning of Art 37(i) of the Directive.14

2. Directors’ duties and qualification As to the addressee of the duties of disclosure, Art 41 leaves it to the Member States 40 to determine who shall carry out the disclosure formalities. Most Member States have opted for the managing directors of the company in question. For details see commentary to Art 41. Additional items of disclosure can be defined by national law, such as the managing director’s assurance that there is no barrier to his personal appointment under national law.15

Article 38 Limits of compulsory disclosure of accounting documents 1. The compulsory disclosure provided for by Article 37(j) shall apply to the accounting documents of the company as drawn up, audited and disclosed pursuant to the law of the State which governs the company. Where they are not drawn up in accordance with or in a manner equivalent to Directive 2013/34/EU, Member States may require that accounting documents relating to the activities of the branch be drawn up and disclosed. 2. Articles 32 and 33 shall apply.

14 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 935. 15 Case C-469/19, Request for a preliminary ruling from the BGH lodged on 19 June 2019, All in One Star Ltd, OJ C 328/15; BGH 14.05.2019 – II ZB 25/17, NZG 2019, 775; Kindler, ‘Internationales Handelsund Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 905 a; also de Raet, ‘Urteilsanmerkung zum BGH-Beschluss v. 14.05.2019 – II ZB 25/17 – EuGH-Vorlage zur Handelsregistereintragung der Zweigniederlassung einer Gesellschaft mit beschränkter Haftung mit Sitz in anderem EU-Mitgliedstaat’ EWiR 2019, 485; Stelmaszczyk, ‘Unionsrechtskonformität der Geschäftsführerversicherung bei der Anmeldung von Zweigniederlassungen’ EuZW 2019, 819.

Peter Kindler

193

Art 38 Limits of compulsory disclosure of accounting documents I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Compulsory Disclosure of Accounting Documents pursuant to the Law of the State which Governs the Company (Article 38 Para. 1 Sentence 1) . . . . . . III. Member States’ Option to Provide for Accounting Documents relating to the Activities of the Branch (Article 38 Para. 1 Sentence 2) . . . . . . . . . . . . . . . . . . IV. Language of Disclosure and Translation of Documents to Be Disclosed (Article 38 Para. 2 Read with Art 32) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Multiple Branches (Article 38 Para. 2 Read with Art 33) . . . . . . . . . . . . . . . . . . . . .

1 1 3 4 8 11 12

I. General Features 1. Overview This Article refers to the compulsory disclosure of accounting documents provided for by Art 37(j). Art 38 para. 1 defines the range of accounting documents a third country company has to submit including the Member States’ option to require that accounting documents relating to the activities of the branch be drawn up and disclosed; according to Art 38 para. 2 the rules contained in Chapter III Section 2 regarding the language of disclosure and disclosure in cases of multiple branches (Arts 32, 33) apply by analogy. As regards exemptions to Art 38 for branches opened by credit institutions, financial institutions and insurance companies, see Art 42 of this Directive. 2 According to Recital 19 of the preamble to the company Law Directive (related to accounting documents of EU companies), the disclosure in the register of the branch is subsidiary to the disclosure in the register of the state of origin of the company. In the eyes of the European legislators national provisions in respect of the disclosure of accounting documents relating to a branch can no longer be justified following the coordination of national law in respect of the drawing up, audit and disclosure of companies' accounting documents. In intra-EU situations it is accordingly sufficient to disclose, in the register of the branch, the accounting documents as audited and disclosed by the company. Unlike Art 31, Art 38 does not extend this philosophy to companies governed by the law of a third country. 1

2. Background 3

Art 38 Company Law Directive replaces Art 9 of the Eleventh Directive 89/666/EEC concerning disclosure requirements in respect of branches (repealed by Art 166 Company Law Directive).

II. Compulsory Disclosure of Accounting Documents pursuant to the Law of the State which Governs the Company (Article 38 Para. 1 Sentence 1) Under Art 38 para. 1 of the Directive the compulsory disclosure provided for by Art 30(j) shall be limited to the accounting documents of the company as drawn up, audited and disclosed pursuant to the law of the State which governs the company as a whole. 5 The law of the State by which the company is governed has to be determined by the register of the Member State where the branch is located, applying the private international law rules in force in that country, see Art 36, para. 9 et seq. 4

194

Peter Kindler

Art 38

TITLE I GENERAL PROVISIONS

The foreign company law defines the form and the contents of the documents subject 6 to disclosure at the branch.1 The EU standards referred to in Art 38 para. 1 sentence 2 define only the minimum 7 extent of the disclosure duties. Therefore, if national law in the country of origin of the company provides for disclosure of further documents, under Art 38 para. 1 sentence 1 these further documents have to be disclosed also in the country where the branch has been opened.

III. Member States’ Option to Provide for Accounting Documents relating to the Activities of the Branch (Article 38 Para. 1 Sentence 2) Art 38 para. 1 sentence 1 does not provide for separate accounting documents 8 covering the company’s activity through the branch as part of the company’s compulsory disclosure duties. There has been adopted, however, the Member States’ option to provide for accounting documents relating to the activities of the branch in case the accounting documents of the company as a whole (Art 38 para. 1 sentence 1) are not drawn up in accordance with or in a manner equivalent to Directive 2013/34/EU (Article 38 para. 1 sentence 2). Under EU company law, the following documents have to be disclosed (Art 30 et seq. 9 Directive 2013/34/EU):2 – balance sheet – profit and loss account – notes to the financial statements, – management report, – audit report, – consolidated financial statements and consolidated management reports. The test of accordance or equivalency has to take into account these documents and 10 their standard contents as defined by Directive (EU) 2013/34.

IV. Language of Disclosure and Translation of Documents to Be Disclosed (Article 38 Para. 2 Read with Art 32) As regards the language of disclosure and translation of accounting documents to be 11 disclosed, the Member State in which the branch has been opened may stipulate that the documents are to be published in another official language of the Union and that the translations of such documents are to be certified (Article 38 para. 2 read with Art 32 of the Directive). In most cases that other official language will be the language of the country in which the branch has been set up; some Member States leave it up to the company to publish the accounting documents in the language of the host country or in English (e.g. Germany, see Sec. 325 a German Commercial Code).

1 Arenas Garçia, ‘Rechnungslegungspflichten der Zweigniederlassung von ausländischen Gesellschaften’ RIW 2000, 590 (595 et seq.); Merkt, ‘Der internationale Anwendungsbereich des deutschen Rechnungslegungsrechts’ ZGR 2017, 460 (470 et seq.); Kindler, ’Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, Beck 2021), margin no 932. 2 The list is subject to the simplifications under Art 31 Directive 2013/34/EU.

Peter Kindler

195

Art 39 Information on letters and order forms

V. Multiple Branches (Article 38 Para. 2 Read with Art 33) 12

Under Art 38 para. 2 read with Art 33 of the Directive where a company has opened more than one branch in a Member State, the disclosure referred to in Art 38 may be made in the register of the branch of the company's choice. For details see → Art 33.

Article 39 Information on letters and order forms Member States shall prescribe that letters and order forms used by a branch state the register in which the file in respect of the branch is kept together with the number of the branch in that register. Where the law of the State by which the company is governed requires entry in a register, the register in which the company is entered, and the registration number of the company in that register shall also be stated. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Means of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Items to Disclose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Register of the branch and number (Article 39 sentence 1) . . . . . . . . . . . . . . . 2. Register of the company and registration number (Article 39 sentence 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 3 5 8 8 10

I. General Features 1. Overview This Article refers to the letters and order forms used by a branch as secondary means of disclosure (see Foreword to Arts 28a-42, para. 16). Its regulatory content is twofold: (1) As particulars of disclosure, these secondary means of disclosure, on the one hand, have to indicate the register in which the file in respect of the branch is kept together with the number of the branch in that register. (2) Besides these essential particulars of disclosure, the letters and order forms used by a branch shall state the register in which the company is entered (including the registration number of the company in that register). 2 The scope of application covers branches of companies from third countries. As far as branches of companies from another Member State are concerned, Art 35 applies. 1

2. Background Art 39 Company Law Directive replaces Art 10 of the Eleventh Directive 89/666/EEC concerning disclosure requirements in respect of branches (repealed by Art 166 Company Law Directive). 4 Recitals 13 and 20 of the Company Law Directive refer, inter alia, to Art 39. 3

II. The Means of Disclosure 5

As regards the means of disclosure, Art 35 refers explicitly to letters (including electronic communication) and order forms, see commentary on → Art 26.

196

Peter Kindler

Art 39

TITLE I GENERAL PROVISIONS

Surprisingly, Art 39 does not refer to the company’s website if used by a branch. 6 In this regard, Art 39 seems to fall back behind the standards set by art 26 subpara 2 with respect to companies from another Member State (according to which company websites are to contain, among other items, the information necessary in order to identify the register in which the file referred to in Art 16 is kept, together with the number of the company in that register). Interpreting Art 39 in the light of the preamble, one has to conclude, however, that 7 the company’s website if used by the branch (or, all the more, if the branch is operating a website of its own) is an additional means of disclosure besides letters and order forms. In the age of the Internet, any website of the company has to be taken into account. In fact, according to Recital 13, in the light of technological developments, it is appropriate to provide a statement of compulsory particulars – like the register in which the file in respect of the branch is kept (including the number of the branch in that register) – be placed on any company website including a website operated by the branch (emphasis added).1

III. Items to Disclose 1. Register of the branch and number (Article 39 sentence 1) Art 39 sentence 1 Company Law Directive mentions the register in which the file in 8 respect of the branch is kept as a compulsory item of disclosure. Unlike in Art 35, there is no reference to Art 16 of the Directive, because companies from third countries are not subject to Art 16, i.e. its transposition in national law of the Member States. In addition, the letters, order forms and the website (→ mn. 6 et seq.) must indicate 9 the number of the branch in that register.

2. Register of the company and registration number (Article 39 sentence 2) Art 39 sentence 2 Company Law Directive mentions the register in which the 10 company is entered and the registration number of the company in that register as a compulsory item of disclosure. These details make it easier for the public to gain access to the central, commercial or companies register in the third country concerned. The details of registration are crucial for persons who deal with companies through the intermediary of branches because the compulsory disclosure at the branch (Art 37 of the Directive) might be less comprehensive than the disclosure in the main register of the company. The disclosure of the register of the company and the relevant number in that register makes it possible for third parties to identify the company and to gain access to the entry of the company in its home register. The same rationale can be found in Art 37(d) as far as disclosure in the register is concerned. The disclosure of the register and the registration number of the company is compul- 11 sory only ‘Where the law of the State by which the company is governed requires entry in a register’. In this regard, Art 39 sentence 2 refers to the applicable third country company law within the meaning of Art 37(c). The provision is based on the principle ‘Ad impossibilia nemo tenetur’ (nobody is held to the impossible): if the 1 Preamble to Directive 2017/1132/EU, Recital 13: “It is appropriate to clarify that the statement of the compulsory particulars set out in this Directive should be included in all company letters and order forms, whether they are in paper form or use any other medium. In the light of technological developments, it is also appropriate to provide that that statement of compulsory particulars be placed on any company website.”

Peter Kindler

197

Art 40 Penalties foreign company is not entered in any register in its home country, then there can be no duty to disclose any details referred to its registration.

Section 4 Application and implementing arrangements Article 40 Penalties Member States shall provide for appropriate penalties in the event of failure to disclose the matters set out in Articles 29, 30, 31, 36, 37 and 38 and of omission from letters and order forms of the compulsory particulars provided for in Articles 35 and 39. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Relevant Infringements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Failure to disclose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Omission of particulars from letters and order forms . . . . . . . . . . . . . . . . . . . . . III. Appropriate Character of Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Fines or penalty payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Personal liability of the persons who acted for the company . . . . . . . . . . . . . .

1 1 3 5 5 7 9 9 11

I. General Features 1. Overview Art 40 provides for penalties to combat two types of infringements by the companies concerned: the failure to disclose certain matters and the omission of certain particulars in letters and order forms. 2 These penalties must be ‘appropriate’. Unsurprisingly, the ECJ case-law related to the freedom of establishment of EU letterbox companies – i.e. a company registered in Member State A without any real connection to that State, but with a branch in Member State B – is based on the fact that the company’s creditors are protected by measures in respect of disclosure required in the Member State in which the branch is situated (Recital 16).1 1

2. Background Art 40 Company Law Directive replaces Art 12 of the Eleventh Directive 89/666/EEC on branches (repealed by Art 166 Company Law Directive). 4 As to appropriate penalties, the general provision is contained in Art 28 of the Directive. 3

1 Case C-212/97, 09.03.1999, Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECLI:EU:C:1999:126, para. 36; Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 135; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin nos 530, 881.

198

Peter Kindler

Art 40

TITLE I GENERAL PROVISIONS

II. Relevant Infringements 1. Failure to disclose As far as the failures to disclose are concerned, Art 40 refers to Art 29 (Disclosure 5 of documents and particulars relating to a branch of a company from another Member State), 30 (Documents and particulars to be disclosed), 31 (Limits on the compulsory disclosure of accounting documents), 36 (Disclosure of documents and particulars relating to a branch of a company from a third country), 37 (Compulsory documents and particulars to be disclosed) and 38 (Limits of compulsory disclosure of accounting documents). The wording of Art 40 does not cover failures within the meaning of Art 32 6 (translation of the instruments of constitution and of accounting documents). In this regard, Art 4(3) subpara 2 TEU applies (‘The Member States shall take any appropriate measure, general or particular, to ensure fulfilment of the obligations […] resulting from the acts of the institutions of the Union’). The same is true with respect to failures to comply with Art 33 subpara 2 (disclosure in cases of multiple branches in a Member State). Without any threat of a penalty at all Arts 32, 33 would be ineffective.

2. Omission of particulars from letters and order forms As far as the omission from letters and order forms of compulsory particulars con- 7 cerned, Art 40 refers to Arts 35 and 39 (Information on letters and order forms). Art 40 does not seem to provide for any penalties in case of an inaccurate indication 8 of the details mentioned in Arts 35, 39 in letters and/or order forms, e.g. an inaccurate indication of the number of a branch in the register. In this regard, again Art 4(3) subpara 2 TEU applies (see above, para. 6). Without any threat of a penalty at all Arts 35, 39 would be ineffective insofar as the inaccurate indication of particulars is concerned.

III. Appropriate Character of Penalties 1. Fines or penalty payments Under national law, the persons who shall carry out the disclosure formalities (Art 41 9 of the Directive) may be subject to fines or penalty payments in case of infringements, e.g. according to Section 14 of the German Commercial Code. Experience shows, however, that the threat of fines or penalty payments in case of 10 infringements of disclosure obligations is mostly ineffective because of the notorious lack of personnel at the register offices and/or because of the foreign domicile of the persons responsible under Art 41 of the Directive.2 Furthermore, under national law creditors and third parties often have no right to apply to the register in order to fix a penalty payment against persons responsible under Art 41 of the Directive. It is well known, in this regard, that the CJEU has interpreted Art 28 of the Company Law Directive (ex Art 6 of the First Council Directive 68/151/EEC) as precluding the legislation of a Member State from restricting to members or creditors of a company, the central works council or the company's works council the right to apply for imposition 2 For Germany see Roth and Kindler, The Spirit of Corporate Law (2013), 167 et seq.; Eidenmüller and Rehberg, ‘Umgehung von Gewerbeverboten mittels Auslandsgesellschaften’ NJW 2008, 28; Koch, ‘§ 13d’ in Staub, Canaris, Habersack and Schäfer (eds), Handelsgesetzbuch. Großkommentar, Vol. 1 (5 th edn, 2016), margin no 59 et seq.; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 530.

Peter Kindler

199

Art 40 Penalties of the penalty provided for by the law of that Member State in the event of failure by a company to fulfil the obligations regarding disclosure.3

2. Personal liability of the persons who acted for the company 11

The only effective penalty is the personal liability of the persons who shall carry out the disclosure formalities (Art 41 of the Directive) in case of failure to disclose. Such a responsibility is codified in Italian law (Art 2509-bis codice civile)4 whereas German judges have denied it in 2005.5 Example:6

12

The ‘X Ltd.’, a private limited company governed by English law and registered in the Companies House/ Cardiff, has its real seat in Germany. The company’s German branch is not registered in the German commercial register. X Ltd concluded a gas supply contract with the claimant, a German energy provider, but never paid for the gas it was supplied by the claimant. Is the managing director of the ‘X Ltd.’ liable for the debts of the company arising under the gas supply contract?

In a case like this, liability could derive from Section 11(2) of the German law pertaining to the private limited company (GmbH-Gesetz), applied by analogy. The provision is the transposition of Art 7(2) of the Company Law Directive which states as follows: ‘If, before a company being formed has acquired legal personality, action has been carried out in its name and the company does not assume the obligations arising from such action, the persons who acted shall, without limit, be jointly and severally liable therefor, unless otherwise agreed.’

The rationale of Art 7(2) of the Company Law Directive is to create an incentive for the management of a company to comply with the disclosure obligations established by the Directive. Altough designed for the phase of the incorporation of the company, its rationale also covers any non compliance of disclosure obligations at a later stage, e.g. after having set up a branch in another State (Arts 29, 36 of the Directive). 14 As regards the appropriateness of such a personal liability, Art 40 has to be interpreted in the light of the case-law on Art 4(3) subpara 2 TEU (‘The Member States shall take any appropriate measure, general or particular, to ensure fulfilment of the obligations arising out of the Treaties or resulting from the acts of the institutions of the Union’). In this regard, in the Inspire Art case the ECJ held:7 13

‘The Court has consistently held that where [an EU] regulation does not specifically provide any penalty for an infringement or refers for that purpose to national laws, regulations and administrative provisions, Article [4(3) TEU] requires the Member States to take all measures necessary to guarantee the application and effectiveness of [EU] law. For that purpose, while the choice of 3 Case C-97/96, 04.12.1997, Verband deutscher Daihatsu-Händler v Daihatsu Deutschland [1997] ECLI: EU:C:1997:581, para. 22; Case C-191/95, 29.09.1998, Kommission v Deutschland [1998] ECLI:EU:C: 1998:441. 4 Art 2509-bis codice civile (Responsabilità in caso di inosservanza delle formalità): ‘Fino all'adempimento delle formalità sopra indicate, coloro che agiscono in nome della società rispondono illimitatamente e solidalmente per le obbligazioni sociali.’ – Art 2509-bis Italian civil code (Responsibility in case of violation of the formalities): ‘Until the fulfilment of the formalities defined above, persons who acted in the name of the company shall, without limit, be jointly and severally liable for the debts of the company.’ 5 BGH 14.03.2005 – II ZR 5/03, NJW 2005, 1648; for a critical comment see – with numerous further references – Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin nos 528 et seq., 942 et seq. 6 The example is based on the facts of the German case BGH 14.03.2005 – II ZR 5/03, NJW 2005, 1648. 7 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECLI:EU:C:2003:512, para. 62; Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchner Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin nos 530, 881.

200

Peter Kindler

Art 41

TITLE I GENERAL PROVISIONS

penalties remains within their discretion, they must ensure in particular that infringements of [EU] law are penalised in conditions, both procedural and substantive, which are analogous to those applicable to infringements of national law of a similar nature and importance and which, in any event, make the penalty effective, proportionate and dissuasive.’

Since it is commonly known, that any threat of fines or penalty payments is ineffec- 15 tive as far as the implementation of disclosure duties is concerned (→ mn. 10), personal liability of the responsible persons remains the only – and therefore appropriate – measure to guarantee the application and effectiveness of Community law. Italian law shows the way, in this regard (→ mn. 11).

Article 41 Persons carrying out disclosure formalities Each Member State shall determine who shall carry out the disclosure formalities provided for in Sections 2 and 3. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Categories of Persons Able to Carry Out Disclosure Formalities . . . . . . . . . . . . . 1. TEU requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The single categories of persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 2 3 3 5

I. General Features 1. Overview Art 41 applies to both branch of companies from other Member States and of 1 companies from third countries. The provision leaves it up to the Member States to determine who shall carry out the disclosure formalities.

2. Background Art 41 Company Law Directive replaces Art 13 of the Eleventh Directive 2 89/666/EEC on branches (repealed by Art 166 Company Law Directive).

II. Categories of Persons Able to Carry Out Disclosure Formalities 1. TEU requirements Unlike the wording of Art 41 might suggest, Member States are not completely free to 3 determine who shall carry out the disclosure formalities provided for in Art 28 a et seq. and Art 36 et seq. Like every provisions of EU secondary law, Art 41 must to be interpreted in the 4 light of the Treaties. In this regard, Art 4(3) subpara 2 TEU applies (‘The Member States shall take any appropriate measure, general or particular, to ensure fulfilment of the obligations […] resulting from the acts of the institutions of the Union’). It follows from Art 4(3) subpara 2 TEU that the persons responsible for the disclosure formalities must be in a position, under national company law, to perform these formalities. Otherwise the fulfilment of the disclosure formalities provided for in Sections 2 and 3 would be impossible. Peter Kindler

201

Art 42 Exemptions to provisions on disclosure of accounting documents for branches 2. The single categories of persons As a first category of persons who are authorised to represent the company in legal proceedings, Sections 2 and 3 in Chapter III pertaining to disclosure mention ‘the persons who are authorised to represent the company […] as a company organ constituted pursuant to law or as members of any such organ’ (Arts 30(1)(e) indent 1, 37(h) indent 1, emphasis added). It follows that national law can determine that legal representatives shall carry out the disclosure formalities provided for in Sections 2 and 3. This is the case, e.g., under German law which refers to the managing directors in their number entitled to representation (Section 13e(2) sentence 1 German Commercial Code). 1 For details regarding company organs see the commentaries to Art 30, para. 13 et seq., and to Art 37, para. 23 et seq. 6 As a second category the ‘permanent representatives’ of the company for the activity of the branch can be determined by national law as responsible for carrying out the disclosure formalities. The permanent representatives are mentioned in Arts 30(1)(e) indent 2, 37(h) indent 2 of the Directive, and they too, by definition, are authorised to represent the company in legal proceedings. It follows that national law can determine that permanent representatives shall carry out the disclosure formalities provided for in Sections 2 and 3. For details regarding permanent representatives see the commentaries to Art 30, para. 17 et seq., and to Art 37, para. 26 et seq. 7 The shareholders of a limited liability company normally do not have any power to represent the company, if not in specific situations such as in dealings with members of a company organ (e.g. under Section 112 German Law pertaining to public companies limited by shares – AktG). It follows that national law cannot determine that shareholders shall carry out the disclosure formalities provided for in Sections 2 and 3. 5

Article 42 Exemptions to provisions on disclosure of accounting documents for branches 1. Articles 31 and 38 shall not apply to branches opened by credit institutions and financial institutions covered by Council Directive 89/117/EEC(7). 2. Pending subsequent coordination, the Member States need not apply Articles 31 and 38 to branches opened by insurance companies. I. General Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Disclosure of Accounting Documents of Credit Institutions and Financial Institutions (Article 42(1)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Disclosure of Accounting Documents of Insurance Companies (Article 42(2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 3 4 5

1 Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Vol. 12 (8th edn, 2021), margin no 899. (7) Council Directive 89/117/EEC of 13 February 1989 on the obligations of branches established in a Member State of credit institutions and financial institutions having their head offices outside that Member State regarding the publication of annual accounting documents (OJ L 44, 16.2.1989, p. 40).

202

Peter Kindler

Art 42

TITLE I GENERAL PROVISIONS

I. General Features 1. Overview This Article states two sector-related exemptions to provisions on disclosure of 1 accounting documents for branches. In the credit institutions and financial institutions sector (Art 42(1)), there is overrid- 2 ing EU legislation, whereas in the insurance sector coordination is still pending (at least Art 42(2) states so).

2. Background Art 42 Company Law Directive replaces Art 14 of the Eleventh Directive 3 89/666/EEC concerning disclosure requirements in respect of branches (repealed by Art 166 Company Law Directive).

II. Disclosure of Accounting Documents of Credit Institutions and Financial Institutions (Article 42(1)) The disclosure of accounting documents of credit institutions and financial institu- 4 tions being covered by Council Directive 89/117/EEC, Arts 31 and 38 step back. Although not mentioned in Art 42(1), also Arts 30(1)(g) and 37(j) shall not apply to branches opened by credit institutions and financial institutions covered by Council Directive 89/117/EEC. Art 42(1) is not meant to remove the limits of compulsory disclosure as defined in Arts 31 and 38, but compulsory disclosure as such as defined in Arts 30(1)(g) and 37(j).

III. Disclosure of Accounting Documents of Insurance Companies (Article 42(2)) As regards branches opened by insurance companies, the Member States need not 5 apply Arts 31 and 38 (again read with Arts 30(1)(g) and 37(j); see above, para. 4). Surprisingly, this exemption is stated ‘pending subsequent coordination’. This word- 6 ing seems to be taken from the original version of Art 14(2) of the Eleventh Directive 89/666/EEC concerning disclosure requirements in respect of branches (see above, para. 3), without taking into account that shortly after the adoption of that directive another directive on annual accounts of insurance undertakings was adopted, i.e. the Council Directive of 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings (91/674/EEC).1 Since that day, coordination in that field was no longer ‘pending’. It follows that under Art 42(2) – and against the wording of that provision – Articles 7 31 and 38 shall not apply to branches opened by insurance companies. Interpreting Art 42(2) by the letter would lead to a Member States’ option to apply both regimes – the one based on the Directive 91/674/EEC and the one based on Arts 31 and 38 (read with Arts 30(1)(g) and 37(j)) – to insurance companies.

1

OJ 1991 L 374/7.

Peter Kindler

203

Foreword to Arts 44-85

Article 43 Contact Committee The Contact Committee set up pursuant to Article 52 of Council Directive 78/660/EEC (1) shall also: (a) facilitate, without prejudice to Articles 258 and 259 of the Treaty, the harmonised application of the provisions of Sections 2, 3 and this Section, through regular meetings dealing, in particular, with practical problems arising in connection with their application; (b) advise the Commission, if necessary, on any additions or amendments to the provisions of Sections 2, 3 and this Section. 1

Art 43 was deleted by Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law.

CHAPTER IV CAPITAL MAINTENANCE AND ALTERATION Foreword to Arts 44-85 I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Ratio legis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Public limited liability companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Material scope and structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Legal relationship between shareholders and company . . . . . . . . . . . . . . . . . . . 4. Exemption of liquidation measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Exemption of groups of companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Primacy of issuer liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Interpretation of the Provisions Derived from the Second Directive . . . . . . . . . VI. Minimum Protection and Scope for Divergent National Legislation . . . . . . . . . VII. Incomprehensive Regime / effet utile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Direct Applicability / Direct Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

3 7 19 27 29 30 38 39 43 46 49 55 62 64

The provisions laid down in Title 1, Chapter II, Section 1, i.e. Articles 2 through 6, and the provisions laid down in Title 1, Chapter IV, i.e. Articles 44 through 86 derive from the Second Directive in its latest and final version 2012/30/EU 1. They have been codified in the Directive with the intention to fully preserve their content, which also applies to the further provisions laid down in the Directive that derive from Directives 82/891/EEC, 89/666/EEC, 2005/56/EC, 2009/101/EC and 2011/35/EU. 2 In this regard, the Directive is merely a compilation of formerly separate and individual legislative acts. 1 Directive 78/660/EEC of the Council of 25 July 1978 based on Article 54(3)(g) of the Treaty on the annual accounts of certain types of companies [1978] OJ L 222/11. 1 Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ L 315, 14.11.2012, p. 74–97. 2 Proposal for a Directive of the European Parliament and of the Council relating to certain aspects of company law, COM/2015/0616 final – 2015/0283, p. 2.

204

Jan P. Brosius

Foreword to Arts 44-85

Article 43 Contact Committee The Contact Committee set up pursuant to Article 52 of Council Directive 78/660/EEC (1) shall also: (a) facilitate, without prejudice to Articles 258 and 259 of the Treaty, the harmonised application of the provisions of Sections 2, 3 and this Section, through regular meetings dealing, in particular, with practical problems arising in connection with their application; (b) advise the Commission, if necessary, on any additions or amendments to the provisions of Sections 2, 3 and this Section. 1

Art 43 was deleted by Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law.

CHAPTER IV CAPITAL MAINTENANCE AND ALTERATION Foreword to Arts 44-85 I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Ratio legis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Public limited liability companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Material scope and structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Legal relationship between shareholders and company . . . . . . . . . . . . . . . . . . . 4. Exemption of liquidation measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Exemption of groups of companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Primacy of issuer liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Interpretation of the Provisions Derived from the Second Directive . . . . . . . . . VI. Minimum Protection and Scope for Divergent National Legislation . . . . . . . . . VII. Incomprehensive Regime / effet utile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Direct Applicability / Direct Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

3 7 19 27 29 30 38 39 43 46 49 55 62 64

The provisions laid down in Title 1, Chapter II, Section 1, i.e. Articles 2 through 6, and the provisions laid down in Title 1, Chapter IV, i.e. Articles 44 through 86 derive from the Second Directive in its latest and final version 2012/30/EU 1. They have been codified in the Directive with the intention to fully preserve their content, which also applies to the further provisions laid down in the Directive that derive from Directives 82/891/EEC, 89/666/EEC, 2005/56/EC, 2009/101/EC and 2011/35/EU. 2 In this regard, the Directive is merely a compilation of formerly separate and individual legislative acts. 1 Directive 78/660/EEC of the Council of 25 July 1978 based on Article 54(3)(g) of the Treaty on the annual accounts of certain types of companies [1978] OJ L 222/11. 1 Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ L 315, 14.11.2012, p. 74–97. 2 Proposal for a Directive of the European Parliament and of the Council relating to certain aspects of company law, COM/2015/0616 final – 2015/0283, p. 2.

204

Jan P. Brosius

Foreword to Arts 44-85

TITLE I GENERAL PROVISIONS

As a consequence, the provision laid down in Articles 2 through 6 and 44 through 86 have to be read and interpreted in the light of the Second Directive, it historical background and ratio legis. The Second Directive – in its initial version 77/91/EEC3 – was adopted in 1976 to 2 coordinate the national provisions focusing on the capital structure of public limited liability companies. The European legislature intended to create a uniform standard of minimum safeguards in respect of the company’s formation and the maintenance and alteration of its capital. The Second Directive and, thus, the provisions laid down in Articles 2 through 6 and 44 through 86 aim at equally protecting the interests of both shareholders and creditors. Essential to the legislature’s dogmatic approach is the introduction of the concepts of legal capital and minimum capital in European law.

I. Historical Background The Second Directive was based on Article 50 (1) and (2) (g) of the Treaty on the 3 Functioning of the European Union.4 Accordingly, its legislative intent derived from the endeavours to fully coordinate and consolidate European company law, in particular its safeguards in favour of shareholders and creditors. In the General Programme for the abolition of restrictions on freedom of establishment of 18 December 1961 the Council stated that the safeguards in favour of shareholders as well as creditors stipulated in the individual Member States had to be coordinated with the objective to make such provisions equivalent within the second year of the second stage of the transition period.5 This coordination process was begun by the adoption of the First Council Directive 4 68/151/EEC of 9 March 19686 (cf. → Foreword to Arts 7-12 mn. 1 et seqq.). The legislative process to adopt the Second Directive was initiated by the Commission’s first proposal of 5 March 19707, followed by the Opinion of the European Economic and Social Committee of 26 May 19718 and the Report of the European Parliament of 19 October 19719, which resulted in the Commission’s second proposal of 30 October 197210. These documents exhaustively constitute the legislative material that was officially published. They are the only reliable (and acceptable, cf. → mn. 49 et seqq.) sources to determine the relevant European legislature’s intent with regard to the initial version of the Second Directive, i.e. Directive 77/91/EEC. More than four years after the Commission made its second proposal, the Second 5 Directive was formally adopted on 13 December 1976.11 The extended period between the Commission’s second proposal and the adoption of the Second Directive was not 3 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1. 4 Also see the second recital of the Directive and Article 45 (2) of the Directive. 5 OJ No P 2, 15.01.1962, p. 39/62. See Art 8 EEC Treaty in the version of the Treaty of Rome. The second stage eventually ended 31 December 1965, cf. Dedman, The Origins and development of the European Union, 2. Ed. (2010), p. 102. 6 First Council Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community, OJ No L 65, 14.3.1968, p. 8–12. 7 COM (1970) 232 final; OJ No C 48, 24.4.1970, p. 8-22. 8 OJ No C 88, 6.9.1971, p. 1-6. 9 OJ No C 114, 11.11.1971, p. 18-20. 10 COM (1972) 1310 final.

Jan P. Brosius

205

Foreword to Arts 44-85 least due to the accession of Denmark, the United Kingdom and Ireland as of 1 January 197312 and their involvement in the henceforth rather lengthy legislative process which led to significant amendments of the initial proposal.13 Nonetheless, the Second Directive was considered highly valuable and it was remarked that “with admirable skill, the best features of national company laws have been welded into an instrument which practical importance goes far beyond the impact of the First Directive”.14 6 By EEA Agreement of 2 May 1992, entering into force on 1 January 1994 and 1 January 1995, respectively, the scope of the Second Directive was extended to the Republic of Iceland, the Kingdom of Norway and the Principality of Liechtenstein as well as former EEA Members and todays Member States the Republic of Austria, the Republic of Finland and the Kingdom of Sweden.15

II. Amendments 7

Since its adoption in 1976 the Second Directive 77/91/EEC had been amended by four amending acts of accession16 as well as four amending directives before being repealed and replaced by Directive 2012/30/EU17, which again was amended by two directives before being repealed and replaced by the Directive (cf. → Art 166), where its provisions have been codified in Articles 2 through 6 and 44 through 86 (cf. → Annex IV). Since then, the provisions derived from the Second Directive have been amended by Directive (EU) 2019/102318 (cf. → Art 84 mn. 6, 16 et seqq.) and Directive (EU) 2019/115119 (cf. → mn. 18).

11 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1. 12 Treaty between the Kingdom of Belgium, the Federal Republic of Germany, the French Republic, the Italian Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Kingdom of Denmark, Ireland, the Kingdom of Norway and the United Kingdom of Great Britain and Northern Ireland concerning the accession of the Kingdom of Denmark, Ireland, the Kingdom of Norway and the United Kingdom of Great Britain and Northern Ireland to the European Economic Community and to the European Atomic Energy Community of 22.01.1972, OJ L 73, 27.3.1972, p. 5–204. 13 See also Wooldridge, Company Law in the UK and the EC, p. 25; Piepkorn, ZHR 141 (1977), 330, 344. 14 Schmitthoff, 15 CMLR (1978), 43, 54. 15 Article 77, Annex XXII (Company Law) No. 1 (b), also see OJ No. L 1/1, 3.1.1994. 16 Accession of the Hellenic Republic, OJ No L 291 , 19.11.1979, p. 89; Accession of the Kingdom of Spain and the Portuguese Republic, OJ No L 302, 15.11.1985, p. 157; Accession of the Republic of Austria, the Republic of Finland and the Kingdom of Sweden, OJ C 241, 29.08.1994, p. 194; Accession of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic, OJ No L 236, 23.9.2003, p. 338–340. 17 Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97. 18 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18–55.

206

Jan P. Brosius

Foreword to Arts 44-85

TITLE I GENERAL PROVISIONS

The first substantive material amendment to the Second Directive was made by 8 Council Directive 92/101/EEC20. In order to prevent public limited liability companies from the circumvention of the restrictions on a company’s acquisition of its own shares by using a subsidiary, Article 67 was inserted. In 1999, the work of the SLIM Initiative21 gave raise to further amendments. The 9 Company Law SLIM Working Group was composed of Member State representatives as well as experts in and users of company law and was chaired by Eddy Wymeersch.22 Its purpose was not to further harmonise, but to slim regulation.23 Accordingly, the “Company Law Slim Exercise” was defined as a “deregulation exercise” to point out and propose regulative improvements regarding regulations within the scope of the First and Second Directives that should be simplified.24 In its report on the results of the fourth phase of SLIM the Commission stated that some matters within the Second Directive, particularly those dealing with company capital, would require modification in order to allow greater flexibility to companies and shareholders.25 It was argued that the provisions dealing with the formation of companies represent “an excessive administrative burden and should be replaced by less onerous rules”.26 The SLIM Working Group made proposals on the contribution in kind, legal capital, shares and the relation between these categories, the withdrawal of shares, the acquisition of own shares, the financial assistance of the acquisition of own shares and pre-emptive rights.27 In 2000, the Commission expressed its broad agreement with all the recommendations presented by the SLIM Working Group.28 Subsequently, the results of the SLIM Initiative were mostly confirmed and com- 10 plemented by the High Level Group of Company Law Experts in their report on a “Modern Regulatory Framework for Company Law in Europe”.29 The High Level Group argued that the view prevailed – although difficult to access – that the current provisions on capital formation and maintenance had a negative impact on the cost of capital and 19 Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law, OJ L 186, 11.7.2019, p. 80–104. 20 Council Directive 92/101/EEC of 23 November 1992 amending Directive 77/91/EEC on the formation of public limited liability companies and the maintenance and alteration of their capital, OJ No L 347, 28.11.1992, p. 64–66. 21 The SLIM initiative – Simpler Legislation for the Internal Market – was launched by the Commission in May 1996 with the objective of identifying ways in which Single Market legislation could be simplified. 22 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999 (http://ec.europa.eu/internal_market/company/docs/official/60 37en.pdf), p. 7. 23 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999 (http://ec.europa.eu/internal_market/company/docs/official/60 37en.pdf), p. 7. 24 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999 (http://ec.europa.eu/internal_market/company/docs/official/60 37en.pdf), p.7. 25 Report from the Commission – results of the fourth phase of SLIM of 4 February 2000, COM (2000) 56 final, p. 2. 26 Report from the Commission – results of the fourth phase of SLIM of 4 February 2000, COM (2000) 56 final, p. 2 et seq. 27 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999 (http://ec.europa.eu/internal_market/company/docs/official/60 37en.pdf), p.4 et seqq. 28 Report from the Commission – results of the fourth phase of SLIM of 4 February 2000, COM (2000) 56 final, p. 5. 29 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002.

Jan P. Brosius

207

Foreword to Arts 44-85 credit.30 It proposed to modernise the capital formation and capital maintenance regime by removing the defects perceived in it while maintaining its virtues.31 11 In its “Plan to Move Forward” of 2003, the Commission acknowledged once again the results of the SLIM Initiative and the High Level Group.32 In 2004, the Commission made a proposal for a number of comprehensive amendments to the Second Directive. 33 Following the Opinion of the European Economic and Social Committee34 and the Report of the Committee on Legal Affairs of the European Parliament, 35 that made some significant changes to the proposal that was finally approved by the European Parliament,36 the amending Directive 2006/68/EC37 was adopted on 6 September 2006 and became effective on 15 October 2006. 12 Directive 2006/68/EC focussed on four regulatory areas: the expert valuation of contributions in kind, the acquisition of own shares, the reduction of subscribed capital and the financial assistance of the acquisition of own shares. Its purpose was to facilitate capital related measures taken in public limited liability companies by enabling Member States – under certain conditions – to eliminate specific reporting requirements, to “facilitate specific changes in share ownership”, and “to provide a basically harmonised legal procedure for creditors […] in the context of capital reduction.”38 By the flexibility gained in terms of capital size, capital structure and ownership, companies ought to be enabled “to react more promptly and in a less costly and protracted manner” to developments in their markets.39 This strengthening of business efficiency and competitiveness was ought to be achieved without reducing the protection offered to shareholders and creditors.40 13 The intend to simplify was taken up in the second recital of Directive 2006/68/EC that, with reference to the “Plan to Move Forward” of 21 May 200341, emphasised the Commission’s conclusion that a simplification and modernisation of the Second Directive would significantly contribute to the promotion of business efficiency and competitiveness without reducing the protection offered to shareholders and creditors. It expressly made clear, that those objectives had the first priority. At the same time, there had been need to also proceed without delay to a general examination of the feasibility 30 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 78. 31 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 81. 32 Communication to the Council and the European Parliament: Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward, COM(2003) 284 final, p. 18. 33 COM/2004/0730 final. 34 Opinion of the European Economic and Social Committee on the Proposal for a Directive of the European Parliament and of the Council amending Council Directive 77/91/EEC, as regards the formation of public limited liability companies and the maintenance and alteration of their capital (COM(2004) 730 final — 2004/0256 (COD)), OJ No C 294, 25.11.2005, p. 1–4. 35 Report on the proposal for a directive of the European Parliament and of the Council amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital (2004/0256(COD)), A6-0050/2006. 36 P6_TA (2006) 0073. 37 Directive 2006/68/EC of the European Parliament and of the Council of 6 September 2006 amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital, OJ No L 264, 25.9.2006, p. 32–36. 38 Proposal of the Commission of 29.10.2004, COM (2004) 730 final, p. 2. 39 Proposal of the Commission of 29.10.2004, COM (2004) 730 final, p. 2. 40 Proposal of the Commission of 29.10.2004, COM(2004) 730 final, p. 2. 41 Communication of 21 May 2003 to the Council and the European Parliament entitled ‘Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward’.

208

Jan P. Brosius

Foreword to Arts 44-85

TITLE I GENERAL PROVISIONS

of alternatives to the capital maintenance regime which would adequately protect the interests of creditors and shareholders of a public limited liability company. Later in that same year of 2006, but merely by reason of the accession of Bulgaria and Romania, the Second Directive was amended by Directive 2006/99/EC.42 In 2009, the Second Directive was amended by Directive 2009/109/EC.43 First, as laid down in the third recital of its preamble, the scope of the Second Directive had to be adapted in order to reflect changes in Finnish company law.44 Secondly and more significantly, as, pursuant to the directive’s ninth recital, an independent expert’s report “is often not needed where an independent expert’s report protecting the interests of shareholders or creditors also has to be drawn up in the context of the merger or the division”, Directive 2009/109/EC allowed Member States in such cases to dispense companies “from the reporting requirement under [the Second Directive] or of providing that both reports may be drawn up by the same expert.” Respective changes were made to the provisions now laid down in Articles 49 (5) and 70 (3). In 2012, Directive 77/91/EEC of 13 December 1976 was repealed and replaced by Directive 2012/30/EU. According to the first recital of its preamble, as the Second Council Directive 77/91/EEC of 13 December 1976 had been substantially amended several times and was to be further amended in the future, it should be recast in the interests of clarity. In 2013, the Second Directive was amended by Council Directive 2013/24/EU45 by reason of the accession of the Republic of Croatia. The last amendment to the Second Directive before its repeal has been made by Directive 2014/59/EU 46, as a consequence of the financial crisis. Pursuant to its former Article 123 47 a third paragraph was added in Article 84 of the Directive. With effect as of 20 July 2017 (cf. → Art 167 of the Directive) the Second Directive, i.e. its last version 2012/30/EU, has been repealed by the Directive (cf. → Art 166 of the Directive). The provisions formerly laid down in Directive 2012/30/EU have been codified in Articles 2 through 6 and 44 through 86 thereby fully preserving their content, i.e. the amendments were limited to formal amendments required by the codification exercise itself.48 The most recent amendments to the provision derived from the Second Directive became effective in 2019. Pursuant to Article 32 of Directive (EU) 2019/1023 49, a fourth paragraph was added in Article 84 of the Directive, obliging Member States to derogate from certain provisions to the extent and for the period that such derogations are necessary for the establishment of the preventive restructuring frameworks provided 42 Council Directive 2006/99/EC of 20 November 2006 adapting certain Directives in the field of company law, by reason of the accession of Bulgaria and Romania, OJ No L 363, 20.12.2006, p. 137–140. 43 Directive 2009/109/EC of the European Parliament and of the Council of 16 September 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions, OJ No L 259, 2.10.2009, p. 14–21. 44 In Article 1(1), the fourteenth indent “- in Finland: osakeyhtiö/aktiebolag” was replaced by the following: “- Finland: julkinen osakeyhtiö/publikt aktiebolag”. 45 Council Directive 2013/24/EU of 13 May 2013 adapting certain directives in the field of company law, by reason of the accession of the Republic of Croatia, OJ No L 158, 10.6.2013, p. 365–367. 46 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ No L 173, 12.6.2014, p. 190–348. 47 Article 123 of Directive 2014/59/EU has been repealed by the Directive, cf. Annex III Part A to the Directive. 48 Cf. Proposal for a Directive of the European Parliament and of the Council relating to certain aspects of company law, COM/2015/0616 final – 2015/0283, p.3.

Jan P. Brosius

209

14 15

16

17

18

Foreword to Arts 44-85 for in Directive (EU) 2019/1023 (cf. → Art 84 mn. 6, 16 et seqq.). A so far last and – regarding the provisions derived from the Second Directive – minor amendment was made by Directive (EU) 2019/1151.50 Directive (EU) 2019/1151 primarily addressed the use of digital tools and processes regarding the disclosure and interconnection of central, commercial and companies registers of Member States and therefore had a predominant impact on the rules laid down in Title 1, Chapter III of the Directive, which were significantly amended by that directive (cf. → Intro Art 7 mn. 7 et seqq.). As an aside, Directive (EU) 2019/1151 also updated Annex I. According to the Commission, in Annex I, the types of companies of Sweden had to be updated to ensure a clear distinction and more precise terminology from aktiebolag to publikt aktiebolag.51

III. Ratio legis 19

The adoption of the Second Directive reflected the ambition to establish a common market and to remove existing obstacles to the freedom of establishment. 52 As the Second Directive was based on Article 50 (1) and (2) (g) of the Treaty on the Functioning of the European Union it sought to coordinate to the necessary extent the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or firms within the meaning of Article 54 (2) of the Treaty on the Functioning of the European Union53 with a view to making such safeguards equivalent throughout the Union.54 Article 50 (1) and (2) (g) of the Treaty aim to facilitate the exercise of the freedom of establishment by the different types of companies provided for in the Member States as laid down in Article 49 of the Treaty.55 Hence, Member states are not allowed to hinder the free establishment of companies from one Member State in another Member State on the grounds of divergent application of provisions for the protection of shareholders and third parties.56 At the same time, a “race to the bottom” is to be prevented.57 The provisions aim to establish equivalent conditions and to prevent a competition of different corporate laws instead of locations.58 49 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18–55. 50 Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law, OJ L 186, 11.7.2019, p. 80–104. 51 Proposal for a directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law, COM/2018/239 final – 2018/0113, p. 15; This clarification was, inter alia, of material relevance as the minimum capital for the privat aktiebolag amounts to only 50,000 Swedish krona, i.e. roughly EUR 4,700. 52 See also Wooldrige [1978], Acta Juridica, 327, 327; Case C-526/14 (Kotnik and others v. Republic of Slovenia) [2016], para. 87. 53 I.e. companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making. 54 Cf. Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 23; Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 25; C-42/95 Siemens AG v Henry Nold [1996], para. 13. 55 Müller-Graff, Streinz, Art 50, para. 17; Grabitz/Hilf/Nettesheim, Art 50 (2) (g), para. 22; see also Case C-81/09 Idryma Typou AE v Ipourgos Typou kai Meson Mazikis Enimerosis [2010], I-10221, para 38. 56 Müller-Graff, Streinz, Art 50, para. 17; Grabitz/Hilf/Nettesheim, Art 50 (2) (g), para. 22. 57 Grabitz/Hilf/Nettesheim, Art 50 (2) (g), para. 12. 58 Habersack/Verse, Europäisches Gesellschaftsrecht, § 3 para. 84.

210

Jan P. Brosius

Foreword to Arts 44-85

TITLE I GENERAL PROVISIONS

Pursuant to Directive 2012/30/EU’s third Recital – now codified in Recital 3 of the Directive – the provisions derived from the Second Directive aim to ensure minimum equivalent protection for both shareholders and creditors of public limited liability companies.59 They are intended to ensure that members’ and third parties’ rights are safeguarded.60 In this respect, a predominant element of shareholder protection is the principle of equal treatment of shareholders as stipulated in Article 85 which is also reflected – inter alia – in the provisions relating to the increase or reduction of capital.61 The Second Directive was intended to reassure investors that “their rights will be respected throughout the internal market by the governing bodies of the companies in which they have invested, particularly when a company is formed and when its share capital is increased and reduced”.62 Regarding creditors, first, the statutes or instrument of incorporation of a public limited liability company must make it possible for any interested person to acquaint her- or himself with the basic particulars of the company, including the exact composition of its capital.63 Secondly, the coordination of the rules on capital maintenance was deemed necessary to constitute creditors’ security, in particular by prohibiting any reduction of capital by unlawful distributions to shareholders, by imposing limits on the company's right to acquire its own shares64 and, in the context of a reduction of capital, by protecting creditors whose claims exist prior to the decision on reduction.65 Although the amending directives maintained the overall determination of the directive’s purposes, they pursued further objectives as well. Directive 92/101/EEC focused on the prevention of circumvention. Directive 2006/68/EC, in its scope, followed the recommendations of the SLIM Working Group and the High Level Group and aimed to enable companies to react more promptly and in a less costly and protracted way to the demands of and developments in the market. It also placed special emphasis on the enhancement of a standardised creditor protection in all Member States by enabling creditors “to resort, under certain conditions, to judicial or administrative proceedings where their claims are at stake as a consequence of a reduction in the capital of a public limited liability company”.66 Recital 13 of the preamble of the Second Directive 2012/30/EU67 - now codified in Recital 48 of the preamble of the Directive – underlined the importance and priority of the prevention of market abuse by taking into account the provisions of Regulation (EU) No 596/2014 of the European Parliament and the Council.68 Thus, Recital 48 of the preamble of the Directive stresses that these provisions apply without restrictions within the scope of the provisions derived from the Second Directive. Directive 2009/109/EC aimed to relieve companies of reporting requirements deemed unnecessary to enable them to act faster and less costly. Pursuant to Recital 1 of the preamble of Directive 2014/59/EC the financial crisis had shown that there was a significant lack of adequate tools to deal effectively with 59 Also see COM (90) 631 final – syn 317 of 13 December 1990; Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 23. 60 Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 27. 61 See also Case C-174/12 (Alfred Hirmann v Immofinanz AG), [2013], para. 23. 62 Case C-526/14 (Kotnik and others v. Republic of Slovenia) [2016], para. 87. 63 Recital 4 of the preamble of Directive 2012/30/EU. 64 Recital 5 of the preamble of Directive 2012/30/EU; also see COM (90) 631 final – syn 317 of 13 December 1990, see also Case C-526/14 (Kotnik and others v. Republic of Slovenia) [2016], para. 73. 65 Recital 11 of the preamble of Directive 2012/30/EU. 66 Recital 6 of the preamble of Directive 2006/68/EC. 67 First adopted as recital 7 of Directive 2006/68/EC.

Jan P. Brosius

211

20

21

22

23 24

Foreword to Arts 44-85 unsound or failing credit institutions and investment firms. However, such tools were needed to prevent the insolvency of such undertakings and to obviate, to the greatest extent possible, the need for taxpayers’ money to safe such institutions. As stated in Recital 121 of the preamble of Directive 2014/59/EU the rules on shareholders’ rights to decide on capital increases and reductions, on the shareholders’ (pre-emptive) right to participate in any new share issue for cash consideration, on creditor protection in the event of capital reduction and the convening of shareholders’ meeting in the event of serious loss of capital as contained in the Second Directive might hinder the rapid action by resolution authorities as provided for in Directive 2014/59/EU. To guarantee an effective implementation and application of the aims and mechanisms provided for under Directive 2014/59/EU appropriate derogations from such provision had been provided for in the former Article 123 of Directive 2014/59/EU. 69 25 The codification of the provisions of the Second Directive in the Directive solely served the purpose of consolidation (→ mn. 1). 26 The most recent amendments to the provisions derived from the Second Directive were made by Directive (EU) 2019/1023 (→ mn. 18) which deals with preventive restructuring, insolvency, discharge of debt, and disqualifications. According to recital 96 of its preamble, the effectiveness of the process of adoption and implementation of the restructuring plan should not be jeopardised by company law. Therefore, Member States should be able to derogate from the requirements laid down in the Directive concerning the obligations to convene a general meeting and to offer on a pre-emptive basis shares to existing shareholders, to the extent and for the period necessary to ensure that shareholders do not frustrate restructuring efforts by abusing their rights under the Directive. (cf. → Art 84 mn. 6, 16).

IV. Scope 27

The Commission’s first proposal for a Second Directive aimed to continue the work started in the First Directive of 9 March 196870 “in the same spirit” but in a rather “technical field”. The Commission explicitly pointed out that it had not overlooked the overall objective to coordinate the entire field of company law covering all types of companies.71 But due to the “urgency” of the project the Second Directive’s scope had to be limited both in terms of the types of companies addressed as well as in terms of the 68 Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, OJ L 173, 12.6.2014, p. 1–61. Initially, recital 13 of Directive 2012/30/EU referred to Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), OJ No L 96, 12.4.2003, Commission Regulation (EC) No 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buy-back programmes and stabilisation of financial instruments, OJ L 336, 23.12.2003, p. 33, and Commission Directive 2004/72/EC of 29 April 2004 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards accepted market practices, the definition of inside information in relation to derivatives on commodities, the drawing up of lists of insiders, the notification of managers’ transactions and the notification of suspicious transactions, OJ L 162, 30.4.2004, p. 70, which have all been repealed by Regulation (EU) No 596/2014. Also cf. → Art 60 mn. 14. 69 Article 123 of Directive 2014/59/EU has been repealed by the Directive. 70 First Council Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community, OJ No L 65, 14.3.1968, p. 8–12. 71 OJ No C 48, 24.04.1970, p.8.

212

Jan P. Brosius

Foreword to Arts 44-85

TITLE I GENERAL PROVISIONS

topics to be covered.72 Notwithstanding the proclaimed urgency it took more than six years until the Second Directive was finally adopted, while adhering to this limitation of scope. The provisions of the Second Directive apply to all 27 Member States – and, until 28 31 December 2020 also the United Kingdom73 – as well as to the States of the European Economic Area Norway, Liechtenstein and Iceland (cf. → mn. 6).

1. Public limited liability companies Pursuant to Article 2 and Article 44 the provisions derived from the Second Directive 29 and now laid down in Articles 2 through 6 and Articles 44 through 86 exclusively apply to public limited liability companies. The relevant types of public limited liability companies are listed in Annex I to the Directive (cf. → Art 2 mn. 3 et seq., → Art 44 mn. 3 et seq.). As stated in the second Recital to the preamble of the Directive 74 the desired coordination as provided for in point (g) of Article 50 (2) of the Treaty and in the General Programme for the abolition of restrictions on freedom of establishment was especially important with regard to public limited liability companies “because their activities predominate in the economy of the Member States and frequently extend beyond their national boundaries.” Previously, in its first proposal, the Commission had stated that the restriction to public limited liability companies was made not only because they represent the economically most important type of company and their activities usually cross national boundaries, but also because they represent the legally most sophisticated type of company. The coordination of public limited liability companies was intended to be, mutatis mutandis, a solid basis for the harmonisation of further types of companies.75

2. Material scope and structure According to the third Recital of its preamble – now laid down in Recital 3 of the 30 Directive – the provisions laid down in the Second Directive seek to coordinate the national provisions relating to the formation of public limited liability companies and to the maintenance, increase and reduction of their legal capital. As the Commission stated, the selection of topics was made in favour of these safeguards as they are of significant importance to shareholders and creditors and have to be guaranteed right from the establishment of the company.76 The structure of the Second Directive followed a rather chronological order. As 31 regards the codification of the Directive and the inclusion of the provisions derived from the Second Directive, the European legislator maintained that approach. Although the relevant provisions have been split in two parts and are now divided by other provisions, the order of the Second Directive has been retained. The main difference is the division into sections and the introduction of heading for such sections and each individual Article, which do not intend to have any content-related meaning and should not be attributed any particular importance for the interpretation of the respective provisions. Under the heading “incorporation of the public liability company” Section 1 and its 32 Articles 3 through 6 govern certain aspects regarding the minimum information to be provided in the statues, instruments of incorporation or separate documents published OJ No C 48, 24.04.1970, p.8. Cf. → Introduction mn. 79. 74 Formerly recital 2 to Directive 2012/30/EU. 75 OJ No C 48, 24.04.1970, p. 8. 76 OJ No C 48, 24.04.1970, p. 8. 72

73

Jan P. Brosius

213

Foreword to Arts 44-85

33

34

35

36

37

in accordance with the provisions derived from the First Directive which are laid down in Chapter III of the Directive (Articles 3 and 4), the responsibility for liability where government authorisation is required (Article 5), and a shortfall in the number of members, where a Member State requires a legal minimum to form a company (Article 6). Chapter IV, which is headlined “capital maintenance and alteration” is divided into six sections. Section 1, which is headlined “capital requirements”, and particularly Article 45 address the concept of legal capital and stipulate the requirement of a minimum capital. Section 1 further stipulates the requirements on contributable assets (Article 46), the issue below par value (Article 47) and the time of payment of contributions in cash and in kind (Article 48). Section 2, which is headlined “safeguards as regards statutory capital”, in particular addresses the requirement for an experts’ report for considerations in kind (Articles 49 to 52), the release from the obligation to make contributions (Article 53) and the adoption of equivalent rules regarding the conversion of another type of company into a public limited liability company (Article 54). Section 3, which is headlined “rules on distribution”, provides the first set of rules on capital maintenance: The general rules and restrictions on distributions to shareholders (Article 56) and the respective repayment obligation (Article 57) and the convening of a general meeting in case of serious loss of the subscribed capital (Article 58). Section 4, which is headlined “rules on companies’ acquisitions of their own shares”, regards the subscription, acquisition and holding by the company of its own shares (Articles 59 to 63), the financial assistance for the acquisition of own shares (Articles 64 and 65), the acceptance of own shares as security (Article 66) and the subscription, the acquisition or holding of the company’s shares by a subsidiary (Article 67). The provisions laid down in Section 5, which is headlined “rules for the increase and reduction of capital”, govern the alteration of capital, i.e. the increase in capital, in particular regarding the competence of the general meeting (Article 68), the consideration to be made to form the new capital (Articles 69 to 71) and the pre-emptive rights of existing shareholders (Article 72), as well as the reduction of capital, in particular the competence of the general meeting (Articles 73, 74, 81 and 83), creditor protection (Articles 75 and 76), capital reduction to an amount less than the minimal capital (Article 77), rules on the redemption of the subscribed capital without its reduction (Article 78), the reduction in the subscribed capital by compulsory withdrawal (Article 79), the reduction in the capital by withdrawal of own shares (Article 80) and redeemable shares (Article 82). Title 1, Chapter IV concludes in section 6, which is headlined “application and implementing arrangements”, providing options to derogate from certain provisions derived from the Second Directive (Article 84) and emphasising the obligation to guarantee the guiding principle of equal treatment to all shareholders (Article 85). It follows from the above that, in general, the structure of Title 1, Chapter II, Section 1 and Chapter IV, i.e. the provisions derived from the Second Directive, is rather straightforward and chronological, beginning with the formation of the company and continuing with the maintenance of its capital, the increase of capital and the reduction of capital. Systematically inaccurate and potentially misleading is the positioning of the general principles laid down in Articles 46 (requirements on contributable assets), 47 (issue below par value), 53 (no release from the obligation to make contributions), 58 (serious loss of the subscribed capital) and 85 (equal treatment to shareholder). Due to their generality of application, it would have been preferable to place such provisions at the very beginning of Chapter IV.

214

Jan P. Brosius

Foreword to Arts 44-85

TITLE I GENERAL PROVISIONS

3. Legal relationship between shareholders and company As far as the provisions derived from the Second Directive do not solely relate to the 38 company itself anyway, as, for instance, Articles 3 and 4 regarding the minimum information to be provided in the statues, it follows from the wording as well as the objective of the Second Directive that its provisions do not regulate the legal relationships between individual shareholders, but only the relationship established between the company and its shareholders and only to the extent such relationship derives from the statues, i.e. the corporate relationship. The Second Directive and the provisions derived from it are directed solely to internal relations within the company.77

4. Exemption of liquidation measures The Court of Justice repeatedly stated that, in order to be effective, for so long as the company continues to exist within its own structures,78 i.e. as long as the company’s shareholders and normal bodies have not been divested of their powers79 the Second Directive and its provisions do apply. On the other hand, where the company ceases to exist within its own structure the scope of application of the provisions derived from the Second Directive ends as well. The Court of Justice made clear that the Second Directive does not “preclude the taking of execution measures intended to put an end to the company's existence and, in particular, does not preclude liquidation measures placing the company under compulsory administration with a view to safeguarding the rights of creditors.”80 However, the provisions derived from the Second Directive continue to apply “where ordinary reorganisation measures are taken in order to ensure the survival of the company, even if those measures mean that the shareholders and the normal organs of the company are temporarily divested of their powers.”81 In the context of insolvency and liquidation it is also to be noted that Article 84 (3) obliges Member States to ensure that certain provisions of Chapter IV do not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU82 (→ Art 84 mn. 5, 15). Further, Article 84 (4) obliges Member States to derogate from certain provisions of Chapter IV to the extent and for the period that such derogations are necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/102383 (→ Art 84 mn. 6, 16 et seqq.). Cf. Case C-174/12 (Alfred Hirmann v Immofinanz AG) [2013], para. 27. Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 27 et seq. 79 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 30. 80 Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 57; also see Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 30. 81 Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 57. 82 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ L 173, 12.6.2014, p. 190–348. 83 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18–55. 77

78

Jan P. Brosius

215

39

40

41

42

Foreword to Arts 44-85 5. Exemption of groups of companies In general, though except for Article 67, the Second Directive is not concerned with groups of companies.84 In fact, the provisions derived from the Second Directive, and namely the provisions on capital maintenance, do not apply to groups of companies. The legal relationships between group members are excluded from the Second Directive’s scope.85 Although the Directive does not contain an explicit written derogation86 the European legislature clearly intended to cover groups of companies and the legal relationships between their members in a separate directive.87 44 In 1974 and 1975 preliminary proposals for such Ninth Directive had been provided.88 The further development and implementation of these preliminary proposals failed because of the significantly and vastly divergent ideas and concepts of the Member States.89 In 1984 the Commission provided a revised proposal.90 Again, a mutually acceptable compromise had not been found.91 Referring to the High Level Group of Company Law Experts, in 2003, the Commission stated that groups of companies, which were frequent in most Member States, “are to be seen as a legitimate way of doing business, but that they may present specific risks for shareholders and creditors in various ways. The Commission, following the Group's recommendation, [took] the view that there is no need to revive the draft Ninth Directive on group relations, since the enactment of an autonomous body of law specifically dealing with groups does not appear necessary, but that particular problems should be addressed through specific provisions in three areas”, i.e. financial and non-financial information, implementation of a group policy, and pyramids, i.e. chains of holding companies with the ultimate control based on a small total investment thanks to the extensive use of minority 43

84

339.

Cf. Wooldridge, Company Law in the UK and the EC, p. 31; Wooldridge [1978] Acta Juridica 327,

85 Cf. Fleischer, ‘Verdeckte Gewinnausschüttung und Kapitalschutz im Europäischen Gesellschaftsrecht’, in: Lutter (ed.), Das Kapital der Aktiengesellschaft in Europa, p. 114, 132; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 101; Bayer/J. Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht, Eine Bilanz von 1968 bis zur Gegenwart’, in: Bayer/Habersack (eds.), Aktienrecht im Wandel, Vol. 1, 2007, chap. 18 para. 39; Habersack, ZGR 2003, 724, 733; for a different view see Schön, FS Kropff, 1997, 285, 291. 86 Neither did the Second Directive. 87 Fleischer, ‘Verdeckte Gewinnausschüttung und Kapitalschutz im Europäischen Gesellschaftsrecht’, in: Lutter (ed.), Das Kapital der Aktiengesellschaft in Europa, p. 114, 132; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 101; Bayer/J. Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht, Eine Bilanz von 1968 bis zur Gegenwart’, in: Bayer/Habersack (eds.), Aktienrecht im Wandel, Vol. 1, 2007, chap. 18 para. 39; Grundmann, Europäisches Gesellschaftsrecht, § 10 para. 343; also see Chiapetta/Tombari, ‘Perspectives on Group Corporate Governance and European Company Law’, ECFR 2012, 261; Conac, ‘The Chapter on Groups of Companies of the European Model Company Act (EMCA), ECFR 2016, 301; Conac, ‘Constraining Dominant Shareholders’ Self-Dealing: The Legal Framework in France, Germany, and Italy’, ECGI – Law Working Paper No. 88/2007; Conac, ‘Directors’ Duties in Groups of Companies – Legalizing the Interest of the Group at the European Level’, ECFR, 2013-194-226; Drygala, ‘Europäisches Konzernrecht: Gruppeninteresse und Related Party Transactions’, Die Aktiengesellschaft 2013, 198; Enriques, ‘Related Party Transactions: Policy options and Real-World Challenges’ (2015) 16 European Business Organization Law Review; Hopt, ‘Groups of Companies – A Comparative Study on the Economics, Law and Regulation of Corporate Groups’, ECGI 286/2015; Mülbert, ‘Auf dem Weg zu einem europäischen Konzernrecht’, ZHR 179 (2015) 645; Teichmann, ‘Corporate groups within the legal framework of the EU, The group related aspects of the SUP proposal and the EU Freedom of establishment’, ECFR 2/2015, 219. 88 DOK No. XI/328 74-D and DOK No. XI/593 75-D. 89 Schwarz, Europäisches Gesellschaftsrecht, para. 890, 920; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 7 para. 4. 90 DOK No III/1639/84. 91 Habersack/Verse, Europäisches Gesellschaftsrecht, § 4 para. 15.

216

Jan P. Brosius

Foreword to Arts 44-85

TITLE I GENERAL PROVISIONS

shareholders.92 It was not until 2011 that the Reflection Group on the Future of EU Company Law addressed the topic again.93 Still, the Commission made clear that “the idea of a comprehensive legal EU framework covering groups of companies was met with caution”.94 More recently, in its proposal for amendments to Directive 2007/36/EC 95 the Commission addressed a limited number of topics related to groups, mainly relating to “related party transactions”. In 2015 the Forum Europaeum on Company Groups, an association of academics and practitioners, published a „Proposal to Facilitate the Management of Cross-Border Company Groups in Europe“.96 In 2016, the European Company Law Experts published a “proposal for reforming group law in the European Union”, that came to the conclusion that there is “no need to have a full-fledged European law of groups of companies” and only selected issues like group interest and related party transactions would require further harmonization.97 Most recently, in 2017, the EMCA Group published the first edition of its “European Model Company Act”. In Chapter 15 of the EMCA a comprehensive and extensive proposal for a harmonized law on groups. At this point of time, it cannot be foreseen if or to what extend there will be a 45 comprehensive regulation on groups of companies. At least in the foreseeable future it is not to be expected. Hence, for the time being, it is to the sole discretion of each Member State whether or not to provide for intra group exemption to the restrictions provided for in the Second Directive.

6. Primacy of issuer liability In Alfred Hirmann v Immofinanz AG the Court of Justice had to decide whether 46 certain provisions laid down in the Second Directive had to be interpreted as precluding national legislation on issuer liability on the basis of a breach of the information requirements stipulated under European law and the company’s consequential obligation to repay the purchase price of the shares and to redeem those shares.98 The Court of Justice made clear that national legislation transposing and implementing the provisions laid down in the Prospectus Directive 99, the Transparency Directive 100 and the Market Abuse 92 Communication to the Council and the European Parliament: Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward, COM(2003) 284 final, p. 18 et seq. 93 Report of the Reflection Group on the Future of EU Company Law, p. 60 (http://ec.europa.eu/interna l_market/company/docs/modern/reflectiongroup_report_en.pdf). 94 Action Plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies (http://ec.europa.eu/internal_market/company/docs/mo dern/121212_company-law-corporate-governance-action-plan_en.pdf), p. 14 et seq. 95 COM(2014) 213 final; see also amendments by European Parliament A8-0158/2015 and P8_TA(2015)0257. 96 ECFR 2015, 299-306. 97 Cf. a proposal for reforming group law in the European Union – Comparative Observations on the way forward, https://europeancompanylawexperts.wordpress.com/publications/reforming-group-law-in -the-eu/. 98 Case C-174/12 (Alfred Hirmann v Immofinanz AG) [2013], para. 22 et seqq. 99 Directive 2003/71/EC of the European Parliament and of the council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending directive 2001/34/EC, OJ No L 345, 31.12.2003, p. 64-89; repealed and replaced by Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC, OJ L 168, 30.6.2017, p. 12–82. 100 Directive 2004/109/EC of the European Parliament and of the council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ No 390, 31.12.2004, p. 38–58.

Jan P. Brosius

217

Foreword to Arts 44-85 Directive101 do not infringe the provisions laid down in the Second Directive.102 Priority is given to the specific rules laid down in such directives. They – respectively their successors – prevail over the general provisions of the Second Directive.103 47 In particular, the Court of Justice stated that issuer liability of the company towards investors who, at the same time, are also its shareholders, does not derive from the corporate relationship between the company and its shareholders and is not directed solely at the internal relations of that company. Instead the source of such liability was the respective share purchase agreement and its reason the irregular conduct on part of the company.104 48 Further, there is no infringement of the principle of equal treatment pursuant to Article 85 as the relevant shareholders who have suffered loss as a result of such wrongful conduct and the remaining shareholders are not “in the same position”.105 In fact, payments made as compensation for damages do not qualify as distribution to shareholders in the meaning of Article 56 (cf. → Art 56 mn. 6) and, hence, are not subject to its restrictions.106 Consequently, the redemption of shares due to such issuer liability does not fall within the scope of Article 59 but is rather an element of the compensation owed.107

V. Interpretation of the Provisions Derived from the Second Directive 49

The interpretation of the provisions derived from the Second Directive follows the general principles, whereby certain peculiarities are to be carefully considered. The starting point of any interpretation is the precise grammatical meaning and the literal sense, or, where appropriate, the ordinary meaning of the respective provision.108 The Court of Justice has consistently held that the legislation of the European Union is drafted in several languages and that all different language versions are equally authentic. Therefore, an interpretation of a provision of European law involves a comparison of the different language versions.109 At the time the Commission made its first proposal for a Second Directive, the European Economic Community consisted of six countries; it was drafted in four languages. When the Second Directive 77/91/EEC was adopted, the European Economic Community had 9 Members and the directive was drafted in six languages. When Directive 92/101/EEC was adopted it was drafted in the nine 101 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), OJ No L 96, 12.4.2003, p. 16; repealed and replaced by Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, cf. → Art 60 mn. 14; see also Directive 2014/57/EU of the European Parliament and of the council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive), OJ No L 173, 12.06.2014, p. 179-190. 102 Cf. Case C-174/12 (Alfred Hirmann v Immofinanz AG) [2013], para. 35 et seqq. 103 See also Grundmann, Europäisches Gesellschaftsrecht, § 10 para. 343; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 101; Langenbucher, ZIP 2005, 239, 242; Fleischer, ZIP 2005, 1805, 1810; Hutter/Stürwald, NJW 2005, 2428, 2431; Möllers, BB 2005, 1637, 1641 et seq.; Mülbert/Steup, WM 2005, 1639, 1653. 104 Case C-174/12 (Alfred Hirmann v Immofinanz AG) [2013], para. 29. 105 Case C-174/12 (Alfred Hirmann v Immofinanz AG) [2013], para. 30. 106 Case C-174/12 (Alfred Hirmann v Immofinanz AG) [2013], para. 32; see also Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 101. 107 Case C-174/12 (Alfred Hirmann v Immofinanz AG) [2013], para. 34. 108 Cf. Opinion Advocate General Tizzano delivered on 8 May 2001, C-133/00 (Bowden and others) I-7031, 7041. 109 Court of Justice, C-283/81 (C.I.L.F.I.T. v. Ministry of Health), I 3417, 3430 para. 18.

218

Jan P. Brosius

Foreword to Arts 44-85

TITLE I GENERAL PROVISIONS

languages of the then 12 Member States. When Directive 2006/68/EC was adopted the European Community had 24 Members and when Directive 2009/109/EC and Directive 2012/30/EU were adopted the European Community and the European Union, respectively, had 27 Members. When Directive 2014/59/EU was adopted, providing for the latest amendments to the Second Directive, it was drafted in 23 languages and the European Union consisted of today’s 27 Members and the United Kingdom. The same applies for Directive (EU) 2019/1023. Hence, for each directive a different set of languages has to be taken into account. Secondly, European law uses terminology which is peculiar to it and legal concepts referred to do not necessarily have the same meaning in European law as they have in the laws of the various Member States.110 This particularly applies to the Second Directive and the provisions derived from it, which use various legal terms that are comparable to those used under national law. In most cases, the provisions of the Second Directive even use the exact same terminology which, furthermore, often has a long standing in the laws of different Member States. However, these terms may not be interpreted referring to their understanding prevailing in the Member States. Any divergent interpretations of legal terms under national law must not influence the interpretation of the respective directive.111 Where a provision makes no express reference to the law of the Member State for the purpose of determining its meaning and scope it must be given an independent and uniform interpretation. Further, practitioners have to determine the meaning of the provisions of the Directive in the context of the legal system. Every provision of European law must be placed in its context and interpreted in the light of the provisions of European law as a whole, taking into account its objectives and its state of evolution at the date on which the provision in question is to be applied.112 Different directives may use the same terminology in the same context. Therefore, a common understanding has to be established. Accordingly, the European Economic and Social Committee was of the opinion that it was necessary to define certain financial terms used in the Second Directive in the then planned Fourth Directive 78/660/EEC.113 Often, also with regard to the provisions derived from the Second Directive, practitioners place main emphasis on a historical interpretation, i.e. the determination of the meaning expressed by the legislature when the law was under construction. Undeniably, the historical interpretation has particular significance within the interpretation of secondary law.114 There may be a multitude of sources to be used to determine the intention of the legislature. However, it is necessary to ensure that (i) such sources express the view of the legislative body and not only of its individual members, (ii) the respective legislative body intended to express its view in such document, and (iii) the source has been made public. With regard to the initial version of the Second Directive 77/91/EEC the Commission’s first proposal of 5 March 1970, the Opinion of the European Economic and Social Committee of 26 May 1971, the Report of the European Parliament of 19 October 1971, and the Commission’s second proposal of 30 October 1972 are the only Court of Justice, C-283/81 (C.I.L.F.I.T. v. Ministry of Health), I 3417, 3430 para. 19. Court of Justice, C-495/03 (Intermodal Transports BV v Staatssecretaris van Financien) I-8191, 8207 para. 36. 112 Court of Justice, C-283/81 (C.I.L.F.I.T. v. Ministry of Health), I 3417, 3430 para. 20, see also Court of Justice, C-11/76 (Government of the Kingdom of the Netherlands v Commission of the European Communities) 245, 278 para. 6. 113 Opinion of the European Economic and Social Committee, OJ No c 88, 6.9.1971, p. 3 et seq. 114 Schwarz, Europäisches Gesellschaftsrecht, para. 86 et seq; Epiney: in Bieber/Epiney/Haag, § 9 para.15. 110

111

Jan P. Brosius

219

50

51

52

53

Foreword to Arts 44-85 reliable sources to determine the relevant European legislature’s intent. In particular and although it's a frequent occurrence, the statements in the minutes of the Council may not be taken into account.115 54 Many provisions laid down in the Second Directive followed from national role models. Nevertheless, the same conclusions as those reached for the grammatical interpretations (cf. → mn. 49 et seq.) apply to the historical interpretation as well. It is not compatible with the principle of the autonomy of European law to refer to the interpretation of a national provision of a Member State.116 As the Court of Justice had pointed out, European law does not aim in principle to define its concepts on the basis of one or more national legal systems without express provisions to that effect. 117 Only in the rare case where the European legislature clearly expresses that there is the intention for an adoption of a national provision the contrary may apply.

VI. Minimum Protection and Scope for Divergent National Legislation There is a controversy as to whether and to which extent Member States are bound by the provisions derived from the Second Directive or may – namely for the purpose of broadening shareholder or creditor protection – provide for stricter rules. 118 Clearly, on the one hand, certain provisions unambiguously state that any derogation from their requirements is not permitted and, thus, would violate European Law. On the other hand, certain provisions expressly allow for stricter rules individually provided for by Member States in their national laws. 56 It is, however, questionable and controversial whether those other provisions which make no such explicit statement constitute minimum provisions or rather an exhaustive code of rules. A solely grammatical interpretation of such provisions is inconclusive. The very wording does not provide enough information to make a reliable conclusion. However, some scholars are of the opinion that, from a systematical perspective, Member States may supplement the provisions derived from the Second Directive only if the respective provision expressly provides for an authorisation to do so.119 They argue that the fact that some provisions obviously lay down minimum requirements whereas other provisions leave the national legislature without any margin of discretion appears to show that Member States may provide for stricter rules “only where such a possibility is expressly envisaged or in any event allowed.”120 This argument is not convincing. Arguably, it may lead to conclude the opposite as well. 57 Advocate General Tesauro further argued that by granting a margin of discretion the Second Directive’s purpose to ensure protection for both shareholders and creditors 55

For more detail see Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 37 et seqq. Lutter JZ 1992, 593, 602. 117 Court of Justice, C-64/81 (Nicolaus Corman & Fils SA v Hauptzollamt Gronau), 13, 24, para 8. 118 See Edwards, EC Company Law, p. 55; Habersack/Verse, Europäisches Gesellschaftsrecht, § 3 para. 82 et seqq, § 6 para 6 et seq., § 6 para 35 et seqq., § 6 para 64 et seq.; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 59, 84; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm, p. 58 et seqq.; Tesauro, FS Meilicke, 2010, 714, 726 et seq.; Meilicke, DB 1989, 1067, 1071 et seq.; Hirte, in Grundmann, Systembildung und Systemlücken in Kerngebieten de Europäischen Privatrechts, 211, 229 et seq.; Groß AG 1993, 108, 110 et seq.; Schwarz, Europäisches Gesellschaftsrecht, para. 594; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale Recht, 2004, p 108 et seqq. 119 See Edwards, EC Company Law, p. 56. 120 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4907 et seq., para. 12; Edwards, EC Company Law, p. 56. 115

116

220

Jan P. Brosius

Foreword to Arts 44-85

TITLE I GENERAL PROVISIONS

might be undermined by the fact that these two categories of persons, i.e. creditors and shareholders, have interests which do not always coincide. With this in mind, greater protection of one category might hence operate to the detriment of the other. 121 Therefore, if Member States were allowed to provide for stricter rules for the benefit of shareholder protection they might at the same time reduce the protection of creditors and therefore contradict the purpose of the Second Directive.122 Indeed, this is a reasonable argument. If such cases occur, Member States should not be allowed to provide for greater protection for one group while at the same time limiting the protection of the other group. However, such cases are of an exceptional nature. The needs for protection of shareholders and creditors do not necessarily interfere with one another. Most provisions aim to secure the company’s financial resourses and a due and transparent process of possible capital measures and hence provide for the protection of both, shareholders and creditors, at the same time. A safeguard protecting creditors might not support the interests of shareholders but it does not necessarily lower their level of protection. Hence, the tightening of such provisions does generally not contradict the purpose of the Second Directive and its provisions; in most cases the contrary is true. A teleological interpretation of the provisions derived from the Second Directive 58 gives a more reliable indication as to whether Member States may – in general – provide for stricter rules. According to the third Recital of its preamble – now laid down in the third recital of the Directive – the Second Directive aimed to “ensure minimum equivalent protection for both shareholders and creditors of public limited liability companies.” The crucial question is whether the Second Directive has put the emphasis on harmonisation or rather on protection. Certainly, any derogation from the rules derived from the Second Directive inevitably leads to reversing the harmonisation that the directive actually seeks to pursue. But it must be assumed that the objective of harmonisation pursued within the Second Directive and, thus, the Directive is not an end in itself. It serves the greater purpose to offer better safeguards for shareholder as well as creditors. The fact that the Directive also aims to establish equivalent conditions and to prevent a competition of different corporate laws and a “race to the bottom” (cf. → mn. 19) does not contradict but rather supports this view. Such interpretation is consistent with the case-law of the Court of Justice. Although, 59 it repeatedly merely rephrased the third Recital of the Second Directive 123 speaking of the directive’s intend “to ensure minimum equivalent protection”124 it also expressed that the Second Directive aimed “to provide a minimum level of protection for shareholders in all the Member States”125 or, respectively, to ensure “more effective protection for shareholders”.126 In Commission vs. Spain the Court of Justice has pointed out very clearly that it would be apparent from its third Recital that “the Second Directive lays down minimum requirements for the protection of shareholders and creditors of public 121 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4907 et seq., para. 12. 122 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4907 et seq., para. 12. 123 Now the third recital of the Directive. 124 C-42/95 Siemens AG v Henry Nold [1996], para. 13; Case C‑338/06 (Commission vs. Spain), [2008] para. 23. 125 Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 32; Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 25; Case C-101/08 Audiolux SA and Others v Groupe Bruxelles Lambert SA (GBL) and Others [2009] para. 39. 126 Case C-42/95 Siemens AG v Henry Nord [1996] I-6028 para. 19.

Jan P. Brosius

221

Foreword to Arts 44-85 limited liability companies, by leaving the Member States free to adopt provisions that are more favourable to them” and to provide for more protective conditions.127 This fully applies to the Directive as well. 60 It is also important to recognise that the Second Directive was not designed and did not have the characteristics to be an exhaustive code of rules. It did not fully cover the topics addressed (capital contribution, capital maintenance etc.) and some of the issues that are tackled in the provisions derived from the Second Directive are not solved in full detail. In particular, only in a few cases the provisions of the Second Directive provide for sanctions or legal consequences of a breach or the liability of the acting persons.128 In fact, it only deals with a carefully selected number of issues without regulating the overall structure or providing a closed legal system on public limited liability companies or distinguishable aspects thereof. In the current state of European law, the rules derived from the Second Directive always intertwine with national law. Accordingly, the Second Directive’s aims are restricted to the implementation and securing of minimum principles for the protection of shareholders and creditors. 61 Hence, as a guiding principle, the objectives pursed by the Second Directive and the provisions derived from it indicate that Member States may derogate from the rules provided therein to implement stricter rules that provide for better protection to shareholders and/or creditors. However, while it is true that in principle, Member States are allowed to derogate from the rules derived from the Second Directive as long as they provide for more effective safeguards instead, the problem of minimum protection cannot be fully resolved in the abstract, “but account must be taken of the tenor of every single provision of the directive and of the entire set of rules laid down for each sector.”129

VII. Incomprehensive Regime / effet utile Neither the Second Directive and the provisions derived from it nor the Directive as a whole provide for a comprehensive regime or even a closed regulatory system. A closed system has to be provided by the respective national law. According to settled case-law, national laws have to be framed in a way ensuring that the provisions laid down in the relevant directive can be effectively exercised in practice130 and they have to determine the procedural conditions governing actions at law intended to ensure the protection of the rights.131 63 In particular, the Directive only sporadically addresses legal consequences of a breach of the provisions derived from the Second Directive.132 For instance, with regard to Articles 3 and 4 the Commission pointed out that it would be to the discretion of the Member States to provide for sanctions in case of a breach of such provisions. 133 62

127 Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 26. 128 Cf. Case C-243/16 Miravitlles Ciurana and others v. Contimark SA and others [2017], para. 31. 129 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke v ADV/ORGA F.A. Meyer AG), I-4908, para. 12; see also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 6. 130 Cf. Case C-159/00 Sapod Audic v Eco-Emballages SA [2002], I-503, para. 52; Joined Cases C-52/99 and C-53/99 (Camorotto and Vignone) [2001] ECR I-1395, para. 21. 131 Case 33/76 Rewe [1976] ECR 1989, para. 5. 132 See also Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 5, 41; Case C-243/16 Miravitlles Ciurana and others v. Contimark SA and others [2017], para. 32 et seq. 133 OJ No C 48, 24.4.1970, p. 9.

222

Jan P. Brosius

Art 44

TITLE I GENERAL PROVISIONS

Where a directive does not specifically provide for any penalty for an infringement or even refers to national law for that purpose, Member States are required to take the measures necessary to guarantee the application and effectiveness of the provisions laid down in such directive. While it is within the discretion of Member States to choose a suitable method to do so, they have to ensure to provide for procedural and substantive regulation, which, as a matter of fact, may not be less effective than other comparable provisions provided for under national law of a similar nature and importance, and make the penalty effective, proportionate and dissuasive.134

VIII. Direct Applicability / Direct Effect Member States must implement the provisions laid down in a directive by adopting 64 rules that are not only in conformity with the directive but also sufficiently precise, clear and transparent to allow individuals to know the full extent of their rights and rely on them before the national courts.135 Where Member States fail to do so in the prescribed period of time the Court of Justice, with reference to the binding nature of the obligations imposed by a directive,136 recognised the right of persons affected thereby to rely on a directive as against a defaulting Member State.137 However, this requires that their subject-matter is concerned and the respective provision is unconditional and sufficiently precise.138 Regarding the provisions derived from Second Directive, the Court has already upheld the direct applicability of Article 68 (1) (→ Art 68 mn. 36) and Article 72 (1) (→ 72 mn. 43).

Section 1 Capital requirements Article 44 General provisions 1. The coordination measures prescribed by this Chapter shall apply to the provisions laid down by law, regulation or administrative action in Member States relating to the types of company listed in Annex I. 2. The Member States may decide not to apply the provisions of this Chapter to investment companies with variable capital and to cooperatives incorporated as one of the types of company listed in Annex I. In so far as the laws of the Member States make use of this option, they shall require such companies to include the words ‘investment company with variable capital’, or ‘cooperative’ in all documents indicated in Article 26.

134 Case C-354/99 Commission v. Ireland, [2001], I-7657 para. 46; Case C-383/92 Commission v United Kingdom [1994], I-2479, para. 40; Case C-68/88 Commission v. Hellenic Republic [1989], ECR 2965, para. 23 et seq.; Case C-213/99 de Andrade [2000] ECR I-11083, para. 19. 135 Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 54; see also Case C-220/94 Commission v Luxembourg [1995] I-1589, para. 10. 136 See Article 288 (3) of the treaty on the functioning of the European Union. 137 Case C-208/90 Emmott v Minister for Social Welfare and the Advocate General [1991], I-4269, para. 20; Case 8/81 (Becker v Finanzamt Münster-Innenstadt) [1982] para. 24 et seq. 138 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 17.

Jan P. Brosius

223

Art 44 General provisions I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Company Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 8

I. Overview 1

Article 44 limits the scope of Title I, Chapter IV, i.e. the provisions regarding “Capital maintenance and alteration”, to public limited liability companies and, in connection with Annex I, states each type of company existing in the current 27 Member States – and, until 31 December 2020 also the United Kingdom – it applies to. The provision entitles Member States to exclude investment companies with variable capital and cooperatives from the scope of Chapter IV.

II. Historical Background 2

Like its counterpart, the corresponding provision laid down in Article 2, Article 44 originates from Article 1 of the Second Directive as amended from time to time, 1 which limited the scope of the Second Directive to public limited liability companies (→ Art. 2 mn. 2).

III. Scope of Company Types The scope of Title I, Chapter IV regarding “Capital maintenance and alteration” is limited to public limited liability companies as exhaustively listed in Annex I of the Directive and Annex XXII No. 1 (b) to the EEA Agreement (→ Art. 2 mn. 3). 4 Accordingly, Title I, Chapter IV of the Directive applies to the following types of companies within the European Union: the société anonyme/naamloze vennootschap under Belgian Law, the акционерно дружество under Bulgarian Law, the akciová společnost under the laws of the Czech Republic, the aktieselskab under Danish Law, the Aktiengesellschaft under German Law, the aktsiaselts under Estonian Law, the cuideachta phoiblí faoi theorainn scaireanna/public company limited by shares and the cuideachta phoiblí faoi theorainn ráthaíochta agus a bhfuil scairchaipiteal aici/public company limited by guarantee and having a share capital under Irish Law, the ανώνυμη εταιρεία under Greek Law, the sociedad anónima under Spanish Law, the société anonyme under French Law, the dioničko društvo under the laws of Croatia, the società per azioni under Italian Law, the δημόσιες εταιρείες περιορισμένης ευθύνης με μετοχές and δημόσιες εταιρείες περιορισμένης ευθύνης με εγγύηση που διαθέτουν μετοχικό κεφάλαιο under Cyprian Law, the akciju sabiedrība under Latvian Law, the akcinė bendrovė under Lithuanian Law, the société anonyme under Luxembourgian 3

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art. 44 mn. 7 et seqq.

224

Jan P. Brosius

Art 44

TITLE I GENERAL PROVISIONS

Law, the nyilvánosan működő részvénytársaság under Hungarian Law, the kumpanija pubblika ta' responsabbiltà limitata/public limited liability company under Maltese Law, the naamloze vennootschap under the laws of the Netherlands, the Aktiengesellschaft under Austrian Law, the spółka akcyjna under Polish Law, the sociedade anónima under Portuguese Law, the societate pe acțiuni under Romanian Law, the delniška družba under Slovenian Law, the akciová spoločnost' under Slovakian Law, the julkinen osakeyhtiö/publikt aktiebolag under Finish Law, the publikt aktiebolag under Swedish Law, and, until and including 31 December 2020, the public company limited by shares and public company limited by guarantee and having a share capital under the laws of the United Kingdom (→ mn. 1). In respect of the European Economic Area, Title I, Chapter IV applies to the 5 hlutafélag under Icelandic Law, the Aktiengesellschaft under Lichtensteinian Law and the Allmennaksjeselskap under Norwegian Law. In principle, the scope of Title I, Chapter IV and, beyond that, all provisions derived 6 from the Second Directive are limited to the aforementioned types of companies. Note however, that other types of companies may still be affected by the provisions laid down in the respective Sections of the Directive. Most prominent, Article 67 regulates the subscription, acquisition or holding of shares in a public limited liability company by another company within the meaning of Article 13, i.e. as listed in Annex II of the Directive, and companies governed by the law of a third country that have a legal form comparable to those listed in Annex II (cf. → Art. 67 mn. 7). In its first proposal for a Second Directive the Commission stated that two reasons 7 led to the restriction to public limited liability companies.2 First, they represent the economically most important type of company and their activities usually cross national boundaries.3 Secondly, they represent the legally most sophisticated type of company. Thus, the coordination of public limited liability companies was of greater priority, but was also intended to be, mutatis mutandis, a solid basis for the harmonisation of other types of companies.4 Consistently, the second recital of the preamble states that the desired coordination as provided for in point (g) of Article 50 (2) of the Treaty and in the General Programme for the abolition of restrictions on freedom of establishment was especially important in relation to public limited liability companies “because their activities predominate in the economy of the Member States and frequently extend beyond their national boundaries.”

IV. Exceptions Member States may exclude “investment companies with variable capital” and “coop- 8 eratives” incorporated as one of the types of company listed under → mn. 4 from the scope of the Title I, Chapter IV of the Directive.5 Subparagraph 2 of Article 2 (2) provides for a legal definition of the expression “investment companies with variable capital” (→ Art. 2 mn. 11). The rationale behind the exception for investment companies with variable capital 9 is that such companies are subject to individual regulations specifically designed for the 2 See COM (70) 232 final; see also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 189 et seqq. 3 See also Schwarz, Europäisches Gesellschaftsrecht, para. 573. 4 OJ No C 48, 24.04.1970, p. 8. 5 See also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 190 et seq.

Jan P. Brosius

225

Art 44 General provisions characteristics of such companies without contradicting their activities or ignoring the specific risks arising from such activities. The safeguards of the provisions laid down in Title I, Chapter IV of the Directive (formerly Articles 6 through 50 of the Second Directive 2012/30/EU) are replaced by individual safeguards better suited to investment companies with variable capital.6 10 As the Commission pointed out, Member States are allowed to provide for individual rules on investment companies with variable capital in national law until further harmonisation is achieved by means of a separate directive.7 In fact, open-ended investment companies are subject to the UCITS Directive 85/611/EEC8 and its successor Directive 2009/65/EC.9 Closed-ended investment companies, i.e. investment companies with a fixed capital, on the other hand, are subject to the provisions of the Directive (cf. → Art. 56 mn. 15 rt seqq.).10 11 There is an understanding that the exception for cooperatives, which has not been subject to the Commission’s first proposals, has been implemented as a response to requirements under French and Italian Law.11 The burden of contributing and maintaining a minimum capital was not to be imposed on small cooperatives.12 12 Article 44 does not provide for a legal definition of “cooperatives” and neither do Article 2 (→ Art. 2 mn. 15), Article 87 (which also refers to cooperatives incorporated as public limited liability companies → Art. 87 mn. 18) and Article 120 (which refers to the cooperative society→ Art. 120 mn. 7). Thus, the Directive provides Member States with wide discretion to adapt the scope of the exception granted under subparagraph 2. However, the principle of effet utile requires a common basic understanding of this key criterion. Obviously, the decisive feature of such respective public limited liability companies is their pursuit of a cooperative purpose.13 However, this true acknowledgement is of little help defining cooperative. A more accurate understanding and definition of a cooperative can be derived from Council Regulation (EC) No 1435/200314 pursuant to which “cooperatives are primarily groups of persons or legal entities with particular operating principles that are different from those of other economic agents. These include the principles of democratic structure and control and the distribution of the net profit for the financial year on an equitable basis.15 […] Members may consist wholly or partly OJ No C 48, 24.4.1970, p. 9. OJ No C 48, 24.4.1970, p. 9. 8 Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ No L 375, 31.12.1985, p. 3. 9 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ L 302, 17.11.2009, p. 32–96. 10 OJ No C 48, 24.4.1970, p. 9. 11 Edwards, EC Company Law, p. 54; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 17; Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p. 136. 12 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 17; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 190 et seq.; Mülbert, FS Lutter, 2000, p. 535, 548 et seq.; also Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p.136. 13 Mülbert, FS Lutter, 2000, p. 535, 548. 14 Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ No L 207, 18.8.2003, p.1; see also Council Directive 2003/72/EC of 22 July 2003 supplementing the Statute for a European Cooperative Society with regard to the involvement of employees, OJ No. 207, 18.8.2003, p. 25. 15 Recital 7 of the preamble of Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ No L 207, 18.8.2003, p. 2. 6 7

226

Jan P. Brosius

Art 44

TITLE I GENERAL PROVISIONS

of customers, employees or suppliers […]. In some circumstances cooperatives may also have among their members a specified proportion of investor members who do not use their services, or of third parties who benefit by their activities or carry out work on their behalf.”16 A cooperative “should have as its principal object the satisfaction of its members’ needs and/or the development of their economic and/or social activities”. 17 “Its activities should be conducted for the mutual benefit of the members so that each member benefits from the activities of the [cooperative] in accordance with his/her participation”.18 Thus, ideally, a cooperative does not pursue profit maximization in its own interest.19 It is founded on rather altruistic motives.20 Typical examples are procurement companies.21 For the purpose of creditor protection22 and the protection of legal transactions in 13 general, if and to the extend Member States make use of the exceptions provided for under the second paragraph, they must require such companies to include the words ‘investment company with variable capital’, or ‘cooperative’23 in all documents indicated in Article 26, i.e. in all letters and order forms, whether they are in paper form or use any other medium. In the light of Article 26 (3) (→ Art. 26 mn. 4), pursuant to which Member States 14 shall prescribe that company websites are to contain at least the particulars mentioned in Article 26 (1), and to fully serve the purpose of the provision, the company websites are to contain such detailed name affix as well.24 Article 44 does not provide for an exception for banks. If constituted in the form of 15 public limited liability companies they fall within the scope of the Title I, Chapter IV of the Directive.25 As the Court of Justice pointed out, this follows from the fact that the Directive, for example in point (c) of Article 60 (1) or in Article 64 (6) and Article 66 (2), expressly takes account of the particular features of banks by providing that certain provisions do not apply or do not need to be applied to banks and other financial institutions constituted in the form of public limited liability companies.26 This view has been confirmed by the European legislature in Directive 2014/59/EU 27, which provided in its (former) Article 12328 for certain exceptions from the Directive with a view to financial 16 Recital 9 of the preamble of Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ No L 207, 18.8.2003, p. 2. 17 Recital 10 of the preamble of Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ No L 207, 18.8.2003, p. 2. 18 Recital 10 of the preamble of Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ No L 207, 18.8.2003, p. 2. 19 Mülbert, FS Lutter, 2000, p. 535, 554; Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p. 103. 20 Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p. 9. 21 Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p. 9. 22 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 17; Nienhaus, Kapitalschutz in der Aktiengesellschaft mit atypischer Zwecksetzung, p.135; Niessen, AG 1970, 281, 282. 23 Respectively the terms used in the different language versions. 24 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 17, § 18 para. 25. 25 See also Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 19 et seqq. 26 Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 22. 27 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ No L 173, 12.6.2014, p. 190–348. 28 Repealed by the Directive, cf. Annex III, Part A.

Jan P. Brosius

227

Art 45 Minimum capital institutions (cf. → Art. 84 mn. 5, 15), implying that banks fall within the scope of the Directive.

Article 45 Minimum capital 1. The laws of the Member States shall require that, in order for a company to be incorporated or obtain authorisation to commence business, a minimum capital shall be subscribed the amount of which shall be not less than EUR 25 000 . 2. Every five years the European Parliament and the Council, acting on a proposal from the Commission in accordance with Article 50(1) and Article 50(2)(g) of the Treaty, shall examine and, if need be, revise the amount expressed in paragraph 1 in euro in the light of economic and monetary trends in the Union and of the tendency to allow only large and medium-sized undertakings to opt for the types of company listed in Annex I. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Minimum Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Examination and Amendment of Minimum Capital . . . . . . . . . . . . . . . . . . . . . . . . . V. Amount Provided for in the Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 12 15

I. Overview 1

Article 45 obliges Member States to provide for a minimum capital for all public limited liability companies and thereby addresses the Second Directive’s constitutive principle of legal capital, i.e. a guaranteed capital that has to be effectively contributed, which is subject to a strict statutory regime of maintenance and may be altered only by a specified set of capital measures. The High Level Group attested the concept of legal capital to be one of the cornerstones of European Company Law.1

II. Historical Background 2

Article 45 derives from the Second Directive2 (cf. Art 6 of Directive 2012/30/EU). The requirement of a minimum capital was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976.

1 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 13; see also Bayer/Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht: Eine Bilanz von 1968 bis zur Gegenwart’, in: Bayer/Habersack (eds.), Aktienrecht im Wandel 2007, Vol. 1, chap. 18, para. 24. 2 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq.

228

Jan P. Brosius

Art 45

TITLE I GENERAL PROVISIONS

In its first proposal for a Second Directive the Commission provided for a fixed 3 amount3 of 25,000 European units of account (EUA) to ensure the unimpeded exercise of the freedom of establishment. In the Commission’s view, different amounts of minimum capital within the Union might hinder cross border establishments of subsidiaries.4 However, the version finally adopted required a minimum amount of 25.000 EUA and allowed Member States to stipulate a higher minimum capital. Initially, Article 45’s predecessor laid down in the Second Directive referred to 25,000 4 European units of account (EUA) as defined by Commission Decision No 3289/75/ECSC.5 Pursuant to Article 1 of the Council Regulation (EEC, EURATOM) No 3308/80 of 16 December 1980 on the replacement of the European unit of account by the ECU in Community legal instruments6 the EUA was replaced by the European Currency Unit (ECU) as defined in Regulation (EEC) No 31 80/78 of 18 December 1978 7 changing the value of the unit of account used by the European Monetary Cooperation Fund. Pursuant to Article 2 of the Council Regulation (EC) No 1103/97 of 17 June 1997 on certain provisions relating to the introduction of the euro8 the ECU was replaced by the euro.

III. Minimum Capital Article 45 (1) stipulates that a minimum capital of at least EUR 25,000 must be subscribed. Article 45 only refers to the subscription of legal capital. The contribution, i.e. the actual payment and transfer of funds or assets is subject to Articles 48 and 53 and – with respect to considerations in kind – Articles 49 to 52. Article 45 (1) refers to the point in time of the company’s incorporation or the authorisation to commence business, respectively. The amount of subscribed capital is fixed until the company’s capital is increased or decreased pursuant to the provisions laid down in Articles 68 et seqq. However, it is at this specific point in time, i.e. upon subscription, that the obligation to make the contribution arises and is shown on the company’s balance sheet. Despite the strict rules on capital maintenance (cf. Articles 56 to 67) there is no obligation or guarantee that the amount paid in9 as consideration is still available at any point in time following the company’s incorporation. The requirement of a minimum capital inevitably leads to the principle of legal capital as a, logically, imperative prerequisite of the idea of a minimum capital. On the contrary, although often deemed to be, a statutory minimum capital is not a necessary element of the principle of legal capital. The Commission was of the opinion that the company’s legal capital is a core element in the formation of a company. It represents the shareholders’ participation ratio and, as stressed by the Commission, serves as collateral for third parties. It is argued that the subscribed capital is the “credit basis of the company in the interest of those having Subject to a margin of adjustment of 10 % due to rounding in national currencies. First Proposal, OJ C 48, 24. 4. 70, p. 10; See also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 218. 5 Decision No 3289/75/ECSC of the Commission of 18 December 1975 on the definition and conversion of the unit of account to be used in decisions, recommendations, opinions and communications for the purposes of the Treaty establishing the European Coal and Steel Community, OJ No L 327, 19.12.1975, p. 4. 6 OJ No L 345, 20.12.1980, p. 1. 7 OJ No L 379, 30.12.1978, p. 1. 8 OJ No L 162, 19.06.1997, p. 1. 9 Or to be paid in, see → Art 48. 3 4

Jan P. Brosius

229

5

6

7

8

Art 45 Minimum capital dealings with it”.10 To effectively fulfil this twofold purpose the amount of such legal capital has to be of a certain significance. It also aims to prevent small businesses or undertakings from “taking refuge in anonymity” provided by this type of company which is actually reserved for major enterprises. In the Commission’s view the amount of legal capital is a criterion of and correlates with the size of the company’s enterprise. 11 Initially, the Commission had set the minimum capital at 25 000 European units of account (EUA) as, to its opinion, on the one hand it had to be high enough to serve as adequate (financial) security, and on the other hand, it must not be too high to avoid that companies chose to transform to another type of company.12 9 Ever since, there has been an ongoing discussion as to whether a minimum capital serves any useful purpose13 and as to whether the system of legal capital should be replaced by an alternative regime, or at least whether it should be offered as an alternative to Member States, who could elect to impose the alternative regime on companies subject to their jurisdictions.14 Its opponents argue that the costs related to a minimum capital are a significant burden and are not outweighed by the benefits it brings to creditors.15 The current system with its lack of flexibility would not take account of the broad range of company sizes that all have to provide for the same amount of legal capital.16 Effective creditor protection could only be provided if the minimum capital were contingent on the size of the relevant company and its respective risk profile. 17 An adequate solvency test, it is argued, pursuant to which a company can only make distributions to shareholders if the company remains solvent after the distribution, would protect creditors and, at the same time, preserve the shareholders’ interests and the financing prospects more efficiently. A legal capital regime, on the contrary, would not effectively prevent that a solvent company is prohibited from making distributions, or, conversely, that an insolvent company is allowed to do so.18 10 It is without doubt that the concept of limited liability does require an effective system of creditor protection. To qualify as a genuine guarantee for creditor protection, the figure of EUR 25,000 certainly is much too small, especially with a view to public limited liability companies and the typical sizes of their business operations. However, to a certain degree it does serve as a risk buffer.19 Arguably, a minimum capital is the counterpart and fair price for limited liability.20 More importantly, it serves as a guarantee of a certain corporate integrity, respectability and seriousness and prevents the precipitous and inconsiderate establishment of companies and their business operations.21 It is “a Schmitthoff, 15 CMLR (1978), 43, 48. First Proposal, OJ C 48, 24. 4.1970, p. 10. 12 First Proposal, OJ C 48, 24. 4.1970, p. 10. 13 See Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 37 et seqq. 14 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 87. 15 Eidenmüller/Grunewald/Noack, in Lutter (ed.), Das Kapital der Aktiengesellschaft in Europa, 2006, p. 16 with further references. 16 Eidenmüller/Grunewald/Noack, in Lutter (ed.), Das Kapital der Aktiengesellschaft in Europa, 2006, p. 16. 17 Eidenmüller/Grunewald/Noack, in Lutter (ed.), Das Kapital der Aktiengesellschaft in Europa, 2006, p. 16; See also Jungmann, ZGR 2006, p. 638, 640 et seq. 18 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 88. 19 See Eidenmüller/Grunewald/Noack, in Lutter (ed.), Das Kapital der Aktiengesellschaft in Europa, 2006, p. 26. 20 For the economic consequences of limited liability see Hansmann/Kraakman, Yale L.J. 110 (2000), p. 387, 425 et seqq.; European Parliament, Committee on Legal Affairs, Rapporteur: Klaus-Heiner Lehne, Draft Report on the proposal for a Council regulation on the Statute for a European private Company, 2008/0130(CNS), p. 39; see also Schwarz, Europäisches Gesellschaftsrecht, para. 582. 10

11

230

Jan P. Brosius

Art 45

TITLE I GENERAL PROVISIONS

reasonable threshold for solidity”.22 Thus, a legal system providing a minimum capital may lead to an increase in prestige and reputation and the companies’ creditworthiness. In this regard, it also serves the purpose of shareholder protection.23 Notwithstanding the gaps in the present system of legal capital, it cannot be assumed 11 that the European legislature will make significant structural changes. As the High Level Group, which has assumed a crucial role in the legislative procedure, pointed out, an abolition of legal capital does not necessarily reduce the level of shareholder protection. It concluded that it would probably be wise not to spend much time on minimum capital in a reform to make the current system more efficient, but to direct attention to issues which are more relevant. In the view of the High Level Group, the minimum capital requirement should not be removed, nor increased.24 Further, the European Commission ordered a study by KPMG to evaluate the feasibility of an alternative to the current regime of legal capital established by the Second Directive – now laid down in Title I, Chapter IV of the Directive – which was released in 2008. The KPMG study concluded that the compliance and administrative costs concerning the requirements laid down in the Second Directive were generally low and “generally not overly burdensome”.25 It was concluded that the reduction of such costs would unlikely be a motivation for the transition to an alternative system and it was unclear whether EU businesses would actually benefit.26 As the study pointed out, the requirement of a minimum capital “does not have an immediate effect on the equity financing of companies as the capital in most cases only represents an insignificant fraction of the company’s total equity“ and in practice, the subscribed capital regularly significantly exceeds the minimum amounts prescribed by national law. 27 However, the design of solvency tests could have significant relevance on administrative costs.28

21 Eidenmüller/Grunewald/Noack, in Lutter (ed.), Das Kapital der Aktiengesellschaft in Europa, 2006, p. 30; European Parliament, Committee on Legal Affairs, Rapporteur: Klaus-Heiner Lehne, Draft Report on the proposal for a Council regulation on the Statute for a European private Company, 2008/0130(CNS), p. 39. 22 European Parliament, Committee on Legal Affairs, Rapporteur: Klaus-Heiner Lehne, Draft Report on the proposal for a Council regulation on the Statute for a European private Company, 2008/0130(CNS), p. 39. 23 Bayer, ‘Grundkapital, Kapitalaufbringung, Kapitalerhaltung’, in: Bayer/Habersack (ed.), Aktienrecht im Wandel 2001, Vol. 2, chap. 17 para. 132. 24 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 89 et seq. 25 Contract ETD/2006/IM/F2/71, Feasibility study on an alternative to the capital maintenance regime established by the Second Company Law Directive 77/91/EEC of 13 December 1976 and an examination of the impact on profit distribution of the new EU-accounting regime, http://ec.europa.eu/internal_marke t/company/docs/capital/feasbility/study_en.pdf, p. 1, 3, 6. 26 Contract ETD/2006/IM/F2/71, Feasibility study on an alternative to the capital maintenance regime established by the Second Company Law Directive 77/91/EEC of 13 December 1976 and an examination of the impact on profit distribution of the new EU-accounting regime, http://ec.europa.eu/internal_marke t/company/docs/capital/feasbility/study_en.pdf, p. 1, 6. 27 Contract ETD/2006/IM/F2/71, Feasibility study on an alternative to the capital maintenance regime established by the Second Company Law Directive 77/91/EEC of 13 December 1976 and an examination of the impact on profit distribution of the new EU-accounting regime, http://ec.europa.eu/internal_marke t/company/docs/capital/feasbility/study_en.pdf, p. 2, 275. 28 Contract ETD/2006/IM/F2/71, Feasibility study on an alternative to the capital maintenance regime established by the Second Company Law Directive 77/91/EEC of 13 December 1976 and an examination of the impact on profit distribution of the new EU-accounting regime, http://ec.europa.eu/internal_marke t/company/docs/capital/feasbility/study_en.pdf, p. 6.

Jan P. Brosius

231

Art 45 Minimum capital

IV. Examination and Amendment of Minimum Capital Every five years the European Parliament and the Council, acting on a proposal from the Commission in accordance with Article 50(1) and (2)(g) of the Treaty, shall examine and, if need be, revise the amount expressed in the first paragraph in euro in the light of economic and monetary trends in the Union and of the tendency towards allowing only large and medium-sized undertakings to opt for the types of company listed in Annex I. 13 According to the fourteenth Recital of the preamble of Directive 2012/30/EU and in the light of the judgment of the Court of Justice of 6 May 2008 in Case C-133/06, it was considered necessary to redraft the wording of Article 45 (2) (i.e. Article 6 (2) of Directive 2012/30/EU) in order to remove an existing secondary legal basis and to provide for the examination and, if need be, the revision of the amount referred to in paragraph 1 by both the European Parliament and the Council.29 14 Until today, the amount of EUR 25,000 as expressed in paragraph 1 has not been revised.30 12

V. Amount Provided for in the Member States 15

Member States have provided for a wide range of minimum capital amounts. While the provisions of some jurisdictions are oriented towards the minimum amount of EUR 25,000 as required by Article 45 (1),31 other Member States require amounts of minimum capital between – depending on exchange rate fluctuations – EUR 45,000 to approx. EUR 80,000.32 Some Member States, however, require a significantly higher amount for companies exercising certain specific business activities or for listed companies.33 Due to rate fluctuations the minimum amount required by the statutory laws of some jurisdictions is de facto below the threshold of EUR 25,000 required by the Directive.34

29 Due to such redrafting and the thereby implied substantive change that would therefore go beyond straightforward codification, it was considered necessary that point 8 of the Interinstitutional Agreement of 20 December 1994 - Accelerated working method for official codification of legislative texts - be applied, in the light of the joint declaration on that point, cf. COM (2011) 29 final. This led to a delay in the adoption process of directive 2012/30/EU. 30 See also Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 43. 31 See, for instance Bulgaria: BGN 50,000, cf. Artt. 158 et seqq. HG; Estonia: EUR 25,000, cf. sec. 222 Äriseadustik; Ireland: EUR 25,000, cf. sec. 1000 Companies Act 2014; Romania: 90,000 RON, cf. 302/2005, Slovenia: EUR 25,000, cf. Art 170 et seq. Zakon o gospodarskih družbah; Slovakia: EUR 25,000, cf. Art 162 Rek zákony 513/1991 Zb.; Poland: 100,000 Zloty, cf. Art 308 Ustawa z dnia 15 września 2000 r. Kodeks spółek handlowych. 32 See, for instance Netherlands:45,000, cf. Art 67 Burgerlijk Wetboek; Belgium: EUR 61,500, cf. Art 439 Wetboek van vennootschappen; Germany: EUR 50,000, cf. sec. 7 AktG; Finnland: EUR 80,000, cf. 1 III OYL; Sweden: 500,000 skr, cf. chap. 1 sec. 14 (1) Aktiebolagslag; United Kingdom: GBP 50,000, cf. sec 763 CA 2006; Austria: EUR 70.000, sec 7 Aktiengesetz; Hungary: HUF 20,000,000, cf. Art 288 I Hungarian Act IV of 2006 on Business Associations; Spain: EUR 60,000, cf. Art 4 (3) Real Decreto Legislativo por el que se aprueba el texto refundido de la Ley de Sociedades de Capital. 33 Until 2009 the latter was the case in France requiring a minimum capital in the amount of EUR 225,000. 34 E.g. Poland: 100,000 Zloty, cf. Art 308 Ustawa z dnia 15 września 2000 r. Kodeks spółek handlowych; Romania: 90,000 RON, cf. Art 10 Legea 31/1990, 302/2005.

232

Jan P. Brosius

Art 46

TITLE I GENERAL PROVISIONS

Article 46 Assets Subscribed capital may be formed only of assets capable of economic assessment. However, an undertaking to perform work or supply services may not form part of those assets. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Limitation to Assets Capable of Economic Assessment . . . . . . . . . . . . . . . . . . . . . . III. Exclusion of Undertaking to Perform Work or Supply Services . . . . . . . . . . . . . .

1 5 8

I. Historical Background Article 46 derives from the Second Directive1 (cf. Art 7 of Directive 2012/30/EU). It was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976. Its material content has not been amended since. In its first proposal for a Second Directive the Commission provided for a different wording requiring that the subscribed capital may not be formed of assets that are not “realisable”.2 The Commission had considered to allow for the contribution of “intangible assets”, provided such assets are written off before a distribution of profits. Though, the Commission concluded that it would not be justified to allow shareholders to exchange unrealisable assets against liquidable shares.3 In the view of the European Economic and Social Committee the proposed wording would have given rise to interpretation and valuation difficulties. The Committee insisted that the legislator clarified that contributions in kind consisting of know-how or good-will qualify as “realisable”.4 In the version finally adopted, the central notion changed from “realisable assets” to “assets capable of economic assessment” granting a broader scope than originally proposed by the Commission.5 The exclusion of undertaking to perform work or supply services was demanded by the European Parliament.6

1

2

3

4

II. Limitation to Assets Capable of Economic Assessment Article 46 stipulates that the subscribed capital may be formed only of assets capable 5 of economic assessment and thereby not only imposes a general limitation but also im1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 2 OJ No C 48, 24.04.1970, p. 18. 3 First Proposal, OJ No C 48, 24.04.1970, p. 11. 4 Opinion of the European Economic and Social Committee, OJ No C 88, 6.9.1971, p. 3. 5 Although, in its proposal the Commission already expressed that it did not intend to preclude know-how or good-will from qualifying as “realisable”, see OJ No C 48, 24.04.1970, p. 11. 6 OJ No C 114, 11.11.1971, p. 20.

Jan P. Brosius

233

Art 46 Assets plies that contributions may be made not only in cash but also in kind. For a distinction between contributions in cash and contributions in kind see Article 48 (→ Art 48 mn. 4 et seqq.). 6 To ensure an “effective capital contribution” the contributed assets need to be capable of economic assessment. That requires that contributions are made up of assets which can be objectively valued in cash terms.7 7 Article 46 does not require that contributable assets need to be capable of being the subject of an execution or distress. As the Commission pointed out, the respective provisions in the laws of the Member States were far too diverse to allow for a respective reference in the Second Directive.8 Know-how or good-will, for instance, do qualify as lawful consideration.9 Further, many legal scholars argue that, in general, the respective assets do not need to be capable of recognition, i.e. capable of being shown in the balance sheet.10 Although this conclusion is correct, the approach is not unproblematic with a view to the systematic context of Title I, Chapter IV (i.e. the provisions derived from the Second Directive) and the provisions regarding distributions laid down in Article 56. Rights of use also classify as contributable assets.11

III. Exclusion of Undertaking to Perform Work or Supply Services 8

Article 46 explicitly excludes undertakings to perform work or supply services from the scope of contributable assets. With respect to shareholders, it must be noted that their work or supply services often are inseparably intertwined with the company’s business and often of no or limited value for creditors. However, Article 46 applies to third parties’ work or supply services as well.12 Such exclusion is necessary as their legal existence, enforceability and value is not ascertainable.13 With a view to the wording and the protective purpose of Article 46, no other conclusion may be drawn.14

7 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4911, para. 15. 8 First Proposal, OJ No C 48, 24.04.1970, p. 11. 9 Schmitthoff, 15 CMLR (1978), 43, 48. 10 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 52; Hüffer, NJW 1979, 1065, 1067; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 220; Meilicke, DB 1989, 1067, 1075; Grundmann, Europäisches Gesellschaftsrecht, para. 333. 11 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 52; Hirte, EWiR 2000, 941, 942. 12 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 53; Habersack/Verse, Europäisches Gesellschaftsrecht § 6 para. 25; different Hirte in Grundmann, Systembildung und Systemlücken in Kerngebieten des Europäischen Privatrechts, 2000, p. 211, 228; Schwarz, Europäisches Gesellschaftsrecht, para. 586; Hüffer, NJW 1979, 1065, 1067. 13 See also Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 53; Habersack/Verse Europäisches Gesellschaftsrecht § 6 para. 25; Nobel, Transnationales und Europäisches Aktienrecht, 2006, chap. 2 para. 100; for a different view, see Hirte in Grundmann, Systembildung und Systemlücken in Kerngebieten des Europäischen Privatrechts, 2000, p. 211, 228. 14 Schwarz, Europäisches Gesellschaftsrecht, para. 586, Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 30.

234

Jan P. Brosius

Art 47

TITLE I GENERAL PROVISIONS

Article 47 Issuing price of shares Shares may not be issued at a price lower than their nominal value, or, where there is no nominal value, their accountable par. However, Member States may allow those who undertake to place shares in the exercise of their profession to pay less than the total price of the shares for which they subscribe in the course of this transaction. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Material Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. No issue at a discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The concept of share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Reform Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 3 6 11 13 14

I. Historical Background Article 47 derives from the Second Directive1 (cf. Art 8 of Directive 2012/30/EU). It 1 was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976. Its material content has not been amended since. Legal Scholars argue that the provision on the issue of shares at a discount was partly 2 modelled on existing case law in the United Kingdom.2 Also, as the Commission stated in its first proposal for a Second Directive, no-par value shares were common under Belgian and Luxembourgian Law.3

II. Material Scope 1. No issue at a discount Article 47 provides that shares may not be issued at a price below their nominal value 3 or their accountable par, respectively, i.e. shares may not be issued at a discount. That means that the proportion of the company’s capital represented by a share always corresponds with at least the contribution its holder has to make following the subscription. However, shares may be issued with a premium, i.e. at a price higher than their nominal value. This follows in particular from Article 49 (2) pursuant to which the required experts' report regarding contributions in kind has to state whether the values of the contributions correspond to the premium on the shares to be issued for them.

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 Edwards, EC Company Law, p. 51 citing Ooregum Gold Mining Co v Roper [1892] AC 125. 3 OJ No C 48, 24.04.1970, p. 10.

Jan P. Brosius

235

Art 47 Issuing price of shares The SLIM Initiative had addressed the question whether Article 47 only applies to the issue of shares in the course of the company’s incorporation or to the issue of any subsequent issue of new shares in the course of a capital increase as well.4 The latter is the case. Although, it is true that its positioning within the Directive is systematically inaccurate and potentially misleading (cf. → Intro Art 44 mn. 37) Article 47 clearly constitutes a general principle that applies to any issue of shares, be it during the company’s formation or in the course of an increase in capital. Accordingly, in its proposal for Directive 2006/68/EC the Commission pointed out that it was of the opinion that the prohibition to issue shares below par value or their accountable par, respectively, applies to all share issues without exception, not just to the initial share issue in the context of the company’s incorporation.5 5 However, the Commission also made clear that this does not imply that subsequent share issues cannot be made at a nominal or accountable par value lower than that of a previous issue, as long as the price at which the new shares are issued complies with the above mentioned obligation.6 4

2. The concept of share capital It can be derived from Article 47 that the company’s legal capital must be divided into shares and that it is fully represented by the sum of such shares. Accordingly, the amount of the company’s legal capital represented by each share can be calculated from the total number of shares existing and vice versa. 7 The Directive provides for two types of shares Member States may choose from (also see points (b) and (c) of → Art 4, mn. 8). Companies may either issue shares with nominal value or with accountable par. 8 The nominal value of a share does not reflect or in any way indicate the true value of the company. No particular value at all can be concluded from it. The nominal value merely expresses the ratio between the company’s shares and the company’s total amount of legal capital. That means the company’s legal capital equals the product of the multiplication of the total number of shares and their nominal value.7 9 The Directive allows for a second type of shares which does not express the ratio between the company’s shares and its total amount of legal capital by means of a nominal value but rather in terms of the so-called accountable par.8 That means the value of such shares, i.e. the proportion of the legal capital each share represents, has to be calculated by dividing the total amount of legal capital by the number of shares. The result represents the "accountable par” of each share.9 6

4 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999 (http://ec.europa.eu/internal_market/company/docs/official/6 037en.pdf), p. 12; also see Report from the Commission results of the fourth phase of SLIM of 4 February 2000, COM (2000) 56 final, pp. 4, 12. 5 Proposal of the Commission of 29.10.2004, COM (2004) 730 final, 3. 6 Proposal of the Commission of 29.10.2004, COM (2004) 730 final, 3. 7 See recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999 (http://ec.europa.eu/internal_market/company/docs/official /6037en.pdf), p. 11. 8 See recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999 (http://ec.europa.eu/internal_market/company/docs/official /6037en.pdf), p. 12. 9 See recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999, cf. http://ec.europa.eu/internal_market/company/docs/offi cial/6037en.pdf, p. 12.

236

Jan P. Brosius

Art 47

TITLE I GENERAL PROVISIONS

This second type of shares is also often referred to as no-par-value-shares which is 10 not perfectly accurate as the only difference between to nominal value shares is that the “value” of no-par-value-shares is not expressed as a face value but has to be calculated (see → mn. 6). Actual no-par-value-shares as provided for under US law do not exist in the system provided for by the Directive.10

III. Exception Pursuant to Article 47 (2) Member States may, at their discretion, 11 allow those who 11 undertake to place shares in the exercise of their profession to pay less than the total price of the shares for which they subscribe in the course of that transaction. This exception addresses the issuing banks, which do not intend to become shareholders themselves, and aims to meet the needs of the capital markets.12 This requires, however, that the issuing bank executes the share placement without undue delay.13 Further, the Court of Justice has ruled that Article 47 (1) “must be interpreted as not 12 precluding a measure […] adopted in a situation where there is a serious disturbance of the economy and the financial system of a Member State threatening the financial stability of the European Union, the effect of that measure being new shares being issued at a price lower than their nominal value.”14 However, this view taken by the Court of Justice is highly doubtful and contains an error of reasoning (cf. → Art 68 mn. 7 et seqq.).

IV. Direct Application Article 47 (1) is unconditional and sufficiently precise to fulfil the requirements of a 13 direct application (cf. → Intro Art 44 mn. 64). The same does not apply to Article 47 (2).

V. Reform Efforts Since the adoption of the Second Directive there has been a discussion as to whether 14 the notions of nominal value and accountable par constitute the right concept for public limited liability companies or if a different approach might be preferable. Certainly, this discussion goes hand in hand with the question of whether the concept of legal capital is appropriate and functional (for the corresponding debate on minimum capital cf. → Art 45 mn. 9). The SLIM Working Group pointed out that in a potential third system, there either is no statutory capital, as known under US law, or if there is, it is not divided into shares with a defined value. Under such a system, shares do not represent any precise value, but only a percentage of the overall company. Upon issue of additional shares and 10 See Bayer/Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht: Eine Bilanz von 1968 bis zur Gegenwart’, in: Bayer/Habersack (eds), Aktienrecht im Wandel 2007, Vol. 1, chap. 18, para. 30, with further references in Fn. 12. 11 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 50, Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 143 with further references. 12 Cf. Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 142 et seq.; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale Recht, 2004, p. 46. 13 See also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 222. 14 Case C-41/15 (Gerard Dowling and others v Minister for Finance (request for a preliminary ruling from the High Court (Irland)) [2016], para. 55.

Jan P. Brosius

237

Art 47 Issuing price of shares without regard to the issue price this percentage merely changes.15 Under such concept of “true no value shares” any reference to the company’s statutory legal capital would be obsolete. The Company Law Slim Working Group also stated in its recommendations that “there is subject for further investigation and research whether the present notions of nominal value and accountable par should be maintained, or whether a simplification would result from the use of shares that merely represent a fraction of the company”. 16 15 In 2004, the Commission made clear that, before deciding to introduce an alternative regime which is not based on the concept of legal capital and which would fundamentally depart from the capital maintenance regime currently organised by (the provisions derived from) the Second Directive, further work were needed as to both the exact characteristics of a possible alternative regime and its ability to achieve an effective protection of shareholders and third parties.17 16 Accordingly, the European Commission ordered a study by KPMG to evaluate the feasibility of an alternative to the current regime of legal capital established by the Second Directive which was released in 2008. The KPMG study concluded that the compliance and administrative costs concerning the requirements laid down in the Second Directive were generally low and “generally not overly burdensome”.18 It was concluded that the reduction of such costs would unlikely be a motivation for the transition to an alternative system and it was unclear whether EU businesses would actually benefit.19 As the study pointed out, although the abolition of the par value concept and a complete changeover would likely cause once-off costs, subsequently it might lead to less complexity in the administration of shares. However, this assumption, the benefits and the associated cost could not be reliably verified.20 17 There have been further proposals in literature considering possible changes to the current capital regime, in particular the abolishment of the concept of legal capital the revision of profit distributions as stipulated in the Second Directive. Inter alia, these are the so called Rickford Group21, the Dutch Group22 and the Lutter Group23.

15 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999, cf. http://ec.europa.eu/internal_market/company/docs/official/ 6037en.pdf, p.12. 16 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999, cf. http://ec.europa.eu/internal_market/company/docs/official/ 6037en.pdf, p. 4, 13. 17 Communication to the Council and the European Parliament: Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward, COM(2003) 284 final, p. 18. 18 Contract ETD/2006/IM/F2/71, Feasibility study on an alternative to the capital maintenance regime established by the Second Company Law Directive 77/91/EEC of 13 December 1976 and an examination of the impact on profit distribution of the new EU-accounting regime, http://ec.europa.eu/internal_marke t/company/docs/capital/feasbility/study_en.pdf, p. 1, 3, 6. 19 Contract ETD/2006/IM/F2/71, Feasibility study on an alternative to the capital maintenance regime established by the Second Company Law Directive 77/91/EEC of 13 December 1976 and an examination of the impact on profit distribution of the new EU-accounting regime, http://ec.europa.eu/internal_marke t/company/docs/capital/feasbility/study_en.pdf, p. 1, 6. 20 Cf. Contract ETD/2006/IM/F2/71, Feasibility study on an alternative to the capital maintenance regime established by the Second Company Law Directive 77/91/EEC of 13 December 1976 and an examination of the impact on profit distribution of the new EU-accounting regime, http://ec.europa.eu/int ernal_market/company/docs/capital/feasbility/study_en.pdf, p. 275. 21 Cf. Rickford, ‘Reforming Capital’, 15 EBLR (2004), pp. 919 et seqq. 22 Cf. Boschma/Lennarts/Schutte-Veenstra, Alternative Systems for Capital Protection, Final Report 2005. 23 Cf. Lutter, in: Lutter (ed.), ‘Legal Capital in Europe’, ECFR Special Volume 1, 2006, p. 9.

238

Jan P. Brosius

Art 48

TITLE I GENERAL PROVISIONS

Article 48 Paying up of shares issued for a consideration Shares issued for consideration shall be paid up at the time the company is incorporated or is authorised to commence business at not less than 25 % of their nominal value or, in the absence of a nominal value, their accountable par. However, where shares are issued for consideration other than in cash at the time the company is incorporated or is authorised to commence business, the consideration shall be transferred in full within five years of that time. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Distinction Between Contribution in Cash and Contribution in Kind . . . . . . . IV. Time of Payment or Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Minimum Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 4 18 22 23 24 25

I. Overview Article 48 stipulates the relevant time of payment of a contribution and for that 1 purpose distinguishes between contributions in cash and contributions in kind.

II. Historical Background Article 48 derives from the Second Directive1 (cf. Article 9 of Directive 2012/30/ 2 EU). It was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976. Its material content has not been amended since. The provision on considerations in kind stipulated in the second paragraph falls 3 considerably behind the provisions in the Commission’s first proposal for a Second Directive which provided for the requirement of payment of considerations in kind in full on allotment.2 In the view of the Commission, the obligation to transfer the consideration in full would have granted the protection necessary to prevent shareholders from making “fictive” contributions. Such approach was considered to be one of the simplest means of ensuring an effective contribution.3 However, it did not gain acceptance. The European Parliament was of the opinion that there should be a fixed period of time in which contributions in cash should be fully paid in.4 This approach did not gain acceptance as well. 1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 OJ No C 48, 24.04.1970, p. 18. 3 OJ No C 48, 24.04.1970, p. 10. 4 OJ No C 114, 11.11.1971, p. 20.

Jan P. Brosius

239

Art 48 Paying up of shares issued for a consideration

III. Distinction Between Contribution in Cash and Contribution in Kind 4

5

6

7

8

Shareholders are free to agree upon the assets they will have to contribute to generate the company’s legal capital. They are permitted to make a contribution in cash or a contribution in kind or, equally well, a mixed contribution.5 However, compared to a consideration in cash, the Directive provides for much more comprehensive and stricter provisions on contributions in kind (cf. Articles 48 (2), 49 to 52). Where shareholders make mixed contributions, i.e. contributions that are partly contributions in cash and partly contributions in kind, each portion follows its respective statutory regime. The Directive does not provide for a legal definition allowing to make a distinction between contributions in cash and contributions in kind.6 Still, Member States are not permitted to provide for an individual national definition of these two concepts. Granting such a right would be tantamount to delegating the competence of restricting the entire scope of the Directive and clearly thwarts its legislative purpose (cf. → Intro Art 44 mn. 19 et seqq.). A minimum equivalent protection would be impossible to guarantee. Advocate General Tesauro stated accordingly that “the demarcation line between contributions in cash and contributions in kind has a significant impact on the very scope of the directive, in view of the different rules laid down for the two categories of contributions. (…) If the Member States were entitled independently to define what is to be understood by contribution in kind (and, conversely, what is to be understood by contribution in cash) and therefore were empowered freely to trace the borderline between the two categories of contributions in question, they would essentially be allowed to define the scope of the directive, by shifting it in one direction or the other.”7 Consequently, it is the task of the European legislature and the Court of Justice to provide for a respective definition.8 To define the relevant terms is particularly difficult as the Directive does not use different terms for the determination of the notions of contribution in cash and contribution in kind. It merely distinguishes between a “consideration in cash” and “a consideration other than in cash”. Whereas such distinction clearly rules out the existence of any third category of contributions9 it does not provide for a criterion of delimitation and makes it more difficult to identify an accurate definition of these two categories. Cash is money in hand, i.e. in its physical form, and money shown on a bank account balance. A consideration in cash comprises all instruments of payment using all means of bank transfer. A consideration in kind comprises all legally possible contribution other than in cash. The amending Directive 2006/68/EC10 introduced the term “asset contribution” used in Article 50 and Article 51 giving a slightly more concrete indication of the concept of a contribution in kind. However, Article 46 gives the decisive notion of what “a Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 55. See also Schwarz, Europäisches Gesellschaftsrecht, para. 586. 7 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4908, para. 13. 8 See also Edwards, EC Comapny Law, p. 64; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 56; Groß, AG 1993, 108, 111; Wiedemann, JZ 1997, 1058, 1059; Meilicke, DB 1989, 1067, 1072; Meilicke, DB 1990, 1173, 1175. 9 Edwards, EC Comapny Law, p. 64; Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4909, para. 13. 10 Directive 2006/68/EC of the European Parliament and of the Council of 6 September 2006 amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital, OJ L 264, 25.9.2006, p. 32–36. 5

6

240

Jan P. Brosius

Art 48

TITLE I GENERAL PROVISIONS

consideration other than in cash” means by providing that the subscribed capital may be formed only of assets capable of economic assessment (cf. → Art 46 mn. 5 et seqq.). 11 The center of debate regarding the distinction between the two types of considera- 9 tion is whether transfers of (monetary) claims qualify as a contribution in cash or a contribution in kind. This question has been a continual source of discussion for many years. Accordingly, the SLIM Working Group pointed out how difficult it was under the (then) current provisions for Member States to appropriately define the difference between a contribution in cash and a contribution in kind, in particular with respect to the contribution of a claim. The Commission agreed on the need to clarify their respective meaning.12 However, the SLIM Working Group refrained from making a recommendation. In their view, defining the concept of contribution in kind would run contrary to the purpose of SLIM, which was not to harmonise further, but rather to slim regulation. Unfortunately, it was therefore decided to leave it at drawing the attention to these difficulties instead of providing for clarification.13 It seems quite clear, and most legal scholars agree, that claims made by the contribu- 10 tor against third parties are to be classified as contributions in kind.14 The contribution of a (monetary) claim against the company itself is not to be 11 regarded differently, irrespective of whether it was initially incurred by the contributor or any third party. Certainly, the fact that a claim can be valued in cash terms (as required in Article 46) does not automatically constitute it as cash.15 Such conversion of debt into legal capital qualifies as a contribution in kind. This applies irrespective of how such conversion is put into effect.16 However, this opinion is heavily disputed.17 In particular, Advocate General Tesauro argued that the contribution of a claim against the company must be qualified as a contribution in cash as in such circumstances “the money contributed by the claim has already been paid into the corporate funds”. Hence, any valuation wasn’t necessary. The contribution would rather be limited to eliminating the company’s debt and raising the legal capital in the company’s accounts.18 In the view of Advocate General Tesauro such contribution would only strengthen the company's asset position and cause no damage or disadvantage either to creditors or to shareholders. He concludes that “a contribution comprising the waiver of a claim against the company at its nominal value, regardless of the solvency or otherwise of the company, and thus even when the company is in critical financial circumstances, must therefore be regarded as permitted by the provision in question.”19

See also Schwarz, Europäisches Gesellschaftsrecht, para. 586. Report from the Commission results of the fourth phase of SLIM of 4 February 2000, COM(2000)56 final, p.4 et seq. 13 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999, http://ec.europa.eu/internal_market/company/docs/official/603 7en.pdf, p. 11. 14 See also Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4909, para. 14. 15 For a different approach see Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4911, para. 15. 16 For instance by means of incurring the obligation to pay the capital contribution in cash with a simultaneous set-off; for more detail see also Meilicke, DB 1989, 1067. 17 See also Meilicke, DB 1989, 1067 et seqq., 1119 et seqq. 18 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4910, para. 14. 19 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4911, para. 15. 11

12

Jan P. Brosius

241

Art 48 Paying up of shares issued for a consideration 12

13

14

15

16

However, these arguments put forward are not convincing. First, a grammatical interpretation strongly suggests that a contribution of claims is a “consideration other than in cash”.20 A claim, monetary or not, is – at least in general21 – as such no cash. Secondly, where “the claim has not yet come to its ordinary maturity, it can merely be a contribution in kind, thus rendering inevitable a valuation of it, which cannot be left to the discretion of the directors.”22 Though, to assess whether this is the case requires a reliable examination, i.e. valuation as only provided for regarding a contribution in kind. Thirdly, although Tesauro rightly notes that in general the conversion of debt into legal capital also results in the subordination of the shareholder’s respective rights with regard to those of the company’s other creditors,23 this argument misses the point that the Directive’s provisions on capital contribution primarily aim to guarantee an effective capital contribution. This means that at the time the formation or the capital increase is effected and the contribution is made, the company’s assets actually are increased accordingly. In the course of the company’s formation, the amount of legal capital is a snapshot of the financial situation at the time such legal capital is created. The same applies in the course of a capital increase; that is with respect to the amount of the capital increase.24 Yet, the provisions on capital contribution and capital maintenance do not guarantee that the assets the company’s legal capital is formed of remain preserved (cf. Art 45 mn. 6). It is therefore all the more important that the Directive fulfils its purpose to ensure that when the legal capital is formed, the company is or, where a subsequent contribution is permitted, will be effectively funded as well. If, however, the contribution owed consists of a claim against the company, it is uncertain whether the actual value of such claim equals its face value at the time the claim against the company is contributed, which is the only relevant point in time. In this regard, the company’s solvency and liquidity are of great significance. Both strongly affect the recoverability and intrinsic value of the claim intended to be contributed. 25 This is true from the perspective of the shareholder, but also from the perspective of the company.26 Thus, the conclusion, that from the perspective of the creditors of the company, the contribution to the company of a claim against the company can never be overvalued, even in the event of insolvency,27 cannot be upheld. From the company’s as well as from its creditors’ perspective it does make a significant difference whether the company is relieved from a not (fully) recoverable liability or provided with actual cash. This applies all the more as the claim against the company of a contributor who already is a shareholder in the company or, subsequent to the subscription of shares, becomes a shareholder generally is subordinated to the claims of third party creditors. For the purpose of qualifying a claim as a consideration in cash or a consideration in kind it is – in general – irrelevant whether the claim is shown on the balance sheet with its face value.28 The fact that a claim has been recognised in the balance sheet See also Meilicke, DB 1989, 1067, 1072. Where cash in a bank account legally constitutes a claim against the bank and transferring such cash legally means transferring the claim against the bank, such claim is cash in the meaning of Article 48, cf. → mn. 7. 22 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4909, para. 14. 23 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4910, para. 14. 24 There is no effective guarantee that the existing legal capital is still available. 25 See also Meilicke, DB 1989, 1067, 1072 et seq. 26 For a different view see Meilicke, DB 1989, 1069, 1074 et seqq.; Meilicke, DB 1989, 1119, 1124. 27 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4910, para. 14 et seq. 20

21

242

Jan P. Brosius

Art 48

TITLE I GENERAL PROVISIONS

as a liability does not guarantee that the obligation has been effectively incurred and has yet not been fulfilled, or that any adequate consideration has been granted to the company or, where applicable, that the respective amount of money has been paid into the corporate funds. And even where the claim has been effectively incurred and the company has received a corresponding and valuable consideration at an earlier date, this is of no relevance for the contribution made on a later date. The only relevant point in time for the assessment of a capital contribution is the time the obligation to make such contribution arises. Particularly, any money paid to the company before that point in time has not been subject to the strict rules on capital maintenance. If money has been effectively paid to the company, these funds may have been consumed, de facto maybe even (unrecoverably) repaid to the respective shareholder. It is rather doubtful if the balance sheet, for this purpose, constitutes a sufficient base for the valuation of a claim. It seems clear, however, that such balance sheet valuation may only become relevant in the context of the procedure laid down in Article 50 (2) (cf. → Art 50 mn. 16 et seqq.). It is clear and undisputed that “the purpose of the rules of contributions in kind is to 17 avoid the danger of overvaluation (either of property or of claims) to the detriment to the company and to protect the interests of shareholders and creditors.”29 The argument that a valuation report is unnecessary because the requirements underlying the rules on contributions in kind have already been satisfied becomes circular if it is made on the assumption that the claim is “liquid and payable”.30 It is a principle that a claim that is not recoverable may not serve as a capital contribution.

IV. Time of Payment or Provision Pursuant to Article 48 (1) shares issued for a consideration must be paid up at the 18 time the company is incorporated or is authorised to commence business at not less than 25 % of their nominal value or, if applicable, their accountable par. As the Commission stated, it had proposed for the 25% threshold because it met average requirements stipulated in laws of the Member States.31 Most scholars argue that, pursuant to Article 48 (1), only a consideration in cash 19 must be paid up at not less than 25 % at the time the company is incorporated or authorised to commence business.32 This view is, however, difficult to reconcile with the very wording of the provisions and can only be justified on the basis of the first word “however” of Article 48 (2). Other than that, it could only be argued, that the European legislature solely forgot to amend the wording of the first paragraph, which addresses all contributions, after changing the requirements for contributions in kind from an immediate transfer, as proposed to by the Commission (cf. → mn. 3), to a transfer within five years (cf. → mn. 21). In that case, the broad wording of Article 48 (2) would merely be an editorial mistake. Inadmissible, however, is the reference to the national provisions that 28 For a different view see Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4910, para. 15. 29 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4909, para. 14. 30 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4909, para. 14 et seq. 31 First Proposal, OJ No C 48, 24.04.1970, p. 10; Edwards, EC Company Law, p. 61. 32 See Schmitthoff, 15 CMLR (1978), 43, 46; Wooldridge, Company Law in the UK and the EC, p. 27; Schwarz, Europäisches Gesellschaftsrecht, para. 584 et seq.; Grundmann, Europäisches Gesellschaftsrecht, para. 334; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 58 et seq.; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6, para 27 et seqq.

Jan P. Brosius

243

Art 48 Paying up of shares issued for a consideration existed before the Second Directive was adopted and the question whether the Directive should be interpreted in the light of such provisions.33 European Law must be given an independent and uniform interpretation (cf. → Intro Art 44 mn. 49 et seqq.). 20 Yet, there is a strong case to argue that any consideration, i.e. in cash or in kind, must be paid up at the time the company is incorporated or is authorised to commence business at not less than 25 % of the nominal value or, if applicable, the accountable par of the shares subscribed. This follows from the provision’s very wording in Article 48 (1) which addresses any consideration. Consequently, the requirements laid down in Article 48 (2) apply in addition to the rule stipulated in Article 48 (1). Article 48 (2) is a supplementary provision not a substitute or replacement. Also, it could easily be argued that privileging contributions in kind would contradict the very purpose of the provision. It would be welcome if the European legislature provided for clarity and redrafted Article 48 (1). 21 Article 48 (2) provides that where shares are issued for a consideration other than in cash at the time the company is incorporated or is authorised to commence business, the consideration must be transferred in full within five years of that time. This requirement falls considerably behind the provisions in the Commission’s first proposal (cf. → mn. 3) but still takes account of the fact that considerations in kind may be subject to significant fluctuations in value. With a view to Article 50 (2) a, the five year period provided for in Article 48 (2) does not apply where the company or its management, respectively, has availed itself of a derogation from the requirement of an experts' report as provided for under Article 50 (cf. → Art 50 mn. 11).

V. Premium 22

Article 48 does not apply to the payment of a premium.34 Pursuant to the second sentence of Article 69 any issue premium to be made in the course of a capital increase must be paid in full. As Article 48, on the contrary, does not mention a premium the converse conclusion may be drawn that Article 48 does not apply to an issue premium.

VI. Exception 23

Pursuant to Article 84 (1) Member States may derogate from the first paragraph of Article 48 to the extent that such derogation is necessary for the adoption or application of provisions designed to encourage the participation of employees, or other groups of persons defined by national law, in the capital of undertakings.

VII. Minimum Protection 24

Article 48 provides for minimum protection. Member States may implement stricter requirements.35 33 Argueing along these lines Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 222 et seq. 34 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 58; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998 p. 151, Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 138; Grundmann, Europäisches Gesellschaftsrecht, para. 334; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 27; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994 p. 119, 224; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale Recht, 2004, p. 82.

244

Jan P. Brosius

Art 49

TITLE I GENERAL PROVISIONS

VIII. Direct Application Even though Member States may provide for stricter rules, Article 48 is unconditional 25 and sufficiently precise to fulfil the requirements of a direct application where Member States do not at least provide for the requirements laid down in Article 48 (→ Intro Art 44 mn. 64).

Section 2 Safeguards as regards statutory capital Article 49 Experts’ report on consideration other than in cash 1. A report on any consideration other than in cash shall be drawn up before the company is incorporated or is authorised to commence business, by one or more independent experts appointed or approved by an administrative or judicial authority. Such experts may be natural persons as well as legal persons and companies or firms under the laws of each Member State. 2. The experts' report referred to in paragraph 1 shall contain at least a description of each of the assets comprising the consideration as well as of the methods of valuation used and shall state whether the values arrived at by the application of those methods correspond at least to the number and nominal value or, where there is no nominal value, to the accountable par and, where appropriate, to the premium on the shares to be issued for them. 3. The experts' report shall be published in the manner laid down by the laws of each Member State, in accordance with Article 16. 4. Member States may decide not to apply this Article where 90 % of the nominal value, or where there is no nominal value, of the accountable par, of all the shares is issued to one or more companies for a consideration other than in cash, and where the following requirements are met: (a) with regard to the company in receipt of such consideration, the persons referred to in point (i) of Article 4 have agreed to dispense with the experts' report; (b) such agreement has been published as provided for in paragraph 3; (c) the companies furnishing such consideration have reserves which may not be distributed under the law or the statutes and which are at least equal to the nominal value or, where there is no nominal value, the accountable par of the shares issued for consideration other than in cash; (d) the companies furnishing such consideration guarantee, up to an amount equal to that indicated in point (c), the debts of the recipient company arising between the time the shares are issued for a consideration other than in cash and one year after the publication of that company's annual accounts for the financial

35 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 58 et seq.; Dorresteijn/Monteiro/C. Teichmann/Werlauff, European Corporate Law, 2009, 5.13 b, Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 147 et seq.; Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 147; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para 27; Krebs/Wagner, AG 1998, 467, 469; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale Recht, 2004, p. 82; Schwarz, Europäisches Gesellschaftsrecht, para. 588.

Jan P. Brosius

245

Art 49 Experts’ report on consideration other than in cash year during which such consideration was furnished. Any transfer of such shares shall be prohibited during that period; (e) the guarantee referred to in point (d) has been published as provided for in paragraph 3; and (f) the companies furnishing such consideration shall place a sum equal to that indicated in point (c) into a reserve which may not be distributed until three years after publication of the annual accounts of the recipient company for the financial year during which such consideration was furnished or, if necessary, until such later date as all claims relating to the guarantee referred to in point (d) which are submitted during this period have been settled. 5. Member States may decide not to apply this Article to the formation of a new company by way of merger or division where a report by one or more independent experts on the draft terms of merger or division is drawn up. Where Member States decide to apply this Article in the cases referred to in the first subparagraph, they may provide that the report drawn up under paragraph 1 of this Article and the report by one or more independent experts on the draft terms of merger or division may be drawn up by the same expert or experts. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Material Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Publication of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Legally Binding Effect and Judicial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Intragroup incorporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Formation by way of merger or division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Article 84 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Minimum Protection and Scope for National Legislation . . . . . . . . . . . . . . . . . . . . IX. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 4 5 14 15 16 17 23 27 28 29

I. Overview 1

Article 49 stipulates the requirement to draw up an experts’ report whenever a consideration in kind shall be made in the course of the company’s formation. Article 49 contains detailed provisions on the demands to be met by the respective experts, the content of the report and its publication. Article 49 aims to guarantee that any contribution made is of effective intrinsic value. Further, certain possible exceptions from such requirements are provided. Article 49 must be read in conjunction with Articles 50 and 51 and, regarding possible circumventions, Article 52.

II. Historical Background Article 49 derives from the Second Directive1 (cf. Article 10 of Directive 2012/30/ EU). It was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976 and was amended by Directive 2009/109/EC2 implementing paragraph 5. 3 In 1999, the SLIM Initiative pointed out that the requirement of an expert opinion in cases where the assets had already been valued by another expert or in another procedure in the near past and where those assets had not suffered any substantial changes since the first valuation, it would be unnecessary and not conducive both in 2

246

Jan P. Brosius

Art 49

TITLE I GENERAL PROVISIONS

terms of cost and time to have them valued again.3 It is with this aim in view that the fifth paragraph was implemented by Directive 2009/109/EC. Pursuant to the ninth Recital of the preamble of Directive 2009/109/EC an independent expert’s report as provided for under the Second Directive is often not needed where an independent expert’s report protecting the interests of shareholders or creditors also has to be drawn up in the context of the merger or the division. In such cases, Member States should have the possibility of dispensing companies from the reporting requirement under the Second Directive or of providing that both reports may be drawn up by the same expert.

III. Purpose In its first proposal for a Second Directive the Commission stated that the report shall 4 have the purpose to inform the future shareholders about the intended contributions, their value and the value of the shares issued in return.4 For the purpose of creditor protection, the report aims to ensure that the company’s legal capital is effectively covered by assets.5 However, Article 49 also serves the protection of the shareholders. The provisions guarantees that all shareholders have to contribute the same value and prevent that individual shareholders can acquire the same shares for an effectively lower price.6

IV. Material Scope Article 49 applies to contributions in kind only. Contributions in cash do not require 5 respective regulation. The report has to be drawn up before the company is incorporated or authorised to 6 commence business. Hence, the material date for the valuation of the respective asset and its reporting is the company’s incorporation and, thus, the date when the contribution or the respective claim is recognised and shown in the company’s balance sheet. To that end, the date on which the consideration is actually transferred is irrelevant (→ Art 48 mn. 18 et seqq.). The Report shall be drawn up by one or – to the discretion of each Member State – 7 more experts. The Directive does not provide for any specific requirements with regard 1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 Directive 2009/109/EC of the European Parliament and of the Council of 16 September 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions, OJ No L 259, 2.10.2009, p. 14–21. 3 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999 (http://ec.europa.eu/internal_market/company/docs/official/60 37en.pdf), p. 11. 4 First Proposal, OJ No C 48, 24.04.1970, p. 18 (Article 8). 5 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 31. 6 Cf. Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 153.

Jan P. Brosius

247

Art 49 Experts’ report on consideration other than in cash

8

9

10

11

12

13

to the expert’s professional qualifications.7 It only specifies that the expert has to be independent and appointed or approved by an administrative or judicial authority, while leaving a large scope for Member States to place requirements upon such experts. The Directive does not provide for a definition of what “independence” means in respect of the expert.8 What is clear is that an expert is only independent if she or he is under no direct or indirect influence of the company, the shareholders or any of the company’s corporate bodies or of any person that is among those who themselves are typically under the influence of the aforementioned. It is at least questionable, although widely accepted, whether the company’s own auditor will qualify as an independent expert.9 Where the auditor is an auditing company, the requirement of independence applies to both, the company and the natural persons carrying out the auditing (cf. → mn. 10). Further, experts have to be appointed or approved by an administrative or judicial authority as specified in national law. The Directive does not require a certain procedure. Also, the Directive merely requires the appointment but no continuous monitoring by such authority. Experts may be natural persons as well as legal persons and companies or firms under the laws of each Member State. The reference made to the laws of each Member State clarifies that it is to the discretion of each Member State to make restrictions with regard to the legal personality of an expert. At the same time, it does not limit the scope to companies or firms regulated by the law of the respective Member State but rather allows Member State to approve companies or firms under the laws of any Member State to qualify as an expert.10 Article 49 (2) provides for the required minimum content of an expert’s report. “At least” it must contain a description of each of the assets comprising the consideration. This requires a description that allows for a clear and unambiguous identification of the respective assets and states all characteristics and factors affecting their value. Further, the report must state the methods of valuation used. This constitutes a mere information obligation. The Directive does not stipulate what methods of valuation are adequate and does not require a justification for the choice made regarding the method of valuation. The report not only needs to state the specific value of the respective asset. It must also state whether the values arrived at correspond at least to the number and nominal value or to the accountable par, respectively, and, in case there is a premium, to the premium on the shares to be issued for them. Hence, the Directive provides for the requirement of an explicit confirmation and assurances on the legality and regularity of the envisaged contribution. Notably, this does include the confirmation of correspondence with a premium paid11 and thereby highlights the underlying notion of shareholder protection.

7 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 62; Bayer/ J. Schmidt, ZGR 2009, 805, 811; Grundmann, Europäisches Gesellschaftsrecht, para. 336; Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 146, Kalss in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 227. 8 Bayer/J. Schmidt, ZGR 2009, 805, 811; Notari ECFR 2010, 63, 71. 9 For a different view Schmitthoff, 15 CLMR (1978), 43, 48. 10 First Proposal, OJ No C 48, 24.04.1970, p. 10. 11 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 63; Bayer, FS Ulmer 2003, p. 21, 32 f.; Bayer/Schmidt, ZGR 2009, 805, 843; Denecker, Rev. Soc. 1977, 661, 667; Edwards, EC Company Law, p. 62, Grundmann, Europäisches Gesellschaftsrecht, para. 337, Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 31; different Kalss in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p 119, 227.

248

Jan P. Brosius

Art 49

TITLE I GENERAL PROVISIONS

V. Publication of the Report The experts’ report shall be published in accordance with Article 16 (former Article 3 14 of Directive 2009/101/EC) pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means. (cf. → Art 16 mn. 6 et seq.). This publication obligation goes beyond what was initially proposed by the Commission that merely stated that, as far as provisions on an official valuation of contributions in kind are established, these provisions must be subject to publication.12

VI. Legally Binding Effect and Judicial Review The experts’ report is not legally binding vis-à-vis the shareholders.13 At the same 15 time the Directive does not provide for a judicial review of the expert’s report in the course of the company’s formation. This regulatory restraint is welcome as courts are often not qualified to review the valuation and the respective procedure would be even more time consuming. Though, Member States are not precluded from providing for such judicial review.14

VII. Exceptions Article 49 provides for two exceptions as stipulated in the fourth and fifth para- 16 graphs.

1. Intragroup incorporations Pursuant to Article 49 (4) Member States may decide not to apply Article 49 where 90 % of the nominal value or, if applicable, of the accountable par of all shares are issued to one or more companies and, cumulatively, where the following requirements are met. First, all founders unanimously, i.e. each person by whom or in whose name the statutes or the instrument of incorporation have been signed, have to agree to dispense with the experts' report and such agreement has been published in the same way a report has to be published (cf. → mn. 14). Secondly, the respective companies furnishing such consideration have to create special reserves which may not be distributed and which are at least equal to the nominal value or, where applicable, the accountable par of the shares issued for the respective consideration in kind. Thirdly, the respective companies furnishing such consideration have to guarantee the debts of the recipient company arising between the time the respective shares are issued and one year after the publication of the respective company's annual accounts for the financial year during which such consideration was furnished up to an amount equal to the nominal value or, where applicable, the accountable par of the shares issued for the respective consideration in kind. Within this period, any transfer of those shares First Proposal, OJ No C 48, 24.04.1970, p. 11. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para.64; Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 146; Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 274; Niessen AG 1970, 281, 288. 14 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 65. 12

13

Jan P. Brosius

249

17

18

19

20

Art 49 Experts’ report on consideration other than in cash is prohibited. Again this guarantee has to be published in the same way a report has to be published (→ mn. 14). 21 Finally, the respective companies furnishing such consideration are obliged to place a sum equal to the nominal value or, if applicable, the accountable par of the shares issued for the respective consideration in kind into a reserve. Such reserve may not be distributed until three years after publication of the annual accounts of the recipient company for the financial year during which such consideration was furnished or, if necessary, until such later date as all claims relating to the guarantee which are submitted during that period have been settled. 22 This provision was not part of the Commission’s first proposal for a Second Directive. Some Commentators argue that it can be traced back to an instigation of the Dutch delegation.15

2. Formation by way of merger or division Paragraph 5 allows Member States to derogate from the reporting requirements stipulated in Article 49 (1) where a new company is formed by way of a merger or division and a report by one or more independent experts on the draft terms of the merger or division is drawn up. Alternatively, they also may decide to adhere to the requirement of an expert report but to provide that the expert’s report required under Article 49 and the expert’s report on the draft terms of the merger or division may be drawn up by the same expert.16 24 The exception provided for in the fifth paragraph was not included in the initial directive 77/91/EEC. A first version of this exception was to be found in Article 23 (4) of the Third Directive17 that stated that “the Member States need not apply to the formation of a new company the rules governing the verification of any consideration other than cash which are laid down in Article 10 of Directive 77/91/EEC.” 25 Paragraph 5 in its current version had been introduced by Article 1 of Directive 2009/109/EC18. This amendment, as much as the amendment to Article 70 (3), was a coherent rearrangement of the relationship between reporting requirements of the Second Directive and the provisions derived from it and those applying to mergers and division leading to a harmonisation of the – until then – divergent regulations.19 26 Pursuant to the ninth Recital of the preamble of Directive 2009/109/EC an independent expert’s report is often not needed where an independent expert’s report protecting the interests of shareholders or creditors also has to be drawn up in the context of the merger or the division. In such cases, Member States should therefore have the possibility of dispensing companies from the reporting requirement under the Second Directive or of providing that both reports may be drawn up by the same expert. In support of that, the Commission had pointed out that although – and contrary to the report referred to in Article 49 of the Directive –the (former) directives on mergers and divisions20 did not provide for an obligation to make the expert reports required by these 23

Edwards, EC Company Law, p. 62. Bayer/Schmidt, ZIP 2010, 953, 956. 17 Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies, OJ No L 295, 20.10.1978, p. 36–43. 18 Directive 2009/109/EC of the European Parliament and of the Council of 16 September 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions, OJ No L 259, 2.10.2009, p. 14–21. 19 Bayer/Schmidt, ZIP 2010, 953, 956. 20 Now laid down in Title II of the Directive. 15 16

250

Jan P. Brosius

Art 50

TITLE I GENERAL PROVISIONS

directives available to creditors, creditors would in practice have access to it. 21 However, where shareholders make use of the possibility to waive the expert report under the provisions, for instance, in Title II on mergers and divisions of limited liability companies, which derive from the Third Directive22, the Sixth Directive23 and the Cross-Border Mergers Directive 24, the obligation to draw up a report on the contribution in kind continues to apply in order to allow for a sufficient degree of creditor protection.25

3. Article 84 (3) Further, pursuant to Article 84 (3) Member States must ensure that Article 49 does 27 not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU of the European Parliament and of the Council (cf. → Art 84 mn. 5, 15).

VIII. Minimum Protection and Scope for National Legislation The limits, within which a Member State may render the rules on expert reports 28 stricter, as in the second paragraph (“at least”), or less strict, as in Article 50 (4), are expressly indicated.26 Beyond that, the requirements stipulated in Article 49 are mandatory and leave no discretion to derogate.

IX. Direct Application Article 49 is not sufficiently precise to fulfil the requirements of a direct application 29 (cf. → Intro Art 44 mn. 46).

Article 50 Derogation from the requirement for an experts' report 1. Member States may decide not to apply Article 49(1), (2) and (3) where, upon a decision of the administrative or management body, transferable securities as defined in point 44 of Article 4(1) of Directive 2014/65/EU of the European Parliament and of the Council(8) or money-market instruments as defined in point 17 of Article 4(1) of that Directive are contributed as consideration other than in cash, and those securities or money-market instruments are valued at the weighted average price COM(2008) 576 final, p. 8., Also Sandhaus, NZG 2009, 41, 46. Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies, OJ L 295, 20.10.1978, p. 36–43, later replaced by Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies, OJ L 110, 29.4.2011, p. 1–11. 23 Sixth Council Directive 82/891/EEC of 17 December 1982 based on Article 54 (3) (g) of the Treaty, concerning the division of public limited liability companies, OJ No L 378, 31.12.1982, p. 47–54. 24 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies, OJ No L 310, 25.11.2005, p. 1–9. 25 Commission Proposal of 24.9.2008, COM(2008) 576 final, p. 8. 26 Cf. Opinion of the Attorney General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4912, para. 17. (8) Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173, 12.6.2014, p. 349). 21

22

Jan P. Brosius

251

Art 50 Derogation from the requirement for an experts' report at which they have been traded on one or more regulated markets as defined in point 21 of Article 4(1) of that Directive during a sufficient period, to be determined by national law, preceding the effective date of the contribution of the respective consideration other than in cash. However, where that price has been affected by exceptional circumstances that would significantly change the value of the asset at the effective date of its contribution, including situations where the market for such transferable securities or moneymarket instruments has become illiquid, a revaluation shall be carried out on the initiative and under the responsibility of the administrative or management body. For the purposes of such revaluation, Article 49(1), (2) and (3) shall apply. 2. Member States may decide not to apply Article 49(1), (2) and (3) where, upon a decision of the administrative or management body, assets, other than the transferable securities and money-market instruments referred to in paragraph 1 of this Article, are contributed as consideration other than in cash which have already been subject to a fair value opinion by a recognised independent expert and where the following conditions are fulfilled: (a) the fair value is determined for a date not more than six months before the effective date of the asset contribution; and (b) the valuation has been performed in accordance with generally accepted valuation standards and principles in the Member State which are applicable to the kind of assets to be contributed. In the case of new qualifying circumstances that would significantly change the fair value of the asset at the effective date of its contribution, a revaluation shall be carried out on the initiative and under the responsibility of the administrative or management body. For the purposes of the revaluation referred to in the second subparagraph, Article 49(1), (2) and (3) shall apply. In the absence of such a revaluation, one or more shareholders holding an aggregate percentage of at least 5 % of the company's subscribed capital on the date the decision on the increase in the capital is taken, may demand a valuation by an independent expert, in which case Article 49(1), (2) and (3) shall apply. Such shareholder(s) may submit a demand up until the effective date of the asset contribution, provided that, at the date of the demand, the shareholder(s) in question still hold(s) an aggregate percentage of at least 5 % of the company's subscribed capital, as it was on the date the decision on the increase in the capital was taken. 3. Member States may decide not to apply Article 49(1), (2) and (3) where, upon a decision of the administrative or management body, assets, other than the transferable securities and money-market instruments referred to in paragraph 1 of this Article, are contributed as consideration other than in cash the fair value of which is derived from the value of an individual asset from the statutory accounts of the previous financial year provided that the statutory accounts have been subject to an audit in accordance with Directive 2006/43/EC. The second to fifth subparagraphs of paragraph 2 of this Article shall apply mutatis mutandis.

252

Jan P. Brosius

Art 50

TITLE I GENERAL PROVISIONS I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background and Rationale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Transferable Securities and Money-Market Instruments . . . . . . . . . . . . . . . . . . . . . IV. Assets Subject to Recent Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Value Derived from Statutory Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 16 22 24

I. Overview Article 50 provides for exceptions to the requirement of an experts’ report and 1 permits Member States to relax the reporting requirements stipulated in Article 49 where the contribution consists of transferable securities or money-market instruments which are valued at the weighted average price at which they have been traded on one or more regulated markets. Further, Article 50 provides for an exception for other assets that were valued according to an earlier expert’s fair value opinion or according to the fair value derived from the statutory accounts of the previous financial year. In the legislature’s view, in such cases reliable references for the true value of the respective asset(s) already exist and therefore a new valuation would not be necessary.1

II. Historical Background and Rationale Article 50 derives from the Second Directive2 (cf. Art 11 of Directive 2012/30/EU). 2 It has been introduced by Directive 2006/68/EC3. It can be tracked back to the proposal of the Company Law SLIM Working Group, which stated that expert opinions are not always useful or necessary. In its opinion this would apply especially to stock exchange acquisitions or acquisitions on the market. In case the assets have already been valued in a different context and procedure a second valuation would only be costly and time consuming.4 Therefore it was recommended to implement an (additional) exception to the requirements stipulated in Article 49 for transferable securities traded on a regulated market and assets that have recently been valued independently.5

See also Bayer/Schmidt, ZGR 2009, 805, 807. Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 3 Directive 2006/68/EC of the European Parliament and of the Council of 6 September 2006 amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital, OJ No L 264, 25.9.2006, p. 32–36. 4 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999, http://ec.europa.eu/internal_market/company/docs/official/6 037en.pdf, p. 11; see also Report from the Commission results of the fourth phase of Slim of 4 February 2000, COM(2000)56 final, p. 4, 13; Schäfer, Der Konzern 2007, 407. 5 Report from the Commission results of the fourth phase of Slim of 4 February 2000, COM(2000)56 final, p. 4, 13. In 2000, the Commission expressed its endorsement of the recommendations made by the SLIM Initiative, cf. Report from the Commission results of the fourth phase of SLIM of 4 February 2000, COM(2000)56 final, p. 5. 1

2

Jan P. Brosius

253

Art 50 Derogation from the requirement for an experts' report The High Level Group of Company Law Experts took up the proposal and identified the valuation of non-cash contributions as one of the main problems of the system of capital formation created by the Second Directive.6 It agreed that expert valuations are expensive on the one hand but often not effective on the other hand, i.e. they do not offer a guarantee regarding the asset’s real value,7 what the Commission, with a view to its proposal,8 later emphasized, too.9 Provided that minority shareholders have the right to require an expert valuation, the High Level Group endorsed to make an exception for securities traded in the regulated market and assets that have been evaluated recently before the contribution is made.10 Moreover, the High Level Group proposed on relying on values derived from audited accounts.11 4 Accordingly and as stated in the third Recital of the preamble of Directive 2006/68/EC, Member States should be able to permit companies to allot shares for consideration in kind without requiring them to obtain a special expert valuation in cases in which there is a clear point of reference for the valuation of such consideration. But, nonetheless, the right of minority shareholders to require such valuation was intended to be guaranteed. 3

III. Transferable Securities and Money-Market Instruments Article 50 (1) provides for an exception for transferable securities and money-market instruments. Transferable securities, as defined in point 44 of Article 4(1) of Directive 2014/65/EU,12 are “those classes of securities which are negotiable on the capital market, with the exception of instruments of payment, such as (a) shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares, (b) bonds or other forms of securitised debt, including depositary receipts in respect of such securities, and (c) any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.” 6 Money-market instruments, as defined in point 17 of Article 4(1) of Directive 2014/65/EU, are “those classes of instruments which are normally dealt in on the money market, such as treasury bills, certificates of deposit and commercial papers and excluding instruments of payment.” 7 The contribution to be made has to be approved by a decision of the administrative or management body. The Directive does not require that the administrative or management body itself initiated the contribution. It only acts as a monitoring authority. Simple majority is sufficient. 5

6 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 83. 7 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 83. 8 Proposal of the Commission of 29.10.2004, COM(2004) 730 final. 9 SEC (2004), 1342, p. 2. 10 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 83. 11 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 83. 12 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast), OJ L 173, 12.6.2014, p. 349–496.

254

Jan P. Brosius

Art 50

TITLE I GENERAL PROVISIONS

The company has to calculate the weighted average price at which the transferable securities and money-market instruments have been traded on one or more regulated markets, as defined in point 21 of Article 4(1) of Directive 2014/65/EU, i.e. in “a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third‑party buying and selling interests in financial instruments – in the system and in accordance with its non-discretionary rules – in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorized and functions regularly and in accordance with the provisions of Title III” of such directive. The underlying assumption is that the weighted average price at a regulated market always reflects the true value.13 The term “weighted average price” is not legally defined. Neither does the Directive stipulate who has the competence to determine such weighted average price.14 It is to be assumed that Article 50 refers to a weighted average price that is volume / turnover based. Apart from that, it is to the discretion of each Member State to specify the rules and procedures that shall apply. The transferable securities and money-market instruments have to be traded at such weighted average price during a sufficient period of time. Article 50 does not define how long the period has to be to be classified as sufficient. It is to the discretion of each Member State to determine sufficiency. The Commission’s proposal provided for a period of three months preceding the effectuation of the respective consideration. 15 Providing for a period of three months seems reasonable to ensure a reliable assessment without requiring excessive evaluations.16 The relevant point in time for the backward calculation, which Article 50 (2) (a) refers to, is the effective date of the contribution. This generates a certain structural discontinuity if one looks at Article 49, which requires that report on any consideration other than in cash shall be drawn up before the company is incorporated, while Article 48 (2) provides that a consideration in kind does not have to be transferred immediately but within five years of the time the company is incorporated or is authorised to commence business. Consequentially, regarding any contributions that shall have the benefit of the exceptions provided for in Article 50, shareholders may not make use of the extensive time period offered in Article 48(2).17 Pursuant to the second subparagraph of Article 50 (1) the exceptions made in the first subparagraph do not fully apply if the weighted average price has been affected by exceptional circumstances that would significantly change the value of the asset at the effective date of its contribution. In that case a revaluation must be carried out on the initiative and under the responsibility of the administrative or management body. For the purposes of such revaluation, coherently, Article 49 (1), (2) and (3) do apply (→ Art 49 mn. 5 et seqq.). The provision demonstrates the need to limit the scope of the exception granted under the first subparagraph to effectively serve the purpose of capital protection.18 Such exceptional circumstances rebut the presumption of a true value derived from market prices. As an example of an exceptional circumstance Article 50 points out “situ13 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 71; Bayer/ Schmidt ZGR 2009, 805, 809; see also Schäfer, Der Konzern 2007, 407, 408. 14 See also Van der Elst, European Company Law 6 (2009) 110, 111. 15 Proposal of the Commission of 29.10.2004, COM(2004) 730 final, p. 10. 16 Van der Elst, European Company Law 6 (2009) 110; Schäfer, Der Konzern 2007, 407, 408; for the possibility of a flexible period or, respectively, a prolongation see Westermann, ZHR 172 (2008), 144, 150. 17 See also Drinhausen/Keinath BB 2008, 2078, 2079; Pentz, MüKoAktG, 5 th edn (2019), § 33 a para. 24. 18 Merkner/Decker, NZG 2009, 887, 888.

Jan P. Brosius

255

8

9

10

11

12

13

Art 50 Derogation from the requirement for an experts' report ations where the market for such transferable securities or money-market instruments has become illiquid.”19 In addition, the Commission referred to manipulation of market prices.20 Exceptional circumstances do not only derive from market failures. They may also derive from the respective asset itself or any value-forming factor. Any circumstance affecting the weighted average price that has been determined during the relevant period may constitute an exceptional circumstance. However, exceptionality requires a form of market failure or an extraordinary event outside the usual cause of business that has a temporary effect on the share price. Under such exceptional circumstances it is to be assumed that the weighted average price does not reflect the true value of the shares at the time of the contribution.21 14 It is for the administrative or management body to identify such exceptional circumstances and to carry out or initiate a revaluation. Failing to do so may lead to liability; Member Sates have to provide respective legal framework. Minority shareholders, however, may not enforce a revaluation based on the assumption of exceptional circumstances (but see subparagraph 2 of Article 70 (2)).22 15 The exceptional circumstance has to significantly change, compared to the weighted average value, the value of the asset at the effective date of its contribution. The Directive does not define significance but leaves it to the discretion of Member States to decide upon the relevant threshold. It has to be taken into account that the significance has to refer to the effect on the weighted average price for the relevant period. Therefore, shortterm price fluctuations may have no influence at all. Overall, it appears that significance requires a price movement of at least 10 %.

IV. Assets Subject to Recent Valuation Article 50 (2) aims to prevent the company and its shareholders from a redundant repetitive valuation.23 Member States may decide not to apply Article 49 (1), (2) and (3) where assets other than the transferable securities and money-market instruments are contributed as consideration in kind, if such assets have already been subject to a fair value opinion by a recognised independent expert. Article 50 (2) does not define the notion of “fair value”. The question rises whether this concept refers to applicable accounting standards or whether the term has to be interpreted autonomous.24 The provision in point (b) suggests that the latter is true. However, the principles of European law (cf. → Intro Art 44 mn. 51) require to assess the meaning of fair value with a view to the different accounting directives, e.g. Directive 2013/34/EU 25 which frequently refers to the notion of fair value. 17 Article 50(2) applies to any contribution in kind that does not concern transferable securities and money-market instruments; apart from that, the nature of the contribution 16

19 Although it remains unclear how “illiquid” is to be defined, see also Van der Elst, European Company Law 6 (2009) 110, 111. 20 SEC(2004) 1342, p. 2. 21 See also Van der Elst, European Company Law 6 (2009) 110, 111. 22 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 75; Bayer/ Schmidt, ZGR 2009, 805, 815 et seq.; Notari ECFR 2010, 63, 70, Schäfer, Der Konzern 2007, 407, 412, different, van der Elst (2009) 6 ECL 110, 111. 23 In more detail see Notari ECFR 2010, 63, 67 et seqq. 24 In more detail see Notari ECFR 2010, 63, 71 et seq. 25 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ No L 182, 29.6.2013, p. 19.

256

Jan P. Brosius

Art 50

TITLE I GENERAL PROVISIONS

is irrelevant. As for the exception under the first paragraph, the contribution to be made has to be approved by a decision of the administrative or management body (cf. → mn. 12). Additionally, the provision requires certain further conditions to be fulfilled. First, the valuation has been performed by a recognised independent26 expert in accordance with generally accepted valuation standards and principles in the Member State which are applicable to the kind of assets to be contributed. In this respect, Article 50 (2) is significantly more detailed and tends to be stricter than the provisions laid down in Article 49 (1), (2) and (3). Generally accepted valuation standards and principles may be statutory evaluation standards or market standards. Secondly, the fair value is determined for a date not more than six months before the effective date of the asset contribution. In this respect, the second paragraph refers to the reference date for the valuation, not the date of the valuation. However, the provision refers to backward-looking valuations only. The effective date is the day the title is transferred, the respective asset to be contributed becomes the company’s property and, hence, is fully shown on the company’s balance sheet.27 Subparagraph 2 of the second paragraph systematically corresponds to subparagraph 2 of the first paragraph. In the case of new qualifying circumstances that would significantly change the fair value of the asset at the effective date of its contribution, a revaluation shall be carried out on the initiative and under the responsibility of the administrative or management body. Consequently, for the purposes of such revaluation, Article 49 (1), (2) and (3) applies. Subparagraphs 3 and 4 provide for minority shareholder protection. If the administrative or management body decides not to initiate a revaluation, one or more shareholders holding an aggregate percentage of at least 5 % of the company's subscribed capital on the day the decision on the capital increase is taken and at the date of such demand, may demand a valuation by an independent expert pursuant to the provisions laid down in Article 49(1), (2) and (3). The demand may be submitted until the effective date of the asset contribution.

18

19

20

21

V. Value Derived from Statutory Accounts Article 50 (3) complements the exception laid down in Article 50(2). It provides 22 that Member States may decide not to apply Article 49 (1), (2) and (3) where assets other than the transferable securities and money-market instruments are contributed as consideration in kind, provided that their fair value is derived from the value of an individual asset from the statutory accounts of the previous financial year and such statutory accounts have been subject to an audit in accordance with Directive 2006/43/ EC28. Again, the contribution to be made has to be approved by a decision of the administrative or management body (cf. → mn. 12). The second to fifth subparagraphs of paragraph 2 apply to paragraph 3 as well (cf. → 23 mn. 18 et seqq.). In particular, that means that significant changes in the value of the asset at issue have to be taken into account by the board appropriately through a revaluation. Further, minority shareholders may seek remedy against a perceived improper valuation by requesting an additional valuation by an independent expert. Santella/Turrini (2008) 9 EBOR 427, 439 questioning the independence of experts. See also Schäfer, Der Konzern 2007, 407, 409 who is referring to the transfer of risks and benefits. 28 Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC, OJ L 157, 9.6.2006, p. 87–107. 26 27

Jan P. Brosius

257

Art 51 Consideration other than in cash without an experts' report

VI. Direct Application 24

Article 50 is not directly applicable. It is to the sole discretion of the Member States whether any exception is transformed into national law.

Article 51 Consideration other than in cash without an experts' report 1. Where consideration other than in cash as referred to in Article 50 is provided without an experts' report as referred to in Article 49(1), (2) and (3), in addition to the requirements set out in point (h) of Article 4 and within one month of the effective date of the asset contribution, a declaration containing the following shall be published: (a) a description of the consideration other than in cash at issue; (b) its value, the source of this valuation and, where appropriate, the method of valuation; (c) a statement whether the value arrived at corresponds at least to the number, to the nominal value or, where there is no nominal value, the accountable par and, where appropriate, to the premium on the shares to be issued for such consideration; and (d) a statement that no new qualifying circumstances with regard to the original valuation have occurred. The publication of the declaration shall be effected in the manner laid down by the laws of each Member State in accordance with Article 16. 2. Where consideration other than in cash is proposed to be provided without an experts' report, as referred to in Article 49(1), (2) and (3), in relation to an increase in the capital proposed to be made under Article 68(2), an announcement containing the date when the decision on the increase was taken and the information listed in paragraph 1 of this Article shall be published, in the manner laid down by the laws of each Member State in accordance with Article 16, before the contribution of the asset as consideration other than in cash is to become effective. In that event, the declaration pursuant to paragraph 1 of this Article shall be limited to the statement that no new qualifying circumstances have occurred since the aforementioned announcement was published. 3. Each Member State shall provide for adequate safeguards ensuring compliance with the procedure set out in Article 50 and in this Article where a contribution for a consideration other than in cash is provided without an experts' report as referred to in Article 49(1), (2) and (3). I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Exception Pursuant to Article 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Capital Increase and Authorised Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Safeguards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

258

Jan P. Brosius

1 2 3 4 8 10 12 13

Art 51

TITLE I GENERAL PROVISIONS

I. Overview If and in so far as a Member State provides for the exceptions as stipulated in 1 Article 50 (→ Art 50 mn. 5 et seqq., 16 et seqq.) it has to make sure, and provide for accordingly, that where a consideration in kind is made without an experts’ report as referred to in Article 49 (→ Art 49 mn. 6 et seqq.) the respective company complies with certain publication obligations. Similar requirements apply to an increase in the capital proposed to be made under Article 68 (2). Member States are expressly requested to provide for adequate safeguards ensuring compliance with Articles 50 and 51 where a contribution in kind is made without an experts’ report.

II. Historical Background Article 51 derives from the Second Directive1 (cf. Article 12 of Directive 2012/30/ 2 EU). It has been introduced by Directive 2006/68/EC2.

III. Purpose Article 51 aims to provide protection to shareholders and creditors by means of 3 publication. With a view to its proposal3 the Commission pointed out that the provisions in Article 51 would provide further safeguards to compensate for the possible absence of expert valuation of contributions in kind by setting forth additional detailed disclosure requirements as to the asset contributed and its valuation.4

IV. Exception Pursuant to Article 50 If and in so far as a Member State provides for the exceptions as stipulated in 4 Article 50 (→ Art 50 mn. 5 et seqq., 16 et seqq.) it has to make sure, and provide for accordingly, that where a consideration in kind is made without an experts’ report as referred to in Article 49 (→ Art 49 mn. 6 et seqq.) the respective company has published a declaration in accordance with Article 51. Such declaration has to contain a description of the assets to be contributed, the value of such assets stating the source of that valuation and the method of that valuation, a statement that such value corresponds at least to the nominal value or, if applicable, the accountable par and, where a premium is paid, to the premium on the shares to be issued for the respective consideration, and 1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 Directive 2006/68/EC of the European Parliament and of the Council of 6 September 2006 amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital, OJ No L 264, 25.9.2006, p. 32–36. 3 Proposal of the Commission of 29.10.2004, COM(2004) 730 final. 4 SEC (2004) 1342, p. 3.

Jan P. Brosius

259

Art 51 Consideration other than in cash without an experts' report a statement that no new qualifying circumstances with regard to the original valuation have occurred.5 5 The declaration has to be made in addition to the requirements set out in point (h) of Article 4 which requires that the nominal value of the shares or, in case of an accountable par, the number of shares issued for a consideration in kind, together with the nature of such consideration and the name of the person providing that consideration appear in either the statutes or the instrument of incorporation or a separate document. 6 Such declaration has to be published in accordance with Article 16 pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means (→ Art 16 mn. 6 et seq.). 7 The declaration has to be made within one month after the effective date of the asset contribution.

V. Capital Increase and Authorised Capital Under Article 68 (2) Member States may allow companies to provide for authorised capital. Where a consideration in kind is proposed to be made without an experts’ report in relation to a capital increase to be made under Article 68 (2), Article 50 (2) states that an announcement by the company has to be published in accordance with Article 16 (→ mn. 6, Art 16 mn. 6 et seq.). As in Article 50 (1), such announcement has to contain the date when the decision on the increase was taken, a description of the assets to be contributed, the value of such assets stating the source of that valuation and the method of that valuation, a statement that such value corresponds at least to the nominal value or, if applicable, the accountable par and, where a premium is paid, to the premium on the shares to be issued for the respective consideration. Further it has to contain a statement that no new qualifying circumstances with regard to the original valuation have occurred. 9 The announcement has to be made before the contribution of the asset as consideration in kind becomes effective.6 The announcement does not release the company from its obligation to publish a declaration pursuant to Article 51 (1). However, such declaration may be limited to the statement that no new qualifying circumstances have occurred since the announcement pursuant to Article 51 (2) was published.7 8

VI. Safeguards 10

In its third paragraph Article 51 states that each Member State has to provide for adequate safeguards that ensure compliance with the procedure set out in Article 50 and the procedure stipulated within Article 51 itself. In its proposal the Commission had pointed out “the necessity to provide for adequate safeguards that have to replace the valuation requirement as currently set forth by the Directive.”8 It is to be noted that such obligation also arises as a result of the general principle of effectiveness and effet utile (→ Intro Art 44 mn. 62 et seq.). See also Schäfer, Der Konzern 2007, 407, 410 et seq. In more detail see Schäfer, Der Konzern 2007, 407, 411. 7 See also Schäfer, Der Konzern 2007, 407, 411. 8 SEC (2004) 1342, p. 2.

5 6

260

Jan P. Brosius

Art 52

TITLE I GENERAL PROVISIONS

It is to the discretion of each Member State to determine what kind of safeguards are 11 to be considered adequate. Effective measures contain the liability of administrative or management body.

VII. Minimum Provision Article 51 provides for minimum requirements. Member States may provide for 12 stricter rules.

VIII. Direct Application Article 51 (1) and Article 51 (2) are unconditional and sufficiently precise to fulfil the 13 requirements of a direct application (→ Intro Art 44 mn. 46). The same does not apply to Article 51 (3).

Article 52 Substantial acquisitions after incorporation or authorisation to commence business 1. If, before the expiry of a time limit laid down by national law of at least two years from the time the company is incorporated or is authorised to commence business, the company acquires any asset belonging to a person or company or firm referred to in point (i) of Article 4 for a consideration of not less than one-tenth of the subscribed capital, the acquisition shall be examined and details of it published in the manner provided for in Article 49(1), (2) and (3), and it shall be submitted for the approval of a general meeting. Articles 50 and 51 shall apply mutatis mutandis. Member States may also require these provisions to be applied when the assets belong to a shareholder or to any other person. 2. Paragraph 1 shall not apply to acquisitions effected in the normal course of the company's business, to acquisitions effected at the instance or under the supervision of an administrative or judicial authority, or to stock exchange acquisitions. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Material Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Application of Articles 50 and 51 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Minimum Protection and Scope for National Legislation . . . . . . . . . . . . . . . . . . . . VIII. General Principles on Circumvention of the Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 5 6 11 14 18 24 26 27

I. Overview In Article 52 the European legislature aimed to prevent circumvention of the rules 1 on contributions in kind where a shareholder who intends to make a contribution in kind, but, at the same time, is unwilling to comply with the provisions on contributions

Jan P. Brosius

261

Art 52 Substantial acquisitions after incorporation or authorisation to commence business in kind, first makes his contribution in cash and subsequently sells to the company the property the shareholder initially intended to contribute. As this transaction would be exempted from the control of the provisions on contributions in kind, there is the risk that the price the company pays for the property is too high.1 In Case C-83/91 Advocate General Tesauro argued that particularly in the first time of its existence the company needs to be protected from operations which might be tainted by conflicts of interest, because at that point its survival is exposed to greater uncertainties.2 Therefore, Article 52 extends the requirement to provide for an expert’s valuation to any acquisition of assets where (i) the owner of the assets is one of the company’s founders 3, (ii) the consideration paid is of certain significance4 and (iii) the transactions falls within a period of at least two years from the company’s incorporation. Additionally, such transactions require the approval of the general meeting. 2 The European legislature assumed that transactions subsequent to a contribution in cash are typically intended to circumvent the rules on contributions in kind and therefore created and absolute and unchallengeable presumption of circumvention.

II. Historical Background Article 52 derives from the Second Directive5 (cf. Article 13 of Directive 2012/30/ EU). It was implemented in the Second Directive 77/91/EEC as initially adopted 13 December 1976. It has been amended by Directive 2006/68/EC. 4 Arguably, the provision was modeled after the German concept of “Nachgründung”.6 Indeed, before implemented in the Second Directive, the principle was known and embedded only in German law; none of the other initial Member States provided for a respective provision.7 The Commission pointed out, that such provision were new to most Member States but also appreciated by many of its law experts.8 3

1 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 78; Werlauff, EU-Company Law, p. 239. 2 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4915, para. 19. However, it is to be noted that while it is true that the company needs to be protected from such actions, equivalent risks may arise during an increase in capital as well. 3 As defined in point (i) of Article 4, i.e. the persons by whom or in whose name the statutes or the instrument of incorporation or, respectively, the drafts of those documents have been signed. 4 One-tenth of the subscribed capital. 5 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 6 Wooldridge, Company Law in the UK and the EC, p. 28; Schwarz, Europäisches Gesellschaftsrecht, para. 590; Bayer/Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht: Eine Bilanz von 1968 bis zur Gegenwart’, in: Bayer/Habersack (ed), Aktienrecht im Wandel 2007, Vol. 1, chap. 18, para. 32. 7 OJ No C 48, 24.04.1970, p. 11. 8 OJ No C 48, 24.04.1970, p. 11.

262

Jan P. Brosius

Art 52

TITLE I GENERAL PROVISIONS

III. Purpose Article 52 intends to prevent shareholders from engaging in a fraudulent circum- 5 vention of the protective provisions laid down in Article 49 by subscribing for shares promising a consideration in cash while subsequently selling the company assets charging an excessive price.9

IV. Material Scope It follows from the provision’s very wording that the scope of Article 52 is limited to the acquisition of assets belonging to the founders as referred to in point (i) of Article 4, i.e. the person or company or firm by whom or in whose name the statutes or the instrument of incorporation have been signed. However, Member States may also provide that the requirements laid down in Article 52 are to be applied where the respective assets belong to a shareholder or to any other person, cf. subparagraph 3 of Article 52 (1). Further, the consideration paid for such assets must correspond to at least 10% of the subscribed capital. Member States may not provide for stricter requirements. National law that provides for a higher threshold, i.e. less than 10% of the subscribed capital, constitutes an infringement of the Directive. This materiality threshold significantly limits the scope of Article 52 for the benefit of effectiveness and flexibility. The acquisition has to take place within a certain period as provided for by each Member State individually, provided however, that such time-limit must be at least two years from the time the company is incorporated or is authorised to commence business.10 While Member States may not provide for a shorter period they are free to provide for a more extensive time-limit (“at least”).11 Any such acquisition as described above must be examined and the details of the transaction must be published in the manner provided for in Article 49 (1), (2) and (3), i.e. a report by an independent expert has to be drawn up containing the description of each of the assets sold and stating the methods of valuation used and whether the values arrived at by the application of those methods correspond to the purchase price paid (→ Art 49 mn. 11 et seqq.). Such report has to be published in accordance with Article 16 (former Article 3 of Directive 2009/101/EC) pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means (→ Art 16 mn. 6 et seq.). After the examination and the publication of the relevant details the acquisition has to be submitted for the approval of the general meeting. Article 52 does not provide for rules for a quorum. A simple majority is sufficient. Member States may, however, lay down stricter rules for a quorum.

OJ No C 48, 24.04.1970, p. 11; see also Schwarz, Europäisches Gesellschaftsrecht, para. 590. See also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 230. 11 See also Ebenroth/Kräutter, DB 1990, 2153, 2156; Ebenroth/Neiß, BB 1992, 2085, 2088. 9

10

Jan P. Brosius

263

6

7

8

9

10

Art 52 Substantial acquisitions after incorporation or authorisation to commence business

V. Application of Articles 50 and 51 According to the second subparagraph of Article 52 (1), Articles 50 and 51 shall apply mutatis mutandis. Therefore, in respective application of Article 50, Member States are allowed to provide for an exception to the requirement of an experts’ report and relax the reporting obligations as required by the first paragraph where the object of purchase are transferable securities or money-market instruments which are valued at the weighted average price at which they have been traded on one or more regulated markets. Further, Article 50 provides for an exception where other assets sold were valued according to an earlier expert’s fair value opinion or according to the fair value derived from the statutory accounts of the previous financial year. It is understood that in such cases reliable references for the true value of an asset already exist and therefore a new valuation would not be necessary (→ Art 50 mn. 1, 16 et seqq.). 12 If and in so far as a Member State provides for the exceptions as stipulated in Article 50 (cf. → Art 50 mn. 5 et seqq., 16 et seqq.), Article 51 requires that it has to make sure, and provide for accordingly, that where an experts’ report is not drawn up, the respective company has to comply with certain publication obligations. Member States are also requested to provide for adequate safeguards ensuring compliance with Articles 50 and 51 where a transaction pursuant to Article 52 is made without an experts’ report. 13 There is some disagreement as to whether the Member States may – within the scope of Articles 50 and 51 – refrain from the requirement of an approval of the general meeting.12 It seems conclusive that Member States may not dispense with such requirement. Articles 50 and 51 allow Member States – under the circumstances stated – to refrain from the requirement of an expert’s valuation. They do not contain rules on competence and they do not intend to restrict the powers of the general meeting. The provisions are limited to valuation proceedings. An approval of the general meeting is not subject of Articles 50 and 51. A historic interpretation clearly supports this opinion. The Commission expressly stated that while the simplification regarding expert valuation in Articles 50 and 51 is extended to cases of acquisition of assets from founders, the requirement of approval by the general meeting is retained.13 At the same time, the argument that the overall purpose of directive 2006/68/EC, namely to strengthen the business efficiency and competitiveness,14 is supported more effectively when enabling Member States to dispense with the approval of the general meeting,15 seems overly broad and does not carry that much weight. 11

VI. Exceptions 14

Article 52 (2) states three types of acquisitions that are excluded from the procedure laid down in the first paragraph. These exceptions are mandatory for Member States to implement.16 12 Consenting Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 81; dissenting Handelsrechtsausschuss des DAV (German Lawyers' Association's commercial law committee (NZG 2005, 426, 428). 13 SEC (2004) 1342, p. 3. 14 See Commission proposal, COM (2004) 730 final, p. 2. 15 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 81. 16 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 80; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994 p. 119, 230; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale Recht, 2004, p. 93 et seq.; Lutter/Ziemons, ZGR 1999, 479, 491.

264

Jan P. Brosius

Art 52

TITLE I GENERAL PROVISIONS

First, paragraph 1 is not to be applied to acquisitions effected in the normal course 15 of the company's business. Such transactions shall not be restricted.17 The European Economic and Social Committee and the European Parliament pointed out that the provision laid down in Article 52 shall not interfere with the company’s daily business and its usual commercial transactions.18 However, in the view of the Committee, as the rules would only apply to the formation of the company, in practice, the scope of application would be rather limited and therefore the provision would have almost no significance.19 The Commission agreed and its second proposal explicitly provided for an exemption for transactions in the normal course of business.20 However, there is no definition of the notion of “normal course of business”. Accordingly, there is some disagreement as to whether this exception requires that the respective transaction bears a relationship to the company’s core business or a certain frequency of occurrence is necessary.21 Certainly, the requirements placed on the term “normal course of business” should not be set too high, while, on the other hand, the transaction must fall within the scope of the company’s objects as laid down in the statutes according to point (b) of Article 3 (cf. → Art 3 mn. 6) and Article 9 (cf. → Art 9 mn. 15). 22 Overall, a broad understanding of this notion is preferable. Further, the provisions stipulated in the first paragraph may not be applied to acquisi- 16 tions effected at the instance or under the supervision of an administrative or judicial authority. Finally, the provisions stipulated in the first paragraph may not be applied to stock 17 exchange acquisitions.

VII. Minimum Protection and Scope for National Legislation As follows from the very wording (“at least”), the time limits laid down in the first 18 paragraph may be extended beyond a two-year-period. Further, “the circle of persons affected by the rules in question may be widened, so as to include shareholders and others.”23 On the other hand, it is clear from the very wording of the provision that the provisions may not be applied to assets representing less than one-tenth of the capital. 24 However, there is quite some disagreement as to whether Article 52 lays down an 19 exhaustive set of rules against circumvention or whether Member States are permitted to provide for stricter rules in order to prevent any circumvention. On the one hand, it is alleged that the fact that Article 52 expressly states two cases 20 in which the national legislature is allowed to adopt stricter measures would support 17 Grundmann, Europäisches Gesellschaftsrecht, para. 340; Kalss in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 230; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale Recht, 2004, p. 93 et seq.; Lutter/Ziemons, ZGR 1999, 479, 491. 18 OJ No c 88, 6.9.1971, p. 3; OJ No C 114, 11,11,1971, p. 20. 19 OJ No c 88, 6.9.1971, p. 3. 20 COM (72) 1310, p. 2, 8. 21 Cf. Diekmann, ZIP 1996, 2149, 2150, Lutter/Ziemons, ZGR 1999, 479, 493, Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 233; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale Recht, 2004, p. 62 et seqq. 22 See also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 230. 23 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4913, para. 17. 24 See also Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4914, para. 17.

Jan P. Brosius

265

Art 52 Substantial acquisitions after incorporation or authorisation to commence business the view that apart from that, its protective provisions are exhaustive and may not be intensified.25 It is further argued, that the fact that acquisitions made in the normal course of the company's business are expressly removed from the scope of the rules laid down in Article 52 would provide a further ground for an exhaustive provision.26 Therefore, Advocate General Tesauro concluded that, by treating only the case expressly stated in Article 52 as equivalent to a contribution in kind, the European legislature intended to exclude similar cases from the possibility of being treated similar to that laid down in Article 52.27 21 Advocate General Tesauro further considered that it was necessary to exclude any possibility of intervention by the national legislature or by national courts by way of interpretation which, by adopting a description of all possible cases of circumvention that might arise, serves to impose penalties without taking into account whether the parties involved act with fraudulent intent and detrimental to the legitimate interests involved.28 Certainly, this objection is not unfounded. The same can be said of the further argument brought forward by Advocate General Tesauro: a different view would require that the second paragraph had to be read as meaning that the company's ordinary transactions are exempted from any rules aiming to prevent circumvention although they may be regarded as involving circumvention under national law.29 Hence, if the national legislature were allowed to provide for a stricter regime than laid down in the first paragraph and if the second paragraph imposed an unchallengeable presumption of no circumvention, the latter would have to be read differently, namely that any rules on circumvention do not apply to privileged transactions. 22 Still, Article 52 is not exhaustive. 30 Member States may provide for stricter rules. Article 52 aims to provide protection against circumvention of the rules on contributions in kind, in particular as laid down in Article 49. The principle of effectiveness not only allows but rather requires Member States to extend the scope of Article 52 where necessary to fulfil that purpose. Also, the Commission clearly stated that the provisions laid down in Article 52 cannot prevent shareholders to find ways to circumvent the procedure stipulated in Article 49. However, as the Commission expressly pointed out, it is to the discretion of each Member State to provide for extended, further reaching rules.31 23 A major subject of the debate is the German concept of “disguised contribution in kind” (verdeckte Sacheinlage) as stipulated in sec. 27 (3) of the German Stock Corporation Act (AktG).32 The Bundesgerichtshof33 held – based on the acte claire doctrine34 – that it was obvious that the Directive allows Member States to implement stricter rules and found it unnecessary to refer to the Court of Justice for a preliminary ruling. This, however, will require that the provision is unequivocal and "no question can arise and there is no need to seek an interpretation." The Court of Justice made clear that Article 25 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4912, para. 18. 26 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4913, para. 18. 27 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4913, para. 18. 28 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4915, para. 20. 29 See Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4915, para. 20. 30 See also Henze, in Grundmann, Systembildung und Systemlücken in Kerngebieten des Europäischen Privatrechts, 2000, 235, 239 et seq.; for a differentiated view see Drinkuth, Die Kapitalrichtlinie – Mindestoder Höchstnorm?, p. 165. 31 First Proposal, OJ No C 48, 24.04.1970, p. 11.

266

Jan P. Brosius

Art 52

TITLE I GENERAL PROVISIONS

Art 267 TEFU “is to be interpreted as meaning that a court […] is required, where a question of Community law is raised before it, to comply with its obligation to bring the matter before the Court of Justice, unless it has established that the question raised is irrelevant or that the Community provision in question has already been interpreted by the Court or that the correct application of Community law is so obvious as to leave no scope for any reasonable doubt.”35 Certainly, this does not apply to Article 52. Hence, the matter has to be broad before the Court of Justice. The divergent views of the German Bundesgerichtshof do not stand up to the fact that this question is highly controversial and the Court of Justice is the highest and only authority to make a definite interpretation of European Law.

VIII. General Principles on Circumvention of the Law Notwithstanding the controversy described above (cf. → mn. 23), it must be noted 24 that Member States may apply their general principals on “circumvention of the law', “abuse of law” or “concealment” as long as the avoidance or circumvention of the respective provisions is not irrebuttably presumed but has to be proved.36 Accordingly, Advocate General Tesauro argued that there was no need for Member 25 States to implement stricter rules. Even in the absence of specific rules, any case where a transaction is carried out to circumvent the law would be penalised and declared void. This would, however, require that proof is provided that circumstances exist characterising a transaction designed to circumvent the law, namely that (i) the transaction is capable of achieving the same result as a contribution in kind and (ii) there is the intention to circumvent a mandatory provision.37

IX. Minimum Provision Regarding the time period of two years stipulated in paragraph 1, Member States may 26 provide for a longer period of time (“at least”). Further, as follows from the wording of the provision (“of not less than one-tenth of the subscribed capital”), Member States may not broaden the scope of Article 52 with respect to financial impact of the transaction. Also, Member States may provide for regulation forbidding further transactions to prevent the circumvention of the rules on capital contributions. Article 52(2) is exhaustive; Member States may not deviate from its provisions.

32 See also Schwarz, Europäisches Gesellschaftsrecht, para. 592 et seqq., with further references; Henze, in Grundmann, Systembildung und Systemlücken in Kerngebieten des europäischen Privatrechts, 2000, 235, 239 et seq.; Bayer/Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht: Eine Bilanz von 1968 bis zur Gegenwart’, in: Bayer/Habersack (eds.), Aktienrecht im Wandel 2007, Vol. 1, chap. 18, para. 34; Ebenroth/Kräutter, DB 1990, 2153, 2156; Ebenroth/Neiß, BB 1992, 2085, 2087. 33 BGH, judgement of 15.1.1990 – II ZR 164/88, NJW 1990, 982, 987; BGH, order of 4.12.2006 – II ZR 305/05, DStR 2006, 2326. 34 Cf. Court of Justice, C-495/03 (Intermodal Transports BV v. Staatssecretaris van Financiën) I-8191, I-8208, para. 38 et seqq. 35 Court of Justice, C-283/81 (C.I.L.F.I.T. v. Ministry of Health), 3417, 3431 para 21; C-495/03 (Intermodal Transports BV v Staatssecretaris van Financien) I-8191, 8206, 8208, para. 33, 38 et seq. 36 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4916, para. 21. 37 Opinion of the Advocate General Tesauro delivered on 8 April 1992, C-83/91 (Wienand Meilicke ./. ADV/ORGA F.A. Meyer AG), I-4897, 4914, para. 19.

Jan P. Brosius

267

Art 53 Shareholders' obligation to pay up contributions

X. Direct Application 27

Article 52 is not sufficiently precise to fulfil the requirements of a direct application (→ Intro Art 44 mn. 64).

Article 53 Shareholders' obligation to pay up contributions Subject to the provisions relating to the reduction of subscribed capital, the shareholders may not be released from the obligation to pay up their contributions. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. No Release from the Obligation to Pay Up Contributions . . . . . . . . . . . . . . . . . . . . IV. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 5

I. Historical Background 1

Article 53 derives from the Second Directive1 (Article 14 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

II. Purpose 2

Article 53 is a reinsurance for the principle of effective capital contribution and aims to protect creditors as well as shareholders. The Commission argued that Article 53 stipulated a core principle of the Second Directive which takes into account legal capital’s twofold nature as the sum of all contributions and a security for creditors. 2

III. No Release from the Obligation to Pay Up Contributions 3

Every share in a company represents the obligation to pay to the company the contribution allocated to it. This obligation arises upon the subscription of such share. Article 53 stipulates that shareholders may not be released from their obligation to make the contribution they subscribed for. The principle laid down in Article 53 applies to the formation of the company as well as to any subsequent capital increase. It complements the rules laid down in Articles 47 and 48 as well as Articles 69 et seq.

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 First Proposal, OJ No C 48, 24.4.1970, p. 11.

268

Jan P. Brosius

Art 54

TITLE I GENERAL PROVISIONS

This basic principle of “effective capital contribution” and the prohibition laid down 4 in Article 53 apply to any release or waiver, irrespective of its form or method and does not allow any circumvention.3 A reduction of capital according to the provisions in Articles 73 et seqq. is the only way permitted by law to achieve a release from the obligation to pay up contributions. This principle has to be taken into account in the context of the acquisition of own shares pursuant to Article 60 as well, which requires that the respective shares are fully paid-up shares.

IV. Direct Application Article 53 is unconditional and sufficiently precise to fulfil the requirements of a 5 direct application (cf. → Intro Art 44 mn. 64).

Article 54 Safeguards in the event of conversion Pending coordination of national laws at a subsequent date, Member States shall adopt the measures necessary to require provision of at least the same safeguards as are laid down in Articles 3 to 6 and Articles 45 to 53 in the event of the conversion of another type of company into a public limited liability company. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Conversion of Another Type of Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 6

I. Historical Background Article 54 derives from the Second Directive1 (cf. Article 15 of Directive 2012/30/ 1 EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since. As the wording suggests, the provision was meant to be only of temporary significance until national laws on conversions are harmonized. From today’s point of view it appears to be permanent.2

See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 179 et seq. Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 181. 3

1

Jan P. Brosius

269

Art 54 Safeguards in the event of conversion

II. Conversion of Another Type of Company Article 54 provides for protection against a circumvention of the provisions in Articles 3 through 6 and Articles 45 through 53 in the event that a public limited liability company is established by means of a conversion of another type of company into a public limited liability company.3 In this regard, conversions are deemed equivalent to the regular formation of a public limited liability company.4 Above all, Article 54 serves the purpose of creditor protection. 3 Article 54 applies to conversions within the jurisdiction of a single Member State as well as to cross border conversions, including cross boarder conversions of one type of public limited liability into another type of public limited liability company.5 4 Article 54 does not comprise the formation of a new public limited liability company by way of a merger or a division. Mergers and divisions are governed by Title II of the Directive (essentially derived from Directive 2011/35/EU 6 and Directive 82/891/EEC7) making the implementation of a further provision in Article 54 redundant.8 Nevertheless, the provisions derived from the Second Directive generally do apply to mergers and divisions. Article 49 (5), for instance, merely facilitates the reporting requirements for formations by way of mergers and divisions. The explicit provision in Article 54 is due to the fact that the conversion into a public limited liability company does not result in the formation of a new company. The principle of continuation of the legal entity applies. 2

III. Minimum Provision 5

As follows from the very wording of the provision (“at least”) Member States may provide for stricter provisions for the conversion of another type of company into a public limited liability company.9

IV. Direct Application 6

Article 54 is not sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

3 See also Le Fevre Rev soc. 1982, 441, 446; Wooldridge, Company Law in the UK and the EC, p. 28; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 234. 4 See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 181. 5 For cross border conversion see the reasoning of the Court of Justice in Case C-378/10 VALE Építési kft [2012]. 6 Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies. 7 Directive 82/891/EEC of 17 December 1982 based on Article 54 (3) (g) of the Treaty, concerning the division of public limited liability companies. 8 See Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 234. 9 For a different view see Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 181 et seq.

270

Jan P. Brosius

Art 56

TITLE I GENERAL PROVISIONS

Article 55 Modification of the statutes or of the instrument of incorporation Articles 3 to 6 and Articles 45 to 54 shall be without prejudice to the provisions of Member States on competence and procedure relating to the modification of the statutes or of the instrument of incorporation.

I. Historical Background Article 55 derives from the Second Directive1 (cf. Article 16 of Directive 2012/30/ 1 EU). It was implemented in the Second Directive 77/91/EEC as initially adopted 13 December 1976. Its material content has not been amended since.

II. No Modification of the Statutes or of the Instrument of Incorporation Article 55 concludes the provisions on formation and capital contribution. It is 2 merely declaratory.2 The competence and procedure relating to the modification of the statutes or of the instrument of incorporation does not fall within the scope of the Directive.

Section 3 Rules on distribution Article 56 General rules on distribution 1. Except for cases of reductions of subscribed capital, no distribution to shareholders may be made when on the closing date of the last financial year the net assets as set out in the company's annual accounts are or, following such a distribution, would become, lower than the amount of the subscribed capital plus those reserves which may not be distributed under the law or the statutes of the company. 2. Where the uncalled part of the subscribed capital is not included in the assets shown in the balance sheet, that amount shall be deducted from the amount of subscribed capital referred to in paragraph 1. 3. The amount of a distribution to shareholders may not exceed the amount of the profits at the end of the last financial year plus any profits brought forward and sums drawn from reserves available for this purpose, less any losses brought forward and sums placed to reserve in accordance with the law or the statutes. 1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 182.

Jan P. Brosius

271

Art 56 General rules on distribution 4. The term ‘distribution’ used in paragraphs 1 and 3 includes, in particular, the payment of dividends and of interest relating to shares. 5. When the laws of a Member State allow the payment of interim dividends, at least the following conditions shall apply: (a) interim accounts shall be drawn up showing that the funds available for distribution are sufficient; (b) the amount to be distributed may not exceed the total profits made since the end of the last financial year for which the annual accounts have been drawn up, plus any profits brought forward and sums drawn from reserves available for this purpose, less losses brought forward and sums to be placed to reserve pursuant to the requirements of the law or the statutes. 6. Paragraphs 1 to 5 shall not affect the provisions of the Member States as regards increases in subscribed capital by capitalisation of reserves. 7. The laws of a Member State may provide for derogation from paragraph 1 in the case of investment companies with fixed capital. For the purposes of this paragraph, the term ‘investment company with fixed capital’ means only companies: (a) the exclusive object of which is to invest their funds in various stocks and shares, land or other assets with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their assets; and (b) which offer their own shares for subscription by the public. In so far as the laws of Member States make use of the option they shall: (a) require such companies to include the term ‘investment company’ in all documents indicated in Article 26; (b) not permit any such company whose net assets fall below the amount specified in paragraph 1 to make a distribution to shareholders when on the closing date of the last financial year the company's total assets as set out in the annual accounts are, or following such distribution would become, less than one-and-ahalf times the amount of the company's total liabilities to creditors as set out in the annual accounts; and (c) require any such company which makes a distribution when its net assets fall below the amount specified in paragraph 1 to include in its annual accounts a note to that effect. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Prohibition of Unlawful Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Deduction of Uncalled Amounts of Subscribed Capital . . . . . . . . . . . . . . . . . . . . . . VI. Maximum Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Interim Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Increases in Subscribed Capital by Capitalisation of Reserves . . . . . . . . . . . . . . . . IX. Derogation Rules for Investment Companies with Fixed Capital . . . . . . . . . . . . X. Derogation for Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. Issuer Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Minimum Protection and Scope for National Legislation . . . . . . . . . . . . . . . . . . . . XIII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

272

Jan P. Brosius

1 2 3 4 11 12 13 14 15 19 20 22 23

Art 56

TITLE I GENERAL PROVISIONS

I. Overview Article 56 stipulates the requirements for lawful distributions and constitutes the 1 central provision on capital maintenance.

II. Historical Background Article 56 derives from the Second Directive1 (cf. Article 17 of Directive 2012/30/ 2 EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Irrespective of editorial changes, its material content has not been amended since.

III. Purpose Article 56 aims to maintain the company’s legal capital (plus non-distributable re- 3 serves) for the purpose of creditor protection.2 However, the company’s other assets and capital are not protected by Article 56.3

IV. Prohibition of Unlawful Distributions Article 56 prohibits any distribution to shareholder where the balance sheet as of the 4 end of the last financial year shows net assets that are lower than the amount of the company’s legal capital (cf. → Art 45 mn. 5 et seqq.) plus any reserves which may not be distributed. Where this is not the case, distributions to shareholders, however, are also prohibited to the extent they have the effect of reducing the net assets, as shown in the company’s accounts, below the amount of legal capital plus undistributable reserves. Article 56 does not provide for a definition of the term “distribution”. However, the 5 fourth paragraph states that “distributions” include most notably – but not exclusively – the payment of dividends and of interest relating to shares. Apart from that, the provision leaves some scope for interpretation. In particular, it remains unclear whether so called “disguised distributions” do4 or do not5 fall within the scope of Article 56.

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art. 44 mn. 7 et seqq. 2 See Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 98. 3 See Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 235. 4 Bayer/Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternhemensrecht’, in: Bayer/Habersack, Aktienrecht im Wandel, Vol. 1 2007, chap. 18 para. 37; Grundmann, Europäisches Gesellschaftsrecht, para. 343; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 43; Mülbert, ‘Kapitalschutz und Gesellschaftszweck bei der AG’, in: FS Lutter, p. 535, 545; Fleischer, in: Lutter, Das Kapital der Aktiengesellschaft in Europa 2006, p. 114, 120; Veil, WM 2003, 2169, 2171.

Jan P. Brosius

273

Art 56 General rules on distribution In particular, disguised distribution are distributions which are not labeled as dividend payouts but rather result from related party transactions for no or inadequate consideration, i.e. transactions concluded with or to be assigned to shareholders that were not concluded at arm’s length.6 Payments lawfully made as compensation for damages do not qualify as (disguised) distributions.7 The purpose of the Directive to effectively maintain the company’s legal capital requires a comprehensive approach and a broad and functional notion in defining the term “distribution”, unrestricted by the limitations of the legal terms. It generally comprises any transfer of cash or other assets to shareholder which has an effect on the balance sheet, including disguised distributions.8 7 A distribution becomes unlawful where the net assets as set out in the company's annual accounts are, or as a consequence of such distribution become, lower than the amount of the company’s legal capital plus any reserves which may not be distributed under European law, the laws of the relevant Member State or the company’s statutes. Other (free and distributable) reserves may be distributed to shareholders. 9 Consequently, the company has to carry out a so called balance sheet test.10 8 The actual level of harmonisation strongly depends on the harmonisation of accounting regulations. As Article 56 refers to the net assets as set out in the company's annual accounts, the applicable accounting standards in each Member State carry significant weight. In this regard, European legislation has led to a certain degree of harmonisation. In particular, mention is made to the Fourth Directive of 25 July 197811 and the Seventh Directive of 13 June 198312 as well as Directive 2013/34/EU of 26 June 201313 which repealed the Fourth and Seventh Directives, consolidating, updating and supplementing their provisions (cf. Accounting and Auditing Law of the European Union, mn. 3 et seqq.). 6

5 Bezzenberger, Das Kapital der Aktiengesellschaft, p. 259 et seqq.; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm, 1998, p. 185; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht, p. 124; Ullrich, Verdeckte Vermögensverlagerungen in den Aktien- und GmbH-Rechten Frankreichs, Belgiens und Deutschlands, p. 17. 6 See also Fleischer, in: Lutter, Das Kapital der Aktiengesellschaft in Europa 2006, p. 114, 115; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 184; Bezzenberger, Das Kapital der Aktiengesellschaft, p. 228. 7 See also Case C-174/12 Alfred Hirmann v Immofinanz AG, [2013]. Para. 32; cf. Intro Art 44 mn. 46 et seqq. 8 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 98; Bayer/ Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht: Eine Bilanz von 1968 bis zur Gegenwart’, in: Bayer/Habersack (eds.), Aktienrecht im Wandel 2007, Vol. 1, chapt. 18, para. 37. 9 The European Economic and Social Committee was of the opinion that there was a need to ensure and make clear that dividends may be paid out of free reserves, OJ No c 88, 6.9.1971, p. 4; see also Niessen, AG 1970, 281, 289. 10 See also Results of the external study on the feasibility of an alternative to the Capital Maintenance Regime of the Second Company Law Directive and the impact of the adoption of IFRS on profit distribution, p. 1, 10 (http://ec.europa.eu/internal_market/company/docs/capital/feasbility/markt-positio n_en.pdf). 11 Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies, OJ L 222, 14.8.1978, p. 11–31. 12 Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts, OJ L 193, 18.7.1983, p. 1–17. 13 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ No L 182, 29.6.2013, p. 19.

274

Jan P. Brosius

Art 56

TITLE I GENERAL PROVISIONS

As pointed out in Recital 3 of the preamble of Directive 2013/34/EU “the coordina- 9 tion of national provisions concerning the presentation and content of annual financial statements and management reports, the measurement bases used therein and their publication in respect of certain types of undertakings with limited liability is of special importance for the protection of shareholders, members and third parties. Simultaneous coordination is necessary in those fields for such types of undertakings because, on the one hand, some undertakings operate in more than one Member State and, on the other hand, such undertakings offer no safeguards to third parties beyond the amounts of their net assets”. This particularly applies to Article 56.14 On the other hand, European Law offers choices for Member States leaving signifi- 10 cant room for an individual organisation of the balance sheet. Above all, pursuant to Article 5 of Regulation (EC) No 1606/200215 Member States may permit or require companies to prepare their annual accounts in conformity with the international accounting standards (cf. Accounting and Auditing Law of the European Union mn. 47 et seqq.). Whether Member States make or do not make use of this option has significant influence on the level of capital protection pursued under the Directive.

V. Deduction of Uncalled Amounts of Subscribed Capital Article 56 (2) provides that where any uncalled part of the subscribed capital is not 11 included in the assets shown in the balance sheet, as the laws of a Member State might provide for, such amount must be deducted from the amount of subscribed capital referred to in the first paragraph. This takes into account different ways under different laws how outstanding amounts are shown in the balance sheet.16

VI. Maximum Distribution Article 56 (3) complements the restrictions in the first paragraph. It stipulates that the 12 amount of a distribution to shareholders may not exceed the amount of the profits at the end of the last financial year plus any profits brought forward and sums drawn from reserves available for this purpose, less any losses brought forward and sums placed to reserve in accordance with the law or the statutes. This means that the company has to carry out a so called earned surplus test or retained earnings test.17

VII. Interim Dividends Member States may allow the payment of interim dividends as long as such payments 13 are subject to the requirements stipulated in Article 56 (5). That means interim accounts have to be drawn up, which show that the funds available for distribution are sufficient See also Edwards, EC Company Law, p. 69. Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, OJ No L 243, 11.9.2002, p. 1; see also the Report from the Commission to the European Parliament and the Council regarding the evaluation of Regulation No 1606/2002, COM(2015) 301 final. 16 For further details see Grundmann, Europäisches Gesellschaftsrecht, para. 342; Leinekugel, Die Sachdividende im deutschen und europäischen Aktienrecht, p. 13 et seqq. 17 See also Results of the external study on the feasibility of an alternative to the Capital Maintenance Regime of the Second Company Law Directive and the impact of the adoption of IFRS on profit distribution, p. 10 (http://ec.europa.eu/internal_market/company/docs/capital/feasbility/markt-position_en.pdf). 14

15

Jan P. Brosius

275

Art 56 General rules on distribution on the basis – mutatis mutandis – of the criteria laid down in Article 56 (1) and (2). Further, the amount to be distributed may not exceed the total profits made since the end of the last financial year for which the annual accounts have been drawn up, plus any profits brought forward and sums drawn from reserves available for that purpose, less losses brought forward and sums to be placed to reserve pursuant to the requirements of the law or the statutes.

VIII. Increases in Subscribed Capital by Capitalisation of Reserves 14

Pursuant to Article 56 (6) the provisions laid down in Article 56 shall not affect the provisions of the Member States as regards increases in subscribed capital by capitalisation of reserves.

IX. Derogation Rules for Investment Companies with Fixed Capital Member States may also provide for derogation from the prohibition of unlawful distributions as stipulated in Article 56 (1)18 in the case of investment companies with fixed capital if they are subject to the requirements stipulated in Article 56 (7). 16 Article 56 (7) contains a definition pursuant to which investment companies with fixed capital must have the exclusive object to invest their funds in various stocks and shares, land or other assets and in doing so pursue the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their assets. Further, they must offer their own shares for subscription by the public. For “investment companies with variable capital” see → Art 2 mn. 11. 17 To make this derogation Member States must require such investment companies with fixed capital to include the expression ‘investment company’ in all documents indicated in Article 26 (former Article 5 of Directive 2009/101/EC), i.e. all letters and order forms, whether they are in paper form or use any other medium. In accordance with the third subparagraph of Article 26 the same must apply to the company’s website. Further Article 56 (1) must also apply to investment companies if on the closing date of the last financial year the company's total assets as set out in the annual accounts are, or would become, less than one-and-a-half times the amount of the company's total liabilities to creditors as set out in the annual accounts. Lastly, Member States must ensure that whenever an investment company does make a distribution that would fall within the scope of Article 56 (1), it has to include a respective note with a respective statement in its annual accounts. 18 It is argued that this provision aims to allow such companies to make disguised distributions by acquiring their own shares without the restrictions of Article 60. 19 15

X. Derogation for Groups 19

Groups of companies and the legal relationship between their members do not fall within the scope of the Directive (cf. → Intro Art 44 mn. 43 et seqq.). 20 Therefore Member States are free to provide for group privileges. 18 Not, however, from the restrictions laid down in Article 56 (2) and (3). Though, the exception must also apply to point (a) of Article 56 (5). 19 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 100; Mülbert FS Lutter, 2000, 535, 548.

276

Jan P. Brosius

Art 57

TITLE I GENERAL PROVISIONS

XI. Issuer Liability The compatibility and consistency of the provisions on capital maintenance and 20 issuer liability has been subject to a long ongoing discussion (cf. → Intro Art 44 mn. 46 et seqq.). It is true that issuer liability leads to an outflow of funds to the respective shareholder 21 and such outflow reduces the capital that would otherwise be available to cover creditors' claims. However, payments to shareholders on the grounds of issuer liability do not qualify as a capital distribution and, hence, do not fall within the scope of Article 56.21 Liability claims are restitutions, but not distributions. Capital maintenance and issuer liability are two separate legal concepts each with its own distinctive regulatory purpose.22 Also, it follows from Article 11 of Regulation (EU) 2017/112923 and Article 7 of Directive 2004/109/EC24 that issuer liability is privileged. In Alfred Hirmann v Immofinanz AG the Court of Justice has confirmed this view.25

XII. Minimum Protection and Scope for National Legislation Article 56 provides for a minimum standard and allows Member States to implement 22 stricter rules.26

XIII. Direct Application Article 56 (1) to (5) is unconditional and sufficiently precise to fulfil the requirements 23 of a direct application (→ Intro Art 44 mn. 46).

Article 57 Recovery of distributions unlawfully made Any distribution made contrary to Article 56 shall be returned by shareholders who have received it if the company proves that those shareholders knew of the irregularity of the distributions made to them, or could not in view of the circumstances have been unaware of it. 20 See also Bayer/Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht: Eine Bilanz von 1968 bis zur Gegenwart’, in: Bayer/Habersack (eds.), Aktienrecht im Wandel 2007, Vol. 1, chap. 18, para. 39 with further references; Grundmann, Europäisches Gesellschaftsrecht, para. 343. 21 Cf. Gruber, JBl 2007, 2, 11; Fleischer ZIP 2005, 1805, 1811; Langenbucher, ZIP 2005, 239, 242; Mülbert/Steup, WM 2005, 1633, 1653. 22 See also Grundmann, Europäisches Gesellschaftsrecht, para. 343. 23 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC, OJ L 168, 30.6.2017, p. 12–82; also see its predecessor Article 6 of Directive 2003/71/EC of the European Parliament and of the council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending directive 2001/34/EC. 24 Directive 2004/109/EC of the European Parliament and of the council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. 25 Case C-174/12 (Alfred Hirmann v Immofinanz AG) [2013], para. 22 et seqq., 35 et seqq. 26 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 103; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 46.

Jan P. Brosius

277

Art 57 Recovery of distributions unlawfully made I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Knowledge or Negligent Unawareness of Shareholder . . . . . . . . . . . . . . . . . . . . . . . . V. Burden of Proof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Limitation Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Minimum Provision and Scope for National Legislature . . . . . . . . . . . . . . . . . . . . . VIII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 7 8 9 10 11

I. Overview 1

Article 57 provides for the legal consequences of an unlawful distribution pursuant to Article 56 and states that any distributions must be returned to the company if the shareholder had or ought to have had knowledge about the infringement.

II. Historical Background Article 57 derives from the Second Directive1 (cf. Article 18 of Directive 2012/30/ EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since. 3 In its first proposal for the Second Directive the Commission pointed out that the statutory obligation to return unlawful distributions had already existed under the laws of the Member States, however, very differently designed. 4 As the Commission made clear, the decision to protect shareholders who are in good faith was aimed to reconcile the need for protection of the company with the protection of those shareholders who cannot be blamed for the infringement.2 2

III. Scope Any distribution made contrary to Article 56 must be returned. Creditor and beneficiary of the repayment is the company.3 Debtor is the shareholder who directly or indirectly has received the unlawful distribution. To ensure the effectiveness of Articles 56 and 57 Member States must determine requirements for the attributability of payments to third parties constituting an unlawful distribution to the respective shareholder. 6 The nature of the distribution received is of no relevance. Article 57 applies to any type of distribution in the meaning of Article 56. Article 57 provides for a monetary claim where the unlawful distribution was made in cash. Where any other assets have been distributed, the claim comprises such assets. Where the return of the asset is not possible Article 57 requires the shareholder to pay compensation. 5

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 First Proposal, OJ No C 48, 24.04.1970, p. 12. 3 See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 190.

278

Jan P. Brosius

Art 57

TITLE I GENERAL PROVISIONS

IV. Knowledge or Negligent Unawareness of Shareholder In the moment the distribution is made, the respective shareholder has to know of the 7 irregularity of the distributions, i.e. the underlying facts constituting the infringement of Article 56, or “could not in view of the circumstances have been unaware of it.” Article 57 does not specify what circumstances need to occur or at what point a shareholder could not have been unaware of the irregularity of a distribution. Accordingly, there is controversy over the extent of negligence required.4 Some legal scholars argue that gross negligence is required. However, taking into account the protective purpose of Articles 56 and 57, even slight negligence triggers the obligation under Article 57.5

V. Burden of Proof It is of considerable practical importance that Article 57 imposes the burden of proof 8 on the company. The company has to proof the shareholder’s knowledge or negligent unawareness.6

VI. Limitation Period Article 57 does not provide for a limitation period. However, Member States may and 9 should provide for reasonable limitation periods.7

VII. Minimum Provision and Scope for National Legislature In principle, Article 57 provides for minimum protection and Member States are 10 allowed to provide for stricter rules.8 However, this does not apply to the privileged status of shareholders who are in good faith as follows, inter alia, from the provision’s priority-setting regarding the clashing interest of shareholders and company.9 Against this background, it appears doubtful whether Member States may reverse the burden of proof and oblige shareholders to prove that they did not know of the irregularity of the distributions made to them and, in view of the circumstances, could have been unaware of it. Further, it appears doubtful whether Member States may limit such privileges to certain types of distributions.

Grundmann, Europäisches Gesellschaftsrecht, para. 344. Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts p. 172; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p.119, 236; Müller, WPg 1978, 565, 568; Bayer/J. Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht’, in Bayer/Habersack, Aktienrecht im Wandel Bd. 1 2007, chap. 18 Rn. 42. 6 See also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 236. 7 See also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 236 et seq. 8 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 109; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 236; Schwarz, Europäisches Gesellschaftsrecht, para. 597. 9 See OJ No C 48, 24.04.1970, p. 12. 4

5

Jan P. Brosius

279

Art 58 Serious loss of the subscribed capital

VIII. Direct Application 11

Article 57 is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

Article 58 Serious loss of the subscribed capital 1. In the case of a serious loss of the subscribed capital, a general meeting of shareholders shall be called within the period laid down by the laws of the Member States, to consider whether the company should be wound up or any other measures taken. 2. The amount of a loss deemed to be serious within the meaning of paragraph 1 shall not be set by the laws of Member States at a figure higher than half the subscribed capital. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Serious Loss of the Subscribed Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Convening of the General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Duties of the General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Minimum Protection and Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 5 6 7 9 11 13 14

I. Historical Background Article 58 derives from the Second Directive1 (cf. Article 19 of Directive 2012/30/ EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since. 2 The Commission had pointed out that it was particularly difficult to achieve coordination because of the considerable disparity between existing national laws.2 However, in the view of the Commission, it was sufficient to stipulate the principle that, in case of a significant loss, the general meeting has to be called to take necessary measures, including, as the case may be, the winding up of the company. The Commission intended to create an obligation to act.3 The Economic and Social Committee, however, had pointed out that the general meeting must be enabled to take the necessary measures but may not be obliged to do so. In the view of the Committee, there was no need 1

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 See also Schmitthoff, 15 CMLR (1978), 43, 52; Ankele, BB 1970, 988, 991. 3 First Proposal, OJ No C 48, 24.04.1970, p. 12.

280

Jan P. Brosius

Art 58

TITLE I GENERAL PROVISIONS

for such obligation as a necessary restructuring could also be launched in other ways.4 Ultimately, the view of the Economic and Social Committee prevailed and no obligation to act has been imposed upon the general meeting; nevertheless, the general meeting is obliged to consider whether specific measures are to be taken (→ mn. 8 et seq.). Due to the very different understanding in each Member State of what constitutes a 3 significant loss it was agreed to provide for a minimum provision stating that the loss of half of the subscribed capital always has to constitute a significant loss.5

II. Purpose Article 58 aims to protect shareholders and, indirectly, creditors. 6 In the event of 4 financial difficulties, it is intended to inform and to involve shareholders as early as reasonable possible in the further process and the decision on the destiny of the company.7 Article 58 complements the provisions on the maintenance of capital and provides for a significant principle of the Second Directive and the provisions derived from it.8

III. Serious Loss of the Subscribed Capital The duty to convene the general meeting arises in case of a serious loss of the 5 subscribed capital.9 As mentioned above, the Directive does not specify on what may constitute a serious loss.10 Paragraph 2 merely points out that the amount of a loss deemed to be serious may not be set at a figure higher than half the subscribed capital. Beyond this threshold, Member States are free to define what constitutes a serious loss.

IV. Convening of the General Meeting It is the duty of administrative or the management body, respectively, to convene 6 the general meeting.11 Member States are free to determine the period in which the general meeting has to be called. Some legal scholars wrongly conclude that national laws shall provide that the general meeting has to be called immediately without undue delay.12 There is no indication that the European legislator intended to establish such a requirement. This, however, does not mean that Members States are precluded from OJ No C 88, 6.9.1971, p. 4. First Proposal, OJ No C 48, 24.04.1970, p. 12. 6 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 112; Habersack/ Verse, Europäisches Gesellschaftsrecht, § 6 para. 52. 7 See also Kalss/Adensamer/Oelkers, in: Lutter (ed.): Das Kapital der Aktiengesellschaft in Europa, p. 134, 137; critical on Article 58 (former Article 19 of Directive 2012/30/EU) Leyte, BLR 2004, 84. 8 See also Bayer/Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht: Eine Bilanz von 1968 bis zur Gegenwart’, in: Bayer/Habersack (ed.), Aktienrecht im Wandel 2007, Vol. 1, chap. 18 para. 43; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 192. 9 In Case T-732/16 Valencia Club de Fútbol v. the European Commission [2020], para. 68, the General Court argues that in Article 58 the notion of ‘subscribed capital’ were confused with the notion of ‘registered capital’ and states that “the ‘serious loss of the [registered] capital’ referred to in Article 17 of Second Directive 77/91 [i.e. Article 58 of the Directive] is not tantamount to a reduction in the registered capital decided by the competent executive bodies, but rather covers a situation where the own equity is reduced, which may lead, as the case may be, to the adoption by those executive bodies of a decision to reduce the registered capital of the company concerned. 10 In more detail see Ankele, BB 1970, 988, 991. 11 Ankele, BB 1970, 988, 991. 4

5

Jan P. Brosius

281

Art 58 Serious loss of the subscribed capital providing for it.13 Member States are only bound by the principle of effectiveness and “effet utile”.14 Against this background, a period of 6 months, as laid down in Danish Law,15 is considered as a maximum limit.16

V. Duties of the General Meeting On the one hand Article 58 provides for information rights enabling the general meeting to address possible responses to the company’s financial distress. On the other hand, Article 58 imposes on the general meeting the actual obligation to consider whether the company should be wound up or any other measures are to be taken. However, there is no duty to act and effectively take any measures necessary (→ mn. 2).17 8 A national provision obliging the general meeting to dissolve the company without considering possible restructuring measures would constitute a breach of the Directive. 18 7

VI. Exceptions Pursuant to Article 84 (3) Member States must ensure that Article 58 (1) does not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU19 (cf. → Art 84 mn. 5, 15). 10 Further, pursuant to Article 84 (4) Member States shall derogate from Article 58 (1) to the extent and for the period that such derogation is necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/1023 20 (→ Art 84 mn. 6, 16 et seq.). 9

VII. Breach 11

The Directive does not provide for legal consequences in case the general meeting is not called in or does not consider whether the company should be wound up or any other measures are to be taken.21 Insofar Member States are free – and in accordance with the principle of effectiveness obliged – to introduce any type of (effective) sanctions. 22 12

238.

Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119,

See German Law: sec. 92 para 1 AktG; Austrian Law: sec. 83 AktG. Grundmann, Europäisches Gesellschaftsrecht, para. 346. 15 Art 119 Lov. Nr. 470 af 12.06.2009; Lov om aktie- og anpartsselskaber (selskabsloven). 16 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 114. 17 See also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para 52; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 113; for a different view Niessen, AG 1970, 281, 291. 18 Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm, 1998, p. 194. 19 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ L 173, 12.6.2014, p. 190–348. 20 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18–55. 21 Piepkorn, ZHR 141 (1977) 330, 346. 13

14

282

Jan P. Brosius

Art 59

TITLE I GENERAL PROVISIONS

Neither Article 58 nor any other provisions of the Directive contain any rules regard- 12 ing the liability of directors in case of a breach of their obligations under Article 58. They neither impose particular requirements as to the jurisdiction of the courts in that regard. Also, Article 58 does not impose upon the Member States the obligation to provide for certain minimum requirements regarding the possible consequences of a failure to comply with that obligation.23 The Court of Justice rightly concludes, that the Directive “does not require there to be either (i) a right to compensation as against the director of a public limited liability company or (ii) a rule concerning the substantive and procedural conditions governing the liability of such a director, in the event of a failure to convene the general meeting despite a serious loss of the subscribed capital. National law therefore governs the question whether –– and if so, under what substantive and procedural conditions –– the creditors of a public limited liability company may bring an action against the director to establish his liability and obtain compensation for their loss, when the general meeting has not been convened in the case of a serious loss of the subscribed capital.”24 Nevertheless, it has to be taken into account that the principle of effet utile obliges Member States to provide for procedural and substantive regulation to ensure the enforcement of the Directive (→ cf. Intro Art 44 mn. 62 et seq.).

VIII. Minimum Protection and Scope Article 57 provides for minimum protection. Member States are allowed to provide 13 for stricter rules.25

IX. Direct Application Article 58 is not sufficiently precise to fulfil the requirements of a direct application 14 (→ Intro Art 44 mn. 64).

Section 4 Rules on companies’ aquisitions of their own shares Article 59 No subscription of own shares 1. The shares of a company may not be subscribed for by the company itself. 2. If the shares of a company have been subscribed for by a person acting in his or her own name, but on behalf of the company, the subscriber shall be deemed to have subscribed for them for his or her own account. 3. The persons or companies or firms referred to in point (i) of Article 4 or, in cases of an increase in subscribed capital, the members of the administrative or management body shall be liable to pay for shares subscribed in contravention of this Article. Schwarz, Europäisches Gesellschaftsrecht, para. 598; see also Lutter, EuR 1974, 44, 57. Case C-243/16 Miravitlles Ciurana and others v. Contimark SA and others [2017], para. 31. 24 Case C-243/16 Miravitlles Ciurana and others v. Contimark SA and others [2017], para. 32 et seq. 25 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 114; Schwarz, Europäisches Gesellschaftsrecht, para. 598; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 193. 22 23

Jan P. Brosius

283

Art 59 No subscription of own shares However, the laws of a Member State may provide that any such person may be released from his or her obligation if they prove that no fault is attributable to them personally. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Prohibition of the Subscription of Own Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Liability of Founders or Members of the Administrative or Management Body . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 7 11

I. Overview 1

Article 59 strictly prohibits the subscription for shares by the company itself. 1 The Directive thereby adopted a principle that – at the time the Commission’s first proposal for a Second Directive was made – had already been in force in all initial Member States.2 This principle is essential and indispensable in a system of legal capital and complements, inter alia, the provision laid down in Article 53. With a view to the company’s contribution claims arising in the course of its formation or any capital increase, a company subscribing for its own shares would become its own creditor and debtor at the same time. There would be no actual capital inflow and hence no effective capital contribution.3

II. Historical Background 2

Article 59 derives from the Second Directive4 (cf. Article 20 of Directive 2012/30/ EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

III. Purpose 3

For the purpose of creditor protection Article 59 aims to guarantee an effective capital contribution. The provision also secures the company’s division of powers and 1 See also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 61; Schwarz, Europäisches Gesellschaftsrecht, para. 600. 2 First Proposal of the Commission, OJ No C 48, 24.04.1970, p. 12. 3 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 60; Kalss in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 239 et seq; Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts p. 176, Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale Recht, 2004, p. 102 et seq.; Drinkuth, Die Kapitalrichtlinie, Mindest- oder Höchstnorm?, p. 196; Nissen AG 1970, 281, 289 et seq. 4 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq.

284

Jan P. Brosius

Art 59

TITLE I GENERAL PROVISIONS

competences by preventing the management from exercising any rights attaching to the issued shares.

IV. Prohibition of the Subscription of Own Shares Article 59 (1) provides for an absolute prohibition of the subscription of own shares 4 by the company itself. For the purpose of effective capital protection5 Article 59 (2) broadens the scope of 5 the prohibition by implementing the legal fiction that whenever shares are subscribed for by a middleman or nominee, i.e. a person acting in his own name, but on behalf of the company, such middleman or nominee is deemed to have subscribed for such shares for his own account.6 Consequentially, the middleman may not have any contractual or statutory rights of recourse against the company.7 This extension of the personal scope was, unlike the general prohibition to subscribe for own shares stipulated in Article 59 (1), an actual innovation to the laws of many Member States.8 The necessity of this provision follows from the principle of effectiveness as any acquisition by a middleman is likely to create the same situation that arises when the company itself makes the subscription. In relation to the company, the middleman will be recognised as shareholder with all the 6 related rights and obligations. Most importantly, only the middleman himself becomes the debtor of the capital contribution owed upon subscription. Article 59 (2) must be read in conjunction with Article 67 which deals with the subscription, acquisition or holding of shares by a subsidiary (cf. → Art 67 mn. 6 et seqq.).

V. Liability of Founders or Members of the Administrative or Management Body Pursuant to Article 59 (3) the founders or the members of the administrative or man- 7 agement body, respectively, shall be liable to pay for shares subscribed for in contrary to the prohibition laid down in Article 59 (1) and (2). Compared to the sanction of nullity, the Commission considered this to be the smoother legal consequence.9 In case of a breach of Article 59 (1) and, in addition to the liability of the middleman, 8 in case of a breach of Article 59 (2), the company’s founders as referred to in point (i) of Article 4 are held liable for any breach in the course of the company’s formation, i.e. the persons or companies or firms by whom or in whose name the statutes or the instrument of incorporation have been signed. For any breach of Article 59 (1) and (2) in the course of a capital increase the members of the administrative or management body are liable to pay for the respective shares. In its first proposal, the Commission pointed out that the acting persons (i.e. the founders, board members as well as acting middlemen) are each personally liable, but only severally and not jointly.10 In its second subparagraph, Article 59 (3) grants Member States the right to provide 9 that a founder, board member or, if applicable, the acting middleman may be released from his individual obligation if he or she proves that no fault is attributable to him First Proposal, OJ No C 48, 24.04.1970, p. 12. See also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 61. 7 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 61. 8 First Proposal, OJ No C 48, 24.04.1970, p. 12. 9 First Proposal, OJ No C 48, 24.04.1970, p. 12. 10 First Proposal of the Commission, OJ No C 48, 24.04.1970, p. 12. 5

6

Jan P. Brosius

285

Art 60 Acquisition of own shares or her personally. This was deemed necessary by the Economic and Social Committee which pointed out that liability should only arise where the acting person is responsible for the infringement.11 The burden of proof lays on the founders or the members of the administrative or management body or the middleman, respectively. Member States may not provide for a reversal of the burden of proof. However, as follows from the very wording of the provision (“may provide”), Member States may hold such persons liable if the violation of Article 59 (1) or (2) occurred without their fault or negligence, too. 12 10 Article 59 (3) does not govern such liability comprehensively. The specific details and conditions of the legal framework remain to the discretion of the Member States, which are, however, bound by the principle of effectiveness (→ Intro Art 44 mn. 62 et seq.).

VI. Direct Application 11

Article 59 is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

Article 60 Acquisition of own shares 1. Without prejudice to the principle of equal treatment of all shareholders who are in the same position, and to Regulation (EU) No 596/2014, Member States may permit a company to acquire its own shares, either itself or through a person acting in his or her own name but on the company’s behalf. To the extent that the acquisitions are permitted, Member States shall make such acquisitions subject to the following conditions: (a) authorisation is given by the general meeting, which shall determine the terms and conditions of such acquisitions, and, in particular, the maximum number of shares to be acquired, the duration of the period for which the authorisation is given, the maximum length of which shall be determined by national law without, however, exceeding five years, and, in the case of acquisition for value, the maximum and minimum consideration. Members of the administrative or management body shall satisfy themselves that, at the time when each authorised acquisition is effected, the conditions referred to in points (b) and (c) are respected; (b) the acquisitions, including shares previously acquired by the company and held by it, and shares acquired by a person acting in his or her own name but on the company’s behalf, cannot have the effect of reducing the net assets below the amount referrred to in Article 56(1) and (2); and (c) only fully paid-up shares can be included in the transaction. Furthermore, Member States may subject acquisitions within the meaning of the first subparagraph to any of the following conditions: (a) the nominal value or, in the absence thereof, the accountable par of the acquired shares, including shares previously acquired by the company and held by it, and shares acquired by a person acting in his own name but on the company’s behalf, 11 12

286

OJ No C 88, 6.9.1971, p. 4. See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 197 et seq.

Jan P. Brosius

Art 60

TITLE I GENERAL PROVISIONS

(b)

(c) (d)

(e)

does not exceed a limit to be determined by Member States; this limit may not be lower than 10 % of the subscribed capital; the power of the company to acquire its own shares within the meaning of the first subparagraph, the maximum number of shares to be acquired, the duration of the period for which the power is given and the maximum or minimum consideration are laid down in the statutes or in the instrument of incorporation of the company; the company complies with appropriate reporting and notification requirements; certain companies, as determined by Member States, can be required to cancel the acquired shares provided that an amount equal to the nominal value of the shares cancelled is included in a reserve which cannot be distributed to the shareholders, except in the event of a reduction in the subscribed capital; this reserve may be used only for the purposes of increasing the subscribed capital by the capitalisation of reserves; the acquisition does not prejudice the satisfaction of creditors’ claims.

2. The laws of a Member State may provide for derogations from the first sentence of point (a) of the first subparagraph of paragraph 1 where the acquisition of a company’s own shares is necessary to prevent serious and imminent harm to the company. In such a case, the next general meeting shall be informed by the administrative or management body of the reasons for and nature of the acquisitions effected, of the number and nominal value or, in the absence of a nominal value, the accountable par, of the shares acquired, of the proportion of the subscribed capital which they represent, and of the consideration for those shares. 3. Member States may decide not to apply the first sentence of point (a) of the first subparagraph of paragraph 1 to shares acquired by either the company itself or by a person acting in his or her own name but on the company’s behalf, for distribution to that company’s employees or to the employees of an associate company. Such shares shall be distributed within 12 months of their acquisition. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Equal Treatment and Market Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Mandatory Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Optional conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Minimum Provision and Scope of Discretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 9 12 13 15 24 31 36 37

I. Overview Article 60 (1) allows Member States to permit companies to acquire their own shares, 1 provided, however, that they make such acquisitions, on the one hand, subject to certain mandatory conditions stated in points (a) to (c) of the first subparagraph and, on the other hand, not subject to any further conditions other than the optional conditions listed in points (a) to (e) of the second subparagraph. This framework established by Directive 2006/68/EC is much tighter than initially provided for under the Second Directive1 and leaves only little scope of discretion for the national legislature.2 The Commission pointed out that whereas the list of conditions Member States had to make Jan P. Brosius

287

Art 60 Acquisition of own shares an acquisition of own shares subject to had initially been a non-exhaustive list, the amended version converted it into an exhaustive list, thus “contributing to a level playing field across the EU in this context.”3 2 Article 60 (2) and (3) provides for derogations from the requirement of a shareholder resolution which Member States may transpose into national law. These derogations are complemented by the more extensive derogations provided for in Article 61. 3 From its wording and structure, Article 60 is designed based on the image of a prohibition of the acquisition of a company’s own shares,4 much like the respective prohibition of the subscription of own shares in Article 59 (cf. Art 59 mn. 4 et seqq.). De facto, the acquisition of own shares is a generally permissible concept subject to certain limited requirements.

II. Historical Background Article 60 derived from the Second Directive (cf. Article 21 of Directive 2012/30/ EU). It was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976 and was amended by Directive 2006/68/EC.5 5 Due to the significant effects on the company’s legal capital the acquisition of own shares had been regulated in most Member States even before the Second Directive was adopted. However, the provisions provided for by the individual Member States were considerably different.6 The European legislature intended to allow the acquisition of own shares under strict conditions. The Commission tried to harmonise the provisions on the acquisition of own shares by taking recourse to the different concepts and principles that had already existed in the laws of the different Member States. In the view of the Commission each existing concept did provide for adequate protection. The task was to provide for a coordinated regulation.7 There is an understanding that Article 60 and the further regulations on the acquisition of own shares were partly modelled on and reflected existing case law in the United Kingdom.8 6 Under the initial version of the Second Directive the acquisition of own shares by the company itself or on its behalf was – inter alia – subject to certain rather rigid requirements, such as an ex ante authorisation by the general meeting which could not 4

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by its last version Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 See also Cahn, Der Konzern 2007, 385, 387. 3 SEC (2004) 1342, p. 4. 4 Ganske, DB 1978, 2461, 2463. 5 Directive 2006/68/EC of the European Parliament and of the Council of 6 September 2006 amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital, OJ No L 264, 25.9.2006, p. 32–36. 6 Cf. First Proposal, OJ No C 48, 24.04.1970, p. 12. 7 First Proposal of the Commission, OJ No C 48, 24.04.1970, p. 12. 8 Edwards, EC Company Law, p. 52, Gower & Davies, Principles of Modern Company Law, para. 13-2, each citing Trevor v Whitworth (1892) 12 App Cas 409; see also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 57; Habersack/Mayer, CFILR 2000, 333 et seqq.

288

Jan P. Brosius

Art 60

TITLE I GENERAL PROVISIONS

exceed a period of 18 months, and the prohibition to reach, through such acquisition, a holding of own shares representing more than 10% of the subscribed capital. These requirements have been significantly lessened by the amendments made by 7 Directive 2006/68/EC. In 1999, the SLIM Initiative9 initiated the reform process stating that the “rule limiting the acquisition of own shares to 10% of the outstanding shares should be replaced by a limitation of the acquisition to the amount of the distributable net assets” and that “the time period for the general meeting's authorisation to acquire own shares (at present 18 months) should be extended to 5 years, the same period as for the issue of shares under the authorised capital.”10 Subsequently, the results of the SLIM Initiative were mostly confirmed and complemented by the High Level Group of Company Law Experts in their report on a “Modern Regulatory Framework for Company Law in Europe”.11 The High Level Group also pointed out that the Market Abuse Directive 2003/6/EC would provide for a “safe harbour” for share repurchases, however, demanding more stringent requirements than under the Second Directive. Therefore, it proposed for flexible requirements at least for unlisted companies. 12 Likewise, the Commission argued that the restrictions of the acquisition of own 8 shares had often been considered to be too rigid. Especially regarding useful transactions like stock-option programs financed by own funds or share repurchase programs to reduce excess cash in the company the Second Directive had not been flexible enough. Therefore, the Commission proposed to allow Member States to permit the acquisition of own shares up to the limit of distributable reserves regardless of the amount of the subscribed capital such shares represent.13 In 2006, Article 60 (former Article 21 of Directive 2012/30/EU) was amended by Directive 2006/68/EC with the objective to make such rules on the acquisition of own shares more flexible. Pursuant to the fourth Recital of its preamble such amendments were made “so as to enhance flexibility and reduce the administrative burden for companies which have to react promptly to market developments affecting the price of their shares.”

III. Purpose The European legislature did not intend to provide for an absolute prohibition as the 9 acquisition of own shares was considered to be generally favourable.14 Notably, this is the case, as the Commission expressly pointed out, where the company tries to prevent a slump in the market or to provide for employee participation.15 However, such acquisition would only be justified as long as the interests of shareholders and creditors remain unharmed. The European legislature pursued a “twofold aim of ensuring maintenance of

9 The SLIM initiative – Simpler Legislation for the Internal Market – was launched by the Commission in May 1996 with the objective of identifying ways in which Single Market legislation could be simplified. 10 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999, http://ec.europa.eu/internal_market/company/docs/official/6 037en.pdf, p. 5; see also Report from the Commission results of the fourth phase of SLIM of 4 February 2000, COM(2000)56 final, p. 13. 11 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002. 12 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 15, 84 et seq. 13 SEC (2004) 1342, p. 3 et seq. 14 In more detail see Bayer/Hoffmann/Weinmann, ZGR 2007, 457, 460 et seq. 15 First Proposal of the Commission, OJ No C 48, 24.04.1970, p. 12; see also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 58.

Jan P. Brosius

289

Art 60 Acquisition of own shares the subscribed capital and guaranteeing respect for the principle of equal treatment for all shareholders”.16 10 The acquisition of own shares goes along with a certain potential for abuse.17 In general, there are three mayor risks associated with such acquisition, i.e. a capital risk, a risk of unjustified unequal treatment of shareholders and a price manipulation risk. The acquisition of own shares exposes the company to greater financial risks. Where a company acquires and holds its own shares, it suffers twice from any damaging event that may occur.18 Any (serious) financial loss suffered by the company will result in a devaluation of its shares and, consequently, in a second financial damage since the shares held by the company and shown on the balance sheet are worth less. The more of its own shares a company holds the higher the leverage and the potential financial risk. Further, there is a risk that the management abusively offers to their preferred shareholders an opportunity to divest while the other shareholders are unable to sell their holdings.19 Notably, in over-the-counter-acquisitions there is a risk that the managements pursues an unjustified high or low price policy.20 In particular, an acquisition of own shares generally results in a repayment of contributions. Also, the company assumes the entrepreneurial risk the shareholder was supposed to bear. 21 As a consequence, the company’s assets are reduced and certain shareholders might be unduly favoured.22 It also interferes with the legal structure of competences between the shareholders and the company’s managements that can now exercise the (voting) rights attached to the shares the company has acquired.23 Articles 60 et seqq. aim to minimise such adverse effects. 11 Over the years, the European legislature changed its rather tight approach. Directive 2006/68/EC aimed to lessen the strict requirement that were laid down in the initial version of Article 60 to “enhance, on the one hand, the flexibility of the administrative or management boards of companies, especially listed ones, in reacting to capital market developments affecting the company.” The then existing requirements were considered to be too rigid with a view to useful transactions.24 At the same time, the legislature, on the other hand, adhered to the objective “to provide safeguards for shareholders by explicitly requiring their equal treatment in a scenario of acquisition (and likewise sale) of a company’s own shares.”25

IV. Scope 12

Article 60 does not require Member States to allow for the acquisition of own shares, although the Economic and Social Committee had made such demand in the course of the legislative process.26 The provision rather grants Member States the right to decide on their own discretion whether to allow for an acquisition of own shares, provided, however, they make such acquisition subject to certain mandatory conditions as stipuCOM (90) 631 final – syn 317 of 13 December 1990. p 2. In more detail see Bayer/Hoffmann/Weinmann, ZGR 2007, 457, 461 et seqq. 18 Oechsler, ZHR 170 (2006), 72, 75. 19 Oechsler, ZHR 170 (2006), 72, 85; see also Wooldridge [1978] Acta Juridica 327, 338. 20 Oechsler, ZHR 170 (2006), 72, 85. 21 Lutter, EuR 1975, 44, 58; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 62. 22 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 57. 23 Cahn, Der Konzern 2007, 385, 394. 24 SEC (2004) 1342, p. 3 et seq. 25 SEC (2004) 1342, p. 4. 26 Opinion of the European Economic and Social Committee, OJ No C 88, 6.9.1971, p. 4. 16 17

290

Jan P. Brosius

Art 60

TITLE I GENERAL PROVISIONS

lated in points (a) to (c) of the first subparagraph of Article 60 (1) and not subject to any further conditions than the optional conditions as stipulated in points (a) to (e) of the second subparagraph of Article 60 (1). In a first step, however, Article 60 (1) expressly points out that as a prerequisite, an acquisition of own shares may not prejudice the principle of equal treatment of all shareholders as laid down in Article 85 or the rules laid down in Regulation (EU) No 596/2014.27 The reference to the principle of equal treatment and market abuse merely serves the purpose of clarification. The same would apply without such explicit reference.28

V. Equal Treatment and Market Abuse First, Article 60 (1) clarifies that an acquisition of own shares may not contradict 13 the principle of equal treatment of all shareholders who are in the same position, i.e. the principle laid down in Article 85. Legal Scholars argue that this requirement is already effectively secured by the requirement of a shareholders resolution as stipulated in point (a) of Article 60 (1).29 Indeed, the company cannot acquire own shares for an inadequately high considerations without violating the principle of equal treatment.30 In general, the right of equal treatment obliges the company to grant each shareholders a right to offer the pro rata amount of his or her shares in the form of a pre-emptive tender right.31 It is unclear whether, for example by analogy with the relevant rule in Article 72 (4), the pre-emptive tender right may be restricted by decision of the general meeting.32 In the view of the Commission, one possible way to ensure equal treatment is the acquisition and sale on a regulated market.33 Further, Article 60 (1) intends to prevent market manipulations. Indeed, the more 14 shares a company acquires the higher the risk for market manipulations.34 The Commission had argued that in any event of an acquisition of own shares, the requirements of the Market Abuse Directive 2003/6/EC and the implementing Commission Directive 2004/72/EC as well as the pertinent Commission Regulation (EC) No 2273/2003 would have to be met. Following the report of the Committee of Legal Affairs of the European Parliament35, this has been emphasised accordingly in the first sentence of Article 60 (1), which, at first, referred to Directive 2003/6/EC36 and due to its repeal by Article 37 of the Market Abuse Regulation of 16 April 201437 with effect from 3 July 2016 now refers 27 Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, OJ L 173, 12.6.2014, p. 1–61. 28 Cahn, Der Konzern 2007, 385, 387; Westermann, ZHR 172 (2008), 144, 158. 29 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 127; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 64. 30 Cf. Oechsler, AG 2010, 526, 527. 31 Oechsler, ZHR 170 (2006), 72, 85 et seq. 32 Cf. Oechsler, ZHR 170 (2006), 72, 87. 33 SEC (2004) 1342, p. 4; see also COM (2004) 730 final, p. 12; Opinion of the European Economic and Social Committee, OJ No C 88, 6.9.1971, p. 4; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 63. 34 Cahn, Der Konzern 2007, 385, 394. 35 See session document A6-0050/2006 final, p. 12. 36 As well as Commission Directives 2004/72/EC, 2003/125/EC and 2003/124/EC and Commission Regulation (EC) No 2273/2003. 37 Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC.

Jan P. Brosius

291

Art 60 Acquisition of own shares to the Market Abuse Regulation (EU) No 596/2014. In this regard, particular attention is to be paid to Article 5 of the Market Abuse Regulation which deals with exemptions for buy-back programmes, i.e.38 trading in own shares in accordance with Articles 60 to 66 of the Directive. In the context of acquisition of own shares it should also be pointed out that regarding buy-back programmes and stabilisation measures, in 2016 the European legislature adopted Commission Delegated Regulation (EU) 2016/1052.39

VI. Mandatory Conditions Points a) to c) of the first subparagraph of Article 60 (1) provide for three mandatory conditions Member States must make an acquisition of a company’s own shares subject to if they decide to permit the concept at all. The acquisition must be authorised by the general meeting, may not reduce the company’s net assets below the distributable amount and may only comprise fully paid shares. 16 Pursuant to point (a) of the first subparagraph of Article 60 (1) – for the purpose of shareholder protection – the general meeting has to authorise the acquisition and determine its terms and conditions. Such authorisation has to at least state (i) the maximum number of shares to be acquired, (ii) the duration of the period for which the authorisation is given and (iii), in the case of acquisitions for value, the maximum and minimum consideration. The last condition clarifies that an acquisition free of charge also falls into the scope of Article 60 (see also → Art 61 mn. 8). The information to be granted constitutes the minimum information necessary to ensure that the shareholders are able to make an informed decision.40 However, it is to be noted that point (a) of the first subparagraph of Article 60 (1) does not provide for an explicit obligation of the management to inform shareholders prior to their decision. The provision rather implies that shareholder are already informed. 17 Member States are obliged to determine the maximum length of the duration of the aforementioned period for which the authorisation is given, which may not, however, exceed five years. This maximum duration was significantly extended from 18 month to 5 years by Directive 2006/68/EC. It was intended not only to avoid all too frequent approval procedures by the general meeting and to disburden politically endorsed measures like stock-option programmes financed by own funds.41 The extension also harmonises the requirements for the acquisition of own shares with the period required for authorised capital as stipulated in Article 68 (2) and Article 72 (5) (cf. → Art 68 mn. 28, → Art 72 mn. 31) thereby bringing a previously unjustified inconsistency to an end.42 Although Articles 68 and 72 (5) deal with a capital inflow along with an increase of outside shareholdings whereas Article 60 deals with a capital outflow along with a decrease of outside shareholdings, the underlying principle is the same.43 15

See Article 3 (17) of the Market Abuse Regulation. Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the conditions applicable to buy-back programmes and stabilisation measures, OJ L 173, 30.6.2016, p. 34–41. 40 Baldamus, Reform der Kapitalrichtlinie, p. 171. 41 Cf. SEC (2004) 1342, p. 4. 42 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999 (http://ec.europa.eu/internal_market/company/docs/official/60 37en.pdf), p. 13; see also Cahn, Der Konzern 2007, 385, 393; Oechsler, ZHR 170 (2006) 72, 80; for a critical view see Baldamus, Reform der Kapitalrichtlinie, p. 174. 43 See also Oechsler, ZHR 170 (2006), 72, 80. 38

39

292

Jan P. Brosius

Art 60

TITLE I GENERAL PROVISIONS

The competence of the general meeting to authorise the acquisition enables shareholders to effectively control the transaction44 and to assess the adequacy of the acquisition price.45 Member States may only allow for an exception from the requirement of shareholder authorisation in the two cases stipulated in paragraph 2 (prevention of serious and imminent harm to the company) and paragraph 3 (participation of employees) as well under the provisions stated in Article 84 (1) and (2) (cf. → mn. 31 et seqq.). Further, pursuant to point (b) of the first subparagraph of Article 60 (1), the acquisition must not – for the purpose of creditor protection46 – have the effect of reducing the net assets below the amount of subscribed capital plus undistributable reserves as described in Article 56 (1) and (2).47 The Commission argued that the company’s assets may never fall below the subscribed capital (cf. → Art 56 mn. 7 et seqq.). 48 It also intended to make sure that Article 60 refers to the same threshold that is relevant in several other cases of capital related measures under the Directive (cf. Articles 78 to 82). 49 In Directive 2006/68/EC, the European legislature had dropped the mandatory requirement that the nominal value or, as the case may be, the accountable par of the acquired shares and any shares previously acquired by the company or a middleman and directly or indirectly held by it may not exceed 10 % of the subscribed capital and limited the restrictions to a capital protection that is based solely on the balance sheet value.50 It is appropriate and necessary that such calculations have to take into account shares previously (directly and indirectly) acquired by the company and (directly and indirectly) held by it. Note that Article 67 (5) should be applied mutatis mutandis (cf. → Art 67 mn. 19). To prevent circumvention by multiple acquisitions, it was clarified that the limit of distributable reserves applies not just to each single acquisition but to the aggregate of all own shares acquired and held by the company or by a person acting in his own name but on the company's behalf. Note that pursuant to point (b) of the first subparagraph of Article 63 (1) an undistributable reserve has to be included among the liabilities if the shares are included among the assets shown in the balance sheet. Own shares held by the company itself have no positive effect on the net assets shown in the balance sheet. Once an amount of the company’s free capital has been used for the acquisition of own shares it is bound for accounting purposes and may not be used again to acquire more of the company’s shares.51 The acquisition of own shares does not constitute a mere asset swap on the balance sheet.52 Pursuant to point (c) of the first subparagraph of Article 60 (1) the acquisition of own shares is limited to fully paid-up shares. An acquisition of non-paid-up shares is incompatible with a system of legal and minimum capital.53 To ensure an effective capital contribution the company must not become the debtor of its own contribution Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 284. Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 64. 46 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 129; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 64. 47 See also Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 287; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 250 et seq. 48 First Proposal of the Commission, OJ No C 48, 24.04.1970, p. 13. 49 SEC (2004) 1342, p. 3 et seq. 50 Cf. Westermann, ZHR 172 (2008), 144, 157; critical on this issue Bayer/Hoffmann/Weinmann, ZGR 2007, 457, 475 et seq. 51 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 63; Lutter, EuR 1975, 43, 58; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 190, 250 et seq. 52 Cahn, Der Konzern 2007, 385, 394. 44

45

Jan P. Brosius

293

18

19

20

21

22

Art 60 Acquisition of own shares claims. Such claims would extinguish while the company’s subscribed capital is not being reduced but rather remains the same.54 This corresponds to the underlying legal principle in Article 59 (cf. Art 59 mn. 1). Point (c) of the first subparagraph does not refer to any premium not yet paid up. Outstanding premiums do not prevent the company from acquiring the respective shares.55 23 Members of the administrative or management body must satisfy themselves that, at the time when each authorised acquisition is effected, the conditions referred to in points (b) and (c) of the first subparagraph are respected, i.e. the company’s net assets are not reduced below the subscribed capital plus any undistributable reserves and all shares comprised by the transaction are fully paid up. With a view to the principle of effectiveness Member States should provide for adequate liability of members of the administrative or management body where they fail to comply with such requirement.

1. Optional conditions The second subparagraph of Article 60 (1) was implemented by Directive 2006/68/EC. It stipulates five conditions Member States may optionally provide for if they permit companies to acquire their own shares. These five optional conditions constitute an exhaustive catalogue of restrictions Member States are allowed to provide for as is apparent from the wording (by argumentum a contrario) and the historical background of the provision.56 It leaves Member States with a narrow and a rather clearly distinguished scope for national legislation. 25 There is a controversy as to whether this exhaustive catalogue only applies to Article 60 (1)57 or to any acquisition made under Article 60 (2) or (3) as well.58 The latter is correct. Article 60 (2) and (3) releases the company only from the requirement of a shareholder resolution. Apart from that, the restrictions laid down in Article 60 (1) apply fully and without restrictions. 26 Pursuant to point (a) of the second subparagraph Member States may provide that the nominal value or, where applicable, the accountable par of the shares to be acquired must not exceed a certain amount of the subscribed capital which is to be determined by Member States, provided however, the amount is not lower than 10 % thereof. Consistently, this threshold may, but does not have to,59 include shares previously acquired directly or indirectly (and lawfully as well as unlawfully) by the company and still held by it. Note that pursuant to Article 67 (5) shares held pursuant to the exemption provided for in such provision have to be taken into account when it is determined whether the condition laid down in point (a) is fulfilled (cf. → Art 67 mn. 19). 27 Further, pursuant to point (b) of the second subparagraph, Member States may require the incorporation of the company’s authorisation to acquire its own shares as well as the key parameters of such an acquisition in the company’s statutes or instrument of incorporation. Such key parameters are (i) the maximum number of shares 24

53 First Proposal, OJ No C 48, 24.04.1970, p. 13; for a different view see the Opinion of the European Economic and Social Committee, OJ No C 88, 6.9.1971, p. 4. 54 Cf. First Proposal, OJ No C 48, 24.04.1970, p. 13. 55 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 131; Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 179; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994 p. 119, 252. 56 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 132; see also Cahn, Der Konzern 2007, 385, 386. 57 Cahn, Der Konzern 2007, 385, 390 et seqq. 58 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 133. 59 See also Cahn, Der Konzern 2007, 385, 388; Westermann, ZHR 172 (2008), 144, 158.

294

Jan P. Brosius

Art 60

TITLE I GENERAL PROVISIONS

to be acquired, (ii) the duration of the period for which the power is given and (iii) the maximum or minimum consideration. In this case, any acquisition of own shares must come along with a corresponding amendment of the statutes.60 Such restriction in the company’s statutes does not, however, replace the requirement of a decision of the general meeting pursuant to point (a) of the first subparagraph of Article 60 (1). Pursuant to point (c) of the second subparagraph, for the purpose of strengthening 28 transparency and enhancing shareholder participation, Member States may provide that the company complies with appropriate reporting and notification requirements. The details of the individual national legislation remains to the discretion of each Member State. Pursuant to point (d) of the second subparagraph, Member States may require that 29 “certain companies” are obliged to cancel the acquired shares, provided that an amount equal to the nominal value of such shares cancelled is included in an undistributable reserve which may only be distributed to shareholders in the event of a reduction in the subscribed capital and only be used for the purposes of increasing the subscribed capital by the capitalisation of reserves. Member States are free to determine what type of company (within the scope or Article 2) such requirement shall apply to. The restrictive wording of point (iv) of Article 60 (1) does not indicate that Member States may not require all companies to cancel the acquired shares. It rather clarifies that Member States may make such distinction. Lastly, pursuant to point (e) of the second subparagraph, Member States may provide 30 that the acquisition of own shares does not prejudice the satisfaction of creditors' claims. It is rather doubtful that additional creditor protection is necessary or adequate. A case of application could be a solvency test.61

2. Exceptions Article 60 (2) and (3) provides for two cases in which Member States may derogate 31 from the requirement of a decision of the general meeting as required in point (a) of the first subparagraph of Article 60 (1). The requirements laid down in points (b) and (c) of the first subparagraph of Article 60 (1) remain unaffected.62 First, Member States may derogate from the requirement of a shareholders’ resolu- 32 tion where the acquisition of own shares is necessary to prevent serious and imminent harm to the company. The requirement of a serious and imminent harm is rather vague and provides quite a scope for interpretation. Likewise, the Commission had pointed out that the “flexibility” of the term “serious and imminent harm” was rather risky; however, the provision would provide for sufficient restrictions to minimise the risk of an abuse of rights by the company’s management.63 In such a case, the administrative or management body must inform the next general 33 meeting, not necessarily each individual shareholder, of the number and nominal value or, if applicable, the accountable par of the shares acquired, of the proportion of the subscribed capital which they represent, of the consideration paid for these shares and – most importantly – of the reasons for and the nature of the acquisitions effected. The provisions aim to ensure an adequate subsequent information of shareholders to enable them to take appropriate measures.64 If, for instance, there was no risk that the 60 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 135; Cahn, Der Konzern 2007, 385, 395. 61 Cahn, Der Konzern 2007, 385, 395. 62 Cahn, Der Konzern 2007, 385, 389. 63 First Proposal of the Commission, OJ No C 48, 24.04.1970, p. 13. 64 Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 285.

Jan P. Brosius

295

Art 60 Acquisition of own shares company is seriously and imminently harmed or the acquisition of own shares at its respective terms was inadequate or incapable, i.e. not necessary to prevent such serious and imminent harm to the company, the general meeting may, under the applicable provisions, assert liability claims against the management. 34 Further, Member States may derogate from the requirement of a shareholders’ resolution where it intends to directly or indirectly through a middleman acquire shares for distribution to its employees or to the employees of an associate company.65 To ensure that the derogation under Article 60 (3) is not used as a way to circumvent the restrictions made in Article 60 (1), particularly to prevent misuse for other purposes like a stabilisation of share prices,66 such shares must be distributed within twelve months of their acquisition. The provisions aims to enhance employee participation and is socio-politically motivated.67 35 Pursuant to Article 84 (1) Member States may derogate from the first sentence of point (a) of Article 60 (1) to the extent that such derogation is necessary for the adoption or application of provisions designed to encourage the participation of employees, or other groups of persons defined by national law, in the capital of undertakings (cf. → Art 84 mn. 8 et seqq). Pursuant to Article 84 (2) Member States may decide not to apply the first sentence of point (a) of Article 60 (1) to companies incorporated under a special law which issue both capital shares and workers’ shares, the latter being issued to the company's employees as a body, who are represented at general meetings of shareholders by delegates having the right to vote (cf. → Art 84 mn. 13 et seq.).

VII. Minimum Provision and Scope of Discretion 36

The wording of Article 60 (1) (“to the extent”) indicates that Member States are permitted to exclude, for example, certain types of companies or certain classes of shares from a permission to acquire own shares. However, where a Member State allows companies to acquire its own shares, the restrictions and scope of discretion provided for in Article 60 (2) are exhaustive. Only where the provisions of the Directive expressly allow for a derogation Member States may provide for stricter rules.

VIII. Direct Application 37

Only the first subparagraph of Article 60 (1) is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

Cf. OJ No C 48, 24.04.1970, p. 13. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 20 para. 112; Fankhauser, p. 181; Ganske, DB 1978, 2461, Schwarz, Europäisches Gesellschaftsrecht, para. 605. 67 Cf. Edwards, EC Company Law, p. 72; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, vol. 1 1994, p. 119, 250. 65

66

296

Jan P. Brosius

Art 61

TITLE I GENERAL PROVISIONS

Article 61 Derogation from rules on acquisition of own shares 1. Member States may decide not to apply Article 60 to: (a) shares acquired in carrying out a decision to reduce capital, or in the circumstances referred to in Article 82; (b) shares acquired as a result of a universal transfer of assets; (c) fully paid-up shares acquired free of charge or by banks and other financial institutions as purchasing commission; (d) shares acquired by virtue of a legal obligation or resulting from a court ruling for the protection of minority shareholders in the event, particularly, of a merger, a change in the company’s object or form, transfer abroad of the registered office, or the introduction of restrictions on the transfer of shares; (e) shares acquired from a shareholder in the event of failure to pay them up; (f) shares acquired in order to indemnify minority shareholders in associated companies; (g) fully paid-up shares acquired under a sale enforced by a court order for the payment of a debt owed to the company by the owner of the shares; and (h) fully paid-up shares issued by an investment company with fixed capital, as defined in the second subparagraph of Article 56(7), and acquired at the investor’s request by that company or by an associate company. Point (a) of the third subparagraph of Article 56(7) shall apply. Such acquisitions may not have the effect of reducing the net assets below the amount of the subscribed capital plus any reserves the distribution of which is forbidden by law. 2. Shares acquired in the cases listed in points (b) to (g) of paragraph 1 shall, however, be disposed of within not more than three years of their acquisition unless the nominal value or, in the absence of a nominal value, the accountable par of the shares acquired, including shares which the company may have acquired through a person acting in his own name but on the company’s behalf, does not exceed 10 % of the subscribed capital. 3. If the shares are not disposed of within the period laid down in paragraph 2, they shall be cancelled. The laws of a Member State may make this cancellation subject to a corresponding reduction in the subscribed capital. Such a reduction shall be prescribed where the acquisition of shares to be cancelled results in the net assets having fallen below the amount specified in Article 56(1) and (2). I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Exceptions Provided for under Article 61 (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Period of disposal and cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 4 5 14

I. Overview Article 61 provides for a set of cases in which Member States may decide not to 1 apply the restrictions stipulated in Article 60.1 This is of particular relevance for the mandatory restrictions in points (a) to (c) of the first subparagraph of Article 60 (1). 1

See also Morse (1977) 2 E.L.Rev. 126, 130.

Jan P. Brosius

297

Art 61 Derogation from rules on acquisition of own shares Under certain circumstances as stipulated in Article 61 Member States may (partly or fully) derogate from such restrictions.2 2 The restrictions laid down in points (a) to (e) of the second subparagraph of Article 60, on the other hand, are not mandatory. Quite the contrary, if a Member State intends to provide for restrictions other than those laid down in points (a) to (c) of the first subparagraph of Article 60 (1), its choice is limited to the optional conditions stated in points (a) to (e) of the second subparagraph of Article 60 (1).3 Legal Scholars argue that Article 61 also applies to the second subparagraph of Article 60 (1).4 Certainly, the clear and unambiguous wording of Article 61 strongly supports this view. However, it appears at least questionable whether Article 61 intends to expand the catalogue in the second subparagraph of Article 60 (1) and allow Member States to provide for (further) restriction not listed therein. Such approach seems not to be in line with the regulatory purpose of Article 61 (cf. → mn. 4).

II. Historical Background 3

Article 61 derives from the Second Directive5 (cf. Art. 22 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Despite for editorial changes, and notwithstanding the impact the amendments to Article 60 had on the regulatory content of Article 61, its material content has not been amended since.

III. Purpose 4

Article 61 intends to exempt such transactions from the scope of Article 60 which, on the one hand, do not carry the same risks or are effectively dealt with in specific regulations fitted for such purpose but, on the other hand, may be favourable to the company or its stakeholders.6

IV. Exceptions Provided for under Article 61 (1) 5

In points (a) to (h) Article 61 (1) lists those cases Member States may decide not to apply Article 60 to. Member States are not obliged to make use of such exceptions. 7 In its Cahn, Der Konzern 2007, 385, 391. For a different view see Cahn, Der Konzern 2007, 385, 390 et seq.; see also Schwarz, Europäisches Gesellschaftsrecht, para. 607 et seq.; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 198 et seqq.; Grundmann, Europäisches Gesellschaftsrecht, para. 348 et seqq. 4 Cahn, Der Konzern 2007, 385, 390 et seq.; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 137. 5 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art. 44 mn.7 et seqq. 6 See also OJ No C 48, 24.04.1970, p. 13. 2

3

298

Jan P. Brosius

Art 61

TITLE I GENERAL PROVISIONS

first proposal the Commission pointed out that acquisitions by the company itself but on behalf of a third party do not constitute an acquisition of own shares as long as the company has been granted respective power of attorney and therefore such transactions do not fall within the scope of Article 60 and do not have to be mentioned in Article 61.8 In this context see Article 67 (3) (→ Art. 67 mn. 17). As stipulated in point (a) Member States do not need to apply the restrictions laid down in Article 60 with regard to shares acquired in carrying out the shareholders’ decision to reduce capital. Insofar the Directive provides for specific rules in Articles 68 et seq. Also, Member States do not need to apply Article 60 to the redemption of shares as regulated in Article 82 (→ Art. 82 mn. 4 et seqq.). In both cases the acquisition of own shares is regulated by provisions specifically designed for such measures. As stated in point (b) Article 60 does not have to be applied to the acquisition of shares as a result of a universal transfer of assets. In terms of legal policy, the European legislature had an interest to ensure the functionality of the concept of a universal transfer of assets, which, to be effective, requires the possibility to derogate from Article 60. Initially, the legislature had cases of inheritance in mind9 that are not subject to any coordination under European law.10 The provision also applies to a universal transfer of assets in the course of a merger, as subject to the provisions in Articles 118 et seqq. of the Directive (former Directive 2005/56/EC11), and in the course of a division, as subject to the provisions in Articles 135 et seqq. of the Directive (former Directive 82/891/EEC 12). Pursuant to point (c) Member States do not need to apply the restrictions laid down in Article 60 to acquisitions of fully paid-up shares, provided, however, such acquisitions are free of charge. As the contributions have been fully paid in and there is no capital outflow such acquisitions do not constitute a repayment of contributions and carry no potential risk for the company.13 Also, Member States do not need to apply Article 60 to the acquisition of fully paid-up shares that had been acquired by banks and other financial institutions as purchasing commission. For a definition of “financial institution” see point (26) of Article 4 (1) of Regulation (EU) No 575/2013 14. The European legislature did not intend to provide for the requirement of a direct purchase and did neither intend to inhibit measures and distribution channels commonly used for indirect purchases in the course of a share issue.15 As stated in point (d), Member States do not have to apply Article 60 to shares acquired by virtue of a legal obligation or resulting from a court ruling for the protection of minority shareholders. Point (d) provides for a non-exhaustive list of events in which the requirement of minority shareholder protection may be fulfilled. These are mergers, a change in the company's object or form, a transfer abroad of the registered office, or the introduction of restrictions on the transfer of shares. The implementation of point (d) was politically motivated. It intends to ensure the execution 7 See also Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 253; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 207 et seq. 8 First Proposal, OJ No C 48, 24.04.1970, p. 13. 9 OJ No C 48, 24.04.1970, p. 13. 10 Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, p. 204. 11 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies. 12 Sixth Council Directive 82/891/EEC of 17 December 1982 based on Article 54 (3) (g) of the Treaty, concerning the division of public limited liability companies. 13 Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 203. 14 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, p. 1–337. 15 See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 204.

Jan P. Brosius

299

6

7

8

9

Art 61 Derogation from rules on acquisition of own shares

10

11

12

13

of structural and restructuring measures and the formation of groups of companies while the interests of minority shareholders are preserved. According to point (e) the acquisition of shares from a shareholder in the event of failure to pay them up may be exempted from the restrictions laid down in Article 60. Point (e) allows, as a last resort, to respond to a statutorily explicitly disapproved situation where a shareholder fails to pay up the contribution he or she is obliged to make upon the subscription. This buyback does not bear a potential risk to the company. Rather, the risk already occurred and materialized prior to such buyback, i.e. upon the failure to pay up the shares. Point (f), pursuing the same purpose as point (d), allows Member States to derogate from the restrictions laid down in Article 60 where a company acquires shares in order to indemnify minority shareholders in associated companies. Like the provision in point (d) the implementation of point (f) was politically motivated and intends to ensure the execution of restructuring measures and the formation of groups of companies while ensuring that the interests of minority shareholders can be preserved. Pursuant to point (g) Member States do not need to apply the restrictions laid down in Article 60 to the acquisition of fully paid-up shares under a sale enforced by a court order for the payment of a debt owed to the company by the owner of the shares. The provision offers the possibility, as a last resort, to collect debt owed by shareholders who are and will not be able to repay such debt by any other means. It is to be noticed, however, that the law of enforcement proceedings have not yet been harmonised.16 Finally, pursuant to point (h), Member States may decide not to apply Article 60 to acquisitions of fully paid-up shares issued by an investment company with fixed capital, as defined in the second subparagraph of Article 56 (7) (cf. → Art. 56 mn. 15 et seqq.), provided, however, those shares are acquired at the investor’s request by that company or by an associate company. This provision is linked to Article 56 (4) and aims to allow such companies to make disguised distributions by acquiring their own shares without the restrictions of Article 60. Accordingly, point (a) of the third subparagraph of Article 56 (7) applies to such acquisitions. Those acquisitions may not have the effect of reducing the net assets below the amount of the subscribed capital plus any reserves the distribution of which is forbidden by law.

V. Period of disposal and cancellation 14

Shares acquired under points (b) to (g) of Article 61 (1) may not be held for an indefinite period. Pursuant to Article 61 (2) the company is required to dispose of any shares acquired in the cases listed in points (b) to (g) of Article 61 (1) within not more than three years of their acquisition. This does not apply, however, where the nominal value or, where applicable, the accountable par of the shares acquired does not exceed 10 % of the total subscribed capital. This calculation has to take into account all shares the company has acquired through a middleman, i.e. a person acting in his own name but on the company's behalf. The decisive criterion is the aggregate amount of own shares held directly or indirectly by the company. The provisions aim to secure that, in the long run, a company does not hold more that 10 % of its own shares even if such shares are acquired under the exemptions of points (b) to (g) of Article 61 (1).17 With a view to the amendments made to Article 60 and the elimination of the respective 10 % threshold therein, it appears unnecessary to stick with the same requirement in Article 61. 16 17

300

See Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 207. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 141.

Jan P. Brosius

Art 62

TITLE I GENERAL PROVISIONS

Article 61 (3) provides that in case of a breach of Article 61 (2) the respective shares 15 must be cancelled. In principle, it is to the Member States’ free discretion whether they make such cancellation subject to a corresponding reduction in the subscribed capital. However, where the acquisition of shares to be cancelled results in the net assets having fallen below the amount specified in Article 56 (1) and (2) (→ Art. 56 mn. 4), such a reduction must be prescribed.

Article 62 Consequences of illegal acquisition of own shares Shares acquired in contravention of Articles 60 and 61 shall be disposed of within one year of their acquisition. If they are not disposed of within that period, Article 61(3) shall apply. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 6 7

I. Historical Background Article 62 derives from the Second Directive 1 (cf. Art 23 of Directive 2012/30/EU). It 1 was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

II. Purpose Article 62 complements the provisions laid down in Articles 60 and 61 and aims to 2 guarantee their effective enforcement.

III. Scope Article 62 governs the legal consequences of a violation of Articles 60 and 61, i.e. of 3 an unlawful acquisition of own shares. It stipulates that shares acquired in contravention of such provisions shall be disposed of. The European legislature did not opt for the legal consequence of nullity of a transac- 4 tion violating Articles 60 and 61. The legal obligation to dispose of the respective shares was considered more appropriate. 1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq.

Jan P. Brosius

301

Art 63 Holding of own shares and annual report in case of acquisition of own shares 5

The disposal has to be effected within a year of the unlawful acquisition of the respective shares. Only where the company in breach fails to meet this obligation Article 61 (3) applies and the respective shares must be cancelled.

IV. Minimum Provision 6

Article 62 constitutes a minimum provision. Member States may provide for stricter rules, for instance nullity of the respective transaction.2

V. Direct Application 7

Article 62 is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

Article 63 Holding of own shares and annual report in case of acquisition of own shares 1. Where the laws of a Member State permit a company to acquire its own shares, either itself or through a person acting in his or her own name but on the company’s behalf, they shall make the holding of these shares at all times subject to at least the following conditions: (a) among the rights attaching to the shares, the right to vote attaching to the company’s own shares must in any event be suspended; (b) if the shares are included among the assets shown in the balance sheet, a reserve of the same amount, unavailable for distribution, shall be included among the liabilities. 2. Where the laws of a Member State permit a company to acquire its own shares, either itself or through a person acting in his or her own name but on the company’s behalf, they shall require the annual report to state at least: (a) the reasons for acquisitions made during the financial year; (b) the number and nominal value or, in the absence of a nominal value, the accountable par of the shares acquired and disposed of during the financial year and the proportion of the subscribed capital which they represent; (c) in the case of acquisition or disposal for a value, the consideration for the shares; (d) the number and nominal value or, in the absence of a nominal value, the accountable par of all the shares acquired and held by the company and the proportion of the subscribed capital which they represent. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Unlawfully Acquired Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

302

See also Spickhoff, BB 1997, 2593, 2601.

Jan P. Brosius

1 2 3 5 9 10 11

Art 63

TITLE I GENERAL PROVISIONS

I. Overview Where a Member State allows for the acquisition of own shares – in which case 1 it has to make such acquisitions subject to the requirements laid down in Article 60 – the subsequent direct or indirect holding of such shares is subject to the minimum requirements stipulated in Article 63.

II. Historical Background Article 63 derives from the Second Directive 1 (cf. Art 24 of Directive 2012/30/EU). It 2 was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

III. Purpose Any acquisition of own shares for a value constitutes, at least partially, a repayment 3 of contributions. The Commission concluded that own shares are of no actual value to the company. Certainly, with regard to the company’s legal capital this is true as the value of shares corresponds to the contribution made upon subscription.2 Against that background, Article 63 aims to ensure that shares acquired by the company or a middleman or nominee have no augmenting effect on the company’s balance sheet, if they are shown on the asset side.3 Also, Article 63 aims to prevent that the company’s management is able to supervise and control itself. Therefore, own shares do not carry any voting rights.4 Further, to provide shareholders and third parties with the essential information 4 regarding the own shares that were acquired and held by the company, Article 63 stipulates certain disclosure requirements for the annual report.5

IV. Scope Article 63 applies both to the direct holding of shares by the company itself and to the 5 indirect holding through a middleman or nominee, i.e. a person acting in his own name but on the company's behalf. In such cases, pursuant to Article 63 (1), two minimum requirements have to be fulfilled.

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 2 First Proposal, OJ No C 48, 24.04.1970, p. 13; for further details on the risks associated with the acquisition and holding of own shares → Art 60 mn. 10 et seq. 3 See also Wooldridge [1978] Acta Juridica 327, 339. 4 Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 212. 5 See also First Proposal, OJ No C 48, 24.04.1970, p. 13.

Jan P. Brosius

303

Art 63 Holding of own shares and annual report in case of acquisition of own shares First, the right to vote attaching to the company's own shares held by the company or the middleman is in any event to be suspended. Article 63 hereby aims to ensure that members of the management board do not control themselves.6 7 Secondly, where a Member State provides that own shares held by the company are included among the assets shown in the balance sheet, an undistributable reserve of the same amount has to be included among the liabilities. The necessity of such provision is derived from the fact that Directive 2013/34/EU7 (cf. Accounting and Auditing Law of the European Union, mn. 3 et seqq.) leaves it to the discretion of each Member State whether and to which extent national laws permit own shares to be shown in the balance sheet and whether national laws require reserves for own shares to be established and shown on the liabilities side of the balance sheet.8 For public limited liability companies, the European legislature intended to make sure that if own shares are shown on the balance sheet, the value assigned to them is neutralised by means of a reserve to ensure that the provisions on capital reductions and unlawful distribution cannot be circumvented.9 Accordingly, point (b) of Article 63 (1) has also the effect to prevent balance sheet manipulations.10 The Economic and Social Committee was of the opinion that the requirement stipulated in point (b) of Article 63 (1) should only apply within the scope of Article 60 (1) and, hence, not to any cases provided for in Article 60 (2) and (3).11 This proposal has not been taken up. 8 Further, Article 63 (2) requires Member States to provide for the obligation to state in the annual report for each financial year the number of shares acquired and disposed of during the respective financial year as well as the number and nominal value or, where applicable, the accountable par of all the shares acquired and held by the company.12 In each case the annual report has to state the proportion of the subscribed capital they represent, the reasons any acquisitions were made during that financial year, and in the case of an acquisition or disposal for a value the consideration that was paid or granted for the shares. Article 63 (2) thereby aims to provide transparency. 13 Reference has to be made to Directive 2013/34/EU, which contains detailed provisions on the reporting of own shares (cf. Accounting and Auditing Law of the European Union, mn. 27). 6

V. Unlawfully Acquired Shares 9

Although the very wording of the provision indicates that Article 63 only applies to shares lawfully acquired, the same requirements – argumentum a maiore ad minus – must also apply where a company unlawfully acquires its own shares,14 without, of 6 Wooldridge [1978] Acta Juridica 327, 339; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 148; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 213; Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital- Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 185; Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 287; Grundmann, Europäisches Gesellschaftsrecht, para. 351. 7 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182, 29.6.2013, p. 19–76. 8 See Annex III and IV of Directive 2013/34/EU. 9 First Proposal, OJ No C 48, 24.04.1970, p. 13; see also Oechsler, AG 2010, 105, 106. 10 Also see Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 287; Habersack/ Verse, Europäisches Gesellschaftsrecht, § 6, para. 57 et seq.; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 250 et seq.; Lutter, EuR 1975, 44, 58. 11 Opinion of the European Economic and Social Committee, OJ No c 88, 6.9.1971, p. 4. 12 Grundmann, Europäisches Gesellschaftsrecht, para. 351 uses the term “ex-post transparency”. 13 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 148.

304

Jan P. Brosius

Art 64

TITLE I GENERAL PROVISIONS

course, limiting the scope of Article 62. The period between the acquisition and the disposal or cancellation of the shares must be made subject to the same rules that apply to the legal holding of own shares.

VI. Minimum Provision As follows from the provision’s very wording (“at least”), Article 63 only provides for 10 minimum requirements.15 Member States may provide for stricter rules.

VII. Direct Application Article 63 is unconditional and sufficiently precise to fulfil the requirements of a 11 direct application (cf. → Intro Art 44 mn. 64).

Article 64 Financial assistance by a company for acquisition of its shares by a third party 1. Where Member States permit a company to, either directly or indirectly, advance funds or make loans or provide security, with a view to the acquisition of its shares by a third party, they shall make such transactions subject to the conditions set out in paragraphs 2 to 5. 2. The transactions shall take place under the responsibility of the administrative or management body at fair market conditions, especially with regard to interest received by the company and with regard to security provided to the company for the loans and advances referred to in paragraph 1. The credit standing of the third party or, in the case of multiparty transactions, of each counterparty thereto shall have been duly investigated. 3. The transactions shall be submitted by the administrative or management body to the general meeting for prior approval, whereby the general meeting shall act in accordance with the rules for a quorum and a majority laid down in Article 83. The administrative or management body shall present a written report to the general meeting, indicating: (a) (b) (c) (d)

the reasons for the transaction; the interest of the company in entering into such a transaction; the conditions on which the transaction is entered into; the risks involved in the transaction for the liquidity and solvency of the company; and (e) the price at which the third party is to acquire the shares.

This report shall be submitted to the register for publication in accordance with Article 16. 14 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 147; Grundmann, Europäisches Gesellschaftsrecht, para. 351. 15 Edwards, EC-Company Law, p. 72; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 147; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 258; Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 287; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 213.

Jan P. Brosius

305

Art 64 Financial assistance by a company for acquisition of its shares by a third party 4. The aggregate financial assistance granted to third parties shall at no time result in the reduction of the net assets below the amount specified in Article 56(1) and (2), taking into account also any reduction of the net assets that may have occurred through the acquisition, by the company or on behalf of the company, of its own shares in accordance with Article 60(1). The company shall include, among the liabilities in the balance sheet, a reserve, unavailable for distribution, of the amount of the aggregate financial assistance. 5. Where a third party by means of financial assistance from a company acquires that company’s own shares within the meaning of Article 60(1) or subscribes for shares issued in the course of an increase in the subscribed capital, such acquisition or subscription shall be made at a fair price. 6. Paragraphs 1 to 5 shall not apply to transactions concluded by banks and other financial institutions in the normal course of business, nor to transactions effected with a view to the acquisition of shares by or for the company’s employees or the employees of an associate company. However, these transactions may not have the effect of reducing the net assets below the amount specified in Article 56(1). 7. Paragraphs 1 to 5 shall not apply to transactions effected with a view to acquisition of shares as described in of Article 61(1)(h). I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Material Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The prohibition of financial assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Advance funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Make loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Provide security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Other means of financial assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Neutral and advantageous transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Direct or indirectly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) With a view to the acquisition of its own shares . . . . . . . . . . . . . . . . . . . . . . . . . 2. Relation to other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Permission to grant financial assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Responsibility of the administrative or management body . . . . . . . . . . . . . . . b) Fair market conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Credit standing of third party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Written report by the administrative or management body . . . . . . . . . . . . . e) Prior approval of general meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) No reduction of net assets below Article 17 (1) and (2) . . . . . . . . . . . . . . . . . . h) Acquisition of own shares at a fair price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i) Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Contesting the General Meeting’s Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 9 11 11 12 13 14 15 16 17 19 23 25 26 27 32 33 36 39 40 44 45 49 50 51

I. Overview 1

Article 64 (1) to (5) deals with the financial assistance of the acquisition of own shares and, since it has been amended by Directive 2006/68/EC, the conditions Member States are required to provide for if they choose to allow such transactions. Article 64 (6) and (7) provide for exceptions from the requirements stipulated in the first five paragraphs. Article 64 is complemented by Article 65 which aims to prevent conflicts of interests.

306

Jan P. Brosius

Art 64

TITLE I GENERAL PROVISIONS

II. Historical Background Article 64 derives from the Second Directive1 (cf. Art 25 of Directive 2012/30/EU). 2 It had been implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976 as a strict and absolute prohibition of the financial assistance of the acquisition of own shares. It has been significantly amended by Directive 2006/68/EC2. Pursuant to Article 64 in the version initially adopted, i.e. Art 23 of Directive 77/91/ 3 EEC, a company was not allowed to advance funds, make loans, or provide security with a view to the acquisition of its shares by a third party, except in some very limited circumstances3 and provided that the financial assistance did not exceed the amount of distributable reserves.4 The prohibition of financial assistance had not been proposed for by Commission.5 Neither did the Economic and Social Committee6 nor the European Parliament7 address the topic. In fact, it did not make it to the negotiating table before all formal proposals had already been published. There is an understanding, that awareness of this topic was raised by the British delegation and that the provision was modelled on existing legislation in the United Kingdom.8 In this regard, many legal scholars refer to the statements in the minutes of the Council.9 However, these (confidential) statements are neither conclusive nor legitimate criteria for interpretation (cf. → Intro Art 44 mn. 49 et seqq.). As frequently pointed out, UK law and specifically section 54 Companies Act 194810 4 did provide for comparable provisions. However, the same applies to the provisions on the “assistenza finanziaria” under Italian law11 and the provisions in Article 134 Code de Commerce 1873 under Belgian law. Further, the provisions laid down in section 54 Companies Act 1948 are comparable, but certainly not identical to the provisions initially provided for in the Second Directive.12 Most importantly, as follows from the very wording of the provisions, while Article 64 is limited to the three types of assistance expressly referred to, section 54 Companies Act 1948 also comprised a financial assis-

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 Directive 2006/68/EC of the European Parliament and of the Council of 6 September 2006 amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital, OJ No L 264, 25.9.2006, p. 32–36. 3 For instance, financial institutions were allowed to do so in their normal course of business. Financial assistance was also allowed with regard to the acquisition of shares by or for a company’s employees or those of an associated company. 4 SEC (2004) 1342, p. 4. 5 See OJ No C 48, 24.04.1970. 6 OJ No C 88, 6.9.1971. 7 OJ No 114, 11.11.1971. 8 Edwards, EC Company Law, p. 51; Schmitthoff, 15 CMLR (1978), 43, 50; Oechlser, ZHR 170 (2006), 72, 83; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6, para. 67. 9 Schröder, Finanzielle Unterstützung zum Aktienerwerb, p. 16 et seqq. 10 As well as section 16 Companies Act 1928 and section 45 Companies Act 1929. 11 See Article 144 Codice di Commercio 1882 and Article 2358 Codice Civile 1942. 12 In more detail see Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, pp. 49 et seqq.

Jan P. Brosius

307

Art 64 Financial assistance by a company for acquisition of its shares by a third party

5

6

7

8

tance “given otherwise”. Overall, the preceding provisions in the Member States are of little help for the interpretation of the European prohibition of financial assistance. In 1999 amendments to the prohibition on financial assistance were initiated by the work of the SLIM Initiative.13 For the purpose of greater flexibility14 the Company Law Slim Working Group proposed to reduce the prohibition on financial assistance to a practical minimum and to either allow financial assistance to the amount of the distributable net assets or to limit the prohibition to the assistance for the subscription of newly issued shares.15 Subsequently, the High Level Group of Company Law Experts took up the cause in their report on a “Modern Regulatory Framework for Company Law in Europe”.16 The High Level Group supported a solution whereby financial assistance is allowed to the extent of the company’s distributable reserves. It stated that such a solution would be consistent with the approach to the acquisition of own shares by the company. Limiting the assistance to distributable reserves would fully cover the risk associated with the financial assistance.17 Further, the High Level Group stated that a shareholders’ resolution should in principle be required, but the general meeting should also be allowed to authorise the management board for a limited period of time to engage the company in financial assistance.18 In 2004, the Commission made its proposal for a number of amendments to the Second Directive.19 It focussed on those (limited) cases where the acquisition of the company’s shares by a third party and its financial assistance is of special interest to the company itself. The Commission therefore proposed to amend the prohibition of financial assistance to an extent which makes it possible to take into account such special interest the company might have in granting such assistance, whilst retaining the necessary protection for minority shareholders and creditors. In the view of the Commission such approach required a comprehensive set of very specific adequate safeguards that relate both to the content of the transaction and to the procedure for its implementation.20 The amending Directive 2006/68/EC21 was adopted on 6 September 2006. According to the fifth Recital of its preamble “Member States should be able to permit public limited liability companies to grant financial assistance with a view to the acquisition of their shares by a third party up to the limit of the company’s distributable reserves so as to increase flexibility with regard to changes in the ownership structure of the share

13 The SLIM initiative – Simpler Legislation for the Internal Market – was launched by the Commission in May 1996 with the objective of identifying ways in which Single Market legislation could be simplified. 14 Report from the Commission results of the fourth phase of SLIM of 4 February 2000, COM(2000)56 final, p. 5. 15 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999, http://ec.europa.eu/internal_market/company/docs/official/603 7en.pdf, p. 5, 14. 16 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002. 17 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 85. 18 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe of 4 November 2002, p. 15, 85. 19 COM/2004/0730 final. 20 SEC (2004) 1342, p. 5. 21 Directive 2006/68/EC of the European Parliament and of the Council of 6 September 2006 amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital, OJ No L 264, 25.9.2006, p. 32–36.

308

Jan P. Brosius

Art 64

TITLE I GENERAL PROVISIONS

capital of companies. This possibility should be subject to safeguards, having regard to this Directive’s objective of protecting both shareholders and third parties.”

III. Purpose The rigid approach made by Article 64 as initially adopted in 1976 was meant to 9 serve not only to prevent circumvention of the given prohibitions of acquisition of own shares (cf. → Art 60 mn. 9 et seqq. and → Art 61 mn. 4),22 but also to provide protection against potentially abusive practices which are to the detriment of minority shareholders as well as of creditors.23 Many legal scholars consider Article 64 to be a general prohibition of leveraged buyouts and any form of financial assistance.24 That is, however, not correct. The prohibition is and has always been limited to the transactions expressly stipulated in Article 64 (1), i.e. advancing funds, making loans and providing security. Other transactions that may qualify as financial assistance or a leveraged buyout do not fall into the scope of Article 64. Only where circumstances arise that justify the conclusion that a transaction constitutes an abusive circumvention of the provisions laid down in Article 64 such transaction would be unlawful if not in compliance with the conditions laid down in Article 64 (2) to (5). Due to the amendments made in Directive 2006/68/EC the provision’s focus shifted 10 to the permission of those limited cases where the acquisition of shares by a third party and its financial assistance are in the company’s interest. However, as the Commission pointed out, that the interests of minority shareholder and creditor protection remain of the utmost importance, given the fact that protection of these two groups is at the very core of the Second Directive’s – and thus the Directive’s – regulatory thrust. 25

IV. Material Scope 1. The prohibition of financial assistance Even though the amendments made by Directive 2006/68/EC significantly changed 11 the notion of the provision, the European legislature de facto retained the prohibition on financial assistance. In principle, Member States may not permit a company to, either directly or indirectly, advance funds or make loans or provide security, with a view to the acquisition of its shares by a third party. a) Advance funds First, a company may not advance funds for the acquisition of its own shares. An 12 advance is a payment26 made in advance of its due date.27 This requires some kind of contractual agreement between the company and the receiver of the advance regarding such due date, irrespective of the nature of such agreement. Advancing funds already falls into the scope of “making loans”, which, thus, renders the explicit reference in the provision redundant.28 Accordingly, the correct transposition and implementation of Oechlser, ZHR 170 (2006), 72, 81. SEC (2004) 1342, p. 4 et seq.; see also Ferran, EBOR 6 (2006), 93. 24 Oechlser, ZHR 170 (2006), 72, 81 with further references. 25 SEC (2004) 1342, p. 5. 26 Or, respectively, the rendering of a service, performance etc. 27 Edwards, EC Company Law, p. 73. 28 Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 60. 22

23

Jan P. Brosius

309

Art 64 Financial assistance by a company for acquisition of its shares by a third party Article 64 into national law does not require Member States to provide for the explicit prohibition of the advancing of funds.29 b) Make loans 13

Further, a company may not make loans with a view to the acquisition of its own shares. The term “loan” must not be interpreted according to national law but from a European perspective (cf. → Intro Art 44 mn. 50). The European legislature provided for a broad and functional notion of the concept of making loans, unrestricted by the limitations of the legal terms used in the laws of the Member States. Thus, the term loan as used in Article 64 comprises the granting of any temporary property or pecuniary advantage. The essential characteristic and decisive criterion is the repayment obligation or duty to return, respectively. The background to this provision is the financial risk associated with such exposure of assets and the uncertainty over their restitution. 30 Hence, “loan” within Article 64 means any temporary granting of cash or assets which is always – and for the means of Article 64 irrefutably – associated with the risk of failure of restitution. Already the entering into a commitment falls within the scope of Article 64. It does not require that the property or pecuniary advantage is actually transferred or otherwise made available.31 In particular, a loan in the meaning of Article 64 comprises any lending or borrowing,32 any prolongation, deferral or extension for payment,33 any silent partnership contribution.34 c) Provide security

14

Finally, a company may not provide security for the acquisition of its own shares. Again, the European legislator provided for a broad and functional concept of the term security.35 Its understanding may not be restricted by the limitations of legal terms used in national laws. The element of providing security does not require any transfer of assets or, respectively, any property or pecuniary advantage. Article 64 is intended to prevent a company from the financial risk associated to the exposure of assets regarding the mere commitment to provide security and the uncertainty linked to such assumption of liability. Thus, the term security as used in Article 64 comprises the incurring of any primary or secondary liability for third party debts, may such liability be internally or externally subordinate, provided, however, that the liability of the original debtor is not excluded.36 That means the company has to become a further, not a new debtor replacing the old one. Therefore, Article 64, inter alia, applies to the incurring of a joint liability, the depositing of cash or the provision of a bank guarantee, mortgages, liens, pledges, transfers by way of security and assignments for security, suretyships and guarantees.

29 See Article 2358 para. 1 of the Italian Codice Civil and Article 98 c para. 1 of the Dutch Burgerlijk Wetboek. 30 Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 61. 31 Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 61. 32 Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 67. 33 Kumpan, AG 2007, 461, 468; Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 66. 34 Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 62 et seqq.; for a different view see Schröder, Finanzielle Unterstützung des Aktienerwerbs, p. 158. 35 Schröder, Finanzielle Unterstützung des Aktienerwerbs, p. 159; Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 68. 36 Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 68 et seqq.

310

Jan P. Brosius

Art 64

TITLE I GENERAL PROVISIONS

d) Other means of financial assistance Means of financial assistance other than advancing funds, making loans or providing 15 security are not comprised by Article 64 and do not fall within the scope of the prohibition on financial assistance. As follows from the very wording, the provision does not merely give examples of financial assistance but provides for an exhaustive list of the relevant measures. Only where, in the individual case, a transaction constitutes a “circumvention of the law” or an “abuse of law”, the restrictions laid down in Article 64 may apply to such transaction (→ mn. 9). e) Neutral and advantageous transactions It is irrelevant whether – in each individual case – the financial assistance is detri- 16 mental to the company, its financial situation or other interest, or whether it is rather neutral, i.e. has no effect on the company’s financial situation at all, or whether it is even favourable and advantageous.37 The European legislator has made the irrefutable, conclusive assumption that such measures as stipulated in Article 64 (1) are always harmful to the company, provided however, the company does not comply with the requirements made under the second to fifth paragraphs.38 f) Direct or indirectly As stated in its first paragraph, Article 64 applies to financial assistance not only 17 where it is made directly but also where it is made indirectly. In particular, this clarifies that the company can either grant the financial assistance itself or via a representative, agent or middleman. Also, this means that the recipient of the financial assistance must not be the person acquiring the shares. Neither does the recipient have to be a shareholder.39 Not only carrying out a financial assistance falls into the scope of Article 64. Already 18 the entering into a respective commitment and the conclusion of the relevant contracts constitute a prohibited financial assistance. g) With a view to the acquisition of its own shares Article 64 requires that the financial assistance was made with a view to the acquisi- 19 tion of its own shares. The element of an acquisition of shares requires a contractual agreement, irrespective of its legal nature. The entering into the respective agreement is sufficient. A fulfilment of the agreement and a transfer of shares is not required. Article 64 does not apply to a statutory succession. A statutory succession cannot be financially assisted in the meaning of Article 64. Article 64 applies to the acquisition by means of a subscription of new shares as 20 well as any subsequent share purchase or other acquisition of shares.40 This follows from paragraph 5 which refers to the acquisition as well as the subscription for shares issued in the course of an increase in the subscribed capital. It is to be noticed that the permission of financial assistance for the subscription of own shares is contrary to the Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 70 et seq. Oechlser, MüKoAktG, 5th edn (2019), § 71 a para. 47; Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 71. 39 Schröder, Finanzielle Unterstützung des Aktienerwerbs, p. 162; Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 72 et seq. 40 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6, para. 67; Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 76 et seqq. 37

38

Jan P. Brosius

311

Art 64 Financial assistance by a company for acquisition of its shares by a third party regulatory purpose as provided for in Article 59 and contrary to the principle of effective capital contribution.41 21 The acquisition must involve shares. An acquisition of, for instance, profit certificates, dividend coupons, convertible bonds, or option or warranty bonds is not sufficient. 22 Article 64 does not require a direct funding of the acquisition. However it does require a functional connection between the acquisition and the financial assistance granted. There has to be a correlation between the two events. The point of reference is the objective purpose of the financial assistance. However, Article 64 also requires a subjective element as follows from the wording “with a view”. Decisive for the subjective element is the intention of the company’s acting body. The intention of the acquirer or the recipient of the financial assistance is irrelevant.42 It stands to reason that the subjective element is to be refutably presumed where the external circumstances indicate it.

2. Relation to other provisions In general, a financial assistance in the meaning of Article 64 qualifies as a direct or indirect distribution to shareholders (for unlawful indirect distributions see → Art 56 mn. 4 er seqq.). This is also set out in Article 64 (4). Consequently, a financial assistance granted by the company may violate Article 64 and Article 56 at the same time. 24 Article 64, inter alia, aims to prevent a circumvention of the prohibition laid down in Article 60. Nevertheless, the exceptions laid down in Articles 60 and 61 do not apply to the financial assistance for the acquisition of own shares. If not in compliance with Article 64, the company may not provide for financial assistance, even if the company would be allowed to acquire its own shares itself.43 Article 64 pursues individual protective purposes and has an individual scope beyond the prevention of circumvention. The exceptions provided for in Article 64 are exhaustive.44 23

3. Permission to grant financial assistance 25

Article 64 (2) to (5) stipulates the conditions Member States must make a financial assistance subject to if they choose to permit such transactions at all. These conditions are cumulative. They have been frequently criticised.45 a) Responsibility of the administrative or management body

26

First, Article 64 (2) provides that the financial assistance must be granted under the responsibility of the administrative or management body. This rule on competence aims to ensure that the interests of the company are more sensitively taken into account. 46 The provision ensures that no financial assistance is granted without the consent of the company’s management. The company’s management, which is personally liable towards the company, is more likely to carefully consider the effects such a transaction may have on the company and its financial constitution. Consequently, as the Commission pointed out, the board is particularly responsible that the assistance is made at fair market conditions (→ mn. 27 et seqq.) and the credit standing of the third party on See also Drygala, Der Konzern 2007, 296, 406; ZGR 2006, 587, 608; Walter, AG 1998, 370, 372. Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 85 et seqq. 43 For a different view see Werner, AG 1990, 1, 14 et seq., Habersack, FS Röhricht 2005, p. 155, 169. 44 Oechlser, MüKoAktG, 5th edn (2019), § 71 a para. 48; Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 71. 45 See Ferran, EBOR 6 (2006), 93, 99. 46 Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 274. 41

42

312

Jan P. Brosius

Art 64

TITLE I GENERAL PROVISIONS

the one hand (→ mn. 32) and the properly analysed projected future cash flows of the company on the other hand (→ mn. 40 et seqq.) are duly investigated.47 b) Fair market conditions Further, pursuant to the first subparagraph of Article 64 (2), the financial assistance must be granted at fair market conditions, i.e. it has to be conducted at arm's length. 48 As an example, Article 64 (2) mentions the interest received by the company and the security provided to the company for the loans and advances. The provision of security at fair market conditions requires that the company’s claims are comprehensively secured and that in case of a realisation of the securities full indemnification is guaranteed.49 In any case, for providing the financial assistance the company has to be appropriately remunerated, for instance in form of a guarantee commission. The Commission made clear that in any event the board has to make sure that not only adequate interest and adequate fees are paid to the company but also adequate security is provided by the third party in return for the financial assistance obtained.50 However, this does not fully apply to a financial assistance by means of providing security. Where the company provides security for the acquisition of its own shares, Article 64 (2) does not require that security is provided to the company in return. 51 Such requirement would render the granting of financial assistance rather pointless. Nevertheless, any financial acquisition has to be backed up by fully recoverable repayment or indemnification claims, respectively. Only where the company’s management is able to make a safe assumption based upon sufficient and reliable information regarding the recoverability financial assistance may be granted (→ mn. 32). The same requirement recurs in the second subparagraph of Article 64 (3) (→ mn. 32). From the perspective of the company, on the asset side of its balance sheet a financial assistance constitutes merely an accounting exchange. Fair market conditions of the transaction are a requirement for an effective approval of general meeting (→ mn. 36).52

27

28 29

30

31

c) Credit standing of third party Moreover, as stipulated in the second subparagraph of Article 64 (2), the credit 32 standing of the third party or parties must be duly investigated by the company’s management and, which is not expressly mentioned, it must be considered to be positive. This requirement aims to guarantee that the company’s repayment or indemnification claims are fully recoverable (→ mn. 30).53 d) Written report by the administrative or management body The second subparagraph of Article 64 (3) requires that prior to the decision of the 33 general meeting (→ mn. 36), the administrative or management body must present a written report to the general meeting. Such report must at least comprise an indication of the reasons for the financial assistance, the interest of the company in granting such financial assistance, the conditions on which the respective transaction is entered SEC (2004) 1342, p. 5. Cf. Schmolke, WM 2005, 1828, 1833. 49 See also Freitag, AG 2007, 157, 160. 50 SEC (2004) 1342, p. 5. 51 Cf. Freitag, AG 2007, 157, 160. 52 Cf. Drygala, Der Konzern 2007, 396. 403. 53 See also Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 268 et seq. 47

48

Jan P. Brosius

313

Art 64 Financial assistance by a company for acquisition of its shares by a third party into, the risks involved in the financial assistance for the liquidity and solvency of the company and the price at which the third party is to acquire the shares.54 34 The report has to be submitted to the register for publication in accordance with Article 16 (former Article 3 of Directive 2009/101/EC) pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means (→ Art 16 mn. 6 et seq.). The report has to be filed and published once the approval from the general meeting has been obtained.55 35 The provisions aim to provide for shareholder protection by means of information and transparency. The report serves as a basis for the decision to be made by the general meeting. However, the provision has been criticised for generating unnecessary additional cost, investigative efforts and liability risks.56 With a view to the high risk of conflicts of interests57 such criticism appears ungrounded. e) Prior approval of general meeting The general meeting has to decide upon the financial assistance in accordance with the rules for a quorum and a majority laid down in Article 83, i.e. the decision must be taken at least by a majority of not less than two-thirds of the votes attaching to the securities or the subscribed capital represented. Pursuant to Article 83 (2), however, Member States may provide that a simple majority of the votes is sufficient when at least half the subscribed capital is represented. 37 However, the general meeting does not have the sole decision-making power. It may only adopt a resolution if the respective transaction has been submitted by the administrative or management body, who is, eventually, responsible for the granting of a financial assistance and the compliance with the restrictions laid down in Article 64 (→ mn. 26). The fact, that any financial assistance requires a mutual agreement and consensus between the company’s management and the general meeting reduces the risk of abuse.58 As follows from Article 60, by argumentum et contrario, the general meeting may not give any general authorization by means of an anticipatory resolution.59 The Commission stated accordingly that “it follows from the extraordinary sensitivity of such transactions, that the general meeting must not give in advance, and without relation to a duly detailed proposal, any general ex-ante authorization to the board so as to enable it to grant financial assistance of a kind yet to be determined at a later stage in the future.”60 Further, the approval of the general meeting has to be obtained in advance of the granting of financial assistance; a subsequent approval and legitimation is not sufficient. In this context, it has to be taken into account that already the entering into a respective commitment qualifies as granting financial assistance (→ mn. 18). 38 A factual justification and the adequacy of the decision that may be subject to a substantive judicial review is not required (see also → Art 72 mn. 36 et seqq.). 36

See also SEC (2004) 1342, p. 5; Schmolke, WM 2005, 1828, 1835. SEC (2004) 1342, p. 5. 56 Ullah, JIBFL (2007), 251, 254; Ferran, EBOR 6 (2006), 93, 97; see also Van der Elst, European Company Law 6 (2009) 110, 113. 57 Cf. Wymeersch, WP 2006-15, 22. 58 See also Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 276. 59 Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 276 et seq. 60 SEC (2004) 1342, p. 5; see also Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 276 et seq. 54

55

314

Jan P. Brosius

Art 64

TITLE I GENERAL PROVISIONS

f) Reserve Further, as provided for in the second subparagraph of Article 64 (4), the company 39 has to set aside an undistributable reserve of the amount of the aggregate financial assistance. Such reserve has the effect of neutralising the company’s repayment or indemnification claim, respectively, shown on the assets side of its balance sheet. 61 Event though, the company’s management has to ensure that the financial assistance is granted at fair market conditions and has to duly investigate the credit standing of the third party or parties involved, the European legislature considered it necessary that any repayment claim is, a priori, per se deemed as being of no value.62 The provision corresponds with the requirements laid down in point (b) of Article 63 (cf. → Art 63 mn. 7). g) No reduction of net assets below Article 17 (1) and (2) In its first subparagraph Article 64 (4) stipulates that the aggregate amount of finan- 40 cial assistance granted must not at any time result in the reduction of the net assets below the amount specified in Article 56 (1) and (2) (→ Art 56 mn. 4), i.e. the amount of the subscribed capital plus those reserves which may not be distributed under the law or the statutes. The Commission set great store by the fact that, to avoid circumvention by multiple transactions, the provision refers to the aggregate transactions under financial assistance, and not just to each single such transaction.63 The provision also expressly states that the determination of the maximum amount of financial assistance has to take into account any reduction of the net assets that may have occurred through the acquisition, by the company or on behalf of the company, of its own shares in accordance with Article 60 (1) (→ Art 60 mn. 12). Fristly, it follows from the first subparagraph of Article 64 (4) that the company 41 must not grant any financial assistance in the event of an adverse balance, i.e. where the company’s net assets are already below the amount specified in Article 56 (1) and (2) (→ Art 56 mn. 4) even before any financial assistance is granted. Secondly, financial assistance may not have the effect that upon its granting the net assets of the company are reduced below the amount of the subscribed capital plus undistributable reserves. Thirdly and most importantly, the company’s net assets may not fall below such 42 amount during the entire term of the financial assistance as follows from the provision’s very wording (“at no time”). This severely affects the scope of Article 64 and raises serious doubts as to the applicability of the right to grant financial assistance.64 Although, prima facie, the provision’s wording (“the financial assistance granted (…) shall at no time result in”) suggests that the recoverability of the corresponding repayment clause has to be taken into account, the opposite is true. The provision does not have the effect that a financial assistance becomes illegal as soon as the company’s repayment or, respectively, indemnification claim loses its recoverability. The requirement to establish a reserve as provided for in the second subparagraph of Article 64 (4) has the effect that any repayment claim is a priori deemed as being worthless to the company. It cannot subsequently become “more worthless”.65 Its unrecoverability has been anticipated and does not affect the lawfulness of the financial assistance granted. However, if the compaDrygala, Der Konzern, 2007, 396. 401. For more details see also Freitag, AG 2007, 157, 162; Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 269. 63 SEC (2004) 1342, p. 6. 64 For a different view see Ferran, EBOR 6 (2006), 93, 96. 65 Drygala, Der Konzern 2007, 396, 402. 61

62

Jan P. Brosius

315

Art 64 Financial assistance by a company for acquisition of its shares by a third party ny’s financial situation deteriorates for any other reason and the company’s net assets are reduced below the amount of the subscribed capital plus undistributable reserves this was, inevitably, also caused by the financial assistance and its corresponding reserve.66 43 Therefore, it is not sufficient that the company’s management, as usually required for decisions based on forecasts, makes a prediction based upon sufficient and adequate information, e.g. pursuant to the respective applicable business judgement rule. Rather, it has to ensure that “at no time” during the term of the financial assistance the company’s net assets will fall below the amount of the subscribed capital plus undistributable reserves.67 This presents an extremely high liability risk for the management.68 The only feasible way to ensure a compliance with the requirements set out in the first subparagraph of Article 64 (4) is to provide for a broad limitation language69 in the contractual documentation of a financial assistance granted pursuant to Article 64 (1).70 The respective agreement has to provide for an extraordinary right to terminate the agreement in case and at least to the extent a breach of the first subparagraph of Article 64 (4) occurs.71 This, however, makes any financial assistance economically rather useless. h) Acquisition of own shares at a fair price 44

Where the acquisition regards shares held by the company itself (→ Art 60 mn. 12 et seqq., Art 63 mn. 5 et seqq.) or the acquirer subscribes for shares issued in the course of a capital increase, Article 64 (5) provides that such acquisition or subscription must be made at a fair price. The provision in Article 64 (5) aims to provide for shareholder protection against dilution of existing holdings.72 An undue dilution of existing shareholdings occurs where the third party obtains the shares at a discount to the fair price. 73 However, there is no distinctive correlation between financial assistance and the risks associated with an unfair acquisition price.74 Such risk is of a general nature and should be governed by rules of a general nature. i) Exceptions

Article 64 (6) provides that the restrictions laid down in Article 64 (1) to (5) do not apply to transactions concluded by banks and other financial institutions in the normal course of business. For a definition of “financial institution” see point (26) of Article 4 (1) of Regulation (EU) No 575/201375. 46 Further, these restrictions do not apply to transactions effected with a view to the acquisition of shares by or for the company's employees or the employees of an associate 45

66 See also Drygala, Der Konzern 2007, 396, 402; Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 271 et seq; for a different view Freitag, AG 2007, 157, 161. 67 Drygala, Der Konzern 2007, 396, 401; see also Wetermann, ZHR 172 (2008), 144, 164. 68 In more detail see Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 272 et seq. 69 For the concept of limitation language see Diem, ZIP 2003, 1283, 1287; Just, BKR 2004, 3, 6; Weitnauer, ZIP 2005, 790, 796. 70 Cf. Freitag, AG 2007, 157, 162; Drygala, Der Konzern 2007, 396, 402. 71 See also Brosius, Die finanzielle Unterstützung des Erwerbs eigener Aktien, p. 272 et seqq. 72 SEC (2004) 1342, p. 6; see also Schmolke, WM 2005, 1828, 1836. 73 SEC (2004) 1342, p. 6. 74 Cf. Ferran, EBOR 6 (2006), 93, 98; Freitag, AG 2007, 157, 160; Schmolke, WM 2005, 1828, 1836; Wymersch, WP 2006-15, 22. 75 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, p. 1–337.

316

Jan P. Brosius

Art 65

TITLE I GENERAL PROVISIONS

company. This provision and its regulatory intent is connected with the rules laid down in Article 60 (3) (→ Art 60 mn. 34) and Article 84 (1) (→ Art 84 mn. 5, 15). However, in both cases, those transactions must not have the effect of reducing the 47 net assets below the amount specified in Article 56 (1), i.e. the value of the company’s net assets may not become lower than the amount of the subscribed capital plus undistributable reserves. Finally, paragraph 7 provides that paragraphs 1 to 5 do also not apply to transactions 48 effected with a view to acquisition of shares as described in point (h) of Article 61 (1), i.e. an acquisition of fully paid-up shares issued by an investment company with fixed capital (cf. Article 56 (7)) and acquired at the investor's request by that company or by an associate company.

V. Contesting the General Meeting’s Decision Initially, the Commission had proposed for a provision granting the right to every 49 shareholder who disagrees with the proposed financial assistance, to contest the general meeting’s approval by applying for a ruling on the transaction’s legality by either an administrative or a judicial authority.76 In the end, this proposal has not been implemented. The Committee of Legal Affairs of the European Parliament pointed out that such provision would be inconsistent with EU-level legislation.77 It remains to the discretion of each Member State whether or not they implement comparative provisions. However, considering the principle of effectiveness, the implementation of comparable provisions appears to be adequate.

VI. Minimum Provision Article 64 provides for minimum provisions. Member States may implement stricter 50 rules.

VII. Direct Application Article 64 is not sufficiently precise to fulfil the requirements of a direct application 51 (cf. → Intro Art 44 mn. 64).

Article 65 Additional safeguards in case of related party transactions In cases where individual members of the administrative or management body of the company being party to a transaction referred to in Article 64(1) of this Directive, or of the administrative or management body of a parent undertaking within the meaning of Article 22 of Directive 2013/34/EU or such parent undertaking itself, or individuals acting in their own name, but on behalf of the members of such bodies or on behalf of such undertaking, are counterparties to such a transaction, Member States shall ensure through adequate safeguards that such transaction does not conflict with the company’s best interests. 76 77

SEC (2004) 1342, p. 6. A6-0050/2006 final, p. 16.

Jan P. Brosius

317

Art 65 Additional safeguards in case of related party transactions I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 8 9

I. Overview 1

Article 65 deals with possible conflicts of interest arising in connection with a financial assistance of the acquisition of own shares as laid down in Article 64.

II. Historical Background 2

Article 65 derives from the Second Directive1 (cf. Art 26 of Directive 2012/30/EU). It was introduced to the Second Directive by Directive 2006/68/EC. Its material content has not been amended since.

III. Purpose 3

Article 65 intends to provide for effective safeguards to prevent conflicts of interest arising in connection with a financial assistance of the acquisition of own shares.2 It aims to ensure that where the company enters into transactions that involve financial assistance pursuant to Article 64 with certain persons whose relationship with the company, de jure or de facto, gives them a decisive influence over the company, i.e. the company’s board members, the company’s controlling company or the latter’s board members, or individuals acting on behalf of either of those, Member States have to ensure that such transactions still are in the best interest of the company and not (only) in the interest of the company’s counterparties.

IV. Scope Article 65 provides that in the event certain natural or legal persons that are the company’s counterparties to a transaction that qualifies as a financial assistance pursuant to Article 64 Member States must provide for adequate safeguards to ensure that such transactions do not conflict with the company’s best interests. 5 The relevant persons with regard to which the European legislature assumes a high likeliness of occurrences of conflicts of interests are the individual member of the administrative or management body of the company or of a parent undertaking, the parent 4

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 SEC (2004) 1342, p. 6.

318

Jan P. Brosius

Art 65

TITLE I GENERAL PROVISIONS

undertaking itself or individuals acting on behalf of either of those. For a definition of the term “parent undertaking” Article 65 refers to Article 22 of Directive 2013/34/EU 3 (Accounting and Auditing Law of the European Union mn. 30 et seqq.). Accordingly, in short, a “parent undertaking” in the light of Article 22 (1)4 of Directive 2013/34/EU is an undertaking that (i) has a majority of the shareholders' voting rights in the company; or (ii) has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of the company and is at the same time a shareholder in the company, or (iii) has the right to exercise a dominant influence over the company pursuant to a contract entered into with the company or to a provision in its articles of association, where the law governing the company permits its being subject to such contracts or provisions – while it’s to the discretion of each Member State whether or not to require the undertaking to be at the same time a shareholder in the company – or (iv) is a shareholder in the company and either (x) has exercised its voting rights to appoint a majority of the members of the then current administrative, management or supervisory bodies of the company – Member States may provide that such undertaking holds at least 20% of the voting rights in the company – while none of the criteria listed above under (i), (ii) and (iii) applies to a third party; or (y) controls alone, pursuant to an agreement with other shareholders in the company (form and contents of such agreements being to the discretion of the Member States), a majority of shareholders' voting rights in the company. Further, in the light of Article 22 (2) of Directive 2013/34/EU undertakings qualify as parent undertakings if they (i) have the power to (otherwise) exercise, or actually (otherwise) exercise, dominant influence or control over the company, or (ii) are managed with the company on a unified basis by the parent undertaking. Not least, middlemen or nominees of the aforementioned, i.e. individuals acting in 6 their own name but on behalf of the members of such bodies or on behalf of such parent undertaking, fall within the scope of Article 65. For those cases where one of the aforementioned persons is a counterparty to a 7 transaction in the meaning of Article 64, Member States are obliged to ensure through adequate safeguards that such transaction does not conflict with the company's best interests. The details are to the discretion of the Member States.

V. Minimum Provision Article 65 provides for a minimum standard of safeguards. Member States may also 8 prohibit such transaction referred to in Article 65 or provide for special safeguards for transactions with other persons as well.

VI. Direct Application Article 65 is not sufficiently precise to fulfil the requirements of a direct application 9 (cf. → Intro Art 44 mn. 64).

3 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182, 29.6.2013, p. 19–76. 4 Also note the definition provided in Art 2 (9) of Directive 2013/34/EU, according to which a parent undertaking means an undertaking which controls one or more subsidiary undertakings.

Jan P. Brosius

319

Art 66 Acceptance of the company’s own shares as security

Article 66 Acceptance of the company’s own shares as security 1. The acceptance of the company’s own shares as security, either by the company itself or through a person acting in his own name but on the company’s behalf, shall be treated as an acquisition for the purposes of Article 60, Article 61(1), and Articles 63 and 64. 2. The Member States may decide not to apply paragraph 1 to transactions concluded by banks and other financial institutions in the normal course of business. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 7 8 9

I. Overview 1

Article 66 partially aligns the acceptance of the company’s own shares as security with the acquisition of own shares.1

II. Historical Background 2

Article 66 derives from the Second Directive2 (cf. Art 27 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since. It is argued that the provision was inspired by German law.3

III. Purpose 3

Article 66 provides for an “anti-avoidance measure”.4 The acceptance of the company's own shares as security bears a high potential risk.5 In the event of realisation of the security, the company assumes the entrepreneurial risk the shareholder is supposed to bear. Where the company faces economic difficulties or gets into financial distress the 1 See also Schwarz, Europäisches Gesellschaftsrecht, para. 610; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 265; Drinkuth, Die Kapitalrichtlinie – Mindestoder Höchstnorm?, p. 215 et seq. 2 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 3 Edwards, EC-Company Law, p. 73. 4 Edwards, EC-Company Law, p. 73. 5 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 163.

320

Jan P. Brosius

Art 66

TITLE I GENERAL PROVISIONS

own shares held as security have the effect of leveraging such difficulties (cf. → Art 60 mn. 10). The financial distress effects the value of the company’s shares, hence devaluating the security held by the company. Article 66 also aims to thwart the circumvention of the restrictions on the acquisition of own shares laid down in Articles 60 et seqq. 6

IV. Scope Article 66 stipulates that most restrictions that apply to the acquisition of own 4 shares also apply to the acceptance of the company's own shares as security. Article 66 comprises any form of security, particularly any security assignments, pledging or any other forms of encumbrances. Article 66 applies both to the acceptance of own shares as security directly by the company itself or indirectly by a middleman or nominee, i.e. through a person acting in his own name but on the company's behalf. Where the company or a nominee intends to accept own shares as security, such 5 transaction has to be made subject to the mandatory conditions stated in in points (a) to (c) of the first subparagraph of Article 60 (1) and not subject to any further conditions than the optional conditions listed in points (a) to (e) of the second subparagraph of Article 60 (1). However, the exceptions provided for in Article 60 (2) and (3) and Article 61 (1) also apply. Further, Member States must make the holding of such security subject to the restric- 6 tions laid down in Article 63. Not least, Member States have to ensure that the company may not, by mutatis mutandis application of Article 64, either directly or indirectly, advance funds or make loans or provide security, with a view to the acceptance of its own shares as security by a third party, unless such transactions are subject to the conditions set out in Article 64 (2) to (5).7 Article 61 (2) and (3) and Article 62, however, do not apply to the acceptance of own shares as security. Therefore, the legal consequences of a breach of the rules laid down in Article 66 are to be determined by the Member States.8

V. Exceptions Pursuant to Article 66 (2) Member States may decide not to apply Article 66 (1) to 7 transactions concluded by banks and other financial institutions in the normal course of business.9 For a definition of “financial institution” see point (26) of Article 4 (1) of Regulation (EU) No 575/201310. Arguably, Article 66 (2) takes into account the contractual provisions that are common in the security deposit business.11

Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, p. 216. For further details see Werlauff, EU-Company Law, p. 272. 8 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 163; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale Recht, 2004, p.111. 9 See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 216; Werlauff, EUCompany Law, p. 272. 10 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, p. 1–337. 11 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 163. 6

7

Jan P. Brosius

321

Art 67 Subscription, acquisition or holding of shares

VI. Minimum Provision 8

Article 66 constitutes a minimum provision. Member States may also provide for stricter rules.

VII. Direct Application 9

Article 66 (1) is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64). The same does not apply for Article 66 (2).

Article 67 Subscription, acquisition or holding of shares by a company in which the public limited liability company holds a majority of the voting rights or on which it can exercise a dominant influence 1. The subscription, acquisition or holding of shares in a public limited liability company by another company of a type listed in Annex II in which the public limited liability company directly or indirectly holds a majority of the voting rights or on which it can directly or indirectly exercise a dominant influence shall be regarded as having been effected by the public limited liability company itself. The first subparagraph shall also apply where the other company is governed by the law of a third country and has a legal form comparable to those listed in Annex II. However, where the public limited liability company holds a majority of the voting rights indirectly or can exercise a dominant influence indirectly, Member States need not apply the first and the second subparagraphs if they provide for the suspension of the voting rights attached to the shares in the public limited liability company held by the other company. 2. In the absence of coordination of national legislation on groups of companies, Member States may: (a) define the cases in which a public limited liability company shall be regarded as being able to exercise a dominant influence on another company; if a Member State exercises this option, its national law shall in any event provide that a dominant influence can be exercised if a public limited liability company: (i) has the right to appoint or dismiss a majority of the members of the administrative organ, of the management organ or of the supervisory organ, and is at the same time a shareholder or member of the other company; or (ii) is a shareholder or member of the other company and has sole control of a majority of the voting rights of its shareholders or members under an agreement concluded with other shareholders or members of that company. Member States shall not be obliged to make provision for any cases other than those referred to in points (i) and (ii) of the first subparagraph; (b) define the cases in which a public limited liability company shall be regarded as indirectly holding voting rights or as able indirectly to exercise a dominant influence; (c) specify the circumstances in which a public limited liability company shall be regarded as holding voting rights.

322

Jan P. Brosius

Art 67

TITLE I GENERAL PROVISIONS

3. Member States need not apply the first and second subparagraphs of paragraph 1 where the subscription, acquisition or holding is effected on behalf of a person other than the person subscribing, acquiring or holding the shares, who is neither the public limited liability company referred to in paragraph 1 nor another company in which the public limited liability company directly or indirectly holds a majority of the voting rights or on which it can directly or indirectly exercise a dominant influence. 4. Member States need not apply the first and second subparagraphs of paragraph 1 where the subscription, acquisition or holding is effected by the other company in its capacity and in the context of its activities as a professional dealer in securities, provided that it is a member of a stock exchange situated or operating within a Member State, or is approved or supervised by an authority of a Member State competent to supervise professional dealers in securities which, within the meaning of this Directive, may include credit institutions. 5. Member States need not apply the first and second subparagraphs of paragraph 1 where shares in a public limited liability company held by another company were acquired before the relationship between the two companies corresponded to the criteria laid down in paragraph 1. However, the voting rights attached to those shares shall be suspended and the shares shall be taken into account when it is determined whether the condition laid down in Article 60(1)(b) is fulfilled. 6. Member States need not apply Article 61(2) or (3) or Article 62 where shares in a public limited liability company are acquired by another company on condition that they provide for: (a) the suspension of the voting rights attached to the shares in the public limited liability company held by the other company; and (b) the members of the administrative or the management organ of the public limited liability company to be obliged to buy back from the other company the shares referred to in Article 61(2) and (3) and Article 62 at the price at which the other company acquired them; this sanction shall be inapplicable only where the members of the administrative or the management organ of the public limited liability company prove that that company played no part whatsoever in the subscription for or acquisition of the shares in question. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 4 6 15 21 22

I. Overview Article 67 aligns the subscription, acquisition and holding of own shares by the com- 1 pany itself with the subscription, acquisition and holding of own shares by a subsidiary and thereby covers one of the most relevant and arguably one of the most evident methods of circumvention of the rules on the acquisition of own shares. However, it was not until November 1992 that Article 67 was implemented into the Second Directive. Arguably, the provision was added when it was realised, that the implementation of

Jan P. Brosius

323

Art 67 Subscription, acquisition or holding of shares a directive on groups failed (cf. → mn. 3; → Intro Art 44 mn. 44). As stipulated in Articles 59, 60 and 63 and eventually also pointed out in Recital 41 of the Directive’s preamble the restrictions on a company’s subscription and acquisition of its own shares apply not only to acquisitions made by the company itself but also to those made by a middleman or nominee, i.e. by any person acting in his own name but on the company's behalf.1 Article 67 complements this protection against circumvention by extending the scope of such provisions to the subscription, acquisition and holding of own shares by a subsidiary of the respective company. Article 67, however, does not require that the subsidiary acts on behalf of the company. Regardless of the motivation or any subjective elements, any subscription, acquisition and holding of own shares by a subsidiary is permitted only if the respective transaction would be legal if made by the company itself.

II. History Article 67 derives from the Second Directive2 (cf. Art 28 of Directive 2012/30/EU). It was implemented into the Second Directive by Directive 92/101/EC. 3 Initially, the Second Directive did not provide for a respective regulation. However, in its first proposal for a Second Directive the Commission expressly pointed out that it was aware of the fact that companies might circumvent the provisions on the acquisition of own shares by using subsidiaries or other affiliated companies. It was also aware of the necessity to regulate these cases. Nevertheless, the Commission was of the opinion that such regulation could only be implemented within the framework of a directive on groups.4 3 It was not until the European legislature finally came to the conclusion that the efforts to adopt a directive on groups had – at least for the moment – failed that Directive 92/1901/EC was adopted and the Second Directive amended accordingly.5 Such delay has been frequently criticised.6 As pointed out by the Economic and Social Committee, the Second Directive had left a loophole by which companies were able to make use of their subsidiaries to acquire their own shares in order to be able to make use of the votes attaching to the shares.7 2

1 Formerly Recital 6 of Directive 2012/30/EU as adopted in 1992 in Recital 1 of Council Directive 92/101/EEC. 2 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 3 Council Directive 92/101/EEC of 23 November 1992 amending Directive 77/91/EEC on the formation of public limited- liability companies and the maintenance and alteration of their capital, OJ L 347, 28.11.1992, p. 64–66. 4 First Proposal, OJ No C 48, 24.04.1970, p. 13; see also Wooldrige, Company Law in the UK and the EC, p. 31. 5 Cf. Schwarz, Europäisches Gesellschaftsrecht, para. 611. 6 See for example Wooldridge, Company Law in the UK and the EC, p. 31: “salami tactics of harmonization”. 7 Opinion of the Economic and Social Committee on the proposal for a Council Directive amending Directive 77/91/EEC on the formation of public limited liability companies and the maintenance and alteration of their capital (91/C 269/06), OJ No C 269, 14.10.91, p. 21.

324

Jan P. Brosius

Art 67

TITLE I GENERAL PROVISIONS

III. Purpose Article 67 aims to prevent the circumvention of the provisions on the acquisition 4 of own shares.8 In its proposal for Directive 92/101/EEC the Commission pointed out that the purpose of the amendment was to extend the scope of the provisions on the acquisition of own shares so as to include the acquisition of shares in a parent company by a subsidiary.9 Particularly in such a situation there was a risk of unlawful repayments of contributions.10 Therefore, the acquisition of own shares by a company’s subsidiary would have to be viewed the same way as if it was an acquisition of shares by the parent company itself and, hence, would have to fulfil the same conditions as the acquisition by the company itself.11 The European legislature put special emphasis on this aspect by stressing in Recital 42 5 of the Directive’ preamble12 that “in order to prevent a public limited liability company from using another company in which it holds a majority of the voting rights or on which it can exercise a dominant influence to make such acquisitions without complying with the restrictions imposed in that respect, the arrangements governing a company's acquisition of its own shares should be extended to cover the most important and most frequent cases of the acquisition of shares by such other companies. Those arrangements should be extended to cover subscription for shares in the public limited liability company.”

IV. Scope Article 67 (1) stipulates that any subscription, acquisition or holding of shares in 6 a company falling into the scope of the Directive (cf. → Art 2 mn. 4) by one of its subsidiaries must be regarded as having been effected by the company itself and thus has to meet the same requirements. However, the scope of Article 67 is not unlimited. First, Article 67 (1) requires that 7 the shares are acquired by “another company” within the meaning of Annex II (formerly Article 1 of Directive 2009/101/EC), i.e., simply put, a corporation with limited liability, or, as stated in the second subparagraph of Article 67 (1), a comparable type of company that is governed by the laws of a third country. Just to name a few, the corporation and, arguably, the limited liability company as provided for under US law, the Aktiengesellschaft and Gesellschaft mit beschränkter Haftung as provided for under Swiss law, 13 the sociedade limitada and the sociedade anônima as provided for under Brazilian law and the limited liability company as provided for under Chinese law fall within the scope of Article 67. Since 1 January 2021 this also applies to the public company limited by shares and public company limited by guarantee and having a share capital under the laws of the United Kingdom. Such extension of scope was made to more effectively prevent the circumvention of the rules laid down in the Second Directive.14 Further, Article 67 requires that the company is a shareholder in such “other com- 8 pany”. However, the fact that the company is holding a proportion of the shares in the other company is not sufficient to fulfil the requirements stipulated in Article 67. Cf. Recital 4 of the preamble of Directive 92/101/EEC. COM (90) 631 final – syn 317 of 13 December 1990, p. 5. 10 Kindl, ZEuP 1994, 77, 85 et seq. 11 COM (90) 631 final – syn 317 of 13 December 1990, p. 5. 12 Formerly Recital 7 of Directive 2012/30/EU. 13 Cf. Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 191. 8

9

Jan P. Brosius

325

Art 67 Subscription, acquisition or holding of shares

9

10

11

12

13

Neither is a mere reciprocal shareholding.15 Article 67 rather requires the other company to be a subsidiary. The Commission argued that the other company shall be deemed to be a subsidiary if the company holds a majority of the voting rights in such other company or if it has the right to appoint or remove a majority of the directors or the right to control by itself a majority of the voting rights pursuant to an agreement or a control clause in the subsidiary's statutes.16 This approach is fully reflected. Article 67 (1) requires that the company either directly or indirectly holds a majority of the voting rights in the subsidiary or is able to directly or indirectly exercise a dominant influence on the subsidiary. This covers not only sub-subsidiaries but also, for instance, trust/fiduciary structures. Such requirements need clarification as Article 67 (2) expressly addresses. It stipulates that in the absence of a coordination of national legislation on groups of companies, Member States may define the elements of control relevant under Article 67. The notion of “may define” is poorly chosen; granting Member States an option was the systematically false approach bearing the risk of creating significant legal uncertainty. The European legislature should have either made clear that the relevant definitions are exclusively subject to national laws as long as the legislation on groups is not harmonised or, alternatively, that they have to be interpreted exclusively in the light of EU law. The principle of effectiveness requires a clear and explicit rule on competence. It must also be clear whether national courts or the Court of Justice have the competence to interpret and define the meaning of the relevant terms. In some cases it might be highly questionable whether or not a Member State made use of the possibility to define the relevant terms on a national level. In particular, this applies where a Member State’s judicial law provides for general and, thus, possibly applicable rules. However, the delegation to provide for definitions on a national level expires as soon as a coordination of national legislation on groups of companies has been achieved on a European level (cf. → Intro Art 44 mn. 44 et seq.). The adoption of a directive on groups, though, is not to be expected in the near future. First, it is to be noted that Article 67 does not refer to the majority of the company’s shares or a proportion of legal capital represented by them. Also, an entitlement to profits or, respectively, dividend right are of no relevance. Article 67 rather refers to voting rights. This is of particular importance where the subsidiary has issued different classes of shares and, therefore, a portion of its shares likely does not carry any voting rights. Also, this might be the case where the subsidiary itself is holding its own shares. Apart from that, Member States are free to specify the circumstances in which a company shall be regarded as holding voting rights and to define the notion of indirectly holding voting rights. Further, Member States may define the meaning of being able to exercise a dominant influence on another company, provided, however, as stipulated in point (a) of Article 67 (2), they provide that dominant influence can be exercised if the company is a shareholder or member of the other company and either (i) has the right to appoint or dismiss a majority of the members of the administrative organ, of the management organ or of the supervisory organ, or (ii) has sole control of a majority of the voting 14 See Recital 8 according to which companies governed by Directive 2009/101/EC and companies governed by the laws of third countries and having comparable legal forms should also be covered by Article 67 in order to prevent the circumvention of the Second Directive; see also Kindl, ZEuP 1994, 77, 88. 15 Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 191. 16 COM (90) 631 final – syn 317 of 13 December 1990, p. 5.

326

Jan P. Brosius

Art 67

TITLE I GENERAL PROVISIONS

rights of the other company’s shareholders or members under an agreement concluded with other shareholders or members of that company (e.g. voting agreements; voting trust agreements). Member States may, but are not obliged to provide for further cases of dominant influence. Moreover, Member States are free to define the cases in which the company shall be regarded as being able to indirectly to exercise a dominant influence. It has to be taken into account, however, that Article 67 does not require that the company actually does exercise such dominant influence on its subsidiary. The provision only requires that the company is capable of doing so.17 In point (a) of Article 67 (2) the European legislature intended to set a framework for the definition of dominant influence without predetermining the harmonisation of the rules on groups of companies.18 Where Member States refrain from an individual national definition of the relevant 14 terms they have to be interpreted and defined in the light of European law aiming to establish a common understanding. It is, therefore, necessary to take account of related provisions or directives which use the same terminology in the same context. The Commission argued that the requirements stipulated in Article 67 were based on criteria applied by other EU legal instruments, namely Directive 83/349/EEC 19, which has been repealed and replaced by Directive 2013/34/EU20, and Directive 88/627/EEC21, which has been repealed and replaced by Directive 2001/34/EC22.23 The notion of “voting rights” and the “holding” of voting rights is frequently used in the Seventh Directive 83/349/EEC and its successor Directive 2013/34/EU. 24 Both directives also use the notion of “dominant influence”.25 In Article 34 (5), the Seventh Directive also referred to the indirect holding of capital in a company; so do Articles 22 (3) to (5), 28 (2) and 29 (2) of Directive 2013/34/EU. Article 7 of Directive 88/627/EEC and Article 92 of its successor Directive 2001/34/EC in great detail describe circumstances that are to be regarded as voting rights held by a person or entity.

V. Exemptions Article 67 also provides for a number of cases in which Member States may, but 15 are not obliged to, provide for certain exemptions from the rules stipulated in its first paragraph.26 17 Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 191. 18 Kindl, ZEuP 1194, 77, 90. 19 Directive 83/349/EEC of 13 June 1983: Seventh Council directive of 13 June 1983 based on the Article 54 (3 ) (g) of the Treaty on consolidated accounts (83/349/EEC), OJ L 193, 18.7.1983, p. 1–17. 20 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182, 29.6.2013, p. 19–76. 21 Council Directive 88/627/EEC of 12 December 1988 on the information to be published when a major holding in a listed company is acquired or disposed of, OJ No L 348, 17.12.1988, p. 62–65 (repealed by Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities, OJ No L 184, 6.7.2001, p. 1–66). 22 Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities, OJ L 184, 6.7.2001, p. 1–66. 23 COM (90) 631 final – syn 317 of 13 December 1990, p. 5. 24 In particular see Article 1 (1) (d) (bb) of the Seventh Directive 83/349/EEC. 25 Cf. point (c) of Article 1(1) of the Seventh Directive 83/349/EEC and point (c) of Article 22 (1) and point (a) of Article 22 (2) of Directive 2013/34/EU.

Jan P. Brosius

327

Art 67 Subscription, acquisition or holding of shares Pursuant to the third subparagraph of Article 67 (1) Member States do not need to apply the first two subparagraphs of Article 67 (1) where a company has only indirect control over the other company. However, in this case Member States are required to provide for the suspension of the voting rights attached to the shares in the company held by the subsidiary. Insofar, the legal notion and rationale of point (a) of Article 63 (1) applies accordingly (cf. → Art 63 mn. 3). Such notion is also reflected in Recital 44 of the preamble of the Directive27 pursuant to which it would appear to be justified to relax the provisions applicable where the relationship between the company and another company is only indirect by providing for the suspension of voting rights as a minimum measure for the purpose of achieving the aims of the Directive. 17 Pursuant to Article 67 (3) Member States do not need apply the first two subparagraphs of Article 67 (1) in the event of an indirect representation of a third beneficiary, i.e. where the subsidiary subscribes, acquires or holds the shares in the company on behalf of a person other than the company itself. Consistently, this beneficiary itself may not be directly or indirectly controlled by the company, i.e. the company may not hold a majority of the voting rights or be able to exercise a dominant influence on the beneficiary. It is argued, that in this case - from an economic standpoint – the need for capital protection is not justified and there are no respective risks attached. 28 18 Pursuant to Article 67 (4) Member States do not need to apply the first two subparagraphs of Article 67 (1) where the subscription, acquisition or holding is effected by a subsidiary in its capacity and in the context of its activities as a professional dealer in securities. However, the provision requires that the subsidiary is a member of a stock exchange situated or operating within a Member State, or is approved or supervised by an authority of a Member State competent to supervise professional dealers in securities which may include credit institutions. For an EU law definition of credit institutions see point (1) of Article 4 (1) of Regulation (EU) No 575/2013 29 and point (1) of Article 4 of Directive 2006/48/EC30. Pursuant to Recital 45 of the preamble of the Directive31 the European legislature considered it justifiable to exempt cases in which the specific nature of a professional activity rules out the possibility that the objectives of the Second Directive may be endangered.32 19 Pursuant to Article 67 (5) Member States do not need to apply the first two subparagraphs of Article 67 (1) where shares in the company held by the controlled company had been acquired before such control was established. Consequently, in this case Member States are required to provide for the suspension of voting rights attached to those shares in the company held by its, meanwhile, subsidiary. Insofar, the legal notion and rationale of point (a) of Article 63 (1) applies accordingly. Further, Article 67 (5) requires that shares held pursuant to the exemption it provides for have to be taken into account when it is determined pursuant to point (a) of the second subparagraph of Article 60 16

26 See also Kindl, ZEuP 1994, 77, 91 et seq.; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 219. 27 Formerly the ninth Recital of Directive 2013/30/EU; also see Recital 5 of directive 92/101/EEC. 28 See also Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 168; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 219. 29 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, p. 1–337. 30 Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions, OJ L 177, 30.6.2006, p. 1–200, repealed. 31 Formerly Recital 10 of Directive 2013/30/EU; also see Recital 7 of directive 92/101/EEC. 32 Also see Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 20 para. 152; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 219.

328

Jan P. Brosius

Art 67

TITLE I GENERAL PROVISIONS

(1) whether an acquisition of own shares exceeds a certain amount of the subscribed capital as determined by the relevant Member State. The reference to point (b) of Article 60 (1) made in Article 67 (5) is incorrect. The provision has not been amended according to the amendments made to Article 60 by Directive 2006/68/EC. Correctly, reference should be made to point (a) of the second subparagraph of Article 60 (1). While Directive 2006/68/EC altered the structure of Article 60 it did not provide for an update of any cross-references in Article 67 and there is no indication that this happened on purpose. The subsequent transcription error was made in Directive 2012/30/EU and has been transferred without correction to the Directive. Article 67 (5) has to be read accordingly. However, from a teleological point of view, the second subparagraph of Article 67 (5) should apply mutatis mutandis to point (b) of the first subparagraph of Article 60 (1). Pursuant to Article 67 (6) Member States do not need to provide for the legal 20 consequences stipulated in Article 61 (2) and (3) and Article 62, provided, however, they require that all voting rights attached to such shares are suspended and that the members of the administrative or the management organ of the company are obliged to buy back such shares that would usually have to be disposed of or cancelled pursuant to Article 61 (2) or (3) or Article 62 from the subsidiary at the price at which it has acquired them. However, this sanction does not apply where the members of the administrative or the management organ of the company prove that that company played no part whatsoever in the subscription for or acquisition of the shares in question. The Economic and Social Committee rightly pointed out that “it is possible that the interests of minority shareholders in subsidiaries could be adversely affected by application of rules, for instance where a partly owned subsidiary already holds shares in the company that controls it, the enforced cancellation of shares (…) would penalize minority shareholders”.33 It is argued that the Article 67 (6) is based on the laws of the Netherlands. 34

VI. Minimum Provision Article 67 provides for minimum provisions. Member States are permitted to provide 21 for stricter regulations.35 Of course, as the Commission pointed out, Article 67 does not affect the legal nature of the provisions in Articles 21 to 27.36

VII. Direct Application Article 67 is not sufficiently precise to fulfil the requirements of a direct application 22 (cf. → Intro Art 40 mn. 64).

33 Opinion of the Economic and Social Committee on the proposal for a Council Directive amending Directive 77/91/EEC on the formation of public limited liability companies and the maintenance and alteration of their capital (91/C 269/06), OJ No C 269/21, 14.10.91, p. 22. 34 Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Bd. 1 1994, p. 119, 259; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 20 para. 153. 35 See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 220. 36 COM (90) 631 final – syn 317 of 13 December 1990, p. 5.

Jan P. Brosius

329

Art 68 Decision by the general meeting on the increase of capital

Section 5 Rules for the increase and reduction of capital Article 68 Decision by the general meeting on the increase of capital 1. Any increase in capital shall be decided upon by the general meeting. Both that decision and the increase in the subscribed capital shall be published in the manner laid down by the laws of each Member State, in accordance with Article 16. 2. Nevertheless, the statutes or instrument of incorporation or the general meeting, the decision of which is to be published in accordance with the rules referred to in paragraph 1, may authorise an increase in the subscribed capital up to a maximum amount which they shall fix with due regard for any maximum amount provided for by law. Where appropriate, the increase in the subscribed capital shall be decided on within the limits of the amount fixed by the company body empowered to do so. The power of such body in this respect shall be for a maximum period of five years and may be renewed one or more times by the general meeting, each time for a period not exceeding five years. 3. Where there are several classes of shares, the decision by the general meeting concerning the increase in capital referred to in paragraph 1 or the authorisation to increase the capital referred to in paragraph 2, shall be subject to a separate vote at least for each class of shareholder whose rights are affected by the transaction. 4. This Article shall apply to the issue of all securities which are convertible into shares or which carry the right to subscribe for shares, but not to the conversion of such securities, nor to the exercise of the right to subscribe. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Competence of General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Several Classes of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Abuse of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Authorised Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Convertible Securities and Option Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Exceptions and Derogations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII. Direct Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 13 16 20 27 32 34 35 36

I. Overview 1

Article 68 grants the general meeting the exclusive competence to decide on any increase in capital. Despite for the derogations explicitly stipulated in the second paragraph, dealing with the concept of authorised capital, and Article 84 this competence is absolute.

II. Historical Background 2

Article 68 derives from the Second Directive1 (cf. Art 29 of Directive 2012/30/EU). It has been introduced in the initial version of the Second Directive adopted in 1976. Its

330

Jan P. Brosius

Art 68

TITLE I GENERAL PROVISIONS

material content has not been amended since. It is argued that the provisions laid down in Article 68 (2) were influenced by the German provisions on “genehmigtes Kapital”. 2

III. Purpose The provisions serve the purpose of shareholder protection. Insofar, the Commis- 3 sion marked the competence of the general meeting as an “indispensable guarantee”. 3

IV. Scope Except for the derogations expressly stipulated in the second paragraph and Article 4 84 the principle laid down in the first paragraph is – or at least has been (cf. → mn. 7) – absolute, i.e. the general meeting always and necessarily decides on any increase in capital. Accordingly, as the Court of Justice made clear, the provision must be interpreted as precluding Member States without exception from implementing any rules incompatible with such principle, even if those rules are meant to cover only exceptional situations. 4 A different approach would impair the binding nature5 and uniform application of European law6 and compromise the directive’s objective to protect shareholders.7 Therefore, the derogations provided in the second paragraph and Article 84 are exhaustive.8 The Court of Justice stated that, particularly, in crisis situations where the company 5 is experiencing financial difficulties the general meeting (compulsorily) maintains the competence to decide as provided in the first paragraph, even if such difficulties are serious and regardless of their possible consequences.9 It pointed out that this also applies where a derogation under national law aims to ensure the survival of the 1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 2 Wooldridge, Company Law in the UK and the EC, p. 28. 3 First Proposal, OJ No C 48, 24.04.1970, p. 14. 4 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 31; Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 33. 5 Cf. Article 288 (3) of the treaty of the functioning of the European Union. 6 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 31; see also to this effect, the judgment in Case C-222/84 Johnston v Chief Constable of the Royal Ulster Constabulary [1986] ECR 1651, para. 26. 7 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 33; also see Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 39. 8 Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 34. 9 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 28; Case C-367/96 Alexandros Refalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para 24; also see Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 40.

Jan P. Brosius

331

Art 68 Decision by the general meeting on the increase of capital company and therefore is of particular economic and social importance for society as a whole.10 Allowing Member States to derogate from Article 68 in situations of financial distress would be contrary to the regulatory content of the Directive as a whole and its regulatory purpose to protect shareholders. In particular, as the Court of Justice made clear, it would not comply with the principle laid down in Article 58 pursuant to which a general meeting of shareholders must be called in the case of a serious loss of the subscribed capital to consider whether the company should be wound up or any other measures ought to be taken.11 Easing the financial situation and the improvement of the economic situation of the company were inherent to any increase in capital and often its predominant motives.12 The scope of a derogation referring to such circumstances would be too far-reaching and unacceptably restrict the powers of the general meeting. This is irrespective of whether shareholders would or would not maintain their pre-emptive rights provided in Article 72.13 6 The applicability of Article 68 (1) is absolute not only in respect of the circumstances of the increase in capital but also in respect of the object or business purpose of the respective company. In particular, Article 68 also applies to banks constituted in the form of public limited liability companies (cf. → Art 44 mn. 16).14 Even though banking legislation does have a lex specialis status and its provisions are dictated by the public interest it does not constitute a closed system unaffected by the Directive. 15 7 However, it should be noticed, that most recently the Court of Justice held that certain exceptional burden-sharing measures involving shareholders or subordinated creditors may be necessary in case of “a serious disturbance of the economy of a Member State and with the objective of preventing a systemic risk and ensuring the stability of the financial system.”16 In the view of the Court of Justice taken in Case C-526/14 in such cases the Directive does not preclude measures relating to share capital being adopted without the approval of the general meeting. The interpretations made by the Court of Justice in the 1990 s referred to above would not contradict that view as those judgements were delivered before the start of the third stage for the implementation of the Economic and Monetary Union, with the introduction of the Euro, the establishment of the Eurosystem and the related amendments to the EU Treaties. The Court of Justice held that “although there is a clear public interest in ensuring throughout the European Union a strong and consistent protection of investors, that interest cannot be held to prevail in all circumstances over the public interest in ensuring the stability of the financial system.”17 8 In Case C-41/15 the Court of Justice confirmed the ruling in Case C-526/14. In a “situation where there is a serious disturbance of the economy and financial system of 10 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 36. 11 Cf. Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 28; Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 35. 12 Also see Case C-367/96 Alexandros Refalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para. 24. 13 Cf. Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 36. 14 Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 18 et seqq. 15 Cf. Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 46 et seqq. 16 Case C-526/14 (Kotnik and others v. Republic of Slovenia) [2016], para. 88. 17 Case C-526/14 (Kotnik and others v. Republic of Slovenia) [2016], para. 91.

332

Jan P. Brosius

Art 68

TITLE I GENERAL PROVISIONS

a Member State” the Court of Justice argues, “the protection conferred by the Second Directive on the shareholders and creditors of a public limited liability company, with respect to its share capital, does not extend” to exceptional measure “taken by the national authorities intended to prevent, by means of an increase in share capital, the failure of a company, which failure would threaten the financial stability of the European Union.”18 It is remarkable that the Court of Justice gives Member States the right to provide for 9 respective derogations irrespective of the provision laid down in Article 84. It concludes that “the fact that, under Article 123 of Directive 2014/59, from 1 January 2016, Articles 29, 34 and 35, and 40 to 42 of Directive 2012/30 [i.e. Articles 68, 73, 74 and 79 to 81 of the Directive] do not apply in the case of use of the resolution mechanisms provided for by Directive 2014/59, does not permit the conclusion that, before that date, derogations of that kind were prohibited.” 19 This view taken by the Court of Justice is highly doubtful and, according to the view advanced here, incorrect. The interpretations made by the Court of Justice in the 1990 s mentioned above have rather been confirmed by the European legislature in Directive 2014/59/EU20 (and again in Directive (EU) 2019/102321 providing for the derogations stated in Article 81 (4)). Only where the Directive expressly provides for the right or the obligation to make derogations, namely in Article 84 (3) and (4), Member States may act accordingly and limit the powers of the general meeting. However, the scope of Article 68 is not unlimited. As said above, Article 84 (3) 10 provides that Member States must ensure that Article 68 (1), (2) and (3) do not apply in the case of use of the resolution tools, powers and mechanisms provided for in Directive 2014/59/EU (cf. → Art 84 mn. 5, 15). As stated in Recital 121 of the preamble of that directive, rules on shareholders’ rights to decide on capital increases may hinder a rapid action by resolution authorities to deal effectively with unsound or failing credit institutions and investment firms. Therefore appropriate derogations from such rules have been provided for, as now stipulated in the third paragraph of Article 84. Further, Article 84 (1) allows Member States to derogate from Article 68 to the extent necessary for the adoption or application of provisions designed to encourage the participation of employees or certain other groups of persons in the capital of undertakings (cf. → Art 84 mn. 8 et seqq.). Also, Article 68 (2), dealing with authorised capital, limits the scope of Article 68 (1) (cf. → mn. 27 et seqq.). However, in this respect it has to be noticed that it is the general meeting who is empowering the management to make use of the authorised capital.22 Most recently, Article 84 (4) has been added to the Directive, pursuant to which Member States are obliged to derogate from the provisions laid down in Article 68 to the extent and for the period that such derogations are necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/1023. 18 Case C-41/15 (Gerard Dowling and others v Minister for Finance (request for a preliminary ruling from the High Court (Irland)) [2016], para. 50. 19 Case C-526/14 (Kotnik and others v. Republic of Slovenia) [2016], para. 93. 20 Directive 2014/59/EU of the European Parliament and the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council. 21 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18–55). 22 See also First Proposal, OJ No C 48, 24.04.1970, p. 14.

Jan P. Brosius

333

Art 68 Decision by the general meeting on the increase of capital Further, rationalisation measures, which fall within the scope of the Directive and Article 6823, are to be distinguished from liquidation matters, in particular in connection with insolvency law or other collective procedures for the satisfaction of creditors’ claims (cf. → Intro Art 44 mn. 39 et seqq.). The Court of Justice stated that “the directive does not preclude the taking of execution measures and, in particular, liquidation measure placing the company under compulsory liquidation in the interests of safeguarding creditors’ rights”24, but “in order to be effective, that safeguard must be secured for members as long as the company continues to exist with its own structures”, i.e. “as long as the company's shareholders and normal bodies have not been divested of their powers”.25 12 The decisive criterion, therefore, is whether or not such measures are intended to put an end to the company's existence. Thus, Article 68 does not preclude liquidation measures placing the company under compulsory administration, but it continues to apply where ordinary reorganisation measures are taken in order to ensure the survival of the company. This is the case even if such measures implicate that shareholders or the company’s management or supervisory organs are temporarily divested of their powers.26 The Court of Justice very distinctly stated that if the specific purpose of the appointment of the temporary administrator is to ensure the survival of the company concerned, it clearly is a reorganisation measure.27 11

V. Competence of General Meeting Pursuant to Article 68 (1) the general meeting has the exclusive competence to decide on any increase in capital. The statutes of the company may not provide for a deviating competence. This follows in particular - argumentum e contrario – from the second paragraph.28 14 Article 68 (1) does not provide for majority requirements. Initially, the Commission proposed a provision that required a decision by the general meeting consistent with the publication and majority requirements of an amendment of the company's articles of association.29 The Commission argued that, except for authorised capital, an increase in capital has to be treated the same way as an amendment of the company's articles.30 This consistency would serve as an indispensable guarantee preserving the purpose of shareholder protection.31 However, this position did not prevail. The Economic and Social Committee was of the opinion that the establishment of majority requirements should rather be left to the then planned Fifth “Structural” Directive32. In the view of 13

23 Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 27, 36. 24 Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 27. 25 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 30; Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 27. 26 Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 57. 27 Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 58. 28 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 174. 29 First Proposal, OJ No C 48, 24.04.1970, p. 20. 30 First Proposal, OJ No C 48, 24.04.1970, p. 14. 31 First Proposal, OJ No C 48, 24.04.1970, p. 14. 32 OJ No C 131, 13.12.1972, p. 49-61; withdrawn by the Commission in 2001, cf. COM (2001) 763 final, p. 22.

334

Jan P. Brosius

Art 68

TITLE I GENERAL PROVISIONS

the Committee it was necessary to ensure that regarding an increase in capital a majority requirement other than a three-fourths majority may be provided for in the statutes. 33 Even though the Commission did not take up the Committee’s proposal at first,34 Article 68 in the version finally adopted did not provide for any majority requirements. It also follows from Article 83, by an argumentum e contrario, that a simple majority is sufficient.35 However, Member States are free to provide for stricter majority requirements. Also note, that a capital increase will in general be accompanied by an amendment of the company's articles of association. Not only the decision of the general meeting but also the increase in the subscribed 15 capital itself has to be published in accordance with Article 16 of the Directive, pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means. (cf. → Art 16 mn. 6 et seq.).

VI. Several Classes of Shares As stated in Article 68 (3), if there are several classes of shares, the decision by the general meeting must be subject to a separate vote at least for each class of shareholders whose rights are affected by the transaction. The Directive does not provide for a definition of classes of shares. In principle, a company issues only one class of shares. These ordinary shares carry one vote per share, are entitled to participate equally in dividends and also beyond carry the same membership rights. Different classes of shares exists where the rights attached to one group of shares differs from those right carried by the other shares in the company. This distinctive feature refers, however, only to membership rights. All shares carrying the same membership rights belong to the same class of shares. Shares carrying different membership rights, however, belong to different classes of shares. On the one hand these are administrative rights and rights of control, for instance voting rights, the right to attend the general meeting or information rights. On the other hand these are profit participation rights. In principle, there is a vast scope for the design of different classes of shares. Typically, this concerns the level of voting rights shareholders receive; certain shares may also carry a preferential right to a fixed dividend. The company may also issue redeemable shares, i.e. shares that can be redeemed by the company at their nominal value (with or without a premium) at a specific date in the future or at the management’s discretion. So called deferred shares commonly carry only a very few rights. However, often there are national company law barriers and companies generally do not have a great deal of creative scope in the legal structuring of their shares. As the Commission stated in its first proposal, Article 68 (3) is based on the principle of equal treatment.36 The necessity of a separate vote for each class of shares results from the fact that a capital increase may as well lead to a dilution of classes of shares. Still, from the wording of the provision it remains unclear under which circumstances the rights of a shareholder are “affected by the transaction”.37 It can be assumed that it OJ No C 88, 6.9.1971, p. 5. COM (72) 1310 p. 15. 35 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 75; Nobel, Transnationales und Europäisches Aktienrecht, chap. 2 para. 110, see also Grundmann, Europäisches Gesellschaftsrecht, para. 353. 36 First Proposal, OJ No C 48, 24.04.1970, p. 14. 33 34

Jan P. Brosius

335

16

17

18

19

Art 68 Decision by the general meeting on the increase of capital is irrelevant in this context, whether a class of shares carries a right to vote or not. 38 In principle, Article 68 (3) should be interpreted broadly.

VII. Abuse of Law A question that has received much attention from the Court of Justice and legal scholars is whether and when the exercise of the rights arising under Article 68 may be deemed abusive. The criteria for such abuse of EU law is – in principle – determined by national law.39 The Court of Justice repeatedly made clear that EU Law cannot be relied on for abusive or fraudulent ends.40 21 However, the Court of Justice has defined the nature and notions of abuse as the shareholder’s attempt “to derive, to the detriment of the company, an improper advantage, manifestly contrary to the objective of that provision, which is to ensure, for the benefit of shareholders, that a decision increasing the capital of the company and, consequently, affecting the share of equity held by them, is not taken without their participation in the exercise of the decision-making powers of the company.”41 The Court of Justice also reminded that this conclusion has to be made on the basis of objective evidence.42 22 Apart from that, the application of national law must not prejudice the full effect and uniform application of EU law in all Member States.43 In particular, it may not alter the scope of that provision or compromise the objectives pursued by it.44 This requires to assess such conduct in the light of the objectives pursued by those provisions.45 23 Although it is for the national courts to apply a provision of its national law to determine whether the right deriving from Article 68 is being abused, the Court of Justice made clear that it is of the opinion that it has jurisdiction to provide Member 20

37 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 181, Edwards, EC Company Law, p. 78; see also Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 200; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 268 et seq.; Werlauff, EU-Company Law, p. 235. 38 Brause, Stimmrechtslose Vorzugsaktien bei Umwandlungen, p. 60 et seqq.; Grundmann, Europäisches Gesellschaftsrecht, para. 354. 39 Case C-367/96 Alexandros Kefalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para 21; Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 34, 44. 40 Case C-367/96 Alexandros Kefalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para 20, Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 33; also see Case C-33/74 Van Binsbergen v Bedrijfsvereniging Metaalnijverheid [1974] ECR 1299, para. 13, and Case C-23/93 TV 10 v Commissariaat voor de Media [1994] ECR 1-4795, para. 21; Case C-229/83 Leclerc and Others v 'Au Blé Vert' and Others [1985] ECR 1, para. 27; Case C-39/86 Lair v Universität Hannover [1988] ECR 3161, para. 43; Case C-8/92 General Milk Products v Hauptzollamt Hamburg-Jonas [1993] ECR I-779, para. 21; Case C-206/94 Brennet v Paletta [1996] ECR 1-2357, para. 24. 41 Case C-367/96 Alexandros Kefalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para. 28; also see Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 33. 42 Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 34. 43 Case C-367/96 Alexandros Kefalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para. 22; Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 68. 44 Case C-367/96 Alexandros Kefalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para. 22. 45 Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 3; Case C-206/94 Paletta [1996] ECR I-2357, para. 25.

336

Jan P. Brosius

Art 68

TITLE I GENERAL PROVISIONS

States and their national courts with “guidance on interpretation” to enable them to assess the compatibility with the aforementioned criteria.46 As, for instance, the competence of the general meeting provided in the first para- 24 graph also applies to situations where the company is experiencing serious financial difficulties47, the Court of Justice has ruled that contesting an increase in capital cannot be characterised as being abusive even if such capital increase would resolve financial difficulties threatening the existence of the respective company. 48 Any other conclusion would be “tantamount to a declaration that the mere exercise of the right arising from that provision is improper” and shareholders could never rely on their rights.49 Similarly, a shareholder is not abusing his or her rights only because a company is subject to reorganisation measures, or because he or she has benefited from the reorganisation of the company.50 Further, contesting an increase in capital pursuant to the first paragraph while not 25 exercising the pre-emptive right pursuant to Article 72 (1) cannot be deemed to be abusive.51 A shareholder would be obliged to willingness to assist in the implementation of a decision he or she – at the same time – has an unconditional right to contest pursuant to Article 68 (1).52 Further, the Court of Justice ruled that a shareholder does not act abusive if he or she has asked for the company to be placed under the scheme applicable to companies in serious financial difficulties.53 Moreover, a shareholder does not act abusive if he or she has allowed a certain period of time to elapse before bringing his or her action, as long as such proceedings are instituted within the limitation period provided for under national law for such actions.54 Also, the absence of a legitimate interest in invoking a legal provision does not constitute a misuse or abuse of law. However the Court of Justice stated that EU law does not preclude national law from 26 deeming an action abusive if the shareholder has chosen a remedy that will cause such serious damage to the legitimate interests of others, in particular bona fide third parties, that it appears manifestly disproportionate.55

46 Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 35. 47 See above under → mn. 5. 48 Case C-367/96 Alexandros Kefalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para. 23 et seqq., 29. 49 Case C-367/96 Alexandros Kefalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para. 24 et seq. 50 Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 36; Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 70. 51 Case C-367/96 Alexandros Kefalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para. 26; also see Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 36. 52 Case C-367/96 Alexandros Kefalas and Others v Elliniko Dimosio (Greek State) [1998] ECR I-1347, para. 27, 29. 53 Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 36, 44; see also Opinion of the Advocate General Saggio delivered on 28 October 1999, Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I-1707, points 27 et seqq. 54 Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 39. 55 Case C-373/97 Dionisios Diamantis v Elliniko Dimosio (Greek State) and Others [2000] I 1723 para. 40, 43 et seq.

Jan P. Brosius

337

Art 68 Decision by the general meeting on the increase of capital

VIII. Authorised Capital 27

28

29

30

31

Pursuant to Article 68 (2) either the statutes or, where applicable, the instrument of incorporation or the general meeting may authorise an increase in capital up to a certain amount. The maximum amount the statutes or the general meeting may provide for are to be determined by the Member States. This concept of “authorised capital” is very different from the concept of “authorised capital” that had been provided for under the company laws of the UK, Ireland and the Netherlands. The Directive rather followed a concept that is much closer to its German and French predecessors.56 The authorisation may only be temporary; it has to be limited in time to a maximum period of five years. However, it may be renewed one or more times by the general meeting, again each time for a maximum period of five years. Member States may provide for a shorter maximum period and may abstain from the possibility of a renewal.57 The Directive does not expressly determine when such period begins. There is a controversy as to whether the period begins with the resolution or whether it is to the discretion of the Member States to set another point of reference. 58 The first appears to be true. If the authorised capital is based on the decision of the general meeting such decision must be published in accordance with the rules referred to in the first paragraph (see → mn. 15, regarding majority requirements see → mn. 14). Within the limits set by the statutes or the general meeting, the company body empowered to do so, i.e. frequently the management body, shall decide, where appropriate, to execute the increase in capital. It is to the discretion of the management whether or not it uses the authority given.

IX. Convertible Securities and Option Bonds Article 68 (4) complements Article 68 (1) to (3) by stipulating that the provisions laid down in the first three paragraphs must apply to the issue of all securities which are convertible into shares or which carry the right to subscribe for shares. However, this does not apply to the conversion of such securities, or to the exercise of the right to subscribe. The Commission pointed out that it was obvious that the general meeting is responsible for the decision regarding the issue of convertibles and subscription rights, as much as it was obvious that any conversion, i.e. the mere practical implementation, does not require another decision of the general meeting.59 33 It is argued that the provision derives from Belgian Law.60 The Commission acknowledged that this provision somewhat prejudices a harmonisation of the field of securities and securities markets. 61 As these topics are directly and materially related, the inclusion of a respective provision appears appropriate. 32

Schmitthoff, 15 CMLR (1978), 43, 48. Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 77; Grundmann, Europäisches Gesellschaftsrecht, para. 355; Schwarz, Europäisches Gesellschaftsrecht, para. 619. 58 See Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 185; Hirte, in: Hirte/Mülbert/Roth (eds) AktG § 202 para. 42, 145. 59 First Proposal, OJ No C 48, 24.04.1970, p. 14. 60 Edward, EC Company Law, p. 79; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 187. 61 First Proposal, OJ No C 48, 24.04.1970, p. 14. 56

57

338

Jan P. Brosius

Art 69

TITLE I GENERAL PROVISIONS

X. Exceptions and Derogations Article 68 (2) (authorised capital, cf. → mn. 27 et seqq.) and Article 84 (1) (employee 34 participation, cf. → mn. 10, Article 84 mn. 8 et seqq.) grant Member States the right and Article 84 (3) as well as Article (84) (4) oblige Member States to make certain derogations from the principle laid down in Article 68 (1) (cf. → mn. 10).

XI. Minimum Provision As the Court of Justice made clear, Member States may not derogate from the provi- 35 sions stipulated in Article 68 in any circumstances, if not expressly allowed for under the Directive (cf. → mn. 4 et seqq; however see Case C-526/14 → mn. 7). 62 Member States may, however, provide for stricter rules, e.g. stricter majority requirements. Insofar, Article 68 provides a minimum level of protection.63 Member States may also abstain from allowing the concept of authorised capital as stipulated in the second paragraph.64

XII. Direct Effect Article 68 (1), (3) and (4) have direct effect and may be relied upon by individuals 36 against the public authorities before the national courts.65 These provisions are unconditional and sufficiently precise.66 The Court of Justice pointed out that Article 68 (1) is “clearly and precisely worded” and provides for an unconditional general principle.67 Its unconditional nature is not affected by the option to derogate laid down in the second paragraph and in the first paragraph of Article 84. These derogations are precisely defined and strictly confined to the very limited cases provided for. The provision does not allow Member States to alter the provisions or opt for a different regime. There is no scope for exemptions other than those expressly stipulated.68

Article 69 Paying up shares issued for consideration Shares issued for consideration, in the course of an increase in subscribed capital, shall be paid up to at least 25 % of their nominal value or, in the absence of a nominal value, of their accountable par. Where provision is made for an issue premium, it shall be paid in full.

62 Cf. Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 27. 63 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 42. 64 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6, para. 77; Schwarz, Europäisches Gesellschaftsrecht, para. 619. 65 Cf. Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 38. 66 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 17; also see. 67 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 19. 68 Cf. Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 20 et seq.

Jan P. Brosius

339

Art 69 Paying up shares issued for consideration I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. 25 % of Their Nominal Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Derogations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 4 5 6 7

I. Overview 1

Article 69 stipulates the relevant time of payment of a contribution in the course of a capital increase and corresponds to the provision laid down in Article 48 (1). Different from the requirements laid down in Article 48, in the course of an increase in capital an issue premium must be paid in in full.1 Article 69 is supplemented by Article 70 stipulating special requirements for considerations in kind.

II. Historical Background Article 69 derives from the Second Directive2 (cf. Art 30 of Directive 2012/30/EU). It was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976. Its material content has not been amended since. 3 The Commission initially proposed for the general requirement that in the course of a capital increase all considerations for shares already issued must be paid up before the capital increase may become effective, however, allowing Member States to provide for certain derogations.3 The company was supposed to demand outstanding contributions before asking its shareholder for further equity financing. Also, in the view of the Commission such requirement would increase creditor protection.4 The Economic and Social Committee, however, opposed that proposal.5 Even though the Commission did not take up the Committee’s proposal at first,6 Article 69 was finally adopted without such requirements. 2

III. 25 % of Their Nominal Value 4

In the course of a capital increase, any consideration must be paid up to at least 25 % of nominal value of the issued shares or, in the absence of a nominal value, of their accountable par. It was only logical that the same requirements that apply to the formation of the company also apply to a capital increase.7 In this respect, the comments on Article Edwards, EC Company Law, p. 83, Habersack/Verse, Europäisches Gesellschaftsrecht § 6 para. 79. Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 3 First Proposal, OJ No C 48, 24.04.1970, p. 20. 4 First Proposal, OJ No C 48, 24.04.1970, p. 13 et seq. 5 OJ No C 88, 6.9.1971, p. 4. 6 COM (72) 1310 p. 15. 1

2

340

Jan P. Brosius

Art 70

TITLE I GENERAL PROVISIONS

48 apply accordingly (→ Art 48 mn. 18 et seq.). A significant difference, however, is that any issue premium must be paid in in full.8

IV. Derogations Pursuant to Article 84 (1) Member States may derogate from Article 69 to the extent 5 that such derogation is necessary for the adoption or application of provisions designed to encourage the participation of employees, or other groups of persons defined by national law, in the capital of undertakings (→ Art 84 mn. 8 et seqq.).

V. Minimum Provision Article 69 provides for minimum protection. The Member States may implement 6 stricter requirements.

VI. Direct Application Even though Member States may provide for stricter rules, Article 69 is unconditional 7 and sufficiently precise to fulfil the requirements of a direct application where Member States do not at least provide for the requirements laid down in Article 69 (cf. → Intro Art 44 mn. 64).

Article 70 Shares issued for consideration other than in cash 1. Where shares are issued for consideration other than in cash in the course of an increase in the subscribed capital, the consideration shall be transferred in full within a period of five years from the decision to increase the subscribed capital. 2. The consideration referred to in paragraph 1 shall be the subject of a report drawn up before the increase in capital is made by one or more experts who are independent of the company and appointed or approved by an administrative or judicial authority. Such experts may be natural persons as well as legal persons and companies and firms under the laws of each Member State. Article 49(2) and (3) and Articles 50 and 51 shall apply. 3. Member States may decide not to apply paragraph 2 in the event of an increase in subscribed capital made in order to give effect to a merger, a division or a public offer for the purchase or exchange of shares and to pay the shareholders of the company which is being absorbed or divided, or which is the object of the public offer for the purchase or exchange of shares. In the case of a merger or a division, however, Member States shall apply the first subparagraph only where a report by one or more independent experts on the draft terms of merger or division is drawn up. Where Member States decide to apply paragraph 2 in the case of a merger or a division, they may provide that the report under this Article and the report by one or First Proposal, OJ No C 48, 24.04.1970, p. 14. Edwards, EC Company Law, p. 83, Schmitthoff, 15 CMLR (1978), 43, 47; Habersack/Verse, Europäisches Gesellschaftsrecht § 6 para. 79. 7

8

Jan P. Brosius

341

Art 70 Shares issued for consideration other than in cash more independent experts on the draft terms of merger or division may be drawn up by the same expert or experts. 4. Member States may decide not to apply paragraph 2 if all the shares issued in the course of an increase in subscribed capital are issued for a consideration other than in cash to one or more companies, on condition that all the shareholders in the company which receive the consideration have agreed not to have an experts’ report drawn up and that the requirements of points (b) to (f) of Article 49(4) are met. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Assets Capable of Economic Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Time Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Expert’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Merger, Division or Public Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 4 5 6 8 12 13

I. Overview 1

Article 70 complements the provisions in Article 69 by laying down special requirements for considerations in kind.1 It widely corresponds to the respective provisions regarding the formation of a company laid down in Article 48 (2) and Articles 49 to 51.

II. Historical Background Article 70 derives from the Second Directive 2 (cf. Art 31 of Directive 2012/30/EU). It was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976. The second subparagraph of Article 70 (2) has been amended by Directive 2006/68/EC implementing the reference made to Articles 50 and 51. 3 Accordingly and as stated in the third Recital of the preamble of Directive 2006/68/EC, Member States should be able to permit companies to allot shares for consideration in kind without requiring them to obtain a special expert valuation in cases in which there is a clear point of reference for the valuation of such consideration. But, nonetheless, the right of minority shareholders to require such valuation was intended to be guaranteed. 3 Article 70 (3) has been amended by Directive 2009/109/EC. Pursuant to the ninth Recital of its preamble an independent expert’s report as provided for under the Directive is often not needed where an independent expert’s report protecting the interests of shareholders or creditors also has to be drawn up in the context of the merger or the division. In such cases, Member States should therefore have the possibility of dispensing 2

See also Edwards, EC Company Law, p. 83 et seq. Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 3 See also Schäfer, Der Konzern 2007, 407. 1

2

342

Jan P. Brosius

Art 70

TITLE I GENERAL PROVISIONS

companies from the reporting requirement under the Directive or of providing that both reports may be drawn up by the same expert.

III. Assets Capable of Economic Assessment The principle laid down in Article 46 also applies to any increase in capital. Ac- 4 cordingly, the subscribed capital may be formed only of assets capable of economic assessment. Undertakings to perform work or supply services may not form part of those assets.

IV. Time Limit Article 71 (1) stipulates that, just as required during the formation of the company, 5 any consideration in kind in the course of a capital increase must be transferred to the company in full within a period of five years from the general meeting’s decision on such capital increase. Article 70 (1) widely corresponds to the second paragraph of Article 48, which is only consistent. Given that the interests at stake are identical compared to the formation of the company, the same principles have to apply to an increase of capital.4 Hence, the comments on Article 48 apply accordingly (cf. → Art 48 mn. 18 et seqq.). 5

V. Expert’s Report Analogous to the process required in the course of the company’s formation, Article 6 70 (2) requires the preparation of an experts’ report. Before the increase in capital is made a report must be drawn up by independent experts who were appointed or approved by an administrative or judicial authority. The comments on Article 49 apply accordingly (→ Art 49 mn. 5 et seqq.). Again, given that the interests at stake are identical compared to the formation of the company, the same principles have to apply in the course of a capital increase. Thus, Article 49 (2) and (3) and, due to the amendments made by Directive 2006/68/EC, the right to provide certain exception as stipulated in Articles 50 and 51 apply accordingly (→ Art 49 mn. 16 et seqq., → Art 50 mn. 5 et seqq., → Art 51 mn. 4 et seqq.). Article 52, however, does not apply as follows, argumentum e contrario, from the explicit wording in the second subparagraph of Article 70 (2). 6 As follows from Article 70 (2), the valuation does comprise a possible premium.7 The Economic and Social Committee proposed to allow for the preparation of the 7 report after the consideration in kind has been made.8 However, this proposal failed.

VI. Merger, Division or Public Offer Article 70 (3) allows Member States to derogate from the reporting requirements 8 stipulated in the second paragraph where the capital increase is made to give effect to a merger, a division or a public offer for the purchase or exchange of shares, provided however, the funds are used to pay the shareholders of the company, which is being abFirst Proposal, OJ No C 48, 24.04.1970, p. 14. See also Edwards, EC Company Law, p. 83. 6 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 196. 7 Bayer/J. Schmidt, ZGR 2009, 805, 843; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 79. 8 OJ No C 88, 6.9.1971, p. 5. 4

5

Jan P. Brosius

343

Art 70 Shares issued for consideration other than in cash sorbed or divided or which is the object of the public offer for the purchase or exchange of shares.9 In the case of a merger or a division, however, this only applies where a report by one or more independent experts on the draft terms of merger or division is drawn up.10 Where, on the other hand, shareholders make use of the possibility to waive the experts’ report under the former Third Directive11, now laid down in Articles 87 et seqq. of the Directive, the former Sixth Directive12, now laid down in Articles 135 et seqq. of the Directive, or the former Cross-border Mergers Directive 13, now laid down in Articles 118 et seqq. of the Directive, the obligation to draw up a report on the contribution in kind continues to apply in order to allow for a sufficient degree of creditor protection. 9 If Member States decide to stick to the requirements laid down in Article 70 (2) and not to make an exception for mergers or divisions, they may, however, provide that the experts’ report required under Article 70 (2) and the experts’ report required by the provisions on mergers and divisions are drawn up by the same expert or experts. 10 Article 70 (3) widely corresponds to the fifth paragraph of Article 49, which is why the corresponding comments apply to Article 70 (3) as well (cf. → Art 49 mn. 23 et seqq.).

Intragroup capital increase 11

Article 70 (4) provides for special regulations on intragroup capital increases providing that Member States may make an exception from the reporting requirements laid down in Article 70 (2) if all newly issued shares are issued to one or more companies, provided that all the shareholders in the company which receive the consideration have agreed not to have an experts' report drawn up and, pursuant to points (b) to (f) of Article 49 (4), first, such agreement has been published in the same way a report has to be published, i.e. in accordance with Article 16 (former Article 3 of Directive 2009/101/ EC), pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means (cf. → Art 16 mn. 6 et seq.). Secondly, the respective companies furnishing such consideration have to create special reserves which may not be distributed and which are at least equal to the nominal value or, where applicable, the accountable par of the shares issued for the respective consideration in kind. Thirdly, the respective companies furnishing such consideration have to guarantee the debts of the recipient company arising between the time the respective shares are issued and one year after the publication of that company's annual accounts for the financial year during which such consideration was furnished up to an amount equal to the nominal value, or the accountable par, of the shares issued for the respective consideration in kind. Within this period, any transfer of those shares is prohibited. Again, this guarantee has to be published in the same way a report has to be published (cf. → Art 49 mn. 14, 20). Finally, the respective companies furnishing such consideration are obliged to place a sum equal to the nominal value or, if applicable, the accountable par of the shares issued for the respective consideration in kind into a reserve. Such reserve may not be See Edwards, EC Company Law, p. 84. See also Grundmann, Europäisches Gesellschaftsrecht, para. 356. 11 Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies, OJ No L 110, 29.4.2011, p. 1–11. 12 Sixth Council Directive 82/891/EEC of 17 December 1982 based on Article 54 (3) (g) of the Treaty, concerning the division of public limited liability companies, OJ No L 378, 31.12.1982, p. 47–54. 13 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies, OJ No L 310, 25.11.2005, p. 1–9. 9

10

344

Jan P. Brosius

Art 71

TITLE I GENERAL PROVISIONS

distributed until three years after publication of the annual accounts of the recipient company for the financial year during which such consideration was furnished or, if necessary, until such later date at which all claims relating to the guarantee which are submitted during that period have been settled.

VII. Exceptions Further, pursuant to Article 84 (3) Member States must ensure that the first subpara- 12 graph of Article 70 (2) does not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU of the European Parliament and of the Council (cf. → Art 84 mn. 5, 15).

VIII. Minimum Provision Article 70 provides for minimum provisions.14 Member States may implement stricter 13 rules. They may also, inter alia, provide for rules comparable to those laid down in Article 52. Even though Article 70 itself does not refer to Article 52 (cf. → mn. 6), Member State may still provide for a respective provision.15

Article 71 Increase in capital not fully subscribed Where an increase in capital is not fully subscribed, the capital will be increased by the amount of the subscriptions received only if the conditions of the issue so provide. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Direct Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 5

I. Overview Article 71 is based on the principle of full subscription1 and stipulates that where only 1 a portion of the shares offered in the course of a capital increase has been subscribed for, such capital increase will only become effected if the conditions of the issue, i.e. particularly the shareholders’ resolution provided for accordingly.2

14 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 196; Nobel, chap. 2 para. 111; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 238. 15 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 80; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 196. 1 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 197; Fankhauser, Gemeinschaftsrechtliche Publizitäts- und Kapital-Richtlinie: Anpassungsbedarf des Schweizer Rechts, p. 208; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 275 et seq.; Morse (1977) 2 E.L.Rev. 126, 130. 2 See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 238.

Jan P. Brosius

345

Art 72 Increase in capital by consideration in cash

II. Historical Background 2

Article 71 derives from the Second Directive3 (cf. Art. 32 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

III. Purpose 3

The provision aims to remove any uncertainty about the status of the capital increase and the fate of the obligations to pay up the contributions incurred by the investors where the shares to be issued were only partially subscribed for.4 Therefore, any deviation from the principle of full subscription requires the transparency of a shareholders’ resolution.5 The competence to decide about the procedure and its conditions remains with the general meeting.6

IV. Minimum Provision 4

Article 71 is not a minimum provision.7 Member States may not withdraw the competence to lay down the conditions of a partial subscription from the general meeting.

V. Direct Effect 5

Article 71 is sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art. 44 mn. 64).

Article 72 Increase in capital by consideration in cash 1. Whenever the capital is increased by consideration in cash, the shares shall be offered on a pre-emptive basis to shareholders in proportion to the capital represented by their shares.

3 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 4 First Proposal, OJ No C 48, 24.04.1970, p. 14. 5 Cf. Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 295; for a slightly different approach of the Economic and Social Committee see OJ No C 88, 6.9.1971, p. 5. 6 See also First Proposal, OJ No C 48, 24.04.1970, p. 14. 7 See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 238.

346

Jan P. Brosius

Art 72

TITLE I GENERAL PROVISIONS

2. The laws of a Member State: (a) need not apply paragraph 1 to shares which carry a limited right to participate in distributions within the meaning of Article 56 and/or in the company’s assets in the event of liquidation; or (b) may permit, where the subscribed capital of a company having several classes of shares carrying different rights with regard to voting, or participation in distributions within the meaning of Article 56 or in assets in the event of liquidation, is increased by issuing new shares in only one of these classes, the right of pre-emption of shareholders of the other classes to be exercised only after the exercise of this right by the shareholders of the class in which the new shares are being issued. 3. Any offer of subscription on a pre-emptive basis and the period within which this right shall be exercised shall be published in the national gazette appointed in accordance with Article 16. However, the laws of a Member State need not provide for such publication where all of a company’s shares are registered. In such case, all the company’s shareholders shall be informed in writing. The right of pre-emption shall be exercised within a period which shall not be less than 14 days from the date of publication of the offer or from the date of dispatch of the letters to the shareholders. 4. The right of pre-emption may not be restricted or withdrawn by the statutes or instrument of incorporation. This may, however, be done by decision of the general meeting. The administrative or management body shall be required to present to such a meeting a written report indicating the reasons for restriction or withdrawal of the right of pre-emption, and justifying the proposed issue price. The general meeting shall act in accordance with the rules for a quorum and a majority laid down in Article 83. Its decision shall be published in the manner laid down by the laws of each Member State, in accordance with Article 16. 5. The laws of a Member State may provide that the statutes, the instrument of incorporation or the general meeting, acting in accordance with the rules for a quorum, a majority and publication set out in paragraph 4 of this Article, may give the power to restrict or withdraw the right of pre-emption to the company body which is empowered to decide on an increase in subscribed capital within the limit of the authorised capital. This power may not be granted for a longer period than the power for which provision is made in Article 68(2). 6. Paragraphs 1 to 5 shall apply to the issue of all securities which are convertible into shares or which carry the right to subscribe for shares, but not to the conversion of such securities, nor to the exercise of the right to subscribe. 7. The right of pre-emption is not excluded for the purposes of paragraphs 4 and 5 where, in accordance with the decision to increase the subscribed capital, shares are issued to banks or other financial institutions with a view to their being offered to shareholders of the company in accordance with paragraphs 1 and 3. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The right of pre-emption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Publishing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Exercise period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Exceptions and Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Exclusion of Pre-Emptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Jan P. Brosius

1 5 7 9 9 13 15 16 23

347

Art 72 Increase in capital by consideration in cash 1. Written report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Decision by the general meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Publishing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Authorisation to exclude . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Factual justification and adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Indirect Subscription . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Minimum Provision and Scope for National Regulations . . . . . . . . . . . . . . . . . . . . IX. Direct Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25 28 30 31 36 39 41 43

I. Overview Article 72 complements Article 69 (1) pursuant to which any increase in capital must be decided upon by the general meeting. This collective right of all shareholders is supplemented by each shareholder’s individual right of pre-emption as stipulated in Article 72. 2 Article 72 contains provisions on the pre-emption right of existing shareholders regarding (i) the subscription of newly issued shares in the context of a capital increase by consideration in cash and (ii) the issue of securities which are convertible into shares or carry the right to subscribe for shares. Publication obligations secure the effectiveness of the prescribed pre-emption right and the desired shareholder protection. Paragraphs 4 and 5 grant the general meeting, under certain conditions, the right to restrict or withdrawal the right of pre-emption or to authorise a company’s body to do so. Article 72 (7) clarifies that pre-emptive rights do not apply where a bank or other financial institutions subscribe for shares for the single purpose to offer such shares to the public, provided however, the pre-emptive rights provided for in Article 72 (1) to (3) do apply to the subsequent offer to the public (cf. → mn. 37 et seq.). 3 In the context of an increase in capital Article 72 provides for a core element of shareholder protection.1 The shareholders’ pre-emptive right provided for in the first paragraph are among the most fundamental rights granted to shareholders under Title I, Chapter IV, of the Directive and constitute a manifestation of the principle of equal treatment.2 It “enables shareholders to avoid the fraction of the capital represented by their shareholdings from being diluted.”3 4 Some legal scholars praised Article 72 as “an illustration of the skilful blending of comparative legal material, taken from the laws and practices of several Member States”4, while others questioned the “wisdom” of the provision and criticised it as providing too little shareholder protections.5 1

II. Historical Background 5

Article 72 derives from the Second Directive6 (cf. Art 33 of Directive 2012/30/EU). It was implemented into the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 203. Cf. Schmitthoff, 15 CLMR (1978), 43, 53; Grundmann, Europäisches Gesellschaftsrecht, para. 357, Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 215; Schwarz, Europäisches Gesellschaftsrecht, para. 621. 3 Case C-42/95 Siemens AG v Henry Nord [1996] I-6028 para. 19. 4 Schmidtthoff, (1978) CMLR 43, 53. 5 Hurst, (1974) 2 Legal Issues of European Integration 63, 70 et seq.; see also Temple Lang, (1972) 7 Irish Jurist 306, 312; see also Rodiere [1965] Revue trimestrielle de droit europeen 336, 353. 1

2

348

Jan P. Brosius

Art 72

TITLE I GENERAL PROVISIONS

The principle of mandatory pre-emptive rights of existing shareholders in the course 6 of a capital increase had been provided for in the laws of many Member States even before the Second Directive was adopted.7 The rules on pre-emption stipulated in Article 72 and the principle of pre-emption have a primal predecessor in German Law in section 2828 of the German Commercial Code (HGB) in its original version adopted on 10 May 1897.9 During the legislative process the Commission pointed out that, in the course of a capital increase by consideration in cash, it were of particular importance to protect existing shareholders and the principle of pre-emption, which had not been recognized in all Member States, and to enshrine such principles in European Law.10

III. Purpose Article 72 and the pre-emptive right stipulated therein constitute a core element of 7 shareholder protection. The Court of Justice stated that the right of pre-emption seeks to enable shareholders to avoid dilution of their stake in the capital represented by their shareholding.11 In this respect, it provides for a twofold dilution protection, i.e. in terms of voting rights as well as equity participation.12 However, Article 72 emphasises the shareholders’ equity participation rights as follows from the exemptions stated in Article 72 (2) (a). The right of pre-emption represents an application of the principle of equal treatment.13 However, the scope of Article 72 reaches beyond the principle of equal treatment as its provisions also apply where the right of pre-emption has been excluded for of all (existing) shareholders.14 On the other hand, the Commission pointed out the importance of the exceptions 8 granted under Article 72, which aim to ensure that the guarantees given to shareholders do not harm the legitimate interests of the company and do not unnecessarily hamper an external financing.15

6 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 7 Edwards, EC Company Law, p. 85; Wooldridge, Company Law in the UK and the EC, p. 29. 8 “Jedem Aktionär muß auf sein Verlangen ein seinem Antheil an dem bisherigen Grundkapital entsprechender Theil der neuen Aktien zugetheilt werden, soweit nicht in dem Beschluß über die Erhöhung des Grundkapitals ein Anderes bestimmt ist.” 9 Also see Edwards, EC Company Law, p. 85; Schmitthoff, 15 CMLR (1978), 43, 53. 10 First Proposal, OJ No C 48, 24.04.1970, p. 14. 11 Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 43; Opinion of the Advocate General Trstenjak delivered on 4 September 2008, C-338/06 (Commission of the European Communities v Kingdom of Spain) [2008] para. 76; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 79. 12 See also First Proposal, OJ No C 48, 24.04.1970, p. 14. 13 Grundmann, Europäisches Gesellschaftsrecht, para. 357, Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 215. 14 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 81. 15 First Proposal, OJ No C 48, 24.04.1970, p. 14.

Jan P. Brosius

349

Art 72 Increase in capital by consideration in cash

IV. Scope 1. The right of pre-emption In the course of every increase of the company’s legal capital by consideration in cash, the shares that are issued must first be offered to the existing shareholders in proportion to the legal capital represented by their respective shareholdings. Article 72 does not entail a corresponding obligation to subscribe for shares. It rather grants to the individual shareholder the subjective individual pre-emptive right to participate in every increase in capital to maintain the shareholder’s proportional stake in the company.16 Hence, where every shareholder exercises his or her pre-emptive right, the capital increase neither alters the circle of shareholders nor their proportional shareholdings. 17 10 The scope of the right of pre-emption stipulated in Article 72 (1) is limited to capital increases by consideration in cash. The provision does not apply to capital increases for consideration in kind, as follows from its very wording.18 Arguably, the legislative decision to limit the scope was due to the fact that, before the adoption of the Second Directive, the laws of most Member States, if at all, had provided for restricted provisions applying exclusively to considerations in cash.19 Also, there is the very practical reason that a specific consideration in kind generally cannot be fulfilled by every shareholder and therefore it would be generally impossible to exercise such pre-emptive rights.20 11 Pursuant to Article 72 (6) the rules laid down in Article 72 are to be applied to the issue of all securities which are convertible into shares or which carry the right to subscribe for shares. This is particularly relevant to any type of option rights and convertible bonds or loans.21 It follows from the statutory system of Article 72 that paragraph 6 only applies where a cash consideration is paid for the respective securities.22 However, Article 72 (6) also makes clear that such rules do not apply to the conversion of such securities or to the exercise of the right to subscribe. The provision has merely the effect of preponing the reference point for the execution of pre-emptive rights. However, this is of great significance as it effectively serves the purpose of the right of pre-emptive as laid down in the first paragraph without making the issue of convertibles practically impossible. 12 Article 72 grants the right of pre-emption to all existing shareholders. 23 No other person may be granted such right.24 To achieve the avoidance of a dilution of their stake in the capital represented by their shareholding, Article 72 “gives precisely to shareholders priority over all other potential purchasers of new shares or of bonds convertible into shares”.25 The purpose of pre-emption would be jeopardised if the new shares or any conversion and subscription rights could also be offered on a pre-emptive 9

16

276.

Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119,

See also Schmitthoff, 15 CMLR (1978), 43, 52. Case C-42/95 Siemens AG v Henry Nord [1996] I-6028 para. 18; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 86; Schwarz, Europäisches Gesellschaftsrecht para.623; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 276. 19 Lutter, ZIP 1995, 648. 20 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 86. 21 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 206. 22 Also see Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 82 et seq., 86. 23 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 205. 24 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 82. 25 Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 43 et seq. 17

18

350

Jan P. Brosius

Art 72

TITLE I GENERAL PROVISIONS

basis to any other category of purchasers, for instance the holders of existing convertible rights.26

2. Publishing The offer of subscription on a pre-emptive basis has to be published in the national 13 gazette appointed in accordance with Article 16 stating the period within which that subscription right must be exercised (cf. → Art 16 mn. 6 et seq.). It is to be noted that the national gazette as a disclosure tool has lost its relevance due to the Digitalisation Directive27 (cf. → Foreword to Arts 13-28 mn. 1 et seq.; → Art 16 mn. 1). Due to the changes made by the Digitalisation Directive it appears doubtful whether it is still not permissible to provide for a disclosure by making the offer publicly available in the register as the standard means of the disclosure provided in Article 16 (see however → mn. 30 for the shareholders’ resolution pursuant to Article 72 (3)). Quite on the contrary, Article 72 (3) should have been updated in the course of the Digitalisation Directive and now be referring to the register instead of the gazette. Member States may provide for an exception from the publication in the national 14 gazette if all of the company’s shares are registered. In such case, the company must inform its shareholders in writing. This exception serves the purpose of practicability and cost efficiency. However, for the prevailing purpose of shareholder protection, it is required that all owners of registered shares are given the information concerning the procedures for exercising their pre-emptive rights addressed to them individually by name.28 Accordingly, the publication of an offer of subscription in daily newspapers does not constitute “information given in writing to the holders of registered shares” within the meaning of the publication provision.29

3. Exercise period The period for the exercise of the pre-emption right to be granted under national law 15 may not be less than 14 days beginning from the date of the publication of the offer in the national gazette or from the date of the dispatch of the letters to the shareholders. If the letters to the shareholders are not send on the same day, the dispatch date for each individual letter is decisive for the start of the subscription period for the respective shareholder. Not sending all letters jointly may constitute a violation of the principle of equal treatment as stipulated in Article 85.

V. Exceptions and Modifications In its second paragraph, Article 72 stipulates two cases in which Member States 16 may derogate from the principle of pre-emption. First, the right of pre-emption is not mandatory for shares which carry a limited right to participate in distributions within 26 Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 45; Opinion of the Advocate General Trstenjak delivered on 4 September 2008, C-338/06 (Commission of the European Communities v Kingdom of Spain) [2008] para. 76. 27 Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law, OJ L 186, 11.7.2019, p. 80–104. 28 Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 65. 29 Case C-441/93 Panagis Pafitis and Others v Trapeza Kentrikis Ellados AE and Others [1996] I-1363, para. 66.

Jan P. Brosius

351

Art 72 Increase in capital by consideration in cash

17

18

19

20

21

22

the meaning of Article 56 (cf. → Art 56 mn. 5) and/or in the company's assets in the event of liquidation. Secondly, where the subscribed capital of a company has several classes of shares and the company’s legal capital is increased by issuing only one class of shares, Member States may permit that the right of pre-emption of the shareholders holding shares of the other classes may only be excised after the shareholders of such class in which the new shares are being issued have exercised their right of pre-emption. Such right of pre-emption obliges the company to offer the shares to shareholders of the respective class pro rata with regard to the proportions held of the respective class of shares. Consequently, if all such shareholders subscribe for the new shares the remaining shareholders are not permitted to subscribe for shares. “Several classes of shares” in this context requires that the shares carry different rights with regard to either voting or participation in distributions within the meaning of Article 56 (cf. → Art 56 mn. 5) or in assets in the event of liquidation (for the nature of classes of shares see → Art 68 mn. 16 et seqq., where, however, a broader meaning of classes of shares is applied). Pursuant to Article 84 (1) Member States may derogate from Article 72 to the extent that such derogations are necessary for the adoption or application of provisions designed to encourage the participation of employees, or other groups of persons defined by national law, in the capital of undertakings (cf. → Art 84 mn. 8 et seqq.). Further, pursuant to Article 84 (3), Member States shall ensure that Article 72 does not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU30 (cf. → Art 84 mn. 5, 15). Pursuant to Article 84 (4), Member States shall derogate from Article 72 to the extent and for the period that such derogation is necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/1023 31 (cf. → Art 84 mn. 6, 16 et seqq.). Moreover, the Court of Justice has ruled that Article 72 “must be interpreted as not precluding a measure […] adopted in a situation where there is a serious disturbance of the economy and the financial system of a Member State threatening the financial stability of the European Union, the effect of that measure being to increase the share capital of a public limited liability company […] and the existing shareholders being denied a pre-emptive right to subscribe.”32 However, this view taken by the Court of Justice is highly doubtful and, according to the advanced here, incorrect (cf. → Art 68 mn. 7 et seqq.).

30 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ No L 173, 12.6.2014, p. 190–348. 31 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18. 32 Case C-41/15 (Gerard Dowling and others v Minister for Finance (request for a preliminary ruling from the High Court (Irland)) [2016], para. 55.

352

Jan P. Brosius

Art 72

TITLE I GENERAL PROVISIONS

VI. Exclusion of Pre-Emptive Rights In its fourth paragraph Article 72 stipulates the principle that the right of pre-emp- 23 tion may not be restricted or withdrawn by the statutes or instrument of incorporation. The same applies to the issue of securities which are convertible into shares or which carry the right to subscribe shares. However, Article 72 allows the restriction or withdrawal of the shareholders’ pre- 24 emptive rights by way of decision of the general meeting.33 Within the Directive, this restriction is exhaustive. The right of pre-emption granted to shareholders does not admit of any exception other than that expressly laid down in the fourth paragraph.34 Member States may, however, provide for further and stricter requirements (cf. → mn. 41 et seq.).35

1. Written report To guarantee effective shareholder protection, a binding procedure has to be imple- 25 mented requiring the administrative or management body to present to the general meeting designated to vote on the restriction of pre-emptive rights a written report. This report has to fulfil two criteria. First, it has to indicate the reasons for restriction or withdrawal of the right of pre-emption. A comprehensive explanation or justifications of such reasons is not required. Secondly, it has to justify the proposed issue price. It follows from this requirement 26 that the issue price for the new shares may be set at below or above their market value. 36 However, this may, in the individual case, constitute a violation of the principle of equal treatment as stipulated in Article 85. The required “justification” indicates that the price has to be, considering the particular circumstances of the individual case, objectively adequate. However, shareholders are not legally entitled to demand or claim that an adequate price is actually proposed. The provision merely requires the administrative or management body to explain why they believe the issue price is adequate. The report aims to ensure that all shareholders are aware of the proposed price before the issue is executed. In case shareholders do not agree with the proposed price they may, collectively, prevent such under-priced issue in the general meeting.37 The individual shareholder has no right to challenge the capital increase on such basis. A factual justification and the adequacy of the decision that may be subject to a 27 substantive judicial review is not required (cf. → mn. 36 et seqq.). The directors’ duty to produce a written report seeks to ensure that shareholders are able to make an informed decision.38

See also Schwarz, Europäisches Gesellschaftsrecht, para. 621. Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 26; Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 40. 35 See also Schwarz, Europäisches Gesellschaftsrecht, para. 622 with further references. 36 Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 30, 32. 37 See also Edwards, EC Company Law, p. 86; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 84. 38 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 217, Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht, p. 294. 33

34

Jan P. Brosius

353

Art 72 Increase in capital by consideration in cash 2. Decision by the general meeting Following the presentation of the directors’ written report, the general meeting has to make its decision by passing a resolution in accordance with the rules for a quorum and a majority laid down in Article 83. That means, the decision must be taken at least by a majority of not less than two-thirds of the votes attaching to the securities or the subscribed capital represented.39 However, pursuant to the second paragraph of Article 83, Member States may provide for a quorum of a simple majority of the votes when at least half the subscribed capital is represented. 29 The Commission was of the opinion that restricting the right of pre-emption was a measure of such profound significance that only the general meeting shall have the competence to decide on it.40 28

3. Publishing 30

The shareholders’ decision has to be published as laid down by national law in accordance with Article 16 (former Article 3 of Directive 2009/101/EC), pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means (cf. → Art 16 mn. 6 et seq.).

4. Authorisation to exclude Pursuant to the fifth paragraph of Article 72, in the context of authorised capital, Member States may provide that the statutes, the instrument of incorporation or the general meeting may authorise the company body which is also empowered to use authorised capital pursuant to Article 68 to restrict or withdraw the right of pre-emption. The maximum period of such authorisation correlates with the period provided for in accordance with the second paragraph of Article 68, i.e. the period in which the competent company body is empowered to use the authorised capital. Accordingly, as stipulated in Article 68 (2), the maximum period is five years. 32 As for the direct withdrawal of pre-emption rights, the shareholders’ resolution granting such power has to be past in accordance with the rules for a quorum and a majority laid down in Article 83 (cf. → mn. 2). The shareholders’ decision has to be published in accordance with Article 16 (cf. → mn. 30). 33 There is a controversy as to whether a written report by the administrative or management body is required and, if so, whether or not it has to be presented prior to the shareholders decision or prior to the exercise of the authorisation. Most legal scholars argue that the wording and the historic background support the view that no such report is required.41 34 Indeed, the very wording of paragraph 5 supports that view. It only refers to the rules for a quorum, a majority and publication set out in the fourth paragraph without 31

See also Schwarz, Europäisches Gesellschaftsrecht, para. 624. First Proposal, OJ No C 48, 24.04.1970, p. 15. 41 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 221, Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 84; Bayer/Schmidt, ‘Überlagerungen des deutschen Aktienrechts durch das Europäische Unternehmensrecht’, in: Bayer/Habersack, Aktienrecht im Wandel, Vol. 1 2007, chap. 18 para. 72; Bosse, ZIP 2001, 104, 105; Bungert, BB 2005, 2757; Grundmann, Europäisches Gesellschaftsrecht para. 361; Hofmeister, NZG 2000, 713, 716; Krämer/Kiefner, ZIP 2006, 301, 306; Waclawik, ZIP 2006, 397, 399; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Vol. 1 1994, p. 119, 279; BGH ZIP 2005, 2205, 2207. 39

40

354

Jan P. Brosius

Art 72

TITLE I GENERAL PROVISIONS

mentioning the requirement of a written report. A historic interpretation supports this view as well. With reference to the broad wording of the Commission’s first proposal42 the European Economic and Social Committee pointed out that the shareholders‘ right of pre-emption may hinder or slow down necessary financing measures if the prerequisites for an exclusion of such pre-emptive rights were too strict. 43 In particular, the Committee argued, the justification of the issue price would not be feasible as the relevant share price cannot be known at the point in time authorisation is granted. Hence, such requirement would make any authorisation to restrict or withdraw the right of pre-emption impossible.44 In the further course of the legislative process the reference has been limited to the rules for a quorum, a majority and publication as set out in the fourth paragraph. Even though the reason for this amendment is not sufficiently documented, it appears that the objections of the Committee have been heard. It is of no relevance for the interpretation of the provision that, apparently, in its pro- 35 posal for the Directive 2006/68/EC, the Commission came to a different conclusion. 45 Those statements are irrelevant for the interpretation of the provision and based merely on a misunderstanding of the existing legislation.

5. Factual justification and adequacy Further, there is a controversy as to whether the exclusion of pre-emptive rights pur- 36 suant to the fourth paragraph is subject to further material requirements, in particular a factual justification that could be subject to a substantive judicial review. Some legal scholars argue that the Directive requires a justification pursuant to the 37 principles of equal treatment of shareholders and with a view to the interests of the company.46 Others argue that the Directive presumes the need for further justification, but assumes that the standards of such factual justification are to be determined by the Member States.47 However, it must be held that a factual justification is not required.48 OJ No C 48, 24. 4. 70, p. 21. See also Bosse, ZIP 2001, 104, 105; Bungert, BB 2005, 2757. 44 OJ No C 88, 6.9.71, p. 5; see also Hofmeister, NZG 2000, 713, 716. 45 COM(2004) 730 final, Article 1 (7), p. 14; the Commission proposed for the implementation of a new paragraph 5 a according to which the requirement of a written report shall not apply to an authorization pursuant to paragraph 5 if the respective company is a listed company and if the shares are issued at the market price. This proposal goes back to a respective proposal of the SLIM Working Group, which pointed out that no special report by the board of directors would be necessary in this case, see http://ec.europa.eu /internal_market/company/docs/official/6037en.pdf, p. 14. The Commission pointed out that requirement of a written report had been considered an undue procedural burden for companies where there exists a clear and unambiguous point of reference for the fair price of the shares to be issued, i.e. in particular if shares of a listed company are traded on a regulated market, see SEC(2004) 1342, p. 7. It also appears that the European Economic and Social Committee supported the Commission's legal interpretation regarding the requirement of a written report for the procedure under paragraph 5. Moreover it rejected the Commission’s proposal as – in the opinion of the EESC – it ran counter the principle of transparency and referred to the general principle that “the general meeting is sovereign when it comes to the powers delegated to company bodies, and always, in all cases, has the right to be informed on what has been done and to receive an account of every budget heading, concerning both income and expenditure”, see OJ No C 294, 25.11.2005, p. 3. It appears that the European Parliament, on the other hand, was of the opinion that no written report was necessary under paragraph 5 and only the implementation of Article 5 a would constitute such requirement. It stated that in order to facilitate an agreement with the council the proposed Article 5 a should be deleted. Rather, the directive should bring further flexibility by eliminating the need to produce a written report, see Report of the European Parliament of 28.02.2006, A6/2006/50, p. 17. 46 Cf. Kindler, ZHR 158 (1994), 339, 360, 369; Kindler, ZGR 1998, 35, 48, who, however rejects the requirement of a proportionality assessment; see also Lutter/Bayer/Schmidt, Europäisches Unternehmensund Kapitalmarktrecht, § 19 para. 223. 47 Drinkuth, IStR 1997, 312, 315; Natterer, ZIP 1995, 1481, 1488; Nobel, Transnationales und Europäisches Gesellschaftsrecht, ch. 2 para. 115. 42 43

Jan P. Brosius

355

Art 72 Increase in capital by consideration in cash The requirement of a written report, as stipulated in Article 72 (4), does not indicate the further requirement of a factual justification of the statements made in such report. 49 Its purpose is to enable shareholders to make a well informed decision. In this respect a justification on objective grounds in the company’s best interest50 is not necessary.51 However, it has to be kept in mind that nevertheless the principle of equal treatment of all shareholders as stated in Article 85 applies and has to be taken into account in the context of any exclusion of pre-emptive rights.52 Although a factual justification, and hence its substantive review, are not required under the Directive, Member States are free to provide for the requirement of further material justifications. 38 This view is in line with the rulings of the Court of Justice. In Siemens AG v Henry Ford the Court of Justice pointed out that “it must be held in this regard that a substantive review (…) which ensures a high degree of protection for shareholders, does not run counter to the aims of the Directive, even if it might give rise to delays in carrying out increases in capital. Moreover, it is for the national courts to utilize such remedies as are available to them under their domestic law in order to penalise delaying or manifestly unfounded actions, whilst having due regard to the aims of the directive.”53 Consequently, argumentum e contrario, the Court of Justice does not assume that Article 72 (4) requires a factual justification or a substantive review, but allows Member States to make respective provisions.

VII. Indirect Subscription In its last paragraph Article 72 clarifies that where shares are issued to banks or other financial institutions with a view to their being offered to shareholders of the company in accordance with the rules laid down in the first and third paragraph, the right of pre-emption does not have to be applied for the purposes of the fourth and the fifth paragraph. For a definition of “financial institution” see point (26) of Article 4 (1) of Regulation (EU) No 575/201354. However, the right of pre-emption is not excluded. It is merely postponed until the actual issue to the public. 40 This provision takes account of the fact that new shares of listed companies are usually subscribed by an issuing bank or consortium/syndicate that offers the shares to the public. To allow this process to run without restrictions the subscription by an issuing bank does not qualify as being offered to such issuing bank as long as the following offering is made in accordance with the rules provided for in the first and third paragraph. In the consequence, the indirect issue and subscription is deemed to be legally equal to the direct issue and subscription. 39

48 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 223; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 85; Fankhauser, Gemeinschaftsrechtliche Publizitätsund Kapital-Richtlinie, p. 222; Grundmann, Europäisches Gesellschaftsrecht, para. 360; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, Bd. 1 1994, p. 119, 278; Meilicke, DB 1996, 513 ff.; also see Edwards, EC Company Law, p. 86 et seq. 49 Similar Groß EuZW 1994, 395, 399; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 223. 50 Cf. Edwards, EC Company Law, p. 87. 51 Cf. Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 85. 52 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 85. 53 Case C-42/95 Siemens AG v Henry Nord [1996] I-6028 para. 21. 54 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, p. 1–337.

356

Jan P. Brosius

Art 72

TITLE I GENERAL PROVISIONS

VIII. Minimum Provision and Scope for National Regulations The right of pre-emption may be expanded to the issue of shares in the context of 41 an increase by consideration in kind.55 The fact that Article 70, which widely governs capital increases by consideration in kind, does not expressly provide for a right of preemption, does not preclude Member States from such extensions.56 Member States may also broaden the scope of paragraph 6 and extend it, for instance, to profit participation rights or participating bonds.57 Also, the period to exercise the pre-emptive right (“not be less than 14 days from the date of publication”) may be extended as follows from the wording. Further, the Court of Justice explained that “although the right of pre-emption grant- 42 ed to shareholders does not admit of any exception other than that expressly laid down in Article 68 (4) of the directive, the fact remains that […] the Second Directive lays down minimum requirements for the protection of shareholders and creditors of public limited liability companies, by leaving the Member States free to adopt provisions that are more favourable to them, which provide, inter alia, for more restrictive conditions on withdrawing the right of pre-emption.”58 In this respect, national law may require a factual justification that may also be subject to a substantive judicial review (cf. → mn. 36 et seqq.).59 But the Court of Justice also made clear that Article 72 (4) requires that the general meeting, in certain circumstances, must be able to decide to withdraw the right of pre-emption for all securities which are convertible into shares.60

IX. Direct Effect Article 72 (1) has direct effect and may be relied upon by individuals against the 43 public authorities before the national courts.61 As the Court of Justice pointed out, Article 72 is clearly and precisely worded and provides for the unconditional general principle that, upon any increase of subscribed capital by consideration in cash, the shares must be offered on a pre-emptive basis to the shareholders in proportion to the capital represented by their shares.62 The unconditional nature of the provision stipulated in the first paragraph is not affected by the strictly limited exemptions stipulated in paragraphs 4 and 5 and Article 84 (1) and (3).63

Case C-42/95 Siemens AG v Henry Nord [1996] I-6028 para. 16 et seqq. Case C-42/95 Siemens AG v Henry Nord [1996] I-6028 para. 17. 57 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 206. 58 Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 26. 59 Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 85. 60 Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 50. 61 Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 38. 62 Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 39; cf. Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 24. 63 Case C-381/89 Sindesmos Melon tis Eleftheras Evangelikis Ekklisias and Others v the Greek State and Others [1992] I-2134, para. 340 et seqq. 55 56

Jan P. Brosius

357

Art 73 Decision by the general meeting on reduction in the subscribed capital

Article 73 Decision by the general meeting on reduction in the subscribed capital Any reduction in the subscribed capital, except under a court order, shall be subject at least to a decision of the general meeting acting in accordance with the rules for a quorum and a majority laid down in Article 83 without prejudice to Articles 79 and 80. Such decision shall be published in the manner laid down by the laws of each Member State in accordance with Article 16. The notice convening the meeting shall specify at least the purpose of the reduction and the way in which it is to be carried out. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Convening Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Publishing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 5 6 8 9

I. Overview 1

Article 73 grants the general meeting the exclusive competence to decide on any capital reduction, while requiring a special majority as laid down in Article 83.

II. Historical Background 2

Article 73 derives from the Second Directive 1 (cf. Art 34 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Irrespective of editorial changes, its material content has not been amended since.

III. Purpose 3

The provisions on capital reduction pursue two main purposes. One is to guarantee the equal treatment of shareholders and their protection from the impairment of their membership rights; the other is to protect existing creditors.2 Article 73 aims to accomplish the first-mentioned goal.

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq.

358

Jan P. Brosius

Art 73

TITLE I GENERAL PROVISIONS

IV. Scope Article 73 applies to any reduction in capital. It states that a capital reduction must be 4 subject to a decision of the general meeting. In general, the competence of the general meeting is absolute.3 The only exceptions allowed for or required, respectively, are capital reductions under a court order, which may, inter alia, be the case in the course of insolvency proceedings,4 and the cases stipulated in Article 79 (Compulsory withdrawal of shares), Article 84 (2) (companies incorporated under special law issuing both capital shares and workers’ shares) and, mandatorily, Article 84 (3) (use of resolution tools, powers and mechanisms provided for in Directive 2014/59/EU5) as well as Article 84 (4) (establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/1023 6).

V. Convening Notice To ensure shareholders are able to make an informed decision, the notice convening 5 the meeting must specify at least the purpose of the capital reduction and the way in which it is to be carried out. Further, the company has to comply with the principle of equal treatment pursuant to Article 85.7 In the view of the Commission, the impact of the decision to be made by the general meeting would require certain profound information obligations. Although the details were intended to be left to Member States until further harmonisation of the rules on general meetings subject to a separate directive would be achieved, the Commission considered it necessary to provide for a minimum information obligation.8

VI. Quorum The resolution has to be passed in accordance with the rules for a quorum and a 6 majority laid down in Article 83, i.e. the decision must be taken at least by a majority of not less than two-thirds of the votes attaching to the securities or the subscribed capital represented (cf. → Art 83 mn. 2). However, pursuant to the second paragraph of Article 83, Member States may provide for a quorum of a simple majority of the votes when at least half the subscribed capital is represented (cf. → Art 83 mn. 3). The Commission pointed out that, pursuant to the laws of most Member States, a capital re2 First Proposal, OJ No C 48, 24.04.1970, p. 15; see also Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 20 para. 204; Grohmann, Das Informationsmodell im europäischen Gesellschaftsrecht, p. 297 et seq.; Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 85 et seq.; Schwarz, Europäisches Gesellschaftsrecht, para. 626; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 253. 3 See also Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 2228. 4 Cf. Eidenmüller/Engert, ZIP 2009, 541, 547; Verse, ZGR 2010, 299, 313. 5 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18. 6 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18. 7 See also Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 88; Nobel, Transnationales und Europäisches Aktienrecht, chap. 2 para. 116. 8 First Proposal, OJ No C 48, 24.04.1970, p. 15.

Jan P. Brosius

359

Art 74 Reduction in the subscribed capital in case of several classes of shares duction requires the amendment of the company’s statutes. Therefore, the Commission considered it necessary to provide for the requirement of a qualified majority.9 In case there are several classes of shares, Article 74 applies (cf. → Art 74 mn. 3 et seq.). Article 73 does not require a factual justification or a substantive review of the decision made by the general meeting.10 Article 73 solely refers to the required majority of votes. 7 The quorum required by Article 73 (1) does not apply to the decision of the general meeting on capital reductions by a withdrawal of shares held by the company itself or a middleman (cf. → Art 80 mn. 5).

VII. Publishing 8

The decision of the general meeting has to be published in accordance with Article 16 (former Article 3 of Directive 2009/101/EC), pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means (cf. → Art 16 mn. 6 et seq.).

VIII. Minimum Provision 9

As follows from the wording “at least” Article 73 provides for a minimum provision and Member States may provide for stricter rules on the decision on capital reductions. Member States may not, however, prohibit capital reductions altogether. The Directive premises that capital reductions are a feasible capital measure.11

Article 74 Reduction in the subscribed capital in case of several classes of shares Where there are several classes of shares, the decision by the general meeting concerning a reduction in the subscribed capital shall be subject to a separate vote, at least for each class of shareholders whose rights are affected by the transaction. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Derogations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 5

I. Historical Background 1

Article 74 derives from the Second Directive1 (cf. Art 35 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

First Proposal, OJ No C 48, 24.04.1970, p. 15. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 231. 11 See Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 254 et seqq. With further references. 9

10

360

Jan P. Brosius

Art 74

TITLE I GENERAL PROVISIONS

II. Purpose As the Commission stated in its first proposal, Article 74 is, just as the correspond- 2 ing provision in Article 68 (3), an application of the principle of equal treatment of shareholders.2 This principle does not require to attach the same rights to all shares of a company. If provided for accordingly in the statutes of the company, it may issue different classes of shares carrying different membership rights. However, within these classes of shares, the shareholders must be treated equally as they are “in the same position” as stated in Article 85.

III. Scope Article 74 complements the requirements laid down in Article 73 and states that 3 where several classes of shares exist in a company, the decision of the general meeting pursuant to Article 73 has to provide that for each class of shares whose rights are affected by the transaction a separate vote has to be held. However, all votes may be taken in one process as long as the majorities, i.e. the outcomes for each class, are determined separately.3 The necessity of a separate vote for each class of shares results from the fact that 4 a capital decrease may as well lead to a dilution of rights attached to the shares of each class. However, from the wording of the provision it remains unclear in which circumstances the rights of a shareholder are “affected by the transaction”. 4 It is to be assumed that any capital reduction “affects” each existing class of shares.5

IV. Derogations Pursuant to Article 84 (2) Member States may decide not to apply Article 74 to 5 companies incorporated under a special law which issue both capital shares and workers' shares, the latter being issued to the company’s employees as a body, who are represented at general meetings of shareholders by delegates having the right to vote (cf. → Art 84 mn. 13 et seq.). Further, pursuant to Article 84 (3) Member States must ensure that Article 74 does not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU6 of the European Parliament and of the Council (cf. → Art 84 mn. 5, 15). Also, pursuant to Article 84 (4), Member States shall derogate from Article 74 to the extent and for the period that such derogation is 1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 First Proposal, OJ No C 48, 24.04.1970, p. 15. 3 See also Werlauff, EU Company Law, p. 286. 4 Cf. Edwards, EC Company Law, p. 88, Morse [1977] ELR 126, 131; Temple Lang, J (1972) 7 Irish Jurist 306, 312. 5 See also Werlauff, EU Company Law, p. 286.

Jan P. Brosius

361

Art 75 Safeguards for creditors in case of reduction in the subscribed capital necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/10237 (cf. → Art 84 mn. 6, 16 et seqq.).

Article 75 Safeguards for creditors in case of reduction in the subscribed capital 1. In the event of a reduction in the subscribed capital, at least the creditors whose claims antedate the publication of the decision on the reduction shall at least have the right to obtain security for claims which have not fallen due by the date of that publication. Member States may not set aside such a right unless the creditor has adequate safeguards, or unless such safeguards are not necessary having regard to the assets of the company. Member States shall lay down the conditions for the exercise of the right provided for in the first subparagraph. In any event, Member States shall ensure that the creditors are authorised to apply to the appropriate administrative or judicial authority for adequate safeguards provided that they can credibly demonstrate that due to the reduction in the subscribed capital the satisfaction of their claims is at stake, and that no adequate safeguards have been obtained from the company. 2. The laws of the Member States shall also stipulate at least that the reduction shall be void, or that no payment may be made for the benefit of the shareholders, until the creditors have obtained satisfaction or a court has decided that their application should not be acceded to. 3. This Article shall apply where the reduction in the subscribed capital is brought about by the total or partial waiving of the payment of the balance of the shareholders’ contributions. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Application to the Appropriate Administrative or Judicial Authority . . . . . . . . VI. Voidness or Restriction of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Waiver of Payment of Shareholder Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 5 6 8 9 10 12

I. Overview 1

Article 75 entitles existing creditors to obtain security if their claims antedate the publication of the shareholders’ decision to make a capital reduction. Only if creditors already have adequate safeguards, or protection is not necessary in view of the assets

6 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ No L 173, 12.6.2014, p. 190–348. 7 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18.

362

Jan P. Brosius

Art 75

TITLE I GENERAL PROVISIONS

of the company, the obligation to grant security shall not apply.1 Within these limits, Member States are fairly free to lay down the conditions for the exercise of this right.

II. Historical Background Article 75 derives from the Second Directive2 (cf. Art 36 of Directive 2012/30/EU). 2 It was implemented in the initial version of the Second Directive 77/91/EEC of 13 December 19763 and significantly amended by Directive 2006/68/EC4 inserting the second subparagraph of Article 75 (1).

III. Purpose Article 75, as clearly follows from its provisions, serves the purpose of creditor 3 protection. The amendments made by Directive 2006/68/EC and the insertion of the second 4 subparagraph in Article 75 (1) aimed to further harmonise creditor protection and to further prevent unnecessary delays in cases where creditors unduly demand security for their claims.5 Pursuant to Recital 47 of the preamble of the Directive6: “creditors should be able to resort, under certain conditions, to judicial or administrative proceedings where their claims are at stake as a consequence of a reduction in the capital of a public limited liability company.” However, the Commission also pointed out that “any priority rights which creditors may have, for example, as a consequence of an insolvency procedure, or any intra-group guarantees that were given to them, for example, by the parent company of the company in which they are shareholders, would of course have to be taken into account when determining the scope of such creditors' legitimate interest in obtaining (further) safeguards.”7

IV. Scope In the event of a capital reduction Article 75 (1) grants creditors the right to obtain 5 security if two requirements are met. First, Article 75 (1) only applies to existing creditors, i.e. creditors whose claims existed before the decision on the capital reduction was See also Schwarz, Europäisches Gesellschaftsrecht, para. 628. Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 3 See also Niessen, AG 1970, 281, 295 et seq. with further references. 4 Directive 2006/68/EC of the European Parliament and of the Council of 6 September 2006 amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital, OJ No L 264, 25.9.2006, p. 32–36. 5 SEC(2004) 1342, p. 7 et seq. 6 Formerly Recital 12 of the preamble of the Second Directive 2012/30/EU, which was implemented by Directive 2006/68/EC. 7 SEC(2004) 1342, p. 8. 1

2

Jan P. Brosius

363

Art 75 Safeguards for creditors in case of reduction in the subscribed capital published. Secondly, the respective claims must not have fallen due by the date of that publication. Article 75 (1), thereby, leaves Member States quite a scope of discretion regarding the transposition of this provisions and the specific conditions for the exercise of the right to obtain security to be laid down in national law. This is due to the fact, as the Commission stated in its first proposal, that the different laws of the Member States had a rather different approach on creditor protection and provided for very individual safeguards. The Commission, therefore, considered it necessary to establish a uniform principle but to leave the details to the Member States.8 Article 75 neither specifies what is suitable as collateral.9 This decision is left to the Member States.

V. Application to the Appropriate Administrative or Judicial Authority The second subparagraph of Article 75 (1) provides that Member States must ensure that creditors are authorised to apply to the appropriate administrative or judicial authority for adequate safeguards. Noteworthy, it remains, within the limits of the principle of effectiveness, to the discretion of each Member States to define “adequate safeguards” and to choose the “appropriate administrative or judicial authority”. 7 However, this right only applies under the condition that the respective creditors can credibly demonstrate that due to the capital reduction the satisfaction of their claims is at stake, and that no adequate safeguards have been obtained from the company. The burden of proof was intentionally imposed on the creditors in order to prevent unnecessary delays in cases where they unduly demand security for their claims. 10 Article 75 hereby partially harmonises procedural law.11 6

VI. Voidness or Restriction of Payment 8

Article 75 (3) is one of the few provisions laid down in Title I, Chapter IV of the Directive to stipulate requirements for the legal consequences in case of a breach of law. It provides that at least the reduction must be void, or, alternatively and to the discretion of each Member State, that no payment may be made for the benefit of the shareholders, until the creditors have obtained satisfaction or a court has decided that their application should not be acceded to.12

VII. Waiver of Payment of Shareholder Contributions 9

Article 75 (3) merely clarifies that the provisions laid down in Article 75 also apply where the capital reduction is brought about by the total or partial waiving of the payment of the balance of the shareholders’ contributions.

8 First Proposal, OJ No C 48, 24.04.1970, p. 15; see also Edwards, EC Company Law, p. 88; with a proposal for the special protection of employees see Economic and Social Committee, OJ No C 88, 6.9.1971, p. 5. 9 See Ekkenga, Der Konzern 2007, 413, 416. 10 SEC(2004) 1342, p. 7; see also Bayer/J.Schmidt, ZIP 2010, 953, 962; Teichmann, SR 2008, 363. 11 Bayer/J.Schmidt, ZIP 2010, 953, 962; Teichmann, SR 2008, 363; Ekkenga, Der Konzern 2007, 413, 414; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 235 et seq. 12 See also Grundmann, Europäisches Gesellschaftsrecht, para. 362.

364

Jan P. Brosius

Art 76

TITLE I GENERAL PROVISIONS

VIII. Exceptions Member States may set aside the right to obtain security only where the creditor has 10 other adequate safeguards, or where such safeguards are not necessary having regard to the assets of the company. Again, the provision leaves Member States great scope of discretion. Legal Scholars argue that this provision was inspired by French law.13 Further, pursuant to Article 84 (3) Member States must ensure that Article 75 does 11 not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU14 of the European Parliament and of the Council (cf. → Art 84 mn. 5, 15).

IX. Minimum Provision As follows from the wording “at least” and “in any event” Article 71 provides for a 12 minimum standard.15 Member States may provide for stricter rules as well.16

Article 76 Derogation from safeguards for creditors in case of reduction in the subscribed capital 1. Member States need not apply Article 75 to a reduction in the subscribed capital the purpose of which is to offset losses incurred or to include sums of money in a reserve provided that, following this operation, the amount of such reserve is not more than 10 % of the reduced subscribed capital. Except in the event of a reduction in the subscribed capital, this reserve may not be distributed to shareholders; it may be used only for offsetting losses incurred or for increasing the subscribed capital by the capitalisation of such reserve, in so far as the Member States permit such an operation. 2. In the cases referred to in paragraph 1, the laws of the Member States shall at least provide for the measures necessary to ensure that the amounts deriving from the reduction of subscribed capital may not be used for making payments or distributions to shareholders, or discharging shareholders from the obligation to make their contributions. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Material Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Direct Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 7 8

Edwards, EC Company Law, p. 88. 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ No L 173, 12.6.2014, p. 190–348. 15 See also Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 20 para. 210 et seq. 16 See also Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?,1998, p. 259. 13 14

Jan P. Brosius

365

Art 76 Derogation from safeguards for creditors in case of reduction in the subscribed capital

I. Overview 1

For the purpose of enabling restructuring measures, Article 76 stipulates special provisions for capital reductions that have the sole purpose to offset losses or to establish a reserve of less than 10% of the amount of subscribed capital remaining after the execution of such capital reduction.

II. Historical Background 2

Article 76 derives from the Second Directive1 (cf. Art 37 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since. The provision has a predecessor in German Law.

III. Purpose 3

Article 76 aims to make economically desirable restructuring measures possible without ignoring the shareholder and creditor protections sought to be granted under the Directive. The Commission pointed out that the provisions laid down in Article 76 are not intended to avoid the safeguards guaranteed to creditors. Rather, the economic purpose of such capital reduction must be to lay the foundation for a subsequent capital increase to provide the company with the necessary financial resources. Such a capital increase requires that the existing losses are offset by means of a capital reduction. Such capital reduction may not, on the other hand, enable shareholders to achieve profits and make distributions.2

IV. Material Scope Member States may refrain from applying Article 75 to capital reductions that have the sole purpose of either offsetting losses incurred or establishing a reserve in the amount of not more than 10 % of the subscribed capital remaining after the execution of such capital decrease. 5 The established reserve, in turn, may not be distributed to shareholders, but only be used for offsetting losses incurred or, as far as permitted under national law, for increasing the subscribed capital by the capitalisation of such reserve. 6 Article 76 (2), as an application of the general principle of effectiveness, provides that Member States must at least provide for the measures necessary to ensure that none of the amounts deriving from the capital reduction are used for the benefit of 4

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 First Proposal, OJ No C 48, 24.04.1970, p. 15.

366

Jan P. Brosius

Art 77

TITLE I GENERAL PROVISIONS

existing shareholders. The company may not make any payments or distributions to shareholders or discharge them from their obligation to make their contributions. The Economic and Social Committee proposed to specify the „measures necessary” 3 but, unfortunately, its proposal was not taken up.

V. Minimum Provision As follows from the very wording of the provisions (“need not to apply”, “at least”) 7 Article 76 provides for a minimum provision and Member States are allowed to maintain general rules on capital decreases or, for that matter, provide for even stricter provisions.

VI. Direct Effect Article 76 is not unconditionally and not sufficiently precise to fulfil the requirements 8 of a direct application (cf. → Intro Art 44 mn. 64).

Article 77 Reduction in the subscribed capital and the minimum capital The subscribed capital may not be reduced to an amount less than the minimum capital laid down in accordance with Article 45. However, Member States may permit such a reduction if they also provide that the decision to reduce the subscribed capital may take effect only when the subscribed capital is increased to an amount at least equal to the prescribed minimum. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. No Capital Reduction Below Minimum Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 5 6

I. Historical Background Article 77 derives from the Second Directive 1 (cf. Art 38 of Directive 2012/30/EU). It 1 was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

OJ No C 88, 6.9.1971, p. 5. Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 3

1

Jan P. Brosius

367

Art 78 Redemption of subscribed capital without reduction

II. Purpose 2

As pointed out by the Commission, the principle laid down in Article 77 is an indispensable complement to the principle of minimum capital as stipulated in Article 45.2

III. No Capital Reduction Below Minimum Capital 3

Article 77 clarifies that the subscribed capital may not be reduced to an amount less than the minimum capital laid down in accordance with Article 45. The reference point is the minimum capital determined by the relevant national law and not the minimum amount of EUR 25.000,00 as stipulated in Article 45.

IV. Exception 4

Article 77 (2) provides for a permissible exception. Member States may allow companies to reduce their capital below the minimum capital provided for in national law if they also provide that the decision to reduce the subscribed capital may take effect only when it is increased to an amount at least equal to the prescribed minimum. This exception is intended to facilitate the implementation of the capital measures where the company is in a tense financial situation and should be viewed in conjunction with the provisions laid down in Article 76.

V. Sanctions 5

The Commission explicitly stated that, as usually, it remains to the discretion of Member States to provide for sanctions in case of a breach of the principle laid down in Article 77.3

VI. Direct Application 6

Article 77 is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

Article 78 Redemption of subscribed capital without reduction Where the laws of a Member State authorise total or partial redemption of the subscribed capital without reduction of the latter, they shall at least require that the following conditions are observed: (a) where the statutes or instrument of incorporation provide for redemption, the latter shall be decided on by the general meeting voting at least under the usual conditions of quorum and majority; where the statutes or instrument of incorporation do not provide for redemption, the latter shall be decided upon by 2 3

368

First Proposal, OJ No C 48, 24.04.1970, p. 16. First Proposal, OJ No C 48, 24.04.1970, p. 16.

Jan P. Brosius

Art 78

TITLE I GENERAL PROVISIONS

the general meeting acting at least under the conditions of quorum and majority laid down in Article 83; the decision shall be published in the manner prescribed by the laws of Member States, in accordance with Article 16; (b) only sums which are available for distribution within the meaning of Article 56(1) to (4) may be used for redemption purposes; (c) shareholders whose shares are redeemed shall retain their rights in the company, with the exception of their rights to the repayment of their investment and participation in the distribution of an initial dividend on unredeemed shares. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Redemption of Subscribed Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 9 10

I. Overview Article 78 lays down certain requirements that have to be transposed into national 1 law if a Member State authorises the total or partial redemption1 of the subscribed capital without its reduction.

II. Historical Background Article 78 derives from the Second Directive2 (cf. Art 39 of Directive 2012/30/EU). 2 It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since. Article 78 and the redemption of the subscribed capital have a predecessor in French and Belgian Law.3

III. Purpose Article 78 intends to provide for minimum safeguards for a measure that is, in its 3 effects, highly comparable to a capital decrease. The Commission wanted to make sure that the same rules on capital reductions as laid down in Articles 73 et seqq. also apply

1 For more details on the redemption of shares see Gower & Davies, Principles of Modern Company Law, para. 3-7 et seqq. 2 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 3 First Proposal, OJ No C 48, 24.04.1970, p. 16, Wooldrige, Company Law in the UK and the EC, p. 32; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 20 para. 221; Denecker Rev. Soc. 1977, 661, 677; Edwards, EC Company Law, p. 89, Pipkorn ZHR 141 (1977) 330, 348; Wooldridge [1978] Acta Juridica 327, 341.

Jan P. Brosius

369

Art 79 Reduction in the subscribed capital by compulsory withdrawal of shares to the redemption of the subscribed capital without requiring Member States to provide for this capital mechanism that most of them were unfamiliar with.4

IV. Redemption of Subscribed Capital 4

5

6

7 8

The redemption of subscribed capital without its reduction requires, at a first step, that the statutes of the company generally allow for such measures. The general meeting may then decide on the redemption of capital voting at least under the usual conditions of quorum and majority, i.e. generally with simple majority. In case there are several classes of shares Article 81 applies. Where the company’s statues do not allow for a redemption of capital, the general meeting must decide with a quorum as laid down in Article 83, i.e. the decision must be taken at least by a majority of not less than two-thirds of the votes attaching to the securities or the subscribed capital represented. However, pursuant to the second paragraph of Article 83, Member States may provide for a quorum of a simple majority of the votes when at least half the subscribed capital is represented. Again, in case there are several classes of shares Article 81 applies. In both cases described above, the decision of the general meeting has to be published in accordance with Article 16 (former Article 3 of Directive 2009/101/EC), pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means. (cf. → Art 16 mn. 6 et seq.). However, only sums which are available for distribution within the meaning of Article 56 (1) to (4) may be used for redemption purposes (cf. → Art 56 mn. 4 et seqq.). Shareholders whose shares are redeemed shall retain their rights in the company, with the exception of their rights to the repayment of their investment and participation in the distribution of an initial dividend on unredeemed shares.

V. Minimum Provision 9

As follows from the very wording of the provision (“at least”) Article 78 provides for a minimum provision and Member States may provide for stricter rules.

VI. Direct Application 10

Article 78 is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

Article 79 Reduction in the subscribed capital by compulsory withdrawal of shares 1. Where the laws of a Member State allow companies to reduce their subscribed capital by compulsory withdrawal of shares, they shall require that at least the following conditions are observed: 4

370

First Proposal, OJ No C 48, 24.04.1970, p. 16.

Jan P. Brosius

Art 79

TITLE I GENERAL PROVISIONS

(a) compulsory withdrawal must be prescribed or authorised by the statutes or instrument of incorporation before the shares which are to be withdrawn are subscribed for; (b) where the compulsory withdrawal is authorised merely by the statutes or instrument of incorporation, it shall be decided upon by the general meeting unless it has been unanimously approved by the shareholders concerned; (c) the company body deciding on the compulsory withdrawal shall fix the terms and manner thereof, where they have not already been fixed by the statutes or instrument of incorporation; (d) Article 75 shall apply except in the case of fully paid-up shares which are made available to the company free of charge or are withdrawn using sums available for distribution in accordance with Article 56(1) to (4); in these cases, an amount equal to the nominal value or, in the absence thereof, to the accountable par of all the withdrawn shares must be included in a reserve; except in the event of a reduction in the subscribed capital, this reserve may not be distributed to shareholders; it can be used only for offsetting losses incurred or for increasing the subscribed capital by the capitalisation of such reserve, in so far as Member States permit such an operation; and (e) the decision on compulsory withdrawal shall be published in the manner laid down by the laws of each Member State in accordance with Article 16. 2. The first paragraph of Article 73 and Articles 74, 76 and 83 shall not apply to the cases to which paragraph 1 of this Article refers. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Derogations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 10 11 12

I. Overview Article 79 lays down certain requirements that have to be transposed into national 1 law, if a Member State allows companies to reduce their subscribed capital by compulsory withdrawal of shares.

II. Historical Background Article 79 derives from the Second Directive 1 (cf. Art 40 of Directive 2012/30/EU). It 2 was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Despite for editorial changes, its material content has not been amended since. Article 79 and the principle of compulsory withdrawal of shares have a predecessor in German Law.2 The SLIM Initiative proposed that a compulsory withdrawal should be allowed not only if authorised by the statutes at their issue, but also after their issue, by a later resolution of the general meeting passed by a majority of at least 90 % of the share capital to ensure that the shares of the remaining minority can be withdrawn where a Member States has not introduced squeeze-out remedies.3 However, this proposal to amend the Second Directive was not taken up in Directive 2006/68/EC.

Jan P. Brosius

371

Art 79 Reduction in the subscribed capital by compulsory withdrawal of shares

III. Purpose 3

The European legislature did not intend to obligate Member States to provide for the principle of compulsory withdrawal of shares which most of them were unfamiliar with. Rather, Article 79, just as Article 78, intends to provide for minimum safeguards for this legal measure which is, in its effects, highly comparable to a capital decrease in the meaning of Article 73. The Commission wanted to make sure that at least the basic rules on capital reductions as laid down in Articles 73 to 77 also apply to a compulsory withdrawal of shares.4 It aims to provide shareholder protection as well as creditor protection.5

IV. Scope If a Member State allows for a compulsory withdrawal of shares, it is obliged to implement certain conditions. First, the compulsory withdrawal must be provided for in the company’s statutes, stating either the prescription or the authorisation of such measure, before the respective shares have been subscribed for. 5 Where the statutes don’t prescribed, but merely authorised the withdrawal, the general meeting has to decide upon it, unless the withdrawal has been unanimously approved by the shareholders concerned. As follows from Article 79 (2) a simple majority is sufficient. However, Member States may provide for stricter requirements. In case there are several classes of shares Article 81 applies (cf. → Art 81 mn. 3 et seqq.). 6 It further follows from the wording of point (b) of Article 79 (1) that even an amicable withdrawal with the consent of the respective shareholder requires an authorisation contained in the company’s statutes before the respective shares have been subscribed for. Even though the legislature aimed not only to provide for shareholder protection but also creditor protection it remains unclear whether it intended to impose such a broad restriction. From a dogmatic point of view, the result is certainly found to be correct. 7 If not expressly provided for in the statues, the company body deciding on the compulsory withdrawal has to fix its terms and manner. Where the withdrawal has been prescribed by the statutes, this generally addresses the management body. In cases provided for in point (b) of Article 79 (1) the obligation generally addresses the general meeting. The key terms are the compensation and its payment as well as the effective date of the withdrawal. 4

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq. 2 First Proposal, OJ No C 48, 24.04.1970, p. 16; Wooldrige, Company Law in the UK and the EC, p. 32. 3 Recommendations by the Company Law Slim Working Group on the simplification of the First and Second Company Law Directives of 1999 (http://ec.europa.eu/internal_market/company/docs/official/60 37en.pdf), p. 4, 13. 4 First Proposal, OJ No C 48, 24.04.1970, p. 16. 5 First Proposal, OJ No C 48, 24.04.1970, p. 16.

372

Jan P. Brosius

Art 79

TITLE I GENERAL PROVISIONS

The provisions on creditor protection as stipulated in Article 75 generally apply to 8 a compulsory withdrawal of shares as well. However, Article 75 is not applicable if the respective shares are fully paid up and made available to the company free of charge, i.e. particularly without the obligation to pay a compensation, or using sums legally available for distribution pursuant to Article 56 (1) to (4) (cf. → Art 56 mn. 4 et seqq.). In this case an undistributable reserve has to be established in the amount of the nominal value or, where applicable, the accountable par of the withdrawn shares. Such reserve may only be distributed to shareholders in the event of a capital reduction or be used to offset losses or, where Member States permit such mechanisms, to increase the capital by its capitalisation. In any case, Article 76 and its exceptions do not apply as follows from Article 79 (2). The decision on the compulsory withdrawal has to be published in accordance with 9 Article 16 (former Article 3 of Directive 2009/101/EC), pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means. (cf. → Art 16 mn. 6 et seq.).

V. Derogations Pursuant to Article 84 (2) Member States may decide not to apply Article 79 to 10 companies incorporated under a special law which issue both capital shares and workers' shares, the latter being issued to the company's employees as a body, who are represented at general meetings of shareholders by delegates having the right to vote (cf. → Art 84 mn. 13 et seq.). Further, pursuant to Article 84 (3) Member States must ensure that Article 79 does not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU6 of the European Parliament and of the Council (cf. → Art 84 mn. 5, 15). Also, pursuant to Article 84 (4), Member States shall derogate from point (b) of Article 79 (1) to the extent and for the period that such derogation is necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/10237 (cf. → Art 84 mn. 6, 16 et seqq.).

VI. Minimum Provision As follows from the wording of the provision (“at least”) Article 79 provides for 11 minimum protection. Member States may provide for stricter provisions.

6 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ No L 173, 12.6.2014, p. 190–348. 7 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18.

Jan P. Brosius

373

Art 80 Reduction in the subscribed capital by the withdrawal of shares

VII. Direct Application 12

Article 79 is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

Article 80 Reduction in the subscribed capital by the withdrawal of shares acquired by the company itself or on its behalf 1. In the case of a reduction in the subscribed capital by the withdrawal of shares acquired by the company itself or by a person acting in his own name but on behalf of the company, the withdrawal shall always be decided on by the general meeting. 2. Article 75 shall apply unless the shares are fully paid up and are acquired free of charge or using sums available for distribution in accordance with Article 56(1) to (4); in these cases an amount equal to the nominal value or, in the absence thereof, to the accountable par of all the shares withdrawn shall be included in a reserve. Except in the event of a reduction in the subscribed capital, this reserve may not be distributed to shareholders. It may be used only for offsetting losses incurred or for increasing the subscribed capital by the capitalisation of such reserve, in so far as the Member States permit such an operation. 3. Articles 74, 76 and 83 shall not apply to the cases to which paragraph 1 of this Article refers. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Derogations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 7 8 9

I. Overview 1

Article 80 lays down the requirements to be transposed into national law which have to be met to withdrawal shares held directly by the company itself or by a middleman on behalf of the company.

II. Historical Background 2

Article 80 derives from the Second Directive 1 (cf. Art 41 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

III. Purpose 3

Article 80 serves the protection of shareholders as well as creditors.

374

Jan P. Brosius

Art 80

TITLE I GENERAL PROVISIONS

IV. Scope Article 80 does not oblige Member States to provide for the concept of withdrawal of 4 own shares. It rather stipulates the requirements to be met where a withdrawal of own shares exists under national law. However, the withdrawal of own shares is a suitable and appropriate means of cancelling shares pursuant to Articles 61 (3) and 62. Article 80 applies to shares held directly by the company or indirectly, i.e. by a 5 middleman or nominee who acts in his own name but on behalf of the company. It assigned exclusive competence to decide on this measure to the general meeting. As follows from Article 80 (3) a simple majority is sufficient. However, Member States may provide for stricter requirements. In case there are several classes of shares Article 81 applies (→ Art 81 mn. 3 et seqq.). The provisions on creditor protection as stipulated in Article 75 generally apply to the 6 withdrawal of own shares as well. However, Article 75 is not applicable if the respective shares (i) are fully paid up and (ii) were acquired either free of charge or using sums legally available for distribution pursuant to Article 56 (1) to (4) (→ Art 56 mn. 4 et seqq.). In this case an undistributable reserve has to be established in the amount of the nominal value or, if applicable, the accountable par of the withdrawn shares. Such reserve may only be distributed to shareholders in the event of a capital reduction or be used to offset losses or, where Member States permit such mechanisms, to increase the capital by its capitalisation. In any case, Article 76 and its exceptions do not apply as follows from Article 80 (3).

V. Derogations Pursuant to Article 84 (2) Member States may decide not to apply Article 80 to 7 companies incorporated under a special law which issue both capital shares and workers' shares, the latter being issued to the company's employees as a body, who are represented at general meetings of shareholders by delegates having the right to vote (cf. → Art 84 mn. 13 et seq.). Further, pursuant to Article 84 (3) Member States must ensure that Article 80 does not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU2 of the European Parliament and of the Council (cf. → Art 84 mn. 5, 15). Also, pursuant to Article 84 (4), Member States shall derogate from Article 80 (1) to the extent and for the period that such derogation is necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/10233 (cf. → Art 84 mn. 6, 16 et seqq.). 1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 2 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ No L 173, 12.6.2014, p. 190–348.

Jan P. Brosius

375

Art 81 Redemption of the subscribed capital or its reduction by withdrawal of shares

VI. Minimum Provision 8

Article 80 provides for minimum protection. Member States may provide for stricter requirements.

VII. Direct Application 9

Article 80 is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

Article 81 Redemption of the subscribed capital or its reduction by withdrawal of shares in case of several classes of shares In the cases covered by Article 78, Article 79(1)(b) and Article 80(1), when there are several classes of shares, the decision by the general meeting concerning redemption of the subscribed capital or its reduction by withdrawal of shares shall be subject to a separate vote, at least for each class of shareholders whose rights are affected by the transaction. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Material Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Derogations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 5 6

I. Historical Background 1

Article 81 derives from the Second Directive 1 (cf. Art 42 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

II. Purpose 2

Article 81 is an application of the principle of equal treatment of shareholders as laid down in Article 85. This principle does not require to attach the same rights to all 3 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18. 1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn. 7 et seqq.

376

Jan P. Brosius

Art 81

TITLE I GENERAL PROVISIONS

shares of a company. If provided for accordingly in the statutes of the company, it may issue different classes of shares carrying different membership rights (for the nature of classes of shares see → Art 68 mn. 16 et seqq.). However, within these classes of shares, the shareholders must be treated equally as they are “in the same position” as stated in Article 85.

III. Material Scope Article 81 applies to all cases of a redemption of subscribed capital pursuant to Article 3 78, a compulsory withdrawal authorised by statutes pursuant to point (b) of Article 79 (1) and the withdrawal of own shares pursuant to Article 80 (1). If there are several classes of shares, the decision by the general meeting concerning the aforementioned cases must be subject to a separate vote at least for each class of shareholders whose rights are affected. Regarding the notion of classes of shares see → Art 68 mn. 16 et seqq. From the wording of the provision it remains unclear in which circumstances the 4 rights of a shareholder are “affected by the transaction”.2 It is to be assumed that any measure pursuant to Article 78, point (b) of Article 79 (1) and Article 80 (1) affects each existing class of shares.

IV. Derogations Pursuant to Article 84 (2) Member States may decide not to Article 81 to companies 5 incorporated under a special law which issue both capital shares and workers’ shares, the latter being issued to the company’s employees as a body, who are represented at general meetings of shareholders by delegates having the right to vote (cf. → Art 84 mn. 13 et seq.). Further, pursuant to Article 84 (3) Member States must ensure that Article 81 does not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU3 of the European Parliament and of the Council (cf. → Art 84 mn. 5, 15). Also, pursuant to Article 84 (4), Member States shall derogate from Article 81 to the extent and for the period that such derogation is necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/10234 (cf. → Art 84 mn. 6, 16 et seqq.).

V. Minimum Provision As follows from the wording of the provision (“at least”) Article 81 constitutes a 6 minimum provision and Member States may provide for stricter requirements.

See also Edwards, EC Company Law, p. 88; Temple Lang, J (1972) 7 Irish Jurist 306, 312. 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ No L 173, 12.6.2014, p. 190–348. 4 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18. 2

3

Jan P. Brosius

377

Art 82 Conditions for redemption of shares

Article 82 Conditions for redemption of shares Where the laws of a Member State authorise companies to issue redeemable shares, they shall require that the following conditions, at least, are complied with for the redemption of such shares: (a) redemption must be authorised by the company’s statutes or instrument of incorporation before the redeemable shares are subscribed for; (b) the shares must be fully paid up; (c) the terms and the manner of redemption must be laid down in the company’s statutes or instrument of incorporation; (d) redemption can be only effected by using sums available for distribution in accordance with Article 56(1) to (4) or the proceeds of a new issue made with a view to effecting such redemption; (e) an amount equal to the nominal value or, in the absence thereof, to the accountable par of all the redeemed shares must be included in a reserve which cannot be distributed to the shareholders, except in the event of a reduction in the subscribed capital; it may be used only for the purpose of increasing the subscribed capital by the capitalisation of reserves; (f) point (e) shall not apply to redemption using the proceeds of a new issue made with a view to effecting such redemption; (g) where provision is made for the payment of a premium to shareholders in consequence of a redemption, the premium may be paid only from sums available for distribution in accordance with Article 56(1) to (4), or from a reserve other than that referred to in point (e) of this Article which may not be distributed to shareholders except in the event of a reduction in the subscribed capital; this reserve may be used only for the purposes of increasing the subscribed capital by the capitalisation of reserves or for covering the costs referred to in point (j) of Article 4 or the cost of issuing shares or debentures or for the payment of a premium to holders of redeemable shares or debentures; (h) notification of redemption shall be published in the manner laid down by the laws of each Member State in accordance with Article 16. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Derogations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 11 12 13

I. Overview 1

Article 82 lays down certain requirements that have to be transposed into national law if a Member State authorises companies to issue redeemable shares. There is a close connection to the acquisition of own shares pursuant to Article 60 et seq.1

1

378

For further details see Habersack, FS Lutter, p. 1329, 1335 et seq.

Jan P. Brosius

Art 82

TITLE I GENERAL PROVISIONS

II. Historical Background Article 82 derives from the Second Directive2 (cf. Art. 43 of Directive 2012/30/EU). 2 It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since. Article 82 and the concept of redeemable shares have a predecessor in UK law3 and there is an understanding, that the provision was widely modelled on existing legislation in the United Kingdom.4

III. Purpose Article 82 aims to protect shareholders as well as creditors.

3

IV. Scope Article 82 does not oblige Member States to provide for the concept of redeemable shares. It rather stipulates certain minimum requirements to be met where redeemable shares exists under national law. Frist, Article 82 requires that the redemption of shares has been authorised in the company’s statutes before the respective shares have been subscribed for, including a specification of terms and the manner of redemption. This includes particularly the questions who may at what time and under which conditions exercise the right of redemption and what price and, as the case may be, premium has to be paid by the company.5 The shares to be redeemed must be fully paid up and the redemption may only be effected by using either sums legally available for distribution pursuant to Article 56 (1) to (4) (cf. → Art. 56 mn. 4 et seqq.) or the proceeds of a new issue made with a view to effecting such redemption, while the amount of such proceeds must be fixed and collected prior to the redemption and may not merely be predicted. These requirements serve the purpose of capital maintenance and hence creditor protection.6 An undistributable reserve has to be established in the amount of the nominal value or, where applicable, the accountable par of the redeemed shares. Such reserve may only be distributed to shareholders in the event of a capital reduction or, where Member States permit such mechanisms, be used to increase the capital by its capitalisation. Point (f), however, excludes the redemption using the proceeds of a new issue as referred to under → mn. 6 from the requirement of an undistributable reserve. 2 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art. 44 mn.7 et seqq. 3 Wooldrige, Company Law in the UK and the EC, p. 32; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 250; Davies, 13-9; Dominguez AG 2004, 487; Habersack, FS Lutter, p. 1329, 1331. 4 Edwards, EC Company Law, p. 52; Morse (1977) 2 E.L.Rev. 126, 131. 5 In more detail see Habersack, FS Lutter, p. 1329, 1339 et seqq. 6 See Habersack, FS Lutter, p. 1329, 1342.

Jan P. Brosius

379

4

5

6

7

Art 83 Voting requirements for the decisions of the general meeting If, in consequence of a redemption, a premium is to be paid to the respective shareholder, consistently, this premium may only be effected by using either sums legally available for distribution pursuant to Article 56 (1) to (4) or sums from a reserve other than that referred to under → mn. 7 and which may be used only for a limited number of purposes, i.e. a capital increase by means of capitalisation of such reserve or for covering the costs referred to in point (j) of Article 4, i.e. the costs payable by the company or chargeable to it by reason of its formation, or the cost of issuing shares or debentures or, as provided for in Article 82, for the payment of a premium to holders of redeemable shares or debentures. 9 The notification of redemption has to be published in accordance with Article 16 (former Article 3 of Directive 2009/101/EC), pursuant to which Member States shall ensure that disclosure of documents is effected by making them publicly available in the register. In addition, Member States may also require that documents are published in a national gazette designated for that purpose, or by equally effective means. (cf. → Art 16 mn. 6 et seq.). 10 The Directive does not specify what happens to the respective shares after their redemption. It is to the discretion of the Member States to provide either for their cancellation or to allow the company to hold them as own shares.7 8

V. Derogations 11

Pursuant to Article 84 (2) Member States may decide not to apply Article 82 to companies incorporated under a special law which issue both capital shares and workers' shares, the latter being issued to the company’s employees as a body, who are represented at general meetings of shareholders by delegates having the right to vote (cf. → Art. 84 mn. 13 et seq.).

VI. Minimum Provision 12

As follows from the wording of the provision (“at least”) Article 82 only stipulates minimum requirements. Member States are allowed to provide for stricter rules. 8

VII. Direct Application 13

Article 82 is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art. 44 mn. 64).

Article 83 Voting requirements for the decisions of the general meeting The laws of the Member States shall provide that the decisions referred to in Article 72(4) and (5) and Articles 73, 74, 78 and 81 are to be taken at least by a majority of not less than two thirds of the votes attaching to the securities or the subscribed capital represented.

7 8

380

Habersack, FS Lutter, p. 1329, 1244 et seq. with further references. Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 264.

Jan P. Brosius

Art 83

TITLE I GENERAL PROVISIONS

The laws of the Member States may, however, lay down that a simple majority of the votes specified in the first paragraph is sufficient when at least half the subscribed capital is represented. I. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Three-Fourths Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Simple Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Minimum Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 5

I. Historical Background Article 83 derives from the Second Directive 1 (cf. Art 44 of Directive 2012/30/EU). It 1 was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since.

II. Three-Fourths Majority Pursuant to Article 83 (1) Member States must provide that the decisions by the general 2 meeting referred to in Article 72 (4) (restriction of pre-emptive rights), Article 72 (5) (delegating the power to restrict pre-emptive rights), Articles 73 and 74 (reduction in capital), Article 78 (redemption of capital) and 81 (several votes for several classes of shares) must be taken at least by a majority of not less than two-thirds of the votes attaching to the securities, i.e. shares, or the subscribed capital represented.

III. Simple Majority By derogation from Article 83 (1), Article 83 (2) grants Member States the right to lay 3 down the requirement of a simple majority of the votes as specified in the first paragraph when at least half the subscribed capital is represented.

IV. Minimum Provision Article 83 stipulates minimum provisions. Member State may provide for stricter 4 majority requirements.

1 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq.

Jan P. Brosius

381

Art 84 Derogation from certain requirements

V. Direct Application 5

Article 83 (1) is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64). The same does not apply to Article 83 (2).

Section 6 Application and implementing arrangements Article 84 Derogation from certain requirements 1. Member States may derogate from the first paragraph of Article 48, the first sentence of Article 60(1)(a) and Articles 68, 69 and 72 to the extent that such derogations are necessary for the adoption or application of provisions designed to encourage the participation of employees, or other groups of persons defined by national law, in the capital of undertakings. 2. Member States may decide not to apply the first sentence of Article 60(1)(a) and Articles 73, 74 and 79 to 82 to companies incorporated under a special law which issue both capital shares and workers’ shares, the latter being issued to the company’s employees as a body, who are represented at general meetings of shareholders by delegates having the right to vote. 3. Member States shall ensure that Article 49, Articles 58(1) and 68(1), (2) and (3), the first subparagraph of Article 70(2), Articles 72 to 75, 79, 80 and 81 do not apply in the case of use of the resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU of the European Parliament and of the Council (9). 4. Member States shall derogate from Article 58(1), Article 68, Articles 72, 73, and 74, point (b) of Article 79(1), Article 80(1) and Article 81 to the extent and for the period that such derogations are necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/1023 of the European Parliament and of the Council(10). The first subparagraph shall be without prejudice to the principle of equal treatment of shareholders. I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Derogation in Favour of Employee Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Derogation in Favour of Worker’s Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Derogation in Favour of Mechanisms laid down in Directive 2014/59/EU . . VII. Derogation in Favor of Restructuring Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 7 8 13 15 16 20

(9) 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190). (10) Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) (OJ L 172, 26.6.2019, p. 18).

382

Jan P. Brosius

Art 84

TITLE I GENERAL PROVISIONS

I. Overview Article 84 (1) and (2) grants Member States the right to provide for derogations from 1 a number of restrictions laid down in Title I, Chapter IV of the Directive for the purpose of employee participation and the participation of certain other groups of people as well as for workers’ shares, where companies incorporated under a special law issuing such shares exist, if such shares are being issued to the company’s employees as a body. In this context, attention should be paid to the provisions laid down in Article 60 (3) and Article 64 (6) as well.1 Further, Article 84 (3) obliges Member States to provide for a derogation from a 2 number of provisions stipulated in Title I, Chapter IV of the Directive for the use of the resolution tools, powers and mechanisms as provided for in Directive 2014/59/EU 2. Lastly, Article 84 (4) obliges Member States to derogate from certain provisions laid 3 down in Title I, Chapter IV of the Directive to the extent and for the period that such derogations are necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/10233.

II. Historical Background Article 84 (1) through (3) derive from the Second Directive 4 (cf. Art 45 of Directive 4 2012/30/EU). Paragraphs 1 and 2 were implemented in the initial version of the Second Directive 77/91/EEC of 13 December 1976; subsequently, Article 84 (1) was amended and revised by Article 1 point 10 of Directive 2006/68/EC.5 Article 84 (3) was added by Article 123 of Directive 2014/59/EU. Pursuant to the first 5 Recital of the preamble of Directive 2014/68/EC the financial crisis had shown that there was a significant lack of adequate tools to deal effectively with unsound or failing credit institutions and investment firms. However, such tools were needed to prevent insolvency and to obviate the need for taxpayers’ money to safe such institutions to the greatest extent possible. As laid down in recital 121 of the preamble of Directive 2014/68/EC the (Second) Directive stipulated shareholders’ rights to decide on capital increases and See, in general, Morse [1977] E.L.Rev. 126, 132; Wooldridge [1978] Acta Juridica 327, 341. 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council, OJ No L 173, 12.6.2014, p. 190–348. 3 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, p. 18. 4 Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 5 Directive 2006/68/EC of the European Parliament and of the Council of 6 September 2006 amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital, OJ L 264, 25.9.2006, p. 32–36. 1

2

Jan P. Brosius

383

Art 84 Derogation from certain requirements reductions, on their right to participate in any new share issue for cash consideration, on creditor protection in the event of capital reduction and the convening of shareholders’ meeting in the event of serious loss of capital which may hinder the rapid action by resolution authorities. Therefore, derogations from such provisions became necessary. 6 Article 84 (4) was added by Article 32 of Directive (EU) 2019/1023. Pursuant to the first Recital of the preamble of Directive (EU) 2019/1023 its objective is to contribute to the proper functioning of the internal market and to remove obstacles in particular to the exercise of the free movement of capital and freedom of establishment, concerning preventive restructuring, insolvency, discharge of debt, and disqualifications by ensuring that (i) viable enterprises and entrepreneurs that are in financial difficulties have access to effective national preventive restructuring frameworks which enable them to continue operating; (ii) honest insolvent or over-indebted entrepreneurs can benefit from a full discharge of debt after a reasonable period of time, thereby allowing them a second chance; and (iii) the effectiveness of procedures concerning restructuring, insolvency and discharge of debt is improved, in particular with a view to shortening their length. Inter alia, Directive (EU) 2019/1023 lays down minimum standards for the content of a restructuring plan. (cf. Recital 42 of Directive (EU) 2019/1023). Recital 96 of the preamble of Directive (EU) 2019/1023 states that the effectiveness of the process of adoption and implementation of the restructuring plan should not be jeopardised by company law. Therefore, Member States should be able to derogate from the requirements laid down in the Directive concerning the obligations to convene a general meeting and to offer on a pre-emptive basis shares to existing shareholders, to the extent and for the period necessary to ensure that shareholders do not frustrate restructuring efforts by abusing their rights under the Directive.

III. Purpose 7

Initially, Article 84 has pursued exclusively social policy objectives;6 in particular, the first two paragraphs aim to encourage private individuals to acquire shares.7 Hence, it pursues to strengthen the position of employees and comparable groups of people. Due to the implementation of Article 84 (3), it also aims to protect the general public, i.e. the taxpayers, from the effects of a failure of a financial institution and the cost of the prevention or consequences of its insolvency. The most recent implementation of Article 84 (4) somewhat deviates from such notion while focusing on rather functional goals regarding the areas of restructuring, insolvency, discharge of debt, and disqualifications. Article 84 in its entirety clearly emphasises a stakeholder approach.8

IV. Derogation in Favour of Employee Participation 8

Article 84 (1) grants Member States the right to derogate from the provisions laid down in Article 48 (1) (due date of capital contributions in the course of the company’s formation), the first sentence of Article 60 (1) (a) (competence of the general meeting regarding the acquisition of own shares), Article 68 (competence of the general meeting regarding a capital increase), Article 69 (due date of capital contributions in the course of a capital increase) and Article 72 (right of pre-emption in the course of a capital Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 253. Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 32. 8 See also Pipkorn, ZHR 141, (1977) 330, 349. 6

7

384

Jan P. Brosius

Art 84

TITLE I GENERAL PROVISIONS

increase), provided, however, (i) the Member State provides for provisions designed to encourage the participation of employees, or other groups of persons defined by national law, in the capital of undertakings, and (ii) the respective derogations are necessary for the adoption or application of such provisions. There is a controversy as to whether members of the management body qualify as employees privileged by Article 84 (1).9 If the members of the management body are also employed by the company they do fall in the scope of Article 84 (1), irrespective of their powers as members of the management board or their possibly privileged financial situation. Article 84 (1) does not provide for the essential characteristics of “other groups of persons defined by national law”. It is the responsibility and in the discretion of the Member States to provide for a respective definition. However, such groups must be clearly distinguishable and not so broadly defined that they effectively remove the impact of the respective provisions laid down in the Directive. They have to remain narrowly formulated exceptions. Further, it can be assumed that in their political impact, they must be somewhat comparable to employees. The Court of Justice pointed out that the reference to “other groups of persons” refers to shareholdings by private individuals and is not concerned with the transfer of shares to credit institutions or to public-law bodies.10 Article 84 (1), just like the provisions in Article 60 (3) (→ Art 60 mn. 24 et seq.) and Article 64 (6) (→ Art 64 mn. 46) is intended “solely to encourage, in an objective and concrete manner, persons, such as employees, who generally do not have the means necessary to do so under the normal conditions of company law in the Member States, to participate in the capital of undertakings.”11 As follows from the word “encourage” the respective provisions to be adopted by Member States not only have to make such participations possible, but rather have to contain effective incentives for employees to take part in such acquisitions. The national law may not merely provide for the possibility to transferring shares to employees or to individuals as such a possibility is “merely hypothetical and ancillary”.12 The Court of Justice stated accordingly that “a national rule cannot take advantage of that derogation unless its practical application helps to achieve the objective” of Article 84 (1). 13 The derogation may not go any further than necessary to achieve the participation as stipulated in Article 84 (1).

9

10

11

12

V. Derogation in Favour of Worker’s Shares Article 84 (2) grants Member States the right not to apply the first sentence of Article 13 60 (1) (a) (competence of the general meeting regarding the acquisition of own shares), Articles 73 and 74 (competence of the general meeting regarding the decrease of capital), Article 79 (requirements for the compulsory withdrawal of shares), Article 80 (require9 In support of such view Hüffer, ZHR 161 (1997), 214, 239 et seq.; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, vol. 1 1994, p. 119, 224; Schmidtthoff (1978) 15 CMLR 43, 48; for a different view Martens, FS Ulmer, 2003, 399, 410 et seq. 10 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 35. 11 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 32. 12 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 34. 13 Joint Cases C-19/90 and C-20/90 Karella and Karallas v Minister for Industry, Energy and Technology, and Organismos Anasygkrotiseos Epicheiriseon AE [1991], I 2710, para. 33.

Jan P. Brosius

385

Art 84 Derogation from certain requirements ments for the withdrawal of shares held by the company), Article 81 (requirement of a separate vote for separate classes of shares regarding a redemption of share capital or a capital decrease) and Article 82 (requirements for the issue of redeemable shares) to companies incorporated under a special law which issue both capital shares and workers' shares. Such workers’ shares exist, for instance, under French law, cf. Art L225-259 et seqq. Code de commerce (actions de travail).14 14 Article 84 (2), however, requires that such workers’ shares are issued to the company’s employees as a body and such body of employees must be represented at general meetings of shareholders by delegates having the right to vote. Regarding the rights of the body of employees within the general meeting, Article 84 (2) merely sets a minimum requirement. It follows from the provision’s purpose that Member States may endow employees with further rights.

VI. Derogation in Favour of Mechanisms laid down in Directive 2014/59/EU 15

Article 84 (3) provides that Member States are obliged to ensure that certain restrictions and requirements laid down in Title I, Chapter IV of the Directive do not apply in case certain mechanisms provided for in Directive 2014/59/EU are used. The affected provisions laid down in the Directive are Article 49 (requirement of an expert report for contributions in kind), Article 58 (1) (calling of a general meeting in the event of a serious loss of the subscribed capital), Article 68 (1), (2) and (3) 15 (competence of the general meeting regarding a capital increase), the first subparagraph of Article 70 (2) (requirement of an expert report for contributions in kind in the course of a capital increase), Article 72 (right of pre-emption in the course of a capital increase), Articles 73 and 74 (competence of the general meeting regarding the decrease of capital), Article 75 (creditors’ right to obtain security), Article 79 (requirements for the compulsory withdrawal of shares), Article 80 (requirements for the withdrawal of shares held by the company), and Article 81 (requirement of a separate vote for separate classes of shares regarding a redemption of share capital or a capital decrease). The “resolution tools, powers and mechanisms” provided for in Directive 2014/59/EU are those laid down in great detail in Articles 70 et seqq. of such directive.

VII. Derogation in Favor of Restructuring Efforts 16

Article 84 (4) obliges Member States to derogate from certain provisions laid down in Title I, Chapter IV of the Directive to the extent and for the period that such derogations are necessary for the establishment of the preventive restructuring frameworks provided for in Directive (EU) 2019/1023. The affected provisions laid down in the Directive are Article 58 (1) (calling of a general meeting in the event of a serious loss of the subscribed capital), Article 68 (competence of the general meeting regarding a capital increase) Article 72 (right of pre-emption in the course of a capital increase), Articles 73 and 74 (competence of the general meeting regarding the decrease of capital), Article 80 (1) (competence of the general meeting regarding the withdrawal of shares held by the company), and Article 81 (requirement of a separate vote for separate classes of shares See also Denecker Rev.soc. 1977, 661, 678; Piepkorn, ZHR 141 (1977), 330, 349. Article 84 (3) does not apply to Article 68 (4) regarding the issue of securities which are convertible into shares or which carry the right to subscribe for shares. 14

15

386

Jan P. Brosius

Art 85

TITLE I GENERAL PROVISIONS

regarding a redemption of share capital or a capital decrease). Article 84 (4) intends to ensure that shareholders do not frustrate restructuring efforts by abusing these rights. For the purpose of clarification, Recital 96 of Directive (EU) 2019/1023 exemplary 17 states that “Member States might need to derogate from the obligation to convene a general meeting of shareholders or from the normal time periods, for cases where urgent action is to be taken by the management to safeguard the assets of the company, for instance through requesting a stay of individual enforcement actions and when there is a serious and sudden loss of subscribed capital and a likelihood of insolvency.” Further, it is stated that “derogations from company law might also be required when the restructuring plan provides for the emission of new shares which could be offered with priority to creditors as debt-to-equity swaps, or for the reduction of the amount of subscribed capital in the event of a transfer of parts of the undertaking.” Such derogations have to be limited in time to the extent and for the period that 18 such derogations are necessary for the establishment of the preventive restructuring frameworks. It is to the discretion of each Member State to determine the circumstances of such necessity, as pointed out in Recital 96 of Directive (EU) 2019/1023. Also, “Member States should not be obliged to derogate from company law, wholly or partially, for an indefinite or for a limited period of time, if they ensure that their company law requirements do not jeopardise the effectiveness of the restructuring process or if Member States have other, equally effective tools in place to ensure that shareholders do not unreasonably prevent the adoption or implementation of a restructuring plan which would restore the viability of the business.”16 Member States shall “attach particular importance to the effectiveness of provisions relating to a stay of individual enforcement actions and confirmation of the restructuring plan which should not be unduly impaired by calls for, or the results of, general meetings of shareholders.”17 The second subparagraph of Article 84 (4) emphasises that such derogations shall be 19 without prejudice to the principle of equal treatment of shareholders. This clarification has been added not before the very end of the legislative process. The provision clarifies that Article 84 (4) allows to deprive the general meeting, to a certain degree, from its decision making authority and the shareholders’ pre-emptive rights; however, the measures taken in exercise of the derogation provided for under Article 84 (4) may under no circumstances violate the principle of equal treatment, as, inter alia, laid down in Article 85.

VIII. Direct Application Article 84 (3) is unconditional and sufficiently precise to fulfil the requirements of a 20 direct application (cf. → Intro Art 44 mn. 64). The same does not apply to Article 84 (1) and (2).

Article 85 Equal treatment of all shareholders who are in the same position For the purposes of the implementation of this Chapter, the laws of the Member States shall ensure equal treatment to all shareholders who are in the same position.

16 17

Recital 96 of Directive (EU) 2019/1023. Recital 96 of Directive (EU) 2019/1023.

Jan P. Brosius

387

Art 85 Equal treatment of all shareholders who are in the same position I. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Direct Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 7

I. Overview 1

The principle of equal treatment to all shareholders is a guiding principle of the provisions derived from the Second Directive and a core criterion for their interpretation. It is concretised throughout the entire Second Directive and the provisions derived from it and, therefore, was somewhat unjustly placed at the very end of Title I, Chapter IV of the Directive1.

II. Historical Background 2

Article 85 derives from the Second Directive2 (cf. Art 46 of Directive 2012/30/EU). It was implemented in the Second Directive 77/91/EEC as initially adopted on 13 December 1976. Its material content has not been amended since. In written law Article 85 has a predecessor in French Law.3 In other jurisdictions, for instance under German law, the principle had been generally accepted.4

III. Scope 3

Article 84 is a manifestation of the general principle of equal treatment. Such principle requires that comparable situations must not be treated differently and different situations must not be treated in the same way unless such treatment is objectively justified.5 However, as follows from the very wording of Article 85 which limits the scope to the implementation of Title I, Chapter IV of the Directive,6 the obligation to ensure equal treatment to all shareholders who are in the same position applies only within the framework of such Chapter.7 The Court of Justice made clear that the Second Formerly the end of the Second Directive. Second Council Directive 77/91/EEC of 13 December 1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 26, 31.01.1977, p. 1, later replaced by Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ No L 315, 14.11.2012, p. 74-97, cf. → Intro Art 44 mn.7 et seqq. 3 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, § 19 para. 258; Dencker, Rev. Soc. 1977, 661, 679; Henn AG 1985, 240, 242; Kalss, in: Koppensteiner, Österreichisches und europäisches Wirtschaftsprivatrecht, vol 1 1994, p. 119, 215 Fn. 356; in more detail regarding the historical background, see Verse, Der Gleichbehandlungsgrundsatz im Recht der Kapitalgesellschaften, p. 27 et seqq. 4 Cf. Habersack/Verse, Europäisches Gesellschaftsrecht, § 6 para. 93. 5 Case C-101/08 (Audiolux SA and Others v Groupe Bruxelles Lambert SA (GBL) and Others) [2009] para. 54; case C-127/07 (Arcelor Atlantique and Lorraine and Others) [2008] para. 23, with further references; see also Mucciarelli, ECFR 2010, 158 et seqq. 6 Assumed the legislator intended a true and correct transfer of the provisions derived from the Second Directive to the Directive, it should be emphasised that Article 85 applies to Title I, Chapter II, Section 1 of the Directive as well; its significance for those provisions can be neglected, though. 1

2

388

Jan P. Brosius

Art 85

TITLE I GENERAL PROVISIONS

Directive’s purpose confirms that the European legislature did not intend the rule of equal treatment of shareholders as provided for in Article 85 to be applied outside the framework of the Second Directive (Articles 2 through 6 and Articles 44 through 86 of the Directive) and that it cannot be considered to reflect a general principle of European Law.8 The principle stipulated in Article 85 imposes an obligation only on the issuers of 4 shares and the company. It does not apply to the relations between the shareholders. Only the company bodies, but not the shareholders themselves are bound by the principle of equal treatment.9 Article 85 does not require an equal treatment of any and all shareholders in the com- 5 pany, but only of those who are in the same position.10 Justified distinctions between shareholders that are founded on facts can be made.11 This is the case, for instance, where shareholders assert claims derived from issuer liability (cf. → Intro Art 44 mn. 46 et seqq.). Also, as the Court of Justice has stated, where the company is setting the issue price of new shares in the course of a capital increase at below their market value while restricting the pre-emptive right of existing shareholder pursuant to Article 72 (4) this does not lead to an unequal treatment between existing and new shareholders.12 Otherwise, the third sentence of Article 72 (4) would be rendered redundant. 13 Careful distinction has to be made between provisions in the statutes and resolutions of the general meeting legally putting shareholders in different positions, on the one hand, and those unlawfully circumventing Article 85, on the other hand.14 Similar approaches can be found, inter alia, in Article 17 of Directive 2004/109/EC 15 6 which states that the issuer of shares admitted to trading on a regulated market shall ensure equal treatment for all holders of shares who are in the same position, and Article 4 of Directive 2007/36/EC16 pursuant to which the company shall ensure equal treatment for all shareholders who are in the same position with regard to participation and the exercise of voting rights in the general meeting.

7 Cf. Case C-101/08 Audiolux SA and Others v Groupe Bruxelles Lambert SA (GBL) and Others [2009] para. 37. 8 Case C-101/08 Audiolux SA and Others v Groupe Bruxelles Lambert SA (GBL) and Others [2009] para. 38 et seqq.; also see Opinion of the Attorney General Trstenjak delivered on 30 June 2009, C-101/08 (Audiolux SA and Others v Groupe Bruxelles Lambert SA (GBL) and Others) [2009] para. 84. 9 Opinion of the Attorney General Trstenjak delivered on 30 June 2009, C-101/08 (Audiolux SA and Others v Groupe Bruxelles Lambert SA (GBL) and Others) [2009] para. 117 et seqq. with further references. 10 While it has to be kept in mind that a company’s shareholders very regularly are in the same position. 11 In more detail regarding the justification of distinctions, see Verse, Der Gleichbehandlungsgrundsatz im Recht der Kapitalgesellschaften, p. 27 et seqq. 12 Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 30. 13 Case C‑338/06 Commission of the European Communities v Kingdom of Spain [2008] I-10139, para. 32. 14 Also see Lutter, FS Ferid, p. 599, 607 et seq.; Verse, Der Gleichbehandlungsgrundsatz im Recht der Kapitalgesellschaften, p. 99 et seq.; Drinkuth, Die Kapitalrichtlinie – Mindest- oder Höchstnorm?, 1998, p. 269. 15 Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ No L 390, 31.12.2004, p. 38–57. 16 Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies, OJ No L 184, 14.7.2007, p. 17–24.

Jan P. Brosius

389

Foreword to Arts 86a-86 t

IV. Direct Application 7

Article 85 is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

Article 86 Transitional provisions Member States may decide not to apply points (g), (i), (j) and (k) of Article 4 to companies already in existence at the date of entry into force of the laws, regulations and administrative provisions adopted in order to comply with Council Directive 77/91/EEC(11).

TITLE II CONVERSIONS, MERGERS AND DIVISIONS OF LIMITED LIABILITY COMPANIES CHAPTER -I CROSS-BORDER CONVERSIONS Foreword to Arts 86a-86 t I. Twenty Years after the ECJ’s Centros Decision – The Company Law Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The ECJ Shaping Freedom of Establishment: Centros, Überseering and Inspire Art . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. The ECJ’s Judgements on Cross-Border Mergers and Conversions: SEVIC, Cartesio and VALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. The ECJ on the Isolated Transfer of the Registered Office: Polbud . . . . . . . . . . . V. The 2019 Directive in Light of the ECJ’s Judgements . . . . . . . . . . . . . . . . . . . . . . . . . VI. Key Drivers Behind the 2019 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. European Model for Structural Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Transposition of the 2019 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Advance Effect of the 2019 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Brexit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 7 11 12 13 16 17 18 21

I. Twenty Years after the ECJ’s Centros Decision – The Company Law Package 1

Twenty years after the Court of Justice of the European Union (ECJ) rendered its Centros1 judgement, thereby taking a first step towards enforcing the freedom of establishment for corporate entities within the single market, the so-called European Company Law Package came into force.2 Inter alia, it establishes for the first time (11) Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent (OJ L 26, 31.1.1977, p. 1). 1 Case 212/97 Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECR I-01459.

390

Karsten Kühnle

Foreword to Arts 86a-86 t

IV. Direct Application 7

Article 85 is unconditional and sufficiently precise to fulfil the requirements of a direct application (cf. → Intro Art 44 mn. 64).

Article 86 Transitional provisions Member States may decide not to apply points (g), (i), (j) and (k) of Article 4 to companies already in existence at the date of entry into force of the laws, regulations and administrative provisions adopted in order to comply with Council Directive 77/91/EEC(11).

TITLE II CONVERSIONS, MERGERS AND DIVISIONS OF LIMITED LIABILITY COMPANIES CHAPTER -I CROSS-BORDER CONVERSIONS Foreword to Arts 86a-86 t I. Twenty Years after the ECJ’s Centros Decision – The Company Law Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The ECJ Shaping Freedom of Establishment: Centros, Überseering and Inspire Art . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. The ECJ’s Judgements on Cross-Border Mergers and Conversions: SEVIC, Cartesio and VALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. The ECJ on the Isolated Transfer of the Registered Office: Polbud . . . . . . . . . . . V. The 2019 Directive in Light of the ECJ’s Judgements . . . . . . . . . . . . . . . . . . . . . . . . . VI. Key Drivers Behind the 2019 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. European Model for Structural Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Transposition of the 2019 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX. Advance Effect of the 2019 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X. Brexit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 7 11 12 13 16 17 18 21

I. Twenty Years after the ECJ’s Centros Decision – The Company Law Package 1

Twenty years after the Court of Justice of the European Union (ECJ) rendered its Centros1 judgement, thereby taking a first step towards enforcing the freedom of establishment for corporate entities within the single market, the so-called European Company Law Package came into force.2 Inter alia, it establishes for the first time (11) Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent (OJ L 26, 31.1.1977, p. 1). 1 Case 212/97 Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECR I-01459.

390

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Foreword to Arts 86a-86 t

a European legal framework on cross-border conversions. Technically, the new framework is being introduced by Directive (EU) 2019/2121 of the European Parliament and of the Council amending Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law as regards cross-border conversions, mergers and divisions (herein referred to the 2019 Directive). Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law is herein referred to as the Company Law Directive. The 2019 Directive is based on the Commission’s proposal of 25 April 20183 which is herein referred as the Commission Proposal. Facilitating cross-border mobility of corporate entities to enhance cross-border 2 trade and unleash the potential of the single market has been on the European Commission’s agenda since its 2015 Single Market Strategy.4 In its strategy, the Commission announced that it will examine the need to update the existing rules on cross-border mergers as established under the Cross-Border-Merger Directive 5, and the possibility to complement them with rules as regards cross-border divisions.6 In 2016, the European Parliament commissioned a study to analyse if and to which extent there is a need to legislate with respect to cross-border mergers, cross-border divisions and cross-border transfers of seat (cross-border conversions).7 In 2017, the Commission launched a public consultation with a particular focus on cross-border mobility of companies (mergers, divisions, conversions), which revealed a strong support by respondents for establishing EU-rules on cross-border conversions.8

II. The ECJ Shaping Freedom of Establishment: Centros, Überseering and Inspire Art A series of prominent decisions by the ECJ helped trailblaze the way towards the 3 new rules on cross-border mobility over the years.9 The trilogy of Centros, Überseering, and Inspire Art created the fundament of the ECJ’s interpretation of freedom of establishment as far as foreign-market access scenarios and recognition of companies established under the laws of a different Member State are concerned. In the Centros case of 1999, which concerned foreign branch registration, the ECJ 4 held that a Member State must not refuse registration of a branch of a company 2 Directive (EU) 2019/2121 of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions. Published in the Official Journal of the European Union on 12 December 2019, OJ L 321, 12.12.2019. 3 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions COM/2018/241 final – 2018/0114(COD). 4 A Single Market Strategy for Europe – Analysis and Evidence (COM(2015) 550 final). Cross-border conversions were not mentioned in the Commission’s communication. See also Recital (7) et seq. of the 2019 Directive. 5 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies, OJ L 310, 25.11.2005. 6 A Single Market Strategy for Europe – Analysis and Evidence COM(2015) 550 final, 5. 7 J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? Study for the JURI Committee, 2016. 8 COM(2016) 710 final, 25.10.2016. EU Company law upgraded: Rules on digital solutions and efficient cross-border operations. Previous consultations did also focus on cross-border mobility, e.g., the 2014 public consultation on cross-border mergers and divisions; the 2013 public consultation on cross-border transfers of registered offices; and the 2012 consultation on the future of EU company law. 9 Sascha Stiegler, Stefanie Jung and Peter Krebs (eds), Gesellschaftsrecht in Europa (1 st edn, Nomos 2019), § 10; Mörsdorf, CMLR (49) 2012, 629-670.

Karsten Kühnle

391

Foreword to Arts 86a-86 t formed in accordance with the law of another Member State even in case of that company not carrying out any business activity in that other Member State, the company’s share capital having never been paid-up, the branch registration obviously aiming at establishing full business operations without formation of a local corporate entity in the host Member State and, by taking such branch approach, ultimately circumventing more restrictive requirements for paying-up a minimum share capital in the Member State where the branch is to be registered.10 5 In the Überseering case of 2002, which concerned the question whether a company established under the laws of a Member States gets deprived of its capacity to be party to legal proceedings in case of its centre of administration being moved to another Member State, the ECJ held that a Member State must not refuse recognition of legal capacity in such case and any requirement of reincorporation of the same company in the Member State it has moved its centre of administration to constitutes a restriction on freedom of establishment.11 By this judgement, the ECJ took position in favour of the doctrine of incorporation compared to the real seat theory.12 6 In the Inspire Art case of 2003, which concerned national disclosure requirements imposed on foreign branch registration, the ECJ confirmed its Centros ruling. The ECJ held that a Member State must not impose national legislation requiring the branch to disclose the branch as “formally foreign company” as such national disclosure requirement prevents the exercise of freedom of secondary establishment in that Member State by a company formed in accordance with the law of another Member State.13

III. The ECJ’s Judgements on Cross-Border Mergers and Conversions: SEVIC, Cartesio and VALE A new chapter of the ECJ’s interpretation of freedom of establishment began with the SEVIC, Cartesio, VALE and Polbud cases, which concerned cross-border reorganizations, namely cross-border mergers and cross-border conversions. 8 In the SEVIC case of 2005, which dealt with a cross-border merger between a German and a Luxembourg entity, the ECJ established permissibility of a cross-border merger between companies incorporated in different Member States on grounds of freedom of establishment. The ECJ’s main argumentation was treating cross-border mergers differently from domestic mergers constitutes a restriction of the freedom of establishment. To the extent that a merger between two domestic companies is permitted under national laws, the same must apply in a scenario involving companies from different Member States.14 9 In the Cartesio case of 2008, where a Hungarian company contemplated transferring its seat to Italy whilst at the same time wishing to retain its statute as a company governed by Hungarian law, the ECJ decided that freedom of establishment does not preclude legislation of a Member State providing that a company incorporated under the law of that Member State may not transfer its seat to another Member State whilst retaining its status as a company governed by the law of the Member State of incorporation.15 In consequence, such a transfer would require (i) that the company 7

Case 212/97 Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECR I-01459, §§ 29, 30, 39. Case 208/00 Überseering BV v Nordic Construction Company Baumanagement GmbH [2002] ECR I-09919, § 94. 12 Kersting, NZG 2003, 9 et seq.; Kindler, NJW 2003, 1073 et seq.; Eidenmüller, ZIP 2002, 2233 et seq. 13 Case 167/01 Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECR I-10155. 14 Case 411/03 SEVIC Systems AG [2005] ECR I-10805. 10

11

392

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Foreword to Arts 86a-86 t

ceases to exist and (ii) that the company reincorporates itself in compliance with Italian laws.16 Otherwise, the company’s transfer of seat would break the connecting factor required under Hungarian laws for existence and maintenance of the company’s status as a company incorporated and existing under Hungarian law. In 2012, the ECJ rendered the VALE17 judgement. VALE, a company incorporated 10 under Italian law requested from the competent Italian commercial register its deregistration on grounds of a contemplated seat and business transfer to Hungary. The Italian commercial register accommodated the request stating in the register file that the company had moved to Hungary. Subsequently, new articles of association governed by Hungarian law were adopted, the share capital was paid up and registration with the competent Hungarian commercial register was applied for. In the application it was stated that the dissolved Italian company was the predecessor of the newly established Hungarian company, registration of which was applied for. The application was rejected with the argument that under Hungarian law, a company which is not a Hungarian company cannot be listed as predecessor in law in the Hungarian register. Confirming the reasoning of its SEVIC decision, the ECJ held that freedom of establishment precludes national legislation enabling companies established under national law to convert, but not allowing, in a general manner, companies governed by the law of another Member State to convert to companies governed by national law. Importantly, by referring to its Cadbury Schweppes18 decision, the ECJ emphasized that freedom of establishment involves the actual pursuit of an economic activity through a fixed establishment in the host Member State for an indefinite period.

IV. The ECJ on the Isolated Transfer of the Registered Office: Polbud In 2017, the ECJ rendered the Polbud19 decision which concerned an outbound 11 cross-border conversion of a Polish company to Luxembourg. Polbud passed a resolution to transfer only its registered office to Luxembourg whilst preserving its business operations in Poland. The Polish commercial register refused Polbud’s request for deregistration and insisted on a mandatory liquidation procedure applicable to a transfer of registered office to a Member State other than Poland. In its decision, the ECJ established that the isolated transfer of the registered office to another Member State – compared to a transfer of the principal place of business – does not preclude freedom of establishment. In that context, the ECJ referred to its judgements on Centros and Inspire Art and stressed that the fact that either the registered office or real head office of a company was established in accordance with the legislation of a Member State for the benefit of enjoying more favourable legislation does not, in itself, constitute abuse. Finally, the ECJ held that a Member State may not require that a company intending to transfer its registered office to another Member State in compliance with the applicable laws of that Member State undergoes a liquidation procedure first. It is suspected that the Polbud decision triggered the European Commission to come up speedily with a proposal for cross-border operations (meaning mergers, conversions, and divisions) in an attempt to finally get some level of harmonization in place in that respect.20 Case 210/06 CARTESIO Oktató és Szolgáltató bt. [2008] ECR I-0964, § 99 et seq. Case 210/06 CARTESIO Oktató és Szolgáltató bt. [2008] ECR I-0964, § 103. 17 Case 378/10 VALE Építési kft. [2012] ECLI:EU:C:2012:440. 18 Case 196/04 Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue [2006] ECR I-07995. 19 Case 106/16 Polbud – Wykonawstwo sp. z o.o. [2017] ECLI:EU:C2017:804; Szydlo, CML Review 55, 2018: pp. 1549-1572; Kindler, NZG 2018, 1 et seq.; Kieninger, ZEuP 2018, 309 et seq. 15

16

Karsten Kühnle

393

Foreword to Arts 86a-86 t

V. The 2019 Directive in Light of the ECJ’s Judgements 12

As a result of there being no harmonised rules at EU level on cross-border corporate mobility, the case law of the ECJ has developed the principles, based on freedom of establishment, in relation to cross-border conversions, but also to the recognition of companies incorporated in another Member State. Based on the ECJ’s judgments described above, freedom of establishment in the context of cross-border conversions includes three major principles: (i) the right of a company formed in accordance with the legislation of a Member State to convert into a company governed by the law of another Member State provided that the prerequisites laid down by the legislation of that other Member State are satisfied and, in particular, that the test adopted by the latter Member State to determine the connection of a company to its national legal order is satisfied; this may include a Member State requesting both the registered office and the center of business operations being in such Member State; (ii) save for abusive scenarios designed to violate applicable laws, freedom of establishment does not hinder the use of a cross-border conversion for forum shopping in a sense of seeking incorporation or establishment in the Member State with the most favourable legislation; and (iii) the ECJ’s judgements dealt with the general permissibility of corporate cross-border mobility in the context of freedom of establishment but did not establish a dedicated and specific legal framework for cross-border operations, which is what the 2019 Directive now aims to facilitate.

VI. Key Drivers Behind the 2019 Directive The Commission Proposal21 criticises the lack of harmonized rules across the EU for cross-border conversions. Whilst acknowledging that the Polbud decision gives clarity in terms of cross-border conversions, the Commission Proposal underlines the lack of legal certainty given the absence of EU harmonization on cross-border conversions and the fact that national laws, if any, are still decisive for the protection of the stakeholders concerned.22 The issues attached to such lack of harmonization have been revealed by the Impact Assessment. As far as cross-border conversions are concerned, such issues include: “legal battles” with registration authorities, which generally do not directly apply the case-law but base their decisions on national procedures; high costs and administrative burdens making a cross-border conversion prohibitive for small companies; non-uniform procedures, deadlines, and requirements in terms of documentation and publication; difficulties or impossibility to carry-out a direct conversion procedure ultimately motivating a company to achieve the same result in an indirect way by first creating a subsidiary abroad and then merging with it. 14 Recital (5) of the 2019 Directive picks-up on this by referring to such legal fragmentation and legal uncertainty resulting in the creation of barriers to the exercise of the freedom of establishment and suboptimal protection of employees, creditors 13

Bartman, ECLJ 16, no. 5 (2019): 140-142.; COM(2018) 241 final, Explanatory Memorandum p. 8, 9. Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions dated 25.04.2018, 10. See Garcimartín/Gandia, ECFR 2019, 15, 19.; Teichmann, ECFR 2019, 3 et seq.; Bartman, ECLJ 16, no. 5 (2019): 140-142.; European Company Law Experts (ECLE): The Commission’s 2018 Proposal on Cross-Border Mobility – An Assessment, September 2018; see: https://europeancompanylawexperts.wordpress.com/pub lications/the-commissions-2018-proposal-on-cross-border-mobility-an-assessment-september-2019/. 22 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions dated 25.04.2018, 10. 20

21

394

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Foreword to Arts 86a-86 t

and minority members. Recital (6) of the 2019 Directive highlights the benefit of a harmonized legal framework to remove restrictions on the freedom of establishment on the one hand whilst at the same time providing adequate protection for employees, creditors and members on the other hand. In terms of harmonizing the level of stakeholder protection, however, the 2019 Di- 15 rective follows a minimum approach.23 For instance, in the context of member protection, Recital (17) explicitly refers to the same minimum level of protection which should be offered regardless of the Member State in which the company is situated. The minimum harmonization approach, in turn, creates a high level of discretion for Member States when implementing the 2019 Directive. This may not necessarily lead to greater legal certainty in complex cross-border operations such as a cross-border conversion. This becomes acute when protection of creditors is concerned. The 2019 Directive ultimately didn’t implement certain innovative concepts suggested by the Commission Proposal for the protection of creditors (→ Art 86 j) and, therefore, lost opportunity to create a more harmonized framework across Member States.

VII. European Model for Structural Changes In terms of procedures attached to cross-border operations, the 2019 Directive fol- 16 lows the so called European model for structural changes.24 It has been set out for the first time in the Merger Directive25 and has subsequently been adopted in the SE-Regulation26 and in the Cross-Border Merger Directive.27 Key procedural elements of a cross-border conversion are, therefore: (i) the draft terms of the cross-border conversion (Art. 86 d); (ii) the report of the management or administrative organ for members and employees (Art. 86 e); (iii) the report of the independent expert; (iv) the disclosure of the draft terms of the cross-border conversion and additional information (Art. 86 g); (v) approval of the draft terms of the cross-border conversion by the general meeting (Article 86 h); and (vi) two-step legal scrutiny by the departure and the destination Member State (Art. 86 m, Art. 86 o).

VIII. Transposition of the 2019 Directive Member States shall bring into force the laws, regulations and administrative provi- 17 sions necessary to comply with this Directive by 31 January 2023 (see Art. 3 (1) of the 2019 Directive).

Wimmer, ECFR 2019, 44, 47. Mörsdorf, EuZW 2019, 141, 145. Riesenhuber, NZG 2004, 15 et seq.; J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? Study for the JURI Committee, 2016, 35; Sascha Stiegler in Jung/Krebs/Stiegler (eds), Gesellschaftsrecht in Europa (1st edn, Nomos 2019), § 32 Rn. 45, § 18, § 75; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 30.12. 25 Originally Directive 78/855/EEC; since 1 July 2011 codified as Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies, OJ L 110, 29.4.2011, 1. 26 Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), OJ L 294, 10.11.2001. 27 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies, OJ L 310, 25.11.2005. 23

24

Karsten Kühnle

395

Foreword to Arts 86a-86 t

IX. Advance Effect of the 2019 Directive From a practitioner’s point of view, when dealing with the competent authorities in the destination and departure Member State for purposes of effecting a cross-border conversion prior to expiry of the 2019 Directive’s implementation period on 31 January 2023, it will be relevant to consider under which conditions the directive may have advance effect on existing national law such that the converting company may invoke the directive’s content vis-à-vis the relevant Member State, its authorities and courts. 19 In line with the ECJ’s judicature28 as developed in case Inter-Environnement Wallonie, the prohibition on frustrating the objective of a directive29 as derived from the obligation not to defeat the object and purpose of a treaty as set out in Article 18 of the Vienna Convention on the law of treaties30, and the duty of loyalty derived from Article 4 (3) EUV (Lisbon) in connection with Article 288 (3) TFEU, Member States must refrain from taking any measures liable seriously to compromise the attainment of the result prescribed by the 2019 Directive during the transposition period. Practical challenges will arise as long as the 2019 Directive has not been transposed into national law. Just to name a few: will there be room to apply national rules on cross-border mergers (as implemented as a result of the Cross Border Merger Directive 31) mutatis mutandis? Will there be a combination of domestic rules on conversion (if existing) with national rules on cross-border mergers? Which authority will be the authority competent to issue a “pre-conversion certificate” and under which conditions? Will elements of the 2019 Directive be required (whilst still not being transposed into national law) by the competent authority? 20 A recent case of the German Higher Regional Court (OLG) of Saarbrucken 32 illustrates the before. The case concerned an outbound conversion involving a German limited liability company which wanted to cross-border convert into a French S.à r.l. The company had a single-member structure and no employees other than the company’s director. The competent German commercial register refused the company’s application for registration of the cross-border conversion in the German commercial register for reasons of having neither disclosed a conversion plan (on the basis of applying section 122 d33 of the German Transformation Act, which applies to cross-border mergers and requires disclosure of the common draft terms with the commercial register) nor prepared a report of the company’s management explaining the implications of the crossborder merger for creditors and employees (on the basis of applying section 122 e 34 of the German Transformation Act, which applies to cross-border mergers and requires management to prepare a report explaining the implications of the cross-border merger for creditors and employees). The commercial register argued that the absence of domestic law on cross-border conversion requires certain provisions relative to domestic conversions and cross-border mergers to be applied mutatis mutandis to ensure 18

28 Case C-129/96 Inter-Environnement Wallonie [1997] ECLI:EU:C:1997:628 § 44 et seq.; Case C-212/04 Adeneler [2006] ECLI:EU:C:2005:654, § 121 et seq.; Case C-43/10 Nomarchiaki Aftodioikisi Aitoloakarnanias and Others [2011] ECLI:EU:C:2011:651 § 98 et seq. 29 See Opinion of the General Advocate Kokott delivered on 17 January 2019 on Case C‑637/17 Cogeco Communications, ECLI:EU:C:2019:32, § 101. 30 United Nations, Treaty Series, vol. 1155, 331. 31 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies. 32 OLG Saarbrücken, 7.1.2020 – 5 W 79/19, NZG 2020, 390; Fink/ Chilevych, NZG 2020, 544 et seq.; Rawert/ Hülse, ZIP 2021, 272 et seq.; Heckschen, GWR 2020, 449 et seq. 33 The provision is based on Article 6 of the Cross-Border Merger Directive. 34 The provision is based on Article 7 of the Cross-Border Merger Directive.

396

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Foreword to Arts 86a-86 t

absence of gaps relative to protection of employees, minority shareholders and creditors. The commercial register further argued that such reasoning shall be justified against background of Directive (EU) 2019/2121 of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions which contemplates similar instruments to protect the stakeholders affected. In essence, the commercial register interpreted the existing German rules on domestic conversions as well as cross-border mergers in light of the 2019 Directive which took advance effect. The Higher Regional Court of Saarbrucken upheld the decision by the commercial register.

X. Brexit In relation to the United Kingdom, given that the United Kingdom has left the 21 EU (Brexit) on 31 January 2020, it seems fair to question whether the 2019 Directive will be implemented in the United Kingdom. If it is not, the question then arises as to the status of ECJ’s Polbud decision in the UK. The framework for analysis is the UK European Union (Withdrawal) Act 201835 (the UK Withdrawal Act). It is worth noting that this was passed before the UK-EU withdrawal agreement had been agreed and came into force, and although its starting point is retention of a relatively wide body of EU law, it contains a mechanism for narrowing this. For example, the effect of the UK Withdrawal Act is that certain articles of the TFEU which contain directly effective rights would be converted into UK domestic law, for instance, Articles 49, 56, and, most importantly with a view to carrying out a cross-border conversion, that pre-exit case law of the ECJ be given that same binding, or precedent, status in UK courts as decisions of the UK Supreme Court.36 However, the UK Government has issued Regulations37 which disapply provisions on the freedom of establishment and the free movement of services which continue as directly effective rights in domestic law, by virtue of the UK Withdrawal Act. These Regulations make it clear that any rights, powers, liabilities, obligations, restrictions, remedies and procedures which are derived directly or indirectly from Articles 49 or 56 of TFEU (amongst others) cease to be recognized and available under domestic UK law following expiry of the Brexit Transition Period. Even had these rights been preserved, in the past, the UK Companies House has been unwilling to facilitate a the conversion of a UK-incorporated limited liability company into a limited liability company of another destination Member State referring to the fact that the UK Companies Act 2006 does not permit it. This was the case even though, at that time refusing a cross-border conversion (migration) was contrary to the ECJ’s Polbud decision and the principle of freedom of establishment. The UK Cross Border Merger regime which established a framework for cross-border mergers between UK companies, and companies governed by the laws of the EEA was revoked at the end of the Brexit Transition Period and there is no indication that replacement legislation is intended or that the 2019 Directive will be implemented. Accordingly, cross-border conversions (on the basis of the ECJ’s Polbud decision) are not available to UK companies.38

European Union (Withdrawal) Act 2018. Explanatory Notes to the European Union (Withdrawal) Act 2018, 8/9. 37 The Freedom Of Establishment And Free Movement Of Services (EU Exit) Regulations 2019. 38 See also J. Schmidt, GmbHR 2021, 229, 237. 35

36

Karsten Kühnle

397

Art 86 a Scope

Article 86 a Scope 1. This Chapter shall apply to conversions of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union, into limited liability companies governed by the law of another Member State. 2. This Chapter shall not apply to 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. Action taken by such a company to ensure that the stock exchange value of its units does not vary significantly from its net asset value shall be regarded as equivalent to such repurchase or redemption. 3. Member States shall ensure that this Chapter does not apply to companies in either of the following circumstances: (a) the company is in liquidation and has begun to distribute assets to its members; (b) the company is subject to resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU. 4. Member States may decide not to apply this Chapter to companies which are: (a) the subject of insolvency proceedings or subject to preventive restructuring frameworks; (b) the subject of liquidation proceedings other than those referred to in point (a) of paragraph 3, or (c) the subject of crisis prevention measures as defined in point (101) of Article 2 (1) of Directive 2014/59/EU. I. Cross-border Conversions Involving Limited Liability Companies . . . . . . . . . . 1. Societas Europaea – not explicitly covered by the 2019 Directive . . . . . . . . . 2. Civil partnerships – not covered by the 2019 Directive . . . . . . . . . . . . . . . . . . . 3. Relevance for EFTA States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. 2019 Directive Not Applicable to UCITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Exclusion of Companies Subject to Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Exclusion of Credit Institutions and Investment Firms . . . . . . . . . . . . . . . . . . . . . . . V. Member State Option for Preventive Restructuring Scenarios . . . . . . . . . . . . . . .

1 2 5 6 7 8 9 10

I. Cross-border Conversions Involving Limited Liability Companies 1

Article 86 a determines the scope and applicability of Chapter I which comprises those provisions of the 2019 Directive dealing with cross-border conversions. Chapter I only applies to conversions of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Union, into limited liability companies governed by the law of another Member State. The new framework applies to limited liability companies carrying out an intra-EU cross-border conversion. Extra-EU inbound or outbound conversions remain governed by national law, which may lead to extra-EU cross-border conversions being easier to facilitate than intra-EU conversions. 1 1

398

Garcimartín/Gandia, ECFR 2019, 15, 22.

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 a

Limited liability companies are defined in Article 86 b (1) as the companies listed in Annex II to the Company Law Directive2, i.e. limited liability companies irrespective of whether or not the shares are listed for public trading.3 In Germany 4, this would include a limited liability company (Gesellschaft mit beschränkter Haftung, GmbH), an entrepreneur company (Unternehmergesellschaft)5, a stock corporation irrespective of whether or not its shares are listed for public trading (Aktiengesellschaft, AG), and a partnership limited by shares (Kommanditgesellschaft auf Aktien, KGaA).

1. Societas Europaea – not explicitly covered by the 2019 Directive The Commission Proposal and the 2019 Directive remain silent on the new frame- 2 work for cross-border operations being applicable to a Societas Europaea. This may be the result of the SE-Regulation containing specific mechanisms relative to a crossborder transfer of an SE’s registered office and head office and the SE-Regulation therefore being considered as lex specialis. In case an SE contemplates transferring its registered office to another Member State, Article 8 SE-Regulation contains dedicated rules for such cross-border transfer which address, inter alia, the new proposed governance of the SE in the destination Member State, implications of the transfer on employees, the proposed timeline, protection of shareholders and creditors (Article 8 (2) (a)-(e)) as well as procedural aspects (Article 8 (8)-(12)). Such transfer, as Article 8 SE-Regulation expressly states, shall not result in the winding up of the SE or in the creation of a new legal person. Importantly, unlike the 2019 Directive, the SE-Regulation requires the registered office of an SE to be located in the same Member State as its head office, and Member States may go even further and require the registered office to correspond to the SE’s head office (Article 9 SE-Regulation). However, a transfer of an SE’s registered office and head office as governed by 3 Article 8 SE-Regulation is a subject matter different to a cross-border conversion regulated under the 2019 Directive. Excluding the SE from the new framework for cross-border operations caused criticism during the legislative process. 6 The concerns can be illustrated with the following example: an SE established under the laws of Germany contemplates converting its legal form into a public limited liability company governed by the laws of the Netherlands (de naamloze vennootschap). This operation would be restricted by the SE-Regulation. Practically, the German SE would first need to transfer its registered office and head office to the Netherlands and in a second step, now being a Dutch SE, the Dutch SE would need to convert into a Dutch public limited liability company (de naamloze vennootschap); this domestic conversion would be permitted pursuant to Article 66 SE-Regulation. It is obvious that this two-step procedure is much more complex and likely to restrict cross-border mobility than a cross-border conversion effected in one single step. There could indeed be arguments in favour of the SE being covered by the new 4 framework for cross-border conversions. Firstly, pursuant to Article 10 SE-Regulation, an SE shall be treated in every Member State as if it were a public limited-liability 2 Types of companies referred to in Articles 7 (1), 13, 29 (1), 36 (1), 67 (1), points (1) and (2) of Article 86 b, point (a) of Article 119 (1), and point (1) of Article 160 b. 3 Commission Proposal, page 78 (Detailed explanation of the specific provisions of the proposal). 4 Brandi, BB 2018, 2626, 2630; Stelmaszcyk, GmbHR 2020, 61, 62; Wicke, DStR 2018, 2642, 2643. 5 The entrepreneur company can only be utilized in outbound scenarios; it will not be available as converted company in inbound scenarios, see Stelmaszcyk, GmbHR 2020, 61, 62; Wicke, DStR 2018, 2642, 2643. 6 Schreiben Deutscher Notarverein vom 4. Juli 2018 an das Bundesministerium der Justiz und für Verbraucherschutz, 28; Wicke, DStR 2018, 2642, 2643.

Karsten Kühnle

399

Art 86 a Scope company formed in accordance with the law of the Member State where the SE has its registered office. By such reference, the SE would literally fall under the definition of a limited liability company within the meaning of Annex II to the Company Law Directive.7 Secondly, Article 66 SE-Regulation, is, at least from a German law perspective, only considered as of exclusive nature as far as the domestic conversion of an SE into a domestic public limited liability company is concerned; it does not restrict the conversion of an SE into a domestic private limited liability company (assuming the law of the Member State permits a conversion of a public limited liability company into a private limited liability company). 8 Thirdly, the ECJ’s interpretation of freedom of establishment meaning the right of a company to convert itself into a company governed by the law of another Member State to the extent that it is permitted under that law to do so 9 works in favour of the considerations above. Interpreting Article 66 para. 1 SE-Regulation in the light of these considerations would mean that it does not restrict cross-border conversions as long as the mechanisms imposed in Article 66 para. 3 SE-Regulation to protect the shareholders and the employees of the SE are complied with; the cross-border conversion must not undermine the provisions aiming at stakeholder protection.

2. Civil partnerships – not covered by the 2019 Directive 5

In contrast to limited liability companies, civil partnerships are not encompassed by the new framework without this being expressly articulated in Article 86 a et seq. The inclusion of civil partnerships into the new framework had been raised by the European Parliament during the law making process.10 Reference was made to the fact that certain Member States, for instance Germany, Belgium, Italy and the UK, upon implementation of the Cross-Border-Merger Directive into national law, extended the scope to civil partnerships as well.11 The Commission Proposal reveals that the exclusion of companies other than limited liability companies, e.g., partnerships and cooperatives, from the new framework goes back to statistical data demonstrating that the huge majority of companies effecting cross-border action are public and private limited liability companies. An additional reason given in the Commission Proposal is the concern that the inclusion of companies other than limited liability companies would interfere with the existing framework, in particular EU-accounting rules. Irrespective of civil partnerships not being covered by the 2019 Directive, they still benefit from the ECJ’s interpretation of freedom of establishment, meaning that they may nevertheless undertake a cross-border conversion if the respective prerequisites outlined by the ECJ are fulfilled. 12 A conWicke, DStR 2018, 2642, 2643. Oplustil/Schneider, NZG 2003, 13, 15; Vossius, ZIP 2005, 741, 748; Wicke, DStR 2018, 2642, 2643; Drinhausen in Semler/Stengel (eds), Umwandlungsgesetz (4th edn, 2017), Einleitung C. Rn. 63; Schäfer in Münchener Kommentar zu Aktiengesetz (4th edn, 2017), SE-VO Article 66 § 14; Eberspächer in Spindler/ Stilz (4th edn, 2019), SE-VO Article 66 § 1, 2. 9 Case 210/06 CARTESIO Oktató és Szolgáltató bt. [2008] ECR I-0964, § 112. 10 Impact Assessment accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law and Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, Section 2.2. 11 Impact Assessment accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law and Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, 161, 163. 12 Schreiben Deutscher Notarverein vom 4. Juli 2018 an das Bundesministerium der Justiz und für Verbraucherschutz, 28; Stellungnahme des Deutschen Anwaltvereins durch den Ausschuss Handelsrecht, Stellungnahme Nr. 31/2018, July 2018, 5; Wicke, DStR 2018, 2642, 2643; J. Schmidt, Der Konzern 2018, [X68]; Case 411/03 SEVIC Systems AG [2005] ECR I-10805. 7

8

400

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 a

siderable lack of legal certainty in the absence of harmonized procedures and regulations still remains.

3. Relevance for EFTA States Per definition, the new framework applies to limited liability companies formed in 6 accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Union. However, the 2019 Directive is of relevance for the Agreement on the European Economic Area. The 2019 Directive is currently under scrutiny for incorporation into the EEA Agreement by Iceland, Liechtenstein and Norway. Articles 31, 34 of the Agreement on the European Economic Area13 address freedom of establishment of nationals of EC Member States or EFTA States in any such state. They expressly stipulate the right to set-up and manage companies in any EC Member State or EFTA State including setting up agencies, branches or subsidiaries. As provisions dealing with matters of freedom of establishment, they are subject to the ECJ’s interpretation thereof. 14 As a result, for instance, a German limited liability company would be able to cross-border convert into a Norwegian limited liability company provided that the requirements for establishing a Norwegian limited liability company are met.

II. 2019 Directive Not Applicable to UCITS The 2019 Directive does not apply to collective investment companies. Neither the 7 rules on cross-border conversion, cross-border mergers nor cross-border divisions apply to such companies as these are governed by other dedicated provisions of European law as lex specialis.

III. Exclusion of Companies Subject to Liquidation Member States shall ensure that the 2019 Directive does not apply to limited 8 liability companies in liquidation which have begun to distribute assets to the members. The Commission Proposal and the 2019 Directive do not contain any specific explanation of such exclusion. Once the company’s members resolved to liquidate the company (so-called solvent or voluntary liquidation), the company’s purpose turns from conducting an economic activity into dissolution, typically under the control of a liquidator. Liquidation is generally subject to dedicated rules relative to the company’s management being effected by a liquidator, protection of creditors, a certain period of time to elapse until a distribution of assets is permissible, and certain assurances to be made vis-à-vis authorities, e.g., the competent commercial register, tax authorities and social security providers, prior to the company being struck off the commercial register. The distribution of the company’s assets to the company’s members is typically subject to all creditor’s being satisfied, so more or less the final step before the liquidator applies for the company’s deletion from the commercial register. In light of this, it is obvious that a company undergoing dissolution shall not be permitted to change its applicable

Agreement on the European Economic Area, Official Journal L 001 , 03/01/1994, 0003–0036. Expressly ruled out by the German Federal High Court in Civil Cases in BGH, NJW 2005, 3351. The case concerned recognition of a Luxembourg public limited liability company which transferred its central administration to Germany. 13

14

Karsten Kühnle

401

Art 86 a Scope corporate law (which is generally decisive for the applicable insolvency law) by means of a cross-border conversion.

IV. Exclusion of Credit Institutions and Investment Firms 9

Further, Member States shall ensure that the 2019 Directive does not apply to credit institutions and investment firms being subject to the resolution tools, powers and mechanisms set out in Title IV of the Bank Recovery and Resolution Directive which addresses the problems of troubled financial institutions.15

V. Member State Option for Preventive Restructuring Scenarios Member States may decide not to apply Chapter I to limited liability companies which are: (i) the subject of insolvency proceedings or subject to preventive restructuring frameworks; (ii) the subject of liquidation proceedings other than those referred to in point (a) of paragraph 3, or (iii) the subject of crisis prevention measures as defined in point (101) of Article 2 (1) of Directive 2014/59/EU. 11 The Commission Proposal (Article 86 c) did not contain such Member State option but rather excluded companies subject to preventive restructuring scenarios from carrying out a cross-border conversion.16 Introducing the Member State option instead is certainly more appropriate than an absolute prohibition, which would probably not have satisfied the proportionality test.17 Taking a look at the factual reality of cross-border restructuring and insolvency, tools such as a so-called COMI-shift 18 to benefit from the most favourable insolvency law, divisions, mergers, and cross-border transfer of assets are commonly used tools.19 The Member State option should also be considered in the light of the recent Directive on Restructuring and Insolvency20 which emphasizes the need for preventive restructuring frameworks with the purpose of enabling debtors to restructure effectively at an early stage and to avoid insolvency, thus limiting the unnecessary liquidation of viable enterprises (Recital (2)). Utilizing both the Member State option under the 2019 Directive and the framework for preventive and early restructuring as established under the recent Directive on Restructuring and Insolvency may result in powerful restructuring tools for all stakeholders concerned. 10

15 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council. 16 The same exclusion was supposed to apply for cross-border mergers (Article 120 (4)) and cross-border divisions (Article 160 d) as well. 17 Garcimartín/Gandia, ECFR 2019, 15, 22. 18 Mankowski, in Mankowski/Müller/J. Schmidt (eds), EuInsVO (2016), Article 3, § 25 ff.; Fritz/Scholtis, BB 2019, 2051. 19 Garcimartín/Gandia, ECFR 2019, 15, 22; Bayer/J. Schmidt, BB 2019, 1922, 1927. 20 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency); Dahl/Linnenbrink, NJW-Spezial 2020, 21; Fritz/Scholtis, BB 2019, 2051; Suchan/Albrecht, WPg 2019, 1181, 1183.

402

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 b

Article 86 b Definitions For the purposes of this Chapter: (1) ‘company’ means a limited liability company of a type listed in Annex II that carries out a cross-border conversion; (2) ‘cross-border conversion’ means 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, as listed in Annex II, and transfers at least its registered office to the destination Member State, while retaining its legal personality; (3) ‘departure Member State’ means a Member State in which a company is registered prior to a cross-border conversion; (4) ‘destination Member State’ means a Member State in which a converted company is registered as a result of a cross-border conversion; (5) ‘converted company’ means a company formed in a destination Member State as a result of a cross-border conversion. Article 86 b stipulates a limited number of mostly self-explanatory definitions relative 1 to a cross-border conversion. A limited liability company is a company of a type listed in Annex II to the Company Law Directive, hence, an addressee of the new framework established by Article 86 a et seq. both in terms of a “company” and “converted company”. On grounds of the ECJ’s interpretation of freedom of establishment and in tradition with Member States defining domestic conversions, the definition of “cross-border conversion” emphasizes the fact that the conversion does not result in any kind of dissolution of the company. The company’s legal personality remains untouched by the conversion. The company alters its “legal clothes” but remains exactly the same, continuously existing, subject of law; nor is there any interruption in its activities and legal relations.1 Or, in the words of Recital (47), as a consequence of the cross-border conversion, the company resulting from the conversion (the “converted company”) should retain its legal personality, its assets and liabilities, and all its rights and obligations, including any rights and obligations arising from contracts, acts or omissions. Further, by referring to the company at least transferring its registered office to the destination Member State, the definition of cross-border conversion explicitly acknowledges the ECJ’s position rendered in the Polbud case, where the ECJ held that an isolated transfer of registered office2 (legal mobility as opposed to physical mobility, i.e., a transfer of the principal place of business) falls within the scope of Articles 49 and 54 of the Treaty on the Functioning of the European Union. At first glance, one misses a couple of other, more complex, definitions. For 2 instance, terms like “creditor”, “safeguards”, “special rights”, “procedures and formalities” which are of greater substance for the provisions and mechanics established under the 2019 Directive. At second glance, obviously, there is room for Member States to add additional definitions as long as these are within the framework of the 2019 Directive. Practice and conflicting interpretations, if not disputes, will show the need for Member States imposing definitions or national courts or the ECJ, respectively, interpreting terms prone to interpretation difficulties. 1 Mörsdorf, ‘The legal mobility of companies within the European Union through cross-border conversion’, 49 CML Rv. (2012) 629-670, 630-631, 637-638. 2 Case 106/16 Polbud – Wykonawstwo sp. z o.o [2017] ECLI:EU:C:2017:804.

Karsten Kühnle

403

Art 86 d Draft terms of cross-border conversions

Article 86 c Procedures and formalities In compliance with Union law, the law of the departure Member State shall govern those parts of the procedures and formalities to be complied with in connection with the cross‐border conversion in order to obtain the pre-conversion certificate, and the law of the destination Member State shall govern those parts of the procedures and formalities to be complied with following receipt of the pre-conversion certificate. 1

Article 86 c expresses what the ECJ emphasized in its VALE decision, namely, that the implementation of a cross-border conversion presupposes the consecutive application of two national laws.1 The law of the departure Member State will be decisive for obtaining the pre-conversion certificate. The law of the destination Member State will be decisive for whether the company will be registered and as such become a converted company within the meaning of the definition of Article 86 b. As the ECJ stated in the VALE decision2, referring to previous decisions Daily Mail, General Trust and Cartesio, a cross-border conversion leads to the incorporation of a company governed by the law of the destination Member State; companies are creatures of national law and exist only by virtue of the national legislation which determines their incorporation and functioning. Technically, Article 86 c should be read in context with Article 86 m, which deals with the issuance of the pre-conversion certificate by the departure Member State, and Article 86 o, which deals with the scrutiny of the cross-border conversion by the destination Member State.

Article 86 d Draft terms of cross-border conversions The administrative or management body of the company shall draw up the draft terms of a cross-border conversion. The draft terms of a cross-border conversion shall include at least the following particulars: (a) the legal form and name of the company in the departure Member State and the location of its registered office in that Member State; (b) the legal form and name proposed for the converted company in the destination Member State and the proposed location of its registered office in that Member State; (c) the instrument of constitution of the company in the destination Member State, where applicable, and the statutes if they are contained in a separate instrument; (d) the proposed indicative timetable for the cross-border conversion; (e) the rights conferred by the converted company on members enjoying special rights or on holders of securities other than shares representing the company capital, or the measures proposed concerning them; (f) any safeguards offered to creditors, such as guarantees or pledges; (g) any special advantages granted to members of the administrative, management, supervisory or controlling bodies of the company; (h) whether any incentives or subsidies were received by the company in the departure Member State in the preceding five years; 1 2

404

Case 378/10 VALE Építési kft. [2012] ECLI:EU:C:2012:440, § 44. Case 378/10 VALE Építési kft. [2012] ECLI:EU:C:2012:440, § 55.

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 d

(i) details of the offer of cash compensation for members in accordance with Article 86 i; (j) the likely repercussions of the cross-border conversion on employment; (k) where appropriate, information on the procedures by which arrangements for the involvement of employees in the definition of their rights to participation in the converted company are determined pursuant to Article 86 l. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Disclosure of certain minimum content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Form and language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Responsibility for Preparing the Draft Terms of the Cross-Border Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Information to be Disclosed in the Draft Terms of the Cross-Border Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Corporate information in the departure and destination Member State 2. Instrument of constitution and statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Indicative timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Treatment of holders of special rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Safeguards offered to creditors; solvency statement . . . . . . . . . . . . . . . . . . . . . . 6. Special advantages granted to members of the administrative, management, supervisory or controlling organs of the company . . . . . . . . 7. Incentives or subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Details of the offer of cash compensation for members . . . . . . . . . . . . . . . . . . 9. Repercussion of the cross-border conversion on employment . . . . . . . . . . . 10. Employee participation in the converted company . . . . . . . . . . . . . . . . . . . . . . .

1 1 5 7 8 10 11 12 14 17 21 24 25 27 29

I. Introduction 1. Disclosure of certain minimum content Article 86 d governs the draft terms of the cross-border conversion as one of the most fundamental and critical pieces of documentation to validly effect the conversion. Recital (15) emphasizes that the information disclosed by the company should be comprehensive and make it possible for stakeholders to assess the implications of the intended cross-border operation but also caveats that companies should not be obliged to disclose confidential information, the disclosure of which would be prejudicial to their business position, in accordance with Union or national law. However, as described in Recital (15), non-disclosure should not be used as an excuse to undermine the requirements established under the 2019 Directive. In that context, Recital (13) expresses that the draft terms of the proposed operation shall contain the most important information about it. From a legal practitioner’s point of view, utmost diligence should therefore be put on the draft terms’ content and structure to avoid ambiguities, multiple re-drafts, and the draft terms being contested by stakeholders, such as employee representatives, for reasons of not being sufficiently comprehensive, or being misleading or inaccurate, or by the competent authority assessing whether the prerequisites for issuing a pre-conversion certificate are fulfilled. In this context it is relevant that the 2019 Directive gives the company’s members, creditors and representatives of the company’s employees, or, where there are no such representatives, the employees themselves, the right to submit comments on the draft terms of the cross-border conversion to the company (point (b) of Article 86 g (1)). Unlike Article 86 e which concerns the report of the administrative or management body for members and employees and stipulates that the report shall be made available

Karsten Kühnle

405

1 2

3

4

Art 86 d Draft terms of cross-border conversions to addressees not less than six weeks before the date of the general meeting resolving upon approval of the draft terms of the cross-border conversion (Article 86 e (7)), Article 86 d does not stipulate a timeline for disclosure. It must, therefore, be read in conjunction with Article 86 g (1) which requires the draft terms of the cross-border conversion being disclosed by the company and made publicly available in the register of the departure Member State at least one month before the date of the general meeting resolving upon approval of the draft terms of the cross-border conversion.

2. Form and language In terms of form of the draft terms of the cross-border conversion, the 2019 Directive shall not affect national rules on special form requirements (Recital (18)). Subject to national rules, the draft terms of the cross-border conversion may therefore require notarization by a notary public or any other specific form. 6 In terms of language, the draft terms of the cross-border conversion shall be drawn up in both the official language of the departure Member State and the official language of the destination Member State. Article 86 d (2) of the Commission Proposal, which required Member States to allow the company to use a language customary in the sphere of international business and finance (e.g. English) in addition to the official languages of the departure and destination Member States1 for the draft terms, has been skipped in the legislative process. 5

II. Responsibility for Preparing the Draft Terms of the Cross-Border Conversion 7

Depending on the company’s existing corporate governance structure, drawing up the draft terms of the cross-border conversion is the responsibility of the management (in a two-tier system) or the administrative organ (in a one-tier system). 2 To the extent that the company is subject to employee participation at board level, the relevant employee representatives should be involved in the decision on the draft terms of cross-border conversion (Recital (12)). From a German legal perspective, the managing director(s) of a private limited liability company (GmbH) or members of the executive board in case of a public limited liability company (AG), in each case in a number corresponding to the company’s rules of representation and, where the company is subject to co-determination, the employee representatives of the supervisory board, are responsible for drawing up the draft terms. As long as management’s ultimate responsibility for the draft terms of the cross-border conversion remains unaffected, delegation shall be permissible.

III. Information to be Disclosed in the Draft Terms of the Cross-Border Conversion 8

Points (a) to (k) of Article 86 d stipulate the minimum content of the draft terms, which will be made publicly available for every person interested in this operation.3 A departure Member State is therefore free to require more information to be disclosed Noak/Kraft, DB 2018, 1577, 1578. Stefanie Jung, Peter Krebs and Sascha Stiegler (eds), Gesellschaftsrecht in Europa (1 st edn, Nomos 2019). 3 COM(2018) 241 final, Explanatory Memorandum, Article 86 d. 1 2

406

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 d

as long as this being within the framework of the 2019 Directive and freedom of establishment. For instance, Article 86 k of the Commission Proposal suggested that Member States shall have the right to request in the draft terms a declaration by the company stating that the conversion will not affect the ability to satisfy the obligations towards third parties and that creditors will not be prejudiced. This option is now contained in Article 86 j (2) but with the slight difference that 9 Member States may require the declaration to be disclosed “with” the draft-terms of cross-border conversion and not as part of the draft-terms of cross-border conversion. In more detail:

1. Corporate information in the departure and destination Member State Point (a) and (b): the draft terms shall contain the existing corporate details of the 10 company, namely its legal form, name and registered office. They shall contain the same set of corporate data as proposed for in the destination Member State. To this end, the competent commercial register in the destination Member State may have to be identified as a first step (in case there are multiple commercial registers in the destination Member State). Furthermore, other authorities may have to contacted, e.g. in order to obtain clearance for the proposed company name or apply for a tax identification number (to the extent this forms part of the registration process). Finally, interaction with private parties may be required where registration of the company’s registered office is subject to the existence of a business address in the destination Member State. In such cases, obtaining the landlord’s consent to indicate the company’s business address vis-à-vis the competent commercial register may be required.

2. Instrument of constitution and statutes Point (c): the draft terms shall contain the instrument of constitution of the compa- 11 ny in the destination Member State, where applicable, and the statutes if they are a separate instrument. The documentation shall therefore be prepared in the form “as if converted”, that means, prepared in compliance with the corporate law of the destination Member State.4 As the ECJ stated in the VALE decision, a cross-border conversion leads to the incorporation of a company under the law of the destination Member State; companies are creatures of national law and exist only by virtue of the national legislation which determines their incorporation and functioning. The documentation may show, for instance, a change of corporate governance where the company moves from a two-tier system to a one-tier system and vice versa, different rules on passing board and shareholder resolutions, different rules of representation, increased requirements on disqualification of directors, the necessity to appoint a company secretary, and different (minimum) share capital requirements. The complexity of documentation may increase massively, for instance if a German limited liability company with comparably lean standard articles of association will convert into a common-law governed company subject to statutes with dozens of pages.

3. Indicative timetable Point (d): the draft terms shall contain the proposed indicative timetable for the 12 cross-border conversion (similar to the requirements of Article 8 (2)(d) SE-Regulation). This provision was contested in the law making process.5 However, the timetable is a 4 Case 378/10 VALE Építési kft. [2012] ECLI:EU:C:2012:440, § 55; BGH ZIP 2005, 1318; Hoger in Limmer, 2209 § 8.

Karsten Kühnle

407

Art 86 d Draft terms of cross-border conversions purely indicative document with no legal consequences attached to non-compliance with the indicated timeline6; yet, drawing up the timeline forces the company’s management and stakeholders to specify relevant key steps, statutory deadlines, and underlying action points, and as such contributes to effective execution. In practice, it would be rather unusual for the company not to prepare a timeline to track progress and allocate action points and responsibilities. The indicative timeline would need to follow at least the key steps and corresponding timelines stipulated by the new framework to effect the cross-border conversion. Obviously, the indicative timeline would be less complex in case of a single-member company concerned whereas in case of multiple members it may need to reflect additional dates, e.g., relative to members declaring to the company their decision to exercise the right to dispose of their shares and the period within which the cash compensation specified in the draft terms of the cross-border conversion is to be paid (Article 86 i (2), (3)). 13 In the event of a single-member company effecting the cross-border conversion, it seems advisable to include, at a minimum, indicative key dates or calendar weeks in respect of each of the following: (i) disclosure of the draft terms of the cross-border conversion in the register of the departure Member State; (ii) submission of the report of the company’s administrative or management body for members and employees 7 to members and to the representatives of the employees or, where there are no such representatives, to the employees themselves; (iii) submission of the independent expert report to members8; (iv) notice in the register of the departure Member State informing the members, creditors and representatives of the employees of the company or, where there are no such representatives, the employees themselves, that they may submit to the company, at the latest five working days before the date of the general meeting, comments concerning the draft terms of the cross-border conversion; (v) general meeting; (vi) launch of employee participation procedure9; (vii) application to the competent authority in the departure Member State to obtain the pre-conversion certificate; (viii) expiry of the standard scrutiny period in the departure Member State assuming issuance of the pre-conversion certificate and submission of the same to the competent authority in the destination Member State by the competent authority in the departure Member State within this period; (ix) scrutiny procedure by the competent authority in the destination Member State; and, finally, (x) registration of the cross-border conversion in the register of the destination Member State and subsequent striking-off or removal of the company from the register in the departure Member State.

4. Treatment of holders of special rights 14

Point (e): the draft terms shall contain the rights conferred by the converted company on members enjoying special rights or on holders of securities other than shares representing the company capital, or the measures proposed concerning them. Whilst the Commission Proposal and the 2019 Directive do not give any further explanations on special rights or the rationale behind the provision, obviously, the disclosure requirement focusses on accomplishing the principle of equal treatment of all shareholders in the company. From a German legal perspective, the disclosure requirement is similar to 5 Stellungnahme des Deutschen Anwaltvereins durch den Ausschuss Handelsrecht, Stellungnahme Nr. 31/2018, July 2018, 8. 6 See for an SE: Casper in Spindler/Stilz (4th edn, 2019), SE-VO Article 8, § 7-10. 7 Unless waived or not required for reasons of a single-member company without employees, see → Art 86 e. 8 Unless waived or not required for reasons of a single-member company, see → Art 86 f. 9 If required, see → Art 86 l.

408

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 d

what the German Transformation Act stipulates in terms of treatment of special rights in domestic as well as cross-border mergers, and domestic conversions. 10 The principle of equal protection aims to protect shareholders without special rights as compared to shareholders equipped with special rights.11 Special rights requiring reporting the draft terms in accordance with point (e) are any rights contractually agreed between the company and one or more – but not all – shareholders. Rights agreed by the company with the entirety of shareholders or rights conferred to shareholders under statutory law do not qualify as special rights and are therefore not subject to reporting. Examples of special shareholders’ rights are preferred shares, non-voting shares, or 15 rights to designate and appoint member(s) of the company’s management and/or supervisory board on a unilateral basis absent a resolution of the shareholders’ meeting. The same reporting requirement applies to any special right(s) held by beneficiaries other than shareholders, for instance, corporate bond holders, convertible bond holders, or holders of profit participation rights. Compliance with the reporting obligation will require an early identification of any existing special rights. It will also require an analysis of each right’s permissibility or, respectively, existence of an equivalent right under the laws of the destination Member State, as holders of special rights will certainly want the status quo to be matched in the converted company. In practice, this may turn out as a complex and time consuming exercise. To the extent that an existing special right cannot be matched in the converted company under the applicable laws in the destination Member State, the company and the affected rightholder will need to enter into discussion to find a solution. This might result in furnishing the rightholder with a right that comes legally and economically as close as possible to the existing right12, or an appropriate compensation where the affected shareholder does not vote against the draft terms (Article 86 j). Where no special rights exist but are proposed to be granted in the converted com- 16 pany, the considerations above will apply mutatis mutandis. Where special rights do neither exist nor are proposed to be granted to shareholders and beneficiaries in the converted company, the 2019 Directive does not require a negative statement. Such statement is (at least from a German perspective13) nevertheless advisable to avoid clarification requests by the competent authority in the departure Member State during the scrutiny procedure.

5. Safeguards offered to creditors; solvency statement Point (f): the draft terms shall contain any safeguards offered to creditors, such as 17 guarantees or pledges. To the extent that the company offers safeguards to creditors, the safeguards shall be conditional on the cross-border conversion taking effect in accordance with Article 86 q. One of the fundamental aims of the 2019 Directive is the protection of a company’s creditors. Recital (4) emphasizes that the right of companies to convert across borders should go hand in hand, and be properly balanced, with the protection of creditors. Recital (22) describes the underlying concern as a situation where, following a cross-border operation, the former creditors of a company carrying out such operation could see their claims affected, where the company that is liable for the debt is, following such operation, governed by the law of another Member State. Recital (23) unArticles 5, 122 c, 194 German Transformation Act (UmwG). Bärwaldt in Semler/Stengel (4th edn, 2017), UmwG § 194, § 22; Stratz in Schmitt/Hörtnagl/Stratz § 7. 12 Bärwaldt in Semler/Stengel (4th edn, 2017), UmwG § 194, § 25. 13 Wicke, DStR 2018, 2642, 2644; Heckschen in Beck’sches Notar-Handbuch (7th edn, 2019), § 24 Umwandlung, § 53. 10

11

Karsten Kühnle

409

Art 86 d Draft terms of cross-border conversions derlines the right of creditors to appropriate protection such that creditors may, in cases where they are not satisfied with the protection offered by the company in the draft terms and where they may not have found a satisfactory solution with the company, apply for safeguards to the appropriate authority. 18 Against this, the company’s obligation to inform of any safeguards offered to creditors, should be read in context of point (b) of Article 86 g (1) and in particular Article 86 j. Whilst Article point (b) of Article 86 g (1) aims at alerting creditors of their right to review and comment on the safeguards offered in the draft terms, Article 86 j (1) offers them the right to apply to the competent administrative or judicial authority for adequate safeguards to the extent they are dissatisfied with the safeguards offered and provided that they can demonstrate the prerequisites set out in Article 86 j (1). The new framework equips a creditor of the company with a strong weapon to protect its claims against the company. Such instrument of protection is new compared to what is offered to creditors under the existing Cross-Border Merger Directive (Article 122). It will apply to cross-border mergers (Article 126 b)14 and cross-border divisions (Article 160 j)15 as well, whereby the need for protection in a cross-border conversion seems lower compared to a cross-border merger or cross-border division. In the latter two cases, the asset-base of the company is subject to transfer whilst in a cross-border conversion the asset base remains untouched given the company only altering its “legal clothes”. 19 To avoid creditors taking legal action against the company in connection with a crossborder conversion, the company should identify its population of creditors as well as the likelihood of potential requests for safeguards diligently and in a timely manner. To ensure efficient protection of creditors in line with the 2019 Directive’s intentions, the term creditor, in the absence of an explicit definition given by the 2019 Directive, should generally be interpreted widely and may include, for instance, active and former employees, active and former members of management, business partners, and administrative authorities such as tax authorities.16 In terms of timing, only those creditors shall be taken into account whose claims antedate the date of disclosure of the draft terms and have not fallen due at that point of time (Article 86 j (1)). Examples of safeguards set out in the provision are guarantees and pledges but other safeguards will also be permitted as long as they are adequate to creditors and this being within the framework of the 2019 Directive and freedom of establishment. Where no safeguards are offered by the company, the 2019 Directive does not require a negative statement. Such statement is (at least from a German perspective17) nevertheless advisable to avoid clarification requests by the competent authority in the departure Member State during the scrutiny procedure. 20 Importantly, where a Member State makes use of the option to require the company’s management to render a solvency declaration (see Article 86 j (2)) which, in essence, shall state that the company’s administrative or management body is, after having made reasonable enquiries, unaware of any reason why the company would, after the conversion takes effect, be unable to meet its liabilities when those liabilities fall due, such declaration shall be disclosed together with the draft terms of the cross-border conversion in accordance with Article 86 g.

See → Art 126 b. See → Art 160 j. 16 See → Art 86 j. 17 Wicke, DStR 2018, 2642, 2644; Heckschen in Beck’sches Notar-Handbuch (7th edn, 2019), § 24 Umwandlung, § 53. 14

15

410

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 d

6. Special advantages granted to members of the administrative, management, supervisory or controlling organs of the company Point (h): the draft terms shall contain any special advantages granted to members 21 of the administrative, management, supervisory or controlling organs of the company. The company’s members shall be informed properly in order to be able to assess whether the special advantage in question will have a negative impact on the beneficiaries’ ability to pass objective decisions in favour of the company compared to decisions made for personal advantages. The provision is similar to Article 5 of the Cross-Border Merger Directive18 which stipulates the particulars to be contained in the common draft terms of cross-border merger. In contrast thereto, point (h) omits inclusion of the independent expert examining the draft terms of the cross-border conversion as a potential beneficiary of special advantages. The company’s assessment as to whether there are special advantages to be disclosed 22 in the draft terms will therefore need to concentrate on the question if and to which extent any advantage has been given to members of management and/or members of controlling bodies in connection with the cross-border conversion which they would not have been entitled to otherwise. Special advantages in that sense include monetary and immaterial advantages of any kind offered by the company to relevant individuals, for instance, a cash compensation (“golden handshake”) in favour of a board member for no longer being a member of the management or controlling body of the company as a result of the new corporate governance applicable under the laws of the destination Member State, payment of cancellation fees for advisory agreements concluded between the company and a member of the management or controlling body which shall no longer being continued with the converted company, the appointment as corporate body in the converted company or the promise to grant discharge of office to a board member when supporting the cross-border conversion. Where no special advantages are granted to members of the administrative board, 23 supervisory or controlling organs of the company, the 2019 Directive does not require a negative statement. Such statement is (at least from a German perspective 19) nevertheless advisable to avoid clarification requests by the competent authority in the departure Member State during the scrutiny procedure.

7. Incentives or subsidies Point (h): the draft terms shall contain information as to whether any incentives 24 or subsidies were received by the company in the departure Member State in the preceding 5 years. Obviously, the provision aims at protecting public creditors and their interest when having granted incentives and/or subsidies to the company. Systematically, the disclosure requirement is linked to point (f) as it focusses on creditor protection but unlike a private creditor, public creditors granting incentives and subsidies do usually not require any safeguards given the nature of incentives and subsidies. Practice shows that incentives and/or subsidies play an important role for businesses and are gratefully accepted but underlying conditions are, regrettably, not always complied with. Underlying conditions which may become relevant in the context of a cross-border conversion are notification obligations in case of a change of legal form, relocation of the company’s registered office, reductions to the work force, sale of (subsidized) 18 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies, OJ L 310, 25.11.2005. 19 Wicke, DStR 2018, 2642, 2644; Heckschen in Beck’sches Notar-Handbuch (7th edn, 2019), § 24 Umwandlung, § 50, 53.

Karsten Kühnle

411

Art 86 d Draft terms of cross-border conversions assets. Given the important role of incentives and subsidies in industrial development programs by public authorities, protection of their interests is a logical consequence. Where neither incentives nor subsidies have been granted to the company during the relevant last 5 years, the 2019 Directive does not require a negative statement. Such statement is (at least from a German perspective20) nevertheless advisable to avoid clarification requests by the competent authority in the departure Member State during the scrutiny procedure.

8. Details of the offer of cash compensation for members Point (i): the draft terms shall contain details of the offer of cash compensation for the members in accordance with Article 86 i.21 The general legal background of the offer of cash compensation is the protection of minority members.22 Recital (18) describes the offer of cash compensation as the response to those minority members not willing to accept the change of the applicable corporate law and therefore voting against the approval of the draft terms. Such minority members shall have the right to exit the company and receive cash compensation for their shares that is equivalent to the value of those shares. In terms of details to be given, the offer of cash compensation must be specific enough such that it can be accepted by a simple declaration of acceptance. This will require that a fixed price per share23 equivalent to the value of the share (Recital (18)) must be offered. Further details should be added to the valuation method applied to determine the fixed price per share, and reference to the independent expert’s report (unless waived by all members, Article 86 f) examining inter alia the adequacy of the cash compensation seems advisable. 26 From a legal practitioner’s point of view, the offer of cash compensation will typically be made under the condition of the conversion taking effect, that means, being registered in the register of the destination Member State or only a certain limited number of members opposing against the draft terms of the cross-border conversion. 25

9. Repercussion of the cross-border conversion on employment Point (j): the draft terms shall contain details of the likely repercussions of the cross-border conversion on employment. The right of companies to convert across borders should go hand in hand, and be properly balanced, with the protection of employees; this is one of the fundamental principles expressed by Recital (4). Further, it is within Member States’ powers to provide strengthened protection for employees in accordance with the existing social acquis (Recital (11)). By no means must a cross-border operation be used by the company to undermine or eliminate employees’ rights. 28 As set out in the Impact Assessment, some Member States have specific rules on employee protection, while some do not have rules at all. The draft terms require the company to comprehensively explain if and to which extent the conversion will affect employment conditions going forward. Items to report24 include in particular whether there will be any change to the employment conditions laid down by law, collective agreements, and bargaining agreements. Explanations will also be required in respect of whether the company’s places of business, such as the location of head office, the 27

20 Wicke, DStR 2018, 2642, 2644; Heckschen in Beck’sches Notar-Handbuch (7th edn, 2019), § 24 Umwandlung, § 53. 21 See → Art 86 i. 22 Winner, ECFR 1-2/2019, 44, 68. 23 Limmer in Limmer (ed), Handbuch der Unternehmensumwandlung, 965, § 251. 24 Additional guidance on items to report can be taken from Recital (13).

412

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 e

location of subsidiaries and branches, will be subject to change in the context of the conversion. Other items to explain include, for instance, whether the composition of management, a co-determined supervisory board, if any, will be subject to change. Obviously, more detail and depth of reporting will be required in scenarios where the crossborder conversion results in an physical relocation of the company’s principle place of business (which would include a relocation of employees and major assets) compared to an isolated transfer of registered office without a physical relocation of assets. Where the company arrives at the conclusion that there will not be repercussions on employment in the converted company, the 2019 Directive does not require a negative statement. Such statement is (at least from a German perspective 25) nevertheless advisable to avoid clarification requests by the competent authority in the departure Member State during the scrutiny procedure.

10. Employee participation in the converted company Point (k): the draft terms shall contain, where appropriate, information on the proce- 29 dures by which arrangements for the involvement of employees in the definition of their rights to participation in the converted company are determined pursuant to Article 86 l. The disclosure requirement entails that the company diligently analysis if and to which extent it will be subject to employee participation in the destination Member State. Whether this will be the case, will need to be examined against the basic rule on employee participation set out in Article 86 l, the exceptions thereto, for instance, the four-fifth rule, and the procedures stipulated therein, e.g. in relation to negotiations with the special negotiation body, content of the participation agreement, application of the standard rules in case of no agreement being reached or the negotiations not being opened or terminated, need to be described and disclosed.26 Where the company arrives at the conclusion that no employee participation will be 30 required in the converted company, the 2019 Directive does not require a negative statement. Such statement is (at least from a German perspective27) nevertheless advisable to avoid clarification requests by the competent authority in the departure Member State during the scrutiny procedure.

Article 86 e Report of the administrative or management body for members and employees 1. The administrative or management body of the company shall draw up a report for members and employees, explaining and justifying the legal and economic aspects of the cross-border conversion, as well as explaining the implications of the cross‐border conversion for employees. It shall, in particular, explain the implications of the cross-border conversion for the future business of the company. 2. The report shall also include a section for members and a section for employees.

Wicke, DStR 2018, 2642, 2644. See → Art 86 l. 27 Wicke, DStR 2018, 2642, 2644; Heckschen in Beck’sches Notar-Handbuch (7th edn, 2019), § 24 Umwandlung, § 53. 25 26

Karsten Kühnle

413

Art 86 e Report of the administrative or management body for members and employees The company may decide either to draw up one report containing those two sections or to draw up separate reports for members and employees, respectively, containing the relevant section. 3. The section of the report for members shall, in particular, explain the following: (a) the cash compensation and the method used to determine the cash compensation; (b) the implications of the cross-border conversion for members; (c) the rights and remedies available to members in accordance with Article 86 i. 4. The section of the report for members shall not be required where all the members of the company have agreed to waive that requirement. Member States may exclude single-member companies from the provisions of this Article. 5. The section of the report for employees shall, in particular, explain the following: (a) the implications of the cross-border conversion for employment relationships, as well as, where applicable, any measures for safeguarding those relationships; (b) any material changes to the applicable conditions of employment or to the location of the company’s places of business; (c) how the factors set out in points (a) and (b) affect any subsidiaries of the company. 6. The report or reports shall be made available in any case electronically, together with the draft terms of the cross-border conversion, if available, to the members and to the representatives of the employees or, where there are no such representatives, to the employees themselves, not less than six weeks before the date of the general meeting referred to in Article 86 h. 7. Where the administrative or management body of the company receives an opinion on the information referred to in paragraphs 1 and 5 in good time from the representatives of the employees or, where there are no such representatives, from the employees themselves, as provided for under national law, the members shall be informed thereof and that opinion shall be appended to the report. 8. The section of the report for employees shall not be required where a company and its subsidiaries, if any, have no employees other than those who form part of the administrative or management body. 9. Where the section of the report for members referred to in paragraph 3 is waived in accordance with paragraph 4 and the section for employees referred to in paragraph 5 is not required under paragraph 8, the report shall not be required. 10. Paragraphs 1 to 9 of this Article shall be without prejudice to the applicable information and consultation rights and procedures provided for at national level following the transposition of Directives 2002/14/EC and 2009/38/EC. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Report for Members and Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Responsibility for drawing up the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Timeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Permissibility to waive sections of the report and the report in its entirety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Implications of the cross-border conversion on the company’s future business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Specific content to be contained in the section for members . . . . . . . . . . . . . . a) Explanation of the cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implications of the cross-border conversion for members . . . . . . . . . . . . . . . . c) Rights and remedies available to members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

414

Karsten Kühnle

1 3 3 4 5 8 13 14 15 16

TITLE II CONVERSIONS, MERGERS AND DIVISIONS 6. Specific content to be contained in the section for employees . . . . . . . . . . . . . a) Continuity of employment relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Implications of the cross-border conversion on employment conditions . . c) Potential structuring options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Employees’ right to render an opinion on the report . . . . . . . . . . . . . . . . . . . . . .

Art 86 e 17 19 21 22 23

I. Introduction Article 86 e governs the report of the administrative or management body for 1 members and employees as another key document for the purpose of effecting crossborder conversions. Unless waived or not required for reasons of a single-member structure (see → Article 86 e (4) below), the administrative or management body of the company is required to draw up either one report containing a section for members and another section for employees or, alternatively, separate reports for members and employees, respectively. The report’s purpose is twofold, namely a combination of information and protec- 2 tion of members and employees, respectively, prior to the members resolving on the approval of the draft terms of cross-border conversion. In terms of content, the report comprises three major elements:1 (i) explaining and justifying the legal and economic aspects of the proposed cross-border conversion, in particular the implications of the cross-border conversion for the future business of the company; (ii) explaining the implications of the cross-border conversion for the company’s members; and (iii) explaining the implications of the cross-border conversion for the company’s employees. The report is without prejudice to the applicable information and consultation rights and proceedings as established under Directive 2002/14/EC (which established a general framework for informing and consulting employees) and Directive 2009/38/EC (concerning the establishment of a European Works Council) which remain unaffected.

II. Report for Members and Employees 1. Responsibility for drawing up the report Article 86 e (1) requires the management or administrative organ to prepare the re- 3 port for the company’s members and employees. Given its complexity and importance from a disclosure and information perspective, sufficient resources should be allocated to it in advance and proper diligence should be applied for when it comes to content, e.g. describing the impacts on the future business and the company’s employees. From a German legal perspective, the managing director(s) of a private limited liability company (GmbH) or members of the executive board in case of a public limited liability company (AG), in each case in a number corresponding to the company’s rules of representation, are responsible for drawing up the report. As long as management’s ultimate responsibility for the report remains unaffected, delegation shall be permissible.

2. Timeline The report has to be made available to the members and employee representatives or, 4 where there are no such representatives, to the employees themselves, not less than 6 weeks before the general meeting resolving upon the draft terms of cross-border conversion (Article 86 e (6)). 1

Schollmeyer, AG 15/2019, 541, 544.

Karsten Kühnle

415

Art 86 e Report of the administrative or management body for members and employees 3. Permissibility to waive sections of the report and the report in its entirety Addressees of the report are the company’s members and employees. They are the beneficiaries of the report and it is basically in their hands to waive the report, that means, the benefit of disclosure and information. The 2019 Directive addresses this by permitting certain exceptions from the report requirement. 6 Firstly, the section dedicated to members may be waived by all members (Article 86 e (4)). The 2019 Directive refers to all members agreed to waive the report requirement. Technically, this will require a corresponding resolution passed by all members unanimously. Secondly, Article 86 e (4) appears to permit Member States to exclude single-member companies from the requirement to draw up the report at all. The wording of the provision – “Member States may exclude single-member companies from the provisions of this Article.” – is somehow prone to misinterpretation. Literally taken, reference to “this Article” would indeed lead to the report not being required at all. Given the context of the provision, namely the first sentence – “The section of the report for members shall not be required where all the members of the company have agreed to waive that requirement.” – one would instinctively conclude that reference to “this Article” is made by mistake or inadvertently 2 and the correct term is rather being “this provision” instead. This would apply even in case where the single-member company employs a large workforce. Obviously, this would deprive the company’s employees of their legitimate interest to be informed of the implications the cross-border conversion has on them.3 This, in turn, would be contrary to the 2019 Directive’s intentions, namely to have the right of companies to convert across borders to go hand in hand, and be properly balanced, with the protection of employees (Recital (4)). On that basis, one would need to conclude that the company’s employees have information rights independent from and irrespective of the company’s members.4 That said, Article 86 e (4) should be interpreted in such way that a Member State may only use the option to the extent that a single-member company without any employees is concerned.5 In other words: if a single-member company has employees, the report for employees will be required and neither the company’s members nor Member States can deprive the company’s employees thereof. Such interpretation is systematically in line with the third exception stipulated by the 2019 Directive, namely that the section dedicated to employees shall not be required where the company and its subsidiaries, if any, have no employees other than those who form part of the company’s administrative or management body (Article 86 e (8)). This exception supports the conclusion that there is no need to protect employees’ interest where there are no employees (other than those in managerial functions) but does not at the same time lead to the conclusion that a single-member structure eliminates the report as such even where there are employees (other than those in managerial functions). 7 Finally, the report as such will not be required where all members waived the section for members and where the section for employees will not be required as a result of the company and its subsidiaries, if any, having no employees other than those who form part of the administrative or management body (Article 86 e (9)). Again, this ex5

Schollmeyer, AG 15/2019, 541, 549. Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’, GmbHR No. 2, 2020, 61, 67; Schollmeyer, AG 15/2019, 541, 549; Lutter/Bayer/Schmidt, ‘Europäisches Kapitalmarkt- und Gesellschaftsrecht’, ZGR (6 th edn, 2017), 1922, 1928. 4 Schollmeyer, AG 15/2019, 541, 550. 5 Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’, GmbHR No. 2, 2020, 61, 67. 2 3

416

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 e

ception supports the reasoning described before. When implementing Article 86 e (4) into German law, the German legislator should therefore take a restrictive approach. 6

4. Implications of the cross-border conversion on the company’s future business The report shall, in particular explain the implications of the cross-border conversion on the company’s future business. The requirement to additionally explain and substantiate the implications of the cross-border conversion on the management’s strategic plan (as proposed in point (a) of Article 86 e (2) of the Commission Proposal) is no longer contained in the 2019 Directive. Other than this, neither the 2019 Directive nor the Commission Proposal give any specific guidance as to what the company’s administrative or management body has to report on when it comes to the implications of the cross-border conversion on the company’s future business. Taking into account Recital (15), which emphasizes that the information disclosed by the company should be comprehensive and make it possible for stakeholders to assess the implications of the intended cross-border operation, the content relating to the implications of the cross-border conversion on the company’s future business should firstly be comprehensive and, secondly, of sufficient substance compared to boilerplate phrases. The magnitude of explanations and information to be given in that context will be certainly driven by whether or not the cross-border conversion will involve a relocation of the company’s headquarters and certain of its key assets into the destination Member State. Irrespective of the above, to the extent that the company operates in a regulated industry (e.g. energy, health care, pharma, telecommunications), the regulatory regime may look different which, in turn, may result in the application of a different or modified business model. Where the company contemplates entering into new fields of business activities in connection with the cross-border conversion, irrespective of those contemplated new activities being related or unrelated to its existing business, will also be important to report. As far as contractual terms are concerned, the existing and future treatment of choice-of-law provisions may look different. This will require obtaining in-depth knowledge of the new law as applicable in the destination Member State, e.g., in terms of liability, contractual penalties, termination rights, guarantees, sureties, access to courts, etc. Subsidies and incentives granted in the departure Member State may not be available in the destination Member State and may more or less heavily impact the future business. From an anti-trust perspective, the cross-border conversion may result in (more) turnover being generated in markets where the company has not yet been (that) active before, which may have an impact on future business as well, be it of restrictive nature or not. This brief selection of examples demonstrates that there is a variety of topics to be taken into account when explaining the implications of the cross-border conversion on the company’s future business activities. Further, the provision requires the company to justify the legal and economic aspects of the cross-border conversion in the context of explaining them. Again, there is no guidance in the 2019 Directive or the Commission Proposal as to which degree of “justification” will be required. It appears advisable to apply a before-and-after approach combined with an analysis of the benefits and risks attached to the crossborder conversion. Taking such approach will also be beneficial to the company’s administrative or management body from a business judgement rule7 perspective. 6 Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’, GmbHR No. 2, 2020, 61, 67.

Karsten Kühnle

417

8

9

10

11

Art 86 e Report of the administrative or management body for members and employees Further, such approach might address providing comprehensive and sufficient substance and permit addressees to reach an educated decision whilst at the same time minimizing the risk of false, misleading or incomplete information. 12 The 2019 Directive does not address the consequences of the report or components thereof being false, misleading, or incomplete other than in the context of the cash-compensation8 (Article 86 i (5)). From a German legal perspective, one would conclude that the resolution on the draft terms of the cross-border conversion can be contested if the report is false, misleading, or incomplete, subject in each case to the prerequisites imposed under applicable law and judicature.9

5. Specific content to be contained in the section for members 13

Article 86 e (3) stipulates that the section of the report for members shall explain certain minimum particulars. As a general comment, protection of members in a cross-border conversion scenario is without doubt of importance. Recital (4) emphasizes that the rights of companies to convert across borders should go hand in hand, and be properly balanced, with the protection of members. Compared to a cross-border merger or a cross-border division, where the asset base of the company will be touched, the need for protection of members appears less urgent given that the asset base of the company remains as is.10 From a minority shareholder’s perspective, however, the risk of being carved-out of the company by means of the cross-border conversion still remains. The change of the applicable corporate law can have a major impact as it may result in different rules relative to the language and venue of shareholder meetings and a loss of forum as far as bringing legal action against shareholder resolutions is concerned.11 a) Explanation of the cash compensation

14

Against that background and subject to all members waiving the report for members or single-member companies not being required to prepare a report for members under the Member State option (Article 86 e (4)), the members section shall, firstly, explain the cash compensation and the method used to determine it (point (a) of Article 86 e (3)). To this end, the company would normally engage an independent expert to value the company as a going concern and arrive at a cash compensation expressed as a certain amount per share. Neither the 2019 Directive nor the Commission Proposal give any specifics on which valuation method(s) to apply.12 In practice, methods to value the cash compensation vary across Member States.13 This may lead to widely diverging results, especially if the company’s value is determined on a book value basis instead of a market value approach looking at the future cash flows of the company.14 The 2019 Directive only indicates that the offer of cash compensation should be based on generally accepted valuation methods (Recital (20)). As a fundamental principle, the cash compensation must be adequate, meaning that is shall correspond to the value of the respective member’s participation in the company (Recital (18)). This will require that a valuation method most appropriate to the company’s business model will have to be apSpindler in Spindler/Stilz (4th edn, 2019), AktG § 116, §§ 43-47. Schollmeyer, AG 15/2019, 541, 548. 9 Schollmeyer, AG 15/2019, 541, 548. 10 Winner, ECRF 1-2/2019, 45, 61. 11 Winner, ECRF 1-2/2019, 45, 61. 12 Lutter/Bayer/Schmidt, ‘Europäisches Kapitalmarkt- und Gesellschaftsrecht’, ZGR (6 th edn, 2017), 1922, 1928. 13 Winner, ECRF 1-2/2019, 45, 61. 14 Winner, ECRF 1-2/2019, 45, 61. 7

8

418

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 e

plied to determine an adequate cash compensation and at the same time minimize the risk of members voting against approval of the draft-terms of cross-border conversion and taking subsequent legal action. In practice, most often this will result in the discounted cash flow method being applied15. Where the company’s shares are publicly traded at a stock exchange, the share price may be taken as decisive instead of a valuation based on generally accepted valuation methods (Article 86 f (2)). b) Implications of the cross-border conversion for members Secondly, the implications of the cross-border conversion for members shall be ad- 15 dressed in the members section of the report (point (b) of Article 86 e (3)). Regrettably, neither the 2019 Directive nor the Commission Proposal give any specifics on what kind of implications shall be addressed in the report. As a major consequence, the conversion will result in a change of the applicable corporate law. A diligent and comprehensive comparison of the company’s corporate governance before-and-after the cross-border conversion also taking into account potential employee participation at board level will be paramount to enable members to pass an educated decision on whether or not to approve the conversion. This will include corresponding elaborations on the company’s statutes in the form being part of the draft terms of cross-border conversion. The magnitude of change can be enormous, for instance, when a company established under a two-tier corporate governance system moves into a one-tier corporate governance and vice versa or where a private limited liability company will convert into a public limited liability company. Receiving additional influence or giving up the same, e.g., in the sense of having the right to give instructions to the management (an active role) or not (a more passive role), being subject to personal liability in a piercing of the corporate veil scenario, applicable voting thresholds, existing veto rights, minority protection, rights and obligations of directors, and taxation on dividends, specific judicature on relevant aspects of corporate law, just to name a few practical hot topics, will certainly impact members’ willingness to approve the cross-border conversion. c) Rights and remedies available to members Thirdly, point (c) of Article 86 e (3) requires the section of the report dedicated to 16 members to explain the rights and remedies available to members in accordance with Article 86 i.16 The latter establishes the principles for protection of members who vote against or, respectively, object against the cross-border conversion.17 From a practical point of view, the report should outline the key elements of protection introduced by Article 86 i, namely, the right of members’ holding voting shares to vote against approval of the draft terms; that right being available to holders of non-voting shares as well provided that Member States conferred such right on them; any formalities attached to voting and objecting, respectively, against approval of the draft-terms; any deadlines and obligations attached to execution of such rights, as well as remedies available to members to the extent they want to contest the adequacy of the cash compensation, and the applicable law.

Drygala in Lutter, UmwG (6th edn, 2019), § 5, § 52. Winner, ECFR 1-2/2019, 45, 64; Jens Bormann and Peter Stelmaszcyk: ‘Grenzüberschreitende Spaltungen und Formwechsel nach dem EU-Company Law Package’, ZIP, No. 355, 2019, 2439. 17 Member States may provide an exit right also to members holding non-voting shares, Article 86 i. 15

16

Karsten Kühnle

419

Art 86 e Report of the administrative or management body for members and employees 6. Specific content to be contained in the section for employees Article 86 e (5) stipulates certain matters to be addressed in the section of the report dedicated to the company’s employees. Protection of employees is a key element of the 2019 Directive as the right of companies to convert across borders should go hand in hand, and be properly balanced, with the protection of the employees (Recital (4)). Key elements to be addressed in the report shall be the implications of the cross-border conversion for employment relationships as well as, where applicable, any measures for safeguarding those relationships; any material changes to the applicable conditions of employment or to the location of the company’s place of business, in each case taking into account the situation at the company’s subsidiaries as well. 18 Corresponding emphasis should be applied when drafting content of the report in that respect. In general, a prudent and comprehensive analysis will be required to examine to which extent the cross-border conversion will impact employment relationships and employment conditions. This, in turn, will take considerable time and resources to be factored in when planning the timeline and the cross-border conversion. Certainly, the complexity of elaborations will depend on whether the cross-border conversion involves an isolated transfer of the company’s registered office or the transfer of the company’s principal place of business to the destination Member State. 17

a) Continuity of employment relationships The fundamental and most important message to employees is set out in point (c) of Article 86 r, which addresses the consequences of the cross-border conversion. It stipulates that the rights and obligations of the company arising from contracts of employment or from employment relationships existing at the date on which the crossborder conversion takes effect shall continue with the converted company. As Recital (47) states, the converted company should in particular respect any rights and obligations arising from contracts of employment or from employment relationships, including any collective agreements. If the cross-border conversion will only involve an isolated transfer of the company’s registered office to the destination Member State but not a transfer of the company’s principal place of business, is seems fair to arrive at the conclusion that there is only very minor change, if at all, to employment relationships. These continue with the same company irrespective of its new legal form and registered office. 20 The situation may look different when looking at managerial functions and directorships. Reporting lines, legal responsibilities, functions, as well as liability regimes towards shareholders, creditors, and employees will change simultaneously with the new corporate governance. This will require reflection in the corresponding service contracts irrespective of the cross-border conversion involving an isolated transfer of the company’s registered office to the destination Member State or a transfer of the company’s principal place of business. 19

b) Implications of the cross-border conversion on employment conditions 21

Other than in respect of a cross-border conversion’s impact on members, the 2019 Directive provides guidance on specific items to form part of the section dedicated to employees. Recital (13) requires the report to explain whether there would be any material change to the employment conditions laid down by law, to collective agreements or to transnational company agreements, and in the locations of the company’s places of business, such as the location of the head office. In addition, Recital (13) requires that the report should include information on the management body and, where applicable, on staff, equipment, premises and assets before and after the cross-border operation and 420

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 e

the likely changes to the organisation of work, wages and salaries, the location of specific posts and the expected consequences for the employees occupying those posts, as well as on the company-level social dialogue, including, where applicable, board level employee representation whereby the report should also explain how those changes would affect any subsidiaries of the company. c) Potential structuring options To reduce the level of complexity it will be advisable to consider structuring options, 22 for instance effecting the cross-border conversion at holding company level assuming absence of employees other than the holding company’s management (point (a) of Article (4)) and all other non-managerial employees being employed at subsidiary level. Against that, scenarios where the company’s cross-border conversion will go hand in hand with a transfer of the company’s principal place of business appear rather rare. Where a transfer of the company’s principal place of business is effected, point (c) of Article 86 r will apply, meaning that the rights and obligations of the company arising from contracts of employment or from employment relationships and existing at the date on which the cross-border conversion takes effect shall be those of the converted company. Continuity in that sense does not necessarily entail that the law applicable to the respective employment contract will remain unchanged after effectiveness of the cross-border conversion. Articles 3, 8 of the Rom I Regulation permit for a choice of law such that the parties to the employment contract may, after effectiveness of the cross-border conversion, agree on the law of the destination Member State as the governing law (compared to the law of the departure Member State) going forward. Such choice of law may not, however, have the result of depriving the employee of the protection afforded to the employee by provisions that cannot be derogated from by agreement under the law that, in the absence of choice, would have been applicable to the employment contract which, normally, is the law of the Member State where the employee performs the employment.

7. Employees’ right to render an opinion on the report Article 86 e (7) is a new instrument designed to enhance the protection of employees 23 in a cross-border conversion scenario. Representatives of the employees or, where there are no such representatives, the employees themselves have the right to render their opinion on the report’s section setting out the implications of the cross-border operation for employees (Recital (13)). Such right is confined to the section dedicated to employees and the general part of the report outlining the implications of the cross-border conversion on the future business office the company. It does not encompass the section dedicated for members.18 This is a very powerful tool given to employees and/or their representatives. They may question the accuracy, completeness, and substance of information provided by the company and raise concerns about the continuity of their employment relationships and employment conditions or any detrimental effects in respect thereof. In turn, this obliges the company’s management to give a full and accurate picture of what is contemplated under the cross-border conversion in respect of employee’s positions. On the other hand, the timeline for employees and employee representatives, respectively, to comment on the report appears rather short assuming a scenario where legal research and some kind of employment impact due diligence will be required for them to comment, question, and, if need be, object to the report. 18 Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’, GmbHR No. 2, 2020, 67; Schollmeyer, AG 2019, 541, 547.

Karsten Kühnle

421

Art 86 f Independent expert report The opinion on the report’s section setting out the implications of the cross-border operation for employees shall be made available to the members and be attached to the report as an appendix. Where the report has been circulated by the company by means of e-mail communication and the opinion can thus not be attached to the report, the opinion will be submitted, within the timeline permitted, as a supplement to the report.19 25 The provision of the report and of any opinion should be without prejudice to applicable information and consultation procedures provided for at national level including those following the implementation of Directive 2002/14/EC of the European Parliament and of the Council or Directive 2009/38/EC of the European Parliament and of the Council. 24

Article 86 f Independent expert report 1. Member States shall ensure that an independent expert examines the draft terms of cross-border conversion and draws up a report for members. That report shall be made available to the members not less than one month before the date of the general meeting referred to in Article 86 h. Depending on the law of the Member State, the expert may be a natural or legal person. 2. The report referred to in paragraph 1 shall in any case include the expert’s opinion as to whether the cash compensation is adequate. When assessing the cash compensation, the expert shall consider any market price of the shares in the company prior to the announcement of the conversion proposal or the value of the company excluding the effect of the proposed conversion, as determined in accordance with generally accepted valuation methods. The report shall at least: (a) indicate the method or methods used to determine the cash compensation proposed; (b) state whether the method or methods used are adequate for the assessment of the cash compensation, indicate the value arrived at using such methods and give an opinion on the relative importance attributed to those methods in arriving at the value decided on; and (c) describe any special valuation difficulties which have arisen. The expert shall be entitled to obtain from the company all information necessary for the discharge of the duties of the expert. 3. Neither an examination of the draft terms of cross-border conversion by an independent expert nor an independent expert report shall be required if all the members of the company have so agreed. Member States may exclude single-member companies from the application of this Article. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Development of the Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Specific Content of the Independent Expert’s Report . . . . . . . . . . . . . . . . . . . . . . . . . 1. Adequacy of the cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Generally accepted valuation principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Access to information; confidential information . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Independence of the Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

422

Schollmeyer, AG 2019, 541, 547.

Karsten Kühnle

1 2 5 6 7 8 9

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 f

I. Introduction The focus of Article 86 f is on the protection of members as key stakeholders in ad- 1 dition to employees and creditors. Member States shall ensure that an independent expert examines the draft terms of the cross-border conversion and draws up a report for members. The provision stands in context with Article 86 g in terms of confidential information, Article 86 i in terms of the right of members to exit the company against adequate cash compensation, Article 86 m as far as issuance of the pre-conversion certificate is concerned, and Article 86 s in terms of the expert’s liability. Neither an examination of the draft terms of cross-border conversion by an independent expert nor an independent expert report shall be required if all the members of the company have so agreed (Article 86 f (3)). Technically, this will require a corresponding resolution passed by all members unanimously. Member States have the option to exclude single-member companies from the requirements of Article 86 f. Member States could also decide that the independent expert report required by this Directive has to be disclosed (Article 86 g (1)).

II. Development of the Provision The Commission Proposal contained much more comprehensive obligations of 2 the independent expert which, in turn, furnished the expert with a very strong role. The proposal suggested that the independent expert examines both the draft terms of cross-border conversion and the report of the company’s administrative or management body for members and employees.1 Unlike in the 2019 Directive, the independent expert was not supposed to examine the adequacy of the cash compensation offered to members in the draft terms of cross-border conversion. Rather, it was supposed that those members who consider the cash compensation inadequate were entitled to demand the recalculation of the cash compensation before a national court. 2 Moreover, the report was suggested to provide the factual basis for the competent authority’s assessment whether the cross-border conversion constitutes an abuse, namely in cases where it qualifies as an artificial arrangement aiming at obtaining undue tax advantages or at unduly prejudicing the legal or contractual rights of employees, creditors or minority members.3 The Commission Proposal had resulted in the independent expert’s review in- 3 cluding at a minimum the following to determine whether the conversion is artificial or not4: the characteristics of the establishment in the destination Member State, including the intent, the sector, the investment, the net turnover and profit or loss, number of employees, the composition of the balance sheet, the tax residence, the assets and their location, the habitual place of work of the employees and of specific groups of employees, the place where social contributions are due and the commercial risks assumed by the converted company in the destination Member State and the departure Member State. Such particular focus on revealing artificial arrangements received some criticism5 and was given up in the legislative process after intensive discussions. Article 86 g, COM(2018) 241 final. Article 86g5 COM(2018) 241 final. The Commission Proposal contained a review of the adequacy of the cash compensation in case of a cross-border merger (Article 125) and the share-exchange ratio in case of a cross-border division (Article 160 i), respectively, by an independent expert. 3 COM(2018)241 final, Explanatory Memorandum, 14. 4 Article 86 g 3 (b) COM(2018) 241 final. 1

2

Karsten Kühnle

423

Art 86 f Independent expert report 4

In terms of procedures, the Commission Proposal required the company to apply with the competent authority for the appointment of the independent expert. Such requirement is no longer contained in the 2019 Directive, and it is on the national legislator to provide for a proper procedure.6 Also, the 2019 Directive does no longer exclude micro or small enterprises within the Commission Recommendation 2003/361/EC 7 from the independent expert’s examination as has been suggested by the Commission Proposal in Article 86 g (6).

III. Specific Content of the Independent Expert’s Report 5

The independent expert shall draw up a report addressed to the company’s members. In terms of specific content which, in turn, will drive the structure of the report, the independent expert’s report shall at least: indicate the method or methods used to determine the cash compensation proposed; state whether the method or methods used are adequate for the assessment of the cash compensation; indicate the value arrived at using such methods and give an opinion on the relative importance attributed to those methods in arriving at the value decided on; and describe any special valuation difficulties which have arisen (points (a), (b) and (c) of Article 86 f (2)).

1. Adequacy of the cash compensation 6

The mandatory key message of the report shall be the independent expert’s opinion on whether the cash compensation which the company offered in the draft terms to members voting against the approval of the draft terms of the cross-border conversion is adequate. To arrive at that conclusion, the 2019 Directive differentiates between listed and unlisted companies (Article 86 f (2)). In case of a listed company, the independent expert shall consider any market price of the shares in the company prior to the announcement of the conversion proposal. In case of an unlisted company, the value of the company excluding the effect of the proposed conversion shall be considered, as determined in accordance with generally accepted valuation principles (Article 86 f (2)).

2. Generally accepted valuation principles 7

Neither the Commission Proposal nor the 2019 Directive contain any additional guidance on generally accepted valuation principles except that the valuation shall not take into account the effect (positive or negative) of the proposed conversion (see Article 86 f (2)).8 Absence of any specific guidance on generally accepted valuation principles corresponds to practical reality as there is no “one-size-fits-all” solution available. Whilst there are certain commonly used valuation methods such as, for instance, a discounted-cash-flow approach, net value or net asset value approach, or use of industry multiples, the individual case at hand needs to be considered by the expert and any special valuation difficulties need to be described.

5 Brandi, BB 2018, 2626, 2632; Bayer/J. Schmidt, BB 2018, 2562, 2570; Stellungnahme des Deutschen Anwaltvereins durch den Ausschuss Handelsrecht, Stellungnahme Nr. 31/2018, July 2018, 6, 12. 6 For Germany, see §§ 122 f, 9, 10 of the Germany Transformation Act (UmwG) where the company, in a cross-border merger scenario needs to apply for an independent expert to be appointed by the competent regional court. 7 Companies employing not more than 49 employees and with an annual turnover not exceeding 10 m Euros. 8 Winner, ECFR 1-2/2019, 44, 70.

424

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 g

3. Access to information; confidential information When preparing the report, the expert shall be entitled to obtain from the company 8 all information necessary to this end (Article 86 e (2)). To the extent that elements of the information requested by the expert for purposes of the examination constitute confidential information, Article 86 g requires Member States, in case they use the Member State option to request disclosure of the expert’s report, to ensure that the company is able to exclude confidential information from the report. If and to which extent information constitutes confidential information will have to be assessed by the company with due diligence. This assessment will have to take into account the requirements and recommendations set out in Directive (EU) 2016/9439 regarding protection of trade secrets. This must, however, as is expressly stated in Recital (15), not result in an undermining of the company’s obligation to disclose comprehensive information. From a practical point of view, any attempt to utilize a broad definition of confidential information as a tool to marginalize disclosure, will typically increase the number of questions being asked either by employees, the expert, or the commercial register competent for issuing the pre-conversion certificate.

IV. Independence of the Expert With regard to the independence of the expert, Member States should take into ac- 9 count the principles laid down in Articles 22 and 22 b of Directive 2006/43/EC of the European Parliament and of the Council (Recital (14)). Hence, as Article 22.2 of the Statutory Audit Directive stipulates: Member States shall ensure that a statutory auditor or an audit firm shall not carry out a statutory audit if there is any direct or indirect financial, business, employment or other relationship — including the provision of additional non-audit services — between the statutory auditor, audit firm or network and the audited entity from which an objective, reasonable and informed third party would conclude that the statutory auditor's or audit firm's independence is compromised.10 The 2019 Directive explicitly recognizes that the expert may be a natural or legal person (Article 86 g (1)). Where legal persons such as audit firms are engaged, they will have to ensure that they qualify as independent taking into account any previous engagement with the company and have no conflict of interest (point (a) of Article 86 s (2)).

Article 86 g Disclosure 1. Member States shall ensure that the following documents are disclosed by the company and made publicly available in the register of the departure Member State, at least one month before the date of the general meeting referred to in Article 86 h: (a) the draft terms of the cross-border conversion; and (b) a notice informing the members, creditors and representatives of the employees of the company, or, where there are no such representatives, the employees 9 Directive (EU) 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure, OJ L 157, 15.06.2016. 10 Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC.

Karsten Kühnle

425

Art 86 g Disclosure themselves, that they may submit to the company, at the latest five working days before the date of the general meeting, comments concerning the draft terms of the cross-border conversion. Member States may require that the independent expert report be disclosed and made publicly available in the register. Member States shall ensure that the company is able to exclude confidential information from the disclosure of the independent expert report. The documents disclosed in accordance with this paragraph shall also be accessible through the system of interconnection of registers. 2. Member States may exempt a company from the disclosure requirement referred to in paragraph 1 of this Article where, for a continuous period beginning at least one month before the date fixed for the general meeting referred to in Article 86 h and ending not earlier than the conclusion of that meeting, that company makes the documents referred to in paragraph 1 of this Article available on its website free of charge to the public. However, Member States shall not subject that exemption to any requirements or constraints other than those which are necessary to ensure the security of the website and the authenticity of the documents, and which are proportionate to achieving those objectives. 3. Where the company makes the draft terms of the cross-border conversion available in accordance with paragraph 2 of this Article, it shall submit to the register of the departure Member State, at least one month before the date of the general meeting referred to in Article 86 h, the following information: (a) the legal form and name of the company and the location of its registered office in the departure Member State and the legal form and name proposed for the converted company in the destination Member State and the proposed location of its registered office in that Member State; (b) the register in which the documents referred to in Article 14 are filed in respect of the company and its registration number in that register; (c) an indication of the arrangements made for the exercise of the rights of creditors, employees and members; and (d) details of the website from which the draft terms of the cross-border conversion, the notice referred to in paragraph 1, the independent expert report and complete information on the arrangements referred to in point (c) of this paragraph may be obtained online and free of charge. The register of the departure Member State shall make publicly available the information referred to in points (a) to (d) of the first subparagraph. 4. Member States shall ensure that the requirements referred to in paragraphs 1 and 3 can be fulfilled fully online without the necessity for the applicants to appear in person before any competent authority in the departure Member State, in accordance with the relevant provisions of Chapter III of Title I. 5. Member States may require, in addition to the disclosure referred to in paragraphs 1, 2 and 3 of this Article, that the draft terms of the cross-border conversion, or the information referred to in paragraph 3 of this Article, be published in their national gazette or through a central electronic platform in accordance with Article 16 (3). In that instance, Member States shall ensure that the register transmits the relevant information to the national gazette or to a central electronic platform.

426

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 g

6. Member States shall ensure that the documentation referred to in paragraph 1 or the information referred to in paragraph 3 is accessible to the public free of charge through the system of interconnection of registers. Member States shall further ensure that any fees charged to the company by the registers for the disclosure referred to in paragraphs 1 and 3 and, where applicable, for the publication referred to in paragraph 5 do not exceed the recovery of the cost of providing such services. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Disclosure of the Draft Terms of the Cross-Border Conversion and Notice to Stakeholders in the Register of the Departure Member State . . . . . . . . . . . . . . III. Development of the Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Disclosure on the Company’s Website in lieu of Disclosure in the Register . .

1 2 4 6

I. Introduction Article 86 h focusses on the disclosure of certain documents and information per- 1 taining to the cross-border conversion. Disclosure of information relevant to the public and stakeholders concerned by the cross-border conversion in the register of the departure Member State as the most common point of reference for stakeholders 1 is one major element attached to the European model of structural changes.2

II. Disclosure of the Draft Terms of the Cross-Border Conversion and Notice to Stakeholders in the Register of the Departure Member State Member States shall ensure that the draft terms of the cross-border conversion 2 as well as a notice to stakeholders (members, creditors, employees and their representatives, respectively) informing them of their right to submit comments on the draft terms of the cross-border conversion to the company will be published in the register of the departure Member State. The publication shall be made at least one month before the date of the general 3 meeting (Article 86 h). Comments, if any, by stakeholders on the draft terms of the cross-border conversion shall be submitted to the company at the latest five working days before the date of the general meeting. The documents and information disclosed in accordance with Article 86 h shall also be accessible – free of charge – via the Business Registers Interconnection System (BRIS)3 (Article 86 h (6)). The disclosure requirements imposed under Article 86 e do not apply to the independent expert’s report (unless departure Member States made use of the option to request public disclosure (Article 86 g (1)) and the report of the administrative or management body for the company’s members and employees, which is not subject to public disclosure in the first place (Article 86 e (6)).

III. Development of the Provision The Commission Proposal contemplated mandatory disclosure of the expert’s re- 4 port (point (b) of Article 86 h (1)) but this stricter requirement was skipped during the COM(2018) 241 final, Explanatory Memorandum, Article 86 h. See → Introduction, A. VI. 3 Bock, GmbHR 2018, 281 et seq. 1 2

Karsten Kühnle

427

Art 86 g Disclosure trilogue process. Instead, it was agreed that Member States shall have the option to require disclosure of the report as it is now set out in Article 86 g (1). As long as the expert’s report does not contain confidential information (or such confidential information has been properly redacted), there is good reason to conclude that the disclosure of the expert’s report certainly creates an additional and independent layer of trust in the information provided by the company in the draft terms of cross-border conversion. 5 Further, the Commission Proposal equipped members, creditors, and employees with two lines of comment submission (point (c) of Article 86 h (1)). In addition to submission of comments to the company, submission of comments to the authority competent for issuing the pre-conversion certificate had been contemplated by the Commission Proposal; however, this was skipped during the trilogue process.

IV. Disclosure on the Company’s Website in lieu of Disclosure in the Register Member States have the option to exempt a company from disclosing the draft terms of the cross-border conversion and the requirement to file the notice to stakeholders in the commercial register (Article 86 g (2). Prerequisite to this exemption is the continuous availability of the draft terms of cross-border conversion and the notice to stakeholders on the company’s website for a period beginning at the latest one month prior to the date fixed for the general meeting and ending not earlier than the conclusion of the general meeting. Member States shall not subject the exemption to any requirements or constraints other than related to website security and authenticity of the documents and information, and which are proportionate to achieving these objectives. 7 Where Member States make use of this option and a company makes the draft terms of the cross-border conversion available on its website, the company shall submit, at least one month prior to the date of the general meeting, the following information to the register of the departure Member State for disclosure (Article 86 g (3)): (i) legal form, name and registered office in the departure Member State as well as the same data proposed for the converted company in the destination Member State; in practice, obtaining this data in the destination Member State should not be underestimated and can be timeconsuming, for instance when it comes to finding office space and utilizing such office space for purposes of registration with the competent register (point (a)) 4; (ii) details of the register of the company (e.g. registration number, court, division) in the departure Member State (point (b)); (iii) an indication of the arrangements made for the exercise of the rights of creditors, employees and members (point (c)); and (iv) details of the website where the draft terms of cross-border conversion, the stakeholders’ notice, as well as the report of the expert (if applicable) can be accessed in full, online and free of charge (point (d)). In terms of procedures to disclose the documents and information vis-à-vis the register in the departure Member State, Article86 g (4) requires Member States to ensure that this can be effected online without the need to appear in person before any register. 8 Finally, Article 86 g (5) gives Member States the right to request that the draft terms of the cross-border conversion or5 the information disclosed with the register in the departure Member State pursuant to points (a) to (d) of Article 86 g (3) shall also be pub6

Some jurisdictions require approval by the landlord for using the address vis-à-vis the register, etc. It appears as the term “or” should rather be interpreted as “and” given the disclosure requirement in Article 86g1 which refers to both the draft terms of cross-border conversion and the notice to stakeholders. 4 5

428

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 h

lished in the national gazette or through a central electronic platform. In that instance, the register shall transmit the relevant information to the national gazette or to a central electronic platform.

Article 86 h Approval by the general meeting 1. After taking note of the reports referred to in Articles 86 e and 86 f, where applicable, employees’ opinions submitted in accordance with Article 86 e and comments submitted in accordance with Article 86 g, the general meeting of the company shall decide, by means of a resolution, whether to approve the draft terms of the cross‐ border conversion and whether to adapt the instrument of constitution, and the statutes if they are contained in a separate instrument. 2. The general meeting of the company may reserve the right to make implementation of the cross-border conversion conditional on express ratification by it of the arrangements referred to in Article 86 l. 3. Member States shall ensure that the approval of the draft terms of the cross-border conversion, and of any amendment to those draft terms, requires a majority of not less than two thirds but not more than 90 % of the votes attached either to the shares or to the subscribed capital represented at the general meeting. In any event, the voting threshold shall not be higher than that provided for in national law for the approval of cross-border mergers. 4. Where a clause in the draft terms of the cross-border conversion or any amendment to the instrument of constitution of the converting company leads to an increase of the economic obligations of a member towards the company or third parties, Member States may require, in such specific circumstances, that such clause or the amendment to the instrument of constitution be approved by the member concerned, provided that such member is unable to exercise the rights laid down in Article 86 i. 5. Member States shall ensure that the approval of the cross-border conversion by the general meeting cannot be challenged solely on the following grounds: (a) the cash compensation referred to in point (i) of Article 86 d has been inadequately set; or (b) the information given with regard to the cash compensation referred to in point (a) did not comply with the legal requirements. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. General Meeting to Approve the Draft Terms of Cross-Border Conversion . . 1. Discussion and debate of reports and comments received from stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Majority to approve the draft terms of the cross-border conversion . . . . . . 3. Approval by members affected of an increase of economic obligations . . . 4. Approval conditioned on express ratification of arrangements regarding employee participation rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Form and Language Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Reasons Ineligible to Challenge Approval of the Draft Terms of the CrossBorder Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Karsten Kühnle

1 2 3 5 7 9 11 13

429

Art 86 h Approval by the general meeting

I. Introduction 1

Article 86 h governs approval of the draft terms of the cross-border conversion by the company’s members and matters related thereto. First of all, the 2019 Directive enables members to effect a cross-border conversion, that means, gives them the right to change the lex societatis, if so desired by the appropriate majority.1 On the reverse side, the right of companies to convert across borders should go hand in hand, and be properly balanced, with the protection of members (Recital (4)). As a consequence of a crossborder operation, members often face a situation whereby the law applicable to their rights changes because they become members of a company governed by the law of a Member State other than the Member State the law of which was applicable to the company before the operation (Recital (18)). To prevent opportunism or expropriation strategies by the majority shareholders ultimately forcing the minority shareholders to accept a change of the lex societatis and change of forum2, the 2019 Directive establishes two major safeguards: (i) it allocates the competence to approve the cross-border conversion to the general meeting; and (ii) it recognizes the minority shareholders’ right to exit the company , that means, members who voted against the approval of the draft terms of the cross-border conversion.3

II. General Meeting to Approve the Draft Terms of Cross-Border Conversion 2

The general meeting’s agenda will need to reflect the matters addressed in Article 86 h and approve the draft terms of the cross-border conversion for the purpose of changing the lex societatis.

1. Discussion and debate of reports and comments received from stakeholders As a first agenda item, subject and subsequent to the chairman of the general meeting ascertaining that the rules stipulated under applicable laws and the company’s statutes for calling and convening a general meeting are complied with and a quorum being present or represented, the 2019 Directive requires members to take note of the report for members and employees prepared by the company’s administrative or management body4, the report of the independent expert5, and comments received from members, creditors and representatives of the company’s employees, or, where there are no such representatives, the employees themselves, on the draft terms of cross-border conversion within five working days prior to the general meeting (Article 86 h (1)). 4 “Taking note” will first of all mean that these reports and comments, if any, will need to be disclosed and be made physically available to each member at the day6 of the general meeting. Furthermore, “taking note” will mean members to understand the content of the reports as well as any comments submitted by stakeholders to the draft terms of 3

Garcimartin/Gandia, ECFR 1-2/2019, 15, 29. Winner, ECFR 1-2/2019, 44, 68; Bayer/J. Schmidt, BB 2019, 1922, 1931. 3 Garcimartin/Gandia, ECFR 1-2/2019, 15, 29. 4 Unless waived by all members or not required, see commentary → Art 86 c. 5 Unless waived by all members or not required, see commentary → Art 86 f. 6 If the company’s statutes or applicable laws require that documentation which is subject of an agenda item must be made available not less than a certain number of business days before the general meeting, such procedural rules will need to be observed. 1

2

430

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 h

the cross-border conversion. This, in turn, will entail that the reports and comments be discussed and debated in the general meeting to enable members to reach an educated decision on the draft terms of cross-border conversion. Where permissible under the company’s statutes, the company could invite the independent expert to join the general meeting as a visitor and explain details of the expert report. The comments submitted by stakeholders (members, creditors, employee representatives or employees themselves, point 1 (b) of Article 86 g) should be acknowledged and put up for discussion in the general meeting; such discussions may result in amendments to the draft terms of cross-border conversion being required. The minutes of the general meeting should document that members took note of and discussed the reports and comments. From a legal practitioners point of view, the chairman of the general meeting or any other person competent shall compile and consolidate, where necessary, the comments submitted by stakeholders such that these can be dealt with in an efficient manner.

2. Majority to approve the draft terms of the cross-border conversion Another, most important, item of the general meeting’s agenda will be the approval 5 of the draft terms of cross-border conversion by the company’s members. Again, this shall entail a discussion and debate of the draft terms’ specific content as set out in points (a) to (k) of Article 86 d so that members can take an educated decision. From a legal practitioner’s point of view, content such as the new statutes of the converted company and their impact on the future corporate governance (e.g. in terms of management and control, passing of resolutions, language requirements, member’s liability), the proposed timetable and the cost attached to the cross-border conversion, any safeguards offered to creditors, details of the offer of cash compensation (in case of a company with multiple members), the likely repercussions of the cross-border conversion on employment (in case of a relocation of the company’s principal place of business) and employee participation related procedures are hot topics which will take considerable time to discuss and debate unless pre-discussed and pre-debated right in advance. It is important that the required majority for the vote on the draft terms of the 6 cross-border conversion be sufficiently large to ensure that the decision is taken by a solid majority (Recital (16)). The 2019 Directive requires departure Member States to ensure that a majority of no less than two thirds (qualified majority or supermajority) but no more than 90 % of the votes attached either to the shares or to the subscribed capital represented7 at the general meeting will be required for the approval of the draft terms of the cross-border conversion and any amendments thereto. Departure Member States are not permitted to request a threshold higher than provided for in national law for domestic cross-border mergers. From a German legal perspective, this means that a qualified majority of not less than 75 per cent of voting rights represented will need to vote in favour of the approval as far as a German limited liability company (GmbH) is concerned (§ 50 (1) of the German Transformation Act), and that a qualified majority of at least 75 per cent of the registered share capital presented will need to vote in favour of an approval as far as a German public limited liability companies (e.g., AG, KGaA or SE) are concerned (§ 65 of the German Transformation Act).

7 “Represented” shall mean the shares or capital subscribed attending (personally or by proxy) the general meeting, see Garcimartin/Gandia, ECFR 1-2/2019, 15, 30.

Karsten Kühnle

431

Art 86 h Approval by the general meeting 3. Approval by members affected of an increase of economic obligations Where a clause in the draft terms of the cross-border conversion or any amendment to the instrument of constitution of the converting company leads to an increase of the economic obligations of a member towards the company or third parties, Member States may require, in such specific circumstances, that such clause or the amendment to the instrument of constitution be approved by the member concerned, provided that such member is unable to exercise the rights laid down in Article 86 i (Article 86 h (4)). The provision was not contained in the Commission Proposal. Neither the Commission Proposal nor the 2019 Directive give any specific guidance on scenarios which constitute an increase of a member’s economic obligations vis-à-vis the company or third parties nor the circumstances under which a member is unable to exercise the exit right laid down in Article 86 i. It seems fair to conclude that this requirement is to protect a minority shareholder against a resolution which is detrimental in the sense of increasing its economic obligations. 8 One could think of an increase of a member’s economic obligations vis-à-vis the company, for instance, when the statutory minimum amount of the registered share capital in the converted company will be higher than the amount of the registered share capital in the company or where, as part of the cross-border conversion, a capital increase beyond the minimum registered share capital in the converted company will be resolved upon by the majority of the members. More difficult to imaging are scenarios where a clause in the draft terms of the cross-border conversion or any amendment to the instrument of constitution of the converting company (compared to ancillary agreements entered into in connection with the cross-border conversion) leads to an increase of a member’s economic obligations vis-à-vis third parties. One could probably think of an increase of a member’s economic obligations vis-à-vis third parties where the company received subsidies in the departure Member State and where the members will be required by the company to contribute funds to settle or personally guarantee any obligations outstanding with the party granting the subsidy as part of the cross-border conversion. To the extent that a member affected by such increase of economic obligations is unable to exercise the exit right established under Article 86 i, the explicit consent of such member to the draft terms of cross-border conversion and the specific clause in the converted company’s statutes, respectively, will be required.8 The question as to what circumstances render a member “unable” to exercise the exit right laid down in Article 86 i remains still open. Even an economically unattractive cash compensation would not per se deprive a member of its right to exit the company. 7

4. Approval conditioned on express ratification of arrangements regarding employee participation rights 9

Especially in a situation where there the company is subject to employee participation rights and where therefore an arrangement on future employee participation in the converted company will need to be a mandatory element of the scrutiny procedure in the destination Member State (Article 86 o (1)), the general meeting may reserve the right to make implementation of the cross-border conversion conditional on its express ratification of such arrangements. This is an important instrument for the benefit of the company’s members in the context of future participation of employees’, e.g., at supervisory board level, in the converted company.9 At the date of the general meeting, ne8 Kraft, BB 2019, 1864, 1867; Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’, GmbHR No. 2, 2020, 70.

432

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 h

gotiations on employee participation in the converted company will, where necessary, typically be under preparation but have not commenced. The special negotiation body competent to negotiate employee participation with the company’s administrative or management body will not have been constituted. The company, if well prepared, will have prepared a draft agreement for the participation of the employees in the converted company and have commenced informal talks with employee representatives and designated members of the special negotiation body, but no formal proceedings will have kicked-off. Further, the progress and outcome, respectively, of the negotiations with the special negotiation body may ultimately be different to what the company’s management and members may have anticipated. In a worst case scenario, the negotiations may even result in no agreement being reached or the negotiations being terminated in which case the standard rules for participation as applicable in the destination Member State shall apply. The same will be true where the special negotiation body decides not to open negotiations. In light of these considerations, members will typically want to seek protection by resolving that their approval of the draft terms of cross-border conversion is conditional on their approval of the outcome of the negotiations with the special negotiation body. In practice, this may be structured in a way that the desired outcome of the negotiations with the special negotiation body will be described and be given as a guideline to the company’s management. The effectiveness of the resolution as such will therefore be suspended until approval of the results of the negotiation on employee participation. Such approval, in turn, will require a separate resolution by the company’s members. The 2019 Directive remains silent on the question as to whether the qualified ma- 10 jority required to approve the draft terms of the cross-border conversion shall apply to the members’ confirmation of the results of the negotiations on employee participation in the converted company as well. From a German legal perspective, the predominant view in legal literature is to apply the same majority requirement.10 The key argument, which is convincing, is that such confirmation is an integral and paramount element of the resolution as such, which means that the confirmation is intrinsically tied to the resolution. Where the confirmation will be rejected, the cross-border conversion will be rejected; where the confirmation will be given, the cross-border conversion will be approved. The minority perspective is to treat the confirmatory resolution independently from the resolution as such and to apply a simple majority as standard majority requirement.11 Given the importance of this resolution, this seems rather unjustified.

III. Form and Language Requirements In terms of form requirements applicable to approve the draft terms of cross-border 11 conversion, the law of the departure Member State shall apply as result of the 2019 Directive not affecting national rules on form (Recital 18)).12 On that basis, from a German legal perspective, the resolution to approve the draft terms, irrespective of being conditional on passing a confirmatory resolution to ratify the arrangement on employee participation or not, will require notarization by a German notary public. Furthermore,

9 Such instrument has been introduced by Article 126 (2) of Directive (EU) 2017/1132 for cross-border mergers already. Garcimartin/Gandia, ECFR 1-2/2019, 15, 30. 10 See Althoff in Böttcher/Habighorst/Schulte (eds), Umwandlungsrecht (2nd edn, 2019), § 122 g, § 14. 11 Drinhausen in Semler/Stengel (4th edn, 2017), UmwG § 122 g. 12 Luy, NJW 2019, 1905, 1908.

Karsten Kühnle

433

Art 86 i Protection of members the company’s statutes will apply with respect to the procedural aspects related to form, calling, and convening of a members’ meeting. 12 In terms of language, the draft terms of the cross-border conversion including the instrument of constitution and the statutes of the converted company, will typically be prepared as bi-lingual table. This is to reflect the official languages of the departure Member State and of the destination Member State. Depending on the jurisdictions concerned, for instance French and German13, a third language, most often English, will be used as well.14 The 2019 Directive does not reflect what has been suggested by Article 86 d (2) of the Commission Proposal, which required Member States to allow the company to use a (third) language customary in the sphere of international business and finance to draw up the draft terms of a cross-border conversion and all other related documents. Member States were supposed to specify which language shall prevail in case of discrepancies. Such proposal, however, was prone to mismatch in case of the departure and the destination Member State specifying different languages as decisive15 and was deleted, consequently.

IV. Reasons Ineligible to Challenge Approval of the Draft Terms of the Cross-Border Conversion 13

The 2019 Directive creates legal certainty as far as grounds eligible to contest the members’ resolution on approval of the draft terms of the cross-border conversion are concerned. Member States shall ensure that the resolution cannot be challenged on grounds of the cash compensation having been inadequately set (point (a) of Article 86 g (5)) and on grounds of the information given with regard to the cash compensation being legally incompliant (point (b) of Article 86 g (4)), with the latter exclusion having been introduced during the trilogue process only. Such deficiencies shall be raised by members in a separate dedicated proceeding under the law of the departure Member State pursuant to Article 86 i (4). 16 For all other grounds eligible to contest the members’ resolution, e.g., deficits related to form, calling and convening of the general meeting or information in the draft terms of the cross-border conversion and the reports, respectively, the law of the departure Member State will be decisive.

Article 86 i Protection of members 1. Member States shall ensure that at least the members of a company who voted against the approval of the draft terms of the cross-border conversion have the right to dispose of their shares for adequate cash compensation, under the conditions laid down in paragraphs 2 to 5. Member States may also provide for other members of the company to have the right referred to in the first subparagraph.

See Article 184 of the German Judicature Act (GVG). Wicke, DStR 2018, 2642, 2645. 15 J. Schmidt, Der Konzern 2018, 229, 240; Schreiben Deutscher Notarverein vom 4. Juli 2018 an das Bundesministerium der Justiz und für Verbraucherschutz, 33, 34; Stellungnahme des Deutschen Anwaltvereins durch den Ausschuss Handelsrecht, Stellungnahme Nr. 31/2018, July 2018, 8. 16 Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’, GmbHR No. 2, 2020, 70. 13

14

434

Karsten Kühnle

Art 86 i

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Member States may require that express opposition to the draft terms of the cross‐ border conversion, the intention of members to exercise their right to dispose of their shares, or both, be appropriately documented, at the latest at the general meeting referred to in Article 86 h. Member States may allow the recording of opposition to the draft terms of the cross-border conversion to be considered proper documentation of a negative vote. 2. Member States shall establish the period within which the members referred to in paragraph 1 have to declare to the company their decision to exercise the right to dispose of their shares. That period shall not exceed one month after the general meeting referred to in Article 86 h. Member States shall ensure that the company provides an electronic address for receiving that declaration electronically. 3. Member States shall further establish the period within which the cash compensation specified in the draft terms of the cross-border conversion is to be paid. That period shall not end later than two months after the cross-border conversion takes effect in accordance with Article 86 q. 4. Member States shall ensure that any members who have declared their decision to exercise the right to dispose of their shares, but who consider that the cash compensation offered by the company has not been adequately set, are entitled to claim additional cash compensation before the competent authority or body mandated under national law. Member States shall establish a time limit for the claim for additional cash compensation. Member States may provide that the final decision to provide additional cash compensation is valid for all members who have declared their decision to exercise the right to dispose of their shares in accordance with paragraph 2. 5. Member States shall ensure that the law of the departure Member State governs the rights referred to in paragraphs 1 to 4 and that the exclusive competence to resolve any disputes relating to those rights lies within the jurisdiction of that departure Member State. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Change of the applicable law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Safeguards available to members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Draft terms of the cross-border conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Report of the company’s administrative or management body for members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Report of the independent expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Substantive protection: Member’s right to exit the company . . . . . . . . . . . . . . II. Development of the Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Fundamental Safeguards for Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Members’ right to dispose of the shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exit right available to holders of voting shares; Member State option for holders of non-voting shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Members’ opposition to the draft terms of the cross-border conversion . . c) Members’ declaration vis-à-vis the company to exercise the right to dispose of the shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Company’s obligation to pay an adequate cash compensation . . . . . . . . . . . . a) Adequate cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Period within which the cash compensation is to be paid . . . . . . . . . . . . . . . . c) Share transfers to effect the disposal of the shares . . . . . . . . . . . . . . . . . . . . . . . . d) Acquisition of own shares by the converted company . . . . . . . . . . . . . . . . . . . . 3. Members’ contesting the adequacy of the cash compensation . . . . . . . . . . . . a) Claim for additional cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Time limitation for the claim for additional cash compensation . . . . . . . . . c) Reformatio in peius; effect of the competent body’s decision . . . . . . . . . . . . . IV. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Karsten Kühnle

1 2 3 4 5 6 7 10 12 13 14 16 18 23 24 25 27 28 30 30 31 33 35

435

Art 86 i Protection of members

I. Introduction 1

From the perspective of a member who voted against the draft terms of the crossborder conversion, Article 86 i is certainly the most important provision of the 2019 Directive. A member who voted against the approval of the draft terms of the cross-border conversion has the right to dispose of the shares held in the company against adequate cash compensation. Conceptually, such right is based on the Cross-Border Merger Directive1, which gave Member States the ability to adopt provisions designed to ensure appropriate protection for minority members who have opposed the cross-border merger.

1. Change of the applicable law 2

Recital (18) describes the underlying legal background as a situation where, as a consequence of a cross-border operation, members often face a situation whereby the law applicable to their rights changes because after the cross-border operation, they become members of a company governed by the law of a Member State other than the Member State the law of which was applicable to the company before the operation. As a consequence, Member States shall furnish at least those members holding shares with voting rights and who voted against the approval of the draft terms with the right to exit the company and receive cash compensation for their shares that is equivalent to the value of those shares; Member States should be free to furnish other members, for example, members holding shares without voting rights with that right as well (Recital (18)). More generally, Recital (17) criticises the lack of harmonization of safeguards for members across Member States, which has been identified as a major obstacle to cross-border operations. To address this, members should be offered the same minimum level of protection regardless of the Member State in which the company is situated and Member States shall be able to maintain or introduce additional rules on protection for members, unless such rules conflict with those provided for under the Directive or with the freedom of establishment (Recital (17)).

2. Safeguards available to members 3

Article 86 i is supplemented by certain other safeguards given to members under the 2019 Directive in an attempt to create a minimum level of member protection across Member States. a) Draft terms of the cross-border conversion

4

There are the draft terms of the cross-border conversion (Article 86 d) 2 which provide certain information specifically relevant to members. For example, the statutes to be adopted in the converted company permit members to understand the future corporate governance of the converted company and to conclude whether members’ influence on management and control remains the same, gets stronger or will be weakened; information of the rights conferred by the converted company on members enjoying special rights in the company, enables members to conclude whether their individual status is 1 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies, OJ L 310, 25.11.2005; replaced by Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law, OJ L 169, 30.06.2017, Article 121 (2). 2 See → Art 86 d.

436

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 i

preserved or not; disclosure of special advantages granted to members of the company’s administrative, management, supervisory or controlling body in connection with the cross-border conversion enables members to understand to which extent management or supervisory functions act independently or for their own benefit; most importantly, the cash compensation available to members who vote against the approval of the draft terms of the cross-border conversion as well as remedies given to them to contest the adequacy of the cash compensation enable members to understand the commercial parameters attached to their shares in case of an exit, the impact of the exit to the company’s liquidity, and the legal proceedings available in that respect. b) Report of the company’s administrative or management body for members There is the report for members as prepared by the company’s administrative or man- 5 agement body (Article 86 e)3 as another safeguard. The report shall, in particular, explain the cash compensation and the method used to determine it; the implications of the cross-border conversion for members; and the rights and remedies available to members under the exit right provided for in Article 86 i. c) Report of the independent expert An additional safeguard is the report of the independent expert (Article 86 f). 4 The 6 expert’s report ties into the draft terms of the cross-border conversion and the report for members as prepared by the company’s administrative or management body (Article 86 e). The expert shall examine the draft terms and draw up a report for members, which shall be made available to the company’s members not less than month before the date of the general meeting. Key element of the expert’s report is the expert’s opinion as to whether the cash compensation is adequate (Article 86f2.).

3. Substantive protection: Member’s right to exit the company The draft terms of the cross-border conversion, the report for members as prepared 7 by the company’s administrative or management body, and the independent expert’s report are without doubt important safeguards to members as far as the members’ ability to reach an informed5 decision on the draft terms of the cross-border conversion is concerned. Substantive protection of members, however, is unthinkable without a member’s 8 right to dispose of the shares against adequate cash compensation; such right being supplemented by the right to challenge the adequacy of the cash compensation and demand an additional cash compensation to arrive at an amount equivalent to the value of the shares. From a German legal perspective, the concept of granting an exit right to dissenting 9 members in case of structural change is not new.6 It has been discussed for the first time almost 20 years ago when the Societas Europaea has been introduced as supra-national legal form into German law by means of the SE-Implementation Act (SEAG). 7 The SEAG furnishes members of the SE with an exit right8 in case of members voting against formation of an SE by means of a cross-border merger where the SE shall have its Unless waived by all members or not required, see → Art 86 c. Unless waived by all members or not requires, see → Art 86 f. 5 Members’ individual rights to information under national law should remain unaffected. 6 Teichmann, NZG 2019, 241, 244. 7 Kalss, ZGR 2003, 593, 595; Teichmann, ZGR 2003, 367, 395. 8 See §§ 7, 9, 12 SEAG. 3

4

Karsten Kühnle

437

Art 86 i Protection of members registered office in a Member State other than Germany and in case of members voting against a transfer of the SE’s registered office to a Member State other than Germany. The same kind of exit right has been introduced into German law (and the law of Member States) upon implementation of the Cross-Border Merger Directive in 2007. 9 In a case where the recipient company is not governed by the laws of Germany, members voting against the common draft terms of the cross-border merger are furnished with an exit right.10

II. Development of the Provision Compared to Article 86 i, the Commission Proposal (Article 86 j) was quite explicit and comprehensive. It stipulated detailed provisions relative to the addressees of the right to dispose of the shares, namely members holding shares with voting rights and members holding shares without voting rights; the cash compensation being conditional upon the cross-border conversion taking effect; the spectrum of possible acquirers of the shares, namely the company, the remaining members of the company, as well as third parties; offer and acceptance as well as payment of the cash-compensation and timelines attached thereto; the acquisition of own shares by the company; the right of members to contest the adequacy of the cash compensation and demand recalculation; and the governing law. Article 86 j as proposed by the Commission Proposal was strict in the sense of not giving Member States options on these matters. It aimed at contributing to cross-border mobility by harmonizing substantive and procedural aspects of minority shareholder protection.11 11 In contrast, Article 86 i in the form as adopted by the 2019 Directive is less comprehensive and strict.12 It misses provisions relative to the spectrum of possible acquirers, is less explicit in terms of offer and acceptance, which may result from the 2019 Directive having taken a slightly different approach13, does note address the acquisition of own shares nor the conditionality between the effectiveness of the cross-border conversion and payment of the cash compensation. Further, it gives Member States much more room in terms of timing and deadlines, which is not necessarily for the benefit of harmonized rules across Member States. This may likely increase the number and complexity of practical challenges attached to a cross-border conversion which in turn will result in increased transaction cost. 10

III. Fundamental Safeguards for Members 12

Article 86 i establishes three fundamental safeguards in favour of minority members, that means members voting against the draft terms of the cross-border conversion: (i) the right to dispose of their shares; (ii) the obligation of the company to pay a cash compensation adequate to the value of the shares whereby adequacy of the cash compensation is subject to an expert opinion14; and (iii) the right of any member to contest 9 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies, OJ L 310, 25.11.2005. 10 See Article 122 i UmwG. 11 COM(2018) 241 final, 39: “The proposal will further contribute to the cross-border mobility of companies by harmonizing substantive and procedural aspects of creditor and minority shareholder protection …”. 12 Schurr, EuZW 2019, 539, 543. 13 Luy, GmbHR 2019, 1105, 1106.

438

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 i

the adequacy of the cash compensation by taking legal action aiming at receiving an additional cash compensation.

1. Members’ right to dispose of the shares As a consequence of a cross-border operation, members often face a situation where- 13 by the law applicable to their rights changes because they become members of a company governed by the law of a Member State other than the Member State the law of which was applicable to the company before the operation (Recital (18)).15 Not all members will necessarily want to accept such new regime. a) Exit right available to holders of voting shares; Member State option for holders of non-voting shares The 2019 Directive requires Member States to ensure that at least the members who 14 voted against the approval of the draft terms of the cross-border conversion have the right to dispose of their shares for adequate cash compensation but Member States have the option to provide such right to other members of the company as well (Article 86 i (1)). Other members are, for example, members holding shares without voting rights (Recital (18)). The Commission Proposal instead granted such right explicitly to all members irrespective of holding voting or non-voting shares and did not contemplate any discretion of Member States in that respect (point (b) of Article 86 j (1)). In fact, a different treatment of members appears inappropriate given that the majority of implications arising out of the cross-border conversion, for example, change of the company’s corporate governance, treatment of holders with non-voting shares in the converted company (assuming the law of the destination Member State permitting non-voting shares as category of shares), distribution of dividends, existence of mandatory veto rights, and taxation of dividends, will affect holders of non-voting shares virtually the same way as holders of voting shares. From a German legal perspective, the German legislator should not limit the right 15 to dispose of the shares to holders of voting shares16, and make use of the Member State option. As far as domestic conversions under the German Transformation Act are concerned, a right to dispose of the shares is already available to all members (irrespective of a member holding voting shares or non-voting shares) whose explicit objection against the conversion has been recorded under the notarial deed.17 b) Members’ opposition to the draft terms of the cross-border conversion In terms of the declarations needed to oppose to the draft terms of the cross-border 16 conversion, Article 86 i (1) provides that Member States may require an express opposition to the draft-terms of the cross-border conversion, the intention of members to exercise their right to dispose of their shares, or both, to be appropriately documented, at the latest at the general meeting resolving upon the approval to the draft terms of the cross-border conversion. Clearly, the requirement for an express statement is for the sake of legal certainty, which does neither tolerate conditioned, caveated, doubtful, or substantiated declarations nor improper documentation. Specifically relevant from a German perspective is that Member States may allow the recording of opposition to the Unless waived by all members or not required, see commentary → Art 86 f. See → Art 86 e. 16 Lutter/Bayer/Schmidt, ‘Europäisches Kapitalmarkt- und Gesellschaftsrecht’, ZGR (6 th edn, 2017), 1932. 17 Article 207 UmwG (German Transformation Act). 14

15

Karsten Kühnle

439

Art 86 i Protection of members draft terms of the cross-border conversion to be considered proper documentation of a negative vote. 18 Such option actually reflects the German status quo as stipulated in Section 207 of the German Transformation Act for domestic conversions. The German Transformation Act does not presuppose the right to dispose of the shares and cash compensation to a vote against the conversion. Nevertheless, whether a negative vote is required in addition to an explicit opposition is controversially discussed in German legal literature.19 From a legal practitioner’s perspective, both a vote against the conversion as well as an explicit objection, in each case recorded under the notarial deed, appear desirable for sake of legal certainty as far as holders of voting shares are concerned. An obvious counterargument is that such twofold declarations appear rather artificial. Insofar, the option for Members States to accept the recording of the opposition to the draftterms of cross-border conversion as proper documentation of a negative vote is appreciated20 and will probably have an impact on the German legal controversy. 17 Holders of non-voting shares are generally not permitted to vote against or in favour of the conversion unless certain exceptional scenarios are concerned21, for example, in case of non-voting shares not being available in the converted company or the liability regime turning from limited liability into unlimited liability of a shareholder.22 Holders of non-voting shares have, however, an indispensable right to attend a members’ meeting and as such are able to express their opposition against the conversion. 23 c) Members’ declaration vis-à-vis the company to exercise the right to dispose of the shares Members considering exercising their right to dispose of their shares are required to notify the company of such intention. Member States shall set the period within which the members have to declare their decision to exercise the right to dispose of their shares to the company and this period shall not exceed one month after the general meeting resolved upon the approval of the draft terms of the cross-border conversion (Article 86 i (2)). Member States shall ensure that the company provides an electronic address for receiving such declaration electronically. 19 The 2019 Directive does not explicitly explain the legal nature of the declaration to exercise the right to dispose of the shares. The question as to the legal nature of such declaration is triggered by the wording used in the Commission Proposal. Article 86 j (3) as contained in the Commission Proposal stated that “Member States shall also establish the period for the acceptance of the offer, which shall not in any event exceed one month after the general meeting referred to in Article 86 i.” On that basis, it appeared as if the declaration to exercise the right to dispose of the shares will constitute the acceptance of the company’s offer of cash compensation as contained in the draft terms of cross-border conversion. Recitals (18) and (19) become relevant in that context. Firstly, the 2019 Directive does not affect national rules on the validity of contracts for the sale and transfer of shares in companies or specific legal form requirements and Member States should, for example, be able to require a notarial deed or a confirmation of signatures (Recital (18)). Therefore, from a German legal perspective, assuming a German limited 18

Such option has been introduced in the trilogue process, see 3 ST 5401/19. Hoger in Lutter (ed), UmwG (6th edn, 2019), § 207 § 7ff. 20 Stellungnahme des DAV Nr. 31/2018. 21 Articles 217 Abs. 1 S. 1, 225 c, 233 (1) UmwG. 22 Henssler/Strohn, Gesellschaftsrecht (4th edn, 2019), § 193, § 4. 23 Peter Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’, ZIP 2019, 2437, 2439; Stellungnahme des Deutschen Anwaltvereins durch den Ausschuss Handelsrecht, Stellungnahme Nr. 31/2018, July 2018, 13. 18 19

440

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 i

liability company undertaking a cross-border conversion into a French limited liability company, the declaration of a minority member to exercise the right to dispose of the shares would require notarization by a German notary public if one were to assume that the declaration constitutes acceptance of the company’s offer for cash compensation under the draft terms of the cross-border conversion, which, from a German legal perspective, will require notarization as well. However, Recital (19) leads to conclude differently24 as “Companies should be able to estimate, to the extent possible, the costs related to the cross-border operation. Members should, therefore, be required to declare to the company whether they have decided to exercise the right to dispose of their shares. That requirement should be without prejudice to any formal requirements laid down in national law.” The declaration by members is put in context of the company’s need for estimating the financial impact of payment of the cash compensation to minority members on the company’s liquidity. Further, the declaration shall be submitted electronically and be received electroni- 20 cally by the company.25 Against this background it is fair to arrive at the conclusion that the declaration does not qualify as binding acceptance of the offer of cash compensation. Receipt by the company of such declaration does not result in a binding share sale and transfer agreement between the minority member and the company to effect the disposal of the shares against cash compensation. Rather, the declaration is an unbinding statement informing the company of a contemplated behaviour 26 by the minority member. As a result, the company may not enforce a disposal of the shares by the minority 21 member who declared its intention to dispose of the shares but ultimately refrains from doing so. The company may, subject to the individual case at hand, have a (pre-contractual) claim for damages suffered as a result of the minority member declaring its intention but not adhering thereto.27 In terms of timing, a member has to declare the decision to exercise the right to dis- 22 pose of the shares within a period not exceeding one month after the general meeting (Article 86 i (2)). This assumes that members be informed without undue delay of the results of the votes cast at the general meeting. Such prompt information is in the interest of the both the company (to ascertain the financial impact) and the minority member to consider declaring the right to dispose of the shares or not. Such one month period shall be calculated in accordance with national law. For the sake of legal certainty, the one month period should be interpreted as preclusive, that means a declaration received by the company after expiry of the one month period will not have any effect at all; the right to dispose of the shares to the company will have elapsed.28 The minority member may, on the other hand, sell the shares (subject to any restrictions and procedures contained in the company’s statues or a shareholders’ agreement, respectively) to another shareholder or a third party, whereby such transaction would typically be under the condition of the cross-border conversion becoming effective, that means being registered in the register of the destination Member State.

Luy, GmbHR 2019, 1105, 1106; Stelmaszcyk, ZIP 51-52/2019, 2437, 2440. The Commission’s proposal had been unclear in respect of what declaration shall be received electronically. Article 86 j 3 proposed that “Member States shall further ensure that the company is able to accept an offer communicated electronically to an address provided by the company for that purpose.” 26 Armbrüster in Münchener Kommentar zum BGB (8th edn, 2018), § 116. 27 Luy, GmbHR 2019, 1105, 1109. 28 Luy, GmbHR 2019, 1105, 1107. 24 25

Karsten Kühnle

441

Art 86 i Protection of members 2. Company’s obligation to pay an adequate cash compensation 23

The cash compensation to be paid to members who dispose of their shares as a result of having voted against the approval of the draft terms of the cross-border conversion must be adequate (Article 86 i (1)). a) Adequate cash compensation

24

The 2019 Directive does not give an explicit definition of the term “adequate” but Recital (18), in the context of the exit right, states that “members … who voted against the approval of the draft terms [to] have the right to exit the company and receive cash compensation for their shares that is equivalent to the value of those shares.” The compensation must be in cash and be expressed as a fixed price per share. 29 From a legal practitioner’s point of view, the offer of cash compensation will typically be conditioned upon the conversion taking effect, that means, being registered in the register of the destination Member State. Whether the cash compensation offered in the draft terms of the cross-border conversion is actually adequate will be examined by the independent expert who shall draw up a report containing, among other things, the expert’s opinion as to whether the cash compensation is adequate (Article 86 f (2)).30 The independent expert therefore takes a kind of gatekeeper-approach.31 b) Period within which the cash compensation is to be paid

Article 86 i (3) requires Member States to establish the period within which the cash compensation specified in the draft terms of the cross-border conversion is to be paid. Member States will, therefore, have flexibility when determining the payment term. This is not necessarily for the benefit of harmonized rules across Member States. The period within which the cash compensation is to be paid shall not end later than two months after the cross-border conversion takes effect in accordance with Article 86 q.32 Reference to Article 86 q means the law of the destination Member State being decisive for the date on which the cross-border conversion takes effect. Most likely, this will be the date where the cross-border conversion will be registered in the register of the destination Member State. In any event, the date on which the cross-border conversion takes effect must be after the scrutiny procedure referred to in Articles 86 m and 86 o has been carried out (2nd sentence of Article 86 q). 26 Presumably, Member States will opt for the full two months period to enable the converted company to provide for sufficient funds and agree on the relevant transfer agreements and actions with those minority members disposing of their shares. From a legal practitioner’s point of view, a minority member will want to make the share transfer conditioned upon receipt of the cash compensation. As far as German law is concerned, the cash compensation shall be due and payable promptly.33 25

c) Share transfers to effect the disposal of the shares 27

To effect the disposal of the shares held by a minority member willing to exit the company, the provisions of national law attached to the legal form in question will apply. The 2019 Directive should not affect national rules on the validity of contracts for the See → Art 86 d. Unless waived by all members or not required, see → Art 86 f. 31 Winner, ECRF 1-2/2019, 44, 70. 32 The Commission Proposal supposed a period of one month instead (Article 86 j). 33 Kalss in Semler/Stengel (4th edn, 2017), UmwG § 209, §§ 7-9.

29 30

442

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 i

sale and transfer of shares in companies or special legal form requirements and Member States should, for example, be able to require a notarial deed or a confirmation of signatures (Recital (18)). From a German legal perspective, this will entail, for instance, notarization of a transfer of shares in case of a German limited liability company concerned. d) Acquisition of own shares by the converted company The Commission Proposal suggested that the acquisition by the company carrying 28 out a cross-border conversion of its own shares shall be without prejudice to national rules governing the acquisition of own shares (Article 86 j (3)). The 2019 Directive remains silent on how to deal with a situation where the corporate law of the converted company does not permit an acquisition of own shares. As far as public limited liability companies are concerned, a harmonized set of rules regarding the acquisition of own shares has been implemented by Articles 60 et seq. of the Company Law Directive. 34 With respect to private limited liability companies, national law as applicable in the destination Member State will apply. From a German legal perspective, such scenario is addressed for domestic conver- 29 sions in Section 207 of the German Transformation Act. Where the acquisition of own shares by the company is permitted, the general restrictions on the acquisition of own shares shall not apply. Where the acquisition of own shares by the company is not permitted (for example, in case of a civil partnership) the shareholder affected shall have an right to withdraw from the company. 35 When implementing Article 86 i (3) into German law, the German legislator might want to take the existing mechanics into account in that respect.

3. Members’ contesting the adequacy of the cash compensation a) Claim for additional cash compensation Member States shall ensure that any members who have declared their decision to ex- 30 ercise the right to dispose of their shares, but who consider the cash compensation offered by the company inadequate, are entitled to claim additional cash compensation before the competent authority or body mandated under national law (Article 86 i (4)). The claim for “additional cash compensation” is different to what the Commission Proposal proposed in Article 86 j (5), which entitled members to “… demand the recalculation of the cash compensation …” instead. “Recalculation”, however, will not work as an assessment of the adequacy of the cash compensation will mean to arrive at the conclusion whether the price offered per share is justifiable rather than correct or false for reasons of calculation errors.36 To arrive at such assessment, benchmarking against peer group companies (to the extent possible), application of industry multiples, and the adoption of alternative valuation methods might be required to demonstrate the substance of the expert’s valuation. To the extent that the price per share offered under the draft terms of the cross-border conversion falls short of the permissible valuation range, the competent authority or body mandated under the law of the departure Member State will rule out that an additional cash compensation be paid by the company to the member. 34 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law, OJ L 169, 30.06.2017. 35 Winter in Schmitt/Hörtnagl/Stratz (8th edn, 2018), UmwG § 207 §§ 1-11. 36 Peter Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’, ZIP 2019, 2437, 2441; Noak, AG 2018, 780, 84; Lutter, UmwG (6th edn, 2019), § 5, § 61.

Karsten Kühnle

443

Art 86 i Protection of members b) Time limitation for the claim for additional cash compensation The 2019 Directive does not subject the claim for additional cash compensation to a time limitation. Rather, Member States shall establish a time limit for the claim for additional cash compensation (Article 86 i (4)). For the sake of harmonized rules across Member States one had appreciated less flexibility in that respect. In contrast, the Commission Proposal supposed that a member is entitled to demand the recalculation of the cash compensation offered before a national court within one month of the acceptance of the offer (Article 86 j (5)). Otherwise, the period of one month to initiate legal proceedings as suggested by the Commission Proposal seems rather short. 32 From a German legal perspective, the German Award Proceedings Act, which is inter alia relevant for the competent court ruling out additional cash compensation in case of cross-border mergers, provides for a filing deadline of three months from registration of the cross-border merger in the commercial register of the transferring or to be newly established company (see Article 4 of the German Award Proceedings Act). 37 When implementing the 2019 Directive into German law, the German legislator might want to take this into consideration. 31

c) Reformatio in peius; effect of the competent body’s decision The 2019 Directive does neither stipulate a ban of reformatio in peius38 nor the final decision of the competent authority or body mandated under national law having erga omnes effect on all members who declared the decision to dispose of their shares. It does, however, give Member States the option to provide for an erga omnes effect of the final decision rendered by the competent authority or body mandated under national laws (Article 86 i (4)). Whether Member States accept a ban of reformatio in peius will be subject to national laws. For the sake of a harmonized set of rules across Member States and against the principle of equal treatment of shareholders39, one would have appreciated mandatory rules regarding the final decision having erga omnes effect and an explicit ban of reformatio in peius when contesting the adequacy of the cash compensation. Providing for an erga omnes effect of the decision would certainly be beneficial to both, judicature and the company, as obviously disburdening from the negative effects of multiple lawsuits pending at the same time. 34 From a German legal perspective, the erga omnes effect is expressly stipulated in Article 13 of the German Award Proceedings Act.40 From a legal practitioner’s point of view, typically, a company offering a cash compensation will make the offer subject to any subsequent adjustments by a court and refer to different deadlines applicable in case of legal proceedings pending against the adequacy of the cash compensation. When implementing Article 86 i (4), that means the right to contest the adequacy of the cash compensation and claim additional cash compensation, into German law, the German legislator should reflect the systematics already existing in Sections 210, 212 of the German Transformation Act as well as in Section 13 of the German Award Proceedings Act. 33

German Award Proceedings Act (SpruchG). BGH, NZG 2010, 1344 (1345 § 12); Puszkajler in Kölner Komm. z. SpruchG (above, fn. 1), § 11 margin no. 14; Luy, NJW 2019, 1905, 1907. 39 Marcus Lutter, Walter Bayer and Jessica Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), 1932. 40 German Award Proceedings Act (SpruchG). 37

38

444

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 j

IV. Governing Law The 2019 Directive requires Member States to ensure that the law of the departure 35 Member State shall govern the rights conferred to members under Article 86 i, namely the right to dispose of their shares, the obligation of the company to pay a cash compensation adequate to the value of the shares, and the right of any member to contest the adequacy of the cash compensation by taking legal action aiming at receiving an additional cash compensation. Further, the exclusive competence to resolve any disputes relating to those rights lies within the jurisdiction of that departure Member State. For sake of achieving legal certainty in complex cross-border matters this explicit ruling is greatly appreciated.

Article 86 j Protection of creditors 1. Member States shall provide for an adequate system of protection of the interests of creditors whose claims antedate the disclosure of the draft terms of the cross-border conversion and have not fallen due at the time of such disclosure. Member States shall ensure that creditors who are dissatisfied with the safeguards offered in the draft terms of the cross-border conversion, as provided for in point (f) of Article 86 d, may apply, within three months of the disclosure of the draft terms of the cross-border conversion referred to in Article 86 g, to the appropriate administrative or judicial authority for adequate safeguards, provided that such creditors can credibly demonstrate that, due to the cross-border conversion, the satisfaction of their claims is at stake and that they have not obtained adequate safeguards from the company. Member States shall ensure that the safeguards are conditional on the cross-border conversion taking effect in accordance with Article 86 q. 2. Member States may require that the administrative or management body of the company provide a declaration that accurately reflects its current financial status at a date no earlier than one month before the disclosure of that declaration. The declaration shall state that, on the basis of the information available to the administrative or management body of the company at the date of that declaration, and after having made reasonable enquiries, that administrative or management body is unaware of any reason why the company would, after the conversion takes effect, be unable to meet its liabilities when those liabilities fall due. The declaration shall be disclosed together with the draft terms of the cross-border conversion in accordance with Article 86 g. 3. Paragraphs 1 and 2 shall be without prejudice to the application of the law of the departure Member State concerning the satisfaction or securing of pecuniary or non‐pecuniary obligations due to public bodies. 4. Member States shall ensure that creditors whose claims antedate the disclosure of the draft terms of the cross-border conversion are able to institute proceedings against the company also in the departure Member State within two years of the date the conversion has taken effect, without prejudice to the jurisdiction rules arising from Union or national law or from a contractual agreement. The option of instituting such proceedings shall be in addition to other rules on the choice of jurisdiction that are applicable pursuant to Union law.

Karsten Kühnle

445

Art 86 j Protection of creditors I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Need for creditor protection: altering of the company’s legal cloth versus a transfer of assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Discontinuity of the applicable corporate law: effects on creditors . . . . . . . II. Development of the Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Lack of harmonization of creditor protection under the Company Law Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Different rules on creditor protection across Member States in conversion scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Legal economics: the 2019 Directive turning away from the concept of rebuttable presumptions (Article 86 k (3) of the Commission Proposal) . . III. Adequate System of Creditor Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Minimum harmonization; Member State option to request a solvency declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Creditors eligible to protection; cut-off date for creditors’ claims . . . . . . . . . 3. Date of disclosure of the draft-terms of the cross-border conversion . . . . . 4. Application for adequate safeguards with the appropriate authority . . . . . . 5. Adequacy of safeguards as an element of the scrutiny procedure? . . . . . . . . IV. Solvency Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Place of Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 5 5 6 8 11 11 12 13 15 20 23 27

I. Introduction 1

In addition to the protection of the company’s members and employees as provided for under Article 86 i and Article 86 k, respectively, protection of creditors is another key element envisaged by the 2019 Directive. The rights of companies to convert across borders should go hand in hand, and be properly balanced, with the protection of creditors (Recital (4)). Background is a situation where, following a cross-border operation, the former creditors of the company carrying out that operation could see their claims affected as the company that is liable for the debt is, following that operation, governed by the law of another Member State, and that creditor protection rules vary across Member States, which leads to uncertainty both for the company involved and for its creditors in relation to the recovery or satisfaction of their claims (Recital (22)).

1. Need for creditor protection: altering of the company’s legal cloth versus a transfer of assets and liabilities 2

The need for a vigorous regime of creditor protection appears urgent in case of a cross-border merger, where the assets and liabilities of the company are transferred uno acto by operation of law to the recipient company and with the transferring company ceasing to exist (Articles 120 et seq.). The same is true in case of a cross-border division, where all or parts of the company’s assets and liabilities are transferred to two or more companies in case of a full division or to one or more companies in case of a partial division or division by separation (Articles 160 a et seq.). In contrast thereto, a cross-border conversion does not result in such transfer of assets. As expressed by Article 86 r, all the assets and liabilities of the company, including all contracts, credits, rights and obligations, shall be those of the converted company; the members of the company shall continue to be members of the converted company, unless they have disposed of their shares; and the rights and obligations of the company arising from contracts of employment or from employment relationships and existing at the date on which the crossborder conversion takes effect shall be those of the converted company. That said, the need for a vigorous set of rules protecting creditors of a company undergoing a crossborder conversion appears less urgent.

446

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 j

2. Discontinuity of the applicable corporate law: effects on creditors However, there is still need for creditor protection as the legal regime applicable to 3 the converted company will change as a result of the cross-border conversion or, in other words, there is a discontinuity in the applicable corporate law. For example, members enjoying special rights or holders of securities other than shares, e.g. convertible bonds, silent partnerships, profit participation rights, etc., are prone to claims due to the crossborder conversion unless they have been granted equivalent rights in the converted company. The applicable corporate law will change as a result of the cross-border conversion and the applicable corporate law of the destination Member State might simply not know, accept or be suitable to create equivalent or similar rights. This, in turn, might result in a potential claim by the respective beneficiary. Against this background, the company has to put emphasis on analysing whether the new corporate law actually permits to preserve the status quo of all members. The requirement to have the draft terms of the cross-border conversion render particulars in respect of the rights conferred by the converted company on members enjoying special rights or on holders of securities other than shares representing the company capital, or the measures proposed concerning them (point (e) of Article 86 c), must be read in this context as well. Should the company arrive at the conclusion that the corporate law of the destination Member State will affect the status quo of members negatively, it will need to agree on adequate safeguards, for instance, the creation of similar or equivalent rights, or compensate the members affected to them taking action to apply for adequate safeguards in front of the competent authority. Additional examples include: the new corporate law being more relaxed on distribu- 4 tion of dividends to the company’s members1 and imposing less strict requirements in terms of maintenance of registered share capital2, respectively; the cross-border conversion resulting in the applicable law being less favourable for creditors in case of a future insolvency of the company as Article 3 (1) of the European Insolvency Regulation (rebuttably) presumes the place of the registered office to be the centre of its main interests3; and, further, the conversion as such simply being a bad business idea destroying the company’s value – whilst this will primarily concern the company’s members, creditors might be affected by such ill-conceived transaction as well. 4 Finally, in abusive scenarios, a cross-border conversion might wilfully be utilized for the detriment of certain or all of the company’s creditors, which again triggers the need for creditor protection.

II. Development of the Provision 1. Lack of harmonization of creditor protection under the Company Law Directive Prior to the adoption of the 2019 Directive, the Company Law Directive5 did not 5 contain any specific rules to protect a company’s creditors. Rather, the Company Law Hoger in Lutter (ed), UmwG (6th edn, 2019), § 202, § 8. Unlike the case for public limited liability companies, where the rules on maintenance of registered share capital are harmonized across Member States on the basis of Chapter IV of the Directive, there is no such harmonization for private limited liability companies; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017) § 9.18 et seq. 3 Garcimartin/Gandia, ECFR 1-2/2019, 15, 33. 4 Winner, ECRF 1-2/2019, 44, 50. 5 Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions. 1

2

Karsten Kühnle

447

Art 86 j Protection of creditors Directive referred to provisions and formalities of national law as far as protection of creditors is concerned (Article 121 (2) 1 (b)).6 As a consequence, the instruments available for creditor protection in case of a cross-border merger scenario involving public limited liability companies) were quite different across Member States. A study of 2013 7 reveals, for example, that the majority of Member States provides for creditor security as the prevailing tool of creditor protection, that some Member States apply an “ex ante” system where creditors can ask for security prior to the merger if their claims are not properly secured and, in contrast thereto, that other Member States apply an “ex-post” system where the merger is suspended for a certain number of days after the application for registration of the merger unless certain measures of creditor protection, for instance, consent of creditors or settlement of creditors, have been fulfilled which, essentially, permits creditors to block the merger.8 The study’s focus was on the Cross-Border Merger Directive9 but the findings identified and suggestions made therein in terms of creditor protection have also, more generally, influenced the discussions on other crossborder operations such as cross-border conversion and cross-border divisions. The Commission Proposal picked-up the results of the study.10 It emphasized the lack of harmonization of creditor protection as a main obstacle to freedom of establishment 11 by referring to the 2015 Consultation12 which revealed that 88 % of the respondents were in favour of harmonization of creditor protection with 75 % of them favouring a full harmonization approach13 and these findings having been more or less confirmed by a subsequent consultation of 2017.14

2. Different rules on creditor protection across Member States in conversion scenarios 6

More specifically, as far cross-border conversions are concerned, the Impact Assessment identified significant differences in creditors’ protection as a major issue towards creditors and companies carrying out a cross-border conversion – “As far as creditor protection is concerned, some MS (usually those with specific rules on cross-border conversions) provide the creditors with a right to request a security or to object the reincorporation (e.g. Cyprus, Czech Republic, Denmark, Malta, Spain and draft bill under discussion in the Netherlands). In Spain creditors are allowed to object the reincorporation, in Cyprus a creditor may object to the reincorporation but the court may intervene; while in the Czech Republic a creditor may demand security for unpaid debts. Some other MS (e.g. France, Greece, Luxembourg and Portugal) do not regulate this issue at all.”15

6 Schmidt, ECFR 2019, 222, 239; Jens Bormann and Peter Stelmaszcyk, ‘Grenzüberschreitende Spaltungen und Formwechsel nach dem EU-Company Law Package’, ZIP, No. 355, 2019, 2444. 7 Bech-Bruun/Lexidale, Study on the application of the cross-border mergers directive, September 2013. 8 Bech-Bruun/Lexidale, Study on the application of the cross-border mergers directive, September 2013, 55 et seq. 9 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies, OJ L 169, 30.06.2017. 10 COM(2018) 241 final, 44 et seq. 11 COM(2018) 241 final, 19. 12 Schmidt, Cross-border mergers and division, transfers of seat: Is there a need to legislate? JURI Committee, June 2016. 13 COM(2018) 241 final, 50. 14 Consultation on Company Law Package of 10 May 2017, EU Company law upgraded: Rules on digital solutions and efficient cross-border operations; COM(2018) 241 final, 54. 15 European Commission, Impact Assessment, SWD(2018) 141 final, page 28.

448

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 j

The Impact Assessment arrived at the following conclusions:16 the same set of 7 harmonized rules should be established for cross-border mergers, divisions and conversions; these rules should be based on existing creditor protection mechanisms in national laws but, importantly, Member States should be given the right to provide for additional safeguards; taking such an approach would entail a modification of the existing cross-border merger rules, and require enactment of new rules for cross-border divisions and conversions which would be identical, mutatis mutandis, with the new rules for cross-border mergers. The Impact Assessment suggested certain key elements of creditor protection, such as a creditor’s right to request adequate protection before a court or the independent expert concluding that there was no reasonable likelihood that the creditors would be prejudiced by the cross-border conversion, which served as a boilerplate for the Commission Proposal but have ultimately not been accepted in full.

3. Legal economics: the 2019 Directive turning away from the concept of rebuttable presumptions (Article 86 k (3) of the Commission Proposal) Article 86 j in the form as finally adopted by the 2019 Directive corresponds in princi- 8 ple to the Commission Proposal. The provision does not reflect, however, the two major (rebuttable) presumptions contained in the Commission Proposal suggesting that the creditors of the company carrying out the cross-border conversion shall be presumed not to be prejudiced by a cross-border conversion in either of the following circumstances: firstly, where the company discloses together with the draft terms of conversion an independent expert report which concluded that there is no reasonable likelihood that the rights of creditors would be unduly prejudiced (point (a) of Article 86 k (3)); and, secondly, where creditors are offered a right to payment, either against a third party guarantor, or against the company resulting from the cross-border conversion of at least equivalent value to their original claim, which may be brought in the same jurisdiction as their original claim, and which is of a credit quality at least commensurate with the creditor's original claim immediately after the completion of the conversion (point (b) of Article 86 k (3)). It is obvious from the first presumption that the Commission Proposal suggested a strong role of the independent expert. Despite the Commission Proposal being appreciated in legal literature and, for exam- 9 ple, described as innovative17, interesting18, a great achievement with a view to introducing reliable secondary law19, and progressive20, in particular with a view to the positive legal economics resulting from putting the assessment of whether creditors are prejudiced by the cross-border conversion into the hands of the independent expert rather than putting this burden on each individual creditor21 and, as an unwanted consequence, equipping “activist” creditors with an option to jeopardize the cross-border conversion22, the concept of (rebuttable) presumptions has not found its way into Article 86 j as finally adopted. Article 86 j imposes a – general – obligation on Member States to provide for an adequate system of protection of the interests of creditors. From a harmonization perspective, this will result in minimum harmonization only, which is not what the results of the public consultations have identified as desirable.23 ShapEuropean Commission, Impact Assessment, SWD(2018) 141 final, page 64. J. Schmitt, ECFR 2019, 222, 261 et seq.; Marcus Lutter, Walter Bayer and Jessica Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), 1922; Winner, ECFR 2019, 46, 57. 18 Noack/Kraft, DB 2018, 1577, 1582. 19 Teichmann, ECFR 2019, 3, 14. 20 Teichmann, NZG 2019, 241, 246. 21 Teichmann, ECFR 2019, 3, 9. 22 Noack/Kraft, DB 2018, 1577, 1582. 16

17

Karsten Kühnle

449

Art 86 j Protection of creditors ing the system of creditor protection such that it becomes adequate in the sense of the 2019 Directive is, therefore, mostly in the hands of Member States. From a legal practitioner’s point of view, the identification and analysis of the different creditor protection rules as well as their impact on transaction certainty and timing will hence remain a major challenge of any cross-border operation and cross-border conversion, respectively. 10 Against that it seems fair to question whether the Commission Proposal with its concept of rebuttable presumptions and a strong role of the independent expert in that respect had not been more favourable in terms of adequate protection.24 Of all things, especially in the field of creditor protection as one of the most important matters attached to planning of a cross-border operation, the 2019 Directive does not address what has been identified as a major obstacle to freedom of establishment, namely the lack of harmonization of creditor protection across Member States. Probably, the concept of rebuttable presumptions suggested by the Commission Proposal had been to progressive and innovative in that respect which caused Member States to object, and the timeframe of the legislative procedure to enact the 2019 Directive had been too ambitious to permit for more intensive discussions of the expert’s role in that context. In light of the before, Member States should seriously consider making use of the option to request a solvency declaration (Article 86 k (2)).

III. Adequate System of Creditor Protection 1. Minimum harmonization; Member State option to request a solvency declaration 11

Article 86 j addresses multiple topics in an attempt to establish a minimum harmonization of creditor protection related rules across Member States. Firstly, it requires Member States to provide for an adequate system of protection of the interests of creditors whose claims antedate the disclosure of the draft terms of the cross-border conversion and have not fallen due at the time of such disclosure. Secondly, it requires Member States to ensure that creditors who are dissatisfied with the safeguards offered in the draft terms of the cross-border conversion may apply to the appropriate administrative or judicial authority for adequate safeguards, provided that they can credibly demonstrate that the satisfaction of their claims is at stake and that they have not obtained adequate safeguards from the company. Thirdly, it requires Member States to ensure that creditors are able to institute proceedings against the company also in the departure Member State within two years of the date the conversion has taken effect. Finally, of more technical nature, it requires Member States to ensure that the safeguards offered in the draft terms of the cross-border conversion are conditional on the cross-border conversion becoming legally effective. In addition to the mandatory matters above, Member States have the option to require that the administrative or management body of the company provides a declaration of solvency stating as a key message to creditors that the administrative or management body, after having made reasonable enquiries, is unaware of any reason why the company would, after the conversion takes effect, be unable to meet is liabilities when those fall due (Article 86 j (2)).

23 24

450

COM(2018) 241 final, 19; Impact Assessment, 68, Section 1.14.3.3. Teichmann, NZG 2019, 241, 246.

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 j

2. Creditors eligible to protection; cut-off date for creditors’ claims Neither the 2019 Directive nor the Commission Proposal contain an explicit defini- 12 tion of the term creditor. In an attempt to identify eligible creditors, Recital (39) can be taken into account. It refers to the competent authority checking in particular, whether the company has fulfilled its obligations towards public creditors and also whether the company is the subject of any ongoing court proceedings concerning, for example, infringement of social, labour or environmental law, the outcome of which might lead to further obligations being imposed on the company, including in respect of citizens and private entities. Against this, it seems fair to apply a basically unlimited understanding of the term creditor in context of the 2019 Directive’s spirit such that public and private creditors of the company are captured. Public creditors are specifically addressed in Article 86 j (3), which focuses on obligations of pecuniary or non-pecuniary nature which the company might have vis-à-vis public bodies. Examples may include: payment of a certain tax amount, obligation to undertake a certain investment as a result of a subsidy received, or preserving a certain number of employment relationships in return for certain tax benefits, contributions to social security systems, and other public duties. Concluding from the above, finding a definition of the term creditor becomes of rather secondary importance whilst the relevant cut-off date of a certain claim becomes the more decisive factor.

3. Date of disclosure of the draft-terms of the cross-border conversion Article 86 j (1) stipulates that only those claims of a creditor will be eligible for protec- 13 tion which antedate the date of disclosure of the draft terms of the cross-border conversion and have not fallen due at such date. The date of disclosure of the draft terms of the cross-border conversion (which shall be a date at least one month before the date of the general meeting resolving upon approval of the draft terms of the cross-border conversion (point (a) of Article 86 g (1)) is therefore decisive in two ways: firstly, a potential claimant will not be considered an eligible creditor if the claim does not antedate the date of disclosure; secondly, a potential claimant whose claim antedates the date of disclosure will nevertheless not be considered an eligible creditor if the claim has fallen due before the date of disclosure. From a legal practitioner’s point of view, the company, when planning the cross-bor- 14 der conversion, is well advised to identify its population of creditors in due time and by taking into account the proposed date of disclosure of the draft terms of the cross-border conversion. In that context, the company should also analyse to which extent creditors are adequately protected under corresponding contractual arrangements, terms and conditions, or by virtue of mandatory laws. In conclusion of this analyses, the company will need to determine the necessity of offering safeguards (for instance, guarantees or pledges, point (f) of Article 86 d) in the draft terms of the cross-border conversion to certain (groups of) creditors.

4. Application for adequate safeguards with the appropriate authority Member States shall ensure that creditors who are dissatisfied with the safeguards 15 offered in the draft terms of the cross-border conversion, may apply, within three months of the disclosure of the draft terms of the cross-border conversion, to the appropriate authority for adequate safeguards provided that such creditors can credibly demonstrate that, due to the cross-border conversion, the satisfaction of their claim is at stake and that they have not obtained adequate safeguards from the company (Article 86 j (1)). In terms of the deadline attached to the application for adequate safeguards, the Karsten Kühnle

451

Art 86 j Protection of creditors

16

17

18

19

deadline of one month from disclosure of the draft terms of the cross-border conversion as suggested by the Commission Proposal (Article 86 k (2)) has been extended to three months from disclosure which, from a creditor’s perspective, is welcomed. Compared to the Commission Proposal25, which had unconditionally referred to dissatisfied creditors26, Article 86 j as finally adopted by the 2019 Directive, is much more balanced in the sense of minimizing the risk of unjustified “attacks” by creditors simply alleging that they are dissatisfied. It is therefore, in line with general legal procedure related requirements, on the individual creditor to credibly demonstrate that a specific claim is at stake due to the cross-border conversion and that the creditor has not obtained adequate safeguards from the company. As a result, the focus on whether a creditor is literally dissatisfied becomes less important. In order to “credibly demonstrate” that a safeguard is inadequate, the creditor will have to show that they have in fact obtained safeguards from the company which are, however, not adequate. This goes beyond safeguards offered by the company in the draft terms of the cross-border conversion. Some guidance on whether a safeguard is adequate or not can be taken from Recital (23), which requires the appropriate administrative or judicial authority, when assessing whether safeguards offered by the company are adequate, to take into account whether a creditor’s claim against the company is of at least equivalent value and of a commensurate credit quality as it was before the cross-border operation and whether the claim may be brought in the same jurisdiction. In practice, smaller creditors will likely be hesitant to request adequate safeguards from the company and be even more hesitant to apply to the appropriate administrative or judicial authority for adequate safeguards to the extent those offered by the company are inadequate. It is fair to question whether a smaller creditor27, for example, a domestic small enterprise, will be able to dedicate sufficient resources and funds to examine if and to which extent the claim is at stake for reasons of inadequate safeguards and the cross-border conversion. Furthermore, it seems fair to raise that question in respect of the appropriate authority as well. Such examination would typically require an in-depth analysis of all facts arising out of the cross-border conversion, e.g., the change of applicable laws, access to courts, etc., and their respective impact on the claim in question against the effectiveness of the safeguards offered to the creditor under the draft terms of the cross-border conversion. In that respect, the Commission Proposal has been much more economic in the sense of putting such assessment into the hands of the independent expert. In contrast thereto, the 2019 Directive rather focusses on and burdens the individual creditor with taking action. However, this will facilitate small and more passive creditors being hesitant to take action and apply for adequate safeguards whilst the larger, active and knowledgeable creditors will typically be protected under dedicated contractual arrangements.28 In consequence, this raises the question whether the system as proposed by the 2019 Directive will be efficient and therefore, in the words of Article 86 j, “adequate”. In terms of legal mechanics, Member States shall ensure that the safeguards are conditional on the cross-border conversion taking effect (Article 86 j (1)). 29 In practice, the company would typically make a corresponding statement to that effect in the draft terms of the cross-border conversion. COM (2018) 241, final, Article 86 k 2. This has been criticized during the legislative process, see Stellungnahme des Deutschen Anwaltvereins durch den Ausschuss Handelsrecht, Stellungnahme Nr. 31/2018, July 2018, 15. 27 Winner, ECFR 2019, 44, 53; Teichmann, NZG 2019, 241, 246. 28 Winner, ECFR 1-2/2019, 44, 53; Teichmann, NZG 2019, 241, 246. 29 The 2019 Directive misses a similar statement in terms of the cash compensation. 25

26

452

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 j

5. Adequacy of safeguards as an element of the scrutiny procedure? Regrettably, the 2019 Directive does not give any explicit guidance on whether an 20 application for adequate safeguards pending with the appropriate administrative or judicial authority restricts issuance of the pre-conversion certificate by the competent authority in the departure Member State. Rather, Member States should be able to stipulate the possible consequences for the issuance of the pre-operation certificate of the procedures initiated by members and creditors (Recital (37)). From a harmonization perspective, this is not necessarily beneficial. Creditors willing to take an “activist” approach by alleging inadequate safeguards and claiming for adequate safeguards in before the appropriate administrative or judicial authority would be able to jeopardize a cross-border conversion. Taken to the extreme, transaction certainty would ultimately vest in the hands of the company’s creditors. On the other hand, adequate safeguards does not mean safeguards going beyond what is equivalent to the creditor’s underlying demand but practice demonstrates that disputes on the scope, value, and grounds of a certain matter can never be excluded per se. The scrutiny procedure established under Article 86 m30 requires the designated au- 21 thority to scrutinize the legality of cross-border conversions as regards the parts of the procedure governed by the law of the departure Member State and to issue a pre-conversion certificate attesting to compliance with all relevant conditions and to the proper completion of all procedures and formalities in the departure Member State. It appears rather questionable whether granting adequate safeguards to the company’s creditors may be considered a “condition” to the legality of the cross-border conversion. One might arrive at a different conclusion where no safeguards where offered by the company at all in the draft terms of the cross-border conversion but a dispute on the adequacy of safeguards offered should not qualify as a condition.31 Where the adequacy of safeguards does not qualify as a condition, it will not qualify, a fortiori, as an element of proper completion of all procedures and formalities. 32 On the contrary, a strong counterargument could be taken from Article 86 m (1), second paragraph, which gives Member States the option to require that the completion of procedures and formalities “may” comprise the satisfaction or securing of pecuniary or non-pecuniary obligations due to public bodies. As a result of the minimum harmonization approach taken by the 2019 Directive regarding creditor protection, Member States would be free to make use of such option and, in addition, encompass private creditors as well. Certainly, the arguments outlined before would be of no relevance had the 2019 Di- 22 rective implemented what the Commission Proposal suggested in Article 86 k (3), namely that creditors of the company shall be presumed not to be prejudiced by the crossborder conversion where the company discloses together with the draft terms of the cross-border conversion an independent expert report, which concluded that there is no reasonable likelihood that the rights of creditors would be unduly prejudiced.

IV. Solvency Declaration Article 86 j (2) gives Member States the option to require that the administrative or 23 management body of the company provide a declaration that accurately reflects its current financial status at a date no earlier than one month before the disclosure of See → Art 86 m. See → Art 86 m. 32 See → Art 86 m. 30

31

Karsten Kühnle

453

Art 86 j Protection of creditors that declaration. The substance of the declaration is that, on the basis of the information available to the administrative or management body of the company at the date of that declaration, and after having made reasonable enquiries, the administrative or management body is unaware of any reason why the company would, after the conversion takes effect, be unable to meet its liabilities when due. In terms of timing, the solvency statement should be disclosed together with the draft terms of the cross-border conversion and reflect the company’s current financial status at a date no earlier than one month before the disclosure. 24 The concept of a solvency declaration is new – at least as far as Germany is concerned. It follows the initial idea of the Commission Proposal to give the company the opportunity to provide such declaration in an attempt to mitigate the risk of creditors taking legal action against the conversion. In Germany, the concept of a solvency declaration has been criticized for various reasons, including an increase of transaction cost 33, a low likelihood of the company’s management being willing to make such declaration for reasons of potential personal liability for the accuracy of the declaration (Recital (25))34 and attempts by the industry to avoid Member States taking such option.35 In contrast, the concept of a solvency declaration has been considered an interesting option36 and the fact that the 2019 Directive skipped the presumptions-model suggested by the Commission Proposal with the expert ascertaining that there is no reasonable likelihood that the rights of creditors be unduly prejudiced by the cross-border conversion (point (a) of Article 86 k (3)) may advocate the need for a solvency declaration. 25 In fact, the underlying idea of the solvency declaration entails several advantages. Firstly, the likelihood of creditor’s taking legal action will be reduced from the outset.37 Secondly, transaction certainty will be increased which becomes even more crucial if one were to assume that legal action against the draft terms of cross-border conversion would block issuance of the pre-conversion certificate38 by the competent authority of the departure Member State. Regrettably, the 2019 Directive does not contain any specific guidance on this important matter.39 Thirdly, from the company’s administrative or management body’s perspective, involving expert capabilities to be backed when giving such declaration plus obtaining D&O insurance might alleviate the burden. In relation thereto, Member States might consider ring-fencing management’s liability by limiting liability for an inaccurate or misleading declaration to cross-negligence and/or wilful misconduct.40 As far as an increase in transaction cost is concerned, this will certainly be the case given the complexities which might be attached to this. Notwithstanding the above, one should still raise the question whether this portion of the overall transaction cost will have the magnitude of a decisive decision

33 Peter Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’, ZIP 2019, 2437, 2445. 34 Jens Bormann and Peter Stelmaszcyk, ‘Grenzüberschreitende Spaltungen und Formwechsel nach dem EU-Company Law Package’, ZIP, No. 355, 2019, 312; Eberhard Schollmeyer, ‘Der Gläubigerschutz bei grenzüberschreitenden Umwandlungen nach der neuen Umwandlungsrichtlinie’, ZGR 2020, 62, 81. 35 Winner, ECFR 1-2/2019, 46, 54. 36 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), 1922, 1933; Schmidt, ECFR 1-2/2019, 222, 263. 37 Schmidt, ECFR 1-2/2019, 222, 263. 38 Peter Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’, ZIP 2019, 2437, 2445. 39 See → Art 86 m. 40 Wicke, DStR 2018, 2703.

454

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 k

making criteria when taking into account all the pros and cons of the cross-border conversion. From a German legal perspective, whilst there is a considerable likelihood that the 26 German legislator will not implement the concept of a solvency declaration for reasons of German law traditionally not operating with solvency statements, conducting a more in-depth analysis as to the pros and cons of such concept seems certainly worthwhile to pursue.

V. Place of Jurisdiction Another element of minimum harmonization is giving creditors access to jurisdiction 27 in the departure Member State. Article 86 j (4) requires Member States to ensure that creditors whose claims antedate the disclosure of the draft terms of the cross-border conversion are able to institute proceedings against the company also in the departure Member State within two years of the date the conversion has taken effect, without prejudice to the jurisdiction rules arising from Union or national law or from a contractual agreement.41 Compared to the Commission Proposal (Article 86 k), Article 86 j (4) as finally adopted is much more explicit when it comes to where a creditor may take legal action. The Commission’s Proposal had not addressed this clearly. It had only mentioned this in context with the presumption of creditors not being prejudiced by the cross-border conversion where they have been offered a right to payment which may be brought in the same jurisdiction as governing the original claim (point (b) of Article 86 k (3)). From a creditor’s perspective, the explicit possibility to bring legal action against the company in the departure Member State is a big win. However, such simplified access to jurisdiction in the departure Member State will only be given on a temporary basis of two years from effectiveness of the cross-border conversion.

Article 86 k Employee information and consultation 1. Member States shall ensure that employees’ rights to information and consultation are respected in relation to the cross-border conversion and are exercised in accordance with the legal framework provided for in Directive 2002/14/EC and, where applicable for Community-scale undertakings or Community-scale groups of undertakings, in accordance with Directive 2009/38/EC. Member States may decide that employees’ rights to information and consultation apply with respect to the employees of companies other than those referred to in Article 3 (1) of Directive 2002/14/EC. 2. Notwithstanding Article 86 e (7) and point (b) of Article 86 g (1), Member States shall ensure that employees’ rights to information and consultation are respected, at least before the draft terms of the cross-border conversion or the report referred to in Article 86 e are decided upon, whichever is earlier, in such a way that a reasoned response is given to the employees before the general meeting referred to in Article 86 h. 3. Without prejudice to any provisions or practices in force more favourable to employees, Member States shall determine the practical arrangements for exercising

41

Luy, NJW 2019, 1905, 1907; Kraft, BB 2019, 1864, 1867; Schollmeyer, ZGR 2020, 62 p. 87.

Karsten Kühnle

455

Art 86 k Employee information and consultation the right to information and consultation in accordance with Article 4 of Directive 2002/14/EC. Article 86 k was not contained in the Commission Proposal relative to Chapter I1; reference to employees’ rights to information and consultation was only made in context of a cross-border merger and cross-border division. The provision focusses on securing employees’ general rights to information and consultation as established under Directives 2002/14 EC2 and 2009/38/EC.3 2 Applicability of each Directive is subject to a certain minimum number of employees but Article 86 k (1) gives Member States the option to apply each Directive irrespective of the number of employees. The general rights to information and consultation as established under the two Directives shall apply in addition to the specific cross-border conversion-related information rights conferred on employees’ and their representatives under Article 86 e (7) and point (b) of Article 86 g (1). The central requirement arising out of the two Directives is that the employees and/or employee representatives (e.g., local works council, European works council) are informed in due time of the contemplated cross-border conversion. In contrast to the specific cross-border conversionrelated rights, which kick-in (at least) one month before the date of the general meeting as far as the draft terms of the cross-border conversion are concerned (Article 86 g (1)) and not less than six weeks before the general meeting as far as the report of the administrative or management body for members and employees are concerned (Article 86 e (7)), the general rights to information and consultation apply to the earlier decision making phase. 3 Keeping employees informed at early stage is generally an effective tool to on-board employees and minimize frictions to transaction certainty at later stage. Article 86 k (2) reflects this and requires Member States to ensure that employees’ rights to information and consultation are respected, at least before the draft terms of the cross-border conversion or the report referred to in Article 86 e are decided upon, whichever is earlier, in such a way that a reasoned response is given to the employees before the general meeting. Information in the sense of Directive 2009/38/EC means transmission of data by the employer to the employees’ representatives in order to enable them to acquaint themselves with the subject matter and to examine it; information shall be given at such time, in such fashion and with such content as are appropriate to enable employees’ representatives to undertake an in-depth assessment of the possible impact and, where appropriate, prepare for consultations (Article 2 (1)f) of Directive 2009/38/EC). 4 From the company’s perspective, the obligation to give a reasoned response to the employees will at first require timely receipt of any opinion rendered by the representatives of the employees or, where there are no such representative, by the employees themselves, in relation to the draft terms of the cross-border conversion and the report of the administrative or management body for members and employees, respectively. In return, employees may expect to receive a sufficiently argued response instead of insubstantial and cursory statements. The reasoned response shall be given to the employees before the general meeting (Article 86 k (2)). 1

Kraft, BB 2019, 1864, 1868; Bayer/Schmidt, BB 2019, 1922, 1934. Directive 2002/14/EC of the European Parliament and of the Council of 11 March 2002 establishing a general framework for informing and consulting employees in the European Community – Joint declaration of the European Parliament, the Council and the Commission on employee representation. 3 Directive 2009/38/EC of the European Parliament and of the Council of 6 May 2009 on the establishment of a European Works Council or a procedure in Community-scale undertakings and Communityscale groups of undertakings for the purposes of informing and consulting employees. 1

2

456

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 l

Article 86 l Employee participation 1. Without prejudice to paragraph 2, the converted company shall be subject to the rules in force concerning employee participation, if any, in the destination Member State. 2. However, the rules in force concerning employee participation, if any, in the destination Member State shall not apply where the company has, in the six months prior to the disclosure of the draft terms of the cross-border conversion, an average number of employees equivalent to four fifths of the applicable threshold, as laid down in the law of the departure Member State, for triggering the participation of employees within the meaning of point (k) of Article 2 of Directive 2001/86/EC, or where the law of the destination Member State does not: (a) provide for at least the same level of employee participation as operated in the company prior to the cross-border conversion, measured by reference to the proportion of employee representatives among the members of the administrative or supervisory body or their committees or of the management group which covers the profit units of the company, subject to employee representation; or (b) provide for employees of establishments of the converted company that are situated in other Member States the same entitlement to exercise participation rights as is enjoyed by those employees employed in the destination Member State. 3. In the cases referred to in paragraph 2 of this Article, the participation of employees in the converted company and their involvement in the definition of such rights shall be regulated by the Member States, mutatis mutandis and subject to paragraphs 4 to 7 of this Article, in accordance with the principles and procedures laid down in Article 12 (2) and (4) of Regulation (EC) No 2157/2001 and the following provisions of Directive 2001/86/EC: (a) Article 3 (1), points (a)(i) and (b) of Article 3 (2), Article 3 (3), the first two sentences of Article 3 (4), and Article 3 (5) and (7); (b) Article 4 (1), points (a), (g) and (h) of Article 4 (2), and Article 4 (3) and (4); (c) Article 5; (d) Article 6; (e) Article 7 (1), with the exception of the second indent of point (b); (f) Articles 8, 10, 11 and 12; and (g) point (a) of Part 3 of the Annex. 4. When regulating the principles and procedures referred to in paragraph 3, Member States: (a) shall confer on the special negotiating body the right to decide, by a majority of two thirds of its members representing at least two thirds of the employees, not to open negotiations or to terminate negotiations already opened and to rely on the rules on participation in force in the destination Member State; (b) may, in the case where, following prior negotiations, standard rules for participation apply and notwithstanding such rules, decide to limit the proportion of employee representatives in the administrative body of the converted company. However, if, in the company, employee representatives constituted at least one third of the administrative or supervisory body, the limitation may never result

Karsten Kühnle

457

Art 86 l Employee participation in a lower proportion of employee representatives in the administrative body than one third; (c) shall ensure that the rules on employee participation that applied prior to the cross-border conversion continue to apply until the date of application of any subsequently agreed rules or, in the absence of agreed rules, until the application of standard rules in accordance with point (a) of Part 3 of the Annex to Directive 2001/86/EC. 5. The extension of participation rights to employees of the converted company employed in other Member States, as referred to in point (b) of paragraph 2, shall not entail any obligation for Member States which choose to do so to take those employees into account when calculating the size of workforce thresholds giving rise to participation rights under national law. 6. Where the converted company is to be governed by an employee participation system, in accordance with the rules referred to in paragraph 2, it shall be obliged to take a legal form allowing for the exercise of participation rights. 7. Where the converted company is operating under an employee participation system, it shall be obliged to take measures to ensure that employees’ participation rights are protected in the event of any subsequent conversion, merger or division, be it cross‐border or domestic, for a period of four years after the cross-border conversion has taken effect, by applying mutatis mutandis the rules laid down in paragraphs 1 to 6. 8. A company shall communicate to its employees or their representatives the outcome of the negotiations concerning employee participation without undue delay. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Development of the Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Protection of Employee Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Basic rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The four-fifth rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The “before-and-after” principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) No employee participation for employees outside the destination Member State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Negotiation procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Possible options of employee participation mutatis mutandis to the SERegulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Principles and procedures mutatis mutandis to the SE-Directive . . . . . . . . c) Certain modifications to the principles and procedures . . . . . . . . . . . . . . . . . . 4. Legal forms permissible to the converted company . . . . . . . . . . . . . . . . . . . . . . . 5. Perpetuation of employee participation in the converted company . . . . . . . 6. Communication of the outcome of negotiations . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 6 7 10 10 12 13 15 16 17 19 23 25 27

I. Introduction 1

Like the protection of members and of creditors, the protection of employees is a key element of the 2019 Directive. The right of a company to convert across borders should go hand in hand, and be properly balanced, with the protection of employees (Recital (4)). The involvement of all stakeholders in cross-border operations, in particular the involvement of employees, contributes to a long-term and sustainable approach being taken by companies across the internal market; in this regard, safeguarding and promoting the participation rights of employees within the board of a company plays an important role, in particular when a company moves or restructures 458

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 l

across borders; therefore, the successful completion of negotiations on participation rights in the context of cross-border operations is essential and should be encouraged (Recital (33)). The Impact Assessment revealed that not all Member States have a system of 2 employee participation and among the Member States which have such a system, the rules vary to a large extent.1 One can summarize these findings as follows2: in some Member States, employee participation is limited to state-owned companies, e.g. in Greece, Ireland, Portugal and Spain. Between the Member States that provide for employee participation in the private sector, there is a wide variety of systems; also, there are huge differences with regard to the thresholds, with the lowest being 25 (Sweden) up to 1000 (Luxembourg). The number of employee representatives in the management board (one-tier structure) or supervisory board (two-tier structure) ranges from one single member (Croatia) to half of the members (Germany); in most of the Member States, the participation rights are limited to one third of the members of the board (e.g. Austria, Denmark, France, Hungary, Luxembourg); in some systems, employees or their representatives have the right to appoint members to the board (e.g. in Germany) while other Member States rather only grant a right to recommend candidates for appointment; finally, in some Member States, no system of employee participation has been established in national law (Belgium, Bulgaria, Cyprus, Estonia, Italy, Latvia, Lithuania, Malta and the United Kingdom). Rules on employee participation are attached to the lex societatis which means that 3 the applicable regime will change as a result of the cross-border conversion.3 Needless to say that there have always been and will always be attempts to minimize or even eliminate employee participation at board level by means of cross-border reorganizations. That said, protection of employees’ rights has been one of the dominating topics during the legislative process. As in the past decades, co-determination aspects in a European context have turned out being the “Achilles heel”4 or “political stumbling block”5 of certain major European legislative projects in the context of European company law and the creation of European legal forms.6

II. Development of the Provision Article 86 l governs the 2019 Directive’s focus on employee participation in the con- 4 verted company. Employee participation is also referred to as board level employee representation or co-determination of employees at board-level. Employee participation means the influence of the body representative of the employees and/or the employees' representatives in the affairs of a company by way of the right to elect or appoint some of the members of the company's supervisory or administrative organ, or the right to recommend and/or oppose the appointment of some or all of the members of the company's supervisory or administrative organ (Article 2 (k) SE-Directive 7). Compared to the Commission Proposal, Article 86 l as finally adopted has not been 5 subject to fundamental change. One has to note, however, that the Commission Proposal European Commission, Impact Assessment, SWD(2018) 141 final, 157. Roest, ECFR 2019, 74, 77 et seq. 3 Schurr, EuZW 2019, 539, 544; Teichmann, NZG 2019, 241, 246. 4 Schmidt, ECFR 2019, 222, 265. 5 Teichmann, NZG 2019, 241, 246. 6 See → Art 118. 7 Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees. 1 2

Karsten Kühnle

459

Art 86 l Employee participation had resulted in different co-determination related rules being applicable for cross-border conversions and cross-border divisions on the one hand, and cross-border mergers on the other hand.8 This raised significant criticism during the legislative process.9 The underlying dilemma had mainly been caused by the legislator’s ambition to achieve appropriate protection of co-determination rights in respect of the new rules on cross-border conversions and cross-border divisions whilst, at the same time, not deteriorating the existing rules on cross-border mergers compared to the acquis.10 For instance, the threshold for taking up negotiations with the special negotiation body had been set at four fifths of the applicable threshold in respect of cross-border conversions and crossborder divisions, whilst for cross-border mergers the threshold of 500 employees had applied. Ultimately, except for certain particulars, the discussions resulted in the same concept of employee participation rules being applicable to all three kinds of cross-border operation.

III. Protection of Employee Participation 6

Article 86 l addresses multiple topics in an attempt to ensure protection of employee participation across Member States. Firstly, it establishes the basic rule that the converted company shall be subject to the rules in force concerning employee participation, if any, in the destination Member State. Secondly, it addresses certain exceptions to the basic rule to ensure that employee participation is not unduly prejudiced as a result of the cross-border conversion, for instance, by the company temporarily lowering down the applicable thresholds for employee participation. Thirdly, where the converted company is to be governed by an employee participation system, it shall be obliged to take a legal form allowing for the exercise of participation rights. Fourthly, where the converted company is operating under an employee participation system, it shall be obliged to take measures to ensure that employees’ participation rights are protected in the event of any subsequent conversion, merger or division, be it cross-border or domestic, for a period of four years after the cross-border conversion. Finally, the provision addresses several rules related to the negotiations with the special negotiation body.

1. Basic rule 7

As a basic rule, the 2019 Directive establishes that the converted company shall be subject to the rules in force concerning employee participation, if any, in the destination Member State (Article 86 l (1)). It is the registered office of the converted company rather than the head office which shall be decisive in that respect.11 Importantly, the consequence of the basic rule is that where the law of the destination Member State does not provide for employee participation rights, no so such rules will apply to the converted company.12 Instead, where the law of the destination Member State provides for employee participation rights, these shall apply unless one of the exceptions contained in Article 86 l (2) is applicable which in turn will require the company’s manage-

Schmidt, ECFR 2019, 222, 265. Roest, ECFR 2019, 74, 90. 10 Peter Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’, ZIP 2019, 2437, 2445. 11 Peter Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’, ZIP 2019, 2446. 12 Roest, ECFR 2019, 74, 89. 8

9

460

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 l

ment to initiate negotiations on employee participation in the converted company with the special negotiation body. The basic rule may be used to eliminate, circumvent or reduce employee participa- 8 tion rights. For instance, a limited liability company co-determined under the laws of the departure Member State might consider a cross-border conversion into a limited liability company governed by the laws of a destination Member State not knowing any co-determination or only knowing a degree of co-determination which is limited compared to the status quo in the departure Member State. Therefore, the basic rule shall not apply where one of the exceptional scenarios stipulated in Article 86 l (2) is given, in which case an obligation of the company’s management will be triggered to launch negotiations with representatives of the company’s employees. Somehow simplified, the mechanics on employee participation, can be illustrated 9 as follows:

#

1 2 3 4 5

6

7

8

9

10

Departure Member State

Destination Member State

Company is…

Has rules in force

Employee participation

Negotiations required

✕

Converted company will not be subject of employee participation

✕

✓

Rules of destination Member State will apply

✕

✕

Converted company will not be subject of employee participation

✕

✓

Rules of destination Member State will apply

✕

… an addressee of employee participation and fulfils the 4/5th rule

✕

Converted company will not be subject of employee participation

✕

✓

Legal form of converted company must permit for employee participation

✓

… operates under a system of co-determination

✕

Converted company will not be subject to employee participation

✕

✓

Legal form of converted company must permit for employee participation

✓

✕

Converted company will not be subject to employee participation

✕

✓

Legal form of converted company must permit for employee participation

✓

… not an addressee of employee participation … an addressee of employee participation and does not fulfil the 4/5th rule

… is obliged to operate under a system of co-determination but has not (yet) implemented such system

Karsten Kühnle

461

Art 86 l Employee participation 2. Exceptions a) The four-fifth rule The first exception is the four-fifth rule pursuant to Article 86 l (2), first paragraph: the company’s management has to launch the negotiation procedure in case it has, in the six months prior to the disclosure of the draft terms of the cross-border conversion, an average number of employees equivalent to four fifths of the applicable threshold for triggering employee participation in the departure Member State. For example 13, a German limited liability company which employs 400 employees on a frequent basis will not be subject to German co-determination pursuant to the German One-Third Participation Act as a result of not having reached the threshold of 500.14 For reasons of exceeding, however, four fifth of 500, the company’s management will be under an obligation to launch a negotiation procedure with employee representatives.15 The same obligation to launch negotiations would be given in case of the German limited liability company employing 1,600 employees as far as the German Co-Determination Act is concerned, which stipulates a threshold of 2,000 frequently employed employees for its applicability.16 The primary purpose of the four-fifth rule is to prevent circumvention of employee participation rights by way of temporarily lowering the number of employees below the applicable thresholds. As described in Recital (31), the company registered in the Member State which provides for the employee participation rights, shall not be able to perform a cross-border operation without first entering into negotiations with its employees or their representatives when the average number of employees employed by that company is equivalent to four fifths of the national threshold for triggering such employee participation (Recital (31)). Further, in the context of replacing the existing threshold of 500 for cross-border mergers by the new four-fifth rule, another purpose is to respect those Member States applying substantially lower thresholds for employee participation.17 11 The four-fifth rule, however, may result in a paradox scenario which raised significant criticism in legal literature.18 Assuming the company not being subject to co-determination in the departure Member State but obliged to enter into negotiations as a result of the four-fifth rule, and the negotiations resulting in the Standard Rules (point (a) of Part 3 of the Annex) becoming applicable as the parties fail to reach an agreement within the negotiation period of six months from establishment of the special negotiation body and this period is not extended up to the maximum period of one year19, this would finally cement absence of employee participation in the converted company. 20 Such status would be preserved even if the converted company would afterwards trigger the threshold for employee participation in the destination Member State. From an eco10

Selent, NZG 2018, 1171, 1173. Article 1 (1) Employee Representation Act (DrittelbG). 15 Assuming that the law of the destination Member State has rules on employee participation. 16 Article 1 (1) German Codetermination Act (MitbestG). 17 For instance, Sweden (25), Denmark (35), Finland (150), Hungary (200), Austria (300). 18 Roest, ECFR 2019, 74, 90; Schmidt, ECFR 2019, 222, 266; Hoffmann, EuZW 2018, 785, 786; Selent, NZA 2018, 1171, 1175; Peter Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’, ZIP 2019, 2473, 2445; Suchan/Albrecht, WPg 2019, 1181, 1188. 19 The negotiations may take up to a total of one year from the establishment of the special negotiating body, see Article 5 (2) of Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees. 20 The negotiations might not be conducted in a spirit of cooperation with a view to reaching an agreement as stipulated in Article 4 (1) of Directive 2001/86/EC. As a result, by the deadline laid down in Article 5, no agreement has been concluded, and the Standard Rules become applicable, see Article 7 (1)(b) of Directive 2001/86/EC. 13

14

462

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 l

nomic perspective, taking into account the resources and cost dedicated to negotiations, which may take up to one year from establishment of the special negotiation body, such result seems hard to understand. Further, one would need to look at the impacts of frustrated negotiations to the relationships between the company and its employees and trade unions. This seems even worse when considering that the parties to a cross-border merger scenario have the right to choose – without any prior negotiation – to be directly subject to the Standard Rules (Article 133 paragraph 4 point (a)). Unlike in a cross-border merger, in a cross-border conversion it is the sole decision of the negotiation body whether or not to open negotiations or to terminate negotiations already opened and to rely on the rules on participation in force in the destination Member State (point (a) of Article 86 l (4)). b) The “before-and-after” principle The second exception is the “before-and-after” principle pursuant to point (a) of Ar- 12 ticle 86 l (2): the company’s management has to launch the negotiation procedure in case the law of the destination Member State does not provide for at least the same level of employee participation as operated in the company prior to the cross-border conversion, measured by reference to the proportion of employee representatives among the members of the administrative or supervisory board or their committees or of the management group which covers the profit units of the company, subject to employee participation. For instance, a German company subject to the German Co-Determination Act and with six employee representatives at supervisory board level (i.e., a total number of 12 supervisory board members) would need to launch the negotiation procedure when contemplating to convert into a limited liability company governed by the law of a Member State only permitting for one-third of the supervisory board members being employee representatives, which would result in 4 employee representatives at supervisory board level in the converted company (as compared to 6). c) No employee participation for employees outside the destination Member State The third exception is the absence of employee participation in establishments situ- 13 ated in Member States other than the destination Member State pursuant to point (b) of Article 86 l (2): the company’s management has to launch the negotiation procedure in case the law of the destination Member State does not provide for employees of establishments of the converted company that are situated in Member States other than the destination Member State the same entitlement to exercise participation rights as enjoyed by those employees employed in the destination Member State. The exception focuses on “establishments”, which entails branch offices but not subsidiaries. Relevant in the context described above is that Member States may confer participa- 14 tion rights to employees of the converted company employed in Member States other than the destination Member State. When doing so, such fact shall not entail any obligation for Member States to take those employees into account when calculating the size of workforce thresholds giving rise to participation rights under national law (Article 86 l (5)). The underlying legal background has been addressed by the ECJ in the Erzberger case.21 Whilst the core element of the case concerned employees’ right to vote and stand in as a candidate in elections of workers’ representatives, the wider context of the case resulted also in the discussion as to whether employees located in Member States other than the Member State where the company has its holding subject to co-determi21

Case 566/15 Konrad Erzberger v TUI AG [2017] ECLI:EU:C:2017:562; Ott/Goette, NZG 2018, 281.

Karsten Kühnle

463

Art 86 l Employee participation nation shall be taken into account when calculation national thresholds. The 2019 Directive brings clarity in the sense that Member States have the option to extend employee participation to employees in Member States other than the destination Member State but, when doing so, are not obliged to take those employees into account when calculating the national thresholds for employee participation.

3. Negotiation procedure 15

The negotiations between the company’s management and the representatives of the employees (the special negotiation body) on employee participation in the converted company shall generally be based on the principles and procedures established under the SE-Directive22 and SE-Regulation.23 Certain adjustments to these rules are provided for in paragraphs 4 to 8 of Article 86 l. a) Possible options of employee participation mutatis mutandis to the SE-Regulation

16

By referring to Article 12 (2) and (4) of the SE-Regulation, the cross-border conversion shall not be registered in the destination Member State unless one the following alternative scenarios is given: an agreement on arrangements for employee involvement in the converted company has been concluded; the special negotiation body has passed a resolution not to open negotiations or terminate negotiations already opened and to rely on the rules on participation in force in the destination Member State (Article 3 (6) of the SE-Directive as adopted by point (a) of Article 86 l (4); or the negotiation period of six months from establishment of the special negotiation body has expired without an agreement been concluded24 (Article 5 of the SE-Directive as referenced by point (c) of Article 86 l (3)). Registration of the cross-border conversion in the destination Member State is therefore subject to one of the scenarios above being confirmed vis-à-vis the competent authority which, as an element of the scrutiny procedure, shall in particular ensure that, where appropriate, arrangements for employee participation have been determined (Article 86 o (1) para. 2. b) Principles and procedures mutatis mutandis to the SE-Directive

17

Further, by referring to the SE-Directive, the more procedural aspects attached to the negotiations shall apply. These include, for example, starting of negotiations as soon as possible after disclosure of the draft terms of cross-border conversion (Article 3 (1) of the SE-Directive), election of members to the special negotiation body as well as composition of the special negotiation body in line with the 10 % rule (points (a)(i) and (b) of Article 3 (2) of the SE-Directive); necessity to have a written agreement between the special negotiation body and the company’s management for the participation of employees in the converted company (Article 3 (3) of the SE-Directive); decisions by the special negotiation body being subject to an absolute majority requirement with each member having one vote except for the decision not to open negotiations or to terminate negotiations already opened which shall be subject to a majority of two thirds (first two sentences of Article 3 (4) of the SE-Directive); right of the special negotiation body to request experts of its choice, for examples representatives of trade union organizations, 22 Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees, OJ L 294, 10.11.2001. 23 Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), OJ L 294, 10.11.2001. 24 The parties may extend the negotiation period up to a maximum period of one year, see Article 5 (2) of the SE-Directive.

464

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 l

to assist and be present at the negotiations in an advisory capacity (Article 3 (5) of the SE-Directive); and the company comprehensively bearing the cost of the negotiations (Article 3 (7) of the SE-Directive). This technique of referring to certain limited provisions, exceptions, principles and 18 procedures on a mutatis mutandis approach is complex, prone to misinterpretation, and will bring the challenge to each Member State of translating this into systematic and stringent provisions of national law. From a German perspective, when implementing Article 86 l into national law, the German legislator might consider stipulating dedicated and exclusive provisions on the negotiations in the German Transformation Act or, alternatively, refer to the German SE-Implementation Act (SEAG) and German SE-Employee Participation Act (SEBG) as far as shall be applicable under the 2019 Directive. c) Certain modifications to the principles and procedures The principles and procedures governing the determination of employee participation in the converted company are subject to the following modifications (Article 86 l (4)): Firstly, Member States shall confer on the special negotiating body the right to decide, by a majority of two thirds of its members representing at least two thirds of the employees, not to open negotiations or to terminate negotiations already opened and to rely on the rules on participation in force in the destination Member State (point (a) of Article 86 l (4)). From an economic efficiency point of view, this is appreciated to avoid lengthy, complex and potentially useless negotiations. In that context, one has to note that the company’s management, which is the addressee of the obligation to launch the negotiations (and can therefore not refrain from launching negotiations), is also entitled to terminate ongoing negotiations. Secondly, Member States have the option to limit the proportion of employee representatives in the administrative body of the converted company; however, where in the company, employee representatives constituted at least one third of the administrative body, the limitation may never result in a lower proportion of employee representatives than one third (point (b) of Article 86 l (4)). From a German legal perspective, this is a tribute to the German One-Third Participation Act. Giving Member States the option to limit the proportion of employee representatives may facilitate efficiency of decision making processes in co-determined supervisory boards. Looking at the German SE-population25, the figures demonstrate that the majority of them used the negotiations with the special negotiation body to reduce the number of supervisory board members.26 Thirdly, Member State shall ensure continuity of the existing rules on employee representation until the date of application of subsequently agreed rules or, in the absence of agreed rules, until the application of the Standard Rules under the SE-Directive. The company must therefore refrain from utilizing the period from disclosure of the draft terms of the cross-border conversion until registration in the destination Member State to facilitate arrangements which may undermine the existing rules on employee participation.

25 As of 31 December 2019, a total number of 3,285 SEs has been registered in Europe. Of such total number, 700 SEs can be considered as fully operative compared to shelf-SEs. Of that 700 fully operative SEs, 389 SEs have been registered in the Germany. See: https://www.boeckler.de/pdf/pb_mitbestimmung_ se_2019_12.pdf. 26 Reichert/Brandes in Münchener Kommentar zum Aktiengesetz (4th edn, 2017), SE-VO Article 40 §§ 66-69; Seibt, ZIP 2010, 1057, 1061.

Karsten Kühnle

465

19

20

21

22

Art 86 l Employee participation 4. Legal forms permissible to the converted company Where the converted company is to be governed by an employee participation system, it shall be obliged to take a legal form allowing for the exercise of employee participation rights (Article 86 l (6)). Employee participation must not be circumvented by choosing a legal form not subject to employee participation. From a transaction planning point of view, the company – if an addressee of co-determination or operating under co-determination – will therefore need to prudently analyse which legal form it will be required to choose in the destination Member State to effect the cross-border conversion in compliance with the 2019 Directive. 24 From a German legal perspective, looking at whether there is an actually existing status of employee participation leads to the discussion in German legal literature 27 and courts28 whether the existing “status quo” or the legal “target status” will be decisive. The following example looks at a German limited liability company employing 510 employees on a frequent basis. The company is obliged to implement a co-determined supervisory board under the German One-Third Participation Act but does not. If the company were to kick-off a cross-border conversion without having actually implemented a co-determined supervisory board, one could raise the question whether the company would actually need to choose a legal form subject of co-determination in the destination Member State. In line with the German Federal High Court in Civil Cases’ recent judgement29, there are good reasons to conclude, however, that the legal “target status” shall be decisive to achieve the legislator’s intentions. 23

5. Perpetuation of employee participation in the converted company The 2019 Directive aims at perpetuating an existing system of employee participation rights – in order to protect the agreed solution or the application of those standard rules, the company should not be able to remove the participation rights through carrying out a subsequent conversion, merger or division, be it cross-border or domestic, within four years (Recital (30)). Concluding from Article 86 l (6), (7), an existing “employee participation system” is the agreement concluded between the company’s management and the special negotiation body on arrangements for the involvement of the employees in the converted company. Such status of negotiated employee participation shall be preserved for a period of four years from the cross-border conversion taking effect. To achieve such protection, the rules laid down in Article 86 l paragraphs 1 to 6 shall apply mutatis mutandis to any such post-conversion operation, irrespective of cross-border or domestic. Importantly, this entails an extension of the scope of Article 86 l to domestic conversions, mergers or divisions. In consequence, the converted company must refrain from any conversion, merger or division to the extent that such operation jeopardizes the status quo of the existing employee participation system. 26 From a legal practitioner’s point of few, this will mean that the company will need to carry out a prudent analysis whether and to which extent, e.g. for reasons of a change in the applicable laws, permissible corporate governance, thresholds for employee participation, etc., any such post-conversion operation will affect the existing employee participation system. The converted company is bound to ensuring the status quo for a period of four years, e.g. by keeping the status as is, or offering, in the context of a post-conver25

27 Luy, NJW 2019, 1905, 1906; Mückl, DB 2018, 2866; Hohenstatt/Müller-Bonanni in Habersack/Drinhausen (eds), SE-Recht (2nd edn, 2016), SEBG § 34, § 6; Habersack in Habersack/Henssler (eds), Mitbestimmungsrecht (4th edn, 2018), SEBG § 34, § 12 a. 28 BGH, 23.07.2019, DB 2019, 2120; OLG Frankfurt/M, 27.08.2018, DB 2018, 2488. 29 BGH, 23.07.2019, DB 2019, 2120.

466

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 m

sion operation, the same level of employee participation. After four years, the converted company will no longer be bound by the existing employee participation system in case of any conversion, merger or division, be it cross-border or domestic. It will, however, anyway be subject to the rules of Article 86 l, which may become applicable again as the case may be.

6. Communication of the outcome of negotiations Finally, Article 86 l (8) obliges the company to communicate to its employees or rep- 27 resentatives the outcome of the negotiations concerning employee participation without undue delay. From a legal practitioner’s point of view, the company shall take the communication lead but the messages to be communicated shall, as a matter of course, be agreed upfront with the special negotiation body.

Article 86 m Pre-conversion certificate 1. Member States shall designate the court, notary or other authority or authorities competent to scrutinise the legality of cross-border conversions as regards those parts of the procedure which are governed by the law of the departure Member State and to issue a pre-conversion certificate attesting to compliance with all relevant conditions and to the proper completion of all procedures and formalities in the departure Member State (’the competent authority’). Such completion of procedures and formalities may comprise the satisfaction or securing of pecuniary or non-pecuniary obligations due to public bodies or compliance with specific sectoral requirements, including securing obligations arising from ongoing proceedings. 2. Member States shall ensure that the application to obtain a pre-conversion certificate by the company is accompanied by the following: (a) the draft terms of the cross-border conversion; (b) the report and the appended opinion, if any, referred to in Article 86 e, as well as the report referred to in Article 86 f, where they are available; (c) any comments submitted in accordance with Article 86 g (1); and (d) information on the approval by the general meeting referred to in Article 86 h. 3. Member States may require that the application to obtain a pre-conversion certificate by the company is accompanied by additional information, such as, in particular: (a) the number of employees at the time of the drawing up of the draft terms of the cross-border conversion; (b) the existence of subsidiaries and their respective geographical location; (c) information regarding the satisfaction of obligations due to public bodies by the company. For the purposes of this paragraph, competent authorities may request such information, if not provided by the company, from other relevant authorities. 4. Member States shall ensure that the application referred to in paragraphs 2 and 3, including the submission of any information and documents, may be completed fully online without the necessity for the applicants to appear in person before the

Karsten Kühnle

467

Art 86 m Pre-conversion certificate competent authority, in accordance with the relevant provisions of Chapter III of Title I. 5. In respect of compliance with the rules concerning employee participation as laid down in Article 86 l, the competent authority of the departure Member State shall verify that the draft terms of the cross-border conversion include information on the procedures by which the relevant arrangements are determined and on the possible options for such arrangements. 6. As part of the scrutiny referred to in paragraph 1, the competent authority shall examine the following: (a) all documents and information submitted to the competent authority in accordance with paragraphs 2 and 3; (b) an indication by the company that the procedure referred to in Article 86 l (3) and (4) has started, where relevant. 7. Member States shall ensure that the scrutiny referred to in paragraph 1 is carried out within three months of the date of receipt of the documents and information concerning the approval of the cross-border conversion by the general meeting of the company. That scrutiny shall have one of the following outcomes: (a) where it is determined that the cross-border conversion complies with all the relevant conditions and that all necessary procedures and formalities have been completed, the competent authority shall issue the pre-conversion certificate; (b) where it is determined that the cross-border conversion does not comply with all the relevant conditions or that not all necessary procedures and formalities have been completed, the competent authority shall not issue the pre‐conversion certificate and shall inform the company of the reasons for its decision; in that case, the competent authority may give the company the opportunity to fulfil the relevant conditions or to complete the procedures and formalities within an appropriate period of time. 8. Member States shall ensure that the competent authority does not issue the pre‐ conversion certificate where it is determined in compliance with national law that a cross-border conversion is set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes. 9. Where the competent authority, during the scrutiny referred to in paragraph 1, has serious doubts indicating that the cross-border conversion is set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes, it shall take into consideration relevant facts and circumstances, such as, where relevant and not considered in isolation, indicative factors of which the competent authority has become aware, in the course of the scrutiny referred to in paragraph 1, including through consultation of relevant authorities. The assessment for the purposes of this paragraph shall be conducted on a case-by-case basis, through a procedure governed by national law. 10. Where it is necessary for the purposes of the assessment under paragraphs 8 and 9 to take into account additional information or to perform additional investigative activities, the period of three months provided for in paragraph 7 may be extended by a maximum of three months. 11. Where, due to the complexity of the cross-border procedure, it is not possible to carry out the assessment within the deadlines provided for in paragraphs 7 and 10,

468

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 m

Member States shall ensure that the applicant is notified of the reasons for any delay before the expiry of those deadlines. 12. Member States shall ensure that the competent authority may consult other relevant authorities with competence in the different fields concerned by the cross-border conversion, including those of the destination Member State, and obtain from those authorities and from the company information and documents necessary to scrutinise the legality of the cross-border conversion, within the procedural framework laid down in national law. For the purposes of the assessment, the competent authority may have recourse to an independent expert. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Development of the Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scrutiny Procedure in the Departure Member State . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Competent authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Scope of scrutiny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Relevant conditions, procedures and formalities . . . . . . . . . . . . . . . . . . . . . . . . . b) Documentation to be submitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Examination of documents and information submitted . . . . . . . . . . . . . . . . . IV. Timeline and potential outcomes of the scrutiny procedure . . . . . . . . . . . . . . . . . . 1. Refusal of the pre-conversion certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Combatting of abusive or fraudulent purposes . . . . . . . . . . . . . . . . . . . . . . . . . . b) Identification of abusive of fraudulent purposes . . . . . . . . . . . . . . . . . . . . . . . . . 2. Judicial review of the authority’s decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Issuance of the pre-conversion certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 5 6 7 7 10 13 15 19 19 21 25 27

I. Introduction As expressed by Recital (10) in more detail, the complexity of a cross-border opera- 1 tion demands to provide for the scrutiny of the legality of the cross-border operation before it takes effect; this is to provide legal certainty. The 2019 Directive establishes a two-step procedure to ensure the legality of the cross-border conversion.1 Article 86 m governs the first step, which entails scrutinising the legality of cross-border conversions as regards the parts of the procedure governed by the law of the departure Member State and issuing a pre-conversion certificate attesting compliance with all relevant conditions and the proper completion of all procedures and formalities in the departure Member State. The second step is governed by Article 86 n, which entails scrutinising the legality of the cross-border conversion as regards the part of the procedure governed by the law of the destination Member State and approving the cross-border conversion. The scrutiny procedure involves both the competent authorities in the departure 2 Member State and the destination Member State.2 This allocation of responsibilities does not mean that each authority operates in its national silo. Rather, they may consult each other as well as other relevant authorities with competence in the different fields concerned by the cross-border conversion (Article 86 m (11) and Recital (37)). Collaboration might involve interaction with, for example, tax authorities, social security providers, insolvency courts or, in exceptional cases, the public prosecutor’s 1 Based on Article 10 and Article 11 of the Cross-Border-Merger Directive and Articles 25, 26 of the SE-Regulation. 2 Marcus Lutter, Walter Bayer and Jessica Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), 1930; Schurr, EuZW 2019, 539; Moersdorf, EuZW 2019, 141, 143; Jens Bormann and Peter Stelmaszcyk: ‘Grenzüberschreitende Spaltungen und Formwechsel nach dem EU-Company Law Package’, ZIP, No. 355, 2019, 358.

Karsten Kühnle

469

Art 86 m Pre-conversion certificate office. In terms of sequence, the 2019 Directive translates what the ECJ emphasized in its VALE decision, namely that the implementation of a cross-border conversion requires the consecutive application of two national laws to that legal operation.3 The competent authority in the departure Member State will firstly scrutinize the legality of the crossborder conversion and, in case of compliance with all relevant conditions, procedures and formalities, issue a pre-conversion certificate. The certificate will hence evidence the legality of the cross-border conversion as far as compliance with the relevant conditions, procedures and formalities in the departure Member State is concerned. The competent authority in the departure Member State will, subsequently, transmit the preconversion certificate to the competent authority in the destination Member State. Once the pre-conversion certificate is issued, the company may “leave” the departure Member State.4 Finally, as a last step in the scrutiny procedure, the authority in the destination Member State will examine whether the converted company complies with provisions of national law on the incorporation and registration5 and that, where required, arrangements for employee participation have been made.

II. Development of the Provision Articles 86 m is based on Articles 5 et seq. of the Cross-Border Merger Directive. 6 The scrutiny procedure established thereunder constitutes a key element of what one commonly refers to as the European model for structural changes.7 Compared to the Commission Proposal, Article 86 m as finally adopted has received some modifications following intense discussions in the legislation procedure as far as a so-called “artificial arrangement” is concerned.8 Whilst some of the modifications are introduced for the sake of clarity, such as examples of competent authorities and an illustrative description of the procedures and formalities subject of the scrutiny procedure, others were introduced as a result of the henceforth more restricted role of the independent expert. The expert shall no longer be obliged to carry out a so called in-depth assessment to determine whether the intended cross-border conversion constitutes an artificial arrangement (Article 86 g and Article 86 n of the Commission Proposal) as an element of its expert report. It is fair to conclude that the substance and vigour of the scrutiny procedure as initially suggested by the Commission Proposal has been weakened by the revised role of the independent expert and the deletion of the explicit obligation to carry out an in-depth-assessment. As finally adopted, Article 86 m (12) gives the competent authority the possibility to engage an independent expert to assist in the scrutiny procedure. Unlike proposed by the Commission’s Proposal this is, however, not a mandatory element of the scrutiny procedure. 4 In terms of the timeline attached to complete the scrutiny procedure, the Commission’s Proposal suggested an initial scrutiny period of one month with an additional period of up to two months in case of an in-depth assessment becoming necessary (Article 86 n (2)) whilst Article 86 m (7) and (10) as finally adopted provides for an initial scrutiny period of up to three months and an option to extend that period by another maxi3

Case 378/10 VALE Építési kft. [2012] ECLI:EU:C:2012:440, § 44. Garcimartin/Gandia, ECFR 1-2/2019, 40. 5 Case 210/06 CARTESIO Oktató és Szolgáltató bt. [2008] ECR I-06941, §§ 106 et seq. 6 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies. 7 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017) §§ 22.100; Noack/Kraft, BB 2018, 1577, 1580. 8 See → Art 86 l.B and → Art 86 j.B. 3

4

470

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 m

mum of three months where the competent authority has serious doubts indicating that the cross-border conversion is set up for abusive, fraudulent or criminal purposes.

III. Scrutiny Procedure in the Departure Member State Article 86 m addresses a number of topics, namely the designation of the competent 5 authority, the authority’s obligation to scrutinize the legality of the cross-border conversion, the limitation of the authority’s jurisdictional reach to matters relevant under the laws of the departure Member State, the elements being part of the scrutiny procedure, and the issuance of a pre-conversion certificate. Further, the provision governs certain procedural aspects related to timing, collaboration with other authorities, and recourse to an independent expert.

1. Competent authority Member States shall designate the court, notary or other authority or authorities 6 competent to scrutinize the legality of cross-border conversions (Article 86 m (1)). From a German legal perspective, in line with existing practice for domestic conversions as well as cross-border mergers, the relevant commercial register, depending on the company’s registered office, will be competent.

2. Scope of scrutiny a) Relevant conditions, procedures and formalities The competent authority in the departure Member State shall scrutinize the legality 7 of the cross-border conversion. From a jurisdictional point of view, the authority in the departure Member State shall focus on the parts of the procedure governed by the law of the departure Member State. From a substance point of view, that means the components which the authority should actually take into account, there is not too much specific guidance in Article 86 m other than issuance of the certificate being subject to the company being in “… compliance with all relevant conditions and the proper completion of all procedures and formalities in the departure Member State …”.9 Some illustration on what compliance with all relevant conditions and the proper completion of all procedures and formalities may comprise can be taken from the 2nd paragraph of 1 of Article 86 m (1). Completion of procedures and formalities may comprise the satisfaction or securing of pecuniary or non-pecuniary obligations due to public bodies or compliance with specific sectoral requirements, including securing obligations arising from ongoing proceedings. It seems fair to question if these examples will not rather qualify as of conditional nature as securing of claims relates to protection of creditors, hence, to mandatory content of the draft-terms of cross-border conversion (point (f) of Article 86 d). In an attempt to curtail the authority’s scope of scrutiny, this will have to focus on, 8 firstly, compliance with all relevant conditions and, secondly, proper completion of all procedures and formalities in the departure Member State. But what are the “relevant conditions”? Neither Article 86 m nor the 2019 Directive give specific guidance on that. Instead, the explanatory memorandum to the Commission Proposal provides some substance. In the context of the competent authority assessing whether the cross-border 9 Stellungnahme des Deutschen Anwaltvereins durch den Ausschuss Handelsrecht, Stellungnahme Nr. 31/2018, July 2018, 21.

Karsten Kühnle

471

Art 86 m Pre-conversion certificate conversion is lawful10, it is explained that the authority would determine if all conditions for the cross-border conversion laid down in the Directive and in national law are fulfilled, including whether the company is solvent, the requisite majority of shareholders has approved the conversion at a general meeting and employees, minority shareholders and creditors are protected within the remit prescribed by the Directive. Looking at Chapter I of the 2019 Directive, additional conditions will be that the company concerned must be a limited liability company lawfully established under the laws of a Member State having its registered office, central administration or principal place of business within the Union; that the company may only convert into a limited liability company governed by the law of another Member State; and that the company must not be subject of any of the exclusions set out in Article 86 a. Additional conditions can be taken from Article 86 m. The draft terms of the cross-border conversion shall include information on the relevant procedures concerning employee participation and the possible options for such arrangements (Article 86 m (5)). The cross-border conversion must neither be set up for abusive or fraudulent purposes leading to or aiming at the evasion or circumvention of Union or national law nor for criminal purposes (86 m (9)). 9 Achieving legal certainty in terms of “compliance with all relevant conditions and proper completion of all procedures and formalities”, will be a key item for national legislators when implementing the 2019 Directive. Otherwise, disputes on what the competent authority is permitted to scrutinize and what not seem rather likely. From a German legal perspective, the mechanics applied when scrutinizing a cross-border merger11 may be used as a boilerplate. These mechanics involve an examination of both the substantive law and legal formalities12 and contain: the ability of the company to enter into a cross-border merger; the common draft terms of cross-border merger; proper publication of the common draft terms of cross-border merger; the management’s report, the independent expert’s report; the approval by the general meeting; the arrangements on employee participation, if any; and instruments for the protection of the company’s creditors. b) Documentation to be submitted The company’s application for issuance of the pre-conversion certificate will need to be supplemented by the following documentation: the draft terms of cross-border conversion pursuant to Article 86 d; the report of the company’s management for members and employees including any opinion received from representatives of employees or employees themselves pursuant to Article 86 e (7), if required; the report of the independent expert pursuant to Article 86 f, if required; any comments made by employees or their representatives pursuant to point (b) of Article 86 g (1); and, finally, information as to the member’s approval of the draft-terms of cross-border conversion pursuant to Article 86 h. 11 Member States have the option to request additional information from the company applying for a pre-conversion certificate (Article 86 m (3)) and may, if not provided by the company, request such information from other relevant authorities. Examples of additional information which may be required relate to: the number of employees at the time of drawing up the draft terms of cross-border conversion, which is obviously of rel10

COM(2018) 241, 15 et seq. Articles 122 b et seq. of the German Transformation Act; Lutter/Bayer/Schmitt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), §§ 22.103. 12 Marcus Lutter, Walter Bayer and Jessica Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017). 10

11

472

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 m

evance to the four-fifth rule13; the existence of subsidiaries and their respective geographical location, which is obviously relevant to the likely repercussions of the crossborder conversion on employment14; and information regarding the satisfaction of obligations due to public bodies which is obviously linked to protection of public creditors, for example, tax authorities, social security providers, municipalities and local governments which may have granted subsidies to the company. Other additional information requests, not given as examples in Article 86 m (3), may relate to the existence of branches or absence of legal action filed against the approval of the draft terms of cross-border conversion. It is evident that the Member State option gives room to bolster the substance of the legal scrutiny procedure with a view to, e.g., employee participation rights, protection of creditors, and prevention of misuse. Reality will show to which extent Member States will actually utilize the option. In terms of form requirements attached to the application for issuance of the pre- 12 conversion certificate and document submission, national law will be decisive. From a German legal perspective, the application will need to be signed by authorized representatives and signatures will require authorization by a German notary public. In terms of timing, the application can only be filed once the company’s members have approved the draft-terms of cross-border conversion in the general meeting. c) Examination of documents and information submitted The competent authority in the destination Member State shall examine all docu- 13 ments and information submitted (point (a) of Article 86 m (6)). This will mean that the competent authority will need to check whether the documentation is complete, the relevant conditions are fulfilled, and procedures and formalities have been complied with, which entails the formal satisfaction of the safeguards regarding employees, creditors and minority shareholders.15 Further, the competent authority shall examine the indication by the company that the negotiations with the special negotiation body have started, where relevant (point (b) of Article 86 m (6)). The latter, in turn, stipulates an (implied) obligation of the company to inform the competent authority of whether negotiations with the company’s employee representatives have been commenced. Specifically, in terms of creditor protection, the competent authority should be able to check in particular whether the company has fulfilled its obligations towards public creditors and whether any open obligations have been sufficiently secured (Recital (39)). In particular, the competent authority should be able to check whether the company is the subject of any ongoing court proceedings concerning, for example, infringement of social, labour or environmental law, the outcome of which might lead to further obligations being imposed on the company, including in respect of citizens and private entities (Recital (39)). The 2019 Directive reflects the ambition of the EU-legislator to establish efficient and 14 non-bureaucratic procedures. To this end, Member States shall ensure that the submission of any information and documents may be completed fully online without the necessity for the applicants to appear in person before the competent authority (Article 86 m (4)). When implementing Article 86 m (4) into national law, Member States will need to take into account Chapter III of Title 1 of the Directive which deals with disclosure and interconnection of central, commercial and companies registers.

See → Art 86 n. See → Art 86 n. 15 Garcimartin/Gandia, ECFR 1-2/2019, 15, 39. 13

14

Karsten Kühnle

473

Art 86 m Pre-conversion certificate

IV. Timeline and potential outcomes of the scrutiny procedure Article 86 m (7) focuses on two important items relevant for the scrutiny procedure in the departure Member State, namely, the scrutiny procedure’s standard timeline on the one hand and the possible outcomes of the scrutiny on the other hand. It requires Member States to ensure that the scrutiny of the legality of the cross-border conversion is carried out within three months (the Commission Proposal suggested one month instead) from receipt of the documents and information concerning the approval of the cross-border conversion by the general meeting of the company. More precisely, one would conclude that the three month’s timeline is triggered by the competent authority’s receipt of the company’s application for a pre-conversion certificate. Considering point (b) of Article 86 m (7) as well as paragraphs 10 and 11 of Article 86 m, it seems fair to say that the three months’ timeline is the standard timeline which may be subject to extension in the following three scenarios: 16 Firstly, in case of the company not being in compliance with the relevant conditions or a lack of completion of necessary procedures and formalities. In such case, the competent authority shall not issue the pre-conversion certificate and inform the company of the reasons for its decision. The competent authority “may” give the company the opportunity to fulfil the relevant conditions or to complete the procedures and formalities within an appropriate period of time (point (b) of Article 89 m (7). This can be interpreted as furnishing the competent authority with reasonable discretion when it comes to the decision as to whether an extension shall be granted or not. It seems fair to conclude that non-compliance with relevant conditions or lack of completion of necessary formalities which is capable of remedy will justify an appropriate extension, whereby incapability of remedying actions will justify a rejection. From a legal practitioner’s point of view, the company will be well advised to diligently prepare the application including supporting documentation, and coordinate with the competent authority in the departure Member State (and destination Member State) beforehand. Obtaining the preconversion certificate is a central milestone in transaction planning. 17 Secondly, the standard timeline may not be sufficient where the competent authority needs to carry out an in-depth examination by collecting additional information, for instance, from an independent expert or the competent authority in the destination Member State (Article 86 m (12)) or performing additional investigative activities (Article 86 m (10)). In such case, the competent authority shall be permitted to extend the standard period by a maximum of three additional months. 18 Thirdly, the standard timeline may be extended by the competent authority as a result of the complexity of the cross-border conversion (Article 86 m (11)). One has to admit that this is not explicitly stated in Article 86 m (11), which appears to address a notification obligation, but one can conclude this indirectly from the provision. Any cross-border operation is a complex operation per se, but there are, of course, scenarios where the documentation itself comprises dozens of pages, complex corporate structures, etc. In such cases, the competent authority must have the ability to take sufficient time for a diligent review – even beyond six months. Should the complexity lead to the standard timeline as well as the additional three months’ timeline being extended, Member States shall ensure that the applicant is informed of the reasons of any delay before the expiry of each of these deadlines. 15

474

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 m

1. Refusal of the pre-conversion certificate a) Combatting of abusive or fraudulent purposes Member States shall ensure that the competent authority does not issue the pre-con- 19 version certificate where it is determined in compliance with national law that a crossborder conversion is set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes (Article 86 m (8), (9)). In certain circumstances, the right of companies to carry out a crossborder operation could be used for abusive or fraudulent purposes, such as for the circumvention of the rights of employees, social security payments or tax obligations, or for criminal purposes. In particular, it is important to counteract “shell” or “front” companies set up for the purpose of evading, circumventing or infringing Union or national law (Recital (35)). The “Panama Papers” and “Paradise Papers” scandals actually uncovered the massive 20 and rampant abuse of letterbox companies for criminal purposes, mostly tax evasion and money-laundering.16 Putting this into context of the ECJ’s Polbud decision17, where the court held that the isolated transfer of the registered office (compared to a transfer of the principal place of business) to another Member State does not preclude freedom of establishment, the emphasis on fighting abusive, fraudulent or criminal purposes does not come as a surprise. Likewise, the ECJ’s Polbud decision has been subject to quite substantial criticism18, in particular, as the court ruled against the opinion of General Advocate Kokott19, who stressed that the concept of establishment as developed by the ECJ in the past involves the actual pursuit of an economic activity through a fixed establishment in the host Member State for an indefinite period. One the other hand, the court reiterated its previous reasoning that a Member State is free to define both the connecting factor required of a company if it is to be regarded as incorporated under its national law, and the connecting factor required to maintain that status.20 Such criteria imposed by national law may include a unity of both the registered office and the central administration in the same Member State.21 Ultimately, the Polbud decision of the ECJ leads to entrusting the Member State with the responsibility to avoid letterbox companies22 which, in the context of the 2019 Directive, puts the authority competent to scrutinize the cross-border conversion in charge. b) Identification of abusive of fraudulent purposes How can the competent authority identify if a cross-border conversion is set up 21 for abusive, fraudulent or criminal purposes? Recital (36) gives some guidance on the following facts and circumstances to take into account, whereby these should be considered only as indicative factors in the overall assessment and therefore should not be regarded in isolation: factors relating to the characteristics of the establishment in the Kieninger, ZEuP 2018, 309; Kindler, NZG 2018, 1. Case 106/16 Polbud – Wykonawstwo sp. z o.o. [2017] ECLI:EU:C2017:804; Szydlo, CML Review 55, 2018, 1549-1572; Paefgen, WM 2018, 1029-1041. 18 Kindler, ‘Unternehmensmobilität nach “Polbud”: Der grenzüberschreitende Formwechsel in Gestaltungspraxis und Rechtspolitik’, NZG 2018, 1 et seq.; Stelmaszczyk, ‘Grenzüberschreitender Formwechsel durch isolierte Verlegung des Satzungssitzes’, EuZW 2017, 890, 893. 19 Opinion of Advocate General Kokott delivered on 4 May 2017, §§ 34, 35, 43. 20 Case 106/16 Polbud – Wykonawstwo sp. z o.o. [2017] ECLI:EU:C2017:804, § 33. 21 For an SE, a unity of registered office and central administration in the same Member State is stipulated by Article 7 SE-Regulation. 22 Stelmaszczyk, ‘Grenzüberschreitender Formwechsel durch isolierte Verlegung des Satzungssitzes’, EuZW 2017, 890. 16

17

Karsten Kühnle

475

Art 86 m Pre-conversion certificate Member State in which the company or companies are to be registered after the crossborder operation, including the intention of the operation, the sector, the investment, the net turnover and profit or loss, the number of employees, the composition of the balance sheet, the tax residence, the assets and their location, equipment, the beneficial owners of the company, the habitual places of work of the employees and of specific groups of employees, the place where social contributions are due, the number of employees posted in the year prior to the cross-border operation; the number of employees working simultaneously in more than one Member State; the commercial risks assumed by the company or companies before and after the cross-border operation; employee participation rights, in particular as regards negotiations on such rights where those negotiations were triggered by reaching four fifths of the applicable national threshold. 22 Reflecting the above leads to conclude that analysing whether the cross-border conversion is set up for abusive, fraudulent, or criminal purposes, is a complex and challenging exercise. Identifying the particulars giving rise to assume that the conversion is motivated by abusive, fraudulent, or criminal purposes may well become a time-consuming effort going far beyond the resources generally available at the competent authority. Article 86 m (12), which essentially gives the competent authority the possibility to consult other relevant authorities (e.g., tax authorities, insolvency courts, social security providers, municipalities, public prosecutor’s office) as well as the right to engage an independent expert, will certainly be of help. Nevertheless, it seems fair to say that the competent authority will need to rely on external resources quite a lot and may be overstrained with certain complexities. 23 From a German legal perspective, the commercial register’s focus of scrutiny in the context of applications for registration is more on compliance with legal formalities. It is not of an investigative nature where digging into (camouflaged) details to reveal abusive, fraudulent, or criminal activity is required. Of course, there is collaboration between competent authorities, for instance, when a German limited liability company applies for deregistration in the context of a solvent liquidation procedure, the commercial register will typically liaise with the competent tax authority to check whether there are any unpaid tax bills without settlement of which, a deregistration will not happen. But, again, there is no automated investigative element attached to German commercial register practice and being obliged to conduct an in-depth legal scrutiny to reveal whether a cross-border conversion is driven by abusive, fraudulent, or criminal purposes, will be a new task to fulfil.23 Moreover, the 2019 Directive already contains certain mechanisms and requirements to protect members, employees, and creditors (Articles 86 i, 86 j, 86 k, 86 l) wherefore any abusive, fraudulent, or criminal purpose must go beyond the level of existing stakeholder protection.24 In essence, the 2019 Directive will lead to the commercial register increasingly coordinating with other domestic and foreign authorities, dealing with topics not necessarily in the commercial register’s traditional scope of scrutiny, and ultimately assuming responsibility for issuing the pre-conversion certificate. 24 On the “positive” side, i.e., looking for cross-border scenarios which the competent authority may – in the sense of a rule of thumb – consider as lawful, Recital (36) states the following: “The competent authority may consider that if the cross-border operation were to result in the company having its place of effective management or place of economic activity in the Member State in which the company or companies are to be registered after the cross-border operation, that would be an indication of 23 24

476

Brandi, BB 2018, 2626, 2633; Jochum/Hemmelrath, IStR 2019, 517, 521. Brandi, BB 2018, 2626, 2633.

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 m

an absence of circumstances leading to abuse or fraud.” Such recital requires careful reflection and should not result in an automatism to issue a pre-conversion certificate if the principal place of business is also transferred to the destination Member State. A cross-border conversion involving a transfer of the principal place of business to the destination Member State does not necessarily mean that there are no abusive, fraudulent or criminal purposes attached to this. In the context of the ECJ’s Polbud decision, where the court held that the isolated transfer of the registered office (compared to a transfer of the principal place of business) to another Member State does not preclude freedom of establishment, the recital quoted above appears like a tribute to those legal commentaries25 and the General Advocate26, who argued that the concept of establishment as developed by the ECJ in the past involves the actual pursuit of an economic activity through a fixed establishment in the host Member State for an indefinite period.

2. Judicial review of the authority’s decision The Commission Proposal explicitly proposed that Member States shall ensure that 25 the decision of the competent authority to issue or refuse to issue a pre-conversion certificate, is subject to judicial review in accordance with national law. In addition, Member States shall ensure that a pre-conversion certificate shall not be effective before the expiry of a certain period to allow parties to bring an action before the competent court and to obtain, where appropriate, interim measures (Article 86 o (1)). The 2019 Directive did not absorb such provision but expresses the same message in Recital (40). Member States should provide for procedural safeguards in line with the general principles of access to justice, including providing for the possibility of reviewing the decisions of the competent authorities in the proceedings concerning cross-border operations, the possibility of delaying the time when a pre-operation certificate takes effect in order to allow parties to bring an action before the competent court and the possibility of having interim measures granted, where appropriate (Recital (40)). From a German legal perspective, the mechanics contained in the German Transfor- 26 mation Act27 might address the situation when implementing Article 86 m into German law.28 These provisions require the company’s management, when applying for registration of a cross-border merger, to confirm vis-à-vis the competent commercial register that hat no action has been brought against the entry into force of a merger resolution, or that any action brought was not filed in due time or was dismissed by a ruling that has become final and conclusive, or that such action has been retracted; a court decision stating that the action having been filed against the merger does not contravene the entry of the merger in the commercial register shall be of the same effect as the confirmation by the company’s management.

3. Issuance of the pre-conversion certificate Where it is determined that the cross-border conversion complies with all the rele- 27 vant conditions and that all necessary procedures and formalities have been completed, the competent authority shall issue the pre-conversion certificate (point (a) of Article 86 m (7)). Form, format, and content of pre-conversion certificates still vary across Member States, which is not necessarily for the benefit of legal certainty. 29 A uniform Kindler, NZG 2018, 1, 3; Stelmaszcyk, EuZW 2017, 890, 893. Opinion of Advocate General Kokott delivered on 4 May 2017, §§ 34, 35, 43. 27 Sections 122 k, 16 (2),(3) German Transformation Act (UmwG). 28 Wicke, DStR 2018, 2703, 2705. 29 Bayer/Schmidt, BB 2019, 1922, 1930; J.Schmidt, DK 2018, 229, 243. 25

26

Karsten Kühnle

477

Art 86 n Transmission of the pre-conversion certificate template of the pre-conversion certificate which is applicable to all Member States would, therefore, be highly appreciated.30 28 Importantly, the pre-conversion certificate shall be accepted by the competent authority in the destination Member State as conclusively attesting to the proper completion of the applicable pre-conversion procedures and formalities in the departure Member State, without which the cross-border conversion cannot be approved (Article 86 o (5)). It should not be possible for the competent authorities of the Member State in which the company is to be registered after the cross-border operation to dispute the information provided by the pre-operation certificate (Recital (45)). On that basis, it seems fair to conclude that the competent authority in the destination Member State will rely on the examination of the legal scrutiny of the cross-border conversion as done by the authority in the departure Member State. Whether “conclusively attesting” still gives room for the authority in the destination Member State to contest the examination by the authority in the departure Member State remains debatable.31

Article 86 n Transmission of the pre-conversion certificate 1. Member States shall ensure that the pre-conversion certificate is shared with the authorities referred to in Article 86 o (1) through the system of interconnection of registers. Member States shall also ensure that the pre-conversion certificate is available through the system of interconnection of registers. 2. Access to the pre-conversion certificate shall be free of charge for the authorities referred to in Article 86 o (1) and for the registers. 1

Article 86 n focusses on ensuring efficiency by the use of digital tools and processes and creation of an appropriate level of transparency (Recital (43)). Member States are required to utilize the system of interconnection of registers for purposes of transmitting and granting public access to the pre-conversion certificate. The system 1 has been in operation since 2017 and is conceived as an electronic one-stop-shop in the area of justice across the European Union, Iceland, Liechtenstein and Norway. In accordance with the general principle underlying Directive (EU) 2017/1132, such exchange of information should always be free of charge. The EU-legislators focus on the use of digital tools is addressed by the Digitalization Directive2, which emphasises that the use of digital tools and processes to provide comprehensive and accessible information on companies, is one of the prerequisites for the effective functioning, modernisation and administrative streamlining of a competitive internal market and for ensuring the competitiveness and trustworthiness of companies (Recital (2) of the Digitalization Directive). This, in turn, will mean that the more traditional way of physical publication in national gazettes will become more and more redundant. From a German legal perspective, the comparably

30 J. Schmidt, ‘Cross-border mergers and divisions, transfers of seat: Is there a need to legislate?’, PE 556.960, 25. 31 Moersdorf, EuZW 2019, 141; different view: Noack, BB 2018, 1577, 1578; J. Schmid, Der Konzern 2018, 229, 243. 1 Bock, GmbHR 2018, 281; Sattler, BB 2018, 2243. 2 Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law. See Lieder, NZG 2019, 1081 et seq.; Schurr, EuZW 2019, 772 et seq.

478

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 o

complex and burdensome dichotomy of traditional physical publication in the German Federal Gazette and the online commercial register will likely be dissolved.3

Article 86 o Scrutiny of the legality of the cross-border conversion by the destination Member State 1. Member States shall designate the court, notary or other authority competent to scrutinise the legality of the cross-border conversion as regards that part of the procedure which is governed by the law of the destination Member State and to approve the cross-border conversion. That authority shall in particular ensure that the converted company complies with provisions of national law on the incorporation and registration of companies and, where appropriate, that arrangements for employee participation have been determined in accordance with Article 86 l. 2. For the purposes of paragraph 1 of this Article, the company shall submit to the authority referred to in paragraph 1 of this Article the draft terms of the cross-border conversion approved by the general meeting referred to in Article 86 h. 3. Each Member State shall ensure that any application for the purposes of paragraph 1, by the company, including the submission of any information and documents, may be completed fully online without the necessity for the applicants to appear in person before the authority referred to in paragraph 1, in accordance with the relevant provisions of Chapter III of Title I. 4. The authority referred to in paragraph 1 shall approve the cross-border conversion as soon as it has determined that all relevant conditions have been properly fulfilled and formalities properly completed in the destination Member State. 5. The pre-conversion certificate shall be accepted by the authority referred to in paragraph 1 as conclusively attesting to the proper completion of the applicable pre‐conversion procedures and formalities in the departure Member State, without which the cross-border conversion cannot be approved. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Development of the Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scrutiny Procedure in the Destination Member State . . . . . . . . . . . . . . . . . . . . . . . . 1. Competent authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Scope of scrutiny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Conditions for incorporation and registration of the company . . . . . . . . . . b) Arrangements on employee participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Documentation to be submitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Timeline of the scrutiny procedure in the destination Member State . . . . . 4. Acceptance of the pre-conversion certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4 5 5 8 9 10 11

I. Introduction Like Article 86 m, Article 86 o focusses on ensuring the legality of the cross-border 1 conversion. The provision sets the rules for the second step of the two-step scrutiny procedure1 whereby the lead and responsibility for the second step of the procedure is Bayer/Schmidt, BB 2019, 1922, 1924; Birkefeld/Schäfer, BB 2019, 2626, 2630. See → Art 86 n A; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), §§ 23.91 et seq. 3

1

Karsten Kühnle

479

Art 86 o Scrutiny of the legality of the cross-border conversion by the destination Member State now with the competent authority in the destination Member State. The carrying out of a cross-border conversion entails a change of the legal form of a company without that company losing its legal personality but must not be used to circumvent the requirements for incorporation of the company in the destination Member State by using the cross-border conversion to opt-out2 of incorporation requirements. Conditions established by the destination Member State for incorporation, including the requirements to have the head office in the destination Member State and those relating to the disqualification of directors, should be fully respected by the company but should not affect the continuity of the converted company’s legal personality (Recital 44).

II. Development of the Provision 2

Article 86 o has not been subject to material change during the legislative process.

III. Scrutiny Procedure in the Destination Member State 3

Article 86 o addresses the designation of the competent authority, the authority’s obligation to scrutinize the legality of the cross-border conversion, the limitation of the authority’s jurisdictional reach to matters relevant under the laws of the destination Member State, the elements being part of the scrutiny procedure, and the approval of the cross-border conversion. Further, the provision governs certain procedural aspects related to collaboration with the competent authority in the departure Member State authorities and the use of digital tools to submit the application for approval of the cross-border conversion as well as supporting documentation online.

1. Competent authority 4

Like Article 86 m (1), Article 86 o (1) requires Member States to designate the court, notary or other authority or authorities competent to scrutinize the legality of the cross-border conversion. From a German legal perspective, in line with existing practice for domestic conversions as well as cross-border mergers, the commercial register, depending on the domiciliation of the company’s registered office, will be competent for an inbound conversion.

2. Scope of scrutiny a) Conditions for incorporation and registration of the company 5

The competent authority in the destination Member State shall scrutinize the legality of the cross-border conversion. From a jurisdictional point of view, the authority in the destination Member State shall focus on the those parts of the procedure which are governed by the law of the destination Member State. Similar to Article 86 m, Article 86 o (1) does not contain a comprehensive and all-embracing description of the scrutiny procedure’s components. Rather, it requires the competent authority to – in particular – ensure that the converted company complies with provisions of national law on the incorporation and registration of companies and, where appropriate, that arrangements for employee participation have been determined in accordance with Article 86 l. The wording “in particular” gives Member States leeway to impose additional re2 Schreiben Deutscher Notarverein vom 4. Juli 2018 an das Bundesministerium der Justiz und für Verbraucherschutz, 40.

480

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 o

quirements, e.g., registration with tax authorities, trade authorities, etc., provided that these requirements do not violate freedom of establishment. In terms of compliance with incorporation requirements, the competent authority 6 will need to examine the draft terms of the cross-border conversion as approved by the general meeting. To this end, the company shall submit the draft terms to the competent authority whereby Member States shall ensure that such submission may be completed fully online without necessity to appear in person (Article 86 o (2), (3)). Pursuant to point (b) of Article 86 d, the draft terms of the cross-border conversion shall include information as to the legal form and name proposed for the converted company in the destination Member State, the proposed location of its registered office in that Member State (point (b)) and, pursuant to point (c) of Article 86 d, the instrument of constitution of the company in the destination Member State, where applicable, and the statutes if they are contained in a separate instrument. On that basis, the competent authority in the destination Member State will be able to examine whether the requirements for incorporation in the destination Member State are met, e.g. minimum registered share capital, statutory components of the company’s statutes, rules of representation, qualification of directors, permissible company name, just to name a few. Importantly, as expressed in Recital (44) and based on the ECJ’s judicature3 that a 7 Member State unquestionably has the power to define the connecting factor required of a company if it is to be regarded as incorporated under its national law, the destination Member State may request the company to have its head office (and the registered office) in the destination Member State. From a legal practitioner’s point of view, this is one of the most important decision making criteria when it comes to planning the cross-border conversion. The efforts attached to a cross-border conversion into a destination Member State requiring that both the statutory seat (registered office) of the company and its head office be in the destination Member State are significantly higher compared to a cross-border conversion involving an isolated transfer of the company’s registered office only. From a legal dogmatic perspective, this boils down to whether the targeted destination Member State applies the real-seat doctrine compared to the incorporation doctrine.4 Member States applying the real-seat doctrine5 include Belgium, Denmark, France, Luxembourg, Austria, Poland, Portugal, Slovenia, and Spain. Member States applying the incorporation doctrine include Bulgaria, the Netherlands, Romania, and the Czech Republic.6 b) Arrangements on employee participation Where the company will be subject to employee participation in the destination 8 Member State 7, the competent authority in the destination Member State shall in particular ensure that arrangements for employee participation have been determined in accordance with Article 86 l (Article 86 o (1) 2nd paragraph). The 2019 Directive does not provide for an explicit confirmation by the company that the arrangements on employee participation have been determined. However, to the extent that the company will be subject to employee participation, the company’s statutes will typically reflect this Case 210/06 CARTESIO Oktató és Szolgáltató bt. [2008] ECR I-06941, §§ 106 et seq. Kindler in Münchener Kommentar zum BGB (7th edn, 2018), 10, Internationales Handels- und Gesellschaftsrecht, §§ 358 et seq. 5 Kindler in Münchener Kommentar zum BGB (7th edn, 2018), 10 Internationales Handels- und Gesellschaftsrecht, §§ 508-512. 6 Kindler in Münchener Kommentar zum BGB (7th edn, 2018), 10 Internationales Handels- und Gesellschaftsrecht, §§ 508-512. 7 See → Art 86 l. 3

4

Karsten Kühnle

481

Art 86 o Scrutiny of the legality of the cross-border conversion by the destination Member State at those sections relative to management, control and supervision. The application for registration of the company in the destination Member State will typically need to enumerate all directors, members of a supervisory or administrative board, and national law may require a separate publication of the composition of the company’s supervisory or administrative board including those members representing the company’s employees. That said, the competent authority should in principle be able to conclude from the draft terms of the cross-border conversion whether the company will be subject to employeeparticipation in the destination Member State. Whether the arrangements on employee participation have actually been determined should nevertheless be part of the administrative or management body’s application for approval of the cross-border conversion by the competent authority in the destination Member State. From a German legal perspective, the application by the company’s management for registration of a cross-border merger, must be supplemented by the agreement, if any, on the arrangements for employee participation in the absorbing company.8 c) Documentation to be submitted 9

The company’s application for approval of the cross-border conversion will need to be supplemented by the draft terms of cross-border conversion (Article 86 o (2)). The preconversion certificate issued by the competent authority in the departure Member State will be shared with the competent authority in the destination Member State through the system of interconnection of registers (Article 86 n). Unlike the competent authority in the departure Member State (Article 86 m (3)), there is no Member State option permitting the competent authority in the destination Member State to request additional information from the company for purposes of the scrutiny procedure. This is certainly linked to the binding nature of the pre-conversion certificate which shall be accepted by the authority in the destination Member State as conclusively attesting to the proper completion of the applicable pre-conversion procedures and formalities in the departure Member State, without which the cross-border conversion cannot be approved (Article 86 o (4)).

3. Timeline of the scrutiny procedure in the destination Member State 10

Article 86 o does not stipulate a timeline for the scrutiny procedure in the destination Member State. It requires the competent authority to approve the cross-border conversion as soon as it has determined that all relevant conditions have been properly fulfilled and formalities have been properly completed (Article 86 o (4)). From a legal practitioner’s point of view, timing typically depends on the duration of the scrutiny procedure in the departure Member State, the quality and completeness of all information and documentation required for incorporation of the company (as converted company) in the destination Member State, and, if applicable, the time required to reach an agreement with the special negotiation body on the arrangements for employee participation in the converted company. Setting a fixed timeline for the scrutiny procedure in the destination Member State would therefore be rather contradictory for both the competent authority and the company. The competent authority in the destination Member State must not approve the cross-border conversion unless the scrutiny procedures in both the departure Member State and the destination Member State have been carried out (Article 86 q). Importantly, as can be taken from Recital (33), the competent authorities 8 Article 122 l of the German Transformation Act (UmwG); see Hörtnagl in Schmitt/Hörtnagl/Stratz (8th edn, 2018), UmwG § 122 l §§ 1-16.

482

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 p

of the Member States of the company or companies resulting from the cross-border operation should not be able to approve the cross-border operation without issuance of the pre-conversion certificate. Situations where the authority in the destination Member State registered the company absent receipt of a pre-merger certificate should henceforth no longer occur.9

4. Acceptance of the pre-conversion certificate Article 86 o (5) stipulates that the pre-conversion certificate shall be accepted by the 11 competent authority in the destination Member State as conclusively attesting to the proper completion of the applicable pre-conversion procedures and formalities in the departure Member State. On that basis, it seems fair to conclude that the competent authority in the destination Member State will rely on the examination of the legal scrutiny of the cross-border conversion as does the authority in the departure Member State. This is clearly expressed in Recital (45), which states that it should not be possible for the competent authorities of the Member State in which the company is to be registered after the cross-border operation to dispute the information provided by the pre-operation certificate. Whether “conclusively attesting” still gives room for the authority in the destination Member State to contest the examination by the authority in the departure Member State remains debatable. From a legal certainty point of view, one would certainly need to accept the decision rendered by the competent authority in the departure Member State as legally binding unless a violation of Union and national law, respectively, is evident.

Article 86 p Registration 1. The laws of the departure Member State and of the destination Member State shall determine, with regard to their respective territories, the arrangements, in accordance with Article 16, for disclosing the completion of the cross-border conversion in their registers. 2. Member States shall ensure that at least the following information is entered in their registers: (a) in the register of the destination Member State, that the registration of the converted company is the result of a cross-border conversion; (b) in the register of the destination Member State, the date of registration of the converted company; (c) in the register of the departure Member State, that the striking off or removal of the company from the register is the result of a cross-border conversion; (d) in the register of the departure Member State, the date of striking off or removal of the company from the register; (e) in the registers of the departure Member State and of the destination Member State, respectively, the registration number, name and legal form of the company and the registration number, name and legal form of the converted company. The registers shall make the information referred to in the first subparagraph publicly available and accessible through the system of interconnection of registers. 9 Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’, GmbHR No. 2, 2020, 71.

Karsten Kühnle

483

Art 86 p Registration 3. Member States shall ensure that the register in the destination Member State notifies the register in the departure Member State, through the system of interconnection of registers, that the cross-border conversion has taken effect. Member States shall also ensure that the registration of the company is struck off or removed from the register immediately upon receipt of that notification. Article 86 p addresses disclosure of the completion of the cross-border conversion in both the register of the departure Member State and the destination Member State. The provision requires Member States to ensure that at least certain minimum information shall be entered into the registers of the Member States involved. This will result in the generation of a harmonized level of registration details across Member States, which is for the benefit of legal certainty and access to relevant registration data. Further, the provision establishes the sequence of registration in the Member States involved. This, in turn, will result in harmonized registration procedures, which is for the benefit of organizational efficiency. 2 The registration process contemplated by Article 86 p can be described as follows: 1 after the scrutiny procedures have been carried out in both the departure Member State and the destination Member State (Article 86 q), the register in the destination Member State shall approve, that means register the cross-border conversion. The information to be registered in the register of the destination Member State shall contain at least the following: that the registration of the converted company is the result of a cross-border conversion, the date of registration of the converted company, and the registration number, name and legal form of the converted company. Thereafter, the register in the destination Member State shall notify the register in the departure Member State through the system of interconnection of registers that the cross-border conversion has taken effect. Immediately upon receipt of such information, the register in the departure Member State shall register at least the following information: that the striking off or removal of the company from the register is the result of a cross-border conversion, the date of striking off or removal of the company from the register, and the registration number, name and legal form of the company. 3 Importantly, the register in the destination Member State must not approve the cross-border conversion, that means register the cross-border conversion, without prior issuance of the pre-conversion certificate by the competent authority in the departure Member State.2 Such condition is not explicitly contained in Article 86 p but can be derived from Article 86 o (5) which states that the cross-border conversion cannot be approved without the pre-conversion certificate. Further, the register in the departure Member State must not strikeoff the company before receipt of the notification through the system of interconnection of registers that the cross-border conversion has taken effect. 4 Entering of the registration number, name and legal form of the company and converted company, respectively, in the respective register, is required to help tracking the corporate history of the company across Member States (Recital (46)). 1

1 Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, OJ L 321/1, Recital 45. 2 Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’, GmbHR No. 2, 2020, 70.

484

Karsten Kühnle

Art 86 r

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Article 86 q Date on which the cross-border conversion takes effect The law of the destination Member State shall determine the date on which the cross‐ border conversion takes effect. That date shall be after the scrutiny referred to in Articles 86 m and 86 o has been carried out. The provision focusses on achieving clarity in terms of the effective date of the cross- 1 border conversion. Such date shall be determined by the destination Member State and shall be a date after the scrutiny of the cross-border conversion has been carried out in both the departure and the destination Member State. Registration of the cross-border conversion will, therefore, have constitutive effect. Presumably, the decisive date will correspond to the date which shall be registered as the date of registration of the converted company in the destination Member State (point (b) Article 86 p (2)). From a legal practitioner’s point of view, it will be of importance to keep good contact to both the register in the destination Member State and the departure Member State to keep track on the scrutiny and registration process (such that the indicative timetable can be complied with in the interest of the company and certain post-conversion actions, for instance, updates to business addresses, letterheads, etc., can be arranged for.).

Article 86 r Consequences of a cross-border conversion A cross-border conversion shall, from the date referred to in Article 86 q, have the following consequences: (a) all the assets and liabilities of the company, including all contracts, credits, rights and obligations, shall be those of the converted company; (b) the members of the company shall continue to be members of the converted company, unless they have disposed of their shares as referred to in Article 86 i (1); (c) the rights and obligations of the company arising from contracts of employment or from employment relationships and existing at the date on which the crossborder conversion takes effect shall be those of the converted company. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Development of the Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Continuity of the Company’s Legal Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Certain Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 4

I. Introduction Article 86 r stipulates the consequences of the cross-border conversion taking ef- 1 fect. All the assets and liabilities of the company, including all contracts, credits, rights and obligations, shall be those of the converted company; the members of the company shall continue to be members of the converted company, unless they have disposed of their shares; and the rights and obligations of the company arising from contracts of employment or from employment relationships and existing at the date on which the crossborder conversion takes effect shall be those of the converted company. Once the cross-

Karsten Kühnle

485

Art 86 r Consequences of a cross-border conversion border conversion has taken effect in compliance with the requirements imposed under the 2019 Directive, it may not be declared null and void (Article 86 t).

II. Development of the Provision 2

The Commission Proposal misleadingly described the consequences of the cross-border conversion as a kind of transfer of assets and liabilities. All the assets and liabilities of the company carrying out the cross-border conversion including all contracts, credits, rights and obligations shall be transferred to and shall continue with the converted company (Article 86 s). Obviously, such description is technically incorrect as the company keeps its legal personality, there is no “transfer” of asset and liabilities.1

III. Continuity of the Company’s Legal Affairs 3

The key characteristics of a conversion are the continuity of the company’s legal identity, economic asset-base, and rights’ of third parties.2 Article 86 r reflects this and the fact that the conversion does not result in any kind of dissolution of the company. In contrast, the company only alters its “legal clothes”, it does not cease to be exactly the same, continuously existing, subject of law; nor is there any interruption in its activities and legal relations.3

IV. Certain Exceptions 4

Certain limited exceptions of such continuity exist, for instance, where an administrative permit or operation license given to the company is attached to the company’s specific legal form.4 In such case, renewal of the permit or license might be required under relevant national law and the law of the destination Member State, respectively. There is no continuity in terms of the offices of corporate bodies in the converted company.5 The change of the lex societatis entails incorporation of the company in the legal form as converted in accordance with the rules of the destination Member State. Upon effectiveness of the cross-border conversion, an office as, for instance, administrative or management body of the company will cease to exist and the relevant individuals will be newly appointed to their respective office (as part of the instrument of constitution and statutes, respectively) and registered as corporate body in the register of the destination Member State. A corporate body’s underlying service agreement with the company remains unchanged but, typically, entitles the corporate body to termination of the agreement.

Garcimartin/Gandia, ECFR 1-2/2019, 15, 40. Markus Althoff/Patrick Narr in Böttcher/Habighorst/Schulte (eds), Umwandlungsrecht (2nd edn, 2019), § 202, §§ 4 et seq. 3 Mörsdorf, ‘The legal mobility of companies within the European Union through cross-border conversion’, 49 CML Rv. (2012), 629-670, 630-631, 637-638. 4 Leonard in Semler/Stengel (4th edn, 2017), UmwG § 202, §§ 12-17. 5 Markus Althoff/Patrick Narr in Böttcher/Habighorst/Schulte (eds), Umwandlungsrecht (2nd edn, 2019), § 202, §§ 4 et seq. 1

2

486

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 s

Article 86 s Independent experts 1. Member States shall lay down rules governing at least the civil liability of the independent expert responsible for drawing up the report referred to in Article 86 f. 2. Member States shall have rules in place to ensure that: (a) the expert, or the legal person on whose behalf the expert is operating, is independent from and has no conflict of interest with the company applying for the pre-conversion certificate; and (b) the expert’s opinion is impartial and objective, and is given with a view to providing assistance to the competent authority in accordance with the independence and impartiality requirements under the law and professional standards to which the expert is subject. I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Development of the Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Liability of the Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Civil liability vis-à-vis the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Civil liability vis-à-vis members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Civil liability vis-à-vis the company’s employees and creditors . . . . . . . . . . . . IV. Independence of the Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 4 5 6 7 8

I. Introduction Article 86 s addresses the independent expert’s civil liability and the expert’s inde- 1 pendence from the company. The provision ties into Article 86 f, which requests that the independent expert shall draw up a report addressed to the company’s members. 1 Mandatory key element of the report is the expert’s opinion as to whether the cash compensation offered by the company to members opposing to the draft terms of the crossborder conversion is adequate (Article 86 f (2)). The independent expert’s report shall at least: indicate the method or methods used to determine the cash compensation proposed; state whether the method or methods used are adequate for the assessment of the cash compensation; indicate the value arrived at using such methods and give an opinion on the relative importance attributed to those methods in arriving at the value decided on; and describe any special valuation difficulties which have arisen (points (a) and (b) of Article 86 f (2)). It is evident from the above, that the 2019 Directive entrusts the independent expert with a key role in the context of determining the adequacy of the cash compensation offered by the company to members opposing to the draft terms of the cross-border conversion. Article 86 s reflects the importance of the independent expert’s report from a liability 2 perspective. Clearly, the company as contractual partner of the independent expert will want to rely on the report and, most importantly, on the statements made by the independent expert on the valuation of the company, the adequacy of the cash compensation proposed, and the methods used for purposes of the valuation. Should these turn out to be wrong and the company and/or its member’s be able to demonstrate damages suffered as a result of the independent expert’s assessment, they may want to take legal action against the independent expert. 1 Unless waived by all members or not required for reasons of a single-member structure, see → Art 86 f.

Karsten Kühnle

487

Art 86 s Independent experts

II. Development of the Provision 3

Member States shall lay down rules governing at least the civil liability of the independent expert responsible for drawing up the report to members (Article 86 s (1)). In essence, that wording of the Commission Proposal has been the same as far as rules governing the civil liability of the independent expert are concerned. In addition, the Commission Proposal referred to misconduct by the expert in the performance of its duties and, more importantly from a liability perspective, proposed that creditors of the company shall be presumed not to be prejudiced by the cross-border conversion, where the company discloses together with the draft terms of conversion an independent expert report, which concluded that there is no reasonable likelihood that the rights of creditors would be unduly prejudiced (point (a) of Article 86 k (3)). The rules on creditor protection as supposed by the Commission Proposal were not adopted by the 2019 Directive, hence the role (and potential liability) of the expert was reduced as far as creditors of the company are concerned.2 The Presidency compromise proposal3 suggested the deletion of the provision in its entirety but, ultimately, the provision was reintroduced, taking into consideration that national legislation (at least in some Member States) already regulates these aspects which should be sufficient and remain applicable. 4

III. Liability of the Expert 4

Article 86 s states that Member States shall lay down rules governing “at least the civil liability” of the independent expert. Whilst it is clear from the provision’s wording that Member State shall establish rules governing the civil liability of the expert, it is not clear to which extent other sources of liability, for example administrative, professional, or criminal liability can be encompassed thereunder. The term “at least” seem to permit for other grounds of liability as well such that a certain element of legal uncertainty is attached thereto.5

1. Civil liability vis-à-vis the company 5

Without doubt, the independent expert and the company will enter into an advisory agreement to govern the obligations of the company and the expert for purposes of preparing the independent expert report. A potential violation of the expert’s obligations under the agreement will therefore be governed by the respective agreement, which may well include exclusions and limitations of the expert’s liability.

2. Civil liability vis-à-vis members 6

Whether a violation of the expert’s obligations vis-à-vis the company will entitle members of the company who voted against the draft terms of the cross-border conversion and disposed of their shares against cash consideration, which in the expert’s opinion is adequate, to claim damages from the expert will depend on national law of the Member States unless the expert granted reliance on the report or elements See → Art 86 j. See: http://data.consilium.europa.eu/doc/document/ST-15678-2018-INIT/EN/pdf, last accessed 16 April 2020. 4 See: http://data.consilium.europa.eu/doc/document/ST-5401-2019-INIT/EN/pdf, last accessed 16 April 2020. 5 Bayer/Schmidt, BB 2019, 1922, 1929. 2

3

488

Karsten Kühnle

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 t

thereof. Reliance could be granted by the expert to the company’s members by means of a separate reliance letter and reliance agreement, respectively. This would typically result in the liability regime crated under the advisory agreement (including exclusions and limitations) being applicable towards the company’s members. Where no reliance is given by the expert, national law will be decisive for such liability of the expert. At least from a German legal perspective, a liability of the expert vis-à-vis the company’s members might be given if the prerequisites of an agreement for the benefit of a third party 6 are met.

3. Civil liability vis-à-vis the company’s employees and creditors The 2019 Directive does neither establish a liability of the independent expert vis- 7 à-vis the company’s employees nor the company’s creditors. The expert’s liability under Article 86 s is attached to the expert being engaged by the company to draw up the report to members pursuant to Article 86 f. The concept supposed by the Commission Proposal (point (a) of Article 86 k (3)) which had advocated a liability of the independent expert vis-à-vis creditors as well, has not been adopted by the 2019 Directive.

IV. Independence of the Expert Article 86 s (2) focusses on ensuring independence of the expert. 7 Firstly, the inde- 8 pendent expert shall be independent from and have no conflict of interest with the company. Secondly, the expert’s opinion shall be impartial and objective. Further, point (b) of Article 86 s (2) states that the expert’s opinion is given with a view to “providing assistance to the competent authority”. Such focus seems rather questionable as the report is addressed to the company and not the competent authority. One might conclude that the wording “providing assistance to the competent authority” was linked to the initial concept of the independent expert’s report forming the basis for the competent authority’s assessment whether the cross-border conversion constitutes an abuse by means of an artificial arrangement. Such concept, however, was not adopted by the 2019 Directive.

Article 86 t Validity A cross-border conversion which has taken effect in compliance with the procedures transposing this Directive may not be declared null and void. The first paragraph does not affect Member States’ powers, inter alia, in relation to criminal law, the prevention and combatting of terrorist financing, social law, taxation and law enforcement, to impose measures and penalties, under national law, after the date on which the cross-border conversion took effect. Article 86 t aims at grandfathering of the cross-border conversion for the benefit of 1 the company, its members, employees and creditors. Once the cross-border conversion has been approved, that means registered by the competent authority in the destination Member State1, it may not be declared null and void. Importantly, grandfathering of 6 So called “Vertrag mit Schutzwirkung zugunsten Dritter” – see Gottwald in Münchener Kommentar zum Bürgerlichen Gesetzbuch (8th edn, 2019), BGB § 328, §§ 170-175. 7 See → Art 86 f.

Karsten Kühnle

489

Art 86 t Validity the cross-border conversion does not restrict the Member States’ powers, inter alia, in relation to criminal law, the prevention and combatting of terrorist financing, social law, taxation and law enforcement, to impose measures and penalties, under national law, after the date on which the cross-border conversion has taken effect.

CHAPTER I MERGERS OF PUBLIC LIMITED LIABILITY COMPANIES Section 1 General provisions on mergers Table of European Union Legislation DIRECTIVES First Council Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European company (SE) Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies Directive 2009/109/EC of 16 September 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions Directive 2010/42/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure. Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies Directive 2012/17/EU of 13 June 2012 amending Council Directive 89/666/EEC and Directives 2005/56/EC and 2009/101/EC of the European Parliament and of the Council as regards the interconnection of central, commercial and company registers (BRIS) 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council. Commission Implementing Regulation (EU) 2015/884 of 8 June 2015 establishing technical specifications and procedures required for the system of interconnection of registers established by Directive 2009/101/EC of the European Parliament and of the Council (BRIS)

1

490

See → Art 86 o and Art 86 p.

Tobias de Raet

Art 86 t Validity the cross-border conversion does not restrict the Member States’ powers, inter alia, in relation to criminal law, the prevention and combatting of terrorist financing, social law, taxation and law enforcement, to impose measures and penalties, under national law, after the date on which the cross-border conversion has taken effect.

CHAPTER I MERGERS OF PUBLIC LIMITED LIABILITY COMPANIES Section 1 General provisions on mergers Table of European Union Legislation DIRECTIVES First Council Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European company (SE) Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies Directive 2009/109/EC of 16 September 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions Directive 2010/42/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure. Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies Directive 2012/17/EU of 13 June 2012 amending Council Directive 89/666/EEC and Directives 2005/56/EC and 2009/101/EC of the European Parliament and of the Council as regards the interconnection of central, commercial and company registers (BRIS) 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 and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council. Commission Implementing Regulation (EU) 2015/884 of 8 June 2015 establishing technical specifications and procedures required for the system of interconnection of registers established by Directive 2009/101/EC of the European Parliament and of the Council (BRIS)

1

490

See → Art 86 o and Art 86 p.

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 t

OFFICIAL DOCUMENTS FROM EU INSTITUTIONS Mémorandum de la Commission de la Communauté Economique Européenne sur la concentration dans le Marché Commun’ (1966) 4 Revue trimestrielle de droit européen, 651 (654) Preliminary draft of the Convention on the international merger of sociétés anonymes of 1967 (Doc. 16082/IV/67-F) Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Doc. 11409/2/XIV/C/68 – F) Preliminary draft of the Convention on the international merger of sociétés anonymes of 1969 (Doc. 5873/XIV/69-F) Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) Draft Convention on the international merger of sociétés anonymes, Doc. 529/XIV/72 = Bulletin of the European Community Supplement 13/73 = Kommission der Europäischen Gemeinschaften, ‘Entwurf eines Übereinkommens über die internationale Verschmelzung von Aktiengesellschaften’ (1975) 39 Rabels Zeitschrift für ausländisches und internationales Privatrecht (RabelsZ), 539 Communication from the Commission, Bulletin of the European Community, 29.6.1973, Supplement 13/73 (http://aei.pitt.edu/5613/), p. 3 Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73, p. 9 Goldmann, Report on the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73 (http://aei.pitt.edu/5613/), p. 120 Ratsprotokoll (Statement in the Council minutes), Doc. R 2337/78 of 5.10.1978 Proposal for a Tenth Council Directive based on Article 54(3)(g) of the EEC Treaty concerning cross-border mergers of public limited companies, COM(84) 727 final, 14.1.1985 Opinion of the Economic and Social Committee on the proposal for a 10th Council Directive based on Article 54(3) (g) of the treaty concerning cross-border mergers of public limited companies, OJ C 303, 25.11.85, p. 27 ‘Richtlinienvorentwurf zur Verlegung des Gesellschaftssitzes innerhalb der EU’ (1997) Zeitschrift für Wirtschaftsrecht (ZIP), 1721 Proposal of a Council Regulation on the Statute for a European Company (SE), 1.2.2001, Doc. 14886/00 Corrigendum, COM(2001) 763 final, 21.12.2001 Communication from the Commission, Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward, 21.5.2003, COM(2003) 284 final. Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003 Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital’, OJ C 117, 30.4.2004, p. 43 Council of the European Union, Working Doc. 9294/04, 6.5.2004 Council of the European Union, Report, Doc. 10934/04, 30.6.2004 Council of the European Union, Working Document, Proposal for a Directive of the European Parliament and of the Council on cross-border mergers with share capital, Doc. 7068/04, 11.03.2004

Tobias de Raet

491

Art 86 t Validity Council of the European Union, Working Doc. 11655/04, 27.6.2004 Council of the European Union, Working Doc. 13133/04, 8.10.2004 Committee on Legal Affairs, Report on the proposal for a directive of the European Parliament and of the Council on cross-border mergers of companies with share capital, A6-0089/2005 final, 25.4.2005 Council of the European Union, Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital – Outcome of the European Parliament’s first reading (Strasbourg, 9 to 12 May 2005), 13.5.2005, Doc. 8728/05 Decision of the EEA Joint Committee No 127/2006 of 22.9.2006 amending Annex XXII (Company law) to the EEA Agreement, OJ L 333, 30.11.2006, p. 59 Proposal for a Directive establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC and Regulation (EU) No 1093/2010, COM(2012) 280 final, 6.6.2012 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018 Proposal for a Directive of the European Parliament and of the Council, amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EECand Directive 2005/56/EC as regards reporting and documentation requirements in the case of merger and divisions, COM(2008) 576 final, 24.9.2008 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law, COM(2018) 239 final, 25.4.2018 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018 Table of National Legislation and Regulations AUSTRIA Bundesgesetz über die grenzüberschreitende Verschmelzung von Kapitalgesellschaften in der Europäischen Union (EU-Verschmelzungsgesetz – EU-VerschG) (BGBl. I Nr. 72/2007 (NR: GP XXIII RV 171 AB 218 p. 31. BR: 7758 AB 7766 p. 748 GERMANY Umwandlungsgesetz, 28.10.1994, BGBl. I, p. 3210; 1995 I, p. 428 UNITED KINGDOM The Companies (Cross-Border Mergers) Regulations 2007 (2007 No. 2974) Table of EU-Cases Case C-81/87, 27.9.1988, The Queen v H.M. Treasury and Commissioners of Inland Revenue ex parte Daily Mail and General Trust PLC, ECR 1988 -05483, ECLI:EU:C:1988:456 Case C-212/97, 9.03.1999, Centros Ltd v Erhvervs-og Selskabsstyrelsen, ECR 1999 I-01459, ECLI:EU:C: 1999:126 Case C-208/00, 5.11.2002, Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC), ECR 2002 I-09919, ECLI:EU:C:2002:632 Case C-167/01, 30.09.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd, ECR 2003 I-10155, ECLI:EU:C:2003:512 Case C-411/03, 13.12.2005, SEVIC Systems, ECR I-10805, ECLI:EU:C:2005:762 Opinion of Advocate General Tizzano in Case 411/03, 7.7.2005, SEVIC Systems, ECR I-10805, ECLI:EU: C:2005:437 Case C-210/06, 16.12.2008, Cartesio Oktató és Szolgáltató bt, ECR 2008 I-09641, ECLI:EU:C:2008:723

492

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 86 t

Case C-378/10, 12.07.2012, VALE Építési kft, ECLI:EU:C:2012:440 Case C‑343/13, 5.3.2015, Modelo Continente Hipermercados SA v Autoridade para as Condições de Trabalho – Centro Local do Lis (ACT), ECLI:EU:C:2015:146 Case C-483/14, 7.4.2016, KA Finanz AG, ECLI:EU:C:2016:205 Case C‑106/16, 25.10.2017, Polbud – Wykonawstwo sp. z o.o., ECLI:EU:C:2017:804 Bibliography: Bayer and J. Schmidt, ‘Die neue Richtlinie über die grenzüberschreitende Verschmelzung von Kapitalgesellschaften – Inhalt und Anregungen zur Umsetzung in Deutschland’ (2006) NJW, 401; Bayer and J. Schmidt, ‘Der Referentenentwurf zum 3. UmwandG: Vereinfachungen bei Verschmelzungen und Spaltungen und ein neuer verschmelzungsspezifischer Squeeze out’ (2010) ZIP, 953 (961); Bech-Bruun and Lexidale, Study on the Application of the Cross-border Mergers Directive (2013) (https://publicati ons.europa.eu/en/publication-detail/-/publication/0291c60a-df7a-11e5-8fea-01aa75ed71a1); Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007); Beitzke, ‘Internationales zur Gesellschaftsfusion’ in: Ernst von Caemmerer, Hand-Jürgen Schlochauer and Ernst Steindorff (eds), Probleme des Europäischen Rechts: Festschrift für Walter Hallstein zu seinem 65. Geburtstag (1966), 15; Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008); Boci, De Vet and Pauer, ‘Gold-plating’ in the EAFRD: To what extent do national rules unnecessarily add to complexity and, as a result, increase the risk of errors? (2014) (IP/D/AL/FWC/209-056 ed.); Bormann and Stelmaszczyk, ‘Grenzüberschreitende Verschmelzung nach dem EU-Company Law Package’ (2019) ZIP, 300; Brocker, ‘Die grenzüberschreitende Verschmelzung von Kapitalgesellschaften’ (2010) BB, 971; Bungert and Becker, ‘Änderung des Verschmelzungsrechts’ (2019) DB; Edwards, EC Company Law (1999); Frenzel, ‘Grenzüberschreitende Verschmelzung von Kapitalgesellschaften – nach dem Ablauf der Umsetzungsfrist’ (2008) RIW; Frischut, ‘Grenzüberschreitende Verschmelzung von Kapitalgesellschaften – ein Überblick über die Zehnte gesellschaftsrechtliche Richtlinie’ (2006) EWS, 55; Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551; Ganske, ‘Internationale Fusion von Gesellschaften in der Europäischen Gemeinschaft – ein neuer Ansatz’ (1985) DB, 581; Van Gerven, ‘Community rules applicable to cross-border mergers’ in Van Gerven (ed), Cross-Border Mergers in Europe (2010), 1; Grohmann, The Information Model in European Company Law (2006); Grohmann and Gruschinske, ‘Grenzüberschreitende Mobilität von Kapitalgesellschaften in Europa: Die Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2006) GmbHR 191; Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012); Habersack and Drinhausen, SE-Recht (2nd edn, 2016); Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019); Heenen, ‘La Directive sur les Fusions internes’ (1981) CDE, 15; Hirte, ‘Die Europäische Aktiengesellschaft’ (2002) NZG, 1; Holzborn and Mayston, ‘Grenzüberschreitender “Downstream Merger” bei Streubesitz und Börsenhandel’ (2012) ZIP, 2380; Hommelhoff, ‘Minderheitenschutz bei Umstrukturierungen’ (1993) ZGR, 452; Keay and Walton, Insolvency Law Corporate and Personal (2008); Semler and Stengel, Umwandlungsgesetz (4 th edn, 2017); Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48. Volume, 2019), E III; Kalss, ‘Europarechtliche und verfassungsrechtliche Rahmenbedingungen für das Umwandlungsrecht’ (1995) JBl., 420 (424); Kindler, ‘Internationales Handels- und Gesellschaftsrecht’ in Münchener Kommentar zum BGB, Part 10 (7th edn, 2018); Kolvenbach, ‘Die Europäische Gemeinschaft und die deutsche Mitbestimmung’ (1986) DB, 1973; Koppensteiner, ‘Grundlagenkritische Bemerkungen zum EWG-Entwurf eines Übereinkommens über die internationale Verschmelzung von Aktiengesellschaften’ (1975) 39 RabelsZ, 405; Krause and Kulpa, ‘Grenzüberschreitende Verschmelzungen – Vor dem Hintergrund der “Sevic”-Entscheidung und der Reform des deutschen Umwandlungsrechts –’ (2007) ZHR, 38; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004); Lutter, Bayer and J. Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017); Lutter, Umwandlungsgesetz (6th edn, 2019); Nagel, ‘Die Richtlinie zur grenzüberschreitenden Verschmelzung’ (2006) NZG, 97; Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP), 893; Neye and Timm, ‘Die geplante Umsetzung der Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften im Umwandlungsgesetz’ (2006) 9 DB, 488; Oechsler, ‘Die Richtlinie 2005/56/EG über die Verschmelzung von Kapitalgesellschaften aus verschiedenen Mitgliedstaaten’ (2006) NZG, 161; van Ommeslaghe, ‘Unternehmenskonzentration und Rechtsangleichung in der EWG’ (1969) ZHR 201; van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’ in Pieter Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), 123; Papadopoulos, ‘The Magnitude of EU Fundamental Freedoms: Application of the Freedom of Establishment to the Cross-Border Mergers Directive’ (2012) 23 EBLR, 517; Priester, ‘Das neue Verschmelzungsrecht’ (1983) NJW, 1459; Rickford, ‘The Proposed Tenth Company Law Directive on Cross Border Mergers and its Impact in the UK’ (2006) EBLR, 1393; Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnah-

Tobias de Raet

493

Art 87 General provisions men” – Zum Schutz durch Information im Europäischen Gesellschaftsrecht’ (2004) NZG, 15; Sandhaus, ‘Richtlinienvorschlag der Kommission zur Vereinfachung der Berichts- und Dokumentationspflichten bei Verschmelzungen und Spaltungen’ (2009) NZG, 41; J. Schmidt, ‘EU Company Law Package 2018 – Mehr Digitalisierung und Mobilität von Gesellschaften (Teil 1) –’ (2018) Der Konzern 229; J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960 (http:// www.europarl.europa.eu/thinktank/en/document.html?reference=IPOL_STU(2016)556960); J. Schmidt, ‘The Mobility Aspects of the EU Commission’s Company Law Package: Or – ‘The Good, the Bad and the Ugly’ (2019) 16 European Company Law Journal 13; J. Schmidt, Cross-border Mergers, Divisions and Conversions: Accomplishments and Deficits of the Company Law Package) (2019) European Company and Financial Law Review, 222; Schmitthoff, ‘Future of the European Company Law Scene’ in Schmitthoff (ed), The Harmonisation of European Company Law (1973), 3; Sonnenberger, ‘Der Vorentwurf eines Abkommens über die internationale Fusion’ (1969) AG, 381; Schollmeyer, ‘Der Verschmelzungs-, Spaltungs- und Formwechselbericht nach der neuen Umwandlungsrichtlinie (2019), AG 591; Siems, ‘The European Directive on Cross-Border Mergers: An International Model?’ (2004) 11 Columbia Journal of European Law, 167; Sonnenberger, ‘Interne Fusion von Aktiengesellschaften im Gemeinsamen Markt’ (1971) AG 76; Rammeloo, Corporations in private international law. A European Perspective (Oxford University Press, Oxford 2001); Stiegler, ‘Zehn Jahre Internationale Verschmelzungsrichtline – Erreichtes, Stand und Perspektiven’ (2016) GmbHR, 406; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019); Temple Lang, ‘Three EEC Draft Directives on Company Law – Capital, Mergers and Management’ (1972) VII The Irish Jurist, 306; Ugliano, ‘The New Cross-border Merger Directive: Harmonisation of European Company Law and Free Movement’ (2007) 18 EBLR, 585; Vermeylen, ‘The Cross-border merger Directive’ in Jérôme Vermeylen and Ivo Vande Velde (eds), European cross-border Mergers and reorganizations (2012); Vetter, ‘Die Regelung der grenzüberschreitenden Verschmelzung im UmwG – Einige Bemerkungen aus Sicht der Praxis’ (2006) AG, 613; Wachter, ‘Europarechtswidrigkeit des Verbots der Handelsregistereintragung von Verschmelzungen in- und EU-ausländischer Gesellschaften (“SEVIC”)’ (2005) EWiR, 581; Wachter, ‘Umwandlung insolventer Gesellschaften’ (2015) NZG, 858 (861); Wiesner, ‘Die grenzüberschreitende Verschmelzung und der neue Mitbestimmungskompromiss’ (2005) DB, 91; Winter (Chairman), Report of the high level group of company law experts on a modern regulatory framework for company law in Europe (Brussels, 4.11.2002); Wooldrigde, ‘The Third Directive and the Meaning of Mergers’ (1980) 1 The Company Lawyer; Zimmer, ‘Ein Internationales Gesellschaftsrecht für Europa’, (2003) 67 RabelsZ, 298.

Article 87 General provisions 1. The coordination measures laid down by this Chapter shall apply to the laws, regulations and administrative provisions of the Member States relating to the types of company listed in Annex I. 2. Member States need not apply this Chapter to cooperatives incorporated as one of the types of company listed in Annex I. In so far as the laws of the Member States make use of this option, they shall require such companies to include the word ‘cooperative’ in all the documents referred to in Article 26. 3. Member States need not apply this Chapter in cases where the company or companies which are being acquired or will cease to exist are the subject of bankruptcy proceedings, proceedings relating to the winding-up of insolvent companies, judicial arrangements, compositions and analogous proceedings. 4. Member States shall ensure that this Chapter does not apply to the company or companies which are the subject of the use of resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU. I. Legislative History and Regulatory Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Legislative Aim of the Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Public limited liability companies (PLCs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Member States of the European Economic Area (EEA) / Brexit . . . . . . . . . . 3. Cooperatives incorporated as a PLC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Companies subject to bankruptcy, insolvency or analogue proceedings . .

494

Tobias de Raet

1 6 10 13 15 18 19

Art 87

TITLE II CONVERSIONS, MERGERS AND DIVISIONS IV. Mergers outside the Scope of the Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Companies which are the subject to the Directive (2014/59/EU) . . . . . . . . . 2. Mergers involving other legal forms of business organization . . . . . . . . . . . . .

20 20 21

I. Legislative History and Regulatory Context The Third Company Law Directive 78/855/EEC1 concerning domestic mergers of 1 public limited liability companies was initially adopted in 1978 (the ‘1978 Directive’). However, a preliminary draft2 (the ‘1968 Preliminary Draft’) supervised by Pierre van Ommeslaghe was published as early as 1968. The 1968 Preliminary Draft was followed by a first official proposal3 in 1970 (the ‘1970 Proposal’). Until the final adoption by the European Parliament on 9.10.1978, two further proposals were necessary in 1973 4 and 19755. The original plan was to adopt a total of fourteen Directives on the approximation 2 of European company law6. The preceding first7 and second8 as well as the succeeding fourth9 Directives focussed on the coordination of safeguards, in particular concerning (i) the disclosure of information, (ii) protection of the interests of members (i.e. shareholders) and others (in essence, creditors) and (iii) the annual accounting of certain types of companies. In 2007, it was considered repealing the 1978 Directive entirely because of concerns 3 it would hinder innovation and increase administrative costs.10 Due to considerable resistance11 the Commission stopped this initiative and pursued an approach of selective modernisation with the two following Directives of 200712 and 200913. Besides these minor amendments14 the 1978 Directive was in effect until 2011, when it was replaced 1 Third Council Directive 78/855/EEC of 9.10.1978 based on Article 54(3)(g) of the EEC Treaty concerning mergers of public limited liability companies. 2 Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F). 3 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091); English version published in the Archive of European Integration, Bulletin of the European Communities, Supplement 5/70, (http://aei.pitt.edu/8620/). 4 Amended Proposal COM(72) 1668 final, 4.1.1973 (Vol. 1972/0232). 5 Amended Proposal COM(75) 671 final, 22.12.1975 (Vol. 1975/0246). 6 Cf. for a comprehensive listing of the fourteen Directives: Lutter, Bayer and J., Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 5.2, p. 76. 7 First Council Directive 68/151/EEC of 9.3.1968 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of Article 58(2) of the EEC Treaty, with a view to making such safeguards equivalent throughout the Community. 8 Second Council Directive 77/91/EEC of 13.12.1976 on the coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of Article 58(2) of the EEC Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with the aim to harmonise such safeguards. 9 Fourth Council Directive 78/660/EEC of 25.7.1978 based on Article 54(3)(g) of the EEC Treaty on the annual accounts of certain types of companies. 10 Communication from the Commission COM(2007) 394 final, 10.7.2007. 11 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.4, p. 623 et seq. See also: Commission Press Release IP/08/1407, 25.9.2008. 12 The first amending Directive 2007/63/EC of 13.11.2007 appended in Article 10(4) of the 1978 Directive (now: Article 96(4)) the possibility to abstain from the requirement of an examination of the draft terms of merger or an expert report. 13 The second amending Directive 2009/109/EC of 16.9.2009 focused inter alia on the alignment of the 1978 Directive with certain intersecting requirements in Directive 2005/56/EC (Cross-border mergers), Directive 77/91/EEC (Capital) and Directive 82/891/EEC (Divisions) as well as on the facilitation of reporting and documentation obligations.

Tobias de Raet

495

Art 87 General provisions in the context of the codification project ‘acquis communautaire’15 by the Directive 2011/35/EU (the ‘2011 Directive’)16 in order to consolidate the three aforementioned Directives on domestic mergers. The 2011 Directive was modified twice 17, before it was repealed to be codified together with five other Directives18 relating to certain aspects of company law in the Directive 2017/1132/EU19 (the ‘2017 Directive’ or the ‘Directive’). 4 The basis for this codification was the Commission’s Action Plan on European company law and corporate governance along with a public consultation in 2012, which stressed that European company law provisions are spread across many different legal acts which “makes it difficult for users to have a clear overview of applicable law in this policy area” and that the “large number of Directives dealing with company law also carries the risk of unintended gaps or overlaps”20. The 2017 Directive is to be seen as a result of the Commission’s intention to combine existing company law Directives in order to make the “EU company law more reader-friendly and to reduce the risk of future inconsistencies”21. 5 In 2019, the Directive of the European Parliament and of the Council amending the 2017 Directive was adopted by the Council on 18 November 2019 and published in the Official Journal of the European Union on 12 December 2019.22 This Directive came into effect as of 1 January 2020 and has to be implemented by the Member States by 31 January 2023.23 While Chapter II (Articles 118 to 134) on cross-border mergers was substantially amended, said Directive did not contain any changes to Chapter I on domestic mergers.

II. Legislative Aim of the Chapter 6

The provisions in this Chapter are based on Article 50(2)(g) TFEU (in 1978: Article 54(3)(g) of the EEC Treaty), which shall, to a necessary extent, ensure the coordination 14 It should also be noted that the scope of application of the 1978 Directive was extended to the EEA States in 1994 and 1995. Cf. Agreement on the European Economic Area (Annex XXII – Company law – List provided for in Article 77) in 94/1/ECSC, EC in OJ L 1/3, 3.1.1994. 15 Communication of the Commission, Codification of the acquis communautaire, COM(2001) 645, 21.11.2001; Volker Heydt, ‘Ein Projekt zur verbesserten Verständlichkeit des Gemeinschaftsrechts durch seine umfassende Kodifizierung’, EuZW 2002, 34 (34); Lutter/Bayer/Schmidt, Europäisches Kapitalmarktund Gesellschaftsrecht (6th edn, 2017), § 20.5, p. 624. 16 Directive 2011/35/EU of 5.4.2011 concerning mergers of public limited liability companies. See also the extension of Directive 2011/35/EU to the Member States of the European Economic Area with the Decision of the EEA Joint Committee of 30.4.2012 in OJ L 248, 13.9.2012, p. 37. 17 Directive 2013/24/EU of 13.5.2013 and the Directive 2014/59/EU (BBRD) of 15.5.2014. 18 Directives 82/891/EEC of 17.12.1982, 89/666/EEC of 21.12.1989, 2005/56/EC of 26.11.2005, 2009/101/EC of 16.9.2009 and 2012/30/EU of 25.10.2012. 19 Directive 2017/1132/EU of 14.6.2917 relating to certain aspects of company law. 20 Communication from the Commission, Action Plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies, COM(2012) 740 final, 12.12.2012, p. 15. 21 Communication from the Commission, Action Plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies, COM(2012) 740 final, 12.12.2012, p. 15. Communication of the Commission concerning the Codification of the Acquis communautaire, COM(2001) 645, 21.11.2001, p. 19 had already come to the same conclusions. 22 Directive (EU) 2019/2121 of the European Parliament and of the Council of 27.11.2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, OJ L321, 12.12.2019. 23 Cf. Article 3 of the Directive (EU) 2019/2121 of the European Parliament and of the Council of 27.11.2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, OJ L321, 12.12.2019 pursuant to which the 2019 Directive has to be implemented by the last day of the 36th month after the date of entry into force.

496

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 87

of safeguards for the protection of the interests of members and third parties which are required by the Member States. Article 50(2)(g) TFEU serves as an element to implement and realise the freedom of establishment pursuant to Article 49 TFEU (in 1978: Article 52 of the EEC Treaty). However, since this Chapter only addresses domestic mergers, the provisions therein may not be independently seen as deriving from the concept of freedom of establishment (Article 49 TFEU). Placed in its legislative context, the Commission’s intention was to lay the ground for a prospective Directive on cross-border mergers24. The approximation of domestic merger laws with the 1978 Directive was, therefore, directed at promoting and facilitating the envisaged legislation of the subsecuent Directive regarding cross-border mergers. 25 However, pursuant to the long-standing opinion of the Commission26 and the ECJ in its Daihatsu case, Article 54(3)(g) of the EC Treaty (now: Article 50(2)(g) TFEU) may not only be seen in the light of the general programme for the abolition of restrictions on the freedom of establishment, but also in the context of Article 3(h) of the EC Treaty, which gives the European Community competence regarding the establishment of a functioning common market. Legislative projects of the European Community have to include the approximation of national laws to the extent required for the functioning of the common market.27 From an economic perspective, with the 1970 Proposal the Commission aspired to 7 stimulate external growth by means of the concentration of companies. The Commission assumed that in order to be able to compete with large companies from countries like the United States28 and Japan, the European Community needed ‘domestic’ companies of an adequate size for the common market. The Commission had already highlighted this aspect in a memorandum from 196629 concluding that, in principle, a positive attitude towards concentration is appropriate and that legal and psychological barriers to concentration ought to be removed.30 The effort to introduce a minimum requirement on safeguards was made in con- 8 sideration of the effects that the concentration of companies can have on shareholders and creditors; in particular for those of the transferring company which ceases to exist in the course of a merger31. Although the Commission’s 1970 Proposal found the protec24 Cf. the introductory comments of the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091), p. 19; Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.13, p. 675; Temple Lang, ‘Three EEC Draft Directives on Company Law – Capital, Mergers and Management’ (1972) VII The Irish Jurist, 306 (313, 318); Priester, ‘Das neue Verschmelzungsrecht’ (1983) NJW, 1459 (1459); Schmitthoff, ‘Future of the European Company Law Scene’, in: Schmitthoff (ed), The Harmonisation of European Company Law (1973), 3 (22); van Ommeslaghe, ‘Unternehmenskonzentration und Rechtsangleichung in der EWG’ (1969) ZHR 201 (228); Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1551). 25 Which in fact took until 2005 to be originally adopted: Directive 2005/56/EC of 26.10.2005 on cross-border mergers of limited liability companies. 26 Cf. Hommelhoff and Riesenhuber, ‘Strukturmaßnahmen im Europäischen und deutschen Gesellschaftsrecht’ in: Grundmann (ed), Systembildung und Systemlücken in Kerngebieten des Europäischen Privatrechts (2000), 259 (268); Hopt, ‘Europäisches Gesellschaftsrecht – Krise und neue Anläufe’ (1998) ZIP, 96 (98). 27 ECJ Case C-97/96 (Daihatsu), [1997], ECR I-6843, para. 18-21. 28 Which van Ommeslaghe called “amerikanische Herausforderung” (“the American challenge”) in: van Ommeslaghe, ‘Unternehmenskonzentration und Rechtsangleichung in der EWG’ (1969) ZHR, 201 (204). 29 Mémorandum de la Commission de la Communauté Economique Européenne sur la concentration dans le Marché Commun’ (1966) 4 Revue trimestrielle de droit européen, 651 (654). 30 See van Ommeslaghe, ‘Unternehmenskonzentration und Rechtsangleichung in der EWG’ (1969) ZHR, 201 (204 et seq); Temple Lang, ‘Three EEC Draft Directives on Company Law – Capital, Mergers and Management’ (1972) VII The Irish Jurist, 306 (313, 316, 318); Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.4, p. 670.

Tobias de Raet

497

Art 87 General provisions tion of creditors to be less important than the economically-driven aim to foster the concentration of companies32 and the protection of shareholders33, the 2017 Directive pursues an equivalent protection for both shareholders and creditors.34 9 Taking into account these aims, the 1978 Directive contained (as well as the subsequent Directives on domestic mergers) the obligation that (i) all Members States had to adopt provisions on domestic mergers35 (considering that such a concept was unknown in certain jurisdictions at that time) and (ii) such provisions on domestic mergers were to be approximated within the European Economic Community.36

III. Scope of Application Article 87(1) of the 2017 Directive (Articles without further specifications are those of the 2017 Directive) limits the scope of application of this Chapter to the types of legal entities listed in Annex I. 11 Article 87(2) and (3) permits Member States to extend the application of the provision in this Chapter to other types of legal entities. 12 Article 87(4) requires the Members States to ensure that this Chapter does not apply to companies which are the subject of the use of resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU. 10

1. Public limited liability companies (PLCs) 13

The provisions laid down in this Chapter only apply to public limited companies (PLCs), whereas Annex I lists all types of companies which are considered PLCs for this purpose. While it is left to the Member States to define the specific characteristics of legal entities, there are some common characteristics of PLCs. First, PLCs need to comply with the concept of limited liability, i.e. the liability of shareholders has to be capped at a certain amount (e.g. the nominal share capital). Second, PLCs need to be public companies. While this does not require the PLC to be listed on a stock exchange, it implies that (i) shares can be transferred without strict requirements such 31 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.6, p. 670. 32 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.9, p. 673; ‘Mémorandum de la Commission de la Communauté Economique Européenne sur la concentration dans le Marché Commun’ (1966) 4 Revue trimestrielle de droit européen, 651 (651 et seq). 33 Pointed out in the recitals of the Directives of 1978 and 2011 as follows for shareholders: “It is particularly important that the shareholders of merging companies be kept adequately informed in as objective a manner as possible and that their rights be suitably protected” and for creditors: “Whereas creditors, including debenture holders, and persons having other claims on the merging companies should be [in 2011: must be] protected so that the merger does not adversely affect their interests .” Recital no 3 of the 2017 Directive conversely reads: ”In order to ensure minimum equivalent protection for both shareholders and creditors of public limited liability companies, the coordination of national provisions relating to the formation of such companies and to the maintenance, increase or reduction of their capital is particularly important.” See also: Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.9, p. 673; and also fn. 21, p. 673 with additional arguments for the minor importance of creditor protection in the earlier Directives. 34 Recital no. 3 of Directive 2017/1132/EU. 35 Cf. Article 2 of Directive 1978/855/EEC as well as Article 2 of the replacing Directive 2011/35/EU and the same in Article 88 of the Directive 2017/1132/EU. See also: the 1968 Preliminary (Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)) commenting Article 2, p. 5. 36 Edwards, EC Company Law (1999), p. 94; Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019), § 8.1, p. 342.

498

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 87

as notarization and (ii) the corporate governance structure of the entity is designed (by law) for a large number of shareholders. Popular private limited companies such as the private company limited by shares, Ltd. (Ireland and United Kingdom), the Gesellschaft mit beschränkter Haftung, GmbH (Austria, Germany and Liechtenstein), the société à responsabilité limitée, S.à.r.l. (France and Luxembourg) and the besloten vennootschap met beperkte aansprakelijkheid, BV (Netherlands) do not qualify as PLCs.37 The limitation to PLCs goes back to the 1970 Proposal, which argued that the PLC 14 was the economically most important and legally sophisticated company structure. The idea was, to first coordinate the merger of PLCs and later transfer a tested and established concept to other forms of legal entities38. Grundmann justifies the limitation to PLCs as follows: “Shareholders who invest across borders in an anonymous way and are therefore in need of protection, which is basically the same all over Europe, exist only within the PLC.”39 While it is questionable that this was the case in 1970 s40, it is at least not true today. Due to the popularity of private limited companies in the Member States, they are increasingly subject to cross-border settings (and cross-border mergers). Hence, there is a practical need for an approximated merger regime for private limited liability companies, and Member States can only be encouraged to adopt the provisions of this Chapter not only for PLCs, but also for private limited liability companies and other types of legal entities.

2. Member States of the European Economic Area (EEA) / Brexit The scope of application of the 1978 Directive was extended to the EEA States in 15 1994 and 1995.41 The provisions on domestic mergers laid down in this Chapter also apply to Member States of the European Free Trade Association (EFTA) which are members of the European Economic Area (EEA), i.e. Iceland, Liechtenstein and Norway. They do not apply to Switzerland, which is a member state of EFTA but not a party to the EEA (‘EEA EFTA States’). The application of the 2011 Directive was extended to the aforementioned EEA EFTA 16 States by an incorporation decision of the EEA Joint Committee on 30 April 2011 42. Such an incorporation decision has not yet been made for the 2017 Directive, which is, however, under scrutiny for incorporation into the EEA Agreement43. After having left the European Union on 31 January 2020 (so-called Brexit), the UK 17 automatically ceased to be an EEA member as of 31 January 2020.44 The UK remained to be bound to the existing obligations during a transition period until 31 December 37 See also: Temple Lang, ‘Three EEC Draft Directives on Company Law – Capital, Mergers and Management’ (1972) VII The Irish Jurist, 306 (313). 38 Cf. the introductory comments of the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091), p. 19. 39 Cf. Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.9, p. 673. 40 Sonnenberger, ‘Interne Fusion von Aktiengesellschaften im Gemeinsamen Markt’ (1971) AG, 76 (77). 41 Cf. Agreement on the European Economic Area (Annex XXII – Company law – List provided for in Article 77) in 94/1/ECSC, EC in OJ L 1/3 et seq, 3.1.1994. 42 Extension of Directive 2011/35/EU to the Member States of the European Economic Area with the Decision of the EEA Joint Committee of 30.4.2012 in OJ L 248, 13.9.2012, p. 37. Directive 2017/1132/EU itself is not yet incorporated into the EEA Agreement. 43 Cf. for current state of progress: http://www.efta.int/eea-lex/32017L1132 and the Decision of the EEA Joint Committe No 200/2019 of 10.7.2019 amending Annex XXII (Company law) to the EEA Agreement (provisional). 44 Article 126(1) EEA states that “The Agreement shall apply to the territories which the Treaty establishing the EEC is applied (…) and to the territories of Iceland, the Principality of Liechtenstein and the Kingdom of Norway.”

Tobias de Raet

499

Art 87 General provisions 2020. Starting as of 1 January 2021, the UK is a third country with respect to the EEA Agreement and therefore not subject to the Directive anymore; i.e. mergers with UK companies no longer fall within the scope of the Directive.45 Considering the high relevance of UK entities, there is a practical need for the EU and the UK to come to an agreement pursuant to which the provisions of this Chapter continue to apply to UK companies.

3. Cooperatives incorporated as a PLC) 18

According to Article 87(2) sentence 1 Member States do not have to apply this Chapter on the domestic mergers of PLCs to cooperatives incorporated as a PLC. This addresses the fact that cooperatives – unlike other public companies – are often subject to sophisticated tax and legal frameworks which are different from Member State to Member State, which makes an approximation nearly impossible. Member States who make use of the option not to apply this Chapter to cooperatives, however, have to ensure that such cooperatives include the term “cooperation” in all the documents referred to in Article 26, demonstrating that transparency is one of the key safeguard mechanisms in European company law.46 This is, for instance, relevant for Italian and French cooperatives as well as UK co-operative societies47 which are subject to detailed legal frameworks in their Member States.48

4. Companies subject to bankruptcy, insolvency or analogue proceedings 19

Given the significant differences in the different domestic insolvency laws, 49 Member States likewise do not have to apply this Chapter on the domestic mergers of PLCs to cases where the company, which is being acquired or ceases to exist, is subject to bankruptcy proceedings, proceedings relating to the winding-up of insolvent companies, judicial arrangements, compositions and analogous proceedings. This also includes the British and Irish concept of “compulsory winding-up”.50

45 See also: Mayer and Many, Der Brexit und seine Folgen auf den Rechtsverkerh zwischen der EU und dem Vereinigten Königreich seit dem 1.1.2021, (2021), BB, 452, (451) which highlight that the UK leaving the EU is a “hard-Brexit” with respect to Company. 46 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (17). 47 Wooldrigde, ‘The Third Directive and the Meaning of Mergers’ (1980) 1 The Company Lawyer, 75 (75). 48 Cf. the 1968 Preliminary Draft (Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)), p. 3; Edwards, EC Company Law (1999), p. 94 and also on p. 54. See also Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 19.17, p. 512 with the consideration that in particular small cooperatives ought to be excluded from the obligation to raise minimum capital as well as from the rigidity of the capital protection rules of the Second Council Directive 77/91/EEC of 13.12.1976. 49 Wooldrigde, ‘The Third Directive and the Meaning of Mergers’ (1980) 1 The Company Lawyer, 75 (75) highlights “the significant differences between the concept and administration of insolvency between the UK and continental countries. 50 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.13, p. 627; Ratsprotokoll (Statement in the Council minutes), Doc. R 2337/78, 5.10.1978, referring to Article 1(3); Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1551). Compulsory winding up as defined by Keay and Walton, Insolvency Law Corporate and Personal (2008), § 14.1, p. 239: “Compulsory liquidation is a statute-defined procedure that enables a person to apply to the court for an order that the affairs of a company be wound up. The name given to this mode of winding up is based on the fact that the company being wound up is not winding up voluntarily, although in certain cases the company may consent to such a winding up”.

500

Tobias de Raet

Art 88

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

IV. Mergers outside the Scope of the Directive 1. Companies which are the subject to the Directive (2014/59/EU) Paragraph 4 was included in the former 2011 Directive as a result of Article 122 20 of the bank recovery and resolution Directive (2014/59/EU).51 Member States have to ensure that this Chapter on domestic mergers of PLCs does not apply to the company or companies which are the subject of the use of resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU. Such derogation was chosen to allow rapid action by authorities.52

2. Mergers involving other legal forms of business organization Under European law, Member States may decide to also adopt the provisions of this 21 Chapter for other legal forms of business organisations into national laws (so-called gold-plating53). As mentioned above, it is unfortunate that Chapter I is limited to PLCs, since there is an urgent need for a uniform codification of domestic mergers, in particular with respect to private limited liability companies. While the European legislator missed the chance to establish a uniform standard for domestic mergers, Member States can only be encouraged to do so, when implementing the 2017 Directive. Various Member States have already codified a comprehensive legal framework for 22 domestic mergers. For example, the German Transformation Act (Umwandlungsgesetz) determines nearly every legal entity to be eligible for merger.54 Those Member States who have not yet codified domestic mergers for certain types of legal entities can only be encouraged to do so.

Article 88 Rules governing mergers by acquisition and mergers by formation of a new company Member States shall, as regards companies governed by their national laws, make provision for rules governing mergers by the acquisition of one or more companies by another company and merger by the formation of a new company. I. Codification of Domestic Mergers in the Member States . . . . . . . . . . . . . . . . . . . . . II. Companies governed by the Laws of the same Member State . . . . . . . . . . . . . . . . III. Types of Mergers Covered by Chapter I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Merger by acquisition and merger by formation of a new company (Article 89, 90) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 4 4

See also Article 111 of the Proposal of the Commission, COM(2012) 280, p. 139. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.14, p. 627. 53 For a definition of gold-plating e.g.: Boci, De Vet and Pauer, ‘Gold-plating’ in the EAFRD: To what extent do national rules unnecessarily add to complexity and, as a result, increase the risk of errors? (2014) (IP/D/AL/FWC/209-056 edn), p 27. 54 According to § 3 of the German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428) the following types of legal entities are eligible for mergers: commercial partnerships (unlimited partnerships, limited partnerships) and professional partnerships; companies limited by shares (limited liability companies, stock corporations, partnerships limited by shares); registered cooperative societies; registered associations (§ 21 of the Civil Code (BGB of 2.1.2002, BGBl. I, p. 42, 2909; 2003 I, p. 738); confederations responsible for auditing cooperative societies; mutual insurance companies. 51 52

Tobias de Raet

501

Art 88 Rules governing mergers by acquisition and mergers by formation of a new company 2. Upstream-mergers of a 100 % subsidiary into its parent company (Article 110, 111) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Upstream-mergers in cases of indirect shareholding (Article 112) . . . . . . . . 4. Upstream-mergers of a 90 % subsidiary into its parent company (Article 113, 114) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Transfer of all assets and liabilities by one or more companies to another company which is the holder of 90 % or more of their shares (Article 115) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Other operations treated as mergers under this Chapter (Articles 116, 117) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Mergers with a cash payment exceeding 10 % (Article 116) . . . . . . . . . . . . . b) Merger without all of the transferring companies ceasing to exist (Article 117) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6 7 9 10 11 12 13

I. Codification of Domestic Mergers in the Member States 1

Article 88 requires Member States to adopt laws regarding mergers by acquisition and mergers by formation of a new company. When first introduced in 1978, some Member States had not adopted laws for such an operation at all.1 Other Member States, like Germany, had adopted only basic frameworks, which, for example, only provided for one-step mergers, while the 1978 Directive introduced the concept of multi-step mergers based on the Italian archetype.2

II. Companies governed by the Laws of the same Member State Article 88 only applies to domestic mergers, i.e. the merger of companies subject to the laws of the same Member State.3 Mergers between companies of different Member States are subject to provisions on cross-border mergers (cf. Chapter II). 3 It is in every Member State’s sole competence to define the terms and conditions pursuant to which companies are subject to the laws of that Member State. In principle, there are two legal concepts being used by Member States to identify the company law of which Member State (lex societatis / company statute) is applicable to a specific company: the ‘incorporation theory’ and the ‘real seat theory’. Each of them uses a different approach with respect to the factor which links a company to a certain jurisdiction. The real seat theory4 purports that the place where a company’s headquarters or 2

1 A domestic merger regime was formally missing in Belgium, Luxembourg and the United Kingdom, but was possible under control of the court. Only in the Netherlands was such an institute unknown in the legal system. However, there were plans to adopt a domestic merger regime in the same year as the 1978 Directive came into force. Cf.: Sonnenberger, ‘Interne Fusion von Aktiengesellschaften im Gemeinsamen Markt’ (1971) AG, 76 (77); Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), p. 675, fn. 24; Edwards, EC Company Law (1999), p. 92; Hommelhoff and Riesenhuber, ‘Strukturmaßnahmen im Europäischen und deutschen Gesellschaftsrecht’ in: Grundmann (ed), Systembildung und Systemlücken in Kerngebieten des Europäischen Privatrechts (2000), 259 (266). See further: Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1551). 2 Cf. Article 2501 of the Italian Civil Code (Codice Civile, Regio Decreto 16.3.1942, n. 262, Gazetta Ufficiale Serie Generale n.79 del 4.4.1942): “La fusione di più società può eseguirsi mediante la costituzione di una nuova società, o mediante l’incorporazione in una società di una o più altre.” See further: Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1552); Priester, ‘Das neue Verschmelzungsrecht’ (1983) NJW, 1459 (1460); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.17, p. 628. 3 See also the introductory comments in the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091), p. 19. 4 Countries applying the ‘real seat theory’: Austria, Belgium, France, Germany, Italy, Luxembourg, Portugal and Spain.

502

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 88

principle place of business (head office) is located, determines the company law of which Member State is applicable to that company. Pursuant to the more liberal incorporation theory,5 the companies are subject to the jurisdiction in which they were incorporated (place of registration).6 Whereas the conflicts of laws system of some Member States – such as Germany – is (still) based on the real seat theory, the ECJ ruled in various judgements in favour of the incorporation theory7. This leads to an unfortunate mix in which Member States apply the incorporation theory to companies from other Member States and the real seat theory to companies of non-Member States, unless they have entered into bilateral agreements with such non-Member States.8 As the ECJ pointed out in its Daily Mail decision, the problem cannot and will not be solved “by the rules concerning the right of establishment, but must be dealt with by future legislation or conventions”.9 While over the past decades, various such attempts have failed,10 a recent study published by the Commission tries a new approach by supporting the idea of EU-wide conflict of laws rules applicable to companies in a future ‘Rome V Regulation’, which shall, in principle, be based on the incorporation theory11. Such legislation would be a huge and necessary step forward for EU company law. Considering that companies are continuously subject to more EU regulation, it is time to codify an EU-wide conflicts of law system. Hopefully the discussion on how to deal with UK-companies after the UK has left the EU (Brexit) will be an impetus for adopting such legislation.

III. Types of Mergers Covered by Chapter I 1. Merger by acquisition and merger by formation of a new company (Article 89, 90) Chapter I only covers operations involving (i) (at least) two companies existing 4 prior to the merger and (ii) a transfer of assets and liabilities to one of these companies. Corporate reorganisations which involve a separation of assets and liabilities, such as spin-offs and split-offs, are subject to Chapter III which deals with the division of PLCs.12

5 Countries applying the ‘incorporation theory’: Denmark, Ireland, Hungary, the Netherlands, Liechtenstein and the United Kingdom. 6 Commission Staff Working Document, Impact assessment on the Directive on the cross-border transfer of registered office, SEC(2007) 1707 (part I), p. 9; Zimmer, ‘Ein Internationales Gesellschaftsrecht für Europa’ (2003) 67 Rabels Zeitschrift für ausländisches und internationales Privatrecht (RabelsZ), 298 (299 et seq). See also on this subject Heenen, ‘La Directive sur les Fusions internes’ (1981) CDE, 15 (16). 7 Cf. Case C-212/97, 9.3.1999, Centros Ltd v Erhvervs-og Selskabsstyrelsen, ECR 1999 I-01459, ECLI:EU: C:1999:126; Case C-208/00, 5.11.2002, Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC), ECR 2002 I-09919, ECLI:EU:C:2002:632; Case C-167/01, 30.9.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd, ECR 2003 I-10155 and most recently Case C‑106/16, 25.10.2017, Polbud – Wykonawstwo sp. z o.o., ECLI:EU:C:2017:804. See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 7.64, p. 121; de Raet, ‘Zur Beschränkung der Niederlassungsfreiheit bei isolierter grenzüberschreitender Satzungssitzverlegung (Polbud – Wykonawstwo)’ (2018) Entscheidungen zum Wirtschaftsrecht (EWiR), 7. 8 Such as the Treaty of Friendship, Commerce and Consular Relations between Germany and the United States of America dated 29.10.1954, BGBl. 1956 II, p. 487 et seq. 9 Case C-81/87, 27.9.1988, The Queen v H.M. Treasury and Commissioners of Inland Revenue ex parte Daily Mail and General Trust PLC, ECR 1988 -05483, ECLI:EU:C:1988:456., para. 23. 10 Such as the Convention on the Mutual Recognition of Companies and Legal Persons (1968) under which the ‘real seat theory’ was supposed to be the mutual basis for all Member States. 11 European Commission, Study on the Law Applicable to Companies (Final Report) (June 2016), p. 349 et seq.

Tobias de Raet

503

Art 88 Rules governing mergers by acquisition and mergers by formation of a new company 5

The types of merger expressly mentioned in Article 88 are the ‘merger by acquisition’ (Article 89) and the ‘merger by formation of a new company’ (Article 90). They are defined in Articles 89 and 90, whereas Sections 2 and 3 of Chapter 1 (Articles 91 up to 108 and 109) outline the specific legal framework for these two types of merger. The main structural difference between the ‘merger by acquisition’ and the ‘merger by formation of a new company’ is the prior existence or non-existence of the acquiring company.13 However, the common characteristics of both mergers are (i) the transfer of all assets and liabilities of a PLC, (ii) the dissolution – without winding it up – of the transferring company and (iii) the granting of shares in the acquiring company to the shareholders of the transferring company with a possible cash top-up of up to 10 %.14

2. Upstream-mergers of a 100 % subsidiary into its parent company (Article 110, 111) 6

In addition, Article 110 requires Member States to adopt a legal framework for upstream-mergers of a 100 % subsidiary into its parent company. According to Article 111 such intra-group mergers are – under certain conditions – exempt from the requirement of approval by the general meeting. For this purpose, a company is, in principle, deemed a 100 % subsidiary when the acquiring company holds all shares and other securities (conferring the right to vote at general meeting) in the transferring company.

3. Upstream-mergers in cases of indirect shareholding (Article 112) Article 112 permits Member States to apply Articles 110 and 111 to operations in which all shares and other securities (as specified in Article 110) of the company or companies being acquired are held by the acquiring company and/or by persons holding those shares and securities in their own names but on behalf of that company. 8 This refers to upstream-mergers of a subsidiary into its parent company where the parent does not technically hold, but economically holds, 100 % of the shares, interest and voting rights in the respective subsidiary.15 7

4. Upstream-mergers of a 90 % subsidiary into its parent company (Article 113, 114) 9

Articles 113 to 114 govern upstream-mergers of a 90 % subsidiary into its parent company by means of a merger by acquisition. Pursuant to Article 113, Member States shall in such cases not require approval of the merger by the general meeting of the acquiring company if certain conditions are fulfilled. If the conditions set out in Article 113 are met, Member States shall, according to and subject to further conditions laid out in Article 114, not impose the requirements set out in Articles 95, 96 and 97 on such mergers.

12 See also: Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 2, p. 20 and 21. 13 See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.21 et seq, p. 629. 14 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.12, p. 674. 15 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.148 et seq, p. 678 et seq.; Bayer and J. Schmidt, ‘Der Referentenentwurf zum 3. UmwÄndG: Vereinfachungen bei Verschmelzungen und Spaltungen und ein neuer verschmelzungsspezifischer Squeeze out’ (2010) Zeitschrift für Wirtschaftsrecht (ZIP), 953 (962).

504

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 89

5. Transfer of all assets and liabilities by one or more companies to another company which is the holder of 90 % or more of their shares (Article 115) Article 115 permits Member States to apply Articles 113 and 114 if 90 % or more, but 10 not all of the shares and other securities referred to in Article 113 of the company or companies being acquired are held by that acquiring company and/or by persons holding those shares and securities in their own names but on behalf of that company. Systematically, Art. 115 is a parallel provision to Article 112 with the difference that the parent company together with its indirect involvement in the subsidiary through a third party does not hold all, but only holds 90 % or more, of the shares and other securities of the transferring companies.

6. Other operations treated as mergers under this Chapter (Articles 116, 117) Operations in the sense of Articles 116 and 117 are not to be interpreted as mergers 11 in the narrow meaning of the Directive (cf. Articles 89 and 90).16 But as they are in many legal and economic aspects similar to mergers, the Directive ensures that certain safeguards provided for in this Chapter also apply to “operations analogous but not identical to those to which it explicitly applies”.17 a) Mergers with a cash payment exceeding 10 % (Article 116) One of the two types of operation treated as mergers under this Chapter are those in 12 which the consideration is not entirely in shares, but to a substantial amount in cash. If Member States permit a cash payment exceeding 10 % for operations referred to in Article 88, they have to ensure that Section 2 (Articles 91 to 108), of Section 3 (Article 109) and Articles 113, 114 and 115 apply to such operations. b) Merger without all of the transferring companies ceasing to exist (Article 117) The other type of operation treated as mergers in this Chapter are those in which at 13 least some of the transferring companies do not cease to exist. If Member States permit operations referred to in Article 88, 110 and 116 to be carried out in a way in which not all of the transferring entities cease to exist18, they need to ensure that Section 2 (Articles 91 to 108) applies accordingly, except for, as a matter of course, point (c) of Article 105(1), according to which the company being acquired ceasing to exist is one of the ipso iure consequences of a merger.

Article 89 Definition of a ‘merger by acquisition’ 1. For the purposes of this Chapter, ‘merger by acquisition’ shall mean the operation whereby one or more companies are wound up without going into liquidation and transfer to another all their assets and liabilities in exchange for the issue to the shareholders of the company or companies being acquired of shares in the acquiring 16 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 2, p. 22; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.23, p. 630. 17 Edwards, EC Company Law (1999), p. 98. 18 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.16, p. 676.

Tobias de Raet

505

Art 89 Definition of a ‘merger by acquisition’ company and a cash payment, if any, not exceeding 10 % of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value. 2. A Member State’s laws may provide that merger by acquisition may also be effected where one or more of the companies being acquired is in liquidation, provided that this option is restricted to companies which have not yet begun to distribute their assets to their shareholders. I. Statutory Definition of a Merger by Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. One or more companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Wound up without going into liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Transfer of all assets and liabilities to the acquiring company . . . . . . . . . . . . . 4. In exchange for shares of the acquiring company or a cash payment . . . . . II. Option to Include Companies in Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 5 7 10

I. Statutory Definition of a Merger by Acquisition 1

Article 89 defines a merger by acquisition as an operation whereby one or more companies are wound up without going into liquidation and transfer to another all their assets and liabilities in exchange for the issuance of shares in the acquiring company to the shareholders of the company or companies being acquired and a cash payment, if any, not exceeding 10 % of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value.

1. One or more companies 2

The definition in Article 88 highlights that this Chapter does not only cover mergers involving two companies (i.e. one transferring and one acquiring company), but also multi-company mergers, whereas such mergers may be performed in one operation and not as a series of mergers.

2. Wound up without going into liquidation One of the key characteristics of a merger pursuant to this Chapter is that the transferring company or companies cease to exist without going into liquidation. This draws a clear line between the concept of winding up companies – voluntarily or involuntarily (e.g. as a consequence of insolvency/bankruptcy proceedings) – on the one hand and mergers on the other hand. Keay and Walton define winding up as the process whereby (i) the assets of a company are collected and realised, (ii) the resulting proceeds are applied in discharging all its debts and liabilities and (iii) any balance which remains after paying the costs and expenses of winding up is distributed among the members according to their rights and interests, or otherwise dealt with as the constitution of the company directs. They define liquidation as the process that prepares a company for dissolution.1 Thus, if a company is wound up without going into liquidation, the assets realised in the process of winding up are not distributed to said company’s members and creditors, but transferred to the acquiring company. Hence, economically the company does not cease to exist but “continues to exist” as part of the acquiring company. 4 Whereas the differences between the two concepts might seem technical at first, they are important when it comes to valuation of the assets, safeguards (for members and creditors) as well as the economic perspective. From all of these perspectives, a company is more than the sum of its assets. It, therefore, makes sense not to use or 3

1

506

Keay and Walton, Insolvency Law Corporate and Personal (2nd edn, 2008), § 12.1, p. 221.

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 89

apply the concepts developed for the voluntary or involuntary liquidation of companies to mergers. Metaphorically speaking, mergers as opposed to liquidations are not the end of a company’s life, but the beginning of something new in such a company’s life.

3. Transfer of all assets and liabilities to the acquiring company A merger results in the transfer of all assets, including the liabilities of the transfer- 5 ring company, to the acquiring company in their totality. Ficker calls this the principle of ‘totality of transfer’ which aims for the seamless continuation of the business activity without having to transfer assets from one juridical person/legal entity to the other by separate legal acts.2 This concept is, however, not unique to mergers, but goes back to the Roman 6 doctrine of universal succession which many jurisdictions apply in inheritance law to avoid uncertainty with respect to the transfer of assets from one juridical person/legal entity to the other.

4. In exchange for shares of the acquiring company or a cash payment The underlying concept of Article 89 is that mergers are, in principle, entirely share- 7 for-share transactions, whereas the shareholders of the transferring company receive shares in the acquiring company. However, the Directive acknowledges that there is sometimes a need for an additional cash payment, in particular to avoid impracticable share conversion ratios.3 Such a cash top-up of up to 10 % is calculated based on the nominal value of the 8 shares issued in this way or, if such shares have no nominal value, based on their accounting par value. The 10 % threshold is known in and was borrowed from German company law.4 9 While the cash top-up option of up to 10 % can be extremely helpful for defining a manageable conversion ratio, 5 it can – from a structural legislative perspective – , also be justified, because cash payments in such a small volume do not alter the character of the merger.6 The Directive, however, also sees the need to close loopholes and treats operations where cash payments exceed 10 % as ‘other operations treated as mergers’ (Article 116).

II. Option to Include Companies in Liquidation Article 89(2) permits Member States to provide that mergers by acquisition may 10 also be effected where one or more of the companies being acquired is in liquidation. 2 Ficker, ‘The EEC Directives on Company Law Harmonisation’, in: Schmitthoff (ed), The Harmonisation of European Company Law (1973), 66 (77). 3 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 2, p. 21. 4 Cf. § 344(2) of the German Stock Corporations Act (Aktiengesetz, 6.9.1965, BGBl. I, p. 1089); see also in the 1968 Preliminary Draft of the Commission to the 1978 Directive: Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F) commenting on Article 2, p. 7. See further: Edwards, EC Company Law (1999), p. 97; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.23, p. 629. 5 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.21 et seq, p. 629; Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (17). 6 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 2, p. 21.

Tobias de Raet

507

Art 89 Definition of a ‘merger by acquisition’ This exemption is borrowed from French7 and German8 company law which provided for such an option prior to the ratification of the 1978 Directive in order to facilitate restructuring of companies in the course of a so-called rescue merger. 9 11 From a systematic point of view, Article 89(2) is to be read in connection with Article 87(3) which gives Member States the option not to apply this Chapter to operations in which the company or the companies being acquired are subject to bankruptcy proceedings, proceedings relating to the winding-up of insolvent companies, judicial arrangements, compositions and analogous proceedings. If a Member State were to make use of such an option, it would be unlikely to make use of the option given in Article 89(2) since there are only limited cases in which a company is in liquidation, but not subject to any of the proceedings mentioned in Article 87(3). 12 While Article 89 does not expressly address the opposite case, i.e. the acquiring company being in liquidation, it is argued that this case is nonetheless covered by the Directive based on the use of the word ‘also’.10 However, given the context, there can be no doubt that the wording ‘also’ is to be understood in relation to Article 89(1) which needs to be adopted by all Member States and deals with transferring companies and companies being acquired. By using the word ‘also’, Article 89(2) gives Member States the option to extend the merger by acquisitions as defined in Article 89(1) to cases in which the acquiring company is in liquidation. This is supported by the fact that the Directive is based on Article 54(2)(g) TFEU, which aims to coordinate safeguards to a necessary extent only, but does not – as it is sometimes argued 11 – try to comprehensively cover all possible cases. This is also in line with the long-standing prevailing interpretation in German company law,12 – upon which Article 89(2) is based – according to which the German law provision similar to Article 89(2) is a definite exemption which may not be applied by analogy to further cases.13 13 Pursuant to the second part of Article 89(2), the provision is restricted to companies which have not yet begun to distribute their assets to their shareholders. This serves to avoid the circumvention of the general rules on distribution set out in Article 56(1) to (4).14

7 Cf. Article 371 Loi n°66-537 du 24.7.1966 sur les sociétés commerciales, JORF du 26.7.1966, p. 6428; currently incorporated as Article L236-10 du code de commerce. 8 Cf. § 339(2) of the German Stock Corporation Act (Aktiengesetz, 6.9.1965, BGBl. I, p. 1089); currently incorporated as § 3(3) of the German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428). 9 In the context of competition law, the Commission understands a ‘rescue merger’ as an operation to acquire a failing company, that is in any event to be forced out of the market; cf. Glossary of terms used in EU competition policy published by the Commission on the 29.1.2003. The German term for rescue merger is ‘Sanierungsfusion’. See also the 1968 Preliminary Draft (Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)) commenting on Article 2, p. 8; Edwards, EC Company Law (1999), p. 97; van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’, in: Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123 (130). 10 Cf. Wachter, ‘Umwandlung insolventer Gesellschaften’ (2015) NZG, p. 858, 861. 11 Cf. Wachter, ‘Umwandlung insolventer Gesellschaften’ (2015) NZG, 858 (861). See further: Madaus, ‘Umwandlungen als Gegenstand eines Insolvenzplans nach dem ESUG’ (2012) Zeitschrift für Wirtschaftsrecht (ZIP), p. 2133, 2135, arguing that the current Article 87(3) generally excludes companies in insolvency proceedings, where the paragraph in fact only applies to the transferring company. 12 Cf. OLG Naumburg 12.2.1997 – 10 Wx 1/97250 in NJW-RR, 1998, 178, 179; OLG Brandenburg 27.1.2015 – 7 W 118/14. 13 OLG Brandenburg, 27.1.2015 – 7 W 118/14 in ZIP, 2015, 929, 930. See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.26, p. 631. 14 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.6, p. 345.

508

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 91

Article 90 Definition of a ‘merger by the formation of a new company’ 1. For the purposes of this Chapter, ‘merger by the formation of a new company’ shall mean the operation whereby several companies are wound up without going into liquidation and transfer to a company that they set up all their assets and liabilities in exchange for the issue to their shareholders of shares in the new company and a cash payment, if any, not exceeding 10 % of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value. 2. A Member State’s laws may provide that merger by the formation of a new company may also be effected where one or more of the companies which are ceasing to exist is in liquidation, provided that this option is restricted to companies which have not yet begun to distribute their assets to their shareholders.

I. Definition of a Merger by Formation of a New Company Article 90 contains the legal definition of a ‘merger by formation of a new company’. 1 While a ‘merger by acquisition’ may involve one or more transferring entities, a ‘merger by formation of a new company’ necessarily requires several transferring companies. Aside from that, the major difference between the ‘merger by formation of a new 2 company’ and the ‘merger by acquisition’ as defined in Article 89, is that the assets of the transferring entities are not transferred to an existing acquiring company in exchange for shares in that company but to a new company set up by the transferring companies specifically for this purpose in exchange for shares in that company. While it is not expressly mentioned in Article 90, it is clear – inter alia from its 3 heading – that the receiving company is not set up (i.e. founded) prior to but in the course of the merger. Thus, the foundation of such a company is, in principle, governed by the provisions for mergers and not the general provisions for setting up a new company.

II. Option to Include Companies in Liquidation Corresponding with Article 89(2), the second paragraph of Article 90(2) permits 4 Member States to include a merger by formation of a new company where one or more of the companies which are ceasing to exist is in liquidation.

Section 2 Merger by acquisition Article 91 Draft terms of merger 1. The administrative or management bodies of the merging companies shall draw up draft terms of merger in writing. 2. Draft terms of merger shall specify at least: (a) the type, name and registered office of each of the merging companies; (b) the share exchange ratio and the amount of any cash payment; (c) the terms relating to the allotment of shares in the acquiring company;

Tobias de Raet

509

Art 91 Draft terms of merger (d) the date from which the holding of such shares entitles the holders to participate in profits and any special conditions affecting that entitlement; (e) the date from which the transactions of the company being acquired shall be treated for accounting purposes as being those of the acquiring company; (f) the rights conferred by the acquiring company on the holders of shares to which special rights are attached and the holders of securities other than shares, or the measures proposed concerning them; (g) any special advantage granted to the experts referred to in Article 96(1) and members of the merging companies’ administrative, management, supervisory or controlling bodies. I. Drawing up the Draft Terms of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Form requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Minimum Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Key figures of the companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Share exchange ratio, amount of cash payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Terms relating to the allotment of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Date of profit entitlement (point d) and accounting date . . . . . . . . . . . . . . . . . 5. Specification of special rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Specification of special advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 5 6 9 11 12 13 14 15 16 17 19

I. Drawing up the Draft Terms of Merger Mergers require a written agreement between the merging companies.1 Article 91 defines this agreement as ‘draft terms of merger’ or in French ‘projet de fusion’. 2 Such ‘draft terms of merger’ are a key element of every merger pursuant to this Directive and have to be implemented by the Member States in their respective law on domestic mergers.3 The administrative or management bodies of the merging companies are to be put in charge by the Member States of drawing up the draft terms of merger in writing. They shall serve as a decision-making basis for the general meetings who have to decide on the merger. 2 Prior to implementation of the 1978 Directive, Member States had different approaches to how mergers were actually conducted and implemented.4 Considering the legislative aim and competence to protect members and other third parties (such as creditors), it was not regarded necessary to entirely eliminate the existing differences in the laws of the Member States. Coordination efforts were rather limited to an extent, which ensured that the essential terms of the merger were laid down in a specific 1

1 Cf. the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 3, p. 23. 2 Considering the national variations of this agreement, a neutral notion for this institute was therewith established. See also: Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 3, p. 23; van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’, in: Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123, 132. 3 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 3, p. 24. 4 With a more detailed view on the different national forms of these ‘draft terms’: van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’, in: Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123, 130 et seq.

510

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 91

document accessible to shareholders and other interested parties in time for a general meeting decision.5 The draft terms of merger model is based on the idea of protecting the interests of 3 the shareholders of the merging entities by involving them directly in the process leading to the merger (cf. Article 93) by means of a system of information and transparency rather than implementing a preventive control by governmental institutions.6 This does, however, require a system in which the shareholders are adequately informed. The drawing up and publication of the draft merger terms are key elements in such a system and are intended to enable shareholders to make informed decisions when exercising their voting rights with respect to the merger.7 Other elements of this information system are (i) the requirement to draw up a 4 detailed written report and information on the merger (cf. Article 95), (ii) the examination of the draft terms of merger by experts (cf. Article 96), (iii) the approval of the merger by the general meetings of the merging companies (cf. Articles 93 and 94) and (iv) the drawing-up and certification of documents in due legal form (cf. Article 102). These elements developed for domestic mergers served as a model for European company reorganisation law (i.e. laws on structural changes of companies)8 and influenced the codification of other forms of corporate reorganisations, such as divisions (spin-offs, split-offs) and cross-border-mergers, as well as the formation of a European Stock Corporation (Societas Europae).9 Another element which, strictly speaking, is not part of that European model, 10 but serves as one pillar of a broadly interpreted information system is the retrospective control of the information provided pursuant to Articles 106 and 108 regarding the civil liability of members of the administrated or management bodies and experts.11

1. Responsibility The administrative or management bodies of the merging companies are responsible 5 for jointly12 negotiating and drawing up the draft terms of the merger. The Directive 5 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 3, p. 23; van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’, in: Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123, 130. 6 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.21, p. 679; Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (19). 7 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (18); Sonnenberger, ‘Der Vorentwurf eines Abkommens über die Internationale Fusion’, (1969) AG, 381 (383); Temple Lang, ‘Three EEC Draft Directives on Company Law – Capital, Mergers and Management’, (1972) VII The Irish Jurist, 306 (315): “If shareholder approval is to be required, this information [regarding the draft terms] clearly must be given to shareholders to enable them to consider the merger plan intelligently”. 8 A “basic legal measure for an EC law on structural changes” as called by Grundmann, European Company Law. Organization, Finance and Capital Markets (2012), § 28.1, p. 668. See also: Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.3 et seq., p. 623. 9 Directive 1982/891/EEC of 17.12.1982 (Divisions), Directive 2005/56/EC of 26.10.2005 (Cross-border mergers), Regulation (EC), No. 2157/2001 of 8.10.2011 (Societas Europaea – SE) and Regulation (EC), Nr. 1435/2003 of 22.7.2003 (Societas Cooperativa Europaea – SCE) as named by Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.29, p. 623. 10 As it is not to be found in the Directive 2005/56/EC of 26.10.2005 (Cross-border mergers), Regulation (EC), No. 2157/2001 of 8.10.2011 (Societas Europaea – SE) and Regulation (EC), No. 1435/2003 of 22.7.2003 (Societas Cooperativa Europaea – SCE). 11 Cf. Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (19).

Tobias de Raet

511

Art 91 Draft terms of merger does not expressly specify which body shall be competent if a company has a two-tier structure, i.e. an executive/management board and an administrative/supervisory board. As was provided for in Article 22(1) of the 1970 Proposal, the executive/management board should be responsible considering the typical corporate governance of and the checks and balances in two-tier companies.13

2. Form requirement Article 91(1) requires the draft terms of merger to be in writing. This requirement, put into the context of other Directives, should be understood in the sense of a durable medium that stores information in a way that is accessible for future reference for a period of time adequate for the purposes of the information, and which allows the unchanged reproduction of the information stored.14 7 However, Member States may impose stricter form requirements (see for example § 6 of the German Transformation Act (Umwandlungsgesetz)15 which requires the draft terms to be notarized.16 8 Pursuant to Article 102(1) sentence 2, Member States have to provide for a notarial certification of the draft terms in cases where the merger does not need to be approved by the general meetings of all the merging companies, replacing the notarial supervision of the merger which is otherwise ensured by the certification of the minutes of the general meetings which decide on the merger. 6

3. Content Considering the different existing national approaches, Article 91 does not provide for certain rights or obligations to be included in the draft terms. Its aim is rather to provide a general framework governing the merger.17 Member States have to ensure that this general framework requires the draft terms of merger to specify at least the minimum requirements set out in Article 91(2). 10 The Directive does not define which further information and content Member States may require to be included in the draft terms of merger. As a general rule, content must not lead to an overload of information. Only information, which is provided in a transparent, clear and comprehensible manner, can fulfil the role of an effective protective instrument.18 Notwithstanding such transparency requirements, Member States are free to introduce specific requirements, such as the merging companies having to enter into merger agreement.19 9

12 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.22, p. 680. 13 Edwards, EC Company Law (1999), p. 103, fn. 67. 14 See for example the Definition in Article 2 No. 10 of Directive 2011/83/EU of 25.10.2011. With further references: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.32, p. 634. 15 German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428. 16 See also: Kalss and Klampfl, Handbuch des EU-Wirtschaftsrechts (48th Volume), E III, p. 65, fn. 389. 17 See van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’ in: Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123, 131. 18 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”’ (2004) NZG, 15 (20). 19 See van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’ in: Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123, 131 et seq.

512

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 91

II. Minimum Content The minimum content to be included in the draft terms of a merger pursuant to 11 Article 91(2) are designed for a ‘standard’ merger. Article 110 sentence 3 makes certain exceptions for group mergers. Member States shall not impose the requirements set out in Article 91(2)(b), (c) and (d) on mergers in which all assets of one or more companies are transferred to another company which is the holder of all their shares.

1. Key figures of the companies Pursuant to point (a) of Article 91(2), the draft terms of merger have to contain the 12 type (i.e. the legal form), the name and the registered office of the merging companies, i.e. the transferring and the acquiring companies as well as companies formed in the course of mergers by formation of a new company (cf. Article 109(1) subparagraph 2).

2. Share exchange ratio, amount of cash payment The share exchange ratio and, where applicable, the amount of cash payment has 13 to be specified in the draft terms of merger (cf. Article 91(2) point (b)). A detailed explanation of the share exchange ratio is to be given as part of the detailed written report (cf. Article 95) and the examination of the draft terms of merger by experts (cf. Article 96(2)).20

3. Terms relating to the allotment of shares The terms relating to the allotment of shares in the acquiring company need to be in- 14 cluded in the draft terms of merger to adequately inform, in particular, the shareholders of the transferring company about the detailed terms and conditions of the transfer of the shares (cf. Article 91(2) point (c)).21

4. Date of profit entitlement (point d) and accounting date The draft terms of merger have to specify the date from which the holding of such 15 shares entitles the holders to participate in profits and any special conditions affecting that entitlement as well as the date from which the transactions of the company being acquired are to be treated for accounting purposes as being those of the acquiring company, as both dates are of extremely high practical relevance (cf. Article 91(2) point (d) and (e)).22

5. Specification of special rights The rights conferred by special rights are attached holders of securities other are only to be specified in

the acquiring company on the holders of shares to which 16 (e.g. voting rights or the distribution of profits) and the than shares, or the measures proposed concerning them, the draft terms if the transferring company or companies

20 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 3, p. 24; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.35, p. 635. 21 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.36, p. 635. 22 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 3, p. 24; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.37, p. 635.

Tobias de Raet

513

Art 92 Publication of the draft terms of merger issued such types of shares and securities (cf. Article 91(2) point (f)). In these cases, the draft terms must provide adequate information on how such rights are dealt with in the course of the merger, e.g. if holders of such shares and securities are granted special rights by the acquiring company.23

6. Specification of special advantages Finally, the draft terms of merger need to specify any special advantages granted to the experts referred to in Article 96(1) and members of the merging companies’ administrative, management, supervisory or controlling bodies (cf. Article 91(2) point (g)). A special advantage is any kind of benefit granted on the occasion of a merger which is not compensation/remuneration for a specific task.24 18 The rationale behind these criteria is to prevent, or at least reduce, abuse by making any such advantages transparent.25 Any special advantages granted to such persons at least raises doubts as to whether they negotiated the merger in the best interest of the company or were to a certain extent also driven by their own (economic) interest. Considering this aspect, the transparency requirement applies to any persons, who are at least potential decision-makers in the mergers, irrespective of whether they are members of statutory or facultative bodies.26 They do, therefore, not apply to auditors.27 17

III. Scope of Application in Regard to Other Types of Mergers 19

Pursuant to Article 109, Article 91 applies to mergers by formation of a new company. Article 91 applies also in the case of an upstream-merger of a 100 % subsidiary into its parent company, but only to the extent that Member States should not impose the requirements laid down in Article 91(2)(b), (c) and (d).

Article 92 Publication of the draft terms of merger Draft terms of merger shall be published in the manner prescribed by the laws of the Member States in accordance with Article 16, for each of the merging companies, at least one month before the date fixed for the general meeting which is to decide thereon. Any of the merging companies shall be exempt from the publication requirement laid down in Article 16 if, for a continuous period beginning at least one month before the date fixed for the general meeting which is to decide on the draft terms of merger and ending not earlier than the conclusion of that meeting, it makes the draft 23 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 3, p. 24. 24 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.39, p. 635. 25 Grohmann, The Information Model in European Company Law (2006), 321; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.39, p. 635. 26 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.39, p. 635. 27 Ratsprotokoll (Statement in the Council minutes), Doc. R 2337/78 of 5.10.1978, referring to Article 5(2)(g)(ii); Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.23, p. 680; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.39, p. 635.

514

Tobias de Raet

Art 92

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

terms of such merger available on its website free of charge for the public. Member States shall not subject that exemption to any requirements or constraints other than those which are necessary in order to ensure the security of the website and the authenticity of the documents, and may impose such requirements or constraints only to the extent that they are proportionate in order to achieve those objectives. By way of derogation from the second paragraph of this Article, Member States may require that publication be effected via the central electronic platform referred to in Article 16(5). Member States may alternatively require that such publication be made on any other website designated by them for that purpose. Where Member States avail themselves of one of those possibilities, they shall ensure that companies are not charged a specific fee for such publication. Where a website other than the central electronic platform is used, a reference giving access to that website shall be published on the central electronic platform at least one month before the date fixed for the general meeting. That reference shall include the date of publication of the draft terms of merger on the website and shall be accessible to the public free of charge. Companies shall not be charged a specific fee for such publication. The prohibition precluding the charging of companies of a specific fee for publication, laid down in the third and fourth paragraphs, shall not affect the ability of Member States to pass on to companies the costs in respect of the central electronic platform. Member States may require companies to maintain the information for a specific period after the general meeting on their website or, where applicable, on the central electronic platform or the other website designated by the Member State concerned. Member States may determine the consequences of temporary disruption of access to the website or to the central electronic platform, caused by technical or other factors. I. Publication of the Draft Terms of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Published as prescribed by law of the Member State in accordance with Article 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Deadline for the publication of the draft terms of merger . . . . . . . . . . . . . . . . . II. Exemption from the Publication Requirement Laid Down in Article 16 . . . . . 1. Online availability of the draft terms of the merger . . . . . . . . . . . . . . . . . . . . . . . 2. Deadline for the publishing on the website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Limits to further restriction of exemption towards the Member States . . . III. Derogation from the Exemption of the Second Subparagraph . . . . . . . . . . . . . . . IV. Reference on the Central Electronic Platform to the Website . . . . . . . . . . . . . . . . V. Availability of the Information on the Website after the General Meeting . . . VI. Consequences of Temporary Disruption of Access . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Scope of Application in Regard to other Types of Mergers . . . . . . . . . . . . . . . . . . .

1 3 5 7 8 9 10 11 12 13 14 15

I. Publication of the Draft Terms of Merger The draft terms of merger need to be published in the manner prescribed by the 1 laws of the Member States in accordance with Article 16 of this Directive for each of the merging companies and at least one month before the date fixed for the general meeting which will decide on the merger. This ensures that the shareholders, who are to decide on a merger, receive the information in a timely and formalized manner1 which enables them to make an informed decision on the merger.2 This is, however, limited to 1 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.24, p. 680.

Tobias de Raet

515

Art 92 Publication of the draft terms of merger the draft terms of merger. Additional and potentially more important3 information, such as the annual accounts and reports, may in contrast only be inspected by shareholders (cf. Article 97). 2 Article 92 (ex Article 6) used to be limited to the first paragraph which constitutes the general rule on the publication of the draft terms of merger. Paragraphs two to six were adopted under the Directive 2009/109/EC4 and introduced options to publish the draft terms of mergers by modern means of publication (e.g. via central electronic platforms such as the websites of the involved companies).5

1. Published as prescribed by law of the Member State in accordance with Article 16 The procedure laid down in Article 16, which was formerly part of the First Directive6, aims at the integration of commercial and company registers in the national legal systems for the information of third parties. At the same time, a file is to be opened for each of the registered companies. According to Article 14, to which Article 16 refers, Member States shall take the measures required to ensure compulsory disclosure by companies of certain documents and particulars. 4 The procedure implemented in the Member States thereby is intended to guide the publication of the draft terms of merger. 3

2. Deadline for the publication of the draft terms of merger The draft terms have to be published at least one month before the date fixed for the general meeting which is to decide on the merger. Shareholders have to be informed adequately in advance of the date on which the decision is taking place. 6 The one-month deadline is a strict minimum deadline. Therefore, the German provision in § 61 sentence 1 in conjunction with § 123 of the German Transformation Act (Umwandlungsgesetz)7 pursuant to which the deadline was set at 30 days (instead of one month) does not comply with the requirement in Article 92 and has to be – despite the clear wording of the German provision – interpreted in a way concurring with the specification of one month in Article 92.8 5

2 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (18); Sonnenberger, ‘Der Vorentwurf eines Abkommens über die Internationale Fusion’ (1969) AG, 381 (383). 3 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.24, p. 680. See also: John Temple Lang, ‘Three EEC Draft Directives on Company Law – Capital, Mergers and Management’ (1972) VII The Irish Jurist, 306 (315): “Rather surprisingly, no details of the capital structures or the nature of the business of the companies involved are required, but presumably in practice this information would emerge from the other information required.” 4 Cf. Article 2 point 2 of the Directive 2009/109/EC amending the 1978 Directive. 5 See also: Sandhaus, ‘Richtlinienvorschlag der Kommission zur Vereinfachung der Berichts- und Dokumentationspflichten bei Verschmelzungen und Spaltungen’ (2009) NZG, 41 (44); Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.43 et seq, p. 636 et seq. 6 First Council Directive 68/151/EEC of 9.3.1968. 7 German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428). 8 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.46, p. 638. Cf. for a detailed analysis: J. Schmidt, ‘§ 123 Abs. 1 AktG i. d. F. des UMAG und §§ 61 Satz 1, 63 Abs. 1 UmwG – ein unbeabsichtigter Richtlinienverstoß’ (2006) 7 DB, 375.

516

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 92

II. Exemption from the Publication Requirement Laid Down in Article 16 A company involved in the merger is to be exempt from the publication requirement 7 laid down in Article 16 if it makes the draft terms of merger available on its website (cf. Article 16(2)).

1. Online availability of the draft terms of the merger The exemption only applies if the draft terms of merger are made available free of 8 charge to the public and on the company’s website (cf. sentence 1 of Article 16(2)). The Commission’s proposal for Directive 2009/109/EC originally allowed the publication of the draft terms of merger on any third party’s website,9 but this passage was deleted in the course of the legislative process10.

2. Deadline for the publishing on the website The exemption further requires that the draft terms of merger be available online 9 for a continuous period beginning not later than one month before the date fixed for the general meeting which is to decide on the draft terms of merger (cf. sentence 1 of Article 16(2)). The draft terms of merger have to be accessible at least until the conclusion of that meeting.

3. Limits to further restriction of exemption towards the Member States Member States may impose requirements or constraints to ensure the security of the 10 website and the authenticity of the documents (cf. sentence 2 of Article 92(2)). Any further restrictions of the exemption laid down in Article 16(2) sentence 1 are, however, limited to the extent that they are proportionate in order to achieve those objectives. Since registers pursuant to Article 16 are, in general, open to the public, Member States may, in particular, not require any registration or identification process which would limit access to the draft terms of merger to certain groups (e.g. subject to nationality or to proof of identification as a shareholder). There is no requirement pursuant to which the website (or even the documents themselves) are to be made available in multiple languages. If companies know that they have an international shareholder base, it is, however, good corporate governance for them to provide the website and the documents at least also in English.

III. Derogation from the Exemption of the Second Subparagraph Member States may require that publication of the draft terms of merger take place 11 via the central electronic platform referred to in Article 16(5) or, alternatively, on any other website designated by them for that purpose. If Member States decide to make such a requirement, they cannot charge companies a fee for said publication (cf. Article 92(3)), but can pass on costs in respect of such a central electronic platform or designated website to them pursuant to Article 92(5). Cf. in the proposal of the Directive 2009/109/EC: COM(2008) 576 final of 24.9.2008, p. 11. Sandhaus, ‘Richtlinienvorschlag der Kommission zur Vereinfachung der Berichts- und Dokumentationspflichten bei Verschmelzungen und Spaltungen’ (2009) NZG, 41 (44); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), p. 637, fn. 108. 9

10

Tobias de Raet

517

Art 93 Approval by the general meeting of each of the merging companies

IV. Reference on the Central Electronic Platform to the Website 12

Where a website other than the central electronic platform is used, a reference to such a website, which is used to publish the draft terms of merger, shall be published on the central electronic platform. The website in the sense of Article 92(4) can be either the company’s own or any other website designated by the Member States for the purpose of publishing the draft terms of merger. The reference on the central electronic platform has to be published at least one month before the date fixed for the general meeting. The reference shall include the date of publication of the draft terms of merger on the website. The reference shall be accessible to the public free of charge, but Member States may decide to pass on to the companies any costs they incur with respect to such a reference pursuant to Article 92(5).

V. Availability of the Information on the Website after the General Meeting 13

Member States may require companies to maintain the information for a specific period after the general meeting on their website or, where applicable, on the central electronic platform or another website designated by the Member State concerned (cf. sentence 1 of Article 92(6)). Consequently, this provision does not apply to Article 92(1), i.e. if the draft terms of merger are published in a register pursuant to Article 16. 11

VI. Consequences of Temporary Disruption of Access 14

The Directive does not contain provisions regarding the consequences of temporary disruption of access to the website or to the central electronic platform caused by technical or other factors (cf. sentence 2 of Article 92(6)). Member States may determine such consequences. It would be appropriate if Member States applied the same statutory law that applies to any other documents which have to be made available online prior to a general meeting (i.e. the agenda) or rely on the case law developed in this context.

VII. Scope of Application in Regard to other Types of Mergers 15

Article 92 also applies to mergers by formation of a new company (cf. Article 109(1)) as well as to upstream-mergers of a 100 % subsidiary into its parent company (cf. Article 110).

Article 93 Approval by the general meeting of each of the merging companies 1. A merger shall require at least the approval of the general meeting of each of the merging companies. The laws of the Member States shall provide that this approval decision shall require a majority of not less than two thirds of the votes attached either to the shares or to the subscribed capital represented. 11 See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.45, p. 638.

518

Tobias de Raet

Art 93

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

The laws of a Member State may, however, provide that a simple majority of the votes specified in the first subparagraph shall be sufficient when at least half of the subscribed capital is represented. Moreover, where appropriate, the rules governing alterations to the memorandum and articles of association shall apply. 2. Where there is more than one class of shares, the decision concerning a merger shall be subject to a separate vote by at least each class of shareholders whose rights are affected by the transaction. 3. The decision shall cover both the approval of the draft terms of merger and any alterations to the memorandum and articles of association necessitated by the merger. I. Approval of the General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Approval of the general meeting of each of the companies involved in the merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Majority requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Majority requirement – general rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Simple majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Rules which apply to the alteration of the articles of association . . . . . . . . . . II. Separate Vote for Each Class of Shareholders (Para. 2) . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Decision to Be Made by the General Meeting . . . . . . . . . . . . . . . . . . . . . . . IV. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 3 6 7 9 10 12 13 14

I. Approval of the General Meeting One of the core principles of European company law is that fundamental decisions 1 have to be made by the shareholders.1 Accordingly, Article 93 determines that a merger needs to be approved by the general meetings of each of the companies involved in the merger.2 Article 93 only contains basic provisions regarding the safeguarding of shareholder 2 rights, but leaves it to the Member States to implement more detailed rules on the governing of general meetings and their decision-making process.3 Consequently, the Directive does not unnecessarily interfere with the national jurisdictions which are not harmonised or approximated in this respect.4 A potential Directive coordinating the corporate structure of PLCs, which would have dealt with the decision-making process, was mentioned in the 1970 Proposal,5 but never made its way through the legislative process.

1 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (19). 2 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 4, p. 25. 3 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.81, p. 651. 4 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 4, p. 25; the 1968 Preliminary Draft (Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)) commenting Article 4, p. 13; van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’ in: Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123, 133. 5 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 4, p. 25.

Tobias de Raet

519

Art 93 Approval by the general meeting of each of the merging companies 1. Approval of the general meeting of each of the companies involved in the merger A merger shall require at least the approval by the general meeting of each of the companies involved in the merger. The term ‘at least’ indicates that mergers may be subject to further approvals. 4 Considering the corporate governance of PLCs, it does not make sense to leave any decision-making or veto power with the executive or supervisory board, since they will have been implemented (directly or indirectly) by the shareholders. Hence, it should not be possible for the executive or supervisory board to overrule or veto decisions of the shareholders meeting. 5 Further approval may, for example, be required by debenture holders as referred to in Article 100. 3

2. Majority requirements 6

The Directive defines a lower limit for the majority that Member States may require for the decisions of the general meetings of the merging companies.6 a) Majority requirement – general rule

Pursuant to the first subparagraph of Article 93(1), the laws of the Member States shall, as a general rule, provide that this approval decision requires a majority of not less than two thirds. Member States may base such a majority requirement either on the votes attached to the shares or on the subscribed capital represented in that general meeting. This takes into account that Member States use different criteria to determine majority requirements in general meetings.7 8 As indicated by the term ‘not less’ Member States may set a higher majority requirement. 7

b) Simple majority 9

The laws of a Member State may provide that a simple majority of the votes specified in the first subparagraph of Article 93(1) is sufficient when at least half of the subscribed capital is represented at the general meeting. This provision takes into account that Member States like France or Italy use quorums, pursuant to which a certain number of shareholders have to be present at the general meeting.8

3. Rules which apply to the alteration of the articles of association 10

Where appropriate, Member States shall apply the rules which apply to the alteration of the memorandum or articles of association. This aspect reflects the fact that in many Member States fundamental decisions, such as changes to the articles of association, often require a ¾ majority.

6 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 4, p. 25. 7 Cf. the 1968 Preliminary Draft (Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)) commenting Article 4, p. 13; van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’ in: Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123, 133. 8 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1554); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), p. 651, fn. 205.

520

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 93

While the 1970 Proposal9 required Member States to apply the rules for alterations of 11 the memorandum and the articles of association in any event, the wording ‘where appropriate’ was included in the 1978 Directive leaving Member States at least some discretion as to whether they apply such rules to the general meetings’ decisions on mergers. In Germany, where alterations to the articles of association require a majority of ¾ of the subscribed capital represented at the general meeting,10 the same requirement applies to the approval of mergers of stock corporations pursuant to § 65 of the German Transformation Act (Umwandlungsgesetz).11

II. Separate Vote for Each Class of Shareholders (Para. 2) Where there is more than one class of shares, a separate vote is necessary (cf. Article 12 93 (2)). The vote has to be held by at least each class of shareholders whose rights are affected by the transaction. While Article 93 does not expressly contain a definition of the term ‘share class’, this may be derived from Article 72(2)(b) pursuant to which share classes may be different based on voting and/or profit participation rights.12

III. Scope of Decision to Be Made by the General Meeting According to Article 93(3), the general meeting shall not only decide on the draft 13 terms of merger, but also on any alterations to the memorandum and articles of association necessitated by the merger, which should be self-explanatory considering that alterations to articles of association are one of the key competences of the shareholders’ meeting.

IV. Scope of Application in Regard to Other Types of Mergers Article 93 also applies to mergers by formation of a new company (cf. Article 109(1)), 14 but not to upstream-mergers of a 100 % subsidiary into its parent company, whereas in the latter case neither Member States nor the general meeting of the transferring or the general meeting of the acquiring companies needs to approve the merger.13 Nor shall Member States require the approval of the general meeting of the acquiring company in the similar case of an upstream-merger of a 90 % (or more) subsidiary into its parent company, if the conditions laid down in Article 113 are fulfilled.

9 Cf. Article 4 of the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) and also in Articles 4 of the 1968 Preliminary Draft (Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)). 10 Cf. § 179(2) of the German Stock Corporation Act (Aktiengesetz, 6.9.1965, BGBl. I, p. 1089). 11 Suggestion to Article 4 of the Economic and Social Committee OJ of 6.9.1971 C 88/18 (19). See also: Edwards, EC Company Law (1999), p. 106; Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.30, p. 684; Hommelhoff and Riesenhuber, ‘Strukturmaßnahmen im Europäischen und deutschen Gesellschaftsrecht’ in: Grundmann (ed), Systembildung und Systemlücken in Kerngebieten des Europäischen Privatrechts (2000), 259 (272); Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), p. 651, fn. 206. 12 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 19.180, p. 587. 13 Edwards, EC Company Law (1999), p. 108; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.87, p. 653.

Tobias de Raet

521

Art 94 Derogation from the requirement of approval by the general meeting

Article 94 Derogation from the requirement of approval by the general meeting of the acquiring company The laws of a Member State need not require approval of the merger by the general meeting of the acquiring company where the following conditions are fulfilled: (a) the publication provided for in Article 92 is effected, for the acquiring company, at least one month before the date fixed for the general meeting of the company or companies being acquired which is to decide on the draft terms of merger; (b) at least one month before the date specified in point (a), all shareholders of the acquiring company are entitled to inspect the documents specified in Article 97(1) at the registered office of the acquiring company; (c) one or more shareholders of the acquiring company holding a minimum percentage of the subscribed capital is entitled to require that a general meeting of the acquiring company be called to decide whether to approve the merger; this minimum percentage may not be fixed at more than 5 %. Member States may, however, provide for the exclusion of non-voting shares from this calculation. For the purposes of point (b) of the first paragraph, Article 97(2), (3) and (4) shall apply. I. Derogation from the Requirement of Approval by the General Meeting of the Acquiring Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Cumulative Fulfilment of Specified Conditions (Points (a-c)) . . . . . . . . . . . . . . . . 1. Publication of draft terms of merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Right of shareholder to inspect the documents specified in Article 97(1) 3. Protection of minority shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Application of Article 97(2), (3) and (4) for Point (b) . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 3 4 5 6 7 8

I. Derogation from the Requirement of Approval by the General Meeting of the Acquiring Company The laws of a Member State need not require approval of the merger by the general meeting of the acquiring company (only) if the conditions laid down in points (a), (b) and (c) are fulfilled. The transferring company or companies cannot be exempt from such a requirement. 2 The derogation from the approval by the general meeting was included in the 1978 Directive at the request of the Netherlands and the United Kingdom.1 Germany, for example, has not made use of this option.2 1

II. Cumulative Fulfilment of Specified Conditions (Points (a-c)) 3

The requirements set out under (a), (b) and (c) have to be fulfilled cumulatively.

Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1554). Cf. § 13 of the German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428). 1

2

522

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 94

1. Publication of draft terms of merger The first requirement (point (a) is that the publication of the draft terms of merger 4 be effected in accordance with Article 92 at least one month before the date fixed for the general meeting of the company or companies being acquired which is to decide on the draft terms of merger. Hence, Member States cannot decide on a derogation from the requirement of approval of the general meeting of the acquiring company if the draft merger terms are – based on certain exceptions – not published.

2. Right of shareholder to inspect the documents specified in Article 97(1) According to point (b), all shareholders of the acquiring company must have the 5 right to inspect the documents specified in Article 97(1) at the registered office of the acquiring company at least one month before the date fixed for the general meeting of the company or companies being acquired which is to decide on the draft terms of merger. This includes the draft terms of merger (point (a)), the annual accounts and annual reports of the companies involved in the merger for the preceding three financial years (point (b)), an accounting statement (point (c)), the reports of the administrative or management bodies of the companies involved in the merger (point (d)) and the expert report (point (e)).

3. Protection of minority shareholders The most important requirement is laid down Article 94 point (c). Member States 6 may only provide that the merger does not need to be approved by the general meeting of the acquiring company in any case if the minority shareholders are granted the right to call a general meeting. In detail: one or more shareholders of the acquiring company holding a minimum percentage of the subscribed capital must be entitled to require that a general meeting of the acquiring company be called to decide nevertheless whether to approve the merger. The minimum percentage must not be fixed at more than 5 %. Nonvoting shares may, however, be excluded from this calculation by the Member States when implementing the provision into national law. In principle, point (c) provides for an adequate protection of minority shareholders and defines an adequate mechanism. Member States who make use of Article 94 should align the minority threshold with similar cases in which minority shareholders can call for a general meeting or require certain items to be put on the agenda of a general meeting.

III. Application of Article 97(2), (3) and (4) for Point (b) The specifications in Article 97(2), (3) and (4) in regard to the availability of docu- 7 ments for the inspection by shareholders shall also apply to point (b).

IV. Scope of Application in Regard to Other Types of Mergers Article 94 does not apply to mergers by formation of a new company (cf. Article 8 109(1)). In this case the approval of the merger by the general meeting is always required.3

3

See also: Edwards, EC Company Law (1999), p. 108.

Tobias de Raet

523

Art 95 Detailed written report and information on a merger

Article 95 Detailed written report and information on a merger 1. The administrative or management bodies of each of the merging companies shall draw up a detailed written report explaining the draft terms of merger and setting out the legal and economic grounds for them, in particular the share exchange ratio. That report shall also describe any special valuation difficulties which have arisen. 2. The administrative or management bodies of each of the companies involved shall inform the general meeting of their company, and the administrative or management bodies of the other companies involved, so that the latter may inform their respective general meetings of any material change in the assets and liabilities between the date of preparation of the draft terms of merger and the date of the general meetings which are to decide on the draft terms of merger. 3. Member States may provide that the report referred to in paragraph 1 and/or the information referred to in paragraph 2 shall not be required if all the shareholders and the holders of other securities conferring the right to vote of each of the companies involved in the merger have so agreed. I. Written Report Explaining the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Responsibility of administrative or management bodies . . . . . . . . . . . . . . . . . . 2. Form of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Detailed written report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Separate or joint report of the companies involved in the merger . . . . . . . . c) Deadline for the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Content of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Obligation to Update in Case of Material Change in the Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Option to Waive Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Civil Liability of Members of the Administrative or Management Bodies (Article 106) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 3 4 4 6 8 9 13 15 17 18

I. Written Report Explaining the Merger The 1970 Proposal stated that the “particulars supplied in the merger plan are not sufficient as a means of informing the shareholders” and suggested to require “the management of each of the companies involved in the merger to draw up a detailed written report explaining the draft terms of merger and in particular the ratio to govern the exchange of shares”.1 This idea was implemented in Article 95(1). Accordingly, the purpose of the report is to provide the shareholders with a reliable basis for their assessment when deciding whether or not to approve the draft terms of merger. 2 In order to get to know the content of the detailed report, the shareholders have the right to inspect said report at least one month before the date fixed for the general meeting which is to decide on the draft terms of merger (cf. Article 97(1)(d)). This shall grant the shareholders sufficient time to assess the envisaged merger prior to the decision of the general meeting.2 1

1 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 5, p. 25. 2 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1553).

524

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 95

1. Responsibility of administrative or management bodies The administrative or management bodies of each of the companies involved in the 3 merger have to draw up the report (cf. Article 96(1) subparagraph 1). For companies with a two-tier management structure, Article 22(1) of the 1970 Proposal determined this to be the executive rather than the supervisory board.3 In contrast to the expert report to be prepared pursuant to Article 96, the written report pursuant to Article 95 is not supposed to be an objective evaluation of the merger. It rather gives the administrative or management bodies the opportunity, to explain why they believe the merger and the draft terms of merger to be in the best interest of the company. 4

2. Form of the report a) Detailed written report The report has to be prepared in detailed written form (cf. Article 95(1) subparagraph 4 1). The written form requires, as described above,5 storage on a ‘durable medium’ that stores information in a way that is accessible for future reference for a period of time adequate for the purposes of the information and which allows the unchanged reproduction of the information stored6. In order to adequately serve the interest of the shareholders, the report has to be 5 transparent.7 Whereas the report on the one hand needs to be ‘detailed’, it should, on the other hand, not be overloaded with information and obscure the key aspects.8 Irrespective of the level of detail required, the report must remain comprehensible to the average shareholder, whereas the concept of the average consumer under European contract law may serve as a role model for defining the concept of the average shareholder.9 b) Separate or joint report of the companies involved in the merger The wording of the first paragraph implies that each company involved in the merger 6 has to draw up a separate report. Despite the clear wording, it is argued that Member States may permit the companies 7 involved in the merger to draw up a joint report,10 which, for example, is possible pursuant to § 8(1) of the German Transformation Act (Umwandlungsgesetz). 11 Others do not expressly raise the problem, but assume that the board of each company involved in the merger has to draw up separate reports.12 Grundmann, however, argues that a separate report is required in order to explain the merger from the perspective of each party, Edwards, EC Company Law (1999), p. 103, fn. 67. Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (20). 5 Cf. → Art 91 mn. 6. 6 See for example Article 2 No. 10 of Directive 2011/83/EU of 25.10.2011. See with further references: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.32, p. 634. 7 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (20). 8 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.25, p. 681. 9 Riesenhuber, Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (20). 10 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.51, p. 640. 11 German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428. 12 Edwards, EC Company Law (1999), p. 105. 3 4

Tobias de Raet

525

Art 95 Detailed written report and information on a merger including their interests.13 This is not convincing, since the interests of the parties do not have to be included in the report pursuant to Article 95(1). A joint report can inform shareholders in the same way as individual reports and is basically a compendium of both reports.14 c) Deadline for the report 8

The wording of Article 95 does not provide for a deadline by which the detailed report has to be prepared. A minimum requirement for the time frame of the expert report can, however, be derived from Article 97,15 pursuant to which the documents listed therein (this includes the written report pursuant to Article 95, cf. Article 97(1) (d)) have to be available for inspection by the shareholders at least one month prior to the date fixed for the general meeting which shall decide on the draft terms of merger.

3. Content of the report The report according to Article 95 has to contain an explanation of the draft terms of merger including the legal and economic reasons for the draft terms of merger. This includes, in particular, the share exchange ratio which is extremely important for the shareholders of the merging companies, since the shareholders may (economically) suffer losses of assets if the exchange ratio is unreasonably low or high.16 The report should also describe any difficulties regarding the valuation of the companies involved in the merger in order to alert shareholders with respect thereto.17 10 The report should not merely reproduce the content of the draft terms of merger, 18 rather it must clarify and substantiate the significant legal and economic aspects of the merger.19 Since the Directive does not define a minimum or maximum content of the report, Member States are free to require specific information or explanations to protect the interests of the shareholders.20 11 Since the German legislator implemented Article 95 almost literally,21 it was left to the German courts22 to further define the necessary content of the report and infor9

13 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.25, p. 681. 14 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 249. 15 Article 97 was initially integrated in Article 5(3) of the different proposals of 1970, 1973 and 1975. 16 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 222. 17 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.25, p. 681. 18 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (20); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.48, p. 639. 19 Hartwig Henze, ‘Das Richtlinienrecht und der Schutz von Minderheitsgesellschaftern und Gläubigern im deutschen Aktienrecht – verdeckte Sacheinlage, Bezugsrecht und Verschmelzungsbericht’ in Grundmann (ed), Systembildung und Systemlücken in Kerngebieten des Europäischen Privatrechts (2000), 235 (252); Grohmann, The Information Model in European Company Law (2006), 322. 20 See also examples of Member States that did increase the level of requirements: Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.48, p. 639. 21 Cf. § 8 of the German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428). See also: Henze, ‘Das Richtlinienrecht und der Schutz von Minderheitsgesellschaftern und Gläubigern im deutschen Aktienrecht – verdeckte Sacheinlage, Bezugsrecht und Verschmelzungsbericht’, in: Grundmann (ed), Systembildung und Systemlücken in Kerngebieten des Europäischen Privatrechts (2000), p. 235, 252. 22 See also inter alia: BGH, 22.5.1989, BGHZ 107, 296; OLG Düsseldorf, 14.1.2004, I-19 W 1/03 AktE, NZG 2004, 429; OLG Düsseldorf, 11.8.2006, I-15 W 110/05.

526

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 95

mation on the merger. The Higher Regional Court (Oberlandesgericht) of Düsseldorf ruled23 that shareholders have to be briefed in all relevant details prior to the general meeting. However, according to the court, the report is not meant to enable the shareholders to review every detail of the merger. The court found that this is the task of the expert report pursuant to Article 96. Instead, the report pursuant to Article 95 should make the merger process and its background transparent for the shareholders, so they can assess if the merger is economically reasonable and meets the legal requirements.24 Although it is not expressly provided for in the wording of Article 95,25 companies 12 may decide not to disclose information in the report which may potentially harm the company, but only if and to the extent that the transparency and the plausibility of the report is not affected.26 The corporate bodies, which are responsible for drafting the report, are also responsible for finding a balance between the company’s interest not to disclose certain information and the obligation to explain the merger in a detailed report. This exposes the competent executive and administrative bodies to substantial liability risks since shareholders may, on the one hand, argue that they were not sufficiently informed or, on the other hand, that the disclosure of certain information is harmful to the company.

II. Obligation to Update in Case of Material Change in the Assets and Liabilities While the report pursuant to Article 95 is, in principle, to be made as of the date 13 of the draft terms of merger, Article 95(2) requires an update in the case of and with respect to any material change in the assets and liabilities between the date of preparation of the draft terms of merger and the date of the general meetings which are to decide on the draft terms of merger. This obligation is imposed on the management or administrative bodies who prepared the report. In the case of a material change in the assets or liabilities, they have to inform the general meeting of such a company as well as the administrative or management bodies of the other companies involved, so that the latter may inform their respective general meetings about such changes. For this purpose, a change is to be regarded material if it can be reasonably expected 14 to have a significant effect on the market price or value of the respective company. This ensures that the shareholders are aware of any significant changes in the value of the respective company which occur prior to the general meeting which shall decide on the merger.27

OLG Düsseldorf, 15.3.1999, 17 W 18/99, para. 23. OLG Düsseldorf, 15.3.1999, 17 W 18/99, para. 23. 25 As is the case in Germany under § 8(2) of the German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428), where legislation in fact, restricts the reporting obligation in the case of information which is likely to cause a significant disadvantage to one of the parties of the merger or to an associated company. 26 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 250; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.50, p. 640. 27 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.52, p. 641. 23

24

Tobias de Raet

527

Art 96 Examination of the draft terms of merger by experts

III. Option to Waive Report Article 95(3) permits Member States to waive the requirement to draft a report in accordance with Article 95(1) and (2) if all shareholders and the holders of other securities conferring the right to vote of each of the companies involved in the merger have agreed. This option makes sense, since the report pursuant to Article 92(1) and (2) is to be seen as an element to protect minority shareholders which do not have the legal or actual power to obtain information about the company and the merger. There is, however, no need for a report on the draft terms of mergers if there are only a few shareholders who not only have certain statutory information rights, but also significant influence on the corporate bodies which are to decide on the merger. 16 While this option was not introduced into European company law prior to 2009,28 national laws – for example in Germany29 – had earlier provided for such an option.30 15

IV. Civil Liability of Members of the Administrative or Management Bodies (Article 106) 17

Shareholders of the transferring company are protected against misconduct on the part of members of the administrative or management bodies of that company in preparing and implementing the merger, since Member States are required to implement rules governing the civil liability of members of those bodies pursuant to Article 106.

V. Scope of Application in Regard to Other Types of Mergers 18

Pursuant to Article 109, Article 95 does not apply to mergers by formation of a new company. Furthermore, pursuant to Article 110, no report according to Article 95 is required in the case of upstream-mergers of a 100 % subsidiary into its parent company (acquisition of a wholly-owned subsidiary).31 However, in the case of an upstreammerger of a 90 % (or more) subsidiary into its parent company (cf. Article 113), Member States may only exempt the companies involved in the merger from drawing up a report pursuant to Article 95 if the conditions laid down in Article 114 are fulfilled.

Article 96 Examination of the draft terms of merger by experts 1. One or more experts, acting on behalf of each of the merging companies but independent of them, appointed or approved by a judicial or administrative authority, shall examine the draft terms of merger and draw up a written report to the shareholders. However, the laws of the Member States may provide for the appointment of one or more independent experts for all the merging companies, if such appointment is made by a judicial or administrative authority at the joint request of those companies. Such experts may, depending on the laws of each Member State, be natural or legal persons or companies or firms. Cf. Article 2 point 4(3) of the Directive 2009/109/EC. German legislature introduced the option to renunciation as early as 1994 in § 8(3) of its Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428). 30 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.24, p. 355 et seq. 31 Edwards, EC Company Law (1999), p. 108. 28

29

528

Tobias de Raet

Art 96

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

2. In the report referred to in paragraph 1, the experts shall in any case state whether in their opinion the share exchange ratio is fair and reasonable. Their statement shall at least: (a) indicate the method or methods used to arrive at the share exchange ratio proposed; (b) state whether such method or methods are adequate in the case in question, indicate the values arrived at using each such methods and give an opinion on the relative importance attributed to such methods in arriving at the value decided on. The report shall also describe any special valuation difficulties which have arisen. 3. Each expert shall be entitled to obtain from the merging companies all relevant information and documents and to carry out all necessary investigations. 4. Neither an examination of the draft terms of merger nor an expert report shall be required if all the shareholders and the holders of other securities conferring the right to vote of each of the companies involved in the merger have so agreed. I. Examination of the Draft Terms of Merger by Experts . . . . . . . . . . . . . . . . . . . . . . . 1. Separate or joint expert reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Expert requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Qualification and independence of experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Appointment or approval by a judicial or administrative authority . . . . . c) Legal quality of the experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Scope of examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Deadline for the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Written Expert Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Methods used to arrive at the share exchange ratio . . . . . . . . . . . . . . . . . . . . . . . 2. Appropriateness of used method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Special valuation difficulties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Expert’s Right to Obtain Information and Investigate . . . . . . . . . . . . . . . . . . . . . . . . IV. Option to Waive Examination of the Draft Terms of the Merger and the Expert Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Civil Liability of Experts (Article 107) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 3 5 5 8 10 11 13 14 15 16 17 18 19 21 22

I. Examination of the Draft Terms of Merger by Experts The draft terms of merger shall be examined by one or more experts who shall 1 examine the draft terms of merger and draw up a written report to the shareholders. 1 This additional report was implemented, because the draft terms of mergers as well as the report pursuant to Article 95 are drawn up by the administrative and management bodies of the companies involved in the merger. In contrast thereto, the report pursuant to Article 96 shall serve as an independent piece of information. Pursuant to Article 97(1)(e), shareholders can inspect the report in the same manner 2 they can inspect the written report provided by the administrative or management bodies pursuant to Article 95.

1 The French Article 377 Loi n° 66-537 du 24.7.1966 sur les sociétés commerciales. JORF du 26.7.1966, p. 6428 (currently incorporated as Article L236-1 du code de commerce) served as the template for Article 96; Sonnenberger, ‘Interne Fusion von Aktiengesellschaften im Gemeinsamen Markt’ (1971) AG, 76 (78); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.56, p. 642.

Tobias de Raet

529

Art 96 Examination of the draft terms of merger by experts 1. Separate or joint expert reports The examination has to be carried out separately for each company involved in the merger. The laws of the Member States may, however, provide for the appointment of one or more joint experts for all companies involved in the merger, if the companies involved in the merger jointly request so. This option goes back to a request from Germany and Britain2 and was not included in the 1968 Preliminary Draft3 and the 1970 Proposal4 which provided for separate expert reports in order to avoid conflicts of interests.5 4 In the case of a multi-step merger, where more than two companies are merged, Member States may also allow a partly joint examination.6 3

2. Expert requirements a) Qualification and independence of experts Since the Directive does not contain provisions regarding the qualification of the experts7, the specific requirements are to be determined by the Member States. 8 6 Besides expertise, the independence of the experts is essential in order to ensure the quality of the report9. The experts have to be independent with respect to all companies involved in the merger (“independent of them”, cf. Article 96(1) sentence 1). Therefore, only experts approved or appointed by a court or an administrative authority may be entrusted with the task of examining the draft terms of merger. 10 Despite the aforementioned, the Directive does not specify any further requirements. 11 7 A provision that was included in the different proposals12 which expressly permitted the experts to be persons who are responsible for auditing the accounts of the respective company, was ultimately not adopted in the 1978 Directive. The absence of such a provision does not, however, mean that the companies’ auditors are automatically disqualified from being appointed as experts pursuant to Article 96.13 5

Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1553). Cf. Article 5 of the 1968 Preliminary Proposal (Les fusions internes. Document de travail n° 6. Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)). 4 Cf. Article 5 of the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091). 5 See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.59, p. 643 et seq. 6 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.59, p. 643 et seq. 7 In contrast to Annex I of the 1968 Preliminary Draft (Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)), p. 55, where a definition of experts is provided. See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.61, p. 644. 8 Kalss and Klampfl, Handbuch des EU-Wirtschaftsrechts (48th Volume), E III, para. 158, p. 66. 9 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 5, p. 25. 10 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 5, p. 26. 11 See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.61, p. 644. 12 Article 5(2) of the 1968 Preliminary Draft (Les fusions internes, Document de travail n° 6: Avantprojet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)) and equally to the Proposals of 1970 (Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091)), 1973 (COM(72) 1668 final, 4.1.1973 (Vol. 1972/0232)) and 1975 (COM(75) 671 final, 22.12.1975 (Vol. 1975/0246)). 13 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.61, p. 644; Wooldrigde, ‘The Third Directive and the Meaning of Mergers’ (1980) The Company Lawyer, 75, 77. 2

3

530

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 96

b) Appointment or approval by a judicial or administrative authority In the standard case of a separate examination, the expert may either be appointed or 8 approved by a judicial or an administrative authority (cf. Article 96(1) sentence 1). The Directive leaves it up to the Member States to decide whether the companies may choose an expert which is subject to approval by the competent administrative or judicial authority, or if the authorities themselves shall able to appoint the expert. Whereas in the latter case, authorities technically have more power, companies can still be granted the – formal or informal – option to suggest one or more persons be appointed as experts. In the case of a joint examination, Member States may not choose the approval 9 model, but – in line with the wording of the Article 96(1) sentence 2 – have to choose the appointment model. c) Legal quality of the experts The Directive does not limit the potential group of experts. Pursuant to Article 10 96(1) sentence 3, “natural or legal persons or companies or firms” may be appointed (or approved) as experts. Hence, it is, in particular, not necessary to appoint a single individual as expert, but gives the option of choosing accounting firms as is typically the case for such tasks.

3. Scope of examination The experts have to review the draft terms of mergers pursuant to Article 91 for 11 completeness and accuracy.14 The main focus of the examination is the verification of the share exchange ratio which is of particular importance to the shareholders 15. The wording of Article 96 does not imply that the detailed report drawn up by the administrative or management bodies of each of the companies involved in the merger pursuant to Article 95 has to be part of the examination.16 However, it is argued that the expert should also have to examine the report pursuant to Article 95, in order to inform shareholders whether or not the explanation given by the administrative or management body for the economic and legal grounds of the merger is correct.17 While the latter approach is indeed in the interest of the shareholders of the merging companies, the main subject of the expert examination and the report is to determine whether the share exchange ratio is fair and reasonable (cf. Article 96(2)). However, since this is only a minimum requirement, Member States are free to widen the scope of the examination pursuant to Article 96.18

14 Kalss and Klampfl, Handbuch des EU-Wirtschaftsrechts (48th Volume), E III, para. 158, p. 66; Grohmann, The Information Model in European Company Law (2006), 323. 15 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.27, p. 682; Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (20). 16 See also: Hommelhoff, ‘Minderheitenschutz bei Umstrukturierungen’ (1993) Zeitschrift für Unternehmens- und Gesellschaftsrecht (ZGR), 452 (465), who argues in this regard, that the utilisation of the German notion “Verschmelzungsplan” (“draft terms of merger”) instead of “Verschmelzungsvertrag” (“merger contract”) would refer to the merger process as a whole – economically and legally. Considering the historic context, the different national forms of that institute in the Member States made it necessary to use the neutral notion “draft terms”. Draft terms only refer to the document that is to be submitted to the general meeting for approval in the sense of Article 91 and 93(3); cf.: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn 2017), § 20.57, p. 642. 17 Cf. Hommelhoff, ‘Minderheitenschutz bei Umstrukturierungen’ (1993) Zeitschrift für Unternehmensund Gesellschaftsrecht (ZGR), 452 (465 et seq).

Tobias de Raet

531

Art 96 Examination of the draft terms of merger by experts 12

The experts may not, however, be given the task of evaluating whether the merger is appropriate from an economic perspective.19 Whether the merger is reasonable economically may only be determined by the shareholders as the owners of the companies involved in the merger.20 The information provided to the shareholders (pursuant to Articles 91, 95 and 96) should only enable them to make an informed decision in the general meeting, but should not make the decision for them.

4. Deadline for the report 13

The wording of Article 96 does not expressly provide for a deadline for the examination of the draft terms of merger or the report to be drawn up by the experts. Since the expert report is to be seen independently of the report provided by the administrative or management bodies of the companies involved in the merger pursuant to Article 95, the examination of the draft terms of merger pursuant to Article 96 can take place before they are completed21. However, pursuant to Article 97(1)(e), the expert report has to be available for inspection by the shareholders at least one month before the date fixed for the general meeting which is to decide on the draft terms of merger.

II. Written Expert Report 14

The experts have to draw up a report on their findings.22 The report has to be addressed to the shareholders and in writing.23 Considering the main objective of the examination, the experts must come to an overall conclusion as to whether the share exchange ratio determined in the draft terms of merger is fair and reasonable. 24 In addition to such an overall conclusion, the expert report also has to indicate the method or methods used to arrive at the share exchange ratio proposed and state whether or not such a method or methods are adequate in the case in question (cf. Article 96(2) (a) and (b)). This ensures that the results obtained by the experts can be verified by the shareholders of the companies involved in the merger and – possibly – competent courts.25 Just like the report on the draft terms of mergers pursuant to Article 95, the expert report shall also describe any special valuation difficulties.

1. Methods used to arrive at the share exchange ratio 15

While the method or methods used to arrive at the share exchange ratio, which is proposed by the draft terms of merger, have to be indicated by the expert report, the Directive does not determine a certain method for the calculation of the share exchange 18 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), p. 254; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.57, p. 643. 19 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1553); Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), p. 227; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.57, p. 642. 20 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.57, p. 642. 21 Lutter and Drygala, ‘§ 9’ in: Lutter, Umwandlungsgesetz (2004), para. 14. 22 Sonnenberger, ‘Interne Fusion von Aktiengesellschaften im Gemeinsamen Markt’ (1971) AG, 76 (78). 23 Written form as defined in Article 2 No. 10 of Directive 2011/83/EU of 25.10.2011 as a ‘durable medium’. 24 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.27, p. 683. 25 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 5, p. 25.

532

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 96

ratio. This recognises the different existing approaches to valuating a company and also allows for other evaluation methods being developed and used in the future.26

2. Appropriateness of used method Furthermore, the expert report has to specify whether the evaluation method or 16 methods used are adequate in the specific case. For this purpose, the experts may rely on standard economic and market practice. The experts have to indicate the values arrived at using each such method and give an opinion on the relative importance attributed to such methods in arriving at the value decided on. Whereas it makes sense to have the experts examine and report on the respective valuation methods, it is questionable whether or not the average shareholder will be in a position to understand and evaluate the method used.

3. Special valuation difficulties The report shall state any particular difficulties which have arisen in the course of 17 the valuation. This statement is intended to attract the attention of shareholders. Such complications can, for example, arise with respect to forecasts of a start-up company or a company in liquidation and if there is insufficient information for the expert to verify.27

III. Expert’s Right to Obtain Information and Investigate In order to enable the experts to conduct their examination in an effective manner, 18 the Directive provides that they shall be entitled to obtain from the merging companies all relevant information and documents and to carry out all necessary investigations.28 The experts have this right not only in respect of the company for which they are appointed as expert, but also with respect to all other companies involved in the merger.29 Hence, the expert appointed (or approved) for the transferring entity may also obtain information with respect to the acquiring company. This makes sense, since experts can only give an opinion on the share exchange ratio if they have sufficient information with respect to both companies.

IV. Option to Waive Examination of the Draft Terms of the Merger and the Expert Report Shareholders and holders of other securities conferring the right to vote of each of the 19 companies involved in the merger may agree not to require an examination of the draft terms of merger or an expert report. This provision was introduced by the Directive 2007/63/EC,30 the preamble of which 20 stated that “there is no reason to require such an examination by an independent expert 26 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1553); Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 227; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.58, p. 643. 27 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.58, p. 643. 28 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.62, p. 645. 29 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.62, p. 645. 30 Cf. Article 2 point 10 of the Directive 2007/63/EC of 13.11.2007 amending the 1978 Directive.

Tobias de Raet

533

Art 97 Availability of documents for inspection by shareholders for the shareholders if all the shareholders agree that it may be dispensed with”.31 A similar provision had been included in Article 8 of the cross-border merger Directive 2005/56/EC.32 Both exemptions are to be regarded – similar to Article 95(3) – as a consequence of the shareholders’ right to self-determination.

V. Civil Liability of Experts (Article 107) 21

Shareholders of the transferring company are protected against misconduct on the part of the appointed experts of that company in the performance of their duties. Similar to Article 95, Member States are required to implement rules governing the civil liability of such experts pursuant to Article 107, but must not apply this provision in the case of an upstream-merger of a 100 % subsidiary into its parent company (cf. Article 110) and shall not implement this provision in regard to an upstream-merger of a 90 % (or more) subsidiary into the parent company when the conditions laid down in Article 114 are fulfilled.

VI. Scope of Application in Regard to Other Types of Mergers The rules laid down in Article 96 also apply to mergers by formation of a new company (cf. Article 109). 23 Article 96, however, neither applies to an upstream-merger of a 100 % subsidiary into its parent company (cf. Article 110) nor to an upstream-merger of a 90 % (or more) subsidiary into its parent company; but in the latter case only if the conditions laid down in Article 114 are fulfilled. 22

Article 97 Availability of documents for inspection by shareholders 1. All shareholders shall be entitled to inspect at least the following documents at the registered office at least one month before the date fixed for the general meeting which is to decide on the draft terms of merger: (a) the draft terms of merger; (b) the annual accounts and annual reports of the merging companies for the preceding three financial years; (c) where applicable, an accounting statement drawn up on a date which shall not be earlier than the first day of the third month preceding the date of the draft terms of merger, if the latest annual accounts relate to a financial year which ended more than six months before that date; (d) where applicable, the reports of the administrative or management bodies of the merging companies provided for in Article 95; (e) where applicable, the report referred to in Article 96(1). For the purposes of point (c) of the first subparagraph, an accounting statement shall not be required if the company publishes a half-yearly financial report in accordance with Article 5 of Directive 2004/109/EC and makes it available to shareholders in 31 Recital no. 4 of the Directive 2007/63/EC. See also with further references: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.65, p. 645. 32 See also the proposal for the Directive 2007/63/EC: COM(2007) 91 final, p. 3.

534

Tobias de Raet

Art 97

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

accordance with this paragraph. Furthermore, Member States may provide that an accounting statement shall not be required if all the shareholders and the holders of other securities conferring the right to vote of each of the companies involved in the merger have so agreed. 2. The accounting statement provided for in point (c) of the first subparagraph of paragraph 1 shall be drawn up using the same methods and the same layout as the last annual balance sheet. However, the laws of a Member State may provide that: (a) it is not necessary to take a fresh physical inventory; (b) the valuations shown in the last balance sheet are to be altered only to reflect entries in the books of account; the following shall nevertheless be taken into account: — interim depreciation and provisions, — material changes in actual value not shown in the books. 3. Every shareholder shall be entitled to obtain, on request and free of charge, full or, if so desired, partial copies of the documents referred to in paragraph 1. Where a shareholder has consented to the use by the company of electronic means for conveying information, such copies may be provided by electronic mail. 4. A company shall be exempt from the requirement to make the documents referred to in paragraph 1 available at its registered office if, for a continuous period beginning at least one month before the date fixed for the general meeting which is to decide on the draft terms of merger and ending not earlier than the conclusion of that meeting, it makes them available on its website. Member States shall not subject that exemption to any requirements or constraints other than those which are necessary in order to ensure the security of the website and the authenticity of the documents and may impose such requirements or constraints only to the extent that they are proportionate in order to achieve those objectives. Paragraph 3 shall not apply if the website gives shareholders the possibility, throughout the period referred to in the first subparagraph of this paragraph, of downloading and printing the documents referred to in paragraph 1. However, in that case Member States may provide that the company is to make those documents available at its registered office for consultation by the shareholders. Member States may require companies to maintain the information on their website for a specific period after the general meeting. Member States may determine the consequences of temporary disruption of access to the website caused by technical or other factors. I. Right of Inspection by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Documents to be inspected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) List of documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Special requirements for the drawing up of the accounting statement . . . . 2. Formal requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Place and time frame of access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Access at the registered office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Access on the website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Requirements for the accounting statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Manner of access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

Tobias de Raet

1 5 5 7 10 10 10 12 15 16 16 19 22

535

Art 97 Availability of documents for inspection by shareholders

I. Right of Inspection by Shareholders The draft terms of merger (cf. Article 91) as well as the report to be prepared by the administrative or executive bodies (cf. Article 95) and the expert report (cf. Article 96) are not designed to be strictly confidential or only public to authorities/courts. Article 97, which was designed based on French law, expressly entitles the shareholders of the companies involved in the merger to review these documents.1 Shareholders shall be entitled to inspect at minimum the documents listed in Article 97(1) points (a) to (e) at the companies’ registered office at least one month prior to the general meeting. 2 While the general idea behind Article 97 was already included in Article 11 of the 1978 Directive, it was modified by Directive 2009/109/EC,2 which introduced several adjustments in order to facilitate communication to the shareholders by means of modern information technology (cf. via the company’s website or email).3 3 It is important to highlight that the Directive limits the right to inspection to shareholders,4 meaning that the documents do not have to be made available to the general public. Modern means of communication have, however, led to a de-facto public availability of the draft terms of merger and the reports pursuant to Article 95 and Article 96. A lot of companies – in particular listed companies – opt to make the documents available on their website without any restrictions as to access. Therefore, the documents referred to in Article 97 are often not only available to the shareholders, but also to potential investors, analysts, and financial media. This not only leads to public and media attention, but may – in the case of listed companies – also have an effect on the share price and eventually the economic terms of the merger. 4 Shareholders may not only inspect the documents provided by or with respect to the company they hold shares in, but for all companies involved in the merger, so they can make an informed decision on the merger. 1

1. Documents to be inspected a) List of documents Article 97 points (a) to (e) list the documents that may be inspected by the shareholders in order to keep them as informed as possible of the situation of the companies involved in the merger.5 As indicated by the wording (‘at least’), Member States are free to implement provisions that require further documents.6 6 The following documents may be inspected by the shareholders as a minimum requirement in accordance with Article 97(1): 5

point (a): point (b):

the draft terms of merger the annual accounts and annual reports of the companies involved in the merger for the preceding three financial years

1 Article 11 as being the current Article 97 is based on the French Article 168 Loi n° 66-537 du 24.7.1966 sur les sociétés commerciales. JORF du 26.7.1966, p. 6414 et seq. (currently incorporated as Article L225-115 du code de commerce). 2 Cf. Article 2 point 5 of the Directive 2009/109/EC. 3 Cf. the proposal for the Directive 2009/109/EC: COM(2008) 576, p. 5: “[...] today’s means of modern information technology allow for an easier and cheaper access to the information [...].” 4 Cf. Grohmann, The Information Model in European Company Law (2006), p. 326. 5 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 5, p. 26. 6 Ratsprotokoll (Statement in the Council minutes), Doc. R 2337/78 of 5.10.1978, referring to Article 11; Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1554); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.69, p. 647.

536

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

point (c): point (d): point (e):

Art 97

the accounting statement (if applicable) the reports of the administrative or management bodies of the companies involved in the merger referred to in Article 95 (if applicable) the expert report referred to in Article 96(1) (if applicable).

b) Special requirements for the drawing up of the accounting statement The accounting statement referred to in point (c) only needs to be drawn up if the 7 latest annual accounts relate to a financial year which ended more than six months before the date of the drawing up of the draft terms of merger. In this case, such a statement shall not be drawn up on a date earlier than the first day of the third month preceding the date of the drawing up of the draft terms of merger. Pursuant to Article 97(1) subparagraph 2 sentence 1, an accounting statement shall 8 not be required if the company publishes a half-yearly financial report in accordance with Article 5 of Directive 2004/109/EC (Transparency Directive) and makes it available to shareholders in accordance with Article 97(1).7 Pursuant to Article 97(1) subparagraph 2 sentence 2, shareholders and the holders 9 of other securities conferring the right to vote of each of the companies involved in the merger may – similar to Article 95(3) and Article 96(4) – agree to renounce the requirement to draw up an accounting statement when the Member States provide for such an option.8

2. Formal requirements a) Place and time frame of access (i) Access at the registered office The shareholders of the companies involved in the merger shall have the right to 10 inspect the documents referred to in Article 97(1)(a) to (e) at the registered office of the companies. Hence, the documents must be made available at the business premises of the companies involved in the merger to which the shareholders are granted access. 9 If a company has more than one registered office, the shareholders have to be able to inspect these documents at all registered offices.10 The documents referred to in Article 97(1)(a) to (e) have to be accessible for the 11 shareholders at least one month before the date fixed for the general meeting which is to decide on the draft terms of merger (cf. Article 97(1)). As this is indicated by the wording ‘at least’, Member States may provide for a longer time period in order to serve the shareholders’ interests.11

7 See also: recital no. 8 of the Directive 2009/109/EC; Lutter/Bayer/Schmidt, Europäisches Kapitalmarktund Gesellschaftsrecht (6th edn, 2017), § 20.76, p. 649. 8 See also: recital no. 6 of the Directive 2009/109/EC; Lutter/Bayer/Schmidt, Europäisches Kapitalmarktund Gesellschaftsrecht (6th edn, 2017), § 20.76, p. 649. 9 In regard to the German provision implementing Article 97: Grunewald, ‘§ 63’ in: Markus Lutter, Umwandlungsgesetz (2004), para. 2. 10 In regard to the German provision implementing Article 97: Diekmann, ‘§ 63’ in: Semler and Stengel, Umwandlungsgesetz (4th edn, 2017), para. 9. 11 Ratsprotokoll (Statement in the Council minutes), Doc. R 2337/78 of 5.10.1978, referring to Article 11; Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1554); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.69, p. 647.

Tobias de Raet

537

Art 97 Availability of documents for inspection by shareholders (ii) Access on the website Companies involved in the merger may, in deviation to Article 97(1), make the documents referred to in Article 97(1) points (a) to (e) available on their website instead of making them available at the registered office of that company. In order to be exempted from Article 97(1), the company has to make these documents available on its website for a continuous period beginning at least one month before the date fixed for the general meeting, which is to decide on the draft terms of merger, and ending not earlier than the conclusion of that meeting. Member States may also require companies to maintain the information on their website for a specific period after the general meeting (cf. Article 94(4) subparagraph 3 sentence 1). 13 This exemption shall not be made subject to any requirements or constraints other than those which are necessary in order to ensure the security of the website and the authenticity of the documents by the Member States (cf. Article 97(4) subparagraph 1 sentence 2). Any requirements or constraints may only be imposed to the extent that they are proportionate in order to achieve said objectives. This leaves some ambiguity if Member States can require shareholders to register for a restricted area of the website or provide some sort of identification. Companies should be given that option online, considering that access at the registered office of the companies is subject to comparable offline restrictions. 14 Member States are responsible for determining the consequences for temporary disruption of access to the website caused by technical or other factors (cf. Article 97(4) subparagraph 3 sentence 2 – similar to Article 92(6) sentence 2). With respect thereto, Member States can only be encouraged not to impose excessive fines or even allow the resolutions passed at the general meeting to be challenged because of technical disruptions. Legislators should rather encourage companies to use such modern means of communication, since they are an excellent option to ensure that the documents referred to in Article 97 are not only required by law, but are actually available for inspection by shareholders. 12

b) Requirements for the accounting statement 15

Article 97(2) defines certain formal requirements which have to be observed with regard to the accounting statement to be made available (cf. Article 97(1)(c)). The most important message is that the methods and layouts used to draw up the accounting statement need to be the same as those used for the last annual balance sheet. This is ensures that the respective statements can actually be compared. c) Manner of access (i) General

Every shareholder shall be entitled to obtain, on request and free of charge, full or, if so desired, partial copies of the documents referred to under points (a) to (e) pursuant to the first subparagraph of Article 97(3), whereas “partial copies” is to be understood as hard copies, i.e. printed documents. 17 The second subparagraph of Article 97(3) determines that such copies may be provided by electronic mail, where a shareholder has consented to use by the company of electronic means for conveying information. 18 It is slightly disappointing that the Directive understands the distribution of paper as the standard case. While this was reasonable at times when email and internet technology was still in its early stage, electronic distribution and availability of documents should 16

538

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 97

be the general standard and not the exception. Member States, unfortunately, have to deal with the clear wording of the Directive and require the companies to distribute hard copies to the shareholders of the merging companies. Shareholders may obtain the entire set of documents from all companies involved in the merger and not just from the company they hold shares in. (ii) Website Article 97(3) shall not apply if the website gives shareholders the opportunity to 19 download and print the documents referred to in Article 97(a) to (e) (cf. Article 97(4) subparagraph 2). This opportunity has to exist for a continuous period beginning at least one month before the date fixed for the general meeting which is to decide on the draft terms of merger, and shall not end earlier than the conclusion of that meeting as specified in Article 97(4) subparagraph 2 in conjunction with Article 97(4) subparagraph 1 sentence 1. Considering there are similar requirements for other documents to be made available with respect to general meetings, Member States should, therefore, align the respective deadlines to establish a comprehensive and coordinated framework. From a technical perspective, companies should only be responsible for providing a 20 technical environment which enables a reasonable shareholder to download and print documents in theory. Companies should not be responsible if certain shareholders are not actually able to download and print the documents due to specific hard- or software issues at the shareholders’ end. If Member States make use of the option pursuant to Article 97(4) subparagraph 21 2, they may still provide that the company must make such documents available at its registered office for consultation by the shareholders pursuant to Article 97(4) subparagraph 2 sentence 2. While it would be old-fashioned to require companies to have documents available at their registered office in any case, they should at least be given the option to fulfil their obligations pursuant to Article 97 by having the documents also available at their registered office. As long as consequences of technical disruptions are not entirely clear, most companies will not want to rely on a mere online publication.

II. Scope of Application in Regard to Other Types of Mergers ny.

Pursuant to Article 109, Article 97 applies to mergers by formation of a new compa- 22

Points (d) and (e) of Article 97(1) do not apply to an upstream-merger of a 100 % 23 subsidiary into its parent company (cf. Article 110). In the case of an upstream-merger of a 90 % (or more) subsidiary into its parent com- 24 pany, the only time Article 97 does not apply is when the conditions laid down in Article 114 are fulfilled.

Tobias de Raet

539

Art 98 Protection of employees’ rights

Article 98 Protection of employees’ rights Protection of the rights of the employees of each of the merging companies shall be regulated in accordance with Directive 2001/23/EC.

I. Protection of Employees’ Rights in Accordance with Directive 2001/23/EC It has always been disputed how the rights of employees are to be dealt with in the course of the merger.1 Since employees are – like shareholders and creditors – an important group of stakeholders affected by a merger, the legislator had to decide if and what kind of protection they are to be given. 2 This includes various matters of individual labour law such as the question as to whether the employment relationship may be terminated by the employer or the employee because of the merger. While in many respects, employment agreements can be treated like any other contract, this is not the case for collective labour law matters. This includes the involvement of works councils and other employee representations in mergers, but also the effects mergers have on them and collective bargaining agreements. 3 Among other things it was discussed whether or not to require the management or administrative boards to draft a report on how the merger would affect the employees of the companies involved in the merger.2 Eventually it was decided not to require an additional report or any other provisions on employee matters in the Directive, but to make reference to the Directive of Transfers and Undertakings (Directive 2001/23/EC) which deals with such aspects. Although transparency is a key element of the Directive, it was correct not to require an additional report in the Directive. Such an additional report might not only have led to an information overload, but would also have been an alien to the system, since employees – as opposed to shareholders – are not eligible to decide on the merger. Considering that the main purpose of documents and reports, which are to be prepared prior to the merger, is to serve as a basis for decision-making, a report prepared for the employees would not make sense. 4 Member States should, nevertheless, require the administrative or management boards of the companies involved in the merger to describe in the report on the draft terms of merger pursuant to Article 95 the effects the merger will have on employees, considering that this information is not only important for employees but also for the shareholders. 1

II. Scope of Application in Regard to Other Types of Mergers 5

Article 98 also applies to mergers by formation of a new company (cf. Article 109(1)) as well as to the case of an upstream-merger of a 100 % subsidiary into the parent company (cf. Article 110 sentence 2).

1 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.122, p. 667; Edwards, EC Company Law (1999), p. 93; Jens Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 264 et seq. 2 See for example Article 6 of the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) and further references as to the various changes provided by Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.122, p. 667, fn. 325.

540

Tobias de Raet

Art 99

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Article 99 Protection of the interests of creditors of the merging companies 1. The laws of the Member States shall provide for an adequate system of protection of the interests of creditors of the merging companies whose claims antedate the publication of the draft terms of merger and have not fallen due at the time of such publication. 2. For the purposes of paragraph 1, the laws of the Member States shall at least provide that such creditors shall be entitled to obtain adequate safeguards where the financial situation of the merging companies makes such protection necessary and where those creditors do not already have such safeguards. Member States shall lay down the conditions for the protection provided for in paragraph 1 and in the first subparagraph of this paragraph. In any event, Member States shall ensure that the creditors are authorised to apply to the appropriate administrative or judicial authority for adequate safeguards provided that they can credibly demonstrate that due to the merger the satisfaction of their claims is at stake and that no adequate safeguards have been obtained from the company. 3. Such protection may be different for the creditors of the acquiring company and for those of the company being acquired. I. Protection of the Interests of Creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Protected claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Protected creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Adequate Safeguard System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Procedural safeguards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. No uniform protection system required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 3 7 8 15 16 17 18

I. Protection of the Interests of Creditors In 1970, the Commission did not consider it necessary to fully approximate the rules 1 for the protection of creditors in the Member States.1 Today, the Directive still does not provide for a sophisticated and comprehensive system on the protection of the creditors of the companies involved in the merger. Article 99’s main intention is to establish the principle that creditors of the companies involved in the merger shall be entitled to a minimum degree of security, whereas it is left to the Member States to provide for a more detailed framework on how such protection is guaranteed. Like employees, creditors do not have the right to vote or in any other way decide on 2 or influence the merger. At same time, the effects a merger can have on the creditors of the companies involved in the merger can be extensive. The most important aspect is that the merger inevitably leads to the change of the debtor that – at least if based on a contractual relationship – was chosen by such creditors. Creditors of the transferring company may – after the merger – be faced with a debtor they did not choose and have a poorer reputation or financial strength (e.g. in terms of rating).2 Since this situation

1 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting Article 10, p. 30; Wooldridge, ‘The Third Directive and the Meaning of Mergers’ (1980) The Company Lawyer, 75 (77). 2 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (22).

Tobias de Raet

541

Art 99 Protection of the interests of creditors of the merging companies may not only affect the enforceability but also the value of the creditors’ claim, a certain degree of creditor protection is required.3

1. Protected claims The Directive limits its protection to such creditors whose claims date to a time before the publication of the draft terms of merger and have not fallen due 4 at the time of their publication (cf. Article 99(1)). 4 Claims that originate after the publication of the draft terms of merger are not subject to protection under the Directive. There is no need for protection for the creditors of such claims, since the creditors were or ought to have been aware of the intended merger.5 This is to a certain extend lopsided, since the draft terms of merger are not aimed at informing the public but only the shareholders of the intended merger. The draft terms of merger may not even be available to creditors. Member States should, therefore, ensure that only those creditors who were actually or at least had a reasonable chance to be aware of the intended merger are excluded from protection under this Directive. 5 Nor do Member States have to include protection for claims that are already due at the time of publication of the draft terms of merger. This is based on the idea that such creditors may enforce their claims prior to the merger. This concept is, despite being true in theory, criticised, because creditors whose claims are not protected, will likely refuse to grant the company any deferral of payment, but rather be compelled to enforce their claims immediately.6 Prior to the adoption of the 1978 Directive, such a restriction was not known in most Member States.7 6 Member States are, however, free to extend the protection to those claims which were already due at the date of publication of the draft terms of merger.8 It seems reasonable to include claims which are due up to a certain period prior to the general meeting. 3

2. Protected creditors 7

The protection of creditors as laid down in Article 99 includes creditors of all companies involved in the merger. The 1970 Proposal had provided that only creditors of the transferring company were to be protected.9 The 1970 Proposal argued that a merger should not be treated any differently than any other acquisition of assets and that, therefore, a particular necessity to protect creditors of the acquiring company does 3 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (22). 4 The German version of the Directive incorrectly translates “not fallen due” or in the French version “échues” with “erloschen”. The correct German translation would be “nicht fällig”. Cf.: Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.35, p. 685; Lutter/ Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.125, p. 668. 5 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 10, p. 31; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.125, p. 668. 6 Heenen, ‘La Directive sur les Fusions internes’ (1981) CDE, 15 (21); Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.35, p. 685. 7 Heenen, ‘La Directive sur les Fusions internes’ (1981) CDE, 15 (21). See for instance: § 347 of the German Stock Corporation Act (Aktiengesetz, 6.9.1965, BGBl. I, p. 1089), which became § 22 of the German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428). 8 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 11, p. 31. 9 Cf. Article 11 as well as the commentary for Article 11 of the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091), p. 31.

542

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 99

not exist.10 While this had been the concept in certain Member States at that time,11 this approach was not undisputed.12 Which is the acquiring company and which is the transferring company often depends on circumstances that cannot be controlled. 13 There is also a need to protect the creditors of the acquiring company if the transferring company has more liabilities than assets. In this case, the merger would have a negative impact on the value of the acquiring company14 and, thus, increase the risk of a default.

II. Adequate Safeguard System Member States have to establish an adequate system of protection for creditors of the companies involved in the merger. While the Directive itself only provides for a minimum standard of safeguards for the protection of creditors,15 the wording “system” emphasizes that it is the obligation of the Member States to adopt a legal framework for the protection of creditors.16 According to Article 99(2) subparagraph 1 Member States must at least provide protection for creditors where the financial situation of the companies involved in the merger makes such protection necessary and said creditors do not already have such safeguards. The first element clarifies that the Directive does not call for a universal and comprehensive system for the protection of all creditors of the companies involved in the merger, but only for those whose claims are actually at risk considering the financial situation of the companies involved in the merger. The system of adequate protection provided for by the Directive serves only to compensate for the typical risks of a merger, hence it is not intended to relieve the creditor of the risk that he has already incurred by choosing one of the companies as the debtor.17 In the Council minutes it is indicated that such protection is not considered necessary if “the financial position of the acquiring company satisfies reasonable criteria as to solvency laid down by national law”.18 The second element highlights that the protection of creditors pursuant to Article 99 is based on the so-called principle of subsidiarity. Member States only need to implement protection of creditors if and to the extent that they do not already have provisions in place which provide for an adequate protection of creditors. Thus, while the Directive

10 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970, Vol. 1970/0091 commenting Article 11, p. 31. See also with more arguments: van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’ in: Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123, 136 et seq. 11 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.35, p. 686. 12 Edwards, EC Company Law (1999), p. 110. 13 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1555). 14 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.35, p. 686. 15 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.35, p. 686; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn 2017), § 20.127, p. 669. 16 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (22). 17 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (22). 18 Ratsprotokoll (Statement in the Council minutes), Doc. R 2337/78 of 5.10.1978, referring to Article 13(iii).

Tobias de Raet

543

8

9

10

11

Art 99 Protection of the interests of creditors of the merging companies calls for an EU-wide protection of creditors, such protection does not need to be approximated or even harmonized. 12 Member States are, however, only exempt from the requirement to implement provisions for the protection of creditors if they already have provisions which protect creditors from the typical risk of mergers. Provisions dealing with the general protection of creditors are not sufficient. The underlying idea of the Directive is that even creditors who are in fact secured (i.e. due to collateral) may demand additional protection with respect to the typical risks of mergers.19 13 The Directive does not further define what is to be understood by “adequate safeguards”. The requirement to provide for an “adequate” safeguard, however, indicates that the Member States are not entirely free to define the level of protection, but have to design a framework whereby the specific risks of a merger are sufficiently addressed. 20 14 There are various options as to how Member States can provide adequate safeguards: the Council minutes discuss the option to set up special funds which protect creditors in case their claims cannot be fulfilled after the merger due to bankruptcy or similar proceedings.21 Another option is to give creditors the right to demand adequate security (i.e. collateral, bank guarantee) if they can demonstrate – prior to the merger – that their claims are at risk due to the merger. This concept was, for example, implemented in § 22 of the German Transformation Act (Umwandlungsgesetz) 22 pursuant to which insofar as creditors of the legal entities involved in the merger cannot demand satisfaction of their claims, security is to be provided to them. This is, however, subject to various conditions: creditors have to file their claim in writing, citing the merits and the amount of such claims, within six months of the day on which the merger is published in the commercial register of the company to which they have provided credit. The creditors are entitled to this right only if they demonstrate satisfactorily that the merger will jeopardise the performance of the claim they hold.

1. Procedural safeguards 15

While the 1970 Proposal expressly refrained from interfering with diverging national procedural rules,23 the second subparagraph which was added in 2009, 24 determines that Member States must ensure that creditors are authorised to apply to the appropriate administrative or judicial authority for adequate safeguards (cf. Article 99(2) subparagraph 2 sentence 2). Creditors must credibly25 demonstrate that, due to the merger, the satis19 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (22). 20 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (22). 21 Ratsprotokoll (Statement in the Council minutes), Doc. R 2337/78 of 5.10.1978, referring to Article 13(i). See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.127, p. 669. 22 German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428. 23 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 11, p. 30 et seq. 24 Cf. Article 2 point 6 of the Directive 2009/109/EC amending the 1978 Directive. See also for more background on that amendment: COM(2008) 576 final, p. 5; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.127, p. 669. 25 The German translation reads “nachweisen können”, but in regard to the English (“can credibly demonstrate”) and the French version (“de manière crédible”) as well as to the parallel Article 75(1) subparagraph 2, it can be concluded that “glaubhaft machen” is meant. See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.127, p. 669; Kalss and Klampfl, Handbuch des EU-Wirtschaftsrechts (48th Volume), E III, para. 163, p. 69.

544

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 100

faction of their claims is at risk and that no adequate safeguards have been obtained from the company. This is similar to the requirement the German legislator included in § 22 of the German Transformation Act (Umwandlungsgesetz), which, however, does not pertain to the right to apply to an administrative or judiciary authority but is a requirement for creditors to receive any protection at all.

2. No uniform protection system required Pursuant to Article 99(3), the protection systems for the creditors of the acquiring 16 company and those of the transferring company may be different. This reflects the compromise reached between the diverging positions on whether the Directive should provide for a protection of creditors of the acquiring company at all.26 It is argued that there is a lesser need of protection for the creditors of the acquiring company. 27 While Member States may determine standards of safeguards for the creditors of the acquiring and the transferring company, such standards must not fall below the minimum standard defined by the Directive.

III. Waiver It is unclear whether creditors may waive their rights granted to them pursuant to 17 Article 99. As opposed to Article 100, which expressly states that debenture holders do not have to be granted the protection pursuant to Article 99 if the meeting has been approved by a meeting of debenture holders, such an option is not included in Article 99. While such a meeting of creditors may be possible in theory, it is not a practical option. Since there is no record as to who belongs to the group of creditors, the protection of creditors can only be decided on a case-by-case basis. Creditors may, however, individually waive their rights.28

IV. Scope of Application in Regard to Other Types of Mergers Article 99 also applies to mergers by formation of a new company (cf. Article 109(1)) 18 and upstream-mergers of a 100 % subsidiary into the parent company (cf. Article 110 sentence 2).

Article 100 Protection of the interests of debenture holders of the merging companies Without prejudice to the rules governing the collective exercise of their rights, Article 99 shall apply to the debenture holders of the merging companies, except where the merger has been approved by a meeting of the debenture holders, if such a meeting is provided for under national laws, or by the debenture holders individually. Edwards, EC Company Law (1999), p. 110. See also the discussion in A. II. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.126, p. 668. 28 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.35, p. 686. 26

27

Tobias de Raet

545

Art 101 Protection of holders of securities, other than shares I. Protection of Debenture Holders Similar to Those of Creditors . . . . . . . . . . . . . . II. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 4 6

I. Protection of Debenture Holders Similar to Those of Creditors The protection of debenture holders is, in principle, similar to that of creditors pursuant to Article 99. National laws on the collective exercise of their rights shall, however, remain unaffected.1 2 While the 1970 Proposal only covered debenture holders of the transferring company,2 Article 100 covers the debenture holders of all companies involved in the merger. 3 Pursuant to the Council minutes, it shall be up to the Member States to define the term ‘debenture holder’.3 1

II. Waiver Based on the right of self-determination (see also: Article 95(3) and Article 96(4)), debenture holders do not have to be protected pursuant to Article 99 if the merger has been approved by a meeting of the debenture holders. This reflects the option of Member States to require such an approval pursuant to Article 93(1). 4 However, Article 99 shall only be inapplicable to debenture holders if such an approval is actually granted. 5 While it is not expressly mentioned, debenture holders may also individually waive the protection granted to them pursuant to Articles 99 and 100.5 4

III. Scope of Application in Regard to Other Types of Mergers 6

Article 100 also applies to mergers by formation of a new company (cf. Article 109(1)) and to upstream-mergers of a 100 % subsidiary into its parent company (cf. Article 110 sentence 2).

Article 101 Protection of holders of securities, other than shares, to which special rights are attached Holders of securities, other than shares, to which special rights are attached shall be given rights in the acquiring company at least equivalent to those they possessed in the company being acquired, unless the alteration of those rights has been approved 1 This exception goes back to Article 12(1) of the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091). 2 Article 12(1) of the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091). 3 Ratsprotokoll (Statement in the Council minutes), Doc. R 2337/78 of 5.10.1978, referring to Article 14. 4 See in particular in the French legal system: Article 380 Loi n°66-537 du 24.7.1966 sur les sociétés commerciales, JORF du 26.7.1966, p. 6428; currently incorporated as Article L236-13 du code de commerce. See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.129, p. 671. 5 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 12, p. 32.

546

Tobias de Raet

Art 101

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

by a meeting of the holders of such securities, if such a meeting is provided for under national laws, or by the holders of those securities individually, or unless the holders are entitled to have their securities repurchased by the acquiring company. I. Holders of Securities with Special Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Qualification of employee participation rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Equal Rights in the Acquiring Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Waiver/Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 1 5 8 11 14

I. Holders of Securities with Special Rights 1. General definition Article 101 determines the protection of holders of securities to which special rights are attached, other than shares. The wording of the Directive is intentionally broad in order to reflect the variety of such securities existing in the various Member States. 1 According to the Council minutes, such securities shall, in particular, include “the holders of negotiable and transferable rights”, but only to the extent that they “are not claims already covered by Article 13 (now: Article 99).”2 Articles 13 and 14 of the 1970 Proposal included specific examples of such securities which were eventually not included in the 1978 Directive and the preceding Directives.3 It is, however, the common understanding, that those instruments are among the securities to be protected pursuant to Article 101. Riesenhuber, for example expressly mentions participation certificates and options.4 Ganske, expressly mentions convertible bonds and participating bonds.5 Others include preferred shares as well as pre-emptive rights and approval rights which do not necessarily represent proprietary rights.6 The ECJ found in its ruling in case C‑483/14 (KA Finanz AG v Sparkassen Versicherung AG Vienna Insurance Group) that securities within the meaning of Article 100 include debentures exchangeable for shares, debentures conferring a right of a preferred subscription right over share capital to be issued, profit-sharing debentures and rights to be issued shares.7 The ECJ concluded that securities within the meaning of Article 101 are those which grant their holders rights which are broader than the mere reimbursement of debts and stipulated interest.8 The ECJ further found that protection pursuant to Article 101 is only granted in favour of the holder of such rights and not their issuer.9 Considering the above-mentioned publications and the ECJ judgments, securities within the meaning of Article 101 can be best described as rights in a company that Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.132, p. 671. 2 Ratsprotokoll (Statement in the Council minutes), Doc. R 2337/78 of 5.10.1978, referring to Article 15. 3 See also: Edwards, EC Company Law (1999), p. 110 et seq. 4 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (22). 5 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1555); Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.36, p. 686 also mentions convertible bonds. 6 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.132, p. 672. 7 Case C-483/14, 7.4.2016, KA Finanz AG, ECLI:EU:C:2016:205, para. 65. 8 Case C-483/14, 7.4.2016, KA Finanz AG, ECLI:EU:C:2016:205, para. 66. 1

Tobias de Raet

547

1

2

3

4

Art 101 Protection of holders of securities, other than shares do not confer any voting rights, but – in contrast to tort claims – grant the right to either become a shareholder or entitle the holder to a profit participation right (e.g. by depending on the stock price or having a profit-sharing component).

2. Qualification of employee participation rights Whether employee participation rights are to be qualified as securities within the meaning of Article 101, depends on their characteristics. Employee participation rights which offer employees the possibility of actually becoming shareholders, such as physical share options, are no different to any other stock options and, therefore, are to be qualified as securities within the meaning of Article 101. 6 While the value of virtual share options directly depends on the stock price, one may argue that holders of such virtual options deserve similar protection to holders of actual stock options. The main difference, however, is that virtual options do not grant the right to actually become a shareholder. Therefore, holders of virtual options are to be treated like any other creditor and not like actual option holders. The same applies to any other performance-based employee participation programmes (e.g. based on revenue or EBITDA). 7 Employees who hold virtual stock options or rights under any other employee participation programme may, however, be subject to the respective tort law, have a right to doctrines of frustration of contract. To avoid any ambiguity, companies should proactively include provisions in their virtual stock and employee participation programmes which determine how such rights are to be dealt with in the case of mergers. 5

II. Equal Rights in the Acquiring Company Since the holders of securities pursuant to Article 101 are affected in a similar way as shareholders, Article 101 intends to provide for an anti-dilution mechanism to protect such security holders.10 This protection is based on the same idea as the protection of creditors pursuant to Article 99. The Directive aims to protect those who are directly affected by the merger, but do not have the right to vote on the merger.11 9 Security holders in any of the companies involved in the merger shall be given rights at least equivalent to those they possessed in the company being acquired.12 The term ‘equivalent’ means economic, but not formal equivalence.13 10 Pursuant to Article 91(2)(f), the rights granted to holders of securities within the meaning of Article 101 have to be included in the draft terms of merger and, consequently, be explained in the written report pursuant to Article 95. This shall, on the one hand, inform the security holders14, but on the other hand also inform the shareholders 8

9 Case C-483/14, 7.4.2016, KA Finanz AG, ECLI:EU:C:2016:205, para. 70. See also with further discussion of the judgement: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.135, p. 673. 10 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1555); Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (22); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.131, p. 671. 11 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1555); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.131, p. 671. 12 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 13 and 14, p. 32. 13 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1555); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.133, p. 672.

548

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 102

in the companies involved in the merger, which are also affected by the rights granted to such security holders.

III. Waiver/Exceptions Similar to the reasons set forth for Article 100, holders of securities pursuant to 11 Article 101 do not have to be granted equivalent rights if a meeting of the holders of such securities approves the alteration of their rights, if such a meeting is provided for under national laws. It is also expressly set forth in Article 101 that security holders may individually 12 approve the alteration of their rights. Finally, protection pursuant to Article 101 does not have to be granted if the security 13 holders are given an exit opportunity, i.e. the possibility to have their securities repurchased by the acquiring company.15 The Directive does not specify terms and conditions to which such a repurchase has to be subject. Repurchase options can only be deemed sufficient protection if the security holders have to be offered a fair and reasonable price. Such a purchase price (as well as the other terms and conditions) should have to be determined by an expert or at least – upon the security holders’ request – be subject to a review by courts.

IV. Scope of Application in Regard to Other Types of Mergers Article 101 also applies to mergers by formation of a new company (cf. Arti- 14 cle 109(1)) and to upstream-mergers of a 100 % subsidiary into its parent company (cf. Article 110 sentence 2).

Article 102 Drawing up and certification of documents in due legal form 1. Where the laws of a Member State do not provide for judicial or administrative preventive supervision of the legality of mergers, or where such supervision does not extend to all the legal acts required for a merger, the minutes of the general meetings which decide on the merger and, where appropriate, the merger contract subsequent to such general meetings shall be drawn up and certified in due legal form. In cases where the merger need not be approved by the general meetings of all the merging companies, the draft terms of merger shall be drawn up and certified in due legal form. 2. The notary or the authority competent to draw up and certify the document in due legal form shall check and certify the existence and validity of the legal acts and formalities required of the company for which that notary or authority is acting and of the draft terms of merger.

14 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.133, p. 673. 15 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.134, p. 673.

Tobias de Raet

549

Art 102 Drawing up and certification of documents in due legal form I. Drawing Up and Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Member States with a preventive judicial or administrative supervision of the legality of mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Member States with no sufficient preventive supervision by judicial or administrative authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Mergers, for which an approval by the general meeting is required . . . . . . b) Mergers, for which no approval by the general meeting is required . . . . . . II. Scope of examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 3 4 5 6 7 9

I. Drawing Up and Certification It is one of the key elements of the merger proceeding pursuant to the Directive, that mergers are subject to at least some supervision by authorities or the judiciary. 2 Considering the various approaches used in the Member States,1 the Directive leaves it up to the Member States to decide whether such supervision is designed as pre- or post-merger-supervision.2 As expressly mentioned in the 1970 Proposal, Member States are also free to combine elements of the pre- and post-merger-supervision. 3 1

1. Member States with a preventive judicial or administrative supervision of the legality of mergers 3

Member States which have already implemented a preventive judicial or administrative supervision of the merger, do not have to take any further action.4

2. Member States with no sufficient preventive supervision by judicial or administrative authorities 4

Member States, which have no sufficient preventive supervision by judicial or administrative authorities in place, need to implement the control mechanism laid out in Article 102(1), whereas the Directive determines different requirements for mergers which need to be approved by the general meetings of the companies involved in the merger and mergers where such approval is not required. a) Mergers, for which an approval by the general meeting is required

5

If mergers have to be approved by the general meetings of the companies involved in the merger, the minutes of the general meetings which decide on the merger need to be drawn up and certified in due legal form (cf. Article 102(1) sentence 1). The same applies, where appropriate, to the merger contract subsequent to such general meetings. Article 102(1) does not specify the particular form of notarisation required. Member States need to determine this based on their legal and notarial system. Considering the legislative aim, certification in due legal form cannot be limited to identification of the parties or comparable formal aspects, but needs to include a substantive element.

1 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 8, p. 28. 2 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.88, p. 653. 3 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 8, p. 28. 4 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), p. 268.

550

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 103

b) Mergers, for which no approval by the general meeting is required If, pursuant to the characteristics of the merger (e.g. Articles 111 and 113) or due to 6 exceptions (e.g. Article 94), mergers do not need to be approved by the general meetings of the companies involved in the merger, the draft terms of merger are to be drawn up and certified in due legal form (cf. Article 102(1) sentence 2).

II. Scope of examination The requirement to have documents drawn up and certified in due legal form re- 7 quires the involvement of a notary or a respective competent authority.5 According to the council minutes, competent authorities may be all natural or legal persons authorised by national law to draw up and certify deeds in due legal form.6 This can, for example, be court officers or other administrative authorities. Article 102(2) sets certain requirements regarding the scope of examination. The 8 notary or the competent authority shall check and certify the existence and validity of the legal acts and formalities required of the company for which that notary or authority is acting and of the draft terms of merger.7 With respect to the legislative aim, certification in due legal form may not be limited to identification or formal aspects but needs to include a substantive test by the notary/authority. This should include a substantive review of the relevant documents, in particular, the draft terms of merger, at least with respect to their completeness.8

III. Scope of Application in Regard to Other Types of Mergers Article 102 also applies to mergers by formation of a new company (cf. Article 109(1)) as 9 well as to the case of an upstream-merger of a 100 % subsidiary into the parent company (cf. Article 110 sentence 2).

Article 103 Date on which a merger takes effect The laws of the Member States shall determine the date on which a merger takes effect.

5 See also: Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 8, p. 28. 6 Ratsprotokoll (Statement in the Council minutes), Doc. R 2337/78 of 5.10.1978, referring to Article 16(2). 7 See also with further discussion in regard to the scope of examination of the notary or competent authority: Heenen, ‘La Directive sur les Fusions internes’ (1981) CDE, 15 (19); Edwards, EC Company Law (1999), p. 112; Grohmann, The Information Model in European Company Law (2006), 325; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.90, p. 653. 8 See also: Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.38, p. 687.

Tobias de Raet

551

Art 104 Publication formalities

I. Effective Date Since the merger has important consequences for the companies involved in the merger, their shareholders and creditors and the general public (cf. Article 105), it is of utmost importance to define a point in time at which the merger becomes effective. 2 The Directive does not define such a point in time, but requires the Member States to define an effective date. Considering the importance of such a date, it is unfortunate that the efforts to agree on a uniform European solution eventually failed.1 3 The term ‘date’ requires the Member States to define the exact point in time, not just the calendar day, at which the merger becomes effective. Possible effective dates can be the date on which the approval of the general meeting becomes final and binding, or the date on which the merger is registered. If Member States determine the date of registration to be the effective date, they further have to determine which registration shall be decisive. From a practical point of view, this should be the date on which the merger is registered in the register of the acquiring company or the date on which the merger has been registered in the registers of all companies involved in the merger. 1

II. Scope of Application in Regard to Other Types of Mergers 4

Article 103 also applies to mergers by formation of a new company (cf. Article 109(1)) and to upstream-mergers of a 100 % subsidiary into its parent company (cf. Article 110 sentence 2).

Article 104 Publication formalities 1. A merger shall be publicised in the manner prescribed by the laws of each Member State, in accordance with Article 16, in respect of each of the merging companies. 2. The acquiring company may itself carry out the publication formalities relating to the company or companies being acquired. I. Communication/Publication of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Right of the Acquiring Company to Initiate a Publication . . . . . . . . . . . . . . . . . . . . III. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 3 4

I. Communication/Publication of the Merger Article 104 prescribes that mergers must be communicated to the public. The communication shall be subject to the laws of each Member State, whereas such laws need to ensure that the merger is published in accordance with Article 16 of this Directive. 1 2 The publication shall not only ensure that the general public is informed,2 but also serve as the basis for further legal consequences, inter alia, whether third parties or the 1

1 Cf. Edwards, EC Company Law (1999), p. 112 with a detailed list of the “unsuccessful attempts” to approximate national provisions in regard to the date on which the merger shall take effect. See for instance: Article 9 of the amended Proposal COM(72) 1668 final, 4.1.1973 (Vol. 1972/0232) or the suggestion to Article 9 of the Economic and Social Committee, OJ of 6.9.1971 C 88/20. 1 Cf. → Art 92 mn. 3.

552

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 105

company may rely upon such disclosure for purposes of bona fide (cf. Articles 16(6) and (7)).3

II. Right of the Acquiring Company to Initiate a Publication In order to avoid any delays, the publication of the merger in the register of the 3 companies involved in the merger does not necessarily have to be initiated by each company. Instead, the acquiring company may carry out the publication in its own name for the transferring companies.4 This, for the avoidance of doubt, does not mean that the merger only has to be published in the corporate register of the acquiring company, but simply gives the acquiring company the competence to initiate publication of the merger in the corporate register for the transferring company.

III. Scope of Application in Regard to Other Types of Mergers Article 104 also applies to mergers by formation of a new company (cf. Article 109(1)) 4 and to upstream-mergers of a 100 % subsidiary into its parent company (cf. Article 110 sentence 2).

Article 105 Consequences of a merger 1. A merger shall have the following consequences ipso jure and simultaneously: (a) the transfer, both as between the company being acquired and the acquiring company and, as regards third parties, to the acquiring company of all the assets and liabilities of the company being acquired; (b) the shareholders of the company being acquired become shareholders of the acquiring company; and (c) the company being acquired ceases to exist. 2. No shares in the acquiring company shall be exchanged for shares in the company being acquired held either: (a) by the acquiring company itself or through a person acting in his own name but on its behalf; or (b) by the company being acquired itself or through a person acting in his own name but on its behalf. 3. The foregoing shall not affect the laws of Member States which require the completion of special formalities for the transfer of certain assets, rights and obligations by the acquired company to be effective as against third parties. The acquiring company 2 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 10, p. 30; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.94, p. 654. 3 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 10, p. 30. 4 Grohmann, The Information Model in European Company Law (2006), 330; Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.39, p. 687; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.94, p. 655.

Tobias de Raet

553

Art 105 Consequences of a merger may carry out such formalities itself; however, the laws of the Member States may permit the company being acquired to continue to carry out such formalities for a limited period which may not, save in exceptional cases, be fixed at more than six months from the date on which the merger takes effect. I. Consequences of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Universal succession – transfer of all assets and liabilities to the acquiring company (the new company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Ipso iure succession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Validity of the transfer in relation to third parties . . . . . . . . . . . . . . . . . . . . . . . 2. Share exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) No waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Dissolution of the company being acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 3 4 5 9 10 12 13 15 16

I. Consequences of the Merger Considering the important consequences of the merger for the companies involved in the merger, their shareholders and creditors and the general public, Article 105 determines that such consequences of the merger shall come into effect ipso jure and simultaneously, i.e. without any further legal actions being required.1 2 Although the general approach of the Directive is to only approximate and not to harmonize the provisions of the Member States on domestic mergers, Article 105 largely harmonizes the consequences of mergers.2 Central aspects are (i) the universal succession (cf. Article 105(1)(a)), (ii) the exchange of shares (cf. Article 105(1)(b)) and the company being acquired ceasing to exist (cf. Article 105(1)(c)). 3 1

1. Universal succession – transfer of all assets and liabilities to the acquiring company (the new company) 3

The principle of universal succession (cf. Article 105(1)(a)) is one of the key aspects of mergers. a) Ipso iure succession

4

Pursuant to such a principle, all assets and liabilities of the transferring company (or companies) are transferred to the acquiring company ipso iure, i.e. without any further legal actions being required.4 It is neither possible to exclude certain assets and liabilities from such a transfer, nor to limit the transfer to certain defined assets or liabilities.5 The terms ‘assets’ and ‘liabilities’ are to be interpreted uniformly throughout 1 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 9, p. 29. 2 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.39, p. 687. This goes back to the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 9, p. 29. 3 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.96, p. 655. 4 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 9, p. 29; the 1968 Preliminary Draft (Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)) commenting on Article 14, p. 30. 5 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.13, p. 349; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.97 p. 655.

554

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 105

the European Union.6 The acquiring company automatically replaces the transferring company or companies as a contract party without a novation of such a contract7 and, in principle, also becomes the obligor of fines imposed on the transferring company (or companies).8 As noted by the Portuguese and Hungarian governments and the European Commission, a company should not be able to use a merger by acquisition as a means of escaping the legal consequences of offences it has committed to the detriment of the Member State concerned or other potential interested parties. 9 b) Validity of the transfer in relation to third parties Under the principle of universal succession, transfers not only become effective inter partes, i.e. between the companies involved in the merger, but also with respect to any third party (cf. Article 105(1)(a)). However, provisions in the laws of the Member States which require certain formalities for the transfer of certain assets, rights and obligations by the acquired company to be effective with regard to third parties shall remain unaffected (cf. Article 105(3)). This may be certain registration of publication requirements, in particular in real estate law (e.g. the French pulicine foncière).10 It is important to point out that such provisions in the laws of the Member States are not a condition precedent for the validity of the transfer of assets or liabilities, which, nonetheless, becomes effective on the date on which the merger becomes effective (cf. Article 103).11 They give, however, Member States the right to raise the defence that the transfer shall not be deemed effective with regard to them. Article 105(3) sentence 2 part 2 provides that Member States may permit the company being acquired to continue to carry out such formalities for a limited period of up to six months from the date on which the merger becomes effective. The Directive, however, also recognises that it is mostly in the interest of the acquiring company to have such formalities completed: pursuant to Article 105(3) sentence 2 part 1, the acquiring company may ensure compliance with these formalities in its own name.12

5

6

7

8

2. Share exchange The second key aspect of mergers is the exchange of shares (cf. Article 105(1)(b)). 9 Pursuant and subject to the share exchange ratio determined in the draft terms of merger, the shareholders of the transferring company or companies become ipso jure

6 Case C‑343/13, 5.3.2015, Modelo Continente Hipermercados SA v Autoridade para. as Condições de Trabalho – Centro Local do Lis (ACT), ECLI:EU:C:2015:146, para. 27. 7 Case C-483/14, 7.4.2016, KA Finanz AG, ECLI:EU:C:2016:205, para. 58; this is however only demonstrated in the case of a cross-border merger, but must consequently also apply to universal succession in the case of national mergers pursuant to Article 105(1)(a). See also with further discussion and references: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.98 p. 656. 8 Case C‑343/13, 5.3.2015, Modelo Continente Hipermercados SA v Autoridade para. as Condições de Trabalho – Centro Local do Lis (ACT), ECLI:EU:C:2015:146, para. 35. 9 Case C‑343/13, 5.3.2015, Modelo Continente Hipermercados SA v Autoridade para. as Condições de Trabalho – Centro Local do Lis (ACT), ECLI:EU:C:2015:146, para. 33. 10 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.100, p. 657. 11 See van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’ in: Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123, 143. 12 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.39, p. 688.

Tobias de Raet

555

Art 105 Consequences of a merger shareholders of the acquiring company. With reference to this aspect, mergers are often also called share-for-share transactions. a) Procedure While Member States may determine the exact procedure for the exchange of shares,13 they shall not impose additional requirements (transaction, documentation).14 The terms relating to the allotment of shares in the acquiring company are to be included in the draft terms of merger (cf. Art. 91(2)(c)). 11 While it is not expressly mentioned in the Directive, any rights of third parties with respect to the shares in the transferring company or companies should also transfer ipso jure to the respective new shares in the acquiring company.15 10

b) Exceptions 12

Pursuant to Article 105(2)(a) no shares in the acquiring company shall be exchanged for shares in the company being acquired held by the acquiring company itself or through a person acting in his own name but on the acquiring company’s behalf. Pursuant to Article 105(2)(b) the same shall apply to shares held by the company being acquired itself or through a person acting in his own name but on the acquiring company’s behalf. Both exceptions shall prevent the creation of treasury shares (i.e. shares in the acquiring company held by the acquiring company itself).16 c) No waiver

It is discussed whether shareholders of the company being acquired may waive their right to receive shares in the acquiring company. On the one hand, the wording of Article 105(1) does not provide for such an option, and the exchange of shares is one of the key characteristics of a merger and goes back to the 1970 Proposal. 17 14 On the other hand, it may be argued that the intention of the exchange of shares is to protect the shareholders of the company being acquired from losing their equity stake, and that such a right may be waived based on the concept of self-determination in the same way as is expressly provided for in Article 95(3) and Article 96(4). 18 13

3. Dissolution of the company being acquired 15

The third important consequence of the merger is that the company which is being acquired ceases to exist ipso jure (cf. Article 105(1)(c)). Member States may not require any additional legal acts such as liquidation proceedings pursuant to Articles 89 and 90. 13 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 9, p. 29; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.101, p. 658. 14 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.101 p. 658. 15 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.101, p. 658. 16 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1556); Jens Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 270; Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019), § 8.14, p. 350; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.101, p. 658. 17 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 2, p. 21. 18 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 239.

556

Tobias de Raet

Art 106

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

II. Scope of Application in Regard to Other Types of Mergers Article 105 is also applicable to mergers by formation of a new company (cf. Arti- 16 cle 109). Point (b) of Article 105(1) however, does not apply to upstream mergers of a 100 % subsidiary into its parent company (cf. Article 110), and point (c) of Article 105(1) does not apply to mergers pursuant to Article 117 where not all of the transferring companies cease to exist.

Article 106 Civil liability of members of the administrative or management bodies of the company being acquired The laws of the Member States shall at least lay down rules governing the civil liability, towards the shareholders of the company being acquired, of the members of the administrative or management bodies of that company in respect of misconduct on the part of members of those bodies in preparing and implementing the merger. I. (Civil) D&O Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Liability towards the shareholders of the company being acquired . . . . . . . 2. Liability of the administrative or management bodies of the company being acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Consequences of misconduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 3 7 9 11

I. (Civil) D&O Liability Article 106 requires Member States to adopt provisions on the civil liability of mem- 1 bers of the administrative or management bodies of the company being acquired in order to protect the shareholders of the company being acquired against such bodies breaching the duties they have with respect to preparing and implementing the merger, which are, in particular, the obligations to draw up the draft terms of merger (cf. Article 95) and the written report on the draft terms of merger (cf. Article 96). While such provisions shall primarily protect the shareholders, they shall also 2 discipline the members of the respective corporate bodies to fulfil their duties in preparing and implementing the merger with due care.1 As opposed to other preemptive safeguards provided for in the Directive (in particular, the information of shareholders in the draft terms of merger (cf. Article 91), the report pursuant to Article 95 and the expert examination pursuant to Article 96), civil liability pursuant to Article 106 provides for a retrospective control of the merger.2

1. Liability towards the shareholders of the company being acquired The Directive only requires the Member States to implement provisions governing 3 the civil liability of the companies being acquired, and only for the benefit of the share1 Grohmann, The Information Model in European Company Law (2006), 329; Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019), § 8.19, p. 353. 2 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG 2004, 15 (15); Grohmann, The Information Model in European Company Law (2006), 329; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.112, p. 662 et seq.

Tobias de Raet

557

Art 106 Civil liability of members of the administrative or management bodies of the company holders of the company being acquired. This is based on the idea that the shareholders are in particular need of protection.3 4 The concept of direct liability towards the shareholders was included in the Directive with a particular view to the share exchange ratio. Any misconduct of members of the administrative or management bodies with respect to the share exchange ratio is only detrimental to the shareholders but not the company.4 Article 106 is, however, not limited to misconduct with respect to calculating the share exchange ratio, but covers the violation of all duties members of the administrative and management bodies of the company being acquired have in preparing and implementing the merger. 5 In certain jurisdictions – like Germany – members of the management or advisory board are, in principle (and save for certain exceptions), not directly liable towards the shareholders, but only towards the company. It is argued that Member States may stick to this concept and implement Article 106 in a way which creates a civil liability of the members of the administrative or management bodies towards the company, but not directly towards its shareholders.5 This would, however, require that the company being acquired does not cease to exist – or is deemed not to have ceased to exist. 6 Germany implemented this in § 25 of The German Transformation Act (Umwandlungsgesetz) pursuant to which the members of the executive and supervisory board may not only be liable to the shareholders but also to the company, whereas for the purposes of claims against the company being acquired, said company shall be deemed to continue to exist. 6 While it is true that there is a particular need to protect the shareholders of the company being acquired, it is unfortunate that the Directive does not require the Member States to implement provisions regarding the liability towards shareholders of the acquiring company. Misconduct of the members of the administrative or management bodies of the company being acquired can harm them quite significantly, in particular, with respect to the share exchange ratio. Hence, it is of utmost importance that they are provided with sufficient and correct information, so that they can make an informed decision on the merger.7 Member States should, therefore, extend the liability concept laid down in Article 106 for the company being acquired to the acquiring company.8

2. Liability of the administrative or management bodies of the company being acquired 7

Article 106 only requires Member States to lay down rules governing the civil liability for misconduct of the of the administrative or management bodies of the acquiring company. Member States are, nevertheless, free to implement rules regarding the liability of other corporate bodies of the company being acquired as well as the acquiring company and its corporate bodies.9

3 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.40, p. 688. 4 Grohmann, The Information Model in European Company Law (2006), p. 329; Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019), § 8.19, p. 353. 5 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.19, p. 353. 6 Cf. Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.40, p. 688. 7 Grohmann, The Information Model in European Company Law (2006), 329. 8 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.114, p. 663. 9 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.114, p. 663.

558

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 107

Misconduct means not only intentional or wilful, but also any negligent violation of 8 duties. This includes, for example, false statements in the draft terms of merger or an incorrect calculation of the share exchange ratio.10

3. Consequences of misconduct It is up to the Member States to determine the exact consequences of misconduct 9 according to Article 106.11 Certain provisions included in the 1970 proposal, i.e. regarding the joint liability of 10 the members of the administrative or management bodies and regarding the burden of proof, were not implemented in the 1978 Directive or any subsequent Directives. 12 Member States are, in principle, free to implement provisions with regard to these aspects.13 However, such provisions may not be designed in a way which would make it virtually impossible to demonstrate, prove and enforce liability claims pursuant to Article 106.14

II. Scope of Application in Regard to Other Types of Mergers Article 106 also applies to mergers by formation of a new company (cf. Arti- 11 cle 109(1)). Pursuant to Article 110 sentence 3, Article 106 does not apply to mergers of a 100 % subsidiary into its parent company.

Article 107 Civil liability of the experts responsible for drawing up the expert report on behalf of the company being acquired The laws of the Member States shall at least lay down rules governing the civil liability, towards the shareholders of the company being acquired, of the experts responsible for drawing up on behalf of that company the report referred to in Article 96(1), in respect of misconduct on the part of those experts in the performance of their duties.

I. Civil Liability of the Experts While Article 106 deals with the civil liability of the members of the administrative or 1 management bodies of the company being acquired, in particular with respect to their duties pursuant to Article 95 (draft terms of merger) and Article 96 (report on the draft terms of merger), Article 107 deals with the corresponding liability of the experts who have to draw up the expert report pursuant to Article 96. 10 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.115, p. 663. 11 Edwards, EC Company Law (1999), p. 114; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.114, p. 663. 12 Cf. Article 16(2)(b) of the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091). 13 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.115, p. 663 et seq. 14 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.20, p. 353. Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.115, p. 663.

Tobias de Raet

559

Art 108 Conditions for nullity of a merger Comparable to Article 106, Article 107 shall protect the shareholders and discipline the experts to fulfil their duties,1 in particular, with respect to the important role the experts have in evaluating the share exchange ratio.2 The civil liability of the experts shall also ensure that they act independently.3 3 Following the same concept as Article 106, Article 107 only requires Member States to lay down rules governing the civil liability of the experts towards the shareholders of the company being acquired. Member States are, nevertheless, free to expand the rules regarding the liability of the experts towards the acquiring company or the companies involved in the merger. 4 Member States are, furthermore, free to specify the legal consequences of any misconduct.4 2

II. Scope of Application in Regard to Other Types of Mergers 5

Article 107 also applies to mergers by formation of a new company (cf. Article 109(1)). Pursuant to Article 110 sentence 3, Article 107 does not apply to mergers of a 100 % subsidiary into its parent company.

Article 108 Conditions for nullity of a merger 1. The laws of the Member States may lay down nullity rules for mergers in accordance with the following conditions only: (a) nullity is to be ordered in a court judgment; (b) mergers which have taken effect pursuant to Article 103 may be declared void only if there has been no judicial or administrative preventive supervision of their legality, or if they have not been drawn up and certified in due legal form, or if it is shown that the decision of the general meeting is void or voidable under national law; (c) nullification proceedings may not be initiated more than six months after the date on which the merger becomes effective as against the person alleging nullity or where the situation has been rectified; (d) where it is possible to remedy a defect liable to render a merger void, the competent court is to grant the companies involved a period of time within which to rectify the situation; (e) a judgment declaring a merger void is to be published in the manner prescribed by the laws of each Member State in accordance with Article 16; (f) where the laws of a Member State permit a third party to challenge such a judgment, that party may only do so within six months of publication of the judgment in the manner prescribed by Section 1 of Chapter III of Title I; (g) a judgment declaring a merger void does not of itself affect the validity of obligations owed by or in relation to the acquiring company which arose before 1 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.112, p. 663. 2 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 17, p. 34. 3 Grohmann, The Information Model in European Company Law (2006), 329. 4 Cf. → Art 106.

560

Tobias de Raet

Art 108

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

the judgment was published and after the date on which the merger takes effect; and (h) companies which have been parties to a merger are jointly and severally liable in respect of the obligations of the acquiring company referred to in point (g). 2. By way of derogation from point (a) of paragraph 1, the laws of a Member State may also provide for the nullity of a merger to be ordered by an administrative authority if an appeal against such a decision lies to a court. Point (b) and points (d) to (h) of paragraph 1shall apply by analogy to the administrative authority. Such nullification proceedings may not be initiated more than six months after the date on which the merger takes effect. 3. The laws of the Member States on the nullity of a merger pronounced following any supervision other than judicial or administrative preventive supervision of legality shall not be affected. I. Rules Regarding Nullity of Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Reasons for nullity and remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Procedural requirements for the nullity of a merger . . . . . . . . . . . . . . . . . . . . . . a) Nullity by court judgement or administrative authority . . . . . . . . . . . . . . . . . b) Deadline for the initiation of the nullification proceeding . . . . . . . . . . . . . . . c) Publication of the judgement or decision declaring a merger void . . . . . . . 3. Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Relation to the Laws of the Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Application in Regard to Other Types of Mergers . . . . . . . . . . . . . . . . . .

1 6 9 9 11 15 16 19 20

I. Rules Regarding Nullity of Mergers Pursuant to Article 108, Member States do not have to, but may lay down rules regarding the nullity of the merger. Article 108 is based on Article 12 of the First Council Directive1 regarding the disclosure and validity of obligations entered into by, and the nullity of, companies with limited liability. The main objective of Article 108 is to limit the reasons which can lead to the nullity of a merger, since it is virtually impossible to unwind a merger.2 Furthermore, the limitation of reasons for which a merger may be null and void ensures legal certainty for the companies involved in the merger and the general public.3 Member States may further limit – but not extend – the conditions for nullity of mergers, or even determine that mergers cannot be declared null and void at all.4 Considering and recognising the different existing concepts in the Member States, the Directive does not intend a harmonization of the rules regarding the nullity for mergers.5

First Council Directive 68/151/EEC of 9.3.1968. Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1556); Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019), § 8.26, p. 358; Lutter/Bayer/Schmidt, Europäisches Kapitalmarktund Gesellschaftsrecht (6th edn, 2017), § 20.106, p. 660. 3 Cf. with similar wording: recital no. 9 of the 1978 Directive, recital no. 10 of the 2011 Directive or recital no. 54 of the 2017 Directive. 4 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.27, p. 358; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.106, p. 660. 5 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 18, p. 35. 1

2

Tobias de Raet

561

1 2

3

4

Art 108 Conditions for nullity of a merger 5

The reason for this restrictive approach of the Directive is that mergers are reviewed in detail and by independent experts before becoming effective (ex ante), but guarantee grandfathering after becoming effective.6 Only in limited and specifically defined exceptions shall mergers be declared null and void.7

1. Reasons for nullity and remedy The restrictions on the nullity of mergers as laid down in Article 108 only apply to mergers that have already become effective pursuant to Article 103. Mergers which have not yet become effective may be unwound, even if the restrictions set out in Article 108 are not met. Member States may, therefore, determine provisions on the unwinding of mergers which have not yet become effective.8 7 Article 108(1)(b) lists the three reasons for which a merger may be declared void: (i) if there has been no judicial or administrative preventive supervision of the merger’s legality, or (ii) if it was not drawn up and certified in due legal form, or (iii) if it is shown that the decision of the general meeting is void or voidable under national law. 8 Reasons which may lead to the nullity of a merger pursuant to Article 108(1)(b) may be remedied, if possible. The competent court has to grant to the companies involved in the merger a period of time within which they have to rectify the situation. This possibility reflects the idea that only in very limited cases mergers shall be declared null and void.9 Consequently, nullification proceedings likewise must not be initiated where the situation has been rectified (cf. Article 108(1)(c)). 6

2. Procedural requirements for the nullity of a merger a) Nullity by court judgement or administrative authority Following the concept of legal certainty, mergers are not – if any of the cases pursuant to Article 108(1)(c) applies – null and void ipso jure, but only if declared void by a court judgement. This conforms with Article 11 subparagraph 1 point (a) pursuant to which a court judgement is required to declare a company void.10 10 Member States may also provide for the nullity of a merger to be ordered by an administrative authority if an appeal against such a decision lies with a court (cf. Article 108(2)). The possibility of having the merger, in a first step, be declared void by an administrative authority and not a court goes back to a suggestion from the Italian delegation which had pointed out the importance of the administrative supervision of mergers.11 9

b) Deadline for the initiation of the nullification proceeding 11

Nullification proceedings may not be initiated more than six months after the date on which the merger becomes effective with regard to the person alleging nullity or 6 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.39, p. 687. 7 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 18, p. 35. 8 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 18, p. 35. 9 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 18, p. 36. 10 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 18, p. 35. 11 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1556).

562

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 108

where the situation has been rectified (cf. Article 108(1)(c)). The effective date is to be determined pursuant to Article 103. The deadline applies irrespective of whether or not the nullification proceedings are 12 initiated before a court or an administrative authority (cf. Article 108(2) sentence 3). If the laws of a Member State permit a third party to challenge the judgement or 13 decision of the administrative authority, that party may only do so within six months of publication of the judgement in the manner prescribed in Section 1 of Chapter III of Title I, i.e. Articles 13 to 28 of the Directive. Considering that the deadlines to initiate and challenge nullification proceedings are 14 intended to promote legal certainty,12 a deadline of six months is rather long. Since the reasons for which a merger may be declared void are limited and specified in detail, there are no reasons why those who want to have a merger declared void cannot be expected to initiate nullification proceedings within three months or even one month after the merger has become effective. Member States, which decide to adopt Article 108 should, therefore, consider significantly shortening at least the deadlines for the initiation of nullification proceedings. c) Publication of the judgement or decision declaring a merger void A judgement (cf. Article 108(1)(e)) or a decision by an administrative authority 15 (cf. Article 108(2) sentence 2 in conjunction with Article 108(2)(e)) declaring a merger void is to be published in the manner prescribed by the laws of each Member State in accordance with Article 16, i.e. in the same manner the merger has to be published pursuant to Article 104(1). The publication shall give the shareholders, creditors and any other parties involved in the merger the opportunity to note the merger being void.

3. Consequences Pursuant to Article 108(1)(g) a judgement declaring a merger void does not of itself 16 affect the validity of obligations owed by or in relation to the acquiring company which arose before the judgement was published and after the date on which the merger takes effect. The same applies to decisions of administrative bodies (Article 108(2) sentence 2 in conjunction with Article 108(1)(g)). Companies which were party to a merger are jointly and severally liable in respect of 17 the obligations of the acquiring company referred to in point (g) (cf. poiont (h)). Thus, even mergers which were declared void can have detrimental effects on the 18 companies involved in the mergers and their shareholders. Both provisions are, however, required in order to protect the general public.13

II. Relation to the Laws of the Member States Article 108(3) clarifies that the laws of the Member States on the nullity of a merger 19 pronounced following any supervision other than judicial or administrative preventive supervision of legality shall not be affected. This deviates from the approach of defining an exhaustive and limited list of reasons for which a merger may be declared void.14 It 12 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 18, p. 36. 13 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.110, p. 661. 14 See also: Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1556 et seq).

Tobias de Raet

563

Art 109 Merger by formation of a new company is, however, necessary to reflect nullification reasons not related to core company law 15 such as decisions of antitrust authorities.16

III. Scope of Application in Regard to Other Types of Mergers 20

Pursuant to Article 109(1), Article 108 also applies to mergers by formation of a new company, without prejudice to Articles 11 and 12 which deal with the conditions and consequences for nullity of a company. Pursuant to Article 110 sentence 3, Article 107 does not apply to mergers of a 100 % subsidiary into its parent company.

Section 3 Merger by formation of a new company Article 109 Merger by formation of a new company 1. Articles 91, 92, 93 and 95 to 108 shall apply, without prejudice to Articles 11 and 12, to merger by formation of a new company. For this purpose, ‘merging companies’ and ‘company being acquired’ shall mean the companies which will cease to exist, and ‘acquiring company’ shall mean the new company. Article 91(2)(a) shall also apply to the new company. 2. The draft terms of merger and, if they are contained in a separate document, the memorandum or draft memorandum of association and the articles or draft articles of association of the new company shall be approved at a general meeting of each of the companies that will cease to exist. I. Application of the Model for Mergers by Acquisition . . . . . . . . . . . . . . . . . . . . . . . . II. Adjustments to the Specific Characteristics of Mergers by Formation of a new company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Article 94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Wording . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Nullification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Information regarding the new company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Approval of memorandum and articles of association . . . . . . . . . . . . . . . . . . . . 6. Possibility to waive contribution report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 2 3 4 5 6 7

I. Application of the Model for Mergers by Acquisition 1

According to Article 109(1), which is based on § 353 of the German Stock Corporation Act (Aktiengesetz) of 19651,2 the basic model3 governing mergers by acquisition, in 15 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.107, p. 661. 16 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1556 et seq); Jens Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 281; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.107, p. 661 et seq. 1 Aktiengesetz, 6.9.1965, BGBl. I, p. 1089. 2 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1557); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn 2017), § 20.137, p. 674. 3 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.137, p. 674.

564

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 109

principle, also applies to mergers by formation of a new company, expressly mentioning Articles 91, 92, 93 and 95 to 108.

II. Adjustments to the Specific Characteristics of Mergers by Formation of a new company 1. Article 94 Article 94, which deals with the derogation from the requirement of approval by the 2 general meeting of the acquiring company, is not applicable, since there is no acquiring company in mergers by formation of a new company.4

2. Wording Apart from this, Article 109 makes the adjustments that are required to reflect the 3 specific characteristics of mergers by formation of a new company.5 This includes the wording: since there is no acquiring company, ‘merging companies’ and ‘company being acquired’ means the companies which will cease to exist, and ‘acquiring company’ means the new company.

3. Nullification Article 109(2) sentence 1 clarifies that Articles 11 and 12 of the Directive, which deal 4 with the conditions and consequences for nullity of a company, shall remain unaffected. This goes back to the 1970 Proposal according to which the provisions on the nullification of a merger, which are today laid down in Article 108 (then: Article 18 of the 1970 Proposal), were not to be applied to mergers by formation of a new company.6 Instead, the nullification of mergers by formation of a new company was supposed to be subject exclusively to the provisions of the First Directive (68/151/EEC) 7. The idea was that the nullification of the foundation of a new company, even if created by merger, should be exclusively governed by the provisions which govern the nullity of a company.8 This position did not last, since the general provisions governing the nullity of a company do not cover all aspects and possible defects of a merger by foundation of a new company.9 Thus, the 1978 Directive already prescribed that the provisions specifically designed for the nullification of mergers shall apply to mergers by formation of a new company, whereas the general provisions regarding the nullification of companies laid down in Articles 11 and 12 shall remain unaffected.

4 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 290; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.137, p. 674. 5 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 19, p. 37. 6 Cf. Article 19(1) of the Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091). 7 First Council Directive 68/151/EEC of 9.3.1968. 8 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 19, p. 37. 9 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 289. See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.1138, p. 674 et seq.

Tobias de Raet

565

Art 110 Transfer of all assets and liabilities by one or more companies to another company 4. Information regarding the new company 5

Pursuant to Article 109(1) subparagraph 2, Article 91(2)(a) shall also apply to the new company, i.e. the draft terms of merger also need to include the type, name and registered office of the new company, as the wording of Article 91(2)(a) only refers to the merging companies.10

5. Approval of memorandum and articles of association 6

Article 109(2) further requires that the memorandum or draft memorandum of association (i.e. the document pursuant to which the new company is incorporated) and the articles or draft articles of association of the new company shall, if they are contained in a separate document, be approved by the general meeting of each of the companies involved in the merger. This is due to the fact that these documents lay the foundation for the internal legal structure of the new company and should, therefore, be approved by all shareholders of the companies involved in the merger.11

6. Possibility to waive contribution report Since the companies which cease to exist are transferred to the new company by means of a contribution, mergers by formation of a new company require a report for such consideration in kind pursuant to Article 49. As expressly provided for in Article 49(5), Member States may, however, choose not to apply Article 49 to the formation of a new company by way of merger where a report by one or more independent experts on the draft terms of merger is drawn up. Since Article 96 requires an examination of the merger by experts and a report to be drawn up by said experts, an additional report on the contribution in kind pursuant to Article 49 would be redundant.12 8 While the 1978 Directive had included such an option in its Article 23 (now: Article 109), it was later included in the provisions on safeguards as regards statutory capital in the Directive 2009/109/EC13, where it remained after both Directives were merged in the 2017 Directive. 7

Section 4 Acquisition of one company by another which holds 90 % or more of its shares Article 110 Transfer of all assets and liabilities by one or more companies to another company which is the holder of all their shares Member States shall make provision, in respect of companies governed by their laws, for the operation whereby one or more companies are wound up without going into liquidation and transfer all their assets and liabilities to another company which 10 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 290. 11 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.139, p. 675. 12 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 290; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.140, p. 675. 13 Cf. Article 1 point 2 of the Directive 2009/109/EC.

566

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 110

is the holder of all their shares and other securities conferring the right to vote at general meetings. Such operations shall be regulated by the provisions of Section 2 of this Chapter. However, Member States shall not impose the requirements set out in points (b), (c) and (d) of Article 91(2), Articles 95 and 96, points (d) and (e) of Article 97(1), point (b) of Article 105(1) and Articles 106 and 107.

I. Application of Chapter 2 to Upstream Mergers of a 100 % Subsidiary Member States shall have to implement provisions on operations whereby one or 1 more companies are wound up without going into liquidation and transfer all their assets and liabilities to another company which is the holder of all their shares and other securities conferring the right to vote at general meetings (cf. Article 110 sentence 1). Such operations, which are usually referred to as “upstream mergers of a 100 % sub- 2 sidiary into its parent company”, are technically not covered by the Directive,1 which characterizes mergers by three elements: (i) transfers of all assets and liabilities, (ii) dissolution without winding up of the transferring company, and (iii) the granting of shares in the acquiring or new company to the shareholders of the transferring company (with a possible cash top-up of up to 10 %).2 The third element does not apply to upstream mergers of a 100 % subsidiary into its parent company. In order to, nonetheless, treat them like mergers, Article 110 sentence 2 determines that such operations shall be regulated by the provisions of Section 2 of this Chapter. This was already provided for in the 1970 Proposal, according to which such operations were not to be treated as, but similar to mergers by acquisition.3

II. Derogations of Certain Requirements However, Member States shall not impose certain requirements of Chapter 2 to such 3 operations. This includes provisions which do not fit the specifics and characteristics of 100 % upstream mergers4 and provisions which would make such operations unnecessarily more complicated.5 The draft terms of merger do not need to include information on the share exchange 4 ratio and the amount of the cash payment, the terms relating to the allotment of shares and the date from which shares are entitled to profits (cf. Article 91(2)(b) and (c)), 6 since no new shares are distributed. For the same reason, Article 105(1)(b), pursuant to which, 1 Cf. the 1968 Preliminary Draft (Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)) commenting on Article 19, p. 40; Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 20, p. 38; Lutter/ Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.143, p. 677. 2 Cf. Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.12, p. 674. 3 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 20, p. 38. 4 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 20, p. 38. 5 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1557); Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019), § 8.10, p. 347; Jens Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 295. 6 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 20, p. 38. See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.144, p. 677.

Tobias de Raet

567

Art 111 Exemption from the requirement of approval by the general meeting the shareholders of the company being acquired become shareholders in the acquiring company, is not applicable.7 5 Furthermore, the written report on the draft terms of merger (cf. Articles 95) as well as an examination of the draft terms of merger by experts (cf. Article 96) shall not be required, since there are no minority shareholders which need to be protected. 8 Consequently, Article 97(d) and (e) are likewise not applicable, nor are the provisions regarding the civil liability of members of the administrative or management bodies of the company being acquired. 6 Since both reports also address, inter alia, the rights of holders of securities, other than shares, to which special rights are attached (cf. Article 91(2)(f)), one may argue such reports should, nonetheless, be drawn up.9 However, since such information is only included in the reports to inform the shareholders of the companies involved in the mergers, there is no reason to maintain this requirement.

Article 111 Exemption from the requirement of approval by the general meeting Member States shall not apply Article 93 to the operations referred to in Article 110 if the following conditions are fulfilled: (a) the publication provided for in Article 92 is effected, as regards each company involved in the operation, at least one month before the operation takes effect; (b) at least one month before the operation takes effect, all shareholders of the acquiring company are entitled to inspect the documents referred to in points (a), (b) and (c) of Article 97(1) at the company’s registered office; (c) point (c) of the first paragraph of Article 94 applies. For the purposes of point (b) of the first paragraph of this Article, Article 97(2), (3) and (4) shall apply.

I. Historical Background 1

While the 1970 Proposal required approval by the general meeting without any exceptions,1 the 1978 Directive permitted, but did not require, Member States to waive the requirement of approval by the general meeting.2 However, only a few Member States made use of this option.3 In order to reduce estimated annual costs of EUR 153.5 mil7 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 20, p. 38. See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.144, p. 677, who argue, that the reference to Article 105(1)(b) is unnecessary as the same result is given by way of Article 105(2)(a). 8 See van Ommeslaghe, ‘Unternehmenskonzentration und Rechtsangleichung in der EWG’ (1969) ZHR, 201, 209; Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.10, p. 347; Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 295; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.145, p. 677. 9 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1557), who expressly criticises the decision to waive the requirement to draw up a report by the administrative or management bodies. 1 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 20, p. 38 et seq. 2 Cf. Article 25 of the 1978 Directive: “The Member States need not apply Article 7 [now: Article 93] to the operations specified in Article 24 [now: Article 110] if the following conditions at least are fulfilled [...]”.

568

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 112

lion for companies,4 the Directive 2009/109/EC required Member States to waive the requirement if certain conditions are fulfilled.

II. Specific Requirements Pursuant to Article 111 subparagraph 1 point (a), the publication provided for in 2 Article 92 needs to be effected, as regards each company involved in the operation, at least one month before the operation takes effect (cf. Article 103). Furthermore, pursuant to Article 111 subparagraph 1 point (b), all shareholders of 3 the acquiring parent company need to be entitled to inspect the following documents at the company’s registered office at least one month before the operation takes effect: (i) the draft terms of merger (cf. Article 97(1)(a)), (ii) the annual accounts and annual reports of the merging companies for the preceding three financial years (cf. Article 97(1) (b)), and (iii) where applicable, an accounting statement drawn up on a date which shall not be earlier than the first day of the third month preceding the date of the draft terms of merger, if the latest annual accounts relate to a financial year which ended more than six months before that date (cf. Article 97(1)(c)). For the purposes of Article 111 subparagraph 1 point (b), Article 97(2), (3) and (4) which deal with the accounting statement shall apply. Finally, pursuant to Article 111 subparagraph 1 point (c), point (c) of the first para- 4 graph of Article 94 has to apply; i.e. one or more shareholders of the acquiring company holding a minimum percentage of the subscribed capital has to be entitled to require that a general meeting of the acquiring company be called to decide whether or not to approve the merger; this minimum percentage may not be fixed at more than 5 %, whereas Member States may, however, provide for the exclusion of non-voting shares from this calculation.

Article 112 Shares held by or on behalf of the acquiring company The Member States may apply Articles 110 and 111 to operations whereby one or more companies are wound up without going into liquidation and transfer all their assets and liabilities to another company, if all the shares and other securities specified in Article 110 of the company or companies being acquired are held by the acquiring company and/or by persons holding those shares and securities in their own names but on behalf of that company. Article 112 permits Member States to apply Articles 110 and 111 to mergers of a sub- 1 sidiary into its parent company, where the parent company does not directly, but economically holds 100 % in the subsidiary.1 For this purpose, all the shares and other securities specified in Article 110 of the 2 company or companies being acquired have to be held by the acquiring company and/or by persons holding those shares and securities in their own names but on behalf of that company. Cf. in the proposal for Directive 2009/109/EC: COM(2008) 576, p. 5. Cf. Article 2 point 9(a) of the Directive 2009/109/EC. 1 Bayer and J. Schmidt, ‘Der Referentenentwurf zum 3. UmwÄndG: Vereinfachungen bei Verschmelzungen und Spaltungen und ein neuer verschmelzungsspezifischer Squeeze out’ (2010) Zeitschrift für Wirtschaftsrecht (ZIP), 953 (961), fn. 138. 3

4

Tobias de Raet

569

Art 113 Merger by acquisition by a company which holds 90 % or more As a consequence, Section 2 of this Chapter, i.e. Articles 91 to 118, subject to the specifics set out in Article 110(3) and Article 111, also applies to these operations. 4 Article 112 goes back to suggestions made by the UK and Ireland,2 since in their jurisdictions shares are often held indirectly in trust by so-called nominee shareholders. 3 The initial proposal of the Directive 2009/109/EC intended to require Member States to adopt Article 112 into their national laws,4 but the European Parliament eventually urged the Commission to keep the article optional, in particular, after the German delegation had raised concerns.5 3

Article 113 Merger by acquisition by a company which holds 90 % or more of the shares of a company being acquired Where a merger by acquisition is carried out by a company which holds 90 % or more, but not all, of the shares and other securities conferring the right to vote at general meetings of the company or companies being acquired, Member States shall not require approval of the merger by the general meeting of the acquiring company if the following conditions are fulfilled: (a) the publication provided for in Article 92 is effected, as regards the acquiring company, at least one month before the date fixed for the general meeting of the company or companies being acquired which is to decide on the draft terms of merger; (b) at least one month before the date specified in point (a), all shareholders of the acquiring company are entitled to inspect the documents specified in points (a) and (b) and, where applicable, points (c), (d) and (e) of Article 97(1) at the company’s registered office; (c) point (c) of the first paragraph of Article 94 applies. For the purposes of point (b) of the first paragraph of this Article, Article 97(2), (3) and (4) shall apply. 1

Article 113 contains a facilitation for mergers by acquisition by a company which holds 90 % or more of the shares of a company being acquired. Member States shall not require approval of such upstream mergers of a 90 % subsidiary into its parent company by the general meeting of the acquiring company if the conditions set out in this Article are fulfilled.

I. Historical Background and Context 2

The requirement laid down in today’s Article 113 was first introduced by the Directive 2009/109/EC1, whereas the reasons for the introduction of the Article were the same as for today’s Article 111.2 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1557). Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.148, p. 678. 4 Cf. in the proposal for Directive 2009/109/EC: COM(2008) 576, p. 13. 5 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.148, p. 678, fn. 413. 1 Cf. Article 2 point 10(a) of the Directive 2009/109/EC. 2

3

570

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 113

Article 113, however, only deals with exemption from approval of the merger by the 3 general meeting of the acquiring company, whereas according to Article 111, upstream mergers of a 100 % subsidiary into its parent company shall not have to be approved by any general meeting of the companies involved in the merger. This makes sense, since in a merger pursuant to Article 113, minority shareholders in the company being acquired are to be protected. While Article 94 and Article 113 are largely parallel in their requirements, Article 113 4 requires Member States to allow a derogation from the requirement of authorisation by the general meeting, whereas Article 94 leaves it up to the Member States if they want to adopt such a derogation.

II. Specific Conditions Pursuant to Article 113 subparagraph 1 point (a), the draft terms of merger have to 5 be published in accordance with Article 92 as regards the acquiring company, at least one month before the date fixed for the general meeting of the company or companies being acquired which is to decide on the draft terms of merger. Pursuant to Article 113 subparagraph 1 point (b), all shareholders of the acquiring 6 company are entitled to inspect (i) the draft terms of merger (cf. Article 97(1)(a), (ii) the annual accounts and annual reports of the merging companies for the preceding three financial years (cf. Article 97(1)(b)), and, where applicable, (iii) an accounting statement drawn up on a date which shall not be earlier than the first day of the third month preceding the date of the draft terms of merger, if the latest annual accounts relate to a financial year which ended more than six months before that date (cf. Article 97(1)(c)), (iv) the report of the administrative or management bodies of the merging companies provided for in Article 95 (cf. Article 97(1)(c)). Article 97(2), (3) and (4) which deal with the accounting statement shall apply. The reference in point (b) of the first subparagraph of Article 113 to points (c), (d) 7 and (e) of Article 97 is irrelevant if the conditions of Article 114 are fulfilled. This is evidenced, on the one hand, by the reference to Article 97 as a whole in Article 114 without a restriction comparable to Article 110 sentence 3, pursuant to which only Article 97(1)(d) and (e) do not apply,3 and, on the other hand, by the amendment to the Directive pursuant to which the second subparagraph was included in Article 113.4 It would have been easy to make an addition to Article 114, making clear that the conditions in point (b) of the first subparagraph of Article 113 remain unaffected. This was, however, apparently not the intention of the European legislator.5

2 Cf. in the proposal for Directive 2009/109/EC: COM(2008) 576, p. 5. See also: commentary to Article 111. 3 Lutter/Bayer/Schmidt state that this could be a legislative error, but with regard to amendments made to the Article under Directive 2009/109/EC, which do not affect the reference to Article 97, such an assumption seems implausible. Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.152, p. 681, fn. 434. 4 Article 2 point 9 (b) and (c) of the Directive 2009/109/EC deleted the second sentence of the current Article 113 subparagraph 1 point (b) with the wording “Article 11 [now: Article 97] (2) and (3) must apply” and added the second subparagraph to this Article, which now reads “[f]or the purposes of point (b) of the first paragraph of this Article, Article 11 [now: Article 97] (2), (3) and (4) shall apply.”. This amendment makes it clear that Article 97 does not always apply (“[f]or the purpose of ”), which could have been assumed in respect to the former wording. 5 See also with a different interpretation of that problem: Kiefner und Brügel, ‘Der umwandlungsrechtliche Squeeze-out’ (2011) AG, 525 (530).

Tobias de Raet

571

Art 114 Exemption from requirements applicable to mergers by acquisition 8

Pursuant to Article 113 subparagraph 1 point (c) in conjunction with Article 94(1)(c), a minority of shareholders in the acquiring company holding a minimum percentage of the subscribed capital of not more than 5 % must be allowed to convene a general meeting of the acquiring company at which a decision is to be taken to approve the merger. Member States may, however, provide for the exclusion of non-voting shares from this calculation.

Article 114 Exemption from requirements applicable to mergers by acquisition Member States shall not impose the requirements set out in Articles 95, 96 and 97 in the case of a merger within the meaning of Article 113 if the following conditions are fulfilled: (a) the minority shareholders of the company being acquired are entitled to have their shares acquired by the acquiring company; (b) if they exercise that right, they are entitled to receive consideration corresponding to the value of their shares; (c) in the event of disagreement regarding such consideration, it is possible for the value of the consideration to be determined by a court or by an administrative authority designated by the Member State for that purpose. A Member State need not apply the first paragraph if the laws of that Member State entitle the acquiring company, without a previous public takeover offer, to require all the holders of the remaining securities of the company or companies to be acquired, to sell those securities to it prior to the merger at a fair price.

I. Historical Background and Context Article 114 provides that Member States do not have to apply the requirements of Article 95 (report of the administrative or management bodies of the merging companies), Article 96 (expert report) and Article 97 (availability of documents for inspection by shareholders) to mergers within the meaning of Article 113, i.e. upstream mergers of a 90 % subsidiary into its parent company, if the conditions laid down in Article 114 are fulfilled. 2 Consequently, Articles 106 and 107, which deal with the civil liability of the members of the administrative or management bodies likewise do not apply.1 3 Article 114 is based on Sections 12, 13 and 15 of the German Transformation Act (Umwandlungsgesetz) from 1956 and 1969.2 The Article was, however, not introduced as mandatory until the Directive 2009/109/EC.3 This was done on the basis of the same considerations as for Articles 111 and 113.4 1

1 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.152, p. 681. 2 Article 114 is based on §§ 12, 13 and 15 of the German Transformation Act (Umwandlungsgesetz) from 1956 or rather 1969; cf. Gesetz über die Umwandlung von Kapitalgesellschaften und bergrechtliche Gewerkschaften v. 12.11.1956, BGBl. I, p. 844. Neubekanntmachung v. 6.11.1969, BGBl. I, p. 2081. 3 Cf. Article 2 point 11 of the Directive 2009/109/EC. 4 Cf. COM(2008) 576, p. 5. See also: commentary to Article 111.

572

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 115

II. Specific Conditions Points (a) to (c) of Article 114 must be fulfilled cumulatively. Pursuant to Article 114 subparagraph 1 point (a), the minority shareholders of the company being acquired need to be granted the opportunity to have their shares acquired by the acquiring company. Such an exit right is one of the key protections of minority shareholders in mergers and balances the interests of the shareholders in favour of and against the merger. While minority shareholders shall not be entitled to block the merger, they shall not be forced to participate in the merger, if certain provisions, which aim to protect them, are not met. This is a change in the protection concept of the Directive: instead of the ex-ante protection by information, Article 114 provides for an ex-post protection by a right to exit.5 If the minority shareholders make use of such an exit right pursuant to Article 114 subparagraph 1 point (b), they need to be entitled to receive consideration corresponding to the value of their shares. If no agreement regarding such consideration can be reached, the fee can be fixed by the court or by an administrative authority designated for that purpose by the Member State. Such a judicial review constitutes a guarantee for the exiting shareholder to be able to at least have an independent check carried out on the adequacy of the compensation, since he himself is not in a position to check the adequacy due to the lack of the company’s obligation to provide timely and comprehensive information on the transaction.6 The second subparagraph of Article 114 permits Member States to apply the first subparagraph of Article 114 where the laws of that Member State authorise the acquiring company to require any holder of the remaining shares in the company or companies to be acquired, without a prior public bid, to sell those shares to it at a fair price before the merger (pre-merger squeeze out).7 The second subparagraph was introduced by Directive 2009/109/EC8 and can therefore be considered as compensation for the obligatory wording of the first subparagraph of Article 114. This is supported by the fact that this subparagraph was added to a draft of the European Parliament9 only after concerns had been expressed by the Danish and German delegations10.11

Article 115 Transfer of all assets and liabilities by one or more companies to another company which is the holder of 90 % or more of their shares The Member States may apply Articles 113 and 114 to operations whereby one or more companies are wound up without going into liquidation and transfer all their 5 Bayer and J. Schmidt, ‘Der Referentenentwurf zum 3. UmwÄndG: Vereinfachungen bei Verschmelzungen und Spaltungen und ein neuer verschmelzungsspezifischer Squeeze out’ (2010) ZIP, 953 (959). 6 Kalss, ‘Europarechtliche und verfassungsrechtliche Rahmenbedingungen für das Umwandlungsrecht’ (1995) Juristische Blätter (JBl.), 420 (427). 7 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.153, p. 682. 8 Article 2 point 11(c) of the Directive 2009/109/EC. 9 Cf. EP-PE_TC1-COD(2008) 0182, p. 17. 10 Cf. Doc 12396/09 ADD 1, p. 8 et seq. 11 See also: Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.11, p. 347; Lutter/ Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.153, p. 682, fn. 439.

Tobias de Raet

573

4 5

6

7

8

Art 116 Mergers with cash payment exceeding 10 % assets and liabilities to another company, if 90 % or more, but not all, of the shares and other securities referred to in Article 113 of the company or companies being acquired are held by that acquiring company and/or by persons holding those shares and securities in their own names but on behalf of that company. Article 115 permits Member States to also apply Articles 113 and 114 in cases, where the parent company does not directly, but economically holds 100 % in the subsidiary. 2 This operation is characterised, like in Article 112, by the fact that one or more companies transfer all their assets and liabilities to another company by way of liquidation without going into liquidation where 90 % or more, but not all, of the shares and other securities referred to in Article 113 of the company or companies being acquired belong to the acquiring company and/or to persons holding those shares and securities in their own name but on behalf of the acquiring company. 3 Articles 91 to 108 are therefore in principle applicable to such transactions, subject to Articles 113 and 114. 4 An economic participation within the meaning of Article 115 is, like in Article 112, any participation pursuant to which shares and other securities with voting rights of the company being acquired are not held solely by the acquiring company but are also held, either wholly or in part, by persons who hold them in their own name but on behalf of the acquiring company.1 1

Section 5 Other operations treated as mergers Article 116 Mergers with cash payment exceeding 10 % Where in the case of one of the operations referred to in Article 88 the laws of a Member State permit a cash payment to exceed 10 %, Sections 2 and 3 of this Chapter and Articles 113, 114 and 115 shall apply. Article 116 extends the scope of the Directive to operations where the cash payment exceeds 10 %. This is necessary because Articles 89 and 90 are only applicable to mergers where the amount of the cash payments does not exceed 10 %. 2 If and to the extent that Member States allow such operations with a cash payment of more than 10 % co-payment, Member States have to apply Sections 2 and 3 of this Chapter as well as Articles 113, 114 and 115 to such operations. Consequently, Articles 110 to 112 concerning upstream mergers of a 100 % subsidiary into its parent company, are excluded. 3 The extended scope shall prevent circumvention of the safeguards regarding the protection of shareholders and creditors of the companies involved in the merger. 1 Article 116 shall cover operations whose economic effects are comparable to those of mergers, but are from a dogmatic point of view different from mergers. 2 1

1 Bayer and J. Schmidt, ‘Der Referentenentwurf zum 3. UmwÄndG: Vereinfachungen bei Verschmelzungen und Spaltungen und ein neuer verschmelzungsspezifischer Squeeze out’ (2010) ZIP, 953 (961), fn. 138. 1 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 21, p. 39; recital no. 53 of the Directive 2017/1132/EU; Edwards, EC Company Law (1999), p. 98; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.23, p. 630.

574

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 117

It is discussed whether there is a limit with regard to the amount of the additional cash payment Member States may permit. The prevailing opinion, however, rejects such a limit,3 which is in line with the wording of Article 116. Whereas the 1970 Proposal expressly required the consideration to consist in whole or in part in shares, the wording (“a cash payment”) was eventually more open in Article 30 of the 1978 Directive and still is in today’s Article 116.4 The German wording (“Zuzahlung” = additional payment) indicates that the cash payment may only be made in addition to a consideration in shares.5 Other language versions,6 do not indicate such a restriction, but rather only contain a translation of the term ‘cash payment’.7 Although provisions of European law are to be interpreted autonomously, national influences on such provisions are recognisable8. Article 116 is similar to provisions in Greek and Swedish stock corporation law and, in particular, the Danish Stock Corporation Act (Aktieselskabsloven) of 13 June 1978. Sections 134 et seq. of the Danish Stock Corporation Act (Aktieselskabsloven), do not require any shares as consideration in a merger, but permit a full cash payment.9 Nonetheless, it is contradictory to apply the concept of mergers to cash-acquisitions, i.e. where the consideration does not consist of any shares in the company being acquired.

4

5

6

7

8

Article 117 Mergers without all of the transferring companies ceasing to exist Where the laws of a Member State permit one of the operations referred to in Articles 88, 110 and 116, without all of the transferring companies thereby ceasing to exist, Section 2, except for point (c) of Article 105(1), and Section 3 or 4 of this Chapter shall apply as appropriate. Article 117 requires Member States to apply the provisions of this Chapter insofar as 1 they authorise an operation in which not all the transferring companies cease to exist but all other conditions of a merger (cf. Articles 89 and 90) are fulfilled.1 2 Cf. Kalss, ‘Europarechtliche und verfassungsrechtliche Rahmenbedingungen für das Umwandlungsrecht’ (1995) JBl., 420 (424). 3 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (17); Kalss, ‘Europarechtliche und verfassungsrechtliche Rahmenbedingungen für das Umwandlungsrecht’ (1995) JBl., 420 (423 et seq); Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.15, p. 675 et seq.; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.23, p. 630. 4 Kalss, ‘Europarechtliche und verfassungsrechtliche Rahmenbedingungen für das Umwandlungsrecht’ (1995) JBl., 420 (424). 5 Kalss, ‘Europarechtliche und verfassungsrechtliche Rahmenbedingungen für das Umwandlungsrecht’ (1995) JBl., 420 (424). 6 English version: “cash payment”; French version: “une soulte en espèces”; Spanish version: “compensación en dinero”. 7 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.23, p. 630. 8 Kalss, ‘Europarechtliche und verfassungsrechtliche Rahmenbedingungen für das Umwandlungsrecht’ (1995) JBl., 420 (425). 9 Kalss, ‘Europarechtliche und verfassungsrechtliche Rahmenbedingungen für das Umwandlungsrecht’ (1995) JBl., 420 (425). 1 Cf. Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.16, p. 676.

Tobias de Raet

575

Art 118 General provisions This Article – like Article 116 – intends to prevent the safeguards of the Directive from being circumvented.2 3 Article 117 therefore stipulates that Section 2, except for point (c) of Article 105(1), and Section 3 or 4 of this Chapter shall apply as appropriate to operations referred to in Articles 88, 110 and 116, without all of the transferring companies thereby ceasing to exist. 4 Article 117 is based on the French split-merger (fusion-scission) 3 and the conversion via merger (verschmelzungsrechtliche Umwandlung)4 pursuant to § 15 of the German Transformation Act (Umwandlungsgesetz) of 1956.5 2

CHAPTER II CROSS-BORDER MERGERS OF LIMITED LIABILITY COMPANIES Article 118 General provisions This Chapter shall apply to mergers of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union, provided at least two of them are governed by the laws of different Member States (hereinafter referred to as ‘cross-border mergers’). I. Legislative History and Regulatory Context of the Provisions on CrossBorder Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. From the EEC Treaty to the failed Convention on cross-border mergers (1957 to 1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The starting point: Article 220 of the EEC Treaty (1957) . . . . . . . . . . . . . . . . b) The 1972 draft of a Convention and its failure . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Controversy regarding employee participation/co-determination . . (ii) The role of the 1978 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iii) Failure in 1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. First attempt at a Directive on cross-border mergers (1985 to 2001) . . . . . . 3. Second attempt at a directive on cross-border mergers (2003 to 2005) . . . a) The road to the 2003 Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) From the 2003 Proposal to the 2005 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Amendments to the cross-border Directive and the 2017 Company Law Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. From the EU Company Law Package 2018 to the 2019 Directive . . . . . . . . . II. Legislative Aim of Chapter II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Removal of legal hurdles for cross-border activities of companies . . . . . . . . 2. Promotion of external growth of EU companies . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 2 5 6 11 13 14 20 20 23 28 33 35 35 38

2 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 21, p. 39; recital no. 53 of the Directive 2017/1132/EU; Edwards, EC Company Law (1999), p. 98; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.27, p. 632. 3 Sonnenberger, ‘Interne Fusion von Aktiengesellschaften im Gemeinsamen Markt’ (1971) Die Aktiengesellschft (AG), 76 (82); Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.12, p. 348 et seq. 4 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.16, p. 676. 5 Neubekanntmachung des Umwandlungsgesetzes v. 6.11.1969, BGBl. I, 2081 et seq; Habersack and Verse, Europäisches Gesellschaftsrecht (4th edn, 2011), § 8.12, p. 243.

576

Tobias de Raet

Art 118 General provisions This Article – like Article 116 – intends to prevent the safeguards of the Directive from being circumvented.2 3 Article 117 therefore stipulates that Section 2, except for point (c) of Article 105(1), and Section 3 or 4 of this Chapter shall apply as appropriate to operations referred to in Articles 88, 110 and 116, without all of the transferring companies thereby ceasing to exist. 4 Article 117 is based on the French split-merger (fusion-scission) 3 and the conversion via merger (verschmelzungsrechtliche Umwandlung)4 pursuant to § 15 of the German Transformation Act (Umwandlungsgesetz) of 1956.5 2

CHAPTER II CROSS-BORDER MERGERS OF LIMITED LIABILITY COMPANIES Article 118 General provisions This Chapter shall apply to mergers of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union, provided at least two of them are governed by the laws of different Member States (hereinafter referred to as ‘cross-border mergers’). I. Legislative History and Regulatory Context of the Provisions on CrossBorder Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. From the EEC Treaty to the failed Convention on cross-border mergers (1957 to 1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The starting point: Article 220 of the EEC Treaty (1957) . . . . . . . . . . . . . . . . b) The 1972 draft of a Convention and its failure . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Controversy regarding employee participation/co-determination . . (ii) The role of the 1978 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iii) Failure in 1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. First attempt at a Directive on cross-border mergers (1985 to 2001) . . . . . . 3. Second attempt at a directive on cross-border mergers (2003 to 2005) . . . a) The road to the 2003 Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) From the 2003 Proposal to the 2005 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Amendments to the cross-border Directive and the 2017 Company Law Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. From the EU Company Law Package 2018 to the 2019 Directive . . . . . . . . . II. Legislative Aim of Chapter II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Removal of legal hurdles for cross-border activities of companies . . . . . . . . 2. Promotion of external growth of EU companies . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 2 5 6 11 13 14 20 20 23 28 33 35 35 38

2 Cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 21, p. 39; recital no. 53 of the Directive 2017/1132/EU; Edwards, EC Company Law (1999), p. 98; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.27, p. 632. 3 Sonnenberger, ‘Interne Fusion von Aktiengesellschaften im Gemeinsamen Markt’ (1971) Die Aktiengesellschft (AG), 76 (82); Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.12, p. 348 et seq. 4 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.16, p. 676. 5 Neubekanntmachung des Umwandlungsgesetzes v. 6.11.1969, BGBl. I, 2081 et seq; Habersack and Verse, Europäisches Gesellschaftsrecht (4th edn, 2011), § 8.12, p. 243.

576

Tobias de Raet

Art 118

TITLE II CONVERSIONS, MERGERS AND DIVISIONS 3. Protection of shareholders, creditors and employees involved in the cross-border merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. The role of the ECJ's SEVIC decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Developments after the 2005 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Limited liability companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Cross-border element . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Location within the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Multiple jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Relevance of company statute (lex societatis) . . . . . . . . . . . . . . . . . . . . . . . (ii) Real seat theory vs. incorporation theory . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Member States of the European Economic Area (EEA) / Brexit . . . . . . . . . . 4. Mergers not within the scope of the Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Mergers involving partnerships, cooperatives and other legal entities . . . . (i) Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Conflict with the ECJ's SEVIC decision . . . . . . . . . . . . . . . . . . . . . . . . (iii) Gold-plating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Crossing the border by formation of a NewCo only . . . . . . . . . . . . . . . . . . . . . . c) Mergers involving non-EU Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39 40 44 45 47 49 49 51 52 54 59 62 62 62 63 65 66 70

I. Legislative History and Regulatory Context of the Provisions on Cross-Border Mergers It was a long time before the European legislature first adopted a Directive regarding 1 cross-mergers in 2005.1

1. From the EEC Treaty to the failed Convention on cross-border mergers (1957 to 1980) a) The starting point: Article 220 of the EEC Treaty (1957) The aim to create an EU-wide legal framework for cross-border mergers goes back to 2 1957. The wording of Article 220 of the EEC Treaty included the objective of initiating negotiations in order to ensure the possibility of cross-border mergers of companies. 2 The idea behind Article 220 of the EEC Treaty was, in a first step, to agree on a 3 Convention on cross-border mergers and not, as was eventually the case, to implement a Directive.3 The reason for this was that the problems to be addressed and solved in this context were deemed too complex to be harmonised in a Directive.4 This approach is evidenced not only in the wording, but also in the systematic 4 position of Article 220 of the EEC Treaty in the section containing the general and final provisions of the EEC Treaty (Articles 210 et seq.) (cf. the actual catalogue of competences in Article 54 of the EEC Treaty, which expressly specifies the form of the Directive).

Directive 2005/56/EC of 26.10.2005 on cross-border mergers of limited liability companies. The Article was also included in the EC Treaty as Article 293 with almost the same content; it was, however, not included in the TFEU. 3 Discussing the limitations of such a Convention: Goldmann, Report on the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73 (http://aei.pitt.edu/5613/), Annex 2 E, p. 120. 4 Cf. Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 29.1, p. 698. 1

2

Tobias de Raet

577

Art 118 General provisions b) The 1972 draft of a Convention and its failure 5

In 1965, the EEC Member States, which had concluded that such negotiations were indeed necessary,5 set up a working group chaired by Berthold Goldmann.6 The working group presented a first official draft7 for a convention on cross-border mergers in 1972.8 The draft contained 69 Articles which predominantly dealt with substantive law, but also included provisions regarding the conflict of laws. The draft had a limited scope,9 and was, in particular, limited to stock corporations (cf. Article 2 of the draft Convention). (i) Controversy regarding employee participation/co-determination

Due to objections raised by Italy,10 the draft presented by the working group in 1972 did not address how to deal with the different co-determination frameworks of the Member States,11 in particular, with respect to the following two scenarios: 7 Avoid co-determination by means of a cross-border merger: Can a transferring entity, which is subject to co-determination of employees in its Member State, 'escape' such co-determination by means of a cross-border merger if the acquiring company is from a Member State whose laws do not provide for such co-determination?12 8 Cross-border merger as trigger for co-determination: Can a cross-border merger trigger the application of co-determination if the laws of the Member State of the transferring company do not provide for co-determination, but the laws of the Member State of the acquiring company provide for co-determination? 9 Both questions relate to the same issue: should the different co-determination frameworks of the Member States be an incentive or a substantial hurdle for cross-border mergers?13 6

5 Communication from the Commission, Bulletin of the European Community, 29.6.1973, Supplement 13/73 (http://aei.pitt.edu/5613/), p. 3; Koppensteiner, ‘Grundlagenkritische Bemerkungen zum EWG-Entwurf eines Übereinkommens über die internationale Verschmelzung von Aktiengesellschaften’ (1975) 39 RabelsZ, 405 (405 et seq.); Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 107. 6 Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1893); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.1, p. 730. 7 Draft Convention on the international merger of sociétés anonymes, Doc. 529/XIV/72 = Bulletin of the European Community Supplement 13/73 = Kommission der Europäischen Gemeinschaften, ‘Entwurf eines Übereinkommens über die internationale Verschmelzung von Aktiengesellschaften’ (1975) 39 RabelsZ, 539. 8 Next to the two preliminary drafts of 1967 (Doc. 16082/IV/67-F) and 1969 (Doc. 5873/XIV/69-F). See also in this regard: Beitzke, ‘Internationales zur Gesellschaftsfusion’ in: von Caemmerer, Schlochauer and Steindorff (eds), Probleme des Europäischen Rechts: Festschrift für Walter Hallstein zu seine 65. Geburtstag (1966), 15. 9 Goldmann, Report on the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73, Introduction, p. 35; Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 107. 10 Goldmann, Report on the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73, Annex 2 E, p. 119 et seq. 11 Cf. Section 5 of the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73 (http://aei.pitt.edu/5613/), p. 17. 12 Goldmann, Report on the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73, Annex 2, p. 105; Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019), § 8.52, p. 372. Similiar: Kolvenbach, ‘Die Europäische Gemeinschaft und die deutsche Mitbestimmung’ (1986) DB, 1973 (1975). 13 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.52, p. 372-373.

578

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 118

Italy primarily expressed concerns if Article 220 of the EEC Treaty gave Member 10 States the legal competence to decide on questions of co-determination and other forms of employee participation by means of a convention as an intergovernmental agreement only. Italy further argued that the institution of employee participation (as established in German and Dutch law) was entirely alien to the process of cross-border mergers and that there was, therefore, no connection between the representation of employees on boards or other bodies of the company and the objective of Article 220 of the EEC Treaty to promote the possibility of cross-border mergers of companies. 14 Consequently, Italy was in favour of solving the question of co-determination by the approximation of laws, i.e. by means of a Directive, on the basis of Article 54(3)(g) in conjunction with Article 54(2) of the EEC Treaty.15 (ii) The role of the 1978 Directive The Third Company Law Directive (1978/855/EEC) ('1978 Directive') on domestic 11 mergers intended to facilitate the negotiations on the conclusion of a convention on cross-border mergers, which, by that time, had already lasted for several years. 16 The approximation of domestic merger laws pursuant to the 1978 Directive was, therefore, aimed at promoting and facilitating the envisaged legislation regarding cross-border mergers17. The approximation of the laws of the Member States on domestic mergers was sup- 12 posed to take pressure off the negotiations about a convention on cross-border mergers by reducing the content.18 It was argued that a harmonisation of domestic mergers must precede the EU-wide regulation of cross-border mergers pursuant to the EEC Treaty. 19 (iii) Failure in 1980 Despite this preparatory work, the negotiations about a convention regarding cross- 13 border mergers eventually failed in 1980, because the required unanimity could not be reached among the Member States due to persistent disagreements on the issue of employee participation.20 14 Goldmann, Report on the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73, Annex 2 E, p. 119; see p. 120 et seq. with arguments contrary to this interpretation by the Italian delegation. 15 Goldmann, Report on the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73, Annex 2 E, p. 119; as well as in Annex 2, p. 105. 16 Cf. Schmitthoff, ‘Future of the European Company Law Scene’ in Schmitthoff (ed), The Harmonisation of European Company Law (1973), 3 (22); Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 29.2, p. 699; Priester, ‘Das neue Verschmelzungsrecht’ (1983) Neue Juristische Wochenzeitschrift (NJW), 1459 (1459); Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 2. 17 Which in fact took until 2005 to be originally adopted: Directive 2005/56/EC of 26.10.2005 on cross-border mergers of limited liability companies. 18 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 29.2, p. 699. With similar considerations: Goldmann, Report on the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73, Introduction, p. 35. 19 Cf. Schmitthoff, ‘Future of the European Company Law Scene’ in Schmitthoff (ed), The Harmonisation of European Company Law (1973), 3 (22). 20 Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1893); Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 107; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.1, p. 730.

Tobias de Raet

579

Art 118 General provisions 2. First attempt at a Directive on cross-border mergers (1985 to 2001) 14

15

16

17

18

19

Following the adoption of the 1978 Directive on domestic mergers, the Commission released a proposal in 1985, in which it suggested also approximating the laws of the Member States regarding cross-border mergers of stock corporations by means of a Directive based on the 1978 Directive ('1985 Proposal').21 This approach seemed promising at the time,22 since it had the advantage, among other things, that it – unlike a Convention – did not require a unanimous decision of the Member States,23 but only a majority decision in the Council (cf. Article 54(2) of the EEC Treaty (today: Article 50(1) in conjunction with Article 294 TFEU)). 24 The 1985 Proposal highlighted that Article 220 of the EEC Treaty did not prohibit the implementation of an EU-wide legal framework on cross-border mergers under a Directive based on the legal competence granted to the EU- legislature with respect to the freedom of establishment pursuant to Article 54(3)(g) of the EEC Treaty. 25 The main advantage, however, was that adoption of cross-border mergers under a directive was a better way of ensuring a uniform implementation and interpretation of domestic and cross-border mergers than with two texts of different legal natures, which would have been the case if domestic mergers had been governed by a directive and cross-border mergers by a convention.26 Being based on and by making reference to the 1978 Directive, the number of Articles of the 1985 Proposal could be limited to 17, whereas the 1972 draft of a convention, as an independent legal framework, contained 69 Articles.27 However, no solution was found for the issue of employee participation. Instead, Article 1(3) of the 1985 Proposal gave Member States the possibility of not having to apply the provisions of the Directive if the cross-border merger were to lead to the elimination of co-determination.28 This option was deemed necessary as long as there was no coordination of the laws of the Member States on employee participation under a 'fifth' directive coordinating the corporate governance structure of public limited companies and their corporate bodies.29 As a result of this option of non-application, all Member States whose national laws provided for co-determination or other forms of employee participation, would have practically not had the option to benefit from the legal framework for cross-border mergers.30 This was harshly criticised by those Member States whose national laws provided for co-determination or other forms of employee participation. In particular, 21 Proposal for a Tenth Council Directive based on Article 54(3)(g) of the EEC Treaty concerning cross-border mergers of public limited companies, COM(84) 727 final, 14.1.1985. 22 Cf. Behrens, ‘Die Umstrukturierung durch Sitzungsverlegung oder Fusion über die Grenze im Licht der Niederlassungsfreiheit im Europäischen Binnenmarkt (Art. 52 und 58 EWGV)’ (1994) ZGR, 1 (23); Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 108. 23 Goldmann, Report on the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73, Annex 2 E, p. 120. 24 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.2, p. 730. 25 Recital no. 2 of the Proposal for a Tenth Council Directive based on Article 54(3)(g) of the EEC Treaty concerning cross-border mergers of public limited companies, COM(84) 727 final, 14.1.1985. 26 Recital no. 3 of the Proposal for a Tenth Council Directive based on Article 54(3)(g) of the EEC Treaty concerning cross-border mergers of public limited companies, COM(84) 727 final, 14.1.1985. 27 Cf. Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 108. 28 Article 1(3) of the Proposal for a Tenth Council Directive based on Article 54(3)(g) of the EEC Treaty concerning cross-border mergers of public limited companies, COM(84) 727 final, 14.1.1985. 29 See for criticism of this option: Ganske, ‘Internationale Fusion von Gesellschaften in der Europäischen Gemeinschaft – ein neuer Ansatz’ (1985) DB, 581 (582); Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 108 et seq.

580

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 118

Germany feared economic disadvantages for its companies and negative impacts on the right of co-determination.31 These concerns revealed the differences that still existed with respect to the issue of employee representation and eventually had the consequence that the draft was not further discussed in the Council.32 In 2001, the Commission formally and definitively withdrew its proposal for a company law directive on cross-border mergers.33

3. Second attempt at a directive on cross-border mergers (2003 to 2005) a) The road to the 2003 Proposal The formal withdrawal of the 1985 Proposal cleared the way for a new approach. This 20 new approach was possible following the compromise on the Societas Europaea (SE) reached at the Nice Summit on 20 December 2000 (the so-called 'Nice miracle'), 34 which contained a solution to the question of employee participation for the SE.35 Encouraged by this success, the Commission tried to extend the SE participation 21 model to cross-border mergers.36 In November 2002, a team led by the Dutch lawyer Jaap Winter published a report37, which reiterated the importance of adopting provisions on cross-border mergers.38 On 21 May 2003, the Commission released a communication on “Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward” in which it announced the preparation of a new proposal for a “Tenth Company Law Directive on cross-border mergers”.39 In November 2003, the Commission issued a new proposal ('2003 Proposal')40 for 22 a directive on cross-border mergers. The scope of the 2003 Proposal was – unlike all previous attempts – not limited to stock corporations, but included all companies with share capital which were, in the unanimous view of the Member States, classified as “companies having legal personality and separate assets which alone serve to cover the company’s debts”.41 It expressly highlighted that “it was aimed primarily at companies

30 Ganske, ‘Internationale Fusion von Gesellschaften in der Europäischen Gemeinschaft – ein neuer Ansatz’ (1985) DB, 581 (583); Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.52, p. 373 et seq.; Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 108 et seq. 31 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 109. Similiar: Kolvenbach, ‘Die Europäische Gemeinschaft und die deutsche Mitbestimmung’ (1986) DB, 1973 (1975). 32 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.52, p. 264; Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 109. See with further criticism: Opinion of the Economic and Social Committee on the proposal for a 10th Council Directive based on Article 54(3) (g) of the treaty concerning cross-border mergers of public limited companies, OJ C 303, 25.11.85, p. 27; Ganske, ‘Internationale Fusion von Gesellschaften in der Europäischen Gemeinschaft – ein neuer Ansatz -’ (1985) DB, 581 (582). 33 Corrigendum, COM(2001) 763 final, 21.12.2001, p. 23. 34 Hirte, ‘Die Europäische Aktiengesellschaft’ (2002) NZG, 1 (1 et seq.); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.2, p. 730. 35 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.53, p. 373; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.2, p. 730. 36 Cf. Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.53, p. 373. 37 Winter (Chairman), Report of the high level group of company law experts on a modern regulatory framework for company law in Europe (Brussels, 4.11.2002). 38 Nagel, ‘Die Richtlinie zur grenzüberschreitenden Verschmelzung’ (2006) NZG, 97 (97). 39 Communication from the Commission, Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward, 21.5.2003, COM(2003) 284 final, p. 20. 40 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003.

Tobias de Raet

581

Art 118 General provisions which are not interested in forming an SE, i.e. for the most part small and medium-sized enterprises.”42 b) From the 2003 Proposal to the 2005 Directive The 2003 Proposal contained only 16 Articles. However, while the 1985 Proposal had consistently referred to the 1978 Directive on domestic mergers, the 2003 Proposal generally referred to the national laws of the Member States on domestic mergers. 43 24 As the European Economic and Social Committee explained, mergers were to be, in principle, subject to the national laws of Member States in which the companies involved in the merger had their head offices, and in addition had to meet a number of specific minimum requirements laid down in Article 2 of the proposed Directive.44 25 With regard to employee participation, the 2003 Proposal initially suggested applying the SE co-determination model exclusively in cases where, pursuant to Article 14 of the 2003 Proposal, (i) at least one of the companies involved in the merger was subject to employee co-determination and (ii) the national laws applicable to the company resulting from the merger did not provide for mandatory employee co-determination. 45 The idea was that, in both cases, the participation of employees in the company was supposed to be subject to the provisions of the SE Regulation46 and the SE Directive.47 This would have avoided the complete elimination of employee participation due to a cross-border merger, but would have accepted a reduction in the level of employee participation.48 26 However, this model was complicated in the course of the legislative procedure and adapted in particular to the ideas of the Economic and Social Committee which argued that Article 14 of the 2003 Proposal should be amended in order to reduce the risk of lower employee participation standards in the companies resulting from the merger.49 It was proposed that the level of employee participation existing in the companies involved in the merger should at least be maintained for the companies resulting from the cross-border merger.50 23

41 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 3. 42 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 3. 43 Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital’, OJ C 117, 30.4.2004, p. 43, point 1.3.2., Cf. Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 110. 44 Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital’, OJ C 117, 30.4.2004, p. 44, point 2.3. 45 The reference to the participation model of the SE would have had the advantage that it would have avoided “the need to repeat discussions within the Community institutions”, cf. Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital’, OJ C 117, 30.4.2004, p. 43, point 1.3.3. 46 Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE). 47 Directive 2001/86/EC of 8.10.2001 supplementing the Statute for a European company with regard to the involvement of employees. 48 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 110. 49 Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital’, OJ C 117, 30.4.2004, p. 46, point 3.3.2. 50 Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital’, OJ C 117, 30.4.2004, p. 46, point 3.3.2.

582

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 118

This proposal of the Economic and Social Committee was eventually implemented 27 in Article 16(2)(a) of Directive 2005/56/EC ('2005 Directive'), which was passed by the European Parliament after only one parliamentary reading51 on 19 May 200552 and eventually adopted on 26 October 2005 when it was signed by the President of the European Parliament and the President of the Council.53

4. Amendments to the cross-border Directive and the 2017 Company Law Directive Over the years, the 2005 Directive has been subject to several amendments. Directive 2009/109/EC54, which also amended the 1978 Directive on domestic mergers, modernised the reporting and documentation requirements.55 The Business Registers Interconnection System (BRIS) Directive 2012/17/EU 56 amended Article 13 of the 2005 Directive and added Article 17 a, 57 which is now Article 161 of Directive 2017/1132/EU. The Bank Recovery and Resolution Directive (BRRD) Directive 2014/59/EU added exemptions for companies subject to a BRRD measure.58 Finally, in 2017, the 2005 Directive was codified together with five other company law directives59 in Directive 2017/1132/EU60 ('2017 Directive'). The basis for this joint codification was the Commission’s Action Plan on European company law and corporate governance along with a public consultation in 2012, which highlighted that European company law provisions were spread across too many different legal acts, making it difficult for users to have a clear overview of the applicable law in this area, and also created the risk of unintended gaps or overlaps.61 The 2017 Directive was implemented to make “EU company law more reader-friendly and to reduce the risk of future inconsistencies”.62 51 Council of the European Union, Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital – Outcome of the European Parliament’s first reading (Strasbourg, 9.–12.5.2005), 13.5.2005, Doc. 8728/05, p. 1: “Thereby avoiding the need for a second reading and conciliation.” 52 With minor amendments: Council of the European Union, Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital – Outcome of the European Parliament’s first reading (Strasbourg, 9. - 12.5.2005), 13.5.2005, Doc. 8728/05. 53 Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1894); Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 111. 54 Directive 2009/109/EC of 16.9.2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC as regards reporting and documentation requirements in the case of mergers and divisions. 55 Cf. Article 4 of the Directive 2009/109/EC. 56 Directive 2012/17/EU of 13.6.2012 amending Council Directive 89/666/EEC and Directives 2005/56/EC and 2009/101/EC of the European Parliament and of the Council as regards the interconnection of central, commercial and company registers. 57 Cf. Article 2 of Directive 2012/17/EU of 13.6.2012. 58 Directive 2014/59/EU of 15.5.2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No. 1093/2010 and (EU) No. 648/2012, of the European Parliament and of the Council. 59 Directives 82/891/EEC of 17.12.1982, 89/666/EEC of 21.12.1989, 2009/101/EC of 16.9.2009, 2011/35/EU of 5.4.2011 and 2012/30/EU of 25.10.2012. 60 Directive 2017/1132/EU of 14.6.2017 relating to certain aspects of company law. 61 Communication from the Commission, Action Plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies, COM(2012) 740 final, 12.12.2012, p. 15.

Tobias de Raet

583

28 29 30

31 32

Art 118 General provisions 5. From the EU Company Law Package 2018 to the 2019 Directive In April 2018, the Commission released two proposals for amendments to the 2017 Directive as part of the EU Company Law Package.63 The objective of these two proposals was (i) to provide for the use of digital tools and procedures throughout the crossborder merger procedure and (ii) to provide for substantive rules, in particular, for creditor protection and minority shareholder protection as well as fast track procedures. 64 Based on the findings of a study from 2013,65 the Commission hereby sought to address some of the shortcomings of the 2017 Directive.66 The 2013 study had identified that under the framework applicable at that time, employees were not sufficiently informed about the details and effects of a cross-border merger. Furthermore, the situation of employees was only addressed to a limited extent in the management report, which was primarily addressed at shareholders. The proposed rules were intended to ensure that employees are properly informed about the impact the respective cross-border merger would have on them.67 In addition, shortcomings in the approximation of national laws were identified, which were attributed to the lack of sufficient substantive safeguards. 68 For example, a minimum level of protection for creditors is largely lacking, as the 2017 Directive did not set any further requirements in this respect. 69 34 The EU Company Law Package passed the EU legislation process relatively smoothly and quickly. In December 2018, the Committee on Legal Affairs of the European Parliament adopted a report on the proposals.70 In January 2019 the trilogy proceedings started and on 18 April 2019 the European Parliament passed a resolution on the final text of the envisaged directive.71 It was initially intended that the new legislation would come into effect prior to the elections for the European Parliament in May 33

62 Communication from the Commission, Action Plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies, COM(2012) 740 final, 12.12.2012, p. 15. With a similar conclusion: Communication of the Commission concerning the Codification of the Acquis communautaire, COM(2001) 645, 21.11.2001, p. 19. 63 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law, COM(2018) 239 final, 25.4.2018; Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018. 64 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018, p. 6. 65 Bech-Bruun and Lexidale, Study on the Application of the Cross-border Mergers Directive (2013) (https://publications.europa.eu/en/publication-detail/-/publication/0291c60a-df7a-11e5-8fea-01aa75ed71 a1). 66 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018, p. 5. 67 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018, p. 7. 68 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018, p. 6. 69 Bech-Bruun and Lexidale, Study on the Application of the Cross-border Mergers Directive (2013), p. 10. 70 Opinion of the Committee on Legal Affairs on the proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (COM(2018)0241 – C8-0167/2018 – 2018/0114(COD)), adopted on 6.12.2018. 71 European Parliament legislative resolution of 18.4.2019 on the proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (COM(2018)0241 – C8-0167/2018 – 2018/0114(COD)).

584

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 118

2019.72 The correction proceedings pursuant to Article 231 (now Article 241) of the Rules of Procedure of the European Parliament however took longer than anticipated, and the Directive of the European Parliament and of the Council amending the 2017 Directive ('2019 Directive' or the 'Directive') was eventually adopted by the Council on 18 November 2019 and published in the Official Journal of the European Union on 12 December 2019.73 The 2019 Directive came into effect as of 1 January 2020 and has to be implemented by the Member States by 31 January 2023.74

II. Legislative Aim of Chapter II 1. Removal of legal hurdles for cross-border activities of companies Until 2005, the Member States did not treat cross-border mergers uniformly, and 35 some even considered them inadmissible.75 A European regulation on cross-border mergers (whether in the form of a conven- 36 tion as an intergovernmental agreement or in the form of a directive) was, therefore, supposed to eliminate the need for complicated and financially burdensome alternative legal structures which had been used to achieve substantially the same effects as cross-border mergers. 76 The recital of the 2005 Directive expressly stated that “[T]here is a need for cooperation and consolidation between limited liability companies from different Member States. However, as regards cross-border mergers of limited liability companies, they encounter many legislative and administrative difficulties in the Community.”77 Among the complex alternative structures used by companies was a structure accord- 37 ing to which the transferring company transferred its assets abroad to the domestic receiving company before it went into liquidation.78 Structures like this made it clear that there was a need for a regulation on cross-border mergers at EU level. 79

72 Bormann and Stelmaszczyk, ‘Grenzüberschreitende Verschmelzung nach dem EU-Company Law Package’ (2019) ZIP, 300 (301). 73 Directive (EU) 2019/2121 of the European Parliament and of the Council of 27.11.2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, OJ L321, 12.12.2019. 74 Cf. Article 3 of the Directive (EU) 2019/2121 of the European Parliament and of the Council of 27.11.2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, OJ L321, 12.12.2019 pursuant to which the 2019 Directive has to be implemented by the last day of the 36th month after the date of entry into force. 75 Cf. Grohmann and Gruschinske, ‘Grenzüberschreitende Mobilität von Kapitalgesellschaften in Europa: Die Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2006) GmbHG, 191 (193). 76 Goldmann, Report on the Draft Convention on the international merger of sociétés anonymes, Bulletin of the European Community, 29.6.1973, Supplement 13/73, Introduction, p. 32 et seq. See in regard to the Directive 2005/56/EC: Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 2; Grohmann and Gruschinske, ‘Grenzüberschreitende Mobilität von Kapitalgesellschaften in Europa: Die Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2006) GmbHG, 191 (193); Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 4. 77 Recital no. 1 of Directive 2005/56/EC. 78 Cf. Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 5. 79 Cf. Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 29.1, p. 698.

Tobias de Raet

585

Art 118 General provisions 2. Promotion of external growth of EU companies 38

The removal of these legal hurdles had its basis in an economic policy decision to enable or promote the concentration of businesses in the European internal market. 80 The promotion of external growth through mergers seemed necessary at the time in view of the new challenges posed by the newly created European internal market.81 The Commission assumed that, in order to be able to compete with large companies from countries like the United States82 and Japan, the European Community needed 'domestic' companies of an adequate size for the common market. The Commission had already highlighted this aspect in a memorandum from 196683 concluding that, in principle, a positive attitude towards concentration is appropriate and that legal and psychological barriers to concentration ought to be removed.84

3. Protection of shareholders, creditors and employees involved in the crossborder merger 39

In view of Article 44 TEC (now: Article 50 TFEU), which serves as the legal basis, and the recitals (Recital nos. 5, 8 and 13 of the 2005 Directive; now: Recital no. 58, 61 and 66 of the 2017 Directive), Chapter II is intended to protect shareholders, creditors and employees involved in cross-border mergers.85

4. The role of the ECJ's SEVIC decision The practical significance of the Directive could be questioned in light of the freedom of establishment and the case law of the ECJ.86 In its 2005 landmark SEVIC case, the ECJ ruled that the freedom of establishment (today Article 49 TFEU) grants companies the right to merge with a company of another Member State and that national laws which prohibit such cross-border mergers are contrary to European law.87 41 The ECJ highlighted that an EU-wide legal framework would be useful to facilitate cross-border mergers, but that the existence of such harmonisation rules cannot be made a precondition for the implementation of the freedom of establishment laid down by Articles 43 and 48 EC Treaty.88 This was in line with the arguments raised by Advo40

80 Mémorandum de la Commission de la Communauté Economique Européenne sur la concentration dans le Marché Commun’ (1966) 4 Revue trimestrielle de droit européen, 651 (654); Pierre van Ommeslaghe, ‘Unternehmenskonzentration und Rechtsangleichung in der EWG’ (1969) ZHR 201 (204 et seq.); Temple Lang, ‘Three EEC Draft Directives on Company Law – Capital, Mergers and Management’ (1972) VII The Irish Jurist, 306 (313, 316, 318); Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.4, p. 670 and 29.1, p. 698. 81 Mémorandum de la Commission de la Communauté Economique Européenne sur la concentration dans le Marché Commun’ (1966) 4 Revue trimestrielle de droit européen, 651 (654). 82 Which van Ommeslaghe called “amerikanische Herausforderung” (“the American challenge”) in: van Ommeslaghe, ‘Unternehmenskonzentration und Rechtsangleichung in der EWG’ (1969) ZHR 201 (204). 83 Mémorandum de la Commission de la Communauté Economique Européenne sur la concentration dans le Marché Commun’ (1966) 4 Revue trimestrielle de droit européen, 651 (654). 84 See van Ommeslaghe, ‘Unternehmenskonzentration und Rechtsangleichung in der EWG’ (1969) ZHR 201 (204 et seq.); Temple Lang, ‘Three EEC Draft Directives on Company Law – Capital, Mergers and Management’ (1972) VII The Irish Jurist, 306 (313, 316, 318); Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 28.4, p. 670. 85 Cf. Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, Baden-Baden, 2019), § 24.10, p. 1720. 86 Grohmann and Gruschinske, ‘Grenzüberschreitende Mobilität von Kapitalgesellschaften in Europa: Die Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2006) GmbHG, 191 (194). 87 Case C-411/03, 13.12.2005, SEVIC Systems, ECR I-10805, ECLI:EU:C:2005:762. 88 Case C-411/03, 13.12.2005, SEVIC Systems, ECR I-10805, ECLI:EU:C:2005:762, para. 26.

586

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 118

cate General Tizzan who had pointed out in his opinion “that exercise of the freedom of establishment cannot be made dependent on the adoption of a directive on harmonisation. That is because these directives do not establish the rights laid down in the Treaty but are merely designed to facilitate the exercise thereof.”89 Consequently, one might assume that the innovations that accompanied the 2005 42 Directive became obsolete just a few months later as a result of the ECJ's SEVIC decision on 13 December 2005.90 However, for companies it was not only important to have certainty regarding the general admissibility of a cross-border merger, but also to have a legal framework for such operations.91 The Directive was, in particular, needed to clarify the laws of which Member State were to be applied to a cross-border merger and how to deal with friction between the laws of the different Member States.92 The objective of the 2005 Directive was, therefore, rather to facilitate the implementa- 43 tion of cross-border mergers and not merely to ensure that they were possible in the first place.93 In this sense, the Directive provides a clear and reliable framework for such operations.94 It helps to create a clear and well-structured legal framework and, thereby, provide legal certainty and significantly reduced the costs for cross-border mergers. 95

5. Developments after the 2005 Directive A 2013 study came to the conclusion that there was strong and substantial evidence 44 that the 2005 Directive “has brought about a new age of cross-border mergers activity” and can be considered “an important step toward a more vibrant and robust market environment within the EU and EEA.”96 This is also reflected in the increasing number of cross-border mergers since implementation of the 2005 Directive in the laws of the Member States.97 The study showed that between 2008 and 2012, cross-border merger activity increased by 173 percent (from 132 cross-border mergers in 2008 to 361 in 2012).98

89 See also: Opinion of Advocate General Tizzano in Case 411/03, 7.7.2005, SEVIC Systems, ECR I-10805, ECLI:EU:C:2005:437, para. 67 et seq. 90 See also with further doubts about this evaluation: Grohmann and Gruschinske, ‘Grenzüberschreitende Mobilität von Kapitalgesellschaften in Europa: Die Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2006) GmbHG, 191 (194). 91 Grohmann and Gruschinske, ‘Grenzüberschreitende Mobilität von Kapitalgesellschaften in Europa: Die Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2006) GmbHG, 191 (194); Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 5. 92 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 29.4, p. 700. 93 Recital no. 1 and 2 of Directive 2005/56/EC. 94 Cf. Wachter, ‘Europarechtswidrigkeit des Verbots der Handelsregistereintragung von Verschmelzungen in- und EU-ausländischer Gesellschaften (“SEVIC”)’ (2005) EWiR, 581 (582). 95 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.6, p. 732. 96 Bech-Bruun and Lexidale, Study on the Application of the Cross-border Mergers Directive (2013), p. 4. 97 The deadline to implement the 2005 Directive expired on 15.12.2007, cf. Article 19 of the 2005 Directive; in some Member States, however, the 2005 Directive was implemented considerably later; see: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), p. 731, fn. 19; Bech-Bruun and Lexidale, Study on the Application of the Cross-border Mergers Directive (2013), p. 5 et seq. 98 Bech-Bruun and Lexidale, Study on the Application of the Cross-border Mergers Directive (2013), p. 4.

Tobias de Raet

587

Art 118 General provisions

III. Scope of Application Chapter II does not intend to require Member States to implement provisions on cross-border mergers in their national laws as a separate legal concept, but rather aims to abolish and prevent discrimination between cross-border mergers and domestic mergers in the Member States.99 46 Consequently, Chapter II only requires Member States to permit cross-border mergers to the extent provisions for domestic mergers already exist in the national laws of the respective Member State on the basis of Chapter I. A legal framework for cross-border mergers is, therefore, initially only required for public limited liability companies (PLCs), as Member States need to implement provisions on domestic mergers of PLCs pursuant to Article 88 in conjunction with Article 87.100 Implementation for other legal forms is only possible to the extent that they may merge under the national laws of the relevant Member States (cf. Article 121(1)(a)). Legal entities which may not merge under national laws of a Member State may, therefore, not be part of a cross-border merger. 101 45

1. Limited liability companies The scope of application of Chapter II only covers corporations and is, in contrast to the draft for the 1972 Convention102 and the 1985 Proposal,103 not limited to public limited companies, but covers all limited liability companies. This goes back to the 2003 Proposal which had suggested extending the scope of a Directive on cross-border mergers to “all companies with share capital which, in the unanimous view of the Member States, may be typified as companies having legal personality and separate assets which alone serve to cover the company’s debts”.104 The intention behind this is to give small and medium-sized enterprises (SMEs) the opportunity to participate in cross-border corporate reorganisation measures without having to form a Societas Europeae (SE). 105 48 Although this extension of the scope makes sense, it must be kept in mind that the 1978 Directive on domestic mergers only covered PLCs and, therefore, only approximates the laws of the Member States with respect to such companies. The extended scope of Chapter II therefore, in principle, creates a need for further harmonisation or at least approximation, as Chapter II is based on the laws of the Member States governing domestic mergers.106 Without further approximation, the laws on cross-border mergers would remain the only “harmonised island” with respect to private limited liability companies.107 However, since most Member States implemented the 1978 Directive not only for PLCs, but also for other types of company, this is practically not an issue.108 47

99 Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 186, p. 79. 100 Cf. Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 186, p. 79. 101 Cf. Ugliano, ‘The New Cross-border Merger Directive: Harmonisation of European Company Law and Free Movement’ (2007) 18 EBLR, 585 (599). 102 Cf. Article 2 of the Draft Convention on the international merger of sociétés anonymes. 103 Cf. Article 1 of the Proposal for a Tenth Council Directive based on Article 54(3)(g) of the EEC Treaty concerning cross-border mergers of public limited companies, COM(84) 727 final, 14.1.1985. 104 Cf. Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 3. 105 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 3. 106 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.16, p. 735; Siems, ‘The European Directive on Cross-Border Mergers: An International Model?’ (2004) 11 Columbia Journal of European Law, 167 (173).

588

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 118

2. Cross-border element a) Location within the European Union Chapter II only applies to companies which have their registered office, central 49 administration or principal place of business within the European Union. The optional link to the registered office, the central administration or the principal 50 place of business reflects that the provisions on the conflicts of laws of the Member States are not (yet) harmonised with respect to company law (e.g. company statute). 109 b) Multiple jurisdictions Chapter II only applies if at least two of the companies involved in the merger are 51 governed by the laws of different Member States.110 This criterion defines the difference between the scope of Chapter I on domestic mergers (Articles 87 to 117) and Chapter II on cross-border mergers (Articles 118 to 134). (i) Relevance of company statute (lex societatis) What matters is not where the two companies involved in the merger have their 52 administrative headquarters, but rather the company law regimes (lex societatis, company statute) to which they are subject.111 It is irrelevant whether the actual branches or administrative headquarters of the companies involved in the merger are located in different Member States.112 It is sufficient if the registered office of the company formed in accordance with the laws of a Member State is situated in the European Union, whereas the administrative headquarter is situated in a country which is not a Member State of the European Union.113 The requirement that at least two of the companies involved in the merger be gov- 53 erned by the laws of different Member States was implemented to avoid conflicts with the provisions on domestic mergers pursuant to Chapter I and the Directive114 on the relocation of corporate seats,115 which is now governed by Art. 86 a et. seq. of the Directive (cf. Chapter V on Cross-Border Conversions). While this requirement is not entirely unproblematic, it is ultimately the only logical and consistent solution for drawing a line between domestic mergers pursuant to Chapter I and cross-border mergers pursuant to Chapter II.116

107 Siems, ‘The European Directive on Cross-Border Mergers: An International Model?’ (2004) 11 Columbia Journal of European Law, 167 (173). 108 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.16, p. 735. 109 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.27, p. 739 et seq. 110 Kalss and Klampfl in ‘Handbuch des EU-Wirtschaftsrechts’ (48th volume), E III, para. 184, p. 78; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.27, p. 739. 111 Kalss and Klampfl in Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 184, p. 78. 112 Kalss and Klampfl in Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 184, p. 78. 113 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.57, p. 376. 114 Cf. Proposal for a 14th EC Company Law Directive, Doc. XV/6002/97, printed in: Stephan Rammeloo, Corporations in private international law. A European Perspective (2001), 296 et seq.; in German: ‘Richtlinienvorentwurf zur Verlegung des Gesellschaftssitzes innerhalb der EU’ (1997) ZIP, 1721. 115 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.57, p. 376; Jürgen Oechsler, ‘Die Richtlinie 2005/56/EG über die Verschmelzung von Kapitalgesellschaften aus verschiedenen Mitgliedstaaten’ (2006) NZG, 161 (162). 116 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.27, p. 739 et seq.

Tobias de Raet

589

Art 118 General provisions (ii) Real seat theory vs. incorporation theory In principle, there are two legal concepts being used by Member States to identify the company law of which Member State (lex societatis) is applicable to a specific company: the 'incorporation theory' and the 'real seat theory'. Each of these uses a different approach with respect to the factor which links a company to a certain jurisdiction. 55 The 'real seat theory'117 purports that the place where a company's headquarters or principle place of business (head office) is located, determines the company law of which Member State is applicable to such a company. Pursuant to the more liberal 'incorporation theory',118 the companies are subject to the jurisdiction in which they were incorporated (place of registration).119 56 The different approaches can – at least theoretically – lead to situations where one Member State considers an envisaged operation to be a cross-border merger and thus holds Chapter II to be applicable, whereas the other Member State considers the operations to be a domestic merger. 54

57 Example:

58

Two companies involved in the merger both have their administrative headquarters and their main business activities in Member State A, but only one of them is also registered in Member State A, whereas the other one is registered in Member State B. If Member State A determines the company law regime based on the administrative/real seat of the company, and Member State B considers the place of incorporation as the relevant connecting factor, then only Member State B would consider the merger to be a cross-border one. Member State A would treat the operation as a domestic merger.

However, the differences in the Member States’ approaches to determining the applicable company law regime are largely balanced out by the ECJ’s jurisprudence on the freedom of establishment of companies (Article 49 TFEU), in particular the Sevic decision of 2005.120 While the conflicts of laws system of some Member States – such as Germany – is (still) based on the real seat theory, the ECJ ruled in various judgments in favour of the incorporation theory.121 According to this case law, the freedom of establishment requires other Member States to recognise the legal capacity which the company enjoys under the laws of its Member State of incorporation.122 At least in the case of companies incorporated in one Member State and moving their business to another Member State’s territory, the latter Member State is required to determine the company law regime with reference to the place of incorporation.123 The ECJ ruled in 117 Countries applying the ‘real seat theory’: Austria, Belgium, France, Germany, Italy, Luxembourg, Portugal and Spain. 118 Countries applying the ‘incorporation theory’: Denmark, Ireland, Hungary, the Netherlands, Liechtenstein and the United Kingdom. 119 Commission Staff Working Document, Impact assessment on the Directive on the cross-border transfer of registered office, SEC(2007) 1707 (part I), p. 9; Daniel Zimmer, ‘Ein Internationales Gesellschaftsrecht für Europa’ (2003) 67 RabelsZ, 298 (299 et seq.). See also in this regard: Heenen, ‘La Directive sur les Fusions internes’ (1981) Cahiers de Droit Européen (CDE), 15 (16). 120 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.27, p. 740. 121 Cf. Case C-212/97, 9.3.1999, Centros Ltd v Erhvervs-og Selskabsstyrelsen, ECR 1999 I-01459, ECLI: EU:C:1999:126; Case C-208/00, 5.11.2002, Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC), ECR 2002 I-09919, ECLI:EU:C:2002:632; Case C-167/01, 30.9.2003, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd, ECR 2003 I-10155, ECLI:EU:C:2003:512 and most recently Case C‑106/16, 25.10.2017, Polbud – Wykonawstwo sp. z o.o., ECLI:EU:C:2017:804. See also: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 7.64, p. 121; de Raet, ‘Zur Beschränkung der Niederlassungsfreiheit bei isolierter grenzüberschreitender Satzungssitzverlegung (Polbud – Wykonawstwo)’ (2018) EWiR, 7 (7 et seq.). 122 Case C-208/00, 5.11.2002, Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC), ECR 2002 I-09919, ECLI:EU:C:2002:632.

590

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 118

its landmark Überseering decision: “Where a company formed in accordance with the law of a Member State ('A') in which it has its registered office exercises its freedom of establishment in another Member State ('B'), Articles 43 EC and 48 EC require Member State B to recognise the legal capacity and, consequently, the capacity to be a party to legal proceedings which the company enjoys under the law of its State of incorporation ('A').”124

3. Member States of the European Economic Area (EEA) / Brexit By decision of 22 September 2006, the scope of the 2005 Directive was extended 59 to include EEA States which are not already Member States of the European Community.125 The provisions on cross-border mergers laid down in this Chapter II, therefore, also apply to Member States of the European Free Trade Association (EFTA) which are members of the EEA; i.e. Iceland, Liechtenstein and Norway. They do not apply to Switzerland, which is a member state of EFTA but not a party to the EEA ('EEA EFTA States').” Such an incorporation decision has not yet been made for the 2017 Directive, 60 which is, however, under scrutiny for incorporation into the EEA Agreement.126 After having left the European Union on 31 January 2020 (so-called Brexit), the UK 61 automatically ceased to be an EEA member as of 31 January 2020.127 The UK remained to be bound to the existing obligations during a transition period until 31 December 2020. Starting as of 1 January 2021, the UK is a third country with respect to the EEA Agreement and therefore not subject to the Directive anymore; i.e. mergers with UK companies no longer fall within the scope of the Directive.128 Considering the high relevance of UK entities, there is a practical need for the EU and the UK to come to an agreement pursuant to which the provisions of this Chapter continue to apply to UK companies.

4. Mergers not within the scope of the Directive a) Mergers involving partnerships, cooperatives and other legal entities (i) Overview The scope of application of Chapter II does not include partnerships or other 62 legal entities which are not corporations. This includes the following popular and economically relevant entities: – Austria: Gesellschaft nach bürgerlichem Recht (GesnbR), Offene Gesellschaft (OG), Kommanditgesellschaft (KG), – Belgium: Société en nom collectif, Société en commandite simple, 123 Case C-208/00, 5.11.2002, Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC), ECR 2002 I-09919, ECLI:EU:C:2002:632, para. 94. 124 Case C-208/00, 5.11.2002, Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC), ECR 2002 I-09919, ECLI:EU:C:2002:632, para. 94. 125 Decision of the EEA Joint Committee No. 127/2006 of 22.9.2006 amending Annex XXII (Company law) to the EEA Agreement, OJ L 333, 30.11.2006, p. 59. 126 Cf. for current state of progress: http://www.efta.int/eea-lex/32017L1132 and the and the Decision of the EEA Joint Committe No 200/2019 of 10.07.2019 amending Annex XXII (Company law) to the EEA A greement (provisional). 127 Article 126(1) EEA states that “The Agreement shall apply to the territories which the Treaty establishing the EEC is applied (…) and to the territories of Iceland, the Principality of Liechtenstein and the Kingdom of Norway.” 128 See also: Mayer and Many, Der Brexit und seine Folgen auf den Rechtsverkerh zwischen der EU und dem Vereinigten Königreich seit dem 1.1.2021, (2021), BB, 452, (451) which highlight that the UK leaving the EU is a "hard-Brexit" with respect to Company.

Tobias de Raet

591

Art 118 General provisions – –

Bulgaria: Gragdansko Druzestvo, Sabiratelno Druzestvo, Komanditno Druzestvo, France: La société civile, Société civile professionelle (SCP), La société en nom collectif, La société en commandite, Germany: Gesellschaft bürgerlichen Rechts (GbR), offene Handelsgesellschaft (oHG), Kommanditgesellschaft (KG), Netherlands: Maatschap, Vennootschap Onder Firma (VOF), Commanditaire Vennootschap (CV), Spain: Compania Colektiva (Cia), Sociedad commanditaria,

– – –

(ii) Conflict with the ECJ's SEVIC decision Considering the ECJ's SEVIC decision, there can be no doubt that the freedom of establishment (cf. Article 49 TFEU) is not only applicable to corporations but also to other entities, insofar as they are companies within the meaning of Article 54 TFEU 129 granting a comprehensive freedom of merger.130 64 There is, therefore, criticism that Chapter II is restricted to limited liability companies.131 Others argue that there does not seem to have been a great need132 to extend Chapter II to all legal entities which enjoy the freedom of establishment, and that the extension to partnerships would have created a whole series of further problems since the partnership law of Member States is typically closely connected to the general private law of the respective Member State.133 Similar arguments were brought up with regard to cooperatives and other legal entities pursuant to Article 54 TFEU134 63

(iii) Gold-plating 65

Under European law, Member States may decide to extend the scope of application of the provisions of Chapter II to other legal entities under the concept of gold-plating. 135 While the European legislature missed the chance to establish a uniform standard for cross-border mergers, Member States can only be encouraged to do so when implementing the 2019 Directive, which various Member States have already done.136

129 Bayer and J. Schmidt, ‘Der Schutz der grenzüberschreitenden Verschmelzung durch die Niederlassungsfreiheit’ (2010) ZIP, 210 (212); Papadopoulos, ‘The Magnitude of EU Fundamental Freedoms: Application of the Freedom of Establishment to the Cross-Border Mergers Directive’ (2012) 23 EBLR, 517 (530); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 7.101, p. 137. 130 Case C-411/03, 13.12.2005, SEVIC Systems, ECR I-10805, ECLI:EU:C:2005:762, para. 26; Bayer and J. Schmidt, ‘Der Schutz der grenzüberschreitenden Verschmelzung durch die Niederlassungsfreiheit’ (2010) ZIP, 210 (212). 131 J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960 (http://www.europarl.europa.eu/thinktank/en/document.html?reference=IPOL_STU (2016)556960), p. 12, 17. 132 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.15, p. 734. 133 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.15, p. 735. 134 J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960, p. 17. 135 For a definition of gold-plating e.g.: Boci, De Vet and Pauer, ‘Gold-plating’ in the EAFRD: To what extent do national rules unnecessarily add to complexity and, as a result, increase the risk of errors? (2014) (IP/D/AL/FWC/209-056 ed.), p 27. 136 Cf. J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960, p. 17. fn. 61.

592

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 118

b) Crossing the border by formation of a NewCo only The Directive does not apply to mergers by formation of a new company (cf. Article 119(2)(b)), where the two transferring companies are subject to the laws of the same Member State and only the newly formed company is governed by the laws of another Member State.137 This is based on the wording of Article 118, which requires the merging companies to be governed by the laws of different Member States (cf. Article 118: “mergers of limited liability companies”). The 2003 Proposal, by contrast, required that at least two of “the companies taking part in the merger” (cf. Article 2 of the 2003 Proposal) be governed by different laws (cf. Article 1 second indent of the 2003 Proposal: “a merger [...] which involves companies”). The newly formed company established by way of merger can be said to be a company involved in the merger, but not one of the merging companies. To emphasise and clarify this point, the European Parliament changed the wording of the 2003 Proposal.138 Furthermore, to let it suffice that the newly formed company is governed by the laws of a different Member State would mean implicit permission to move the place of incorporation for companies of any Member State, irrespective of what the laws of the Member State in question provide. This result was always difficult to reconcile with the discussion on this matter and the planned Directive on the transfer of limited liability companies' registered offices,139After long discussions and the ECJ’s landmark decisions Vale140 and Polbud,141 such cross-border conversions are now finally possible under the 2019 Directive, but still needs to be implemented by the Member States. 142 There is, however, a workaround for this problem: the acquiring company taking part in a cross-border merger by acquisition may be founded shortly before the merger and with the sole purpose of acquiring the other company which wishes to transfer its seat into another Member State. The Directive does not contain any safeguards against such an operation, in particular, no minimum period between the formation of the companies taking part in the merger and the actual operation.143

66

67

68

69

c) Mergers involving non-EU Member States The Directive is not applicable if the transnational element points to a state not 70 being a Member State (or an EEA Member State), i.e. if only one of the companies is governed by the laws of a Member State and the other is governed by the law of a non-EU-Member State (e.g. the United States). 137 Kalss and Klampfl in Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 184, p. 78; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.28, p. 740. This is disputed by Oechsler, ‘Die Richtlinie 2005/56/EG über die Verschmelzung von Kapitalgesellschaften aus verschiedenen Mitgliedstaaten’ (2006) NZG, 161 (162 and more explicitly on p. 166). 138 Committee on Legal Affairs, Report on the proposal for a directive of the European Parliament and of the Council on cross-border mergers of companies with share capital, A6-0089/2005 final, 25.4.2005, p. 13 and 15. 139 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 23.28, p. 740. 140 Case C-378/10, 12.07.2012, VALE Építési kft, ECLI:EU:C:2012:440. 141 Case C‑106/16, 25.10.2017, Polbud – Wykonawstwo sp. z o.o., ECLI:EU:C:2017:804; de Raet, ‘Zur Beschränkung der Niederlassungsfreiheit bei isolierter grenzüberschreitender Satzungssitzverlegung (Polbud – Wykonawstwo)’ (2018) EWiR, 7 (7 et seq.). 142 Cf. Article 86 a to 86 t of the Directive (EU) 2019/2121 of the European Parliament and of the Council of 27.11.2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, OJ L321, 12.12.2019. 143 Jürgen Oechsler, ‘Die Richtlinie 2005/56/EG über die Verschmelzung von Kapitalgesellschaften aus verschiedenen Mitgliedstaaten’ (2006) NZG, 161 (162).

Tobias de Raet

593

Art 119 Definitions 71

Member States may extend the scope of application of Chapter II to mergers involving companies from non-EU Member States when implementing this Directive or when entering into international treaties and agreements with non-EU Member States. In many cases this will, however, be quite difficult, since there is usually no framework – or only a very basic one – linking the company law of a Member State to the company law of a non-EU Member State on which such an extension can be based (e.g. the framework for domestic mergers). Such operations will, therefore, usually lead to substantial legal uncertainty.144

Article 119 Definitions For the purposes of this Chapter: (1) ‘limited liability company’, hereinafter referred to as ‘company’, means: (a) a company of a type listed in Annex II; or (b) a company with share capital and having legal personality, possessing separate assets which alone serve to cover its debts and that is subject, under the national law governing it, to conditions concerning guarantees such as are provided for by Section 2 of Chapter II of Title I and Section 1 of Chapter III of Title I for the protection of the interests of members and others; (2) ‘merger’ means an operation whereby: (a) one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, in exchange for the issue to their members of securities or shares representing the capital of that other company and, if applicable, a cash payment not exceeding 10 % of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities or shares; or (b) two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, the new company, in exchange for the issue to their members of securities or shares representing the capital of that new company and, if applicable, a cash payment not exceeding 10 % of the nominal value, or in the absence of a nominal value, of the accounting par value of those securities or shares; or (c) a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities or shares representing its capital. (d) one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the 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 securities and shares in the same proportion in all merging companies.

144 See Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 7.100, p. 136 who highlight the situation in Germany where it is disputed whether the provisions on cross-border mergers of the German Transformation Act also apply to cross-border mergers involving non-EU Member States.

594

Tobias de Raet

Art 119

TITLE II CONVERSIONS, MERGERS AND DIVISIONS I. Limited Liability Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Corporations pursuant to Annex II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Small general clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Types of Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Merger by acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Merger by the formation of a new company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Upstream-merger of a 100 % subsidiary to the parent company . . . . . . . . . . 4. Side-step cross-border mergers (Article 119(2)(d)) . . . . . . . . . . . . . . . . . . . . . . .

1 1 5 8 11 13 15 16

I. Limited Liability Companies 1. Corporations pursuant to Annex II Article 119(1)(a), by referring to Annex II, specifies which legal forms of the Member States are covered by the scope of the Directive. This includes all corporations with limited liability, e.g. for Germany, the German stock corporation (Aktiengesellschaft), the German partnership limited by shares (Kommanditgesellschaft auf Aktien) and the German private limited liability company (Gesellschaft mit beschränkter Haftung). One of the main differences between corporations and partnerships is that shareholders of corporations are not personally liable for the company's liabilities, whereas there is, in principle, no separation between the liabilities of a partnership and those of its shareholders. A further difference is that corporations always have their own legal capacity, whereas partnerships do not necessarily have one. While the 2005 Directive still referred to the types of company listed in Article 1 of Publicity Directive 68/151/EEC,1 such a reference was replaced by Annex II due to the consolidation of various directives – including the Publicity Directive – in the 2017 Directive. Despite the criticism expressed2, the 2019 Directive did not extend the scope of Chapter II to partnerships. Nonetheless, cross-border mergers of the entities referred to in Article 54 TFEU (including partnerships) remain possible based on EU primary law.3 Member States should consider extending the framework of the 2019 Directive to partnerships by means of gold-plating.

1

2

3

4

2. Small general clause However, the scope of Chapter II is not limited to corporations, but includes all 5 companies which have a legal personality and separate share capital, which alone serves to cover its debts and that is subject, under the national law governing it, to conditions concerning guarantees such as are provided for by Section 2 of Chapter II of Title I and Section 1 of Chapter III of Title I for the protection of the interests of members and others) (cf. Article 119(1)(b)). The purpose of this dynamic 'small general clause' is to ensure that all types of 6 companies (national or European) which currently fulfil these criteria or, in the case of new types of company, will fulfil them in the future (without the need to amend the Directive) are covered by the scope of the Directive.4 1 First Council Directive 68/151/EEC of 9.3.1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community. 2 J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960, p. 17. 3 Case C-411/03, 13.12.2005, SEVIC Systems, ECR I-10805, ECLI:EU:C:2005:762, para. 26.

Tobias de Raet

595

Art 119 Definitions 7

Pursuant to Article 9(1)(c)(ii) and the principle of equal treatment in Article 10 of the SE Regulation,5 an SE is among those companies which are subject to Chapter II due to the small general clause of Article 120(1)(b).6 This, however, in principle, only applies in the case of a cross-border merger by acquisition, where the SE can be the transferring or acquiring company and only in cases where the acquiring legal entity does not change its legal form during the merger from a stock corporation into an SE, as in this case the special provisions for the formation of an SE pursuant to Articles 2 and 17 et seq. of the SE Regulation apply.7 In the case of a cross-border merger by the formation of a new SE (= the newly formed SE is the acquiring legal entity), the provisions regarding the formation of an SE of Articles 2 and 17 et seq. of the SE Regulation apply as a leges specialis and consequently supersede Chapter II or the provisions in the laws of the Member States implementing Chapter II.8

II. Types of Mergers In parallel with the provisions for domestic mergers of Chapter I (cf. Articles 89(1) and 90(1)), Article 120(2)(a) defines the merger by acquisition and Article 119(2)(b) defines the merger by formation of a new company. 9 In contrast to the referral model used for domestic mergers in Chapter I (cf. Article 109) where merger by acquisition is the basic operation, Chapter II is based on a uniform merger regime and only distinguishes between mergers by acquisition and mergers by formation of a new company where this is required. 10 Pursuant to Article 119(2)(c) and in parallel to sentence 1 of Article 110, the upstream merger of a 100 % subsidiary into its parent company is also regarded as a merger within the scope of Chapter II. 8

1. Merger by acquisition Article 119(2)(a) defines a merger by acquisition as an operation whereby one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, in exchange for the issue to their members of securities or shares representing the capital of the other company and, if applicable, a cash payment not exceeding 10 % of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities or shares. 12 In contrast to the definition of mergers by acquisition of Chapter I (cf. Article 89(1), which only applies to PLCs, the definition in Article 119(2) had to be adapted since the provision on cross-border mergers does not only apply to PLCs, but to all corporations.9 This is also the reason why the consideration for the transfer of assets is 11

4 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.17, p. 736. 5 Regulation (EC) No 2157/2001 of 8.10.2001 on the Statute for a European company (SE). 6 Cf. Krause and Kulpa, ‘Grenzüberschreitende Verschmelzungen – Vor dem Hintergrund der “Sevic”Entscheidung und der Reform des deutschen Umwandlungsrechts –’ (2007) ZHR, 38 (54); Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.18, p. 736. 7 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.18, p. 736. 8 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.18, p. 736. 9 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.23, p. 738.

596

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 119

not limited to shares, but can also consist of securities.10 With respect to the specific characteristics of mergers by acquisition, reference can be made to Article 89.

2. Merger by the formation of a new company Article 119(2)(b) defines merger by formation of a new company as an operation 13 where two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, the new company, in exchange for the issue to their members of securities or shares representing the capital of that new company and, if applicable, a cash payment not exceeding 10 % of the nominal value, or in the absence of a nominal value, of the accounting par value of those securities or shares. As in Article 119(a), the definition of Chapter I (cf. Article 90(1)) had to be modified 14 in order to reflect that Chapter II not only applies to cross-border mergers of PLCs but to all corporations, which also means that consideration for the transfer of assets does not necessarily have to consist of shares, but can also consist of other securities.

3. Upstream-merger of a 100 % subsidiary to the parent company In contrast to Chapter I, Chapter II does not treat the (cross-border) merger of a 15 100 % subsidiary into its parent company as a special operation, but equal to (cross-border) mergers by acquisition (cf. Article 119(a)) and mergers by formation of a new company (cf. Article 119(b)).11 The main difference between Article 119(c) on the one hand and Articles 119(a) and (b) on the other hand, which is also evident from the definition, is that in an upstream merger of a 100 % subsidiary into its parent company no shares are granted in the acquiring company. This is due to the fact that the acquiring company already holds 100 % of the shares in the respective subsidiary.

4. Side-step cross-border mergers (Article 119(2)(d)) For reasons of clarification, the 2019 Directive defined two additional types of opera- 16 tion as cross-border mergers in accordance with Chapter II. It had long been disputed whether such side-step mergers should fall within the scope of the Directive.12 Both types are operations whereby one or more companies, on being dissolved with- 17 out going into liquidation, transfer all their assets and liabilities to another existing company, the acquiring company, without the issue of any new shares by the acquiring company, provided however that (i) one person directly or indirectly holds all the shares in the merging companies (i.e. a mere economic participation, see also Art. 112) or (ii) the members of the merging companies hold their shares in the same proportion in all merging companies (i.e. the ownership structure is not affected by such an operation) 13. In contrast to cross border-mergers pursuant to Article 119(2)(a) and (b)), these op- 18 erations referred to in Article 119(2)(d), similar to Article 119(2)(c), lack the element of an exchange of shares in the new company and thus take place without the issue of any 10 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.23, p. 738. 11 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.25, p. 739. 12 Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package’ (2019) BB, 1922 (1929). 13 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018, p. 25 et seq.

Tobias de Raet

597

Art 120 Further provisions concerning scope new shares by the acquiring company.14 The operation(s) referred to in Article 119(2)(d) therefore constitute(s) a subset of the intragroup of a 100 % subsidiary in its parent company.15

Article 120 Further provisions concerning scope 1. Notwithstanding Article 119(2), this Chapter shall also apply to cross-border mergers where the law of at least one of the Member States concerned allows the cash payment referred to in Article 119(2)(a) and (b) to exceed 10 % of the nominal value, or, in the absence of a nominal value, of the accounting par value of the securities or shares representing the capital of the company resulting from the cross-border merger. 2. Member States may decide not to apply this Chapter to cross-border mergers involving a cooperative society even in the cases where the latter would fall within the definition of a limited liability company as laid down in Article 119(1). 3. This Chapter shall not apply to cross-border mergers 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. Action taken by such a company to ensure that the stock exchange value of its units does not vary significantly from its net asset value shall be regarded as equivalent to such repurchase or redemption. 4. Member States shall ensure that this Chapter does not apply to companies in either of the following circumstances: (a) the company is in liquidation and has begun to distribute assets to its members; (b) the company is subject to resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU. 5. Member States may decide not to apply this Chapter to companies which are: (a) the subject of insolvency proceedings or subject to preventive restructuring frameworks; (b) the subject of liquidation proceedings other than those referred to in point (a) of paragraph 4, or (c) the subject of crisis prevention measures as defined in point (101) of Article 2(1) of Directive 2014/59/EU. I. Cash Payments Exceeding 10 % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Opt-out Option for Cooperative Societies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Not Applicable to UCITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Exclusion of Certain Crisis and Restructuring Scenarios from the Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Companies in liquidation which have begun to distribute their assets . . . . 2. Companies subject to preventive restructuring proceedings . . . . . . . . . . . . . .

1 6 9 11 13 16

14 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018, p. 25 et seq.; Bormann and Stelmaszczyk, ‘Grenzüberschreitende Verschmelzung nach dem EU-Company Law Package’ (2019) ZIP, 300 (301). 15 Bormann and Stelmaszczyk, ‘Grenzüberschreitende Verschmelzung nach dem EU-Company Law Package’ (2019) ZIP, 300 (301).

598

Tobias de Raet

Art 120

TITLE II CONVERSIONS, MERGERS AND DIVISIONS 3. Other scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Option to Further Narrow the Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . .

17 19

I. Cash Payments Exceeding 10 % In parallel with Article 116 of Chapter I, Article 120(1) permits Member States to allow cross-border mergers where the amount of the cash payment exceeds 10 %. Pursuant to Article 120(1), Member States shall also apply this Chapter II to crossborder mergers by acquisition and cross-border mergers by formation of a new company, where an additional cash payment within the meaning of Article 120(1) is made, provided that the law of at least one of the Member States concerned allows the cash payment referred to in Article 119(2)(a) and (b) (i.e. cross-border mergers by acquisition and cross-border mergers by formation of a new company) to exceed 10 % of the nominal value, or, in the absence of a nominal value, of the accounting par value of the securities or shares representing the capital of the company resulting from the cross-border merger. The purpose of the extension of the scope is to prohibit the circumvention of the safeguards regarding the protection of shareholders and creditors of the companies involved in the merger,1 for operations whose economic effects are comparable to those of mergers, but are legally dogmatically different from mergers.2 As with Article 116, it can be discussed whether there is a limit with regard to the amount of the additional cash payment Member States may permit.3 However, neither the wording nor the purpose of Article 120 implies such a limit. Consequently, Chapter II is also to be applied to those types of cross-border merger in which the consideration consists entirely of cash and no shares,4 even though the character of an operation is the less that of a merger, the higher the amount of the (additional) cash payment is.5 However, the cases in which only one of the company statutes permits a higher additional cash payment are problematic: it is at least questionable why a cross-border merger between two companies involving an additional cash payment of more than 10 % should be permissible if only one of the two Member States involved provides for that option.6 While in domestic mergers all companies involved in the merger are subject to the same provision regarding the additional cash payment, this is not the case for crossborder mergers. There can be a situation where only one of the companies involved in 1 See for Article 116: cf. Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting Article 21, p. 39; recital no. 53 of the Directive 2017/1132/EU; Vanessa Edwards, EC Company Law (1999), p. 98; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.23, p. 630. 2 Cf. Kalss, ‘Europarechtliche und verfassungsrechtliche Rahmenbedingungen für das Umwandlungsrecht’ (1995) JBl., 420 (424). 3 Rickford argues that there is a natural limit to the amount of cash at 99.9 %, apparently in order to maintain the character of a merger as a granting of shares in contrast to a buy-out or takeover. Cf. Rickford, ‘The Proposed Tenth Company Law Directive on Cross Border Mergers and its Impact in the UK’ (2006) EBLR, 1393 (1402). 4 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 149; Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.16, p. 6; Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 29.8, p. 702 with reference to § 28.15, p. 675. 5 Cf. Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1894, fn. 19); Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 149. 6 Oechsler, ‘Die Richtlinie 2005/56/EG über die Verschmelzung von Kapitalgesellschaften aus verschiedenen Mitgliedstaaten’ (2006) NZG, 161 (162).

Tobias de Raet

599

1 2

3

4

5

Art 120 Further provisions concerning scope the cross-border merger is subject to the laws of a Member State which has made use of the option to not limit the additional cash payment to 10 %. Practically such an operation is, however, only possible if the exchange ratio and the additional cash payments are determined in the draft terms of merger pursuant to uniform principles, 7 in particular, since Article 122 requires common draft terms of merger. Nonetheless, considering its wording, Article 120(1) must ultimately be understood as a way of clarifying the possibilities of such cross-border mergers, even if only one of the companies involved in the merger is subject to a Member State which has made use of the option to permit an additional cash payment exceeding 10 %, whereas, for the avoidance of doubt, the obligation to draw up common draft terms of mergers, however, remains unaffected. 8

II. Opt-out Option for Cooperative Societies Article 120(2) permits Member States to decide not to apply Chapter II to cross-border mergers involving a cooperative society, even in cases where the latter would fall within the definition of a limited liability company as laid down in Article 119(1). 7 The opt-out option was necessary, because cooperative societies are, due to the small general clause of Article 119(1)(b), in principle, subject to the scope of this Chapter II. 9 However, the diversity of the types of cooperative in the EU and the lack of harmonisation of the cooperative laws of the Member States make it impossible to implement a framework for cross-border mergers involving cooperatives.10 Based on a proposal by the Italian delegation,11 cooperatives are not entirely excluded from the scope of Chapter II, but Member States are – similar to Article 87(2) for domestic mergers – given the opportunity to exclude cooperatives from the scope of Chapter II.12 8 The possibility to establish a Societas cooperativa europaea (SCE)13 reduces the need to implement a legal framework for cross-border mergers of cooperatives. 14 6

III. Not Applicable to UCITS 9

Pursuant to sentence 1 of Article 120(3), Chapter II is not applicable to cross-border mergers of Undertakings for Collective Investment in Transferable Securities (UCITS). 7 Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1894). 8 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 149 et seq.; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.23, p. 738. 9 Cf. Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1894); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.20, p. 737. 10 Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1895). Cf. Press Release, Commission welcomes Council agreement on making crossborder mergers easier, 25.11.2004 (IP/04/1405). 11 Cf. Council of the European Union, Working Doc. 9294/04, 6.5.2004, p. 7, fn. 17. 12 Cf. Council of the European Union, Working Doc. 7068/04, 11.3.2004, p. 7, fn. 16; Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.23, p. 7. 13 Regulation (EC) No. 1435/2003 of 22.7.2003 on the Statute for a European Cooperative Society (SCE); Directive 2003/72/EC of 22.7.2003 supplementing the Statute for a European Cooperative Society with regard to the involvement of employees. 14 Cf. Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1894); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.20, p. 737.

600

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 120

This exclusion is due to the fact that cross-border mergers of UCITS are subject to Chapter IV (Articles 37 to 48: Mergers of UCITS) and Directive 2009/65/EC (UCITS Directive) and Articles 3 and 4 of implementing Directive 2010/42/EU. 15 UCITSs are companies whose objective is the collective investment of capital provid- 10 ed by the public. They operate on the principle of risk-spreading and their units are, at the holders' request, repurchased or redeemed, directly or indirectly, out of the assets of that company, whereas actions taken by such a company to ensure that the stock exchange value of its units does not vary significantly from its net asset value are regarded as equivalent to such repurchase or redemption (cf. sentence 2 of Art. 120(3)).

IV. Exclusion of Certain Crisis and Restructuring Scenarios from the Scope of Application Prior to the 2019 Directive, Member States were only prohibited from applying 11 Chapter II to companies which are subject to the winding-up instruments, powers and mechanisms provided for in Title IV of the Bank Recovery and Resolution Directive 2014/59/EU ('BRRD').16 The 2019 Directive redefined the scope of Chapter II with respect to companies in an 12 economic crisis. The Commission's aim was to prevent cross-border mergers from being used as a means of restructuring to the detriment of creditors.17

1. Companies in liquidation which have begun to distribute their assets Article 120(4)(a) requires Member States not to apply Chapter II to companies 13 which are wound up and which have begun to distribute their assets to their members. The provision was included at the last minute based on a proposal by the European Parliament.18 Pursuant to its wording, this exception can be triggered by any of the companies involved in the merger. It is, however, unclear how Art. 120(4) relates to Article 119(2), which expressly de- 14 fines mergers as operations in which companies are “being dissolved without going into liquidation”. 15 Article 89(2) and 90(2) contain further provisions regarding rescue mergers.

2. Companies subject to preventive restructuring proceedings According to Article 120(4)(b), Chapter II shall not apply to companies which are 16 subject to preventive restructuring proceedings initiated because of the likelihood of 15 Directive 2010/42/EU of 1.7.2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure. 16 Directive 2014/59/EU of the European Parliament and of the Council of 15.5.2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No. 1093/2010 and (EU) No. 648/2012, of the European Parliament and of the Council. 17 Bormann and Stelmaszczyk, ‘Grenzüberschreitende Verschmelzung nach dem EU-Company Law Package’ (2019) ZIP, 300 (301); J. Schmidt, ‘EU Company Law Package 2018 – Mehr Digitalisierung und Mobilität von Gesellschaften (Teil 1) -’ (2018) Der Konzern, 229 (239). 18 European Parliament legislative resolution of 18.4.2019 on the proposal for a directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (COM(2018)0241 – C8-0167/2018 – 2018/0114(COD)), P8_TAPROV(2019)0429, p. 86.

Tobias de Raet

601

Art 120 Further provisions concerning scope insolvency pursuant to Title IV of the Directive 2014/59/EU. This provision had been included in an earlier draft by the Commission19 and was again included in the 2019 Directive.

3. Other scenarios The Commission had initially pushed to include further scenarios in Article 120(4), such as (i) the suspension of payments20 or (ii) preventive measures which have been taken by the national authorities to avoid the initiation of proceedings referred to in points (a) or (b).21 In parallel with Article 87(4), it was also suggested to expressly provide that Chapter II shall not apply to companies which are the subject to the winding-up instruments, powers and mechanisms provided for in Title IV of the BRRD22 in order to allow rapid action by authorities.23 18 It remains unclear why such scenarios were ultimately not included and whether or not it can be argued that Member States may include them based on the final wording of the 2019 Directive, when implementing them in their national laws. 17

V. Option to Further Narrow the Scope of Application 19

Pursuant to Article 120(5), Member States may decide not to apply Chapter II to companies which are subject to insolvency proceedings or preventive restructuring frameworks, liquidation proceedings other than those referred to in paragraph 4 point a, or crisis prevention measures in the sense of point (101) of Article 2(1) of the BRRD. Crisis prevention measures means the exercise of powers to directly remove deficiencies or impediments to recoverability under Article 6(6) of the BRRD, the exercise of powers to address or remove impediments to resolvability under Article 17 or 18 of the BRRD, the application of an early intervention measure under Article 27 of the BRRD, the appointment of a temporary administrator under Article 29 of the BRRD or the exercise of the write-down or conversion powers under Article 59 of the BRRD.

19 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018. 20 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018. 21 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018. 22 Directive 2014/59/EU of the European Parliament and of the Council of 15.5.2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No. 1093/2010 and (EU) No. 648/2012, of the European Parliament and of the Council. 23 Proposal for a Directive establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC and Regulation (EU) No. 1093/2010, COM(2012) 280 final, 6.6.2012, p. 17; Recital no. 122 of the Directive 2014/59/EU; Lutter/ Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.14, p. 627.

602

Tobias de Raet

Art 121

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Article 121 Conditions relating to cross-border mergers 1. Save as otherwise provided in this Chapter, (b) a company taking part in a cross-border merger shall comply with the provisions and formalities of the national law to which it is subject. The laws of a Member State enabling its national authorities to oppose a given internal merger on grounds of public interest shall also be applicable to a cross-border merger where at least one of the merging companies is subject to the law of that Member State. This provision shall not apply to the extent that Article 21 of Regulation (EC) No 139/2004 is applicable. 2. The provisions and formalities referred to in point (b) of paragraph 1 of this Article shall, in particular, include those concerning the decision-making process relating to the merger and the protection of employees as regards rights other than those governed by Article 133. I. Limitation of the Permissible Types of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Compliance with the Applicable National Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. National laws on domestic mergers as a basis for cross-border mergers . . 2. Prohibition of mergers for reasons of public interest . . . . . . . . . . . . . . . . . . . . . . 3. Merger control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Specification of provisions and formalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 4 6 7 9

I. Limitation of the Permissible Types of Merger The former Article 121(1)(a) of the 2017 Directive expressly limited the types of 1 mergers covered by Chapter II to mergers between types of companies which may merge under the national laws of the relevant Member State.1 The provision was based on a proposal made by the Dutch Presidency of the Council of the European Union in 2004.2 Member States are not required to implement provisions for types of cross-border merger which would not be permitted as domestic mergers subject to their national laws,3 as this would be contrary to the basic principle of Chapter II.4 Considering the wording of the former Article 121(1)(a) (“under the national law of 2 the relevant Member States”) all operations must be permissible in all Member States involved in the respective cross-merger.5 For example: if Member State A permits domestic mergers of private limited corporations, but Member State B only permits domestic mergers of PLCs, a PLC from Member State A may not merge with a PLC from 1 Ugliano, ‘The New Cross-border Merger Directive: Harmonisation of European Company Law and Free Movement’ (2007) 18 EBLR, 585 (599). 2 Cf. Council of the European Union, Note, Doc. 14060/04, 29.11.2004, p. 3. 3 Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1895); Bayer and J. Schmidt, ‘Die neue Richtlinie über die grenzüberschreitende Verschmelzung von Kapitalgesellschaften Inhalt und Anregungen zur Umsetzung in Deutschland’ (2006) NJW, 401 (401); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.30, p. 742; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.33, p. 1727. 4 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.30, p. 742. 5 Equally the German wording: “die sich nach dem nationalen Recht der betroffenen Mitgliedstaaten verschmelzen dürfen” or the French wording: “qui peuvent fusionner en vertu de la législation nationale des États membres concernés”.

Tobias de Raet

603

Art 121 Conditions relating to cross-border mergers Member State B. Article 121(a) was deleted by the 2019 Directive as the Commission was apparently of the opinion that there is no need for such clarification.6

II. Compliance with the Applicable National Laws 3

Pursuant to Article 121(1), a company taking part in a cross-border merger needs to comply with the provisions and formalities of the national laws to which such a company is subject.

1. National laws on domestic mergers as a basis for cross-border mergers The provisions of Chapter II are based on the principle that cross-border mergers shall follow the same modalities for domestic mergers in the Member States, and Chapter II only contains provisions and specifications where adjustments are necessary due to the cross-border nature of the merger.7 This demonstrates the aim of Chapter II, which is to bring the operation of cross-border mergers closer to that of domestic mergers, since – according to the 2003 Proposal – market participants are familiar with this operation.8 This approach is in line with the unification theory,9 applicable in international restructuring law10 and with the principle of subsidiarity under European law (Article 5(1) Sentence 2 and Article 5(2) TEU).11 5 The unification theory does not require an unrestricted accumulation of the merger requirements of the different legal systems. Rather, the requirements of the jurisdictions, to which the merging companies are subject, are to be combined in such a way that the strictest requirements are generally applied. In the event of any conflicts of laws arising in this context, adaptation methods shall be used.12 This principle is also laid down in recital no. 16 of the 2017 Directive pursuant to which, unless the 2017 Directive provides otherwise, each company taking part in a cross-border merger, and each third party concerned, shall remain subject to the provisions and formalities of the national laws which would be applicable in the case of a domestic merger. It is further clarified that none of the provisions and formalities of national laws, to which reference is made in the 2017 Directive, should introduce restrictions on freedom of establishment or on the free movement of capital.13 A similar reasoning was given in the 2003 Proposal, 4

6 J. Schmidt, ‘EU Company Law Package 2018 – Mehr Digitalisierung und Mobilität von Gesellschaften (Teil 1) -’ (2018) Der Konzern, 229 (240). 7 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 3; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.13, p. 1721. 8 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 3. 9 See also the ECJ with a similar approach with regard to cross-border conversions in: Case C-378/10, 12.7.2012, VALE Építési kft, ECLI:EU:C:2012:440, para. 44: “The implementation of a cross-border conversion requires [...] the consecutive application of two national laws to that legal operation.” 10 Krause and Kulpa, ‘Grenzüberschreitende Verschmelzungen – Vor dem Hintergrund der “Sevic”Entscheidung und der Reform des deutschen Umwandlungsrechts –’ (2007) ZHR, 38 (52); Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.33, p. 744; Kindler in Münchener Kommentar zum BGB, Part 10 (7th edn, 2018): Internationales Handels- und Gesellschaftsrecht, para. 799; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.13, p. 1721. 11 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.13, p. 1721. 12 Kindler in Münchener Kommentar zum BGB, Part 10, (7th edn, 2018): Internationales Handels- und Gesellschaftsrecht, para. 799. 13 Recital no. 56 of the Directive 2017/1132/EU, formerly recital no. 3 of Directive 2005/56/EC.

604

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 122

which explained that cross-border mergers shall in principle be governed by the principles and rules applicable to domestic mergers in each Member State, unless otherwise provided for in the Directive due to the cross-border nature of the merger. 14

2. Prohibition of mergers for reasons of public interest Article 121(1) sentence 2 states that, where the laws of a Member State may permit 6 the authorities of that Member State to prohibit a national merger for reasons of public interest, this shall also apply to cross-border mergers in which at least one of the companies involved in the cross-border merger is governed by the law of that Member State. This provision, like the former Article 121(1)(a), makes it clear that the European legislature did not intend to amend or in any other way substantially interfere with the national laws of the Member States.15

3. Merger control Article 121(1) sentence 3 provides that Article 121(1) sentence 2 shall not apply inso- 7 far as Article 21 of Regulation (EC) No. 139/2004 (hereinafter: 'Merger Regulation') 16 regarding merger control is applicable. As recital 6 in the preamble to the Merger Regulation stresses, the Merger Control 8 Regulation is intended to ensure effective control of all concentrations with regard to their effects on the structure of competition in the Community and to be the only instrument applicable to such concentrations.17 The reference to Article 21 of the Merger Control Regulation ensures the application of this regulation to national law in cases of concentrations with an EU-wide dimension (Article 1(2) of Regulation (EC) No. 139/2004) (Article 21(3)) and preserves the exclusive competence of the Commission to monitor such concentrations (Article 21(2)).

4. Specification of provisions and formalities Article 121(2) specifies what is to be understood by the rules and formalities of the 9 national laws of the Member States referred to in Article 121(1) and what must, therefore, be observed by companies taking part in cross-border mergers as regards these national rules, in particular, those concerning the decision-making process relating to the merger. The reference to (b) is an editorial error due to the deletion of Article 121(1) (a) and is to be understood as a reference to Article 121(1) in its entirety.

Article 122 Common draft terms of cross-border mergers The management or administrative organ of each of the merging companies shall draw up the common draft terms of a cross-border merger. The common draft terms of a cross-border merger shall include at least the following particulars:

14 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 3. 15 Krause and Kulpa, ‘Grenzüberschreitende Verschmelzungen – Vor dem Hintergrund der “Sevic”Entscheidung und der Reform des deutschen Umwandlungsrechts –’ (2007) ZHR, 38 (52). 16 Council Regulation (EC) No. 139/2004 of 20.1.2004 on the control of concentrations between undertakings (the EC Merger Regulation). 17 Recital no. 6 of the Regulation (EC) No 139/2004.

Tobias de Raet

605

Art 122 Common draft terms of cross-border mergers (a) for each of the merging companies, its legal form and name, and the location of its registered office, and the legal form and name proposed for the company resulting from the cross-border merger and the proposed location of its registered office; (b) the ratio applicable to the exchange of securities or shares representing the company capital and the amount of any cash payment, where appropriate; (c) the terms for the allotment of securities or shares representing the capital of the company resulting from the cross-border merger; (d) the likely repercussions of the cross-border merger on employment; (e) the date from which the holding of such securities or shares representing the company capital will entitle the holders to share in profits and any special conditions affecting that entitlement; (f) the date from which the transactions of the merging companies will be treated for accounting purposes as being those of the company resulting from the crossborder merger; (g) the rights conferred by the company resulting from the cross-border merger on members enjoying special rights or on holders of securities other than shares representing the company capital, or the measures proposed concerning them; (h) any special advantages granted to members of the administrative, management, supervisory or controlling bodies of the merging companies; (i) the instrument of constitution of the company resulting from the cross-border merger, where applicable, and the statutes if they are contained in a separate instrument; (j) where appropriate, information on the procedures by which arrangements for the involvement of employees in the definition of their rights to participation in the company resulting from the cross-border merger are determined pursuant to Article 133; (k) information on the evaluation of the assets and liabilities which are transferred to the company resulting from the cross-border merger; (l) dates of the merging companies’ accounts used to establish the conditions of the cross-border merger; (m) details of the offer of cash compensation for members in accordance with Article 126 a; (n) any safeguards offered to creditors, such as guarantees or pledges. I. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Legal Nature of the Common Draft Terms of the Cross-Border Merger . . . . . III. Formalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Responsibility of the management or administrative organ . . . . . . . . . . . . . . . 2. Written form requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Minimum requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Key information on the companies involved in the cross-border merger b) Share exchange ratio, amount of cash payment . . . . . . . . . . . . . . . . . . . . . . . . . c) Terms relating to the allotment of securities or shares . . . . . . . . . . . . . . . . . . d) Implications on employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Date of profit entitlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Accounting date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Specification of special rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h) Specification of special advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i) Instruments and/or statutes of the resulting company . . . . . . . . . . . . . . . . . . j) Information on arrangements for the involvement of employees . . . . . . . . k) Information on the evaluation of the assets and liabilities . . . . . . . . . . . . . .

606

Tobias de Raet

1 3 9 9 11 13 15 17 18 20 23 24 26 27 31 32 34 36 38

Art 122

TITLE II CONVERSIONS, MERGERS AND DIVISIONS l) Reporting date of annual accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . m) Details of the cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n) Safeguards offered to creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Voluntary additions to the minimum requirements . . . . . . . . . . . . . . . . . . . . . . . a) By the companies involved in the merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) By the Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42 43 44 45 45 46

I. Purpose The basis for cross-border mergers are the common draft terms of the cross-border 1 merger. The intention of this document is to lay down the essential terms and conditions of the cross-border merger, on which the shareholders are to vote at the general meeting (cf. Article 126). The drawing up of draft terms of the merger is part of a European basis act for 2 structural changes,1 which is also to be found in other European legal acts2 and which was introduced by Directive 1978/855/EEC on domestic mergers.3 This model primarily pursues a concept which seeks to provide protection through information rather than implementing a system of preventive control by governmental institutions.4 Its elements are: – the draft terms of the cross-border merger and their publication (cf. Articles 122 and 123), – the report of the administrative or management body for members and employees (Article 124), – the independent expert report (Article 125), – the approval by the general meeting (Article 126) and – legality control of the cross-border merger (Articles 127 and 128).

II. Legal Nature of the Common Draft Terms of the Cross-Border Merger The term 'draft terms of merger' implies that the cross-border merger is a corporate 3 organisational act subject to company law and not an agreement subject to contract law.5 This is, inter alia, indicated by the wording 'draft terms of merger' (French: 'projet de 4 fusion'; German: 'Verschmelzungsplan'), which was chosen instead of the term 'merger agreement' (see also Article 102 with respect to the domestic merger regime). The 1 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.21, p. 668. 2 See inter alia: former Sixth Council Directive 82/891/EEC of 17.12.1982 based on Article 54 (3) (g) of the Treaty, concerning the division of public limited liability companies; Regulation (EC) No 2157/2001 of 8.10.2001 on the Statute for a European company (SE); Regulation (EC) No 1435/2003 of 22.7.2003 on the Statute for a European Cooperative Society (SCE). 3 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.32, p. 744. 4 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15; Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 65 et seq.; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.32, p. 744. 5 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.35, p. 746; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.37, p. 1728.

Tobias de Raet

607

Art 122 Common draft terms of cross-border mergers

5

6

7

8

minimum information to be provided in the common draft terms of the cross-border merger likewise does not contain any indication that they are of a contractual nature.6 It is, nonetheless, questionable whether the term 'draft terms of merger' was intentionally chosen to make a conclusive statement on the legal nature of cross-border mergers as a corporate organizational act.7 For domestic mergers, the wording 'draft terms of merger' was deliberately chosen in Article 91, because Member States had different approaches to the legal character of mergers8 and full harmonisation was not sought in this area.9 Thus, at least for domestic mergers within the meaning of Chapter I, Member States are free to (continue to) require a merger agreement subject to the contract law of said Member State for the domestic merger. Germany, for example, continues to use the term 'merger agreement' (German: 'Verschmelzungsvertrag') for domestic mergers (cf. Sec. 4 of the German Transformation Act (Umwandlungsgesetz)). Although Article 122 uses the same term as Article 91 ('draft terms of merger'), it cannot be concluded that Member States shall have the same freedom to determine the legal character of cross-border mergers as with domestic mergers, because there is a particular need for all companies involved in a cross-border merger to be subject to a harmonised legal framework.10 While the different approaches of the Member States could be resolved by the accumulation of the respective laws based on the provision on conflicts of law (cf. Article 121(1)(b)), there is a particular need to define a common European standard when harmonising the substantive law on cross-border mergers.11 This understanding is supported by legislative history: Article 7(3) of the 1972 Convention12 expressly provided that any merger agreement required by national laws of the Member States was to be deemed as the draft terms of merger subject to this Convention. A provision pursuant to which Member States are free to determine the legal character of a cross-border merger was, however, ultimately not included in the 2005 Directive. Consequently, Germany included the term 'draft terms of merger' in its national provisions on cross-border mergers (cf. Sec. 122 b of the German Transformation Act (Umwandlungsgesetz)13) while continuing to use the term 'merger agreement' with respect to domestic mergers. The use of different terms would not have been necessary if Article 91 and Article 122(1)(b) had followed a similar approach with respect to the legal character of the merger. Irrespective of this characterisation of the draft terms of merger, companies involved in cross-border mergers are free to enter into additional agreements (e.g. business combination agreements).14

6 See Section 5(1) no. 2 of the German Transformation Act (Umwandlungsgesetz of 28.10.1994, BGBl. I, p. 3210; 1995 I, p. 428) which requires that “the agreement as to the transfer of the entire assets of each legal entity being acquired, in return for shares in the acquiring legal entity being allotted, or memberships in same being granted” must be set out in the merger agreement at minimum. Cf. Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 158 et seq. 7 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 156. 8 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 3, p. 23. 9 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 157. 10 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 157. 11 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 157. 12 Draft Convention on the international merger of sociétés anonymes, Doc. 529/XIV/72 = Bulletin of the European Community Supplement 13/73 = Kommission der Europäischen Gemeinschaften, ‘Entwurf eines Übereinkommens über die internationale Verschmelzung von Aktiengesellschaften’ (1975) 39 RabelsZ, 539. 13 Section 122 c of the German Transformation Act (Umwandlungsgesetz, 28.10.1994, BGBl. I, p. 3210; 1995 I, p. 428).

608

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 122

III. Formalities 1. Responsibility of the management or administrative organ The management or administrative organ of each of the merging companies is re- 9 sponsible for drawing up the common draft terms of the cross-border merger. Chapter II, however, refrains from further provisions, leaving it up to the Member States to allocate the competences between and within these bodies.15 Like Chapter I, Chapter II does not expressly specify which body shall be competent 10 if a company has a two-tier structure, i.e. an executive/management board and an administrative/supervisory board. As provided in Article 22(1) of the 1970 Proposal (with respect to domestic mergers), the executive/management board should be responsible for drawing up the common draft terms of the cross-border merger as this is the only option that makes sense considering the typical corporate governance of and the checks and balances in two-tier companies.16

2. Written form requirement The common draft terms of the cross-border merger must be drawn up at least 11 in writing, although, unlike Article 91, this is not expressly required in the English language version (different in the French and German versions). The written form requirement results from the nature of the common draft terms of the cross-border merger being a separate document,17 and also from the framework for domestic mergers: pursuant to Article 91 Member States have to provide in their national laws that the draft terms of merger be drawn up in writing. This requirement is to be applied to cross-border mergers, since pursuant to Sec. 121(1)(b) a company taking part in a cross-border merger must comply with the provisions and formalities of the national law to which it is subject. Mergers shall, in principle, be governed in each Member State by the principles and rules applicable to domestic mergers, unless otherwise provided by the Directive for reasons relating to the cross-border nature of the merger. Should the national laws of a Member State, to which a company involved in the 12 cross-border merger is subject, impose stricter form requirements (e.g. notarisation as required under § 122c(4) of the German Transformation Act (Umwandlungsgesetz) 18), such requirements must be observed, whereas the strictest requirement prevails, 19 because the common draft terms of the cross-border merger are a joint document and, therefore, have relevance in different Member States.20

14 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.35, p. 745 and § 22.50, p. 753; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.37, p. 1728. 15 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.36, p. 745; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.39, p. 1729. 16 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.37, p. 746; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.40, p. 1729. 17 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.37, p. 746. 18 Umwandlungsgesetz, 28.10.1994, BGBl. I, p. 3210; 1995 I, p. 428. 19 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.37, p. 746. 20 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.37, p. 746.

Tobias de Raet

609

Art 122 Common draft terms of cross-border mergers 3. Language There is no provision regarding the language of the common draft terms of the crossborder merger. Therefore, pursuant to the concept in Article 121(1) sentence 1, the national laws of the Member States involved in the cross-border merger are decisive for this question.21 The Parliament and the Council had suggested amending Art. 122 in order to expressly allow the merging companies to use a language customary in the sphere of international business and finance to draw up the common draft terms of a cross-border merger and all other related documents.22 This amended provision would have established no binding language regime itself (i.e. binding for the merging companies), but would only have required the Member States to establish in their national laws a language regime. This approach was criticised, since it was not in line with the overall aim to eliminate boundaries for cross-border mobility of companies.23 Since the common draft terms of the cross-border merger have to be published in the company register (cf. Article 16) in accordance with Article 123, the national laws will likely require the common draft terms of the cross-border merger be at least published in the official language(s) of that Member State i.e. unless all respective Member States have the same official language (for example, a cross-border merger involving only German and Austrian companies), the draft terms of merger need to be at least bilingual. 24 14 However, in view of the concept of 'protection by information'25 pursued by Chapter II, it is in any case advisable to draft and publish the draft terms of merger in multiple languages.26 Companies involved in a cross-border merger should further consider publishing the draft terms of merger at least also in English or even all three EU procedural languages (English, French, German). 13

IV. Content 15

The purpose of the common draft terms of the cross-border merger is not to provide certain rights or obligations, but a general framework governing the cross-border merger. They serve to inform the shareholders, who are to vote on the cross-border merger at the general meetings of the companies involved in the cross-border merger pursuant to Article 126.27 21 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.105, p. 28; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.38, p. 746; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.48, p. 1731. 22 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018, p. 12. 23 J. Schmidt, Cross-border Mergers, ‘Divisions and Conversions: Accomplishments and Deficits of the Company Law Package’ (2019) ECFR, 222, (243). 24 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.38, p. 746; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.48, p. 1731. 25 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.32, p. 744. 26 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.38, p. 746; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.48, p. 1731. 27 Explaining this concept for the draft terms of domestic mergers: Pierre van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’ in: Pieter Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 123 (131).

610

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 122

Although this is not expressly provided for in Article 122, the common draft terms of 16 a cross-border merger not only need to be drafted jointly by the companies involved in the merger, but must also have the same terms and conditions. This, inter alia, follows from Article 128(1) according to which the scrutiny of the legality of the crossborder merger shall ensure that the merging companies have approved the common draft terms of cross-border merger in the same terms and conditions.

1. Minimum requirements Article 122 contains a list of minimum requirements to be included in the common 17 draft terms of the cross-border merger. This list includes the minimum requirements for domestic mergers pursuant to Article 91, as well additional points (cf. points (d) and (i) to (n)) to reflect the cross-border nature of the operation. 28 a) Key information on the companies involved in the cross-border merger The requirements included in Article 122(a) are basically identical to those of Arti- 18 cle 91(2)(a). The common draft terms of the cross-border merger shall state the legal form, name and the location of the registered office of the merging companies and those proposed for the company resulting from the cross-border merger. Minor amendments were necessary to reflect the uniform codification of cross-border mergers by acquisition and cross-border mergers by formation of a new company.29 In a cross-border merger, the place of the registered office is of particular importance 19 to shareholders and creditors of the company involved in said merger, since it determines which law will be applicable to the (acquiring or new) company.30 b) Share exchange ratio, amount of cash payment Largely identical to Article 91(2)(b), Article 122(b) stipulates that the common draft 20 terms of the cross-border merger must specify the ratio applicable to the exchange of securities or shares representing the company capital and, if any, the amount of additional cash payment. Minor adjustments had to be made to reflect the fact that the scope of Chapter II not 21 only covers PLCs, but also private limited liability companies. Article 122(b) does not stipulate which valuation method is to be used for de- 22 termining the share exchange ratio. In order to have comparable results, all of the companies involved in the cross-border merger should be valued on the basis of the same methods. Thus, the only practical option would be to use valuation methods which are accepted in all Member States relevant to the respective cross-border merger. 31 There is, however, no such accepted EU-wide valuation method. The French financial markets regulation authority (Autorité des Marchés Financiers (AMF)) even requires the use of a specific method which is incomparable with methods used in other Member States.32 It

28 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 5. 29 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.41, p. 748. 30 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 5. 31 J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960, p. 23; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.42, p. 748.

Tobias de Raet

611

Art 122 Common draft terms of cross-border mergers would, therefore, be extremely helpful for cross-border mergers if Member States could eventually agree on a common valuation method. c) Terms relating to the allotment of securities or shares 23

Pursuant to Article 122(c), the common draft terms of merger must specify the terms for the allotment of securities or shares representing the capital of the company resulting from the cross-border merger. The requirements of Article 122(c) largely correspond to those of Article 91(2)(c). They have, however, been modified to reflect the extension from PLCs to all private limited liability companies. d) Implications on employment

Article 122(d) requires that the common draft terms of the cross-border merger include the implications of the cross-border merger on employment. This is an additional requirement to which there is no equivalent in Article 91 on domestic mergers. It was requested by the European Parliament33 and is based on § 5(1) point 9 of the German Transformation Act34.35 25 The information to be provided pursuant to Article 122(d) is intended to inform the shareholders of the companies involved in the cross-border merger about substantial changes and the effects of such changes, for example changes to the number of employees and expenses or changes related thereto.36 The information is not directed at the employees, who are addressed by the report of the management or administrative organ pursuant to Article 124. 24

e) Date of profit entitlement 26

Article 122(e), which is largely identical to Article 91(2)(d), provides that the common draft terms of the cross-border merger must specify (i) the date from which the holding of such securities or shares representing the company capital will entitle the holders to share in profits and (ii) any special conditions affecting that entitlement. f) Accounting date

Article 122(f) provides that the common draft terms of the cross-border merger must specify the date from which the transactions of the merging companies will be treated for accounting purposes as being those of the company resulting from the cross-border merger. Article 122(f) is largely identical to Article 91(2)(e). Due to the absence of European harmonisation, there are different approaches among the Member States for determining the accounting date.37 28 Some Member States require the accounting date to be identical to the date when the merger takes legal effect, others permit the accounting date to be earlier than the date 27

32 J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960, p. 23. See also for a more detailed account of the valuation methods applied in the Union: Bech-Bruun and Lexidale, Study on the Application of the Cross-border Mergers Directive (2013), p. 236 et seq. 33 Committee on Legal Affairs, Report on the proposal for a directive of the European Parliament and of the Council on cross-border mergers of companies with share capital, A6-0089/2005 final, 25.4.2005, p. 17. 34 Umwandlungsgesetz of 28.10.1994, BGBl. I, p. 3210; 1995 I, p. 428. 35 Cf. Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1895, fn. 29); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.44, p. 749. 36 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.44, p. 749.

612

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 122

on which the merger comes into effect. This can obviously lead to friction and cause significant practical problems.38 The Parliament and the Council had suggested implementing a unified accounting 29 date in a new Art. 122 a.39 The suggested regime was as follows: – If the company resulting from the cross-border merger prepared financial annual statements in accordance with the international accounting standards (IFRS)40, the date from which the transactions of the merging companies were to be treated as those of the company resulting from the cross-border merger should be determined in accordance with those accounting standards. – Notwithstanding the aforementioned, the accounting date provided in the common draft terms of the cross-border merger was suggested to be the date on which the cross-border merger takes effect, as referred to in Article 129, unless the merging companies determined another date in order to facilitate the merger process. It was suggested that, in that case, the accounting date should comply with certain requirements. Although such a last-minute proposal was subject to criticism,41 it is disappointing 30 that the suggested Art. 122 a was entirely deleted in the final 2019 Directive. g) Specification of special rights Article 122(g), which is largely identical to Article 91(2)(f), provides that the com- 31 mon draft terms of the cross-border merger must specify the rights conferred by the company resulting from the cross-border merger on members enjoying special rights or on holders of securities other than shares representing the company capital, or the measures proposed concerning them. h) Specification of special advantages Article 122(h) provides that the common draft terms of the cross-border merger 32 need to specify any special advantages granted to members of the administrative, management, supervisory or controlling organs of the merging companies. The provision is largely identical to Article 91(2)(g). A special advantage is any kind of benefit granted on the occasion of a merger which is not compensation/remuneration for a specific task.42 The rationale behind these criteria is to prevent, or at least reduce, abuse by making 33 any such advantages transparent.43 Any special advantages granted to such persons can raise doubts as to whether they negotiated the merger in the best interest of the company or were, to a certain extent, also driven by their own (economic) interest. Considering this aspect, the transparency requirement applies at minimum to anyone who is a po37 Cf. J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960, p. 22 et seq.; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.43, p. 749. 38 J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960, p. 22 et seq. 39 J. Schmidt, Cross-border Mergers, ‘Divisions and Conversions: Accomplishments and Deficits of the Company Law Package’, (2019) ECFR, 222, (222 et seq.). 40 Regulation (EC) No. 1606/2002 of the European Parliament and of the Council. 41 J. Schmidt, Cross-border Mergers, ‘Divisions and Conversions: Accomplishments and Deficits of the Company Law Package’, (2019) ECFR, 222, (242). 42 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.39, p. 635. 43 Uwe Grohmann, The Information Model in European Company Law (2006), 321; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.39, p. 635.

Tobias de Raet

613

Art 122 Common draft terms of cross-border mergers tential decision-maker in the cross-border merger.44 Under the regime of the 2017 Directive, the provision also applied to experts who examine the draft terms of the crossborder merger, and it is somewhat unfortunate that this transparency requirement was deleted in the 2019 Directive. The liability of the independent expert as codified in Art. 133 a of the 2019 Directive cannot entirely make up for the deletion of such a transparency requirement. i) Instruments and/or statutes of the resulting company Pursuant to Article 122(i), the common draft terms of merger need to contain the instrument or instruments of constitution, where applicable, and the statutes if they are contained in a separate instrument, of the company resulting from the cross-border merger. 35 Article 20(1)(h) of the SE Regulation45 seems to have been the model for this provision.46 Its purpose is to inform the shareholders about the content of the articles of association, which is, for some shareholders at least, likely to be subject to a foreign jurisdiction.47 34

j) Information on arrangements for the involvement of employees Pursuant to Article 122(j) the common draft terms of the cross-border merger must, where appropriate, contain information on the procedures by which arrangements for the involvement of employees in the definition of their rights to participation in the company resulting from the cross-border merger are determined pursuant to Article 133. 37 The purpose of this provision is to enable the shareholders to be informed of such a procedure, which does normally not begin until after the common draft terms of the cross-border merger have been published (cf. Article 123). Therefore, the results of this procedure cannot regularly form part of the common draft terms of the cross-border merger.48 This aspect was already included in the 2003 Proposal which noted that “the draft terms must also contain information on the arrangements for employee involvement in decisions taken by the company created by the cross-border merger”.49 In addition, Article 20(1)(i) of the SE Regulation50 served as a model.51 36

k) Information on the evaluation of the assets and liabilities 38

Pursuant to Article 122(k), the common draft terms of merger need to contain information on the evaluation of the assets and liabilities which are transferred to the

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.39, p. 635. 45 Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE). 46 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.45, p. 749. 47 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.45, p. 750. 48 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.46, p. 750. 49 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 5. 50 Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE). 51 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.46, p. 780. 44

614

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 122

company resulting from the cross-border merger. The provision goes back to a proposal by the French delegation.52 The intention of this provision is not entirely clear. One could assume that Article 39 122(k) will provide shareholders with further information on the valuation of the exchange ratio. However, this would not make sense, since the exchange ratio of the cross-border merger is necessarily based on a comparative company valuation, and information on the valuation of the assets of the transferring companies is not useful for the purpose of valuing the exchange ratio.53 Likely the provision only refers to information about how the transferred assets 40 are carried in the accounts of the transferring entity, i.e. whether they are transferred at book value or at fair value.54 In particular, since there is a need for a common approach,55 it is necessary for the merging companies to use the same transfer valuation method.56 It is disputed as to whether it is also sufficient to merely state that the final valuation 41 will be made in connection with the preparation of the annual financial statements of the acquiring entity, i.e. postpone such a decision. The wording and the history of the provision do not imply that such an option shall be possible, but rather requires a final and clear statement in the common draft terms of the cross-border mergers about which valuation option shall be used.57 Others argue that this is not expressly stated in Article 122(k) and that it should be possible to postpone such a decision to when the annual financial statements of the acquiring legal entity are prepared, at least if none of the jurisdictions involved mandatorily requires a decision on the determination of the balance sheet amounts in the common draft terms of merger.58 l) Reporting date of annual accounts Pursuant to Article 122(l) the common draft terms of the cross-border merger need 42 to contain the dates of the merging companies' accounts used to establish the conditions of the cross-border merger. The provision goes back to a proposal by the French delegation.59 It was included in the Directive because the accounts are of significant importance for determining the value of the assets to be taken over by the acquiring company, in particular, if such assets are accounted at book value.60

Cf. Council of the European Union, Working Doc. 9294/04, 6.5.2004, p. 10, fn. 29. Vetter, ‘Die Regelung der grenzüberschreitenden Verschmelzung im UmwG – Einige Bemerkungen aus Sicht der Praxis’ (2006) AG, 613 (618). 54 Vetter, ‘Die Regelung der grenzüberschreitenden Verschmelzung im UmwG – Einige Bemerkungen aus Sicht der Praxis’ (2006) AG, 613 (618). 55 J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960, p. 23; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.42, p. 748. 56 J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960, p. 23. 57 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.47, p. 751. 58 Vetter, ‘Die Regelung der grenzüberschreitenden Verschmelzung im UmwG – Einige Bemerkungen aus Sicht der Praxis’ (2006) AG, 613 (619). 59 Cf. Council of the European Union, Working Doc. 9294/04, 6.5.2004, p. 10, fn. 29. 60 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.35, p. 745 and § 22.48, p. 751. 52

53

Tobias de Raet

615

Art 122 Common draft terms of cross-border mergers m) Details of the cash compensation 43

Article 122(m) provides that the common draft terms of the cross-border merger need to contain details of the offer of cash compensation for the members in accordance with Article 126 a. n) Safeguards offered to creditors

44

Finally, Article 122(n) provides that the common draft terms of the cross-border merger need to contain any safeguards which are provided to creditors of the merging companies, i.e. guarantees or pledges.

2. Voluntary additions to the minimum requirements a) By the companies involved in the merger 45

The wording (“shall include at least”) indicates that points (a) to (n) are a minimum set of details which may be extended. The companies involved in the cross bordermerger may, therefore, voluntarily add further content to the common draft terms of the cross-border merger.61 In the 2003 Proposal this option was expressly mentioned.62 However, nothing to the contrary can be concluded from the fact that this paragraph has not been incorporated into the final version. This is, inter alia, evidenced by recital no. 57 of the 2017 Directive, which expressly states that the minimum content of the common draft terms of the cross-border merger should be specified, while leaving it up to the merging companies to agree on additional terms. Content that may be added to the common draft terms of the cross-border merger by the companies might be, for example, explanations of separate business combination agreements concluded in connection with the cross-border merger.63 b) By the Member States

46

There are good arguments for Member States also requiring companies governed by their national laws to include further information in the common draft terms of the cross-border merger. This is evidenced by the wording (“shall at least”), but also by a comparison with Article 91(2). For domestic mergers, it is in principle accepted 64 that Member States may require further content for the draft terms of merger. 65 Further arguments are to be found in the legislative history of the provision: Article 5(1) of the 1985 Proposal expressly excluded the possibility that Member States may require further content in the common draft terms of the cross-border mergers. Such unequivocal wording cannot be found in Article 121.66 That this is not merely an editorial oversight Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 29.11, p. 705; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.35, p. 745 and § 22.50, p. 753; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.48, p. 1731 et seq. 62 Article 3(2): “In addition to the items provided for in paragraph 1, the merging companies may, by common accord, include further items in the common draft terms of merger.” 63 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.35, p. 745 and § 22.50, p. 753; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.37, p. 1728. 64 See for a discussion on this matter: Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 231; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.49, p. 752. 65 As follows from: Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 193, p. 81. 61

616

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 122

is evidenced by the fact that the issue was discussed in the Council.67 While it had been argued that additional requirements by the Member States may create unnecessary obstacles to cross-border mergers,68 the Commission eventually decided not to include any wording in Article 122 which forbids Member States from requiring further content in the common draft terms of the cross-border merger.69 It must, however, be mentioned that the provisions for the SE follow a different 47 approach: Article 20(1) of the SE Regulation70 expressly states that (only) the merging companies may include further items in the draft terms of merger. This aspect cannot, however, be decisive, since cross-border and domestic mergers were adopted in the form of a Directive and not a Regulation.71 While Regulations are intended to include all provisions required for such a matter, this is not true of Directives, which are by nature not exhaustive and leave room for so-called gold-plating by the Member States.72 Finally, the view that Member States may require additional content is also supported 48 by sentence 2 of Article 121(2) pursuant to which a Member State may, in the case of companies participating in a cross-border merger governed by its laws, adopt provisions designed to ensure appropriate protection for minority members who have opposed the cross-border merger.73 Although this appears to be possible only in exceptional cases in view of the requirement (to protect minority shareholders who have rejected cross-border mergers), it is noted that there can be no uniform standard of content in the draft terms of merger. 74 In view of the practice of some Member States of demanding further requirements in the draft terms of merger, this seems illusory anyway. 75 While there are good arguments that the Member States appear to have been given 49 the possibility of extending the content of the common draft terms of merger, the question can ultimately only be clarified by the ECJ.76

66 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.49, p. 752. 67 Council of the European Union, Working Doc. 7068/04, 11.3.2004, p. 9, fn. 25. 68 Council of the European Union, Working Doc. 7068/04, 11.3.2004, p. 9, fn. 25. 69 Council of the European Union, Working Doc. 7068/04, 11.3.2004, p. 9, fn. 25. 70 Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE). 71 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.49, p. 752. Deviating: Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 163. 72 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.49, p. 752. Deviating: Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 163. 73 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.49, p. 752. 74 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.49, p. 752. 75 See in the UK: Regulation 7(2)(a)(iii) of The Companies (Cross-Border Mergers) Regulations 2007 (2007 No. 2974) and in Austria: Section 5(2) No. 3 and 8 of the EU-Merger Law (Bundesgesetz über die grenzüberschreitende Verschmelzung von Kapitalgesellschaften in der Europäischen Union (EU-Verschmelzungsgesetz – EU-VerschG) (BGBl. I Nr. 72/2007 (NR: GP XXIII RV 171 AB 218 p. 31. BR: 7758 AB 7766 p. 748). Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.49, p. 753. 76 Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 91 et seq.; Vermeylen, ‘The Cross-border merger Directive’ in: Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.47, p. 14; Presumably agreeing: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.49, p. 753. Not agreeing: Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 162 et seq.

Tobias de Raet

617

Art 123 Disclosure

Article 123 Disclosure 1. Member States shall ensure that the following documents are disclosed by the company and made publicly available in the register of the Member State of each of the merging companies, at least one month before the date of the general meeting referred to in Article 126: (a) the common draft terms of the cross-border merger; and (b) a notice informing the members, creditors and representatives of the employees of the merging company, or, where there are no such representatives, the employees themselves, that they may submit to their respective company, at the latest five working days before the date of the general meeting, comments concerning the common draft terms of the cross-border merger. Member States may require that the independent expert report be disclosed and made publicly available in the register. Member States shall ensure that the company is able to exclude confidential information from the disclosure of the independent expert report. The documents disclosed in accordance with this paragraph shall also be accessible through the system of interconnection of registers. 2. Member States may exempt merging companies from the disclosure requirement referred to in paragraph 1 of this Article where, for a continuous period beginning at least one month before the date fixed for the general meeting referred to in Article 126 and ending not earlier than the conclusion of that meeting, those companies make the documents referred to in paragraph 1 of this Article available on their websites free of charge to the public. However, Member States shall not subject that exemption to any requirements or constraints other than those which are necessary to ensure the security of the website and the authenticity of the documents, and which are proportionate to achieving those objectives. 3. Where merging companies make the common draft terms of the cross-border merger available in accordance with paragraph 2 of this Article, they shall submit to their respective register, at least one month before the date of the general meeting referred to in Article 126, the following information: (a) for each of the merging companies its legal form and name and the location of its registered office and the legal form and name proposed for any newly created company and the proposed location of its registered office; (b) the register in which the documents referred to in Article 14 are filed in respect of each of the merging companies, and the registration number of the respective company in that register; (c) an indication, for each of the merging companies, of the arrangements made for the exercise of the rights of creditors, employees and members; and (d) details of the website from which the common draft terms of the cross-border merger, the notice referred to in paragraph 1, the independent expert report and complete information on the arrangements referred to in point (c) of this paragraph may be obtained online and free of charge. The register of the Member State of each of the merging companies shall make publicly available the information referred to in points (a) to (d) of the first subparagraph. 618

Tobias de Raet

Art 123

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

4. Member States shall ensure that the requirements referred to in paragraphs 1 and 3 can be fulfilled fully online without the necessity for the applicants to appear in person before any competent authority in the Member States of the merging companies, in accordance with the relevant provisions of Chapter III of Title I. 5. Where the approval of the merger is not required by the general meeting of the acquiring company in accordance with Article 126(3), the disclosure referred to in paragraphs 1, 2 and 3 of this Article shall be made at least one month before the date of the general meeting of the other merging company or companies. 6. Member States may require, in addition to the disclosure referred to in paragraphs 1, 2 and 3 of this Article, that the common draft terms of the cross-border merger, or the information referred to in paragraph 3 of this Article, be published in their national gazette or through a central electronic platform in accordance with Article 16(3). In that instance, Member States shall ensure that the register transmits the relevant information to the national gazette or to a central electronic platform. 7. Member States shall ensure that the documentation referred to in paragraph 1 or the information referred to in paragraph 3 is accessible to the public free of charge through the system of interconnection of registers. Member States shall further ensure that any fees charged to the company by the registers for the disclosure referred to in paragraphs 1 and 3 and, where applicable, for the publication referred to in paragraph 6 do not exceed the recovery of the cost of providing such services. I. History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Disclosure Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Documents to be disclosed in the registers of the Member States . . . . . . . . . a) Common draft terms of the cross-border merger . . . . . . . . . . . . . . . . . . . . . . . . b) Notice informing members, creditors and employee representatives . . . . . c) Independent expert report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Publication in registers of the Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Availability via BRIS system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Alternatively: Publication on the website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Information to be provided to national register in case of publication on website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Key corporate information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Register and number of entry of company documents and particulars . . c) Indication for the exercise of the rights of creditors and of any minority members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Further details (website, notice, expert report) . . . . . . . . . . . . . . . . . . . . . . . . . . e) Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Online publication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Time of disclosure if cross-border merger does not need to be approved by general meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Additional disclosure in the national gazette . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 4 4 5 6 8 11 13 18 19 20 21 23 24 25 27 29

I. History Article 123 used to be almost identical to Article 92, the corresponding provision for 1 domestic mergers. The 2019 Directive, however, amended and restated the disclosure regime for cross-border mergers. In addition, the 2019 Directive eliminated the requirement laid down in Arti- 2 cle 123(2) of the 2017 Directive pursuant to which for each of the merging companies certain additional information had to be published in the national gazette of that Member State. The provision is based on Article 21 of the SE Regulation1 and Article 24(2) of

Tobias de Raet

619

Art 123 Disclosure the SCE Regulation.2 The notice must be made subject to the additional requirements of the Member State to whose laws the respective company is subject.3 3 The new regime is a consequence of the so-called 'register only' solution introduced in Article 16 by the 2019 Directive,4 which finally abolishes the outdated dichotomy of registration and proclamation.5

II. Disclosure Regime 1. Documents to be disclosed in the registers of the Member States a) Common draft terms of the cross-border merger 4

Member states need to ensure that the common draft terms of the cross-border merger are disclosed and made publicly available at least one month before the general meeting at which a decision is to be taken thereon (Article 123(1)(a)). This requirement ensures that the shareholders, who are to decide on a merger, receive the information in a timely and formalised manner6 which enables them to make an informed decision on the merger. 7 Additional and potentially more important8 information, such as the annual accounts and reports, may however only be inspected by shareholders. Member States can, nevertheless, require that the independent expert report, if drafted in accordance with Article 125, be disclosed and made publicly available in the register. b) Notice informing members, creditors and employee representatives

5

The 2019 Directive amended the documents to be disclosed by a notice by which the members, creditors and representatives of the employees of the merging companies, or, where there are no such representatives, the employees themselves, are informed that they may submit to the respective company, at the latest five working days before the date of the general meeting, comments concerning the common draft terms of the cross-border merger. While such an involvement of other stakeholders may be desirable from their standpoint, it is not in line with the purpose of the publication which is to inform the shareholders of the merging companies as they are the ones who are to decide on the cross-border merger.

Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE). Regulation (EC) No. 1435/2003 of 22.7.2003 on the Statute for a European Cooperative Society (SCE). 3 Neye and Timm, ‘Die geplante Umsetzung der Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften im Umwandlungsgesetz’ (2006) 9 DB, 488 (489); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.55, p. 755. 4 Bayer and J. Schmidt, BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package, (2019), BB, 1922, (1928). 5 Bayer and J. Schmidt, BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package, (2019), BB, 1922, (1928). 6 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.24, p. 680. 7 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (18); Hans-Jürgen Sonnenberger, ‘Der Vorentwurf eines Abkommens über die Internationale Fusion’ (1969) AG, 381 (383). 8 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.24, p. 680. See also: Temple Lang, ‘Three EEC Draft Directives on Company Law – Capital, Mergers and Management’ (1972) VII The Irish Jurist, 306 (315): “Rather surprisingly, no details of the capital structures or the nature of the business of the companies involved are required, but presumably in practice this information would emerge from the other information required”. 1

2

620

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 123

c) Independent expert report While the common draft terms of the cross-border merger shall and will remain the 6 central document for informing the shareholders, the 2019 Directive further provides that Member States may require that the independent expert report be disclosed and made publicly available in the register. Such publication may not only be helpful to the shareholders, but also to members, creditors and employee representatives. Since the independent expert report contains confidential information on the merg- 7 ing companies, Member States need to ensure that the merging companies are able to exclude such information. As the respective confidential information contained in the independent expert reports concerns not just one but all companies involved in the cross-border merger, the Member States should ensure that an independent expert report is only published if all companies involved in the merger have agreed on which passages are to be redacted.

2. Publication in registers of the Member States Both documents, i.e. the common draft terms of the cross-border merger as well 8 as the notice informing the members, creditors and employee representatives (or the employees themselves if there are no such representatives), shall be disclosed and made publicly available in the registers of the Member States of each of the merging companies. While the 2017 Directive included an express reference to Article 16, the 2019 Directive only includes the term 'the register' which is, however, itself defined in Article 16. This new regime is a consequence of the so-called 'register only' solution introduced by the 2019 Directive.9 Member States need to ensure that the documents referred to in Article 123(1) 9 are accessible by the public free of charge through the system of interconnection of registers and that any fees charged to the company by the registers for the disclosure referred to in Article 123(1) do not exceed the recovery of costs of providing such services (cf. Article 123(7)). The procedure laid down in Article 16, which was formerly part of the First Direc- 10 tive10, aims at the integration of commercial and company registers in the national legal systems for the information of third parties. At the same time, a file is to be opened for each of the registered companies. According to Article 14, to which Article 16 refers, Member States must take the measures required to ensure compulsory disclosure by companies of certain documents and particulars. The procedure implemented in the Member States thereby is intended to guide the publication of the draft terms of cross-border merger.

3. Availability via BRIS system Article 123(1) as amended by the 2019 Directive also expressly provides that the 11 documents to be disclosed in accordance with Article 123(1) must be accessible by means of the Business Registers Interconnection System (BRIS) referred to in Article 22. This approach is in line with efforts to digitalize the life circle of companies as provided for by Directive 2019/1151/EU as regards the use of digital tools and processes in company law (hereinafter: the 'Digitalization Directive 2019').11 9 Bayer and J. Schmidt, BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package, (2019), BB, 1922, (1928). 10 First Council Directive 68/151/EEC of 9.3.1968. 11 Directive (EU) 2019/1151 of the European Parliament and of the Council of 20.6.2019 amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law.

Tobias de Raet

621

Art 123 Disclosure 12

The 2017 Directive had already provided that Member States may require that the common draft terms of the cross-border merger be published on the central electronic platform referred to in Article 16(5) of the 2017 Directive or alternatively be published on any other website designated by them for that purpose.

4. Alternatively: Publication on the website 13

14

15

16

17

Pursuant to Article 123(2), Member States may exempt merging companies from the disclosure requirement referred to in Article 123(1). A comparable exemption was already included in the 2017 Directive. The exemption only applies if the respective documents are made available free of charge to the public and on the company's website. The Commission's proposal for Directive 2009/109/EC originally allowed the publication of the draft terms of merger on any third party's website,12 but this passage was deleted in the course of the legislative process.13 The exemption further requires that the documents be available online for a continuous period beginning not later than one month before the date fixed for the general meeting which is to decide on the cross-border merger. The documents have to be accessible at least until the conclusion of that meeting. Member States may impose requirements or constraints to ensure the security of the website and the authenticity of the documents. Any further restrictions of the exemption laid down in Article 16(2) sentence 1 are, however, limited to the extent that they are proportionate to achieving those objectives. Since registers pursuant to Article 16 are, in general, open to the public, Member States may, in particular, not require any registration or identification process which would limit access to the common draft terms of the cross-border merger to certain groups (e.g. subject to nationality or to proof of identification as a shareholder). There is no requirement pursuant to which the website is to be made available in multiple languages. If companies know that they have an international shareholder base, it is, however, good corporate governance for them to also provide the website in the languages of the jurisdictions involved (i.e. those of the merging companies) and in English. The option to publish the respective documents on a private website rather than in an official register is subject to criticism. It is argued that important information should be required to be published in official registers in order to keep them true and complete.14 This is not convincing as it is already possible for companies to publish certain information on their website in connection with mergers, spin offs and other reorganisation matters prior to the shareholders' meeting which is to decide on such measures. Such an option is widely used and in general does not lead to any problems.

5. Information to be provided to national register in case of publication on website 18

Pursuant to Article 123(3), merging companies who decide to make use of the option to disclose the common draft terms of the cross-border merger on their website in accordance with paragraph 2 of Article 123, must provide at least certain key informaCf. in the proposal of the Directive 2009/109/EC: COM(2008) 576 final of 24.9.2008, p. 11. Sandhaus, ‘Richtlinienvorschlag der Kommission zur Vereinfachung der Berichts- und Dokumentationspflichten bei Verschmelzungen und Spaltungen’ (2009) NZG, 41 (44); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), p. 637, fn. 108. 14 Bormann and Stelmaszczyk, ‘Grenzüberschreitende Verschmelzungen nach dem EU-Company Law Package’, (2019) ZIP, 300 (303). 12

13

622

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 123

tion as follows at least one month before the date of the general meeting referred to in Article 126 to the respective national registers: a) Key corporate information The publication to the national registers must include the legal form, name and reg- 19 istered office of each of the merging companies in order to highlight the transnational character of the merger.15 As amended by the 2019 Directive, the same information (i.e. legal form, name and registered office) also needs to be published for the newly created entity in case of a merger by formation of a new company. b) Register and number of entry of company documents and particulars In addition, the publication shall include the register in which the documents 20 referred to in Article 16(3) have been filed for each of the merging companies and the registration number in that register. Such elements will make it easier to obtain information on the company involved in the cross-border merger, in particular, for those who are not familiar with the registers of the respective Member State. 16 c) Indication for the exercise of the rights of creditors and of any minority members The publication must provide an indication, for each of the merging companies, of 21 the arrangements made for the exercise of the rights of creditors and of any minority members of the merging companies and the address at which complete information on those arrangements may be obtained free of charge (cf. Art. 123(3) point (d)). This requirement is not satisfied simply by citing the relevant national laws, but 22 requires an explanation of the respective provisions.17 The intention of the requirement is to ensure that creditors and minority shareholders are aware of their rights, 18 particularly in relation to their respective company.19 d) Further details (website, notice, expert report) The information to be disclosed to the respective national registers further need to 23 include details of the website where the common draft terms of the cross-border merger, the notice and the expert report referred to in paragraph 1 and complete information on the arrangements referred to in point (c) of Art. 123(3) may be obtained online and free of charge.

15 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.5556 p. 755. 16 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.57, p. 755. 17 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.58, p. 755 et seq.; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.53, p. 1732. 18 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.58, p. 756. 19 This was – erroneously – disputed due to the misleading wording of Article 21(c) and (d) of the SE Regulation (“the company in question”) that would indicate a general claim for the mentioned information with regard to all merging companies. Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.58, p. 756.

Tobias de Raet

623

Art 123 Disclosure e) Costs 24

Member States need to ensure that the information referred to in Article 123(3) is accessible by the public free of charge through the system of interconnection of registers and that any fees charged to the company by the registers for the disclosure referred to in Article 123(3) do not exceed the recovery of costs of providing such services (cf. Article 123(7)).

6. Online publication In line with the aim of the first part of the Digitalization Directive 2019, Article 123(4) provides that Member States must ensure that the requirements referred to in Article 123(1) to (3) can be completed entirely online. It further provides that there shall be no necessity for the applicants to appear in person before any competent authority in the Member States of the merging companies, in compliance with the relevant provisions of Chapter III of Title I. This is already possible in most Member States today, as online filing of corporate documents (sometimes via notaries) is common and already widely used. 26 As suggested by the European Council,20 it would have made sense to make an express reference to Article 13 i of the Digitalization Directive 2019. 25

7. Time of disclosure if cross-border merger does not need to be approved by general meeting Article 123(4) provides that where the approval of the merger is not required by the general meeting of the acquiring company pursuant to Article 126(3), the disclosure to the national registers is to be made at least one month before the date of the general meeting of the other merging company or companies. Pursuant to Article 126(3), the laws of a Member State need not require approval of the cross-border merger by the general meeting of the acquiring company if the conditions laid down in Article 94 are fulfilled. Although it is not expressly provided for in Article 123(4), the earliest meeting should be relevant for the start of the one-month period if more than one company is being acquired in the cross-border merger and therefore more than one general meeting is to be held. 28 The conditions of Article 94 are fulfilled if (i) the publication provided for in Article 92 is effected, for the acquiring company, at least one month before the date fixed for the general meeting of the company or companies being acquired which is to decide on the draft terms of merger; (ii) at least one month before the date specified under (i), all shareholders of the acquiring company are entitled to inspect the documents specified in Article 97(1) at the registered office of the acquiring company; and (iii) one or more shareholders of the acquiring company holding a minimum percentage of the subscribed capital is entitled to require that a general meeting of the acquiring company be called to decide whether or not to approve the merger; this minimum percentage must not be fixed at more than 5 %. Member States, however, must provide for the exclusion of nonvoting shares from this calculation. 27

20 Note of the General Secretariat of the Council to the Permanent Representatives Committee, 25.1.2019, ST 5401/19, p. 30.

624

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 124

8. Additional disclosure in the national gazette Member States may require that the common draft terms of the cross-border merger 29 or the information referred to in Article 123(3) also be published in the respective Member State's national gazette or through a central electronic platform in accordance with Article 16(3) (cf. Article 123(6)). If Member States make use of such an option, they need to ensure that the register transmits the relevant information to the national gazette.

Article 124 Report of the administrative or management body for members and employees 1. The administrative or management body of each of the merging companies shall draw up a report for members and employees explaining and justifying the legal and economic aspects of the cross-border merger, as well as explaining the implications of the cross-border merger for employees. It shall, in particular, explain the implications of the cross-border merger for the future business of the company. 2. The report shall also include a section for members and a section for employees. The company may decide either to draw up one report containing those two sections or to draw up separate reports for members and employees, respectively, containing the relevant section. 3. The section of the report for members shall, in particular, explain the following: (a) the cash compensation and the method used to determine the cash compensation; (b) the share exchange ratio and the method or methods used to arrive at the share exchange ratio, where applicable; (c) the implications of the cross-border merger for members; (d) the rights and remedies available to members in accordance with Article 126 a. 4. The section of the report for members shall not be required where all the members of the company have agreed to waive that requirement. Member States may exclude single-member companies from the provisions of this Article. 5. The section of the report for employees shall, in particular, explain the following: (a) the implications of the cross-border merger for employment relationships, as well as, where applicable, any measures for safeguarding those relationships; (b) any material changes to the applicable conditions of employment or to the location of the company’s places of business; (c) how the factors set out in points (a) and (b) affect any subsidiaries of the company. 6. The report or reports shall be made available in any case electronically, together with the common draft terms of the cross-border merger, if available, to the members and to the representatives of the employees of each of the merging companies or, where there are no such representatives, to the employees themselves, not less than six weeks before the date of the general meeting referred to in Article 126. However, where the approval of the merger is not required by the general meeting of the acquiring company in accordance with Article 126(3), the report shall be

Tobias de Raet

625

Art 124 Report of the administrative or management body for members and employees made available at least six weeks before the date of the general meeting of the other merging company or companies. 7. Where the administrative or management body of the merging company receives an opinion on the information referred to in paragraphs 1 and 5 in good time from the representatives of the employees or, where there are no such representatives, from the employees themselves, as provided for under national law, the members shall be informed thereof and that opinion shall be appended to the report. 8. The section of the report for employees shall not be required where a merging company and its subsidiaries, if any, have no employees other than those who form part of the administrative or management body. 9. Where the section of the report for members referred to in paragraph 3 is waived in accordance with paragraph 4 and the section for employees referred to in paragraph 5 is not required under paragraph 8, the report shall not be required. 10. Paragraphs 1 to 9 of this Article shall be without prejudice to the applicable information and consultation rights and procedures provided for at national level following the transposition of Directives 2002/14/EC and 2009/38/EC. I. History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The legal framework under the 2017 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The road to the 2019 Directive: One or two reports? . . . . . . . . . . . . . . . . . . . . . . II. Formal Aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Separate or joint reports by the merging companies . . . . . . . . . . . . . . . . . . . . . . 2. Formal requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Two or three parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Section addressed at members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Section addressed at employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Section for Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Section for employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Entire report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) 100 % subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Cases in which no report is required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. No Facilitation for Upstream-Merger of a 100 % or 90 % Subsidiary . . . . . . . . . VI. Opinion from the Representatives of the Employees to the Merger Report . . VII. Obligation to Update in Case of Material Change in the Assets and Liabilities? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Availability of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Manner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Addressees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Deadline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Consequences of errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 5 10 10 13 13 14 15 17 20 23 29 33 34 34 35 36 36 37 38 39 40 42 42 43 44 45

I. History 1. The legal framework under the 2017 Directive 1

Article 124 of the 2017 Directive provided that the management or administrative organ of each of the merging companies were to draw up a report intended for the members explaining and justifying the legal and economic aspects of the cross-border merger and explaining the implications of the cross-border merger for members, creditors and

626

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 124

employees. Hence, the report was only addressed at the members (i.e. shareholders) of the merging companies, but not to the employees or their representatives. Article 124, however, provided that the report was to be made available not only to 2 the members, but also to the representatives of the employees or, where there are no such representatives, to the employees themselves. The inclusion of the employees and their representatives in the group of those 3 entitled to access the merger report was based on a suggestion of the Parliament. 1 It was argued that it is a fundamental right of employees and their representatives to be informed about the (mostly highly complex, uncertain and far-reaching) consequences of a cross-border merger.2 Despite the obligation to explain the effects of the cross-border merger on creditors, 4 the report was not to be made available to them under the legal framework of the 2017 Directive.3

2. The road to the 2019 Directive: One or two reports? There was much controversy as to whether Article 124 should be modified in such a way that two reports instead of one would be required in future. The legal framework of the 2019 Directive had raised numerous questions, in particular, as to whether and under what terms and conditions the shareholders could waive the requirement to have the report drawn up, since it was to contain information for employees. The Commission wanted to resolve this issue by splitting the report of the management or administrative organ into two reports; one report addressed at the members and one addressed at the shareholders. The amended Article 124 was to provide that the report addressed at the members of the merging company had to explain the implications of the cross-border merger on the future business and the management's strategic plan as well as the implications of the cross-border merger for members as well as the share exchange ratio and describe any special valuation difficulties as well as remedies available to certain members.4 The proposal further provided that this report would also have to be made available to the employees and that it could be waived if all members of the merging companies agreed. The Commission's proposal contained a new Article 124 a pursuant to which each of the merging companies was supposed to provide employees with a separate report that addressed the important issues for the employees in the context of the cross-border merger. It was further suggested that the representatives of the employees (or the employees themselves in cases where there are no representatives) should have the right to express their opinion, which was then supposed to be submitted to shareholders and appended to the report.5 This concept as proposed by the Commission would have solved the question of whether and under what terms and conditions the report could be waived. It was there1 Committee on Legal Affairs, Report on the proposal for a directive of the European Parliament and of the Council on cross-border mergers of companies with share capital, A6-0089/2005 final, 25.4.2005, p. 19. 2 Committee on Legal Affairs, Report on the proposal for a directive of the European Parliament and of the Council on cross-border mergers of companies with share capital, A6-0089/2005 final, 25.4.2005, p. 19. 3 Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 101. 4 Proposal for a Directive of the European Parliament and the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 2018/0114(COD). 5 Proposal for a Directive of the European Parliament and the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 2018/0114(COD).

Tobias de Raet

627

5

6

7

8

Art 124 Report of the administrative or management body for members and employees fore surprising (and disappointing6) that the EU Parliament succeeded in its efforts in the trilogues procedure to revert to the concept of a joint report as the standard model.7 9 Pursuant to the second sentence of Article 124(2) the company (i.e. each of the merging companies) may, however, decide to draw up one report containing two separate sections for members or employees or to draw up separate reports to members and employees respectively.

II. Formal Aspects 1. Separate or joint reports by the merging companies Based on the wording, separate merger reports seem to be required for each of the merging companies.8 This view is also supported by the absence of an exception comparable to Article 125(2), which expressly allows the preparation of a joint expert report. In addition, the second sentence of Article 124(2) as amended by the 2019 Directive implies that each of the merging companies has to draw up a separate report. 11 On the other hand, it should be noted that the obligation to draw up a merger report was only introduced retrospectively following a proposal of the Parliament.9 The possibility of drawing up a joint expert report was, on the contrary, already provided for by the Commission in the 2003 Proposal.10 Because of these different backgrounds, it cannot be concluded that the European legislature deliberately wanted to permit only a joint expert report, but not a joint merger report.11 There is also no reason why a joint merger report, provided it contains all the information required, would not be able to serve the protection of all shareholders just as well as two separate reports. 12 12 It should be noted, however, that the possibility of drawing up a joint report exists only if and to the extent that this option is permitted by the national laws of all companies involved in the cross-border merger.13 If this is the case, the different company statutes should be accumulated in accordance with the unification theory.14 10

6 See also Bormann and Stelmaszczyk, ‘Grenzüberschreitende Verschmelzung nach dem EU-Company Law Package’ (2019), ZIP, 300 (306); Schollmeyer, ‘Der Verschmelzungs-, Spaltungs- und Formwechselbericht nach der neuen Umwandlungsrichtlinie (2019), AG, 541, (543). 7 Art. 124 PE 625.524 (AM 199-213). 8 Agreeing in that respect: Grundmann, European Company Law. Organization, Finance and Capital Markets (2nd edn, 2012), § 29.10, p. 705 and apparently also: Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.56, p. 1733. 9 Committee on Legal Affairs, Report on the proposal for a directive of the European Parliament and of the Council on cross-border mergers of companies with share capital, A6-0089/2005 final, 25.4.2005, p. 19. 10 Article 5(2) of the 2003 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 12. Because the 2003 Proposal did not require the drawing up of a management report, this would only have become necessary where national law required such a report for a domestic merger with regard to Article 2 of the 2003 Proposal. 11 Frenzel, ‘Grenzüberschreitende Verschmelzung von Kapitalgesellschaften – nach dem Ablauf der Umsetzungsfrist’ (2008) RIW, 12 (17). 12 Frenzel, ‘Grenzüberschreitende Verschmelzung von Kapitalgesellschaften – nach dem Ablauf der Umsetzungsfrist’ (2008) RIW, 12 (17). 13 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.62, p. 759. 14 Case C-378/10, 12.07.2012, VALE Építési kft, ECLI:EU:C:2012:440, para. 44: “The implementation of a cross-border conversion requires [...] the consecutive application of two national laws to that legal operation.”; Frenzel, ‘Grenzüberschreitende Verschmelzung von Kapitalgesellschaften – nach dem Ablauf der Umsetzungsfrist’ (2008) RIW, 12 (17).

628

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 124

2. Formal requirements a) Responsibility The report pursuant to Article 124 is to be drawn up by the management or admin- 13 istrative body of each of the merging companies. Chapter II does not include further provisions, leaving it to the Member States to determine the competences within these bodies.15 b) Form Although it is, in contrast to Article 95(1) which deals with the parallel provision for 14 domestic mergers, not expressly provided for, the report must be drawn up in writing. This follows from the nature of the report being a separate document.16 However, it should also be noted that, insofar as no further requirements are made by Chapter II, the relevant national provisions are to be applied. These have been harmonised for domestic mergers of public limited liability companies (PLCs) in accordance with Article 95 and consequently necessitate the written form as a minimum requirement. c) Two or three parts It is not entirely clear if the report should have two or three parts. The wording of 15 Article 124(2) implies by the term “also” that the sections for members and employees are not the entire parts of the report. This is supported by recital 12 of the 2019 Directive. It is, therefore, argued that the report has to contain a general section as well as two additional sections addressed at members and employees.17 This view is also supported by Article 124(9) which states that the entire report is not 16 required, if the section for members is waived in accordance with Article 124(3) and the section for employees is not required in accordance with Article 124(4). Article 124(8) would be redundant if there was no section in addition to the sections addressed at the employees and the members.

III. Content The overall purpose of the report is to explain and justify the legal and economic 17 aspects of the cross-border merger and to explain the implications of the cross-border merger for the employees (cf. Article 124(1). The report is one of the key elements of the European model for structural changes.18 The concept is to protect the relevant stakeholders (shareholders, employee representatives) by providing them with sufficient information about the cross-border merger.19 15 Compare the remarks in regard to the common draft terms of merger by: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.36, p. 745; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.39, p. 1729. 16 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.63, p. 759. 17 Schollmeyer, ‘Der Verschmelzungs-, Spaltungs- und Formwechselbericht nach der neuen Umwandlungsrichtlinie (2019), AG, 541, (544). 18 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.21, p. 668. 19 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15; Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 65 et seq.; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.32, p. 744.

Tobias de Raet

629

Art 124 Report of the administrative or management body for members and employees Since these are only minimum requirements, they may also be extended by the Member States or the companies involved in the merger insofar as this complies with the purpose of the provision to protect members, creditors and employees.20 19 Comparable to Article 95, Member States must not impose a requirement to report on companies if disclosure of such information could lead to significant disadvantages for companies.21 18

1. General Section Article 124(1) does not specifically stipulate what information is required at minimum to explain and justify the legal and economic aspects of the proposed cross-border operation. 21 The content of Article 95(1) can be used as a guideline to explain and justify the legal and economic aspects of the cross-border merger. 22 As expressly provided for in Article 124(1) as amended by the 2019 Directive, the report now also needs to contain the implications of the cross-border merger on the future business of the company. As expressly stated in recital 13 of the 2019 Directive, the report may in this regard not only focus on the entity subject to the cross-border merger, but also needs to include the implications of the cross-border merger on the subsidiaries of the respective company. Considering the scope of the report, such implications will only be those which have an effect on the employees or are of relevance to the shareholders which are to decide on the merger pursuant to Article 126. 22 20

2. Section addressed at members The section addressed at the members (i.e. the shareholders) is of particular importance since the shareholders, on the basis of the information provided in the report (together with the information provided in the expert report pursuant to Article 125), have to decide on the draft terms of the cross-border merger pursuant to Article 126 and hence on the merger as such.23 24 Aspects to be included in this section are – pursuant to Article 124(3) – an explanation of the cash component, if such a component is granted, and the method used to calculate the cash component (cf. Article 124(3)(a)). 25 Furthermore, the report has to include an explanation of the share exchange ratio and the method used to calculate the share exchange ratio (cf. Article 124(3)(b)). 26 This aspect is of particular importance, since the shareholders need to be sufficiently informed about the background of the cross-border merger in order to make an informed decision on the approval of the cross-border merger in accordance with Article 126. Consequently, in addition to the requirements laid down in Article 95, this section of the merger report also needs to highlight the particular difficulties encountered in evaluating the companies involved in the cross-border merger. 23

20 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.69, p. 761. 21 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.70, p. 761. 22 Schollmeyer, ‘Der Verschmelzungs-, Spaltungs- und Formwechselbericht nach der neuen Umwandlungsrichtlinie (2019), AG, 541, (545). 23 Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1896); Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 101; Ugliano, ‘The New Cross-border Merger Directive: Harmonisation of European Company Law and Free Movement’ (2007) 18 EBLR, 585 (604).

630

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 124

The section addressed at the members further has to include the implications of the 27 cross-border merger for the members (cf. Article 124(3)(c)). This refers, in particular, to the shareholders of the company or companies being acquired in the course of the cross-border merger as they become subject to a new jurisdiction. The report should explain any changes of their rights due to such a change of jurisdiction (i.e. differences in the respective voting or information rights).24 Finally, the section addressed at the members further has to include the rights and 28 remedies available to the members in accordance with Article 126(a) regarding the protection of the members (cf. Article 124(3)(d)).

3. Section addressed at employees The section addressed at the employees must, in particular, contain the information expressly set out in Article 124(5). The implications of the cross-border merger for employment relationships, as well as, where applicable, any measure to safeguard them (cf. Article 124(5)(a)) need to be included in this section, since the employment contracts (and indeed all of the employment relationships) of the companies acquired in the course of the cross-border merger can potentially become subject to the laws of a new legal framework. This also includes information on any changes of collective labour matters (i.e. works councils or other employee representations). The section addressed at the employees further needs to include any material changes in the conditions of employment, and in the location of the company's place of business (cf. Article 124(5)(b)). Naturally, any changes of the company's location can lead to significant changes of the applicable laws or have further substantial impact on the employees. As expressly provided for in Article 124(5)(c), the report also needs to explain how the factors set out in points (a) and (b) also affect any subsidiaries of the company.

29 30

31

32

4. Creditors Under the legal framework of the 2017 Directive, the report also had to explain 33 the implications of the cross-border merger for creditors. This would typically include information concerning the change of debtor and the information relating thereto (legal form, company name, registered office, system of liability, etc.). It is of particular importance to inform creditors about the amount of liability available to them, as the minimum amount to which liability may be limited differs among the Member States.25 Since the report is not expressly addressed at the creditors, it seems logical that no section on creditors is required. Cross-border mergers can have a significant impact on the creditors of the merging companies, it would therefore have been advisable to keep such a requirement. Companies may decide to explain the implications of the cross-border merger on the creditors in the general section as part of the implications of the cross-border merger on the future business of the company pursuant to Article 124(1).

24 Schollmeyer, ‘Der Verschmelzungs, Spaltungs- und Formwechselbericht nach der neuen Umwandlungsrichtlinie (2019), AG, 541, (547). 25 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.66, p. 760.

Tobias de Raet

631

Art 124 Report of the administrative or management body for members and employees

IV. Waiver 1. Section for Members 34

Pursuant to Article 124(4), the shareholders may agree to waive the requirement of having the section of the report for members included in the report. Such a waiver requires a unanimous decision of the shareholders and is, therefore, in practice only possible for companies with a limited number of shareholders. The wording indicates that each of the merging companies may decide to waive such a requirement with respect to the report to be prepared by them. Considering that the merger is an operation affecting not just one but all merging companies, it might have been advisable to only grant such an option if all of the merging companies agree to such a waiver.

2. Section for employees 35

Pursuant to Article 124(8), the section for employees is not required if a merging company and its subsidiaries have no employees other than those who form part of the management or the administrative organ. Again, the wording implies that this requirement is to be determined per merging company. Hence, even if only one merging company has no employees, said merging company does not need to prepare the respective section on employees in its report.

3. Entire report a) 100 % subsidiaries 36

Member States may exclude single member companies, i.e. companies which are a direct 100 % subsidiary, from the requirement of providing a report pursuant to Article 124 (cf. Article 125(4)). Hence, 100 % subsidiaries may be exempt from preparing a report pursuant to Article 124 at all, not just from the requirement to prepare the section of the report for members. This is reasonable for intragroup mergers. b) Cases in which no report is required

37

Pursuant to Article 124(9) no report at all is required if the section for members is waived in accordance with Article 124(3) and the section for employees is not required in accordance with Article 124(8).

V. No Facilitation for Upstream-Merger of a 100 % or 90 % Subsidiary 38

Pursuant to Article 110 sentence 3 and Article 114 a merger report is not required in the case of an upstream merger of a 100 % or 90 % subsidiary into its parent company. Such an option is not provided for cross-border mergers, even though it exists with regard to the expert opinion to be provided pursuant to Article 132.26 It seemed to be obvious that this was merely an editorial error.27 However, the 2019 Directive provides for the non-application of Article 124 only in the case of an upstream merger of a 100 % subsidiary into its parent company and only for the company or companies being ac-

26 Committee on Legal Affairs, Report on the proposal for a directive of the European Parliament and of the Council on cross-border mergers of companies with share capital, A6-0089/2005 final, 25.4.2005, p. 19. 27 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.74, p. 763.

632

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 124

quired.28 Thus, the argument that Article 124 is subject to an editorial error cannot be upheld.

VI. Opinion from the Representatives of the Employees to the Merger Report If the laws of the Member States permit or require the employee representatives to is- 39 sue an opinion on the cross-border merger, and the management or administrative body of any of the merging companies receives such an opinion on the parts of the report referred to in Article 124(1) and (5) in good time, that opinion must be appended to the report (cf. Article 124 (7). The enumeration excluding Article 124(3) indicates that the opinion must only cover the general section and the section for the employees, but not the section for the members. The “in good time” requirement should be considered to be met if the management or administrative organ receives the opinion prior to the general meeting of shareholders within the meaning of Article 126.29

VII. Obligation to Update in Case of Material Change in the Assets and Liabilities? Unlike Article 95(2), Article 124 does not contain an obligation to report material 40 changes in the assets and liabilities of a company involved in a cross-border merger, as expressly required by Article 95(2). However, since the laws of the Member States have to provide for such an obligation pursuant to Article 95(2) at least in the case of PLCs, this requirement indirectly also applies to cross border-mergers via Article 121(1) according to which a company taking part in a cross-border merger must comply with the provisions and formalities of the national laws to which it is subject.30 The obligation to update the report is imposed on the management or administrative 41 bodies who prepared the report. In the case of a material change to the assets or liabilities, they have to inform the general meeting of said company as well as the administrative or management bodies of the other companies involved, so that the latter may inform their respective general meetings about such changes. For this purpose, a change is to be regarded material if it can be reasonably expected to have a significant effect on the market price or value of the respective company. This ensures that the shareholders are aware of any significant changes to the value of the respective company which occur prior to the general meeting which is to decide on the cross-border merger. 31

28 See the 2018 Proposal: Article 1(17) referring to Article 132 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018, p. 69. 29 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.58, p. 16. 30 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.71, p. 761; Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 194, p. 82. 31 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.52, p. 641.

Tobias de Raet

633

Art 125 Independent expert report

VIII. Availability of the Report 1. Manner 42

Pursuant to Article 124(6) the report needs to be made available in any case electronically, together with the common draft terms of the cross-border merger, if available.

2. Addressees 43

Addressees of the report are the members and the representatives of the employees of each of the merging companies. If there are no such representatives, the report needs to be made available to the employees themselves in the same manner.

3. Deadline 44

The report needs to be made available not less than six weeks before the date of the general meeting referred to in Article 126. However, if an approval of the merger by the general meeting is not required in accordance with Article 116(3), the report needs to be made available at least six weeks before the date of the general meeting of the other merging company or companies.

4. Consequences of errors If the merger report is not prepared and published pursuant to Article 124, cross-border mergers shall not take effect pursuant to Article 129 in conjunction with Article 128(2) and Article 127(1), because if the formalities and legal acts preceding the crossborder merger (including the merger report) have not been properly completed, a pre-merger certificate cannot be issued. Without such a pre-merger certificate, the legal scrutiny pursuant to Article 128(2) cannot be carried out, which then, in accordance with the second sentence of Article 129, results in the cross-border merger not becoming effective.32 46 Chapter II, however, does not make any statements as to the consequences of errors in the merger report which go beyond non-compliance with formalities, particularly errors in content. There is, for example, no provision similar to Article 106 which deals with the civil liability of members of the administrative or management bodies towards the shareholders of the company being acquired in respect of misconduct on the part of members of those bodies in preparing and implementing a domestic merger. 47 Member States are, therefore, in principle free to adopt their own rules as to the legal consequences of errors in content and the like; the harmonised domestic laws for PLCs, however, must be complied with for cross-border mergers pursuant to Article 121(1). 33 45

Article 125 Independent expert report 1. An independent expert report intended for members and made available not less than one month before the date of the general meeting referred to in Article 126

32 See with similar evaluation: Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 106. 33 Cf. Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 106.

634

Tobias de Raet

Art 125

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

shall be drawn up for each merging company. Depending on the law of each Member State, such experts may be natural persons or legal persons. However, where the approval of the merger is not required by the general meeting of the acquiring company in accordance with Article 126(3), the report shall be made available at least one month before the date of the general meeting of the other merging company or companies. 2. As an alternative to experts operating on behalf of each of the merging companies, one or more independent experts, appointed for that purpose at the joint request of the companies by a judicial or administrative authority in the Member State of one of the merging companies or of the company resulting from the cross-border merger or approved by such an authority, may examine the common draft terms of cross-border merger and draw up a single written report to all the members. 3. The report referred to in paragraph 1 shall in any case include the expert’s opinion as to whether the cash compensation and the share exchange ratio are adequate. When assessing the cash compensation, the expert shall consider any market price of the shares in the merging companies prior to the announcement of the merger proposal or the value of the companies excluding the effect of the proposed merger, as determined in accordance with generally accepted valuation methods. The report shall at least: (a) indicate the method or methods used to determine the cash compensation proposed; (b) indicate the method or methods used to arrive at the share exchange ratio proposed; (c) state whether the method or methods used are adequate for the assessment of the cash compensation and the share exchange ratio, indicate the value arrived at using such methods and give an opinion on the relative importance attributed to those methods in arriving at the value decided on, and in the event that different methods are used in the merging companies, state also whether the use of different methods was justified; and (d) describe any special valuation difficulties which have arisen. The expert shall be entitled to obtain from the merging companies all information necessary for the discharge of the duties of the expert. 4. Neither an examination of the common draft terms of cross-border merger by independent experts nor an expert report shall be required if all the members of each of the companies involved in the cross-border merger have so agreed. Member States may exclude single-member companies from the application of this Article. I. Expert Examination of the Common Draft Terms of the Cross-Border Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Formal requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Responsibility for examination and the expert report . . . . . . . . . . . . . . . . . . . b) Separate or joint expert examination and report . . . . . . . . . . . . . . . . . . . . . . . . c) Choice of law for joint expert report? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Content of the examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Expert Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Content of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Methods used to arrive at the cash compensation and the share exchange ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Appropriateness of method(s) used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Availability of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tobias de Raet

1 3 3 5 8 10 14 15 17 18 19 20

635

Art 125 Independent expert report a) Addressees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Deadline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Manner of access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Right to Request All Relevant Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Consequences of Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Waiver of the Obligation to Draw Up an Expert Report . . . . . . . . . . . . . . . . . . . . . . VI. Upstream-Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Possibility to Waive Reporting on Any Consideration Other than in Cash . .

20 21 22 24 27 30 33 36 38

I. Expert Examination of the Common Draft Terms of the Cross-Border Merger Article 125 provides that each of the companies involved in the cross-border merger must be subject to an examination by one or more independent experts, the results of which must be set out in a report addressed at members. Such an expert examination and report are further key elements of the European model for structural changes. 1 2 The examination of the cross-border merger by independent experts ensures the protection of the members (protection by information2) who are to decide on the cross-border merger pursuant to Article 126 on a sound basis. The export report is intended to provide them with further information to make such a decision.3 1

1. Formal requirements a) Responsibility for examination and the expert report The expert report pursuant to Article 125 is to be drawn up by one or more independent experts. The concept of independence and the question of further qualification are not further specified in Chapter II; it is, therefore, left to the Member States to determine the details.4 4 Article 125(1) sentence 2 provides that, depending on the law of the Member States, natural or legal persons may be appointed as experts. 3

b) Separate or joint expert examination and report 5

Pursuant to Article 125(1), in principle, a separate expert report must be drawn up for each company involved in the cross-border merger. However, in the same way that Article 96(1) sentence 2 provides for domestic mergers, Article 125(2) permits the common draft terms of the cross-border merger to be examined and the expert report drawn up jointly for all the merging companies by one or more experts. Unlike Article 96(1) sentence 2 which leaves it to the Member States to implement the option of a joint report in their national laws, Article 125(2) leaves that option to the companies 1 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.21, p. 668; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.32, p. 744 and § 22.61, p. 757. 2 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.32, p. 744. 3 Ugliano, ‘The New Cross-border Merger Directive: Harmonisation of European Company Law and Free Movement’ (2007) 18 EBLR, 585 (604); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.76, p. 764; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.64, p. 1736. 4 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.81, p. 767.

636

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 125

involved in the cross-border merger.5 The general advantage of the possibility of a joint examination and report is that the joint expert report provides an overall picture of the cross-border merger. This outweighs the disadvantage of being dependent on only one expert.6 In addition, the possibility of a joint review and report obviously reduces costs.7 Pursuant to Article 125(2) a joint report is possible if (i) such experts are at the joint 6 request of the merging companies, appointed by a court or administrative authority of the Member State to whose law one of the companies involved in the merger or the company resulting from the cross-border merger (in the case of a merger by formation of a new company) is subject, or (ii) chosen directly by the companies involved in the merger, the experts having been approved by a court or administrative authority of the Member State to whose law one of the companies involved in the merger or the company resulting from the cross-border merger is subject (in case of a merger by formation of a new company). If more than two companies are involved in a cross-border merger, a joint expert ex- 7 amination and a related joint report may be carried out for only some of the companies involved.8 c) Choice of law for joint expert report? Article 125(2) allows companies in practice to choose the law of the Member State 8 to which they wish to be subject for the purposes of the application and appointment procedure.9 This choice is important, because it is left to the Member States to specify the details of the application and appointment of the experts, i.e. such procedures may vary between the Member States.10 There are, however, different opinions if the chosen law only governs the applica- 9 tion procedure or even the content and subject matter of the expert examination. It is argued that the joint report needs to fulfil the content requirements set by all jurisdictions involved in the cross-border merger11 in order to ensure that companies (more precisely their management) do not try to evade certain requirements without the shareholders being able to prevent this, since the decision on the joint merger review is taken by the management bodies without the participation of the shareholders.12 This is true as Article 125(2) in conjunction with Article 96(2) only lays down the minimum 5 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.80, p. 765; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.65, p. 1736; Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EUWirtschaftsrechts (48th volume), E III, para. 195, p. 83. 6 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.65, p. 1736. 7 Recital no. 59 of Directive 2017/1132/EU; Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.68, p. 19. 8 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.80, p. 765 et seq.; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.65, p. 1736. 9 Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 195, p. 83; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.80, p. 766. 10 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.80, p. 766. 11 Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48 th volume), E III, para. 195, p. 83. 12 Drinhausen, ‘§ 122f ’ in Semler/Stengel, Umwandlungsgesetz (4 th edn, 2017), para. 5; Holzborn and Mayston, ‘Grenzüberschreitender “Downstream Merger” bei Streubesitz und Börsenhandel’ (2012) Zeitschrift für das Wirtschaftsrecht (ZIP), 2380 (2385).

Tobias de Raet

637

Art 125 Independent expert report requirements of the content of the expert report, thus allowing Member States to call for stricter requirements.13 However, since the content of the review is harmonised in accordance with Article 125(2) and (3) in conjunction with Article 96(3), it is at least not possible to undermine this European minimum standard.14 It is, therefore, not necessary to require the joint report to fulfil the content requirements set by all jurisdictions involved in the cross-border merger.

2. Content of the examination The subject matter of the review by the independent experts, not only in the case of a joint review (see above), is the common draft terms of the cross-border merger (cf. Article 125(2)). As required under the parallel provision for domestic mergers (cf. Article 96(1)), the experts have to review the common draft terms of the cross-border merger for completeness and accuracy.15 The main focus of the examination is verification of the share exchange ratio, which is of particular importance to the shareholders.16 The experts need to determine if the exchange ratio is fair and reasonable. 11 As with Article 96, it could be argued that the detailed report of the administrative or management body for members and employees pursuant to Article 124 must also be part of the examination.17 The wording of Article 126, like the wording of Article 96, however, does not imply that the detailed report drawn up by the administrative or management bodies has to be part of the examination. 12 However, since this is only a minimum requirement, Member States are free to widen the scope of the examination pursuant to Article 125 to the report of the administrative or management body for members and employees pursuant to Article 124.18 13 If the cross-border merger is reasonable from an economic perspective, it is not part of the review pursuant to Article 125; this shall and may only be determined by the shareholders of the companies involved in the merger. Member States may, however, extend the scope of the review by the experts to this aspect.19 10

Kiem, ‘§ 122 f UmwG’ in Habersack/Drinhausen, SE-Recht (2nd edn, 2016), para. 4. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.80, p. 766 et seq. 15 Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 195, p. 83; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.77, p. 765.; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.66, p. 1737. 16 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.27, p. 682; Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”’ (2004) NZG, 15 (20). 17 See with respect to domestic mergers (Article 96(2)): Hommelhoff, ‘Minderheitenschutz bei Umstrukturierungen’ (1993) ZGR, 452 (465), who argues in this regard, that the utilisation of the German notion “Verschmelzungsplan” (“draft terms of merger”) instead of “Verschmelzungsvertrag” (“merger contract”) would refer to the merger process as a whole – economically and legally. Considering the historic context, the different national forms of that institute in the Member States made it necessary to use the neutral notion “draft terms”. Draft terms only refer to the document that is to be submitted to the general meeting for approval in the sense of Article 91 and 93(3); cf.: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn 2017), § 20.57, p. 642. 18 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.77, p. 765; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.66, p. 1737. 19 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.77, p. 765; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.66, p. 1737. 13

14

638

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 125

II. The Expert Report Pursuant to Article 126(2) and (3), the independent experts have to draw up a written 14 report on their findings, which is to be addressed at all members.

1. Content of the report Article 125(3) under the framework of the 2017 Directive expressly provided that the 15 expert report had to include at least the content provided for in Article 96(2), which sets out the minimum requirement of the expert report to be drawn up by experts for domestic mergers; i.e. an overall conclusion as to whether the share exchange ratio determined in the draft terms of merger is fair and reasonable.20 In addition to such an overall conclusion, the expert report also had to indicate the method or methods used to arrive at the share exchange ratio proposed and state whether such a method or methods are adequate in the case in question (cf. Article 96(2)(a) and (b)), in order to enable the shareholders of the companies involved in the cross-border merger to verify the results obtained by the experts.21 Article 125(3), as amended by the 2019 Directive, now itself specifies the minimum 16 content of the expert opinion whereas such content is not substantially different to Article 125(3) in the version of the 2017 Directive. Comparable to Article 96(2) the expert report has in any case to include the experts' opinion on whether the cash compensation and the share exchange ratio are adequate. a) Cash compensation If any cash compensation is granted (cf. Article 122 point (m)), the experts shall 17 consider any market price of those shares in the merging companies prior to the announcement of the merger proposal or to the value of the companies excluding the effect of the proposed merger as determined according to generally accepted valuation methods. This shall ensure that the value of the cash compensation is calculated on the merging companies on a 'standalone' basis. b) Methods used to arrive at the cash compensation and the share exchange ratio The method or methods used to arrive at the cash compensation and the share 18 exchange ratio have to be stated in the expert report (cf. Article 125(3)(a) and (b)). It is, however, to be noted that the Directive does not determine a certain method for the calculation of the cash compensation or the share exchange ratio; neither in Article 96(2)(a) for domestic mergers nor in Article 125(3)(a) for cross-border mergers. This recognises the different existing approaches to valuating a company and also considers that other evaluation methods may be developed and used in the future.22

20 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.27, p. 683. 21 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 5, p. 25. 22 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1553); Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 227; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.58, p. 643.

Tobias de Raet

639

Art 125 Independent expert report c) Appropriateness of method(s) used 19

The expert report has to state whether such a method or methods are adequate in the relevant case and indicate the values arrived at using each such method and give an opinion on the relative importance attributed to such methods in arriving at the value decided upon (cf. Article 125(3)(c)). The provision is almost identical to Article 96(2) (b). If different methods are used for the merging companies, the expert report needs to state whether the use of different methods was justified. Furthermore, the expert report must state any particular difficulties which have arisen in the course of the valuation (cf. Article 125(3)(d)). This statement is intended to alert shareholders. Such complications can, for example, arise with respect to forecasts for a start-up company or a company in liquidation, as well as if there is insufficient information for the expert to verify.23

2. Availability of the report a) Addressees 20

Pursuant to Article 125(1), the shareholders of the companies involved in the crossborder merger are the addressees of the report. The information provided to them in the expert report shall enable them to make an informed decision on the cross-border merger pursuant to Article 126.24 b) Form

21

The expert report has to be drawn up in writing.25 Unlike the parallel provision for domestic mergers (cf. Article 96(1)), this is not expressly provided for in Article 125(1), but follows from the expert report being a separate document. In addition, Article 125(2) mentions the written form requirement. c) Deadline

Pursuant to Article 125(1) the expert report needs to be made available not less than one month before the date of the general meeting referred to in Article 126. As indicated by the wording, this requirement is not met if the experts finish preparing the report, but only if the report is actually made available to the shareholders.26 23 If the approval of the cross-border merger is not required by the general meeting of the acquiring company in accordance with Article 126(3), the report needs to be made available, at least one month before the date of the general meeting of the other merging company or companies. 22

23 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 20.58, p. 643. 24 Ugliano, ‘The New Cross-border Merger Directive: Harmonisation of European Company Law and Free Movement’ (2007) 18 EBLR, 585 (604); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.76, p. 764; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.64, p. 1736. 25 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.76, p. 765. 26 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 191 et seq.

640

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 125

d) Manner of access Article 125 does not specify how the report is to be made available. Therefore, the 24 Member States are, within the limits of the effet utile principle, free to determine the manner of access (cf. Article 121(1)(b)).27 In line with the criteria specified in Article 97, options of publication include putting 25 the report on display at the registered office of the companies involved in the crossborder merger or publishing the report on the website of such companies. For PLCs, the national laws which are implemented on the basis of Article 97 need to 26 be complied with.28

III. Right to Request All Relevant Information Pursuant to Article 125(3) the experts are entitled to secure from each of the merging 27 companies all information they consider necessary for the discharge of their duties. The wording of the provision seems to imply that it has a narrower focus than the comparable provision for domestic mergers (cf. Article 96(3)) pursuant to which each expert is entitled to obtain from the merging companies all the relevant information and documents and to carry out all the necessary investigations. However, the general view is that the different wording of Article 125(3) does not limit experts' rights, but is rather to be seen as a mere modernisation.29 There is also no compelling reason to restrict the rights of the experts, since without the possibility of requesting documents or carrying out their own investigations, the examination by the experts would not serve its purpose.30 Consequently, Article 125 grants the experts the right to review and inspect, 31 where- 28 as they may not only request additional oral information but also request further written documents for their review.32 In addition to this right to request documents,33 the experts are entitled to carry out all investigations which they deem necessary for the performance of their task.34 This right not only exists vis-à-vis the company for which the experts perform the 29 review, but also vis-à-vis all other companies involved in the cross-border merger.35

27 Cf. as stated in regard to Article 124: Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 194, p. 82; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.72, p. 762. 28 Cf. as stated in regard to Article 124: Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 185 et seq.; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.72, p. 762. 29 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.82, p. 767. 30 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 190. 31 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 190; Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.64, p. 18; Lutter/Bayer/Schmidt, Europäisches Kapitalmarktund Gesellschaftsrecht (6th edn, 2017), § 22.82, p. 767; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.69, p. 1737. 32 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.82, p. 767. 33 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), p. 18, fn. 125. 34 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.64, p. 18.

Tobias de Raet

641

Art 125 Independent expert report

IV. Consequences of Errors If the experts' report is not properly drawn up (and made available) in accordance with Article 125, the cross-border merger shall, pursuant to the second sentence of Article 129 in conjunction with Article 128(2) and Article 127(1), not take effect, 36 because if the formalities and legal acts preceding the cross-border merger (including the merger report) have not been properly completed, a pre-merger certificate cannot be issued. Without such a pre-merger certificate, the legal scrutiny pursuant to Article 128(2) cannot be carried out, which then, in accordance with the second sentence of Article 129, results in the cross-border merger not becoming effective. 37 31 Chapter II does not, however, make any statements regarding the consequences of errors in the experts' report which go beyond the non-compliance with formalities, in particular, errors in content. There is, for example, no provision similar to Article 106 which deals with the civil liability of members of the administrative or management bodies towards the shareholders of the company being acquired in respect of misconduct on the part of members of those bodies in preparing and implementing a domestic merger. 32 Member States are, therefore, in principle free to adopt their own rules as to the legal consequences of errors in content and the like; the harmonised domestic laws for PLCs, however, must be complied with for cross-border mergers pursuant to Article 121(1). 38 30

V. Waiver of the Obligation to Draw Up an Expert Report Pursuant to Article 125(4), neither an examination of the common draft terms of the cross-border merger by independent experts nor an expert report is required if all members of each of the companies involved in the cross-border merger have consented to this procedure. This provision offers the opportunity to reduce costs, in particular, for companies with only a small number of shareholders, where an agreement on such a waiver can be easily reached.39 34 In addition, Member States may exclude single member companies, i.e. companies which are a direct 100 % subsidiary, from the requirement of drawing up an expert report. This is helpful for intragroup mergers. 35 Chapter II does not provide for specific form requirements regarding the waiver; Member States may, however, request formal requirements pursuant to Article 121(1). 40 33

35 Apparently in this way: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.82, p. 767. Deviating: Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.69, p. 1737. 36 See with similar reasoning: Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 117. 37 See with similar reasoning: Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 106. 38 Cf. Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 117; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.83, p. 767. 39 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 191. 40 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 191; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.85, p. 767.

642

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 126

VI. Upstream-Mergers Pursuant to Article 132(1), Article 125 does not apply to upstream-mergers of a 36 100 % subsidiary into its parent company. Since there are no outside shareholders, an expert report is not required for such operations.41 The provision corresponds to sentence 3 of Article 110 which provides the same simplification for domestic mergers. Pursuant to Article 132(2), where a cross-border merger by acquisition is carried out 37 by a company which holds 90 % or more, but not all, of the shares and other securities conferring the right to vote at general meetings of the company or companies being acquired, reports by an independent expert or experts and the documents necessary for scrutiny are required only to the extent that the national law governing either the acquiring company or the company or companies being acquired so requires, in accordance with Chapter I.42 The provision corresponds to Article 114 which contains a similar exception for domestic mergers which is, however, subject to the fulfilment of certain conditions.

VII. Possibility to Waive Reporting on Any Consideration Other than in Cash Since the companies which cease to exist are transferred to the new company by 38 means of a contribution, mergers by formation of a new company require a report for such consideration in kind pursuant to Article 49. As expressly provided for in Article 49(5), Member States may, however, choose not to apply Article 49 to the formation of a new company by way of merger where a report by one or more independent experts on the draft terms of the merger is drawn up. Since Article 125 requires an examination of the merger by experts and a report to be drawn up by such experts, an additional report on the contribution in kind pursuant to Article 49 would be redundant.43

Article 126 Approval by the general meeting 1. After taking note of the reports referred to in Articles 124 and 125, where applicable, employees’ opinions submitted in accordance with Article 124 and comments submitted in accordance with Article 123, the general meeting of each of the merging companies shall decide, by means of a resolution, whether to approve the common draft terms of the cross-border merger and whether to adapt the instrument of constitution, and the statutes if they are contained in a separate instrument. 2. The general meeting of each of the merging companies may reserve the right to make implementation of the cross-border merger conditional on express ratification by it of the arrangements decided on with respect to the participation of employees in the company resulting from the cross-border merger. 41 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.133, p. 787 et seq. 42 Cf. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.134, p. 788; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.137, p. 1757. 43 Same reasoning with respect to Article 96 for domestic mergers: Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 290; Lutter/ Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.140, p. 675.

Tobias de Raet

643

Art 126 Approval by the general meeting 3. The laws of a Member State need not require approval of the merger by the general meeting of the acquiring company if the conditions laid down in Article 94 are fulfilled. 4. Member States shall ensure that the approval of the cross-border merger by the general meeting cannot be challenged solely on the following grounds: (a) the share exchange ratio referred to in point (b) of Article 122 has been inadequately set; (b) the cash compensation referred to in point (m) of Article 122 has been inadequately set; or (c) the information given with regard to the share exchange ratio referred to in point (a) or the cash compensation referred to in point (b) did not comply with the legal requirements. I. Approval of the General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Information to be provided prior to the general meeting . . . . . . . . . . . . . . . . . 2. Timing of the general meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Approval of the general meeting of each of the merging companies . . . . . . 4. Content of the approval decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Upstream mergers of a 100 % subsidiary into the parent company . . . . . . . II. Reservation of Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Derogation from the Requirement of Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Limitation of Legal Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 5 6 7 12 13 20 21

I. Approval of the General Meeting The approval of the shareholders' meeting is the fourth prerequisite to a European model for structural measures,1 which is also to be found in other European legal acts,2 and which was introduced by Directive 1978/855/EEC on domestic mergers. 2 One of the key principles of European company law is that fundamental decisions must be taken by shareholders.3 As with Article 93 on national mergers, Article 124 therefore provides that the general meeting of each of the merging companies must decide on the approval of the common draft terms of the cross-border merger. 4 1

1. Information to be provided prior to the general meeting 3

Article 126(1) provides that the shareholders' meeting must decide on the approval of the cross-border merger after taking note of the merger report pursuant to Article 124 and the expert report pursuant to Article 125. Consideration is only required insofar as the respective report is prescribed or the requirement has not been waived, provided such a waiver is possible.5 1 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.32, p. 744. 2 See for example: former Sixth Council Directive 82/891/EEC of 17.12.1982 based on Article 54 (3) (g) of the Treaty, concerning the division of public limited liability companies; Regulation (EC) No 2157/2001 of 8.10.2001 on the Statute for a European company (SE); Council Regulation (EC) No 1435/2003 of 22.7.2003 on the Statute for a European Cooperative Society (SCE). 3 Riesenhuber, ‘Die Verschmelzungsrichtlinie: “Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen”‘ (2004) NZG, 15 (19); Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 193. 4 Cf. Recital no. 6 of the Directive 2005/56/EC; recital no. 59 sentence 3 of the Directive 2017/1132/EU. 5 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.72, p. 1738.

644

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 126

There is no provision similar to Article 97 which – for domestic mergers – lays down 4 a procedure as to how the shareholders may inspect the documents prepared for the general meeting. Article 97 stipulates that these documents must in principle be available for inspection by shareholders at the registered office of the company (cf. Article 97(1)); by way of derogation, these documents may also be published on the company's website (cf. Article 97(4)). If PLCs are involved in a cross-border merger, Article 97 applies pursuant to Article 121(1).6 If no PLCs are involved in the cross-border merger, the Member States are responsible for determining the details of how shareholders may inspect the documents referred to in Article 126(1).

2. Timing of the general meeting Article 126(1) clarifies the sequence: the general meeting may only take place after 5 consideration of the reports referred to in Articles 124 and 125. 7 There are, however, provisions which stipulate the specific timing: the general meeting may take place at the earliest one month after publication of the draft terms of merger (cf. Article 123(1)), the merger report (cf. Article 124 subparagraph 2) and the expert report (cf. Article 125(1)).8

3. Approval of the general meeting of each of the merging companies Despite the principle that the general meeting of the shareholders of each of the 6 merging companies must decide on the approval of the common draft terms of merger, Article 126(1) leaves it to the Member States to determine the details of how such approval is granted (cf. Article 121(1)),9 in particular, the voting procedure, quorums for consent and participation, convening of the meeting and formal requirements. If a PLC is involved in a cross-border merger, the national provisions implementing Article 93 apply in accordance with sentence 1 of Article 121(1).10 Article 93(1) provides that the approval decision requires a majority of not less than two thirds of the votes attached either to the shares or to the subscribed capital represented.

4. Content of the approval decision The shareholders' meeting of each of the merging companies must approve the 7 cross-border merger under the conditions laid down in the common draft terms of merger (cf. Article 122). It is unclear whether Article 126(1) permits the shareholders' meeting to derogate 8 from the provisions of the common draft terms of the cross-border merger if the 6 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.89, p. 770; Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 196, p. 84. 7 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 193. 8 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 193; Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.84, p. 23. 9 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 193; Ugliano, ‘The New Cross-border Merger Directive: Harmonisation of European Company Law and Free Movement’ (2007) 18 EBLR, 585 (605); Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.85, p. 23; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.91, p. 771; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.77, p. 1739. 10 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.91, p. 771.

Tobias de Raet

645

Art 126 Approval by the general meeting shareholders only approve the common draft terms of the cross-border merger subject to certain amendments. 9 The wording of Article 126(1) implies that the shareholders' meeting only has the option to either approve or reject the common draft terms of the cross-border merger. A decision amending the common draft terms of the cross-border merger therefore requires the entire merger procedure to start again from scratch. 11 10 It is argued that it would be more effective to permit the shareholders to amend the common draft terms of the cross-border merger.12 This is, inter alia, based on an a fortiori conclusion: if the shareholders can reject the common draft terms of the cross-border merger in their entirety, they should also be permitted to make changes to said document.13 This view, however, disrespects corporate governance and the allocation of competences for cross-border mergers. While the shareholders have the right to either approve or reject the common draft terms of the cross-border merger, the right to initiate a cross-border merger and to define the terms and conditions for such a cross-border merger remain with the management and/or administrative body of the companies involved in the cross-border merger. 11 If the instrument of constitution and the statutes are contained in a separate document, the shareholders need to adopt both.

5. Upstream mergers of a 100 % subsidiary into the parent company 12

Article 126 is not applicable to cross-border mergers of a 100 % subsidiary into its parent company within the meaning of Article 132(1) second indent. This decision by the European legislature is reasonable, as the consent of the transferring company or companies would be of a purely formal nature, with such subsidiaries in any case being fully controlled by the acquiring company.14

II. Reservation of Approval Pursuant to Article 126(2), the general meeting of each of the merging companies may reserve the right to make implementation of the cross-border merger conditional upon its express ratification of the arrangements decided upon with respect to the participation of employees in the company resulting from the cross-border merger. Article 126(2) is based on sentence 2 of Article 23(2) of the SE Regulation. 15 14 The provision is intended to take account of the fact that: (i) at the time of the resolution on the cross-border merger, the outcome of the negotiations on the co-determination model (if necessary) will not yet be known16 and (ii) the shareholders' meeting has no influence on the design of the co-determination solution (cf. Article 133). 17 Article 126(2) ensures that both the right of the shareholders to decide on the cross-border 13

11 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.88, p. 24; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.76, p. 1739. 12 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.88, p. 24. 13 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.88, p. 24. 14 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.77, p. 21. 15 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 195. 16 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.93, p. 772.

646

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 126

merger as well as the interest of the company to implement the cross-border merger in a timely manner are guaranteed.18 As expressed by the use of the term 'arrangements', the condition precedent relates 15 not only to any agreement on employee participation, but also, more generally, to the way in which co-determination is to take place; consequently, it also applies where the standard rule on participation laid down in Article 133(1) applies.19 16 The two-tier approval process is structured as follows: (i)

Declaration of reservation: the shareholders' meeting declares that the arrangements of co-determination shall be subject to its approval. Its approval is therefore subject to the condition precedent of a further resolution.20 (ii) Declaration of approval: after the co-determination modalities have been determined, the shareholders' meeting must decide on the approval of these arrangements.21 Article 126(2) does not provide for majority requirements with regard to the decla- 17 ration of reservation and the declaration of approval; the Member States are, therefore, responsible for determining the majority requirements in accordance with sentence 1 of Article 121(1).22 Since declaration of the reservation is not to be deemed a decision of a fundamental nature, Member States may also determine a quorum which is lower than the two thirds-quorum of Article 126(1).23 The declaration of approval is, however, on the contrary to be deemed a fundamental decision requiring a two-thirds majority, because it is the ultimate decision for the cross-border merger to be approved. 24 The approval has to be granted by means of a formal resolution of the shareholders' 18 meeting, i.e. implied action or mere inaction is not sufficient.25 The shareholders may not delegate the decision to approve the cross-border merger, 26 19 as such a delegation would be inconsistent with the purpose of the provision that fundamental decisions are to be taken by the shareholders.27 17 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.93, p. 772; Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 196, p. 84. 18 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 194 et seq.; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.93, p. 772; Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 196, p. 84. 19 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 195; Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019), § 8.64, p. 380; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.94, p. 772. 20 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.79, p. 1740. 21 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 195. 22 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 195. 23 Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 195; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.95 et seq., p. 773 et seq.; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.80, p. 1740. 24 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.81, p. 1741. Deviating: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.96, p. 773. 25 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.96, p. 773; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.81, p. 1741. 26 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.96, p. 773. Deviating: Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 195, fn. 1016.

Tobias de Raet

647

Art 126 a Protection of members

III. Derogation from the Requirement of Approval 20

Article 126(3) provides that Member States must not require approval of the crossborder merger by the general meeting of the acquiring company if the following conditions laid down in Article 94 are fulfilled: (i) (ii) (iii)

the publication provided for in Article 92 is effected, for the acquiring company, at least one month before the date fixed for the general meeting of the company or companies being acquired which is to decide on the draft terms of merger; at least one month before the date specified under (i), all shareholders of the acquiring company are entitled to inspect the documents specified in Article 97(1) at the registered office of the acquiring company; one or more shareholders of the acquiring company holding a minimum percentage of the subscribed capital is entitled to require that a general meeting of the acquiring company be called to decide whether or not to approve the merger; this minimum percentage must not be fixed at more than 5 %. Member States, however, must provide for the exclusion of non-voting shares from this calculation.

IV. Limitation of Legal Challenges 21

According to Article 126(4), which was introduced by the 2019 Directive, Member States need to ensure that the approval of the cross-border merger by the general meeting cannot be challenged solely on the basis/claim that (i) the share exchange ratio referred to in Article 122(b) has been inadequately set (ii) the cash compensation referred to in Article 122(m) has been inadequately set or (iii) the information given on the share exchange ratio referred to in Article 122(b) or the cash compensation referred to in Article 122(m)) did not comply with the legal requirements. The insertion of Article 126(4) is a consequence of the newly added Article 126 a regarding the new system on the protection of members.

Article 126 a Protection of members 1. Member States shall ensure that at least the members of the merging companies who voted against the approval of the common draft-terms of the cross-border merger have the right to dispose of their shares for adequate cash compensation, under the conditions laid down in paragraphs 2 to 6, provided that as a result of the merger they would acquire shares in the company resulting from the merger which would be governed by the law of a Member State other than the Member State of their respective merging company. Member States may also provide for other members of the merging companies to have the right referred to in the first subparagraph. Member States may require that express opposition to the common draft terms of the cross-border merger, the intention of members to exercise their right to dispose of their shares, or both, be appropriately documented, at the latest at the general meeting referred to in Article 126. Member States may allow the recording of opposi27 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.96, p. 773.

648

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 126 a

tion to the common draft terms of the cross-border merger to be considered proper documentation of a negative vote. 2. Member States shall establish the period within which the members referred to in paragraph 1 have to declare to the merging company concerned their decision to exercise the right to dispose of their shares. That period shall not exceed one month after the general meeting referred to in Article 126. Member States shall ensure that the merging companies provide an electronic address for receiving that declaration electronically. 3. Member States shall further establish the period within which the cash compensation specified in the common draft terms of the cross-border merger is to be paid. That period shall not end later than two months after the cross-border merger takes effect in accordance with Article 129. 4. Member States shall ensure that any members who have declared their decision to exercise the right to dispose of their shares, but who consider that the cash compensation offered by the merging company concerned has not been adequately set, are entitled to claim additional cash compensation before the competent authority or body mandated under national law. Member States shall establish a time limit for the claim for additional cash compensation. Member States may provide that the final decision to provide additional cash compensation is valid for all members of the merging company concerned who have declared their decision to exercise the right to dispose of their shares in accordance with paragraph 2. 5. Member States shall ensure that the law of the Member State to which a merging company is subject governs the rights referred to in paragraphs 1 to 4 and that the exclusive competence to resolve any disputes relating to those rights lies within the jurisdiction of that Member State. 6. Member States shall ensure that members of the merging companies who did not have or did not exercise the right to dispose of their shares, but who consider that the share exchange ratio set out in the common draft terms of the cross-border merger is inadequate, may dispute that ratio and claim a cash payment. Proceedings in that regard shall be initiated before the competent authority or body mandated under the law of the Member State to which the relevant merging company is subject, within the time limit laid down in that national law and such proceedings shall not prevent the registration of the cross-border merger. The decision shall be binding on the company resulting from the cross-border merger. Member States may also provide that the share exchange ratio as established in that decision is valid for any members of the merging company concerned who did not have or did not exercise their right to dispose of their shares. 7. Member States may also provide that the company resulting from the cross-border merger can provide shares or other compensation instead of a cash payment. I. Exit Right (in Return) for Cash Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Eligible Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Shareholders of the company or companies being acquired . . . . . . . . . . . . . . b) Shareholders who voted against the merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Obligor of cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Deadlines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Deadline for claiming the cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Deadline for paying the cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Manner of claiming the cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Right to challenge the cash compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tobias de Raet

1 1 2 2 3 6 7 7 8 9 10

649

Art 126 a Protection of members 7. Alternative compensation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Right to Challenge the Share Exchange Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Eligible Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15 16 17 18 19 23

I. Exit Right (in Return) for Cash Compensation 1. Background 1

The 2019 Directive introduced Article 126 a as one of the key elements to protect minority shareholders. The reasoning is that no shareholder should be forced to become subject to a new jurisdiction and therefore provides for an exit right (in return) for cash compensation. While this argument sounds convincing at first, it is contradictory to the aim of establishing harmonized EU-company law whereby EU directives and regulations ensure a common minimum standard for the protection of shareholders, employees and creditors. If one is serious about the creation of such an EU company law, there is no need for such a protection instrument as provided for in Article 126 a.

2. Eligible Shareholders a) Shareholders of the company or companies being acquired 2

In view of the reasoning that no shareholder should be forced to become subject to a new jurisdiction, the exit right is only available to the shareholders of the company or companies being acquired. b) Shareholders who voted against the merger

Member States have to ensure that at least the shareholders (i.e. those of the company or companies being acquired) who voted against the approval of the common draft terms of the cross-border merger in the general meeting according to Article 126 have the exit right pursuant to Article 126 a. 4 Member States may provide that such an exit right is also granted to other members of the merging companies, i.e. in particular to those shareholders of the company or companies being acquired, who did not vote against the merging company. As it would be contradictory not to vote against the merger, but make use of the exit right, Member States should not make use of such an option. 5 To identify which shareholders actually voted against the merger, the Member States may require that the express opposition to the common draft terms of the cross-border merger and/or the members' intention to exercise their right to dispose of their shares be appropriately documented at the latest at the general meeting referred to in Article 126. For this purpose, they may allow the recording of the objection to the common draft terms of the cross-border merger to be considered as proper documentation of a negative vote. Such a recording could, inter alia, be made by a notary who records the decision and votes taken at the general meeting. 3

3. Obligor of cash compensation 6

The obligor of the cash compensation is not expressly specified. The initial proposal of the Commission in the EU Company Law Package1 provided for three alternatives: the company, the remaining shareholders or external third parties. The wording of

650

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 126 a

Article 126a(4) as introduced by the 2019 Directive (“offered by the merging company concerned”) implies that the cash compensation is to be paid by the company.2

4. Deadlines a) Deadline for claiming the cash compensation According to Article 126a(2), it is up to the Member States to establish the period 7 within which the shareholders who may claim cash compensation have to declare to the merging company concerned their decision to exercise the right to dispose of their shares. That period shall, however, not exceed one month after the general meeting referred to in Article 126. b) Deadline for paying the cash compensation According to Article 126a(3), Member States shall further establish the period within 8 which the cash compensation specified in the common draft terms of the cross-border merger is to be paid, whereas the 2019 Directive determines that this period may not end later than two months after the cross-border merger takes effect according to Article 129.

5. Manner of claiming the cash compensation Member States have to ensure that the merging companies provide an electronic 9 address for receiving the declaration of the shareholders that they want to dispose of their shares electronically (cf. Article 126a(2)). In practice, this can be an email address or an online platform. While it is not expressly provided for, Member States must permit the relevant merging companies to implement an identification mechanism in order to identify the respective shareholder. Such a system can and should be similar to those which are commonly used for registering for a general meeting.

6. Right to challenge the cash compensation Pursuant to Article 126a(4) Member States have to ensure that shareholders who have 10 declared their decision to make use of their right to dispose of shares, have the right to demand additional compensation if the cash compensation has not been adequately set. Eligible shareholders may be granted the opportunity to make such a claim to de- 11 mand additional cash compensation before competent authorities or bodies mandated under national law. Member States shall establish a time limit for the demand relating to additional cash 12 compensation. Member States should rely on customary time periods for exercising comparable shareholder rights (e.g. one month). Member States should not determine time periods exceeding three months in order to have legal certainty on the amount of the cash compensation within a reasonable time period after the cross-border merger becomes effective. 1 Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law, COM(2018) 239 final, 25.4.2018; Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018. 2 Bungert and Becker, ‘Änderung des Verschmelzungsrechts’ (2019) DB, 1609 (1614); J. Schmidt, Cross-border Mergers, ‘Divisions and Conversions: Accomplishments and Deficits of the Company Law Package’, (2019) ECFR, 222, (256).

Tobias de Raet

651

Art 126 a Protection of members Member States may stipulate that the final decision providing additional cash compensation is valid for all shareholders of the merging company who have declared the decision to exercise the right to dispose of their shares according to Article 126a(2), not just for the shareholder who demanded additional cash compensation. 14 The right to challenge the cash compensation shall be subject to the national law of the Member State to which a merging company is subject (cf. Article 126a(5)). 13

7. Alternative compensation? 15

According to Article 126a(7), Member States may also provide that the company resulting from the cross-border merger can issue shares or other compensation instead of a cash payment. This is counter-intuitive with respect to the cash compensation pursuant to Article 126a(1). Only cash compensation can ensure that shareholders are not forced to be subject to a new jurisdiction. Hence, Article 126a(7) can only apply to the right to challenge the cash compensation or the share exchange ratio pursuant to Article 126a(4) and (6).

II. Right to Challenge the Share Exchange Ratio 16

Pursuant to Article 126a(6) Member States have to ensure that shareholders who consider that the share exchange ratio is inadequate have the right to challenge the share exchange ratio, set out in the common draft terms of the cross-border merger.

1. Background 17

The provision is similar to existing provisions in national laws of the Member States, e.g. § 122 i of the German Transformation Act (Umwandlungsgesetz).

2. Eligible Shareholders 18

All shareholders of the merging companies who did not have or did not exercise the exit right pursuant to Article 126a(1) have the right to challenge the share exchange ratio, i.e. also the shareholders of the acquiring company.

3. Proceedings The proceedings to challenge the share exchange ratio shall be initiated before the competent authorities or bodies mandated. 20 Competence shall be determined by the national law of the Member State to which the respective merging company is subject. 21 Member States shall establish a time limit within which the share exchange ratio can be challenged. This time period should not be too long (i.e. not exceed three months) in order to have legal certainty on the share exchange ratio within a reasonable time period. 22 It is important and helpful that the Directive expressly states that proceedings challenging the share exchange ratio should not prevent the registration of the cross-border merger. This eliminates the risk of shareholder activists who strategically buy minority stock in order to block the merger by challenging the share exchange ratio, hoping the company buys them out. 19

652

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 126 b

4. Compensation If the share exchange ratio is found to be inadequate, the compensation does not 23 necessarily have to be a cash payment, but can also consist of shares or any other means of consideration (cf. Article 126(7)). This gives the respective company flexibility and eliminates the risk of having to make (unforseen) cash pay-outs which may lead to liquidity problems.3

Article 126 b Protection of creditors 1. Member States shall provide for an adequate system of protection of the interests of creditors whose claims antedate the disclosure of the common draft terms of the cross‐border merger and have not fallen due at the time of such disclosure. Member States shall ensure that creditors who are dissatisfied with the safeguards offered in the common draft terms of the cross-border merger, as provided for in point (n) of Article 122, may apply, within three months of the disclosure of the common draft terms of the cross-border merger referred to in Article 123, to the appropriate administrative or judicial authority for adequate safeguards, provided that such creditors can credibly demonstrate that, due to the cross-border merger, the satisfaction of their claims is at stake and that they have not obtained adequate safeguards from the merging companies. Member States shall ensure that the safeguards are conditional on the cross-border merger taking effect in accordance with Article 129. 2. Member States may require that the administrative or management body of each of the merging companies provides a declaration that accurately reflects its current financial status at a date no earlier than one month before the disclosure of that declaration. The declaration shall state that, on the basis of the information available to the administrative or management body of the merging companies at the date of that declaration, and after having made reasonable enquiries, that administrative or management body is unaware of any reason why the company resulting from the merger would be unable to meet its liabilities when those liabilities fall due. The declaration shall be disclosed together with the common draft terms of the cross-border merger in accordance with Article 123. 3. Paragraphs 1 and 2 shall be without prejudice to the application of the laws of the Member States of the merging companies concerning the satisfaction or securing of pecuniary or non-pecuniary obligations due to public bodies. I. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Protection of Creditors by Safeguards (Securities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Safeguards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Right to challenge safeguards as inadequate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Deadline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Competent body . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Claim at stake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Causation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) No adequate safeguards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Consequences for the merger taking effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Solvency Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. National laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1 2 2 4 5 6 7 9 10 11 12 14

Bungert and Becker, ‘Änderung des Verschmelzungsrechts’ (2019) DB, 1609 (1614).

Tobias de Raet

653

Art 126 b Protection of creditors

I. Background 1

The 2019 Directive implemented an express provision on the protection of creditors. Although the documents to be prepared in the course of the cross-border merger such as the common draft terms of the cross-border merger and the independent expert report are not addressed at them, creditors are – or at least can be – substantially affected by the cross-border merger.

II. Protection of Creditors by Safeguards (Securities) 1. Safeguards The standard principle of providing safeguards is to proactively provide safeguards which are to be laid down in the common draft terms of the cross-border merger (cf. Article 122 point (n)). This is unfortunately different to the concept for domestic mergers, for which it is not required to already include safeguards in the draft terms of the merger (cf. Article 91).1 Considering this concept, creditors should actively study the common draft terms of the cross-border merger and the safeguards provided therein. Member States should therefore consider the importance of the common draft terms for the cross-border merger for the creditors when implementing the provisions on the publication and availability of such a document. 3 While it is not expressly provided for, the safeguards are naturally to be granted by the acquiring company as the surviving entity. 2

2. Right to challenge safeguards as inadequate 4

Member States need to ensure that the creditors who are not satisfied with the safeguards offered by the respective merging company in the common draft terms of the cross-border merger may challenge the safeguards as being inadequate. This principle is already established in the laws of certain Member States (e.g. § 122 j of the German Transformation Act (Umwandlungsgesetz)) based on Article 121(2) sentence 1 of the 2017 Directive, according to which the protection of creditors is basically governed by the applicable national law. While such concepts have been prone to fragmented regulations between the Member States, it can only be welcomed that the 2019 Directive established a harmonized concept. a) Deadline

5

Creditors may challenge the safeguards within three months after disclosure of the common draft terms of the cross-border merger pursuant to Article 123. b) Competent body

6

The request must be made to the appropriate administrative or judicial authority for adequate safeguards. Since the 2019 Directive makes no further specifications, the Member States may determine which administrative or judicial authority shall be competent. The appropriate administrative body will then decide on adequate safeguards to be provided to the creditors, but only if and to the extent that the creditors can credibly

1 Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package’ (2019) BB, 1922 (1933).

654

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 126 b

demonstrate that due to the cross-border merger the satisfaction of their claim is at stake and no adequate safeguards have been obtained from the merging companies. c) Claim at stake The creditors need to credibly demonstrate that the satisfaction of their claim is 7 at stake. The 2019 Directive does not provide for any details on this element. Typically, a claim will be at stake if the acquiring company is subject to a regime which provides for less protection for creditors, such as with respect to the minimum share capital or equity capital requirements (i.e. restrictions on paying back equity capital to the shareholders). Changes in the accounting system can also put claims at stake. The mere aspect that the creditor has to deal with a new debtor which is subject to a 8 different jurisdiction can, however, not be deemed sufficient to prove that the claim is at stake, because this is the natural consequence of a cross-border merger. d) Causation The claims need to be at stake due to the cross-border merger. This element of 9 causation ensures that creditors do not simply use the cross-border merger as an opportunity to claim safeguards. The credibility requirement also applies to the element of causation. Hence, it is the creditors' burden to demonstrate and prove the causation between the cross-border merger and the claim being at stake. e) No adequate safeguards The claim to receive safeguards may only be made if the respective merging company 10 has not already provided for safeguards in the common terms of the cross-border merger. It is the creditors' burden to make credible the claim that the safeguards set out in the common terms of the cross-border merger are not sufficient. Companies can, therefore, only be advised to use this advantage and provide for safeguards in the common terms of the cross-border merger, provided there are any indications that such safeguards might be required.

3. Consequences for the merger taking effect Article 126 b does not expressly specify the legal consequences in the case that cred- 11 itors challenge the safeguards as being inadequate. In particular, it does not determine whether such a challenge could block the cross-border merger from becoming effective pursuant to Article 129. Since the existence of a challenge by creditors in accordance with Article 126 b is not one of the elements to be examined prior to the cross-border merger being registered pursuant to Article 127, it should not block the merger from taking effect.2

4. Solvency Declaration Pursuant to Article 126b(2), Member States may require that the management or 12 administrative organ of the merging companies provide a declaration accurately reflecting the current financial status of these companies on the date of the declaration. The date of such a solvency declaration may not be earlier than one month before the 2 Bungert and Becker, ‘Änderung des Verschmelzungsrechts’ (2019) DB, 1609 (1614); different: J. Schmidt, ‘EU Company Law Package 2018 – Mehr Digitalisierung und Mobilität von Gesellschaften (Teil 1)’ (2018), Der Konzern, 229, 239.

Tobias de Raet

655

Art 126 c Employee information and consultation disclosure of said solvency declaration. The purpose of such a declaration is to inform the creditors about the financial status of the merging companies, which might include indications if they have reasonable doubts that their claims could be at stake due to the cross-border merger. For this purpose, the declaration must state that, on the basis of the information available to the management or administrative organ of the merging companies on the date of said declaration, and having made reasonable enquiries, they are unaware of any reason why the company resulting from the merger would be unable to meet the liabilities when those liabilities fall due. 13 The declaration shall be disclosed together with the common draft terms of the cross-border merger in accordance with Article 123. It is good that a document was established, in which aspects that are important for the creditors are addressed. It would have been better if the content of the solvency declaration pursuant to Article 126b(2) had been established in the common draft terms of the cross-border merger in a separate section addressed at the creditors. This would also have avoided the various uncertainties in connection with the solvency declaration, e.g. the consequences of errors (including liability) as well as formalities (where to publish, which language(s)). Member States should address these aspects if they want to make use of the option to implement Article 126b(2) into their national laws.

5. National laws 14

Article 126b(3) provides that the provisions regarding the protection of creditors are without prejudice to the application of the national laws of the Member State of the merging companies concerning the satisfaction of payments or securing payments or non-pecuniary obligations due to public bodies. Hence, the national laws of the Member States may – in this respect – prevail.

Article 126 c Employee information and consultation 1. Member States shall ensure that employees’ rights to information and consultation are respected in relation to the cross-border merger and are exercised in accordance with the legal framework provided for in Directive 2002/14/EC, and Directive 2001/23/EC where the cross-border merger is considered to be a transfer of an undertaking within the meaning of Directive 2001/23/EC, and, where applicable for Community-scale undertakings or Community-scale groups of undertakings, in accordance with Directive 2009/38/EC. Member States may decide that employees’ rights to information and consultation apply with respect to the employees of companies other than those referred to in Article 3(1) of Directive 2002/14/EC. 2. Notwithstanding point (b) of Article 123(1) and Article 124(7), Member States shall ensure that employees’ rights to information and consultation are respected, at least before the common draft terms of the cross-border merger or the report referred to in Article 124 are decided upon, whichever is earlier, in such a way that a reasoned response is given to the employees before the general meeting referred to in Article 126. 3. Without prejudice to any provisions or practices in force more favourable to employees, Member States shall determine the practical arrangements for exercising the right to information and consultation in accordance with Article 4 of Directive 2002/14/EC.

656

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS I. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Manner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Art 126 c 1 2 3 4

I. Background Article 126 c contains provisions on the information and consultation of employees. 1 This was not included in the first drafts by the Commission, but only included on the basis of a last-minute suggestion by the EU Parliament.1

II. Content Instead of creating its own regime, Article 126 c makes reference to the following ex- 2 isting directives and relies on the information and consultation systems therein: – Directive 2002/14/EC (Information and Consultation of Employees Directive)2, – Directive 2001/23/EC (Transfers of Undertakings Directive)3, – Directive 2009/38/EC (European Works Council Directive)4

III. Timing The Member States have to ensure that rights of employees to information and 3 consultation are respected, at least before the common draft terms of the cross-border merger or the report referred to in Article 124, are decided, whichever is earlier (cf. Article 126(2)).

IV. Manner While Article 126 c mainly relies on the aforementioned directives, it specifies that in- 4 formation and consultation rights need to be respected by giving a reasoned response to the employees before the general meeting referred to in Article 126. Since there is no express statement about the form or the details required in such a reasoned response, these should be determined by the Member States who should rely on their concepts established based on the directives mentioned in Article 126 c. 1 European Parliament legislative resolution of 18.4.2019 on the proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (COM(2018)0241 – C8-0167/2018 – 2018/0114(COD)); Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package’ (2019) BB, 1922 (1932). 2 Directive 2002/14/EC of the European Parliament and of the Council of 11.3.2002 establishing a general framework for informing and consulting employees in the European Community – Joint declaration of the European Parliament, the Council and the Commission on employee representation, Official Journal L 080, 23/03/2002 P. 0029 – 0034. 3 Council Directive 2001/23/EC of 12.3.2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses Official Journal L 082, 22/03/2001 P. 0016 – 0020. 4 Directive 2009/38/EC of the European Parliament and of the Council of 6.5.2009 on the establishment of a European Works Council or a procedure in Community-scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees (Recast) (Text with EEA relevance ) OJ L 122, 16.5.2009, p. 28–44 (BG, ES, CS, DA, DE, ET, EL, EN, FR, IT, LV, LT, HU, MT, NL, PL, PT, RO, SK, SL, FI, SV) Special edition in Croatian: Chapter 05 volume 001 P. 284 – 300.

Tobias de Raet

657

Art 127 Pre-merger certificate

Article 127 Pre-merger certificate 1. Member States shall designate the court, notary or other authority or authorities competent to scrutinise the legality of cross-border mergers as regards those parts of the procedure which are governed by the law of the Member State of the merging company and to issue a pre-merger certificate attesting to compliance with all relevant conditions and to the proper completion of all procedures and formalities in the Member State of the merging company (’the competent authority’). Such completion of procedures and formalities may comprise the satisfaction or securing of pecuniary or non-pecuniary obligations due to public bodies or compliance with specific sectoral requirements, including securing obligations arising from ongoing proceedings. 2. Member States shall ensure that the application to obtain a pre-merger certificate by the merging company is accompanied by the following: (a) the common draft terms of the cross-border merger; (b) the report and the appended opinion, if any, referred to in Article 124, as well as the report referred to in Article 125, where they are available; (c) any comments submitted in accordance with Article 123(1); and (d) information on the approval by the general meeting referred to in Article 126. 3. Member States may require that the application to obtain a pre-merger certificate by the merging company is accompanied by additional information, such as, in particular: (a) the number of employees at the time of the drawing up of the common draft terms of the cross-border merger; (b) the existence of subsidiaries and their respective geographical location; (c) information regarding the satisfaction of obligations due to public bodies by the merging company. For the purposes of this paragraph, competent authorities may request such information, if not provided by the merging company, from other relevant authorities. 4. Member States shall ensure that the application referred to in paragraphs 2 and 3, including the submission of any information and documents, may be completed fully online without the necessity for the applicants to appear in person before the competent authority, in accordance with the relevant provisions of Chapter III of Title I. 5. In respect of compliance with the rules concerning employee participation as laid down in Article 133, the competent authority in the Member State of the merging company shall verify that the common draft terms of the cross-border merger include information on the procedures by which the relevant arrangements are determined and on the possible options for such arrangements. 6. As part of the scrutiny referred to in paragraph 1, the competent authority shall examine the following: (a) all documents and information submitted to the competent authority in accordance with paragraphs 2 and 3; (b) an indication by the merging companies that the procedure referred to in Article 133(3) and (4) has started, where relevant.

658

Tobias de Raet

Art 127

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

7. Member States shall ensure that the scrutiny referred to in paragraph 1 is carried out within three months of the date of receipt of the documents and information concerning the approval of the cross-border merger by the general meeting of the merging company. That scrutiny shall have one of the following outcomes: (a) where it is determined that the cross-border merger complies with all the relevant conditions and that all necessary procedures and formalities have been completed, the competent authority shall issue the pre-merger certificate; (b) where it is determined that the cross-border merger does not comply with all the relevant conditions or that not all necessary procedures and formalities have been completed, the competent authority shall not issue the pre-merger certificate and shall inform the company of the reasons for its decision; in that case, the competent authority may give the company the opportunity to fulfil the relevant conditions or to complete the procedures and formalities within an appropriate period of time. 8. Member States shall ensure that the competent authority does not issue the pre‐ merger certificate where it is determined in compliance with national law that a cross-border merger is set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes. 9. Where the competent authority, during the scrutiny referred to in paragraph 1, has serious doubts indicating that the cross-border merger is set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes, it shall take into consideration relevant facts and circumstances, such as, where relevant and not considered in isolation, indicative factors of which the competent authority has become aware, in the course of the scrutiny referred to in paragraph 1, including through consultation of relevant authorities. The assessment for the purposes of this paragraph shall be conducted on a case-by-case basis, through a procedure governed by national law. 10. Where it is necessary for the purposes of the assessment under paragraphs 8 and 9 to take into account additional information or to perform additional investigative activities, the period of three months provided for in paragraph 7 may be extended by a maximum of three months. 11. Where, due to the complexity of the cross-border procedure, it is not possible to carry out the assessment within the deadlines provided for in paragraphs 7 and 10, Member States shall ensure that the applicant is notified of the reasons for any delay before the expiry of those deadlines. 12. Member States shall ensure that the competent authority may consult other relevant authorities with competence in the different fields concerned by the cross-border merger, including those of the Member State of the company resulting from the merger, and obtain from those authorities and from the merging company information and documents necessary to scrutinise the legality of the cross-border merger, within the procedural framework laid down in national law. For the purposes of the assessment, the competent authority may have recourse to an independent expert. I. Two-Stage Scrutiny of the Legality of the Cross-Border Merger . . . . . . . . . . . . . . II. Designation of Authority Competent to Scrutinise . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Scrutiny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Pre-Merger Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Purpose of the Pre-Merger Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tobias de Raet

1 5 6 9 11 14 17

659

Art 127 Pre-merger certificate Online . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scope of examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Coordination with other authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Positive decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Negative decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Form of the pre-merger certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Control Against Abuse and Fraudulent Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) b) c) d) e)

17 18 19 21 23 23 25 28 29

I. Two-Stage Scrutiny of the Legality of the Cross-Border Merger The two-stage scrutiny of the legality of the cross-border merger pursuant to Articles 127, 127 a and 128 is the final element of the 'European basic act for structural changes’. 1 It can also be found in Articles 25 and 26 of the SE Regulation2 and takes into account the cross-border nature of the structural measure.3 This two-stage concept ensures that the legal scrutiny of the merger is carried out with appropriate expertise and that the respective authorities of the Member States do not have to deal with the intricacies of foreign jurisdictions.4 2 The first stage concerns all Member States involved in the cross-border merger: compliance with the procedural steps regarding the cross-border merger is scrutinised and, if positive, a certificate to that effect must be issued attesting to compliance with all the relevant conditions and to proper completion of all procedures and formalities in the Member State of the merging company (cf. Article 127).5 As expressly set out in Article 127(1), such completion of procedures and formalities may comprise the satisfaction or securing of pecuniary or non-pecuniary obligations (due to public bodies or the compliance with special sectorial requirements, including securing payments or obligations arising from ongoing proceedings). 3 The second stage only concerns the Member State of the acquiring company (or, in the case of a merger by formation of a new company, the Member State in which such a company is formed). In such a Member State, legal scrutiny of the implementation of the cross-border merger or, in the case of a cross-border merger by formation of a new company, the formation of said new company needs to be carried out (cf. Article 128(1)).6 4 Successful completion of these two stages is a requirement for the cross-border merger to take effect in accordance with Article 129. The first stage respects the principle that each company must be assessed on the basis of its company statute. The second stage reflects the fact that the effectiveness of the cross-border merger requires compliance 1

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.32, p. 744 and § 22.61, p. 757. 2 Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE). 3 Neye, ‘Die neue Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften’ (2005) ZIP, 1893 (1896); Habersack and Verse, Europäisches Gesellschaftsrecht (4 th edn, 2011), § 8.65, p. 271. 4 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European crossborder Mergers and reorganizations (2012), § 1.93, p. 25; Lutter/Bayer/Schmidt, Europäisches Kapitalmarktund Gesellschaftsrecht (6th edn, 2017), § 22.101, p. 775. 5 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.100, p. 774. 6 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.100, p. 774; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.99, p. 1748. 1

660

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 127

with the laws of the Member State to which the company resulting from the cross-border merger is subject.7

II. Designation of Authority Competent to Scrutinise It is left to the Member States to determine the competent authority for scrutinising 5 the legality of the cross-border merger. Article 127(1), however, specifies that said authority must be a court, notary or other authority competent to scrutinise the legality of the cross-border merger.8

III. Scope of Scrutiny The competent national authority determined by the respective Member State must 6 scrutinise whether the relevant stages of the procedure concerning the merging companies have been completed in accordance with the national laws of that Member State;9 i.e. verify the existence and the legality of all (pre-merger) acts and formalities to be fulfilled by the companies involved in the cross-border-merger.10 The procedural stages whose prescribed acts and formalities are to be carried out by 7 the company concerned in the cross-border merger and whose proper conduct is to be verified by the competent authority pursuant to Article 127 include in particular the following aspects:11 – the ability of the company to merge (cf. Articles 119(1), 120, 121(1)) – the common draft terms of the cross-border merger (cf. Article 122) – the disclosure of the common draft terms of merger (cf. Article 123) – the report of the management or administrative body for members and employees (cf. Article 124) – the review by the independent experts and their report (cf. Article 125) – the decision on the cross-border merger by the general meetings (cf. Article 126(1)) and, where appropriate, the approval of the participation model (cf. Article 126(2)) – compliance with the relevant safeguards in favour of members and creditors and minority shareholders (cf. Article 126 a and Article 126 b) – compliance with the provisions regarding employee information and consultation (cf. Article 126 c). The respective authority only verifies whether the relevant stages of the procedure 8 have been completed.12 It does not carry out a comprehensive examination (internal legality13) to determine whether the information is correct.14

7 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 29.18, p. 709. 8 Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 198, p. 84. 9 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 29.19, p. 709. 10 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.97, p. 26. 11 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.103, p. 775 et seq.; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.100, p. 1748.

Tobias de Raet

661

Art 127 Pre-merger certificate

IV. Pre-Merger Certificate The pre-merger certificate certifies, from the perspective of the Member State concerned, that its national legal requirements have been complied with and that they do not prevent the cross-border merger from being effected.15 10 The 2019 Directive implemented a more detailed framework as to the application and issuance of the pre-merger certificate. 9

1. Purpose of the Pre-Merger Certificate The pre-merger certificate certifies, from the perspective of the Member State concerned, that its national legal requirements have been complied with and that they do not prevent the cross-border merger from being effected.16 12 The term 'certificate' as well as its binding effects pursuant to Article 128 indicate that the pre-merger certificate needs to be issued in writing. 17 13 It is unclear and disputed whether the pre-merger certificate should be subject to further requirements as to form and content (e.g. if it has to include facts and merits). 18 Article 127(7) as introduced by the 2019 Directive now expressly states that an affirmative decision of the competent authority needs to expressly state that the cross-border merger complies with all relevant conditions and that all necessary procedures and formalities have been completed. Article 127(7) further states that reasons are only required if the pre-merger certificate is not issued. This implies that the pre-merger certificate does not have to include merits. 11

2. Application 14

Article 127(2) points (a) to (d) provide that Member States need to ensure that the application to obtain a pre-merger certificate by the company is accompanied by the following documents: – the common draft terms of the cross-border merger (cf. Article 122) – the report of the management or administrative body for members and employees as well as the appended opinion, if any (cf. Article 124) – the merger report by the independent experts (cf. Article 125)

12 Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 137; Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.97, p. 26. 13 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.97, p. 26. 14 Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 137. 15 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.102, p. 1748 et seq. 16 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.102, p. 1748 et seq. 17 Bayer and J. Schmidt, ‘Die neue Richtlinie über die grenzüberschreitende Verschmelzung von Kapitalgesellschaften – Inhalt und Anregungen zur Umsetzung in Deutschland’ (2006) NJW, 401 (404); Lutter/ Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.104, p. 776; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.103, p. 1749. 18 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.104, p. 776.

662

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 127

–

any comments submitted by members, creditors and representatives of the employees of the merging company (or, where there are no such representatives, the employees themselves) in accordance with Article 123 (1); – information on the approval by the general meeting referred to in Article 126. Article 127(3) gives Member States the option to require that the application to 15 obtain a pre-merger certificate be accompanied by additional information. The Directive lists certain examples of potential additional requirements which is, however, a non-exhaustive list. The following potential additional information is expressly listed in Article 127(3): – information on the number of employees at the time of the drawing up of the common draft terms of the merger; – information on subsidiaries and their respective geographic allocation; – information regarding the fulfilment of obligations due to public bodies by the company; If the information required pursuant to Article 127(2) and (3) is not provided by 16 the merging companies, the competent authorities may request this information from other relevant authorities (cf. Article 127(4)). The 2019 Directive does not, however, provide for a specific framework based on and by means of which authorities may request such information. Practically, authorities will therefore encounter difficulties, in particular, in cross-border matters.

3. Process a) Online Member States need to ensure that the application to obtain a pre-merger certificate and 17 the submission of any information can be completed entirely online (cf. Art. 127(4)). This is in line with efforts to digitalize the life cycle of companies as provided for by Digitalization Directive 2019 as regards the use of digital tools and processes in company law. b) Scope of examination The competent authority needs to examine the documents referred to which are 18 required by Article 127(2) or by the national laws of the Member States based on Article 127(3) as well as, if relevant, an indication by the merging companies that the procedure referred to in Article 133(3) and (4) has started. c) Coordination with other authorities Member States have to ensure that the competent authorities have the opportunity to 19 consult with other relevant authorities with competence in the different fields concerned with the cross-border merger (cf. Article 127(12)). This is helpful and necessary as crossborder mergers naturally involve elements of various jurisdictions and are, therefore, beyond the competence of the respective competent authority. The competent authorities shall in particular have the opportunity to consult with authorities from the Member State of the company resulting from the merger in order to obtain information and documents necessary to carry out the control of legality. In addition, such documents may be obtained from the respective company involved in the merger. Furthermore, the competent authority shall be given the opportunity to have recourse 20 to an independent expert.

Tobias de Raet

663

Art 127 Pre-merger certificate d) Timing It is the responsibility of the competent authority to ensure that the assessment by the competent authority is carried out within three months of the date on which the application including all relevant documents was received by said authority (cf. Article 127(7)). The start date of this three month period will typically be the date on which the merging companies filed the application. If the application is incomplete and the competent authority needs to obtain relevant information from other authorities, authorities should be given the option to have three months from the date on which the last relevant document or piece of information was received. Such a period may be extended for a maximum of a further three months if the assessment pursuant to Article 127(7) requires additional information or additional investigative activities to be performed (cf. Article 127(10)). 22 Unfortunately, Article 127(11) contains a loophole: if it is not possible to carry out the assessment within the deadlines as provided for in Article 127(3), Member States have to ensure that the applicant is notified of the reasons for any delay before the expiry of the original deadline. This implies that the competent authorities may extend the deadlines even further and without any limits. While and because cross-border mergers may be complex, it is important for the companies involved in the cross-border merger to be able to rely on a fixed time schedule in which such an operation can be completed. 21

e) Decision (i) Positive decision If the competent authority finds that the cross-border merger complies with all relevant conditions and that all necessary procedures and formalities have been completed, it will issue the pre-merger certificate (cf. Article 127(a)). 24 Although not expressly provided for, a reason for a positive decision does not need to be given, as this is only required in the case of a negative decision (cf. Article 127(b)). 23

(ii) Negative decision If the competent authority comes to the conclusion that the relevant conditions are not fulfilled or the necessary procedures have not been completed, it shall not issue the pre-merger certificate (cf. Article 127(7)(b)). 26 In addition, the competent authority needs to inform the respective merging companies (i.e. the acquiring company) of the reasons why the pre-merger certificate was not issued. 27 The competent authority may (but does not have to) give the company the possibility to fulfil the relevant conditions or to complete the procedures and formalities within an appropriate period of time. In order to ensure a smooth process, competent authorities should closely communicate with the respective companies if any documents or information are missing, in order to ensure that all requirements are met prior to the competent authority making its decision. 25

4. Form of the pre-merger certificate 28

Article 127 does not provide for a specific format of other formalities which the premerger certificate has to fulfil. However, pursuant to Art. 24 e as introduced by the 2019 Directive, the Commission may now, by means of implementing acts, adopt a detailed list of data to be transmitted for the purpose of exchange of information between registers and for the purpose of disclosure, inter alia as referred to in Articles 127 a, 128. This 664

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 127 a

may be a first step towards implementing the long-called for uniform template for the pre-merger certificate.19

V. Control Against Abuse and Fraudulent Purposes Under the 2019 Directive provisions regarding the control against abuse and fraudu- 29 lent purposes were included in the directive (cf. Article 127(8) and (9)). Member States need to ensure that the pre-merger certificate is not issued if a 30 cross-border merger is set-up for abusive or fraudulent purposes leading or aimed at leading (i) to evasion or circumvention of national or EU law or (ii) for criminal purposes. This is in line with the case law of the ECJ, i.e. not a material change.20 Article 127(9) sets out further details as to the process of such control. The competent 31 authority shall, inter alia, use and take into consideration facts and indications it has become aware of when performing the legality check of the cross-border merger in accordance with Article 127, including information it obtained through consultation with other relevant authorities.

Article 127 a Transmission of the pre-merger certificate 1. Member States shall ensure that the pre-merger certificate is shared with the authorities referred to in Article 128(1) through the system of interconnection of registers. Member States shall also ensure that the pre-merger certificate is available through the system of interconnection of registers. 2. Access to the pre-merger certificate shall be free of charge for the authorities referred to in Article 128(1) and for the registers. Article 127(a), which was introduced by the 2019 Directive, requires Member States 1 to ensure that the first and second stages of the legality check of the cross-border merger are interlinked. The competent authority, which issues the pre-merger certificate in accordance with Article 127, has to ensure that the pre-merger certificate is shared with the authorities that perform the scrutiny of the legality of the cross-border merger in accordance with Article 128. For this purpose, Member States need to ensure that (i) the pre-merger certificate is 2 available through the system of interconnection of registers pursuant to Article 22 and (ii) the information is accessible free of charge. When implementing Article 127(a), Member States will, in particular, have to take 3 into consideration the cross-border nature of the merger and difficulties connected therewith (i.e. different languages etc.).

19 Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package’ (2019) BB, 1922 (1930). 20 Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package’ (2019) BB, 1922 (1930); J. Schmidt, Cross-border Mergers, ‘Divisions and Conversions: Accomplishments and Deficits of the Company Law Package’, (2019) ECFR, 222, (222 et seq.).

Tobias de Raet

665

Art 128 Scrutiny of the legality of the cross-border merger

Article 128 Scrutiny of the legality of the cross-border merger 1. Each Member State shall designate the court, notary or other authority competent to scrutinise the legality of the cross-border merger as regards that part of the procedure which concerns the completion of the cross-border merger and, where appropriate, the formation of a new company resulting from the cross-border merger where the company created by the cross-border merger is subject to its national law. The said authority shall in particular ensure that the merging companies have approved the common draft terms of cross-border merger in the same terms and, where appropriate, that arrangements for employee participation have been determined in accordance with Article 133. 2. For the purposes of paragraph 1 of this Article, each merging company shall submit to the authority referred to in paragraph 1 of this Article the common draft terms of the cross-border merger approved by the general meeting referred to in Article 126 or, in the event that the approval by the general meeting is not required in accordance with Article 132(3), the common draft terms of the cross-border merger approved by each merging company in accordance with national law. 3. Each Member State shall ensure that any application for the purposes of paragraph 1, by any of the merging companies, including the submission of any information and documents, may be completed fully online without the necessity for the applicants to appear in person before the authority referred to in paragraph 1, in accordance with the relevant provisions of Chapter III of Title I. 4. The authority referred to in paragraph 1 shall approve the cross-border merger as soon as it has determined that all relevant conditions have been fulfilled. 5. The pre-merger certificate shall be accepted by the authority referred to in paragraph 1 as conclusively attesting to the proper completion of the applicable pre-merger procedures and formalities in its respective Member State, without which the cross-border merger cannot be approved. I. Competent Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Scope of the Scrutiny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Documents to Be Submitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Deadline and timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Online . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 7 7 8 10

I. Competent Authority Article 128 provides for the second stage of the scrutiny of the legality of the cross-border merger. Only the competent authority in the Member State of the acquiring company (or the new company in the case of a cross-border merger by formation) is involved in this examination.1 2 As provided for in Article 127, it is left to the Member States to designate the court, notary or other authority competent to scrutinise the legality of the cross-border merger as long as it falls within one of these categories.2 1

1 Ugliano, ‘The New Cross-border Merger Directive: Harmonisation of European Company Law and Free Movement’ (2007) 18 EBLR, 585 (606); Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.65, p. 381.

666

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 128

II. Scope of the Scrutiny The authority shall check the legality of the cross-border merger as regards that part of the procedure which concerns the completion of the cross-border merger and, where appropriate, the formation of a new company resulting from the cross-border merger where the company created by the cross-border merger is subject to its national laws. The respective authority must, in particular, ensure that the merging companies have approved the common draft terms of the cross-border merger in the same terms and conditions. Scrutiny of the common draft terms of the cross-border merger, for the avoidance of doubt, only means formal scrutiny and not a legality check of the content, since this is subject to Article 127 in conjunction with Article 122. 3 In addition, the respective authority must ensure that, where appropriate, arrangements for employee participation have been determined in accordance with Article 133.4 Article 128 does not deal with aspects which only concern the individual companies involved in the cross-border merger; such aspects are exclusively dealt with in Article 127 and subject to the national laws of the respective Member State.5 Member States may also provide for additional requirements in order to ensure compliance of the cross-border merger with their national laws.6 The legal scrutiny of the cross-border merger does not include a legal check of the pre-merger certificate pursuant to Article 127.7 Nonetheless, certain Member States did not adhere to this principle and performed such a check.8 Article 128(5), which was added by the 2019 Directive, now expressly provides that the competent authority of a Member State of the company resulting from the cross-border merger must accept the pre-merger certificate as conclusively attesting to the proper completion of the pre-merger procedures as well as all formalities in the respective Member State or Member States. This makes sense, since the pre-merger certificate certifies, from the perspective of the Member State concerned, that its national legal requirements have been complied with and that they do not prevent the cross-border merger from being effected,9 whereas legal scrutiny pursuant to Article 128 is only carried out by the competent authority in the Member State of the acquiring company (or the new company in the case of a cross-border merger by formation). It would not make sense to require the authority pursuant to Article 128 to check pre-merger certificates which are subject to and deal with foreign jurisdictions, i.e. the national provisions of other Member States 2 Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 198, p. 84. 3 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.106, p. 778; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.115, p. 1752. 4 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.109, p. 778; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.115, p. 1752. 5 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.110, p. 778 et seq.; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.116, p. 1752. 6 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.107, p. 778. 7 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.116, p. 1752. 8 Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package’ (2019) BB, 1922 (1929). 9 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.102, p. 1748 et seq.

Tobias de Raet

667

3

4

5 6

Art 128 Scrutiny of the legality of the cross-border merger on cross-border mergers.10 However, the competent authority pursuant to Article 128 should be permitted to check the legality if it has reasonable doubts that the pre-merger certificate is not correct.11

III. Procedure 1. Documents to Be Submitted 7

Pursuant to Article 128(2), each merging company must submit to the authority referred to in paragraph 1 the common draft terms of the cross-border merger approved by the general meeting referred to in Article 126. If an approval by the general meeting is not required (cf. Article 132(3)), the draft terms of the cross-border merger as approved by each merging company in accordance with the national laws of the respective Member States are to be submitted. Article 128(2) in the form of the 2017 Directive also required that the pre-merger certificate pursuant to Article 127 be submitted. This is no longer necessary as Article 127(a) provides for an automatic interlink between the first and the second stage of the legality check of the cross-border merger. Such simplification is reasonable as there is no reason why the company and not the authority issuing the pre-merger certificate should be responsible for ensuring that said document is made available to the authority performing the legality check pursuant to Article 128.

2. Deadline and timing Article 127(2) in the form of the 2017 Directive required the submission within a six-month period. The competent authority of the Member State of the acquiring company (or the new company in the case of a cross-border merger by formation) in the cross-border merger was responsible for checking whether the six-month period had been observed. If not, the competent authority of this Member State had to reject the application and refuse registration of the cross-border merger.12 Compliance with said six-month period was, therefore, a key prerequisite for the cross-border merger to become effective.13 While the 2019 Directive does not provide for any deadline, the Member States should be deemed competent to set such a deadline and reject the application if the deadline is not met. Member States should coordinate when implementing the 2019 Directive to ensure that deadlines do not deviate too much from Member State to Member State. 9 There is also no defined deadline by the end of which the competent authority has to complete its assessment. Article 128(4) which was added by the 2019 Directive only provides that the competent authority has to approve the cross-border merger as soon as it has completed its assessment of the relevant conditions. 8

10 Case C-378/10, 12.07.2012, VALE Építési kft, ECLI:EU:C:2012:440, para. 61: Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.107, p. 778. 11 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.116, p. 1752. 12 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.114, p. 1751. 13 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.106, p. 777; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.114, p. 1751.

668

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 129

3. Online The Member States have to ensure that any information and documents which 10 are required pursuant to Article 128(1) may be submitted online and that there is no necessity to appear in person before the competent authority (cf. Article 128(3)). This approach is in line with the efforts to digitalize the life cycle of companies as provided for by the Digitalization Directive 2019 as regards the use of digital tools and processes in company law.

Article 129 Date on which the cross-border merger takes effect The law of the Member State to whose jurisdiction the company resulting from the cross-border merger is subject shall determine the date on which the cross-border merger takes effect. That date shall be after the scrutiny referred to in Article 128 has been carried out.

I. No harmonised effective date The Directive does not intend to harmonise the effective dates among the Member 1 States, but only aims to ensure that they do not conflict:1 Pursuant to sentence 1 of Article 129, such a date is to be determined by the laws of the Member State to whose jurisdiction the company resulting from the cross-border merger is subject; i.e. the acquiring company or – in the case of a merger by formation of a new company – the new company. This approach is in line with Article 103, the parallel provision for domestic mergers 2 pursuant to which the laws of the Member States must determine the date on which a domestic merger takes effect. The date on which the cross-border merger takes effect according to Article 129 may 3 and will typically be different to the date from which the transactions of the merging companies will be treated for accounting purposes as being those of the company resulting from the cross-border merger pursuant to Article 122 sentence 2 point (f). 2

II. Earliest Effective Date Sentence 2 of Article 129 states that the effective date may not be prior to the 4 date on which the legal scrutiny pursuant to Article 128 has been carried out. Thus, prerequisite for the merger to become effective is that the pre-merger certificate pursuant to Article 127 has been issued, which is the prerequisite for the legal scrutiny to be carried out.3

1 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.114, p. 780. 2 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.120, p. 1753. 3 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.120, p. 1753.

Tobias de Raet

669

Art 130 Registration

Article 130 Registration 1. The laws of the Member States of the merging companies and of the company resulting from the merger shall determine, with regard to their respective territories, the arrangements, in accordance with Article 16, for disclosing the completion of the cross-border merger in their registers. 2. Member States shall ensure that at least the following information is entered in their registers: (a) in the register of the Member State of the company resulting from the merger, that the registration of the company resulting from the merger is the result of a cross-border merger; (b) in the register of the Member State of the company resulting from the merger, the date of registration of the company resulting from the merger; (c) in the register of the Member State of each merging company, that the striking off or removal of the merging company from the register is the result of a cross-border merger; (d) in the register of the Member State of each merging company, the date of striking off or removal of the merging company from the register; (e) in the registers of the Member States of each merging company and of the Member State of the company resulting from the merger, respectively, the registration number, name and legal form of each merging company and of the company resulting from the merger. The registers shall make the information referred to in the first subparagraph publicly available and accessible through the system of interconnection of registers. 3. Member States shall ensure that the register in the Member State of the company resulting from the cross-border merger notifies the register in the Member State of each of the merging companies, through the system of interconnection of registers, that the cross-border merger has taken effect. Member States shall also ensure that the registration of the merging company is struck off or removed from the register immediately upon receipt of that notification. I. Registration and Publication of the Cross-Border Merger . . . . . . . . . . . . . . . . . . . . II. Notification Through the System of Interconnection of Registers . . . . . . . . . . . . III. Deletion of the Old Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 6 9

I. Registration and Publication of the Cross-Border Merger Being the parallel provision to Article 104, Article 130 deals with informing the general public about the cross-border merger.1 2 In addition to the publication of the common draft terms of the cross-border merger pursuant to Article 122, the completion of the cross-border merger needs to be published in the public register in which each of the merging companies and the company resulting from the cross-border merger is required to file documents, 2 whereas the specifics of the publication are to be determined by each Member State for its 1

1 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.116, p. 781; Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 201, p. 86; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.120, p. 1753.

670

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 130

jurisdiction. Thus, the registration (and its publication) are subject to the laws of the Member State of the respective company involved in the cross-border merger. 3 Pursuant to Article 130(2), which was inserted by the 2019 Directive, the Member 3 States need to ensure that at least the information set out in Article 130(2) points (a) to (e) are made publicly available and accessible by means of the BRIS Directive (Business Registers Interconnection System) referred to in Article 22: The following information must be provided in the register of the Member State of 4 the company resulting from the cross-border merger: – that the registration of the company resulting from the cross-border merger is a result of a cross-border merger (cf. Article 130(1 a)(a)); – the date of registration of the company resulting from the merger (cf. Article 130(2) (b)); and – the registration numbers, names and legal form of each merging company and of the company resulting from the merger (cf. Article 130(2)(e)). The following information must be provided in the register of the Member State of 5 each merging company: – the date of striking off or removal of the company from the register (cf. Article 130(2)(c)); – that the striking off or removal of the company is a result of a cross-border merger (cf. Article 130(2)(d)); and the registration numbers, names and legal form of each merging company and of the company resulting from the merger (cf. Article 130(2) (e)).

II. Notification Through the System of Interconnection of Registers Article 130(3) provides that the Member States must ensure that the register in 6 the Member State of the company resulting from the cross-border merger notifies the register in the Member State of each of the merging companies that the cross-border merger has taken effect, whereby such notification must be made through the system of interconnection of registers established in accordance with Article 22(2). This system ensures sufficient coordination between the Member States.4 Following the amendment of the BRIS Directive,5 the notification has to be made in 7 accordance with Article 22(2) on the register interconnection system, 6 i.e. the European central platform.7 The BRIS system is designed to create communication channels that accelerate the merger process, help overcome language problems and increase legal cer2 Frischut, ‘Grenzüberschreitende Verschmelzung von Kapitalgesellschaften – ein Überblick über die Zehnte gesellschaftsrechtliche Richtlinie’ (2006) Europäisches Wirtschafts- und Steuerrecht (EWS), 55 (58). 3 Bayer and J. Schmidt, ‘Die neue Richtlinie über die grenzüberschreitende Verschmelzung von Kapitalgesellschaften – Inhalt und Anregungen zur Umsetzung in Deutschland’ (2006) NJW, 401 (404). 4 Bayer and J. Schmidt, ‘Die neue Richtlinie über die grenzüberschreitende Verschmelzung von Kapitalgesellschaften – Inhalt und Anregungen zur Umsetzung in Deutschland’ (2006) NJW, 401 (404). 5 Article 2 Point 1 of Directive 2012/17/EU of the European Parliament and of the Council of 13.6.2012 amending Council Directive 89/666/EEC and Directives 2005/56/EC and 2009/101/EC of the European Parliament and of the Council as regards the interconnection of central, commercial and company registers. See also the Implementing Regulation (EU) 2015/884 of 8.6.2015 establishing technical specifications and procedures required for the system of interconnection of registers established by Directive 2009/101/EC of the European Parliament and of the Council. 6 Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 201, p. 87. 7 Cf. Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.122, p. 1754.

Tobias de Raet

671

Art 131 Consequences of a cross-border merger tainty.8 The system of interconnection of registers, in particular, enhances communication between the registers of the various Member States by requiring them to coordinate as laid down in Article 130(2).9 8 The first sentence of Article 130(3) goes back to a proposal by the German delegation which was backed by the Finnish and Estonian delegation10 and is based on provisions of the German Transformation Act (Umwandlungsgesetz)11.12 Pursuant to § 19(1) sentence 1 of the German Transformation Act, the merger may be entered in the register kept at the registered seat of the acquiring legal entity only once it has been entered in the register kept at the registered seat of each of the legal entities being acquired. Pursuant to § 19(2) sentence 1 of the German Transformation Act (Umwandlungsgesetz) the court having jurisdiction at the registered seat of the acquiring legal entity is to notify, ex officio, the court having jurisdiction at the registered seat of each of the legal entities being acquired of the date on which the merger is entered in the register.

III. Deletion of the Old Registration 9

Member States need to ensure that the registration of the merging company is struck off or removed from the register immediately upon (i.e. not before) receipt of the notification pursuant to sentence 1 of Article 130(3) (cf. sentence 2 of Article 130(3)). 13 This is necessary for the sake of legal certainty, since in the period between registration and publication of the cross-border merger in the register of companies resulting from the merger and the registration of the deletion of the transferring company/companies, these companies continue to exist, even though the cross-border merger has already been completed from the perspective of the acquiring company or the company formed in the course of the cross-border merger.14

Article 131 Consequences of a cross-border merger 1. A cross-border merger carried out as laid down in subpoints (a), (c) and (d) of point (2) of Article 119 shall, from the date referred to in Article 129, have the following consequences: (a) all the assets and liabilities of the company being acquired, including all contracts, credits, rights and obligations, shall be transferred to the acquiring company; 8 Recital no. 3, 5, 10, 12 of the Directive 2012/17/EU; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.123, p. 1754. See with a critical evaluation: J. Schmidt, Cross-border mergers and divisions, transfers of seat: Is there a need to legislate? (2016), PE 556.960, p. 24. 9 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.122, p. 1754. 10 Council of the European Union, Working Doc. 7068/04, 11.3.2004, p. 13, fn. 36. 11 Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428. 12 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.66, p. 382; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.117, p. 781. 13 Neye and Birte Timm, ‘Die geplante Umsetzung der Richtlinie zur grenzüberschreitenden Verschmelzung von Kapitalgesellschaften im Umwandlungsgesetz’ (2006) 9 DB, 488 (490); Moritz Brocker, ‘Die grenzüberschreitende Verschmelzung von Kapitalgesellschaften’ (2010) BB, 971 (976). 14 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.123, p. 1754.

672

Tobias de Raet

Art 131

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

(b) the members of the company being acquired shall become members of the acquiring company, unless they have disposed of their shares as referred to in Article 126a(1); (c) the company being acquired shall cease to exist. 2. A cross-border merger carried out as laid down in subpoint (b) of point 2 Article 119 shall, from the date referred to in Article 129, have the following consequences: (a) all the assets and liabilities of the merging companies, including all contracts, credits, rights and obligations, shall be transferred to the new company; (b) the members of the merging companies shall become members of the new company, unless they have disposed of their shares as referred to in Article 126a(1); (c) the merging companies shall cease to exist. 3. Where, in the case of a cross-border merger of companies covered by this Chapter, the laws of the Member States require the completion of special formalities before the transfer of certain assets, rights and obligations by the merging companies becomes effective against third parties, those formalities shall be carried out by the company resulting from the cross-border merger. 4. The rights and obligations of the merging companies arising from contracts of employment or from employment relationships and existing at the date on which the cross-border merger takes effect shall, by reason of that cross-border merger taking effect, be transferred to the company resulting from the cross-border merger on the date on which the cross-border merger takes effect. 5. No shares in the acquiring company shall be exchanged for shares in the company being acquired held either: (a) by the acquiring company itself or through a person acting in his or her own name but on its behalf; (b) by the company being acquired itself or through a person acting in his or her own name but on its behalf. I. Consequences of the Cross-Border Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Universal succession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Exchange of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Dissolution of the company being acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Validity of the Transfer in Relation to Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . III. Transfer of Rights and Obligations Arising from Contracts of Employment or from Employment Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 7 11 12 15

I. Consequences of the Cross-Border Merger Parallel to Article 105, and closely following the concept of Article 29 of the SE Regu- 1 lation1 and Article 33 of the SCE, Article 1312 stipulates the legal consequences of crossborder mergers.3 This includes, pursuant to Article 131(1), cross-border mergers by acquisition (cf. Article 119(2)(a)), cross-border mergers of a 100 % subsidiary into is parent company (cf. Article 119(2)(c)), side step cross-border mergers (cf. Article 119(2)

Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE). Regulation (EC) No. 1435/2003 of 22.7.2003 on the Statute for a European Cooperative Society (SCE). 3 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.66, p. 382; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.119, p. 782. 1

2

Tobias de Raet

673

Art 131 Consequences of a cross-border merger (d)) as well as pursuant to Article 131(2), cross-border mergers by formation of a new company (cf. Article 119(2)(b)). 2 The legal consequences of the cross-border merger taking effect ipso jure and simultaneously with the cross-border merger becoming effective pursuant to Article 129 and Article 130.4 Unlike Article 105, this aspect is not expressly mentioned in Article 131, but is nonetheless to be deemed common sense. 3 The three legal consequences of cross-border mergers covered by Article 131 are (i) universal succession of assets and liabilities, (ii) exchange of shares and (iii) dissolution of the company being acquired or, in the case of a cross-merger by formation of a new company, the merging companies.

1. Universal succession As one of the legal consequences of the cross-border merger, pursuant to Article 131(1)(a), the entire assets and liabilities of the company being acquired are transferred to the acquiring company (including all contracts, credits, rights and obligations). In the case of a cross-border merger by formation of a new company, all assets and liabilities of the merging companies are transferred to the new company (cf. Article 131(2(a)). 5 Pursuant to such a principle, all assets and liabilities of the transferring company (or companies) are transferred to the acquiring company ipso jure, i.e. without any further legal actions being required.5 It is neither possible to exclude certain assets and liabilities from such a transfer nor to limit the transfer to certain defined assets or liabilities. 6 The terms “assets” and “liabilities” are to be interpreted uniformly throughout the European Union.7 The acquiring company automatically replaces the transferring company or companies as a contract party without a novation of said contract8 and, in principle, also becomes the obligor of fines imposed on the transferring company (or companies).9 6 The proposal to amend the 2017 Directive expressly highlights this aspect stating that “all the assets and liabilities of the company being acquired [or the merging companies] herein including all contracts, credits, rights and obligations shall be transferred to and shall continue with the acquiring company [or the new company]”.10 This clarification was included because certain Members States have not implemented the concept of universal succession. However, the benefit of this clarification is limited as the principle of universal succession is clear. If certain Member States do not adhere to it, there is actually no need for further clarifications, but rather a need for a consistent enforcement of the current laws.11 4

4 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.119, p. 783 et seq.; Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.123, p. 1754. 5 Proposal of a Third Council Directive COM(70) 633 final, 12.6.1970 (Vol. 1970/0091) commenting on Article 9, p. 29; the 1968 Preliminary Draft (Les fusions internes, Document de travail n° 6: Avant-projet de directive, 10.4.1968 (Dok. 11409/2/XIV/C/68 – F)) commenting Article 14, p. 30. 6 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.13, p. 349; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.97 p. 655. 7 Case C‑343/13, 5.3.2015, Modelo Continente Hipermercados SA v Autoridade para. as Condições de Trabalho – Centro Local do Lis (ACT), ECLI:EU:C:2015:146, para. 27. 8 Case C-483/14, 7.4.2016, KA Finanz AG, ECLI:EU:C:2016:205, para. 58. 9 Case C‑343/13, 5.3.2015, Modelo Continente Hipermercados SA v Autoridade para. as Condições de Trabalho – Centro Local do Lis (ACT), ECLI:EU:C:2015:146, para. 35. 10 Article 1(16) referring to Article 131 of the Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, COM(2018) 241 final, 25.4.2018, p. 68.

674

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 131

2. Exchange of shares A further legal consequence of the cross-border merger is that the members of the company being acquired become members of the acquiring company (cf. Article 131(1)(b)), unless they exercise the exit right pursuant to Article 126a(1) as introduced by the 2019 Directive. In the case of a cross-border merger by formation of a new company, the members of the merging companies become members of the new company (cf. Article 131(2)(b)). Pursuant to Article 121(1)(b), it is left to the Members States to stipulate the details of such a transfer.12 Article 131 does not only cover share-for-share transfers, but also operations which include an additional cash payment (cf. Article 119(2)(b) and (c)), Article 120). 13 Article 131(5) stipulates that no shares in the acquiring company be exchanged for shares in the company being acquired held either (i) by the acquiring company itself or through a person acting in his or her own name but on its behalf; or (ii) by the company being acquired itself or through a person acting in his or her own name but on its behalf. This provision shall – in line with Articles 60 to 67 – ensure that the cross-border merger does not lead to an acquisition or creation of treasury shares.14 The provision goes back to a suggestion by the German delegation which had argued that a provision parallel to those for domestic mergers (today Article 105(2)) should be implemented for cross-border mergers.15 Shareholders may also waive their right to receive shares: while the exchange of shares is a fundamental element of any merger,16 the intention of the exchange of shares is to protect the shareholders of the company being acquired from losing their equity stake and that such a right may be waived is based on the concept of self-determination in the same way as expressly provided for in Article 95(3) and Article 96(4). 17 Article 126 a as introduced by the 2019 Directive now expressly provides for such an exit right.

7

8 9

10

3. Dissolution of the company being acquired The third and final legal consequence of the cross-border merger is the company 11 being acquired or, in the case of a cross-border merger by formation of a new company, the merging companies ceasing to exist ipso jure and without any further formal liquidation proceedings (cf. Article 131(1)(c) and Article 131(2)(c)). This is possible since all assets and liabilities are transferred by means of universal succession to the acquiring company or, in the case of a merger by formation of a new company, to the new company formed by such a cross-border merger.18

11 Bormann and Stelmaszczyk, ‘Grenzüberschreitende Verschmelzung nach dem EU-Company Law Package’ (2019) ZIP, 300 (306). 12 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.123, p. 784. 13 Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 188, p. 79. 14 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), § 8.14, p. 350; Lutter/Bayer/ Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.101, p. 658 and § 22.14, p. 784; Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 188, p. 79 et seq. 15 Council of the European Union, Working Doc. 7068/04, 11.3.2004, p. 14, fn. 39. 16 Proposal of a Third Council Directive COM(70) 633 final (Vol. 1970/0091) of 12.6.1970, p. 21. 17 Lösekrug, Die Umsetzung der Kapital-, Verschmelzungs- und Spaltungsrichtlinie der EG in das nationale deutsche Recht (2004), 239.

Tobias de Raet

675

Art 131 Consequences of a cross-border merger

II. Validity of the Transfer in Relation to Third Parties If the laws of the Member States require the completion of special formalities before the transfer of certain assets, rights and obligations by the merging companies becomes effective with regard to third parties, those formalities must be carried out by the company resulting from the cross-border merger (cf. Article 131(3)). 13 Unlike Article 105(1)(a), it does not follow directly from the wording that universal succession also applies in relation to third parties, but argumentum e contrario from Article 131(3) which is based on the general principle that the transfer of assets and liabilities is effected ipso jure19 and such a principle is not followed only if the applicable laws of the Member States provide that certain formalities must be complied with for the effective transfer of certain assets, rights and obligations vis-à-vis third parties. It is, however, important to point out that if such formalities are not met, assets and liabilities are nonetheless transferred, but such a transfer may not be deemed effective vis-à-vis third parties.20 14 The company resulting from the cross-border merger (i.e. the acquiring company or, in the case of a merger by formation, the new company) is responsible for carrying out the formalities necessary for the transfer in accordance with Article 131(3). 12

III. Transfer of Rights and Obligations Arising from Contracts of Employment or from Employment Relationships Article 131(4) provides that the rights and obligations arising out of contracts of employment or employment relationships resulting from the effect of the cross-border merger must be transferred to the company resulting from the cross-border merger at the time when the cross-border merger takes effect. 16 The provision serves for clarification purposes only, since the transfer of employment relationships already results from the universal succession in accordance with Article 131(1), Article 131(2) and Article 131(2)(a) and from the Directive on Business Transfers (2001/23/EC)21 which applies in addition to this Chapter II.22 15

18 Proposal of a Third Council Directive COM(70) 633 final (Vol. 1970/0091) of 12.6.1970, p. 29; Lutter/ Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.104, p. 659 and § 22.125, p. 785. 19 Preliminarily Draft “Les fusions internes: Document de travail n° 6. Avant-projet de directive”, 10.4.1968, Dok. 11409/2/XIV/C/68 – F, p. 30; Proposal of a Third Council Directive COM(70) 633 final (Vol. 1970/0091) of 12.6.1970, p. 33. 20 See van Ommeslaghe, ‘La proposition de troisième directive sur l’harmonisation des fusions de sociétés anonymes’, in Pieter Zonderland (ed), Quo vadis, Ius Societatum? Liber Amicorum Pieter Sanders (1971), p. 143; Edwards, EC Company Law (1999), p. 113; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.121, p. 783. 21 Council Directive 2001/23/EC of 12.3.2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses. 22 Recital no. 65 of the Directive 2017/1132/EU; Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 143; Beutel, Der neue rechtliche Rahmen grenzüberschreitender Verschmelzungen in der EU (2008), 219.

676

Tobias de Raet

Art 132

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Article 132 Simplified formalities 1. Where a cross-border merger by acquisition is carried out either by a company which holds all the shares and other securities conferring the right to vote at general meetings of the company or companies being acquired or by a person who holds directly or indirectly all the shares in the acquiring company and in the company or companies being acquired, and the acquiring company does not allot any shares under the merger: — points (b), (c), (e) and (m) of Article 122, Article 125, and point (b) of Article 131(1) shall not apply; — Article 124 and Article 126(1) shall not apply to the company or companies being acquired. 2. Where a cross-border merger by acquisition is carried out by a company which holds 90 % or more, but not all, of the shares and other securities conferring the right to vote at general meetings of the company or companies being acquired, reports by an independent expert or experts and the documents necessary for scrutiny shall be required only to the extent that the national law governing either the acquiring company or the company or companies being acquired so requires, in accordance with Chapter I of Title II. 3. Where the laws of the Member States of all of the merging companies provide for the exemption from the approval by the general meeting in accordance with Article 126(3) and paragraph 1 of this Article, the common draft terms of cross-border merger or the information referred to in Article 123(1) to (3) respectively and the reports referred to in Articles 124 and 125, shall be made available at least one month before the decision on the merger is taken by the company in accordance with national law. I. Upstream-Merger of a 100 % Subsidiary into its Parent Company . . . . . . . . . . . II. Upstream Mergers of a 90 % or More Subsidiary into the Parent Company . . III. Publication of the Merger Documents if no Shareholders’ Meeting is Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 10 13

Article 132 is intended to facilitate the implementation of cross-border group mergers, i.e. mergers within a group of companies.1 This includes (i) the cross-border merger of a wholly-owned subsidiary into its parent company (cf. Article 132(1)) and (ii) the cross-border merger of a 90% subsidiary into its parent company (cf. Article 132(2)). The 2019 Directive included a provision in Article 132(1) pursuant to which the simplified formalities also apply if a person only indirectly holds all the shares in the acquiring company and in the companies being acquired and the acquiring company does not allot any shares under the merger, i.e. clarifying that side-step-mergers fall within the scope of the 2019 Directive, which was previously heavily disputed.2

1 Proposal for a Directive on cross-border mergers of companies with share capital, COM(2003) 703 final, 18.11.2003, p. 6. 2 Cf. Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package’ (2019) BB, 1922 (1935).

Tobias de Raet

677

Art 132 Simplified formalities

I. Upstream-Merger of a 100 % Subsidiary into its Parent Company 1

2

3

4

5

6

Article 132(1) applies to cross-border mergers within the meaning of Article 119(2) (a) (cross-border merger by acquisition) which are carried out by a company which holds – directly or indirectly – all the shares and other securities of the company or companies being acquired which confer voting rights in the general meeting of shareholders. Strictly speaking, such types of merger lack the characteristic of an exchange of shares typical for of mergers. Article 110 therefore refers to this type of merger as an 'operation' in order to clarify the difference from the basic structure of a merger set out in Articles 89 and 90 for domestic mergers. Article 120(2)(c) follows a similar approach and expressly defines such an 'operation' without an exchange of shares as a cross-border merger for the purposes of Chapter II.3 For cross-border mergers there are no provisions similar to Articles 112 and 115 pursuant to which a mere economic interest is sufficient for the purpose of calculating the 100 % threshold; rather legal ownership of the shares is always required.4 The following provisions do not apply to cross-border mergers of a 100 % subsidiary into its parent company within the meaning of Article 132(1): – Article 122(b), (c), (e) and (m) regarding certain requirements of the content of the common draft terms of the cross-border merger; – Article 125 regarding the independent expert report; – Article 131(1)(b) regarding the exchange of shares as an ipso jure consequence of the cross-border merger; – Article 124 regarding the report of the administrative or management body for members and employees; – Article 125 regarding the independent expert report; – Article 126(1) regarding the approval of the cross-border merger by the general meeting of the company or companies being acquired. Articles 122(b), (c), (e) and (m) are not applicable as there is technically no exchange of shares in a cross-border merger of a 100 % subsidiary into its parent company and, therefore, no need for the common draft terms of the cross-border merger to contain information on (i) the ratio applicable to the exchange of securities or shares representing the company capital and the amount of any cash payment (cf. Article 122(b)), (ii) the terms for the allotment of securities or shares representing the capital of the company resulting from the cross-border merger (cf. Article 122(c)), and (iii) the date from which the holding of such securities or shares representing the company capital will entitle the holders to share in profits and any special conditions affecting that entitlement (cf. Article 122(e)) and the details of the offer of cash compensation to the members in accordance with Article 126 a (cf. Article 122(m)). Just as sentence 3 of Article 110 provides for domestic mergers, an independent expert report pursuant to Article 125 is not required for cross-border mergers of a 100 % subsidiary into its parent company as there are no minority shareholders to be protected.5 As there is technically no exchange of shares in a cross-border merger of a 100 % subsidiary into its parent company, Article 132(1)(b), which determines the exchange of 3 Kalss and Klampfl in Dauses and Ludwigs (eds), Handbuch des EU-Wirtschaftsrechts (48th volume), E III, para. 203, p. 87, fn. 583. 4 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.131, p. 787. 5 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.131, p. 787 et seq.

678

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 132

shares as one of the key legal consequences of a cross-border merger, is not applicable to such operations. Article 124 regarding the report of the administrative or management body for 7 members and employees is not applicable to the company or companies being acquired. This makes sense with respect to the members as there are no minority shareholders to be protected, but it can be seen as controversial with respect to employees who may be affected by intragroup cross-border mergers. The same applies to the independent expert report pursuant to Article 125. Finally, Article 126, which requires the general meetings of the companies involved in 8 the cross-border merger to vote on the cross-border merger, is not applicable to crossborder mergers of a 100 % subsidiary into its parent company, but rather only with respect to the company or companies being acquired.6 Such a resolution, which serves to protect minority shareholders, is not required for such cross-border mergers, because the parent company is the sole shareholder of the subsidiary.7 Article 111, the parallel provision for domestic mergers, exempts all companies involved in the merger from the requirement of approval by the shareholders’ meeting pursuant to Article 126, however, subject to certain conditions.8 Unlike sentence 3 of Article 110, Article 132 does not provide for a waiver of the 9 merger report pursuant to Article 124. Article 97, as well as Articles 106 and 107, the application of which is excluded pursuant to sentence 3 Article 110 p. 3, do not have parallel provisions in Chapter II on cross-border mergers. There was, therefore, no need to specify in Article 132(1) that those provisions do not apply to cross-border mergers of a 100 % subsidiary into its parent company.

II. Upstream Mergers of a 90 % or More Subsidiary into the Parent Company Article 132(2) covers cross-border mergers by acquisitions in which the parent com- 10 pany holds 90 % or more, but not all shares and other securities conferring the right to vote at general meetings in the subsidiary to be merged into its parent company. For such operations, reports by an independent expert or experts and the documents necessary for scrutiny are required only to the extent that the national law governing either the acquiring company or the company or companies being acquired so stipulates, in accordance with Chapter I of Title II. The wording 'documents necessary for scrutiny' indicates that, not only the intendent 11 expert report pursuant to Article 125 (which is expressly mentioned), but also further documents required by the Member States for the purpose of the scrutiny pursuant to Article 128 may not be required under Article 132(2).9

6 Cf. as envisaged by the Commission this exception is limited to the transferring companies and should not be extended to the parent company: Council of the European Union, Working Doc. 9294/04, 6.5.2004, p. 17, fn. 50; Council of the European Union, Working Doc. 11655/04, 27.7.2004, p. 15, fn. 24. Cf. Lutter/ Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.133, p. 788. 7 Stiegler, ‘Internationale Verschmelzung’ in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), § 24.136, p. 1756 et seq. 8 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.133, p. 788. 9 Van Gerven, ‘Community rules applicable to cross-border mergers’ in Van Gerven (ed), Cross-Border Mergers in Europe (2010), 1 (24); Vermeylen, ‘The Cross-border merger Directive’ in: Vermeylen and Vande Velde (eds), European cross-border Mergers and reorganizations (2012), § 1.112, p. 30.

Tobias de Raet

679

Art 133 Employee participation 12

Unlike Article 113, the parallel provision for domestic mergers, it is not possible to waive approval of the cross-border merger by the general meetings of the companies involved in the merger.10

III. Publication of the Merger Documents if no Shareholders’ Meeting is Required 13

Article 132(3), which was included by the 2019 Directive, clarifies the timing of the disclosure of (i) the common draft terms of the cross-border merger or (ii) the disclosure information pursuant to Article 123(1) to (3) and (iii) the report of the administrative or management body for members and employees pursuant to Articles 124 as well as the independent expert report pursuant to Article 125, if no approval by the general meeting in accordance with Article 126(3) and Article 132(1) is required. Such information must be made available at least one month before the decision on the merger is taken by the company in accordance with the national law.

Article 133 Employee participation 1. Without prejudice to paragraph 2, the company resulting from the cross-border merger shall be subject to the rules in force concerning employee participation, if any, in the Member State where it has its registered office. 2. However, the rules in force concerning employee participation, if any, in the Member State where the company resulting from the cross-border merger has its registered office shall not apply where at least one of the merging companies has, in the six months prior to the disclosure of the common draft terms of the cross-border merger, an average number of employees equivalent to four fifths of the applicable threshold, as laid down in the law of the Member State to whose jurisdiction the merging company is subject, for triggering the participation of employees within the meaning of point (k) of Article 2 of Directive 2001/86/EC, or where the national law applicable to the company resulting from the cross-border merger does not: (a) provide for at least the same level of employee participation as operated in the relevant merging companies, measured by reference to the proportion of employee representatives amongst the members of the administrative or supervisory organ or their committees or of the management group which covers the profit units of the company, subject to employee representation; or (b) provide for employees of establishments of the company resulting from the cross-border merger that are situated in other Member States the same entitlement to exercise participation rights as is enjoyed by those employees employed in the Member State where the company resulting from the cross-border merger has its registered office. 3. In the cases referred to in paragraph 2, the participation of employees in the company resulting from the cross-border merger and their involvement in the definition of such rights shall be regulated by the Member States, mutatis mutandis and subject to paragraphs 4 to 7, in accordance with the principles and procedures laid down 10 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.135, p. 789.

680

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 133

in Article 12(2), (3) and (4) of Regulation (EC) No 2157/2001 and the following provisions of Directive 2001/86/EC: (a) Article 3(1), (2) and (3), the first indent of the first subparagraph of Article 3(4), the second subparagraph of Article 3(4) and Article 3(5) and (7); (b) Article 4(1), Article 4(2)(a), (g) and (h) and Article 4(3); (c) Article 5; (d) Article 6; (e) Article 7(1), point (b) of the first subparagraph of Article 7(2), the second subparagraph of Article 7(2) and Article 7(3). However, for the purposes of this Chapter, the percentages required by point (b) of the first subparagraph of Article 7(2) of Directive 2001/86/EC for the application of the standard rules contained in Part 3 of the Annex to that Directive shall be raised from 25 to 33 1/3 %; (f) Articles 8, 10 and 12; (g) Article 13(4); (h) point (b) of Part 3 of the Annex. 4. When regulating the principles and procedures referred to in paragraph 3, Member States: (a) shall confer on the relevant bodies of the merging companies, in the event that at least one of the merging companies is operating under an employee participation system within the meaning of point (k) of Article 2 of Directive 2001/86/EC, the right to choose without any prior negotiation to be directly subject to the standard rules for participation referred to in point (b) of Part 3 of the Annex to that Directive, as laid down by the legislation of the Member State in which the company resulting from the cross-border merger is to have its registered office, and to abide by those rules from the date of registration; (b) shall confer on the special negotiating body the right to decide, by a majority of two thirds of its members representing at least two thirds of the employees, including the votes of members representing employees in at least two different Member States, not to open negotiations or to terminate negotiations already opened and to rely on the rules on participation in force in the Member State where the registered office of the company resulting from the cross-border merger will be situated; (c) may, in the case where, following prior negotiations, standard rules for participation apply and notwithstanding such rules, decide to limit the proportion of employee representatives in the administrative organ of the company resulting from the cross-border merger. However, if in one of the merging companies employee representatives constituted at least one third of the administrative or supervisory board, the limitation may never result in a lower proportion of employee representatives in the administrative organ than one third. 5. The extension of participation rights to employees of the company resulting from the cross-border merger employed in other Member States, referred to in point (b) of paragraph 2, shall not entail any obligation for Member States which choose to do so to take those employees into account when calculating the size of workforce thresholds giving rise to participation rights under national law. 6. Where at least one of the merging companies is operating under an employee participation system and the company resulting from the cross-border merger is to be governed by such a system in accordance with the rules referred to in paragraph Tobias de Raet

681

Art 133 Employee participation 2, that company shall be obliged to take a legal form allowing for the exercise of participation rights. 7. Where the company resulting from the cross-border merger is operating under an employee participation system, that company shall be obliged to take measures to ensure that employees’ participation rights are protected in the event of any subsequent conversion, merger or division, be it cross-border or domestic, for a period of four years after the cross-border merger has taken effect, by applying mutatis mutandis the rules laid down in paragraphs 1 to 6. 8. A company shall communicate to its employees or their representatives whether it chooses to apply standard rules for participation referred to in point (h) of paragraph 3 or whether it enters into negotiations within the special negotiating body. In the latter case, the company shall communicate to its employees or their representatives the outcome of the negotiations without undue delay. I. Worker's Participation vs. Co-Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Co-Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Basic principle: Registered seat principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Exception: Modified SE negotiation model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Employee threshold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Cross-border merger would lead to a lower level of employee participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iii) Lower level of employee protection in establishments . . . . . . . . . . . . . . . b) Modification of SE negotiation model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (i) Threshold for standard rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) Direct application of standard rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iii) Application of the laws of the Member State of the registered seat without prior negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iv) Modification of the standard rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (v) Obligation to take a legal form allowing for the exercise of participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (vi) Four-year perpetuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (vii) Communication to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 5 5 6 7 7 8 10 11 12 13 14 15 16 17 18

Article 133 addresses the question of employee participation. Although it is not a matter of core company law, it has always been one of the most important issues of cross-border mergers how the different approaches of the Member States regarding employee participation are to be dealt with in the course of a cross-border merger. It was such a controversial issue that it not only led to the failure of the 1972 draft of a Convention and the 1985 Proposal, but was also an important aspect during the legislative process of the 2003 Proposal to the 2005 Directive.1 2 The Member States eventually agreed on a compromise based on the following elements: in principle, the employee participation regime of the Member State applies, in which the acquiring or the company formed by the cross-border has its registered office, whereas this refers to the statutory seat and not the administrative office. Modified elements of the negotiation procedures from the SE Directive 2 and the SE Regulation3 were added to this principle. 1

See → Art 118 mn. 18 and mn. 25. Directive 2001/86/EC of 8.10.2001 supplementing the Statute for a European company with regard to the involvement of employees. 3 Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE). 1

2

682

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 133

I. Worker's Participation vs. Co-Determination Chapter II does not address the participation of employees regarding the social, 3 personnel and economic matters within the company which directly affect the daily working life of the employees; i.e. matters that are typically dealt with in works councils. Such employee participation is not subject to this Directive, but is dealt with in the EBR Directive4.5 This significantly streamlines and simplifies the cross-border merger process, but still guarantees adequate protection of employee rights.6 Article 133, however, addresses co-determination, i.e. if and to what extend em- 4 ployees have influence on entrepreneurial decisions by being represented on boards and committees, since they affect the interests of employees, at least indirectly.

II. Co-Determination 1. Basic principle: Registered seat principle The basic principle of Article 133 is that companies resulting from the cross-border 5 merger shall be subject to the provisions on co-determination of the Member States in which the company resulting from the cross-border merger has its registered office. This guarantees equal treatment with domestic companies and also simplifies the process.

2. Exception: Modified SE negotiation model The registered seat principle, however, inevitably bears the risk that cross-border 6 mergers are used to evade co-determination by merging a company in a Member State which has a lower degree of co-determination. To prevent this, Article 133 defines three exceptions to which the real seat principle does not apply. If at least one of these exceptions is fulfilled, co-determination is not subject to the registered seat principle but the negotiation model pursuant to the SE Directive7 and SE Regulation,8 which is, however, significantly modified by Sec. 133(4) to (7). These adjustments are necessary because the result of a cross-border merger is a domestic company and not a European entity like the Societas Europaea.9 a) Exceptions (i) Employee threshold The first exception considers the size of the company (with respect to employees): 7 pursuant to Article 133(2) the rules in force concerning employee participation, if any, in the Member State where the company resulting from the cross-border merger has its registered office shall not apply, where at least one of the merging companies has, in the six months prior to publication of the common draft terms of the cross-border 4 Directive 2009/38/EC of the European Parliament and of the Council of 6.5.2009 on the establishment of a European Works Council or a procedure in Community-scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees. 5 Recital no. 65 of the Directive 2017/1132/EU; recital no. 12 of the Directive 2005/56/EC. 6 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.160, p. 801. 7 Directive 2001/86/EC of 8.10.2001 supplementing the Statute for a European company with regard to the involvement of employees. 8 Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE). 9 Recital no. 66 sentence 2 of the Directive 2017/1132/EU; recital no. 13 sentence 2 of the Directive 2005/56/EC.

Tobias de Raet

683

Art 133 Employee participation merger as referred to in Article 123, an average number of employees equivalent to four fifths of the applicable threshold pursuant to the applicable national law, which triggers the participation of employees.10 The idea behind this exception is that the SE negotiation model is more suitable for limited liability companies of a certain size and with a certain level of employee protection. While the 2017 Directive had provided for a fixed threshold of 500 employees, the 2019 Directive implemented a regime where the obligation to negotiate under the SE-regime already applies if at least four fifths of the threshold regime is reached, with such a threshold being also applicable to cross-border conversions (cf. Article 86l(2)) and cross border spin-offs (cf. Article 160l(2)). (ii) Cross-border merger would lead to a lower level of employee participation The second exception aims to ensure that the cross-border merger does not lead to a lower level of employee protection: pursuant to Article 133(2)(a) the rules in force concerning employee participation, if any, in the Member State where the company resulting from the cross-border merger has its registered office shall not apply, where the national law applicable to the company resulting from the cross-border merger does not provide for at least the same level of employee participation as operated in the relevant merging companies. This is to be measured by reference to the proportion of employee representatives amongst the members of the administrative or supervisory organ or their committees or of the management group which covers the profit units of the company, while ensuring employee representation. 9 This exception ensures that cross-border mergers are not used to transfer a company to a jurisdiction which offers a lower level of employee representation. 8

(iii) Lower level of employee protection in establishments 10

The third exception is basically a variation of Article 133(2)(a): pursuant to Article 133(2)(b), the rules in force concerning employee participation, if any, in the Member State where the company resulting from the cross-border merger has its registered office shall not apply where the national law applicable to the company resulting from the cross-border merger provides for employees of establishments of the company resulting from the cross-border merger that are situated in other Member States the same entitlement to exercise participation rights as enjoyed by those employees employed in the Member State where the company resulting from the cross-border merger has its registered office. Article 133(b) aims to ensure that employees in establishments in other Member States are not subject to less protection than the employees of the company resulting from the merger. b) Modification of SE negotiation model

11

For cross-border mergers, the SE negotiation model is significantly modified by Sec. 133(4) to (7) in order to reflect that the result of a cross-border merger is a domestic company and not a European entity like the Societas Europaea.11

10 Directive 2001/86/EC of 8.10.2001 supplementing the Statute for a European company with regard to the involvement of employees. 11 Recital no. 66 sentence 2 of the Directive 2017/1132/EU; recital no. 13 sentence 2 of the Directive 2005/56/EC.

684

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 133

(i) Threshold for standard rule Article 133(3)(e) lowers the threshold for the fallback provision (standard rule) ac- 12 cording to the SE Directive and SE Regulation, which is triggered in the event of failure of the negotiations. While for SEs this type of standard rule applies if at least 25 % of the employees are subject to co-determination, this threshold has been modified for crossborder mergers to one third. (ii) Direct application of standard rule Pursuant to Article 133(4)(a), the competent corporate bodies of the companies 13 involved in the cross-border merger may decide to apply the standard rule according to the SE Directive and SE Regulation without any prior, or during ongoing, negotiations. For the Societas Europaea, the fallback provision is only applicable if negotiations failed and such negotiations may not be waived. (iii) Application of the laws of the Member State of the registered seat without prior negotiations Pursuant to Article 133(4)(b), the special negotiating body must be given the right 14 to decide, by a majority of two thirds of its members representing at least two thirds of the employees, including the votes of members representing employees in at least two different Member States, not to open negotiations or to terminate negotiations already opened and to rely on the rules on participation in force in the Member State where the registered office of the company resulting from the cross-border merger will be situated, i.e. the registered seat principle. (iv) Modification of the standard rule Based on requests by various Scandinavian countries,12 Member States may, in the 15 case where, following prior negotiations, standard rules for participation apply, decide to limit the proportion of employee representatives in the administrative organ of the company resulting from the cross-border merger. This shall, in particular, address problems of employee participation in monistic companies. (v) Obligation to take a legal form allowing for the exercise of participation If at least one of the companies involved in the merger is subject to an employee 16 participation system and the company resulting from the cross-border merger is to be governed by such a system in accordance with Article 133(3), the company resulting from the merger is obliged to take a legal form allowing for the exercise of participation (cf. Article 133(6)). (vi) Four-year perpetuation Article 133(7) provides that where the company resulting from the cross-border 17 merger is operating under an employee participation system, that company shall be obliged to take measures to ensure that employees' participation rights are protected in the event of a subsequent cross-border or domestic merger, division or conversion for a period of four years after the cross-border merger has taken effect, by applying mutatis mutandis the rules laid down in this Article. This provision was implemented 12 Council of the European Union, Report, Doc. 10934/04, 30.6.2004, p. 6 et seq.; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.163, p. 803.

Tobias de Raet

685

Art 134 Validity at the request of Germany in order to prevent a way out of co-determination after the cross-border merger becomes effective.13 (vii) Communication to employees 18

The 2019 Directive amended Article 133(8) pursuant to which a company is required to communicate to its employees (or their representatives) whether it has applied the standard rule for participation (cf. Article 133(3) point (h)) or entered into negotiations within the special negotiation body. It is further determined that the outcome of any negotiations within the special negotiation body are to be communicated to its employees (or their representatives).

Article 133 a Independent experts 1. Member States shall lay down rules governing at least the civil liability of the independent expert responsible for drawing up the report referred to in Article 125. 2. Member States shall have rules in place to ensure that: (a) the expert, or the legal person on whose behalf the expert is operating, is independent from and has no conflict of interest with the company applying for the pre-merger certificate; and (b) the expert’s opinion is impartial and objective, and is given with a view to providing assistance to the competent authority in accordance with the independence and impartiality requirements under the law and professional standards to which the expert is subject. Article 133 a, which was introduced by the 2019 Directive, stipulates that the Member States have to implement in their national laws, rules governing the civil liability of the independent experts responsible for drawing up the independent expert report pursuant to Article 125. In addition, Member States have to ensure that their national laws provide for certain rules to ensure that the expert is operating independently, has no conflict of interests and that the expert's opinion is impartial and objective. 2 While it is a positive aspect that the 2019 Directive addresses this issue, the language in Article 133 a remains vague and will likely not lead to a harmonisation of the liability of the independent experts.1 Such harmonisation would, however, be necessary in order to ensure that members at least have comparable rights in the different Member States. 1

Article 134 Validity A cross-border merger which has taken effect as provided for in Article 129 may not be declared null and void. 13 Wiesner, ‘Die grenzüberschreitende Verschmelzung und der neue Mitbestimmungskompromiss’ (2005) DB, 91 (94); Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.163, p. 804, fn. 483. 1 Cf. Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package’ (2019), BB, 1922 (1929); J. Schmidt, ‘Crossborder Mergers, Divisions and Conversions: Accomplishments and Deficits of the Company Law Package’ (2019), ECFR, 222 (246).

686

Tobias de Raet

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 134

The first paragraph does not affect Member States’ powers, inter alia, in relation to criminal law, the prevention and combatting of terrorist financing, social law, taxation and law enforcement, to impose measures and penalties, under national law, after the date on which the cross-border merger took effect. Since it is virtually impossible to unwind a merger, 1 the European legislature provided in Chapter I that domestic mergers may only be unwound for the limited reasons expressly set out in Article 108. Limiting the reasons for which a merger may be declared null and void in this way ensures legal certainty for the companies involved in the merger and the general public.2 While it is difficult to unwind a domestic merger, unwinding a cross-border merger would be even more problematic, since multiple jurisdictions are involved. According to Article 134, a cross-border merger which has taken effect as provided for in Article 129 may not be declared null and void. The provision grants absolute protection against the merger being unwound (grandfathering) for whatever reason both ex tunc (from the outset) and ex nunc (from now on). It does not, however, for the avoidance of doubt, prohibit the initiation of legal proceedings against the merger prior to it becoming effective.3 This concept was not undisputed: various Member States argued that the concept should be similar to the one implemented in Article 108 pursuant to which the merger may be declared null and void for certain limited reasons or Article 30 of the SE Regulation4 pursuant to which a merger may not be unwound ex tunc, but ex nunc.5 The Commission, however, eventually prevailed in its position6 arguing that (i) only the current concept can provide legal certainty and (ii) the scrutiny of the legality of the cross-border merger pursuant to Article 27 ensures that no defective mergers come into effect.7 From a practical point of view this approach is to be welcomed, since the unwinding of a merger is legally, but in particular economically, virtually impossible. The EU legislature should have considered also implementing this concept for domestic mergers, which some Member States – like Germany (cf. Article 20 of the German Transformation Act8) – have done. A uniform approach would not only increase legal certainty but also implement a much-needed uniform concept for domestic mergers pursuant to Chapter I, cross-border mergers pursuant to Chapter II and mergers pursuant to Article 17 et seq. of the SE Regulation. The 2019 Directive implemented a new sub-paragraph which clarified that the absolute protection against the merger being unwound (grandfathering) does not affect the 1 Ganske, ‘Änderung des Verschmelzungsrechts’ (1981) DB, 1551 (1556); Habersack and Verse, Europäisches Gesellschaftsrecht (5th edn, 2019), § 8.26, p. 358; Lutter/Bayer/Schmidt, Europäisches Kapitalmarktund Gesellschaftsrecht (6th edn, 2017), § 20.106, p. 660. 2 Cf. with similar wording: recital no. 9 of the 1978 Directive, recital no. 10 of the 2011 Directive or recital no. 54 of the 2017 Directive. 3 Vermeylen, ‘The Cross-border merger Directive’ in Vermeylen and Vande Velde (eds), European crossborder Mergers and reorganizations (2012), § 1.127, p. 33. 4 Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE). 5 Cf. Council of the European Union, Working Doc. 1165/04, 6.5.2004, p. 15; Council of the European Union, Working Doc. 13133/05, 6.5.2004, p. 17; Council of the European Union, Working Doc. 7068/04, 11.3.2004, p. 15; Council of the European Union, Working Doc. 9294/04, 6.5.2004, p. 16. 6 Cf. Council of the European Union, Working Doc. 9294/04, 6.5.2004, p. 16. 7 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22128.106, p. 781 et seq. See also: Nagel, ‘Die Richtlinie zur grenzüberschreitenden Verschmelzung’ (2006) NZG, 97 (100). 8 Umwandlungsgesetz of 28.10.1994, BGBl. 8.11.1994 I, p. 3210; 31.3.1995 I, p. 428.

Tobias de Raet

687

1

2

3

4

5

Art 135 General provisions on division operations Member States' powers to impose measures in penalties under the respective national laws; in particular, in the field of criminal law, terrorist financing, social law, taxation and law enforcement. Although it is not expressly provided for, such measures must not (virtually) have the effect of unwinding the merger (i.e. by imposing sanctions which only have the aim of (financially) destroying the respective company).

CHAPTER III DIVISIONS OF PUBLIC LIMITED LIABILITY COMPANIES Section 1 General provisions Article 135 General provisions on division operations 1. Where Member States permit the types of companies listed in Annex I coming under their laws to carry out division operations by acquisition as defined in Article 136, they shall make those operations subject to Section 2 of this Chapter. 2. Where Member States permit the types of companies referred to in paragraph 1 to carry out division operations by the formation of new companies as defined in Article 155, they shall make those operations subject to Section 3 of this Chapter. 3. Where Member States permit the types of companies referred to in paragraph 1 to carry out operations, whereby a division by acquisition as defined in Article 136(1) is combined with a division by the formation of one or more new companies as defined in Article 155(1), they shall make those operations subject to Section 2 of this Chapter and Article 156. 4. Article 87(2), (3) and (4) shall apply. I. Legislative History and Regulatory Context of the Provisions on Divisions . . II. Legislative Aim and Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. National limited liability companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Insolvency or restructuring proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 5 6 11

I. Legislative History and Regulatory Context of the Provisions on Divisions The Treaty on the Functioning of the European Union (TFEU) provides freedom of establishment for companies in the European Union (EU). In 2005, the EU issued a Directive dealing with cross-border mergers of limited liability companies. This Directive has been consolidated in Chapter 2 of the Consolidated Directive relating to company law (Directive 2017/1132) in 2017 which has now been further amended by means of Directive (EU) 2019/2121.1 2 Being closely related to the merger, the division was originally intended to be regulated in the Merger Directive: Article 24 of the 1986 preliminary draft and Article 21 of the drafts of 1970, 1973 and 1975 provided for the appropriate application of the merger rules to “operations similar to a merger”, including, in particular, the division. However, shortly before the adoption of the Merger Directive, the Council decided in July 1978 1

1 Knapp, ‘Cross border mobility: what do we need in practice’, ERA Forum 19, 63-76, 2018; https://link.s pringer.com/article/10.1007/s12027-018-0495-6.

688

Klaus Bader and Andreas Börner

Art 135 General provisions on division operations Member States' powers to impose measures in penalties under the respective national laws; in particular, in the field of criminal law, terrorist financing, social law, taxation and law enforcement. Although it is not expressly provided for, such measures must not (virtually) have the effect of unwinding the merger (i.e. by imposing sanctions which only have the aim of (financially) destroying the respective company).

CHAPTER III DIVISIONS OF PUBLIC LIMITED LIABILITY COMPANIES Section 1 General provisions Article 135 General provisions on division operations 1. Where Member States permit the types of companies listed in Annex I coming under their laws to carry out division operations by acquisition as defined in Article 136, they shall make those operations subject to Section 2 of this Chapter. 2. Where Member States permit the types of companies referred to in paragraph 1 to carry out division operations by the formation of new companies as defined in Article 155, they shall make those operations subject to Section 3 of this Chapter. 3. Where Member States permit the types of companies referred to in paragraph 1 to carry out operations, whereby a division by acquisition as defined in Article 136(1) is combined with a division by the formation of one or more new companies as defined in Article 155(1), they shall make those operations subject to Section 2 of this Chapter and Article 156. 4. Article 87(2), (3) and (4) shall apply. I. Legislative History and Regulatory Context of the Provisions on Divisions . . II. Legislative Aim and Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. National limited liability companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Insolvency or restructuring proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 5 6 11

I. Legislative History and Regulatory Context of the Provisions on Divisions The Treaty on the Functioning of the European Union (TFEU) provides freedom of establishment for companies in the European Union (EU). In 2005, the EU issued a Directive dealing with cross-border mergers of limited liability companies. This Directive has been consolidated in Chapter 2 of the Consolidated Directive relating to company law (Directive 2017/1132) in 2017 which has now been further amended by means of Directive (EU) 2019/2121.1 2 Being closely related to the merger, the division was originally intended to be regulated in the Merger Directive: Article 24 of the 1986 preliminary draft and Article 21 of the drafts of 1970, 1973 and 1975 provided for the appropriate application of the merger rules to “operations similar to a merger”, including, in particular, the division. However, shortly before the adoption of the Merger Directive, the Council decided in July 1978 1

1 Knapp, ‘Cross border mobility: what do we need in practice’, ERA Forum 19, 63-76, 2018; https://link.s pringer.com/article/10.1007/s12027-018-0495-6.

688

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 135

that further clarification was needed in view of the particular risks involved in a division and that the division should therefore be regulated in a separate Directive.2 The aim of the Division Directive (82/891) was to provide members and third 3 parties, in particular creditors, with the same level of protection in the case of divisions as in the case of mergers, given the close relationship between the two legal restructuring methods, and in particular to prevent potential circumvention of the standards of the Merger Directive. The procedural rules and protective instruments therefore correspond as far as possible to those of the Merger Directive, and the provisions of the latter are even declared to be applicable accordingly in several cases. The “European model for structural changes” developed for mergers thus also applied to the closely related division. Unlike for mergers, however, the European legislator has not established an obligation for the Member States to regulate the legal institution of the division under national law. The background, apart from the lesser practical importance of the division, is probably not least the history of the Division Directive as an instrument to prevent the circumvention of the Merger Directive. However, if and to the extent that Member States permit the division of public limited liability companies, the provisions of the Directive must be observed.3 The Division Directive (82/891) has been consolidated within the Consolidated Di- 4 rective relating to certain aspects of company law (2017/1132) which was subsequently amended in 2019 by Directive (EU) 2019/2121.

II. Legislative Aim and Scope of Application The protection of members’ and third parties’ interests requires that the laws of 5 the Member States relating to divisions of public EU limited liability companies be coordinated where Member States permit such operations.4

1. National limited liability companies The scope of Chapter III Title II Directive 2017/1132 is limited to the EU domestic 6 public limited liability companies expressly listed under Annex I to the Directive. Moreover, only domestic divisions, i.e. divisions in which all participating corporate entities are governed by the law of the same Member State, are covered by the Directive. 5 Germany and many other Member States have implemented the requirements of 7 the Directive in respect of other national corporations and also partnerships; almost all Member States have adopted legal regulations for the implementation of corporate divisions.6 In order to illustrate the specific adoption of the Directive in the different Member States, the authors have included by way of example how the directive was adapted in Germany, Italy and The Netherlands. When drafting the German Transformation Act, the German legislator decided, in 8 view of practical requirements, to comprehensively extend the scope of the Directive. Thus, divisions may not only be performed by public limited companies, but also by all

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 685. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 685-687. 4 Recital 68 Directive 2017/1132. 5 Article 135(1) Directive EU 2017/1132. 6 Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos 2019), § 10, p. 1703. 2

3

Klaus Bader and Andreas Börner

689

Art 136 Definition of a ‘division by acquisition’ other legal entities which may be involved in a merger under German law (and not only by public limited liability companies).7 9 Similarly, Italy has not limited the possibility to engage in corporate divisions to public limited liability companies, but extended its scope to effectively encompass partnerships.8 Article 2506 of the Italian Civil Code states that “by means of a division, a company assigns all its assets to several companies, whether pre-existing or newly incorporated, or part of its assets, in this case even to a single company, and assigns the relative shares or quotas of the recipient companies to its shareholders”. 10 Similarly, the Dutch Civil Code extends the scope of the provisions regarding divisions. Pursuant to article 2:334 b Dutch Civil Code, the provisions apply to among others, private limited liability (besloten vennootschappen) companies and foundations (stichtingen). The parties that are involved with the division must be of the same legal form, albeit that a public and a private limited liability company are considered equivalent.9

2. Insolvency or restructuring proceedings 11

While many Member State laws allow divisions where the company being divided is in liquidation (Article 136, 89 (2)), insolvency or restructuring proceedings normally prevent the participation in a division, even though Article 135, 87(2) provides such an option to the Member States.10 For clarification purposes, this may have to be reconsidered when transposing the new Directive on restructuring and insolvency (EU) 2019/1023 which is silent on this issue.

Section 2 Division by acquisition Article 136 Definition of a ‘division by acquisition’ 1. For the purposes of this Chapter, ‘division by acquisition’ shall mean the operation whereby, after being wound up without going into liquidation, a company transfers to more than one company all its assets and liabilities in exchange for the allocation to the shareholders of the company being divided of shares in the companies receiving contributions as a result of the division (hereinafter referred to as ‘recipient companies’) and possibly a cash payment not exceeding 10 % of the nominal value of the shares allocated or, where they have no nominal value, of their accounting par value. 2. Article 89(2) shall apply. 3. In so far as this Chapter refers to provisions of Chapter I of Title II, the term ‘merging companies’ shall mean ‘the companies involved in a division’, the term ‘company being acquired’ shall mean ‘the company being divided’, the term ‘acquiring company’ shall mean ‘each of the recipient companies’ and the term ‘draft terms of merger’ shall mean ‘draft terms of division’.

Article 124(1) German Transformation Act (UmwG). Organismo Italiano di Contabilita, “Fusione e Scissione”, 2007; https://www.fondazioneoic.eu/wp-cont ent/uploads/2011/02/2007-01-24_OIC-4_Fusione-e-scissione.pdf. 9 Article 2:334b(3) Dutch Civil Code. 10 Jung, Krebs and Stiegler (eds), “Gesellschaftsrecht in Europa (Nomos, 2019), § 21, p. 2192. 7

8

690

Klaus Bader and Andreas Börner

Art 136

TITLE II CONVERSIONS, MERGERS AND DIVISIONS I. Two Types of Domestic Divisions: Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Division by acquisition – Section 2 Chapter III Title II . . . . . . . . . . . . . . . . . . . . . . . III. Division by formation of new companies – Section 3 Chapter III Title II . . . . IV. Ratio-preserving and ratio-altering division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 6 10 11

I. Two Types of Domestic Divisions: Overview Following the logic applied with regard to mergers, the Directive distinguishes between two types of corporate divisions: Division by acquisition in accordance with Section 2 Chapter III Title II Directive and divisions by formation of new companies in accordance with Section 3 Chapter III Title II Directive. Furthermore, Article 135 (3) allows a combination of both types. One decisive difference between the two types of divisions is that in the case of division by acquisition the recipient companies already exist, while in the case of the division by formation of new companies – as the name suggests – the new companies are established only at the time of the division. Article 156 provides that the procedure to be followed in the event of a division by acquisition in accordance with Articles 137 to 153 applies mutatis mutandis to divisions by the formation of new companies, with a number of transaction specific exceptions.1 This distinction between the two types is of fundamental importance for the whole scheme of the Directive Although many of the standard provisions on the procedure for divisions by acquisition also apply to divisions by the formation of new companies, Article 156 also contains a number of special features.2 Three noteworthy common features of the two types of division types are:

1

2

3

4

(1) Partial universal succession, (2) Dissolution of the company being divided without going into liquidation, and (3) Exchange of shares and, if applicable, additional cash payments. It is important to note that the Directive only covers full divisions where the 5 company being divided ceases to exist, leaving it to the Member States on whether and how to implement partial divisions where the company being divided continues to exist with some remaining assets and liabilities.3

II. Division by acquisition – Section 2 Chapter III Title II “Divisions by acquisition” are defined in Article 136(1), meaning any operation 6 whereby a company, after being wound up without going into liquidation, transfers all its assets and liabilities to more than one company. In exchange, shares of the recipient companies, are allocated to the shareholders of the company being divided. Furthermore, a cash payment not exceeding 10 % of the allocated shares’ nominal value or, whenever they do not have a nominal value, of their accounting par value, may be agreed upon. With the possibility of an additional cash payment, the Directive takes account of the fact that, without an option to compensate so-called “fractional amounts”, a division would often fail for technical reasons. At the same time, Article 158 ultimately leaves it to the Member States to allow for additional cash payments exceeding the 10 %

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 690. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 690. 3 See → Art 159.

1

2

Klaus Bader and Andreas Börner

691

Art 136 Definition of a ‘division by acquisition’ threshold, so that one may rightly assume the possibility of a full corporate division in exchange for money instead of shares.4 7 Making use of the leeway which has been granted to the Member States, the German legislator has included, in addition to the division as provided for in accordance with Directive EU 2017/1132, spin-offs5 as well as hive-downs6 within the provisions of the German Transformation Act. In order to open up comprehensive restructuring possibilities for German companies, these transactions were therefore subjected to the same rules as the division process provided for in the Directive. In accordance with the Directive, all types of these “divisions” are possible both by acquisition and by formation of new companies, as well as by way of combining the two.7 8 Following Article 2506 Italian Civil Code, the national law went beyond the minimum standard of the Directive and also allows for spin-offs and hive-downs alongside the division in the sense of Directive 2017/1132.Furthermore, the Italian legislator provided for the possibility of additional Cash payments, while confirming the 10 % threshold provided for by Article 136(1).8 9 In the Netherlands, a division can be performed in either two ways: a full division (zuivere splitsing) or a partial division (afsplitsing). A full division is the legal act whereby the property, proprietary rights and interests and the liabilities of a legal person, which ceases to exist upon the division, are acquired by general transfer of title by two or more other legal persons. On the other hand, a partial division is the legal act whereby all or part of the property, proprietary rights and interests and the liabilities of a legal person are acquired by general transfer of title.

III. Division by formation of new companies – Section 3 Chapter III Title II 10

“Divisions by formation of new companies” are defined under Section 3, Article 155.

IV. Ratio-preserving and ratio-altering division According to the Directive, the division can be carried out as a proportional division (i.e. ratio-preserving), i.e. all shareholders of the company being divided receive shares in all recipient companies in proportion to their shareholdings.9 12 As can be seen from Article 137(2)(i) and Article 151(1)(b), however, the Member States, if they permit divisions at all, must also permit a so-called non-proportional division in which the participation quotas are shifted (ratio altering).10 This includes, in particular, a so-called “division at zero” in which one or more shareholders of the company being divided will only participate in one recipient or new company. The interference with the rights of the (minority) shareholders associated with such non-proportional divisions is supported by the Directive on the one hand by special transparency rules requiring to indicate the share exchange ratio in the draft terms of division (point (i) of Article 137(2)) and its explanations in the report (Article 14(1)). 11

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 691. Article 123(2) German Transformation Act (UmwG). 6 Article 123(3) German Transformation Act (UmwG). 7 Article 123 German Transformation Act (UmwG). 8 Article 2506 Italian Civil Code. 9 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 691. 10 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 691. 4

5

692

Klaus Bader and Andreas Börner

Art 137

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

On the other hand, Article 139(2) explicitly empowers the Member States to grant a withdrawal right to minority shareholders.

Article 137 Draft terms of division 1. The administrative or management bodies of the companies involved in a division shall draw up draft terms of division in writing. 2. Draft terms of division shall specify at least: (a) the type, name and registered office of each of the companies involved in the division; (b) the share exchange ratio and the amount of any cash payment; (c) the terms relating to the allotment of shares in the recipient companies; (d) the date from which the holding of such shares entitles the holders to participate in profits and any special conditions affecting that entitlement; (e) the date from which the transactions of the company being divided shall be treated for accounting purposes as being those of one or other of the recipient companies; (f) the rights conferred by the recipient companies on the holders of shares to which special rights are attached and the holders of securities other than shares, or the measures proposed concerning them; (g) any special advantage granted to the experts referred to in Article 142(1) and members of the administrative, management, supervisory or controlling bodies of the companies involved in the division; (h) the precise description and allocation of the assets and liabilities to be transferred to each of the recipient companies; (i) the allocation to the shareholders of the company being divided of shares in the recipient companies and the criterion upon which such allocation is based. 3. Where an asset is not allocated by the draft terms of division and where the interpretation of those terms does not make a decision on its allocation possible, the asset or the consideration therefor shall be allocated to all the recipient companies in proportion to the share of the net assets allocated to each of those companies under the draft terms of division. Where a liability is not allocated by the draft terms of division and where the interpretation of those terms does not make a decision on its allocation possible, each of the recipient companies shall be jointly and severally liable for it. Member States may provide that such joint and several liability be limited to the net assets allocated to each company. I. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Formalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Draft terms of division – formal requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Draft terms of division – content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Examples of National Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Klaus Bader and Andreas Börner

1 4 4 6 9 9 11 13

693

Art 137 Draft terms of division

I. Purpose Article 137 and subsequent articles contain detailed provisions on the procedure for division by acquisition, which according to Article 156(1) are also largely applicable to division by formation of new companies and are based on the “European model for structural changes” already established by the Merger Directive with its focus on granting protection by information.1 2 The protection of the interests of members and third parties requires that the laws of the Member States relating to divisions of public limited liability companies be coordinated where Member States permit such operations.2 In the context of such coordination, it is particularly important that the shareholders of the companies involved in a division are being kept as adequately informed as possible, and their rights be suitably protected.3 As such, the disclosure requirements under Section 1 of Chapter III of Title I of Directive 2017/1132 also cover divisions so that third parties are kept adequately informed.4 3 The entire division is based upon the “draft terms of division” to be drawn up by the administrative or management bodies of the companies involved in a division. The draft terms form the framework for the division and lay down the essential terms and conditions of the division, on the basis of which the shareholders are to vote at the general meeting. 1

II. Formalities 1. Draft terms of division – formal requirements Other than the written-form requirement set out in Article 137(1), the Directive imposes no further formal requirements on the Member States. 5 It remains in the Member States’ discretion to apply stricter standards and require, for example, the draft terms to be authenticated by a notary or notarized. By cross-referring to Article 102, Article 148 sets out certain circumstances under which a notarization of shareholder meetings adopting the draft terms and/or the division agreement is mandatory. 4

2. Draft terms of division – content In order to ensure that proper information is provided to the affected shareholders, Article 137(2) incorporates a minimum standard by means of a non-exhaustive list of specifications which must be included in every draft terms of division. Just as in relation to the formal requirements, Member States and even corporations themselves may, and in fact do apply stricter standards. 7 The content of the draft terms of division largely corresponds to the content required under the respective provisions regulating corporate mergers. Nevertheless, point (h) and (i) of Article 137(2) provide for two division-specific requirements: – In accordance with point (h) of Article 137(2), the draft terms of division must contain a precise description and breakdown of the assets and liabilities to be transferred in the course of the division. It must be unequivocally clear which assets 6

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 694. Recital 68 Directive 2017/1132. 3 Recital 69 Directive 2017/1132. 4 Recital 71 Directive 2017/1132. 1

2

694

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 137

and liabilities will be transferred to which recipient entity by way of partial universal succession in accordance with point (a) of Article 151(1). As the ultimate content of the distribution is left widely unregulated, the parties enjoy, subject to certain mandatory requirements of the lex rei sitae governing the rights in an asset or a liability, an extensive “freedom of distribution”. – Point (i) of Article 137(2) prescribes the indication of the ultimate allocation of the shares in the recipient companies among the shareholders of the company being divided. The rationale for this requirement is that the Directive also permits a ratio-altering division. This obligation serves the purpose of adequately informing (minority) shareholders before the division.5 In order to ensure the ultimate classification of all assets, the Directive in its Article 8 137(3) provides for a set of fallback rules governing non-allocated items. According to Article 137(3) paragraph 1, if the (forgotten) item forms part of the assets of the company being divided, it shall be transferred to all recipient companies pro rata to the net assets attributable to them under the draft terms of division. In case of (forgotten) liabilities, however, the recipient companies are jointly and severally liable in accordance with Article 137(3) paragraph 2 sentence 1. It is noteworthy that, according to the second sentence of the very same Article, Member States may limit this default-liability proportionally to the net assets allocated to the company in question.

III. Examples of National Implementation 1. Germany In light of the leeway granted to the Member States in this respect, the German legis- 9 lator has decided to adopt the traditional German model of a contract for divisions by acquisition. In accordance with Article 137(1), the board of directors is responsible for drafting the “division and transfer agreement”.6 In terms of formal requirements, stricter standards apply and a notarial deed is re- 10 quired pursuant to Article 125 sentence 1 to 6 of the German Transformation Act. With regard to the minimum content of the division and transfer agreement, the German legislator also went beyond the minimum standard of the Directive demanding the same additional information required for mergers in accordance with Article 5(1) no. 2, 7, 8 and 9 of the German Transformation Act. This means in particular that the division and transfer agreement must include precise information about the modalities of the transfer of the parts of the assets of the company being divided. The fallback provisions contained in Article 137(3)1 regulating non-allocated assets have been transposed into Article 131(1) of the German Transformation Act. With regard to liabilities, there are no special provisions, but pursuant to Article 133(1) sentence 1 of the German Transformation Act, the legal entities involved in the division are generally jointly and severally liable for all liabilities of the company being divided as set out – but only with regard to unallocated liabilities – in Article 137(3) sentence 2.7 Article 133 German Transformation Act arguably goes beyond the provisions of Directive by stipulating that, with regard to liabilities allocated in the division and transfer agreement, the “non-liable” entity’s joint and several liability shall only apply to liabilities which are both 5 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 696-697. 6 Article 125 sentence 1, 4 subparagraph 1 sentence 1 German Transformation Act (UmwG). 7 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th edn, 2017), § 21, p. 698.

Klaus Bader and Andreas Börner

695

Art 137 Draft terms of division due and established or enforceable, within the five years following the date when the registration of the division has been published. At the same time, Germany did not make use of the option to limit the joint and several liability to the net assets allocated to each company.

2. Italy According to Article 1506-bis Italian Civil Code, the administrative body of each company involved in the division is responsible for preparing the draft terms of division containing the details indicated in the first paragraph of Article 2501-ter Italian Civil Code. The draft terms must set out the (i) type, business name and registered seat of the companies engaging in the corporate division, (ii) the instrument of incorporation of the newly established or pre-existing companies, (iii) the exact exchange ratio of the shares or their quotas, as well as any cash adjustments, (iv) the procedures for the allotment of shares or quotas of the companies resulting from the division, (v) the date on which those shares or units are to be included in the statement of loss and profits, (vi) the date as from which the transactions of the company being divided are to be entered in the balance sheet of the recipient companies, (vii) any special rights held by particular categories of shareholders and holders of securities other than shares, (viii) as well as any particular advantages which may be granted in favour of the parties responsible for the administration of the companies involved in the division. Furthermore, and in addition to what is demanded by Article 2501-ter Italian Civil Code, the exact description of the assets to be assigned to each of the recipient companies as well as additional cash payments also have to be outlined.8 12 The Italian legislator has largely transposed Article 137(3) without changes9 However, given that Italian law also provides for spin-offs and hive-downs, all assets the recipients of which cannot be inferred from the draft terms of division shall remain with the company being divided. 11

3. The Netherlands 13

The board of directors of the companies involved must draw up a division proposal (splitsingsvoorstel). According to Article 2:334 f paragraph 2 Dutch Civil Code, this proposal must at least include, among others, (a) the legal form, name and statutory seat (statutaire zetel) of the companies involved, and, if the recipient company is incorporated on the division, the same information for such recipient company, (b) the articles of association of the recipient companies (and if applicable, of the company subject to the division that does not cease to exist) involved, and the articles of association as they read after execution of the division, (c) whether all assets and liabilities of the legal entity being divided are transferred or part thereof, (d) a description by which can be determined which assets and liabilities of the legal entity being divided will be transferred to each of the recipient companies and which assets and liabilities will remain with the legal entity being divided, (e) the value of the assets and liabilities that are transferred, property, proprietary rights and interests and the liabilities to be transmitted or to be retained by the legal entity being divided as well the share value of the recipient companies, (f) a specification of, if any, special rights against the legal entity being divided other than shareholder rights, (g) the allocation of benefits in connection with the division to an officer or director or supervisory board member of a party to the division or 8 9

696

Article 2506-bis Sentence 1 Italian Civil Code. Article 2506-bis Sentence 2 Italian Civil Code.

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 138

to any other person involved in the division, (h) the intentions for the post-division composition of the managements of the recipient companies and the legal entity being divided in case it does not cease to exist, (i) the effective date on which financial particulars to be transmitted shall be reflected in the annual accounts or other financial statements of the recipient companies, (j) the intended measures in connection with the acquisition by the shareholders of the legal entity being divided, (k) the intentions as regards the continuation or termination of the activities, (l) by whom the resolution for the division must be approved. Article 137(3) has been transposed in Article 2:334 s of the Dutch Civil Code. If not 14 all assets and liabilities are transferred in the division, the company being divided remains the owner of the assets and liabilities of which the division proposal remains unclear. In accordance with Article 137(3), the Dutch Civil Code decides that if part of the assets and liabilities are transferred, the assets shall be allocated to the all the recipient companies in proportion to the share of net assets allocated to each of these companies under the division proposal. In addition, and thereby closely following the wording of the Directive, as regards 15 public and private limited liability companies, the draft terms must specify (a) the share exchange ratio, (b) the date as from which the shareholders of the company being divided will share in the profits of the recipient companies, (c) the number of shares which will be cancelled (if any), (d) the consequences of the division for the holders of non-voting shares or shares without profit sharing rights (as regard the private limited liability company), (e) the amount of compensation for a share and the maximum amount for which compensation may be requested with application of Article 2:334ee1 Dutch Civil Code.

Article 138 Publication of the draft terms of division Draft terms of division shall be published in the manner prescribed by the laws of each Member State in accordance with Article 16 for each of the companies involved in a division, at least one month before the date of the general meeting which is to decide thereon. Any of the companies involved in the division shall be exempt from the publication requirement laid down in Article 16 if, for a continuous period beginning at least one month before the date fixed for the general meeting which is to decide on the draft terms of division and ending not earlier than the conclusion of that meeting, it makes the draft terms of division available on its website free of charge for the public. Member States shall not subject that exemption to any requirements or constraints other than those which are necessary in order to ensure the security of the website and the authenticity of the documents and may impose such requirements or constraints only to the extent that they are proportionate in order to achieve those objectives. By way of derogation from the second paragraph, Member States may require that publication be effected via the central electronic platform referred to in Article 16(5). Member States may alternatively require that such publication be made on any other website designated by them for that purpose. Where Member States avail themselves of one of those possibilities, they shall ensure that companies are not charged a specific fee for such publication.

Klaus Bader and Andreas Börner

697

Art 138 Publication of the draft terms of division Where a website other than the central electronic platform is used, a reference giving access to that website shall be published on that central electronic platform at least one month before the date fixed for the general meeting. That reference shall include the date of publication of the draft terms of division on the website and shall be accessible to the public free of charge. Companies shall not be charged a specific fee for such publication. The prohibition precluding the charging to companies of a specific fee for publication, laid down in the third and fourth paragraphs, shall not affect the ability of Member States to pass on to companies the costs in respect of the central electronic platform. Member States may require companies to maintain the information for a specific period after the general meeting on their website or, where applicable, on the central electronic platform or the other website designated by the Member State concerned. Member States may determine the consequences of temporary disruption of access to the website or to the central electronic platform, caused by technical or other factors. I. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Publication Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Form of publication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Notice period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Exemption from publication requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Modalities of publication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 3 7 8 9

I. Purpose The draft terms are one of the key elements of the European model for structural changes. The concept is to protect the relevant stakeholders by providing them with sufficient information about the envisaged division. 2 The underlying rationale of Article 138 is to ensure that timely and comprehensive information is provided to all shareholders, creditors as well as other individuals holding a legal interest in the companies involved. The draft terms are of particular importance to members, who must, on the basis of the information provided therein, decide on the division as a whole. 1

II. Publication Requirements 1. Form of publication The draft terms of division shall be published in the manner prescribed by the laws of each Member State in accordance with Article 16 for each of the companies involved in a division. 4 The German legislator has transposed the publication requirements in relation to the division and transfer agreement by cross-referencing, in Article 125 of the German Transformation Act, the general requirements as set out for each type of entity. In relation to stock corporations, Article 61 of the German Transformation Act 1 requires that the required documentation has to be filed with the commercial register prior to the general meeting that is to adopt the division and transfer agreement. The registry must publish the entry of the (draft) agreement in the commercial register in accordance with the publication requirements under Article 10 German Commercial Code. Some 3

1

698

Article 125 Sentence 1 German Transformation Act (UmwG).

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 138

German legal authors argue, insofar going beyond the provision of the Directive, that shareholders may unanimously waive the publication because creditors are, under the German law transposition of the Directive, sufficiently protected even without this requirement.2 The Italian legislator has regulated the disclosure requirements by reference to Arti- 5 cle 2501-ter Italian Civil Code.3 Following this provision, the draft terms of division need to be filed with the commercial register of the place where the companies involved in the division have their registered office. Furthermore, at least thirty days must lie between the publication of the draft terms and the date set for the decision on the division, unless all shareholders unanimously agree to waive said deadline.4 The Dutch legislator has transposed the publication requirement in Article 2:334 h of 6 the Dutch Civil Code. Pursuant to Article 2:334 h (1), each party to the division shall deposit the draft terms of division and, if required, several financial documents (such as the annual accounts or financial statements) with the trade register of the Dutch Chamber of Commerce. Furthermore, Article 2:334 h paragraph 3 requires the parties to a division to publish a notice in a daily newspaper.

2. Notice period The draft terms of division must be disclosed at least “one month” prior to the date 7 of the general meeting of shareholders which is to decide on them. The exact length of this notice period may vary depending on the number of days of the respective month (28 to 31 days). In practice it is advisable to disclose the draft terms of division at least one entire calendar month in advance, even where Member States require a lower number of days.5

3. Exemption from publication requirements According to Article 138(2) sentence 1, companies involved in the division can 8 replace the publication with certain postings on their website and/or on the central electronic platform referred to in Article 16(5).

4. Modalities of publication The provisions governing the modalities of publication in essence broadly correspond 9 to the parallel provision in Article 92. Company websites or other websites offer, in certain cases, an alternative to publi- 10 cation via the company registers. Member States should be able to designate those other websites which companies can use free of charge for such publication, such as websites of business associations or chambers of commerce or the central electronic platform referred to in this Directive. Where the possibility exists of using company or other websites for publication of draft terms of division and of other documents that have to be made available to shareholders and creditors in the process, guarantees relating to the security of the website and the authenticity of the documents should be met.6

Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 19, p. 1706. Article 2506-bis Italian Civil Code. 4 Article 2501-ter(8) Italian Civil Code. 5 Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 26, p. 1684. 6 Recital 74 Directive 2017/1132. 2

3

Klaus Bader and Andreas Börner

699

Art 139 Approval by the general meeting of each company involved in a division

Article 139 Approval by the general meeting of each company involved in a division 1. A division shall require at least the approval of a general meeting of each company involved in the division. Article 93 shall apply with regard to the majority required for such decisions, their scope and the need for separate votes. 2. Where shares in the recipient companies are allocated to the shareholders of the company being divided otherwise than in proportion to their rights in the capital of that company, Member States may provide that the minority shareholders of that company may exercise the right to have their shares purchased. In such case, they shall be entitled to receive consideration corresponding to the value of their shares. In the event of a dispute concerning such consideration, it shall be possible for the consideration to be determined by a court. I. Approval of the Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General meeting as competent body . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Majority requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Form requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Ratio-Altering Divisions and Protection of Minority Shareholders . . . . . . . . . .

1 1 2 7 9

I. Approval of the Division 1. General meeting as competent body 1

Similar to mergers, the division affects the interests of the (minority) shareholders as well as those of employees and creditors. However, in view of the different concepts in the national legal systems in this respect, these issues have deliberately been only partially harmonised for divisions.1 One of the core principles of European company law is that fundamental decisions have to be made by the shareholders. The sine qua non element of shareholder protection is the general meeting’s prior approval to the division of the company. Pursuant to Article 139(1) sentence 1, the approval of the general meetings of each of the legal entities involved in the division is generally required.

2. Majority requirements With regard to exact majority requirements within the general meeting, the subject matter of the resolution, as well as potentially required special consent requirements of individual shareholders or groups of shareholders, Article 139(1) sentence 2 expressly refers to the corresponding requirements for mergers as codified under Article 93. 3 Thus, and thereby following Article 93, at least two thirds of the votes cast or of the subscribed capital represented at the time of passing the resolution are required for approval, whereby Member States may additionally provide for higher approval thresholds. 4 German law provides for a higher threshold with 75 % of the votes cast of the share capital being present, Article 65 German Transformation Act.2 However, in the case of a non-ratio preserving division, Article 128 sentence 1 of the German Transformation Act 2

1 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht‘ ZGR (6 th edn, 2017), § 21, p. 712. 2 Article 125 sentence 1 German Transformation Act (UmwG).

700

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 139

requires a unanimous resolution in order to protect the minority shareholders of the company being divided. Pursuant to Article 2:334 m of the Dutch Civil Code, the resolution for a division 5 must be adopted by the general meeting. In a Dutch foundation (stichting), the resolution must be adopted by the (legal) person who is authorised to amend the articles of association, or, if no one is allowed to do so, by the board of directors. The resolution for a division may not differ from the draft terms of division. The majority required to adopt a resolution for a division is the same as the major- 6 ity that is required to amend the articles of association. If the law or the articles of association require an unanimous resolution or the approval of certain shareholders for the amendment of the articles of association, then similar requirements apply for the resolution for a division. If the articles of association require different thresholds for different articles of association, then the highest threshold applies for the resolution for a division.

3. Form requirements The Directive does not foresee specific form requirements for the resolution, so the 7 Member States are called to provide for certain form requirements, such as notarization of the resolution. As an example, in the Netherlands, the resolution for a division by formation of 8 new entities (stichting) requires the approval of the Dutch court, unless the articles of association allow for the possibility to amend all articles of association. The Dutch court shall not give its approval if it believes there are substantiated reasons (gegronde redenen) to believe the division is contrary to the interests of the foundation.

II. Ratio-Altering Divisions and Protection of Minority Shareholders However, unlike in the case of mergers, the Directive on divisions also contains a 9 provision on possible further specific protection of minority shareholders.3 In the event of a ratio-altering division, Article 139(2) sentence 1 provides for the 10 minority shareholders’ right to sell their shares held in the divided company. In this case, the minority shareholders are entitled to a cash settlement in proportion to the net value of their shares in the company being divided. Furthermore, the Member States are free to provide for further protective instruments for minority shareholders, such as the right of withdrawal even if the original ownership structure is preserved after the division or the right to request a better share exchange ratio.4 However, it cannot be inferred from Article 139(2) that Member States cannot 11 provide for other specific protection instruments in favour of minority shareholders. They are free to provide for more far-reaching protective provisions, for example a right of withdrawal even in the case of ratio-preserving divisions or a right to request the improvement of the share exchange ratio. Article 139(2) only explicitly states that national law may establish a sell-out right in the special case of a ratio-altering division and at the same time lays down minimum requirements for its design. However, the provision does not simultaneously have the character of a maximum standard or even a final full harmonisation of the protection of minority shareholders. This is not least due to the fact that all subsequent EU legal acts concerning structural changes do not 3 4

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th ed., 2017), § 21, p. 712. Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 39, p. 1710.

Klaus Bader and Andreas Börner

701

Art 140 Derogation from the requirement of approval by the general meeting fully harmonise the protection of minority shareholders, but explicitly leave it to the Member States to enact special provisions to ensure adequate protection of minority shareholders.5

Article 140 Derogation from the requirement of approval by the general meeting of a recipient company The laws of a Member State need not require approval of a division by a general meeting of a recipient company if the following conditions are fulfilled: (a) the publication provided for in Article 138 is effected, for each recipient company, at least one month before the date fixed for the general meeting of the company being divided which is to decide on the draft terms of division; (b) at least one month before the date specified in point (a), all shareholders of each recipient company are entitled to inspect the documents specified in Article 143(1) at the registered office of that company; (c) one or more shareholders of any recipient company holding a minimum percentage of the subscribed capital is entitled to require that a general meeting of such recipient company be called to decide whether to approve the division. Such minimum percentage may not be fixed at more than 5 %. Member States may, however, provide for the exclusion of non-voting shares from this calculation. For the purposes of point (b) of the first paragraph, Article 143(2), (3) and (4) shall apply. Member States should be able to provide that the extensive reporting or information requirements relating to the merger or division of companies, laid down in Chapter I and Chapter III of Title II, need not be complied with where all the shareholders of the companies involved in the merger or division agree that such compliance can be dispensed with.1 2 According to Article 140, Member States may continue to allow waiving the requirement of shareholder consent of the recipient company or companies, which again corresponds to the provisions for cross-border mergers. Only the minimum percentage of subscribed capital required to request that a general meeting to decide on the division be called may not be fixed at more than 5 % by the laws of the Member States.2 However, this is only possible if the draft terms of division have been duly disclosed in accordance with point (a), and the shareholders have been granted access to documents in accordance with point (b) of Article 140. 3 Germany used this derogating option to some extent in the context of divisions of corporations in which at least 90 % of the shares are held by the recipient companies (Article 125 sentence 1 and Article 62(1-3) German Transformation Act), a resolution of the annual general meeting of the company being divided may also be dispensable.3 4 Pursuant to Article 2:334ff of the Dutch Civil Code, a recipient company may resolve upon the division by resolution of its management, unless the articles of association pro1

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 713. Recital 75 Directive 2017/1132. 2 Article 140(c) Directive EU 2017/1132. 3 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 705. 5

1

702

Klaus Bader and Andreas Börner

Art 141

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

vide otherwise. This resolution may only be adopted however, if the company has stated this intention when giving notice of the lodging of the proposed draft terms of division. Such resolution may not be adopted if, within one month after such notice, one or more shareholders, who jointly represent at least 20 % of the issued capital or such lower amount as is proved in the articles of association, have requested the management to convene a general meeting in order to resolve on the division.

Article 141 Detailed written report and information on a division 1. The administration or management bodies of each of the companies involved in the division shall draw up a detailed written report explaining the draft terms of division and setting out the legal and economic grounds for them, in particular the share exchange ratio and the criterion determining the allocation of shares. 2. The report shall also describe any special valuation difficulties which have arisen. Where applicable, it shall disclose the preparation of the report on the consideration other than in cash referred to in Article 70(2) for recipient companies and the register where that report must be lodged. 3. The administrative or management bodies of a company being divided shall inform the general meeting of that company and the administrative or management bodies of the recipient companies so that they can inform their respective general meetings of any material change in the assets and liabilities between the date of preparation of the draft terms of division and the date of the general meeting of the company being divided which is to decide on the draft terms of division. I. Purpose of the Detailed Written Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Content requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Formal requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Information obligation about substantial changes in assets and liabilities III. Written Reports for Group Divisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 2 3 7 8

I. Purpose of the Detailed Written Report Another essential element of the division procedure is a detailed written report 1 drawn up by the administrative and management bodies of each of the participating companies, which is subsequently made available to all shareholders in accordance with the preliminary information rights referred to under Article 143. This requirement again promotes the objective of ensuring extensive shareholder information.

II. Report 1. Content requirements The minimum requirements as to the content of the report set out in Article 141(1) 2 and (2) largely correspond to those for the merger report in accordance with Article 95. Here, too, the draft terms of division and, in particular, the share exchange ratio must be explained and justified in legal and economic terms; furthermore, potential difficulties in respect of the valuation of the shares must be expressly pointed out in the detailed written report. In addition to these requirements which largely coincide Klaus Bader and Andreas Börner

703

Art 141 Detailed written report and information on a division with those of domestic mergers, there are two peculiarities specific to divisions: (i) the criterion regulating the division of shares to be indicated in the draft terms of division in accordance with point (i) of Article 137(2) must be explained and justified in legal and economic terms; this stipulation is particularly important in all cases of ratio-altering divisions; (ii) where appropriate, reference should be made to the report on any non-cash consideration made towards the recipient company, as well as to the register in which these reports must be lodged.1

2. Formal requirements While the default formal requirements generally demand for separate reports to be drawn up by each company involved, just as is the case in domestic mergers, the preparation of joint reports should also be possible (just as is the case in domestic mergers).2 4 In view of the parallels between the draft terms for mergers and divisions, the German transposing provision of Article 127 German Transformation Act largely refers to Article 8 German Transformation Act. The extension of the notification obligations provided for by Article 127 sentence 1, Article 127 sentence 2 and Article 8(1) sentences 2 and 3 of the German Transformation Act is in conformity with the law due to the minimum standard character of Article 141. The joint reporting incorporated in Article 127 sentence 1 German Transformation Act and the limitation of the reporting obligation provided for by Article 127 sentence 2 in conjunction with Article 8(2) of the German Transformation Act are also compatible with the Directive. The reporting obligation pursuant to Article 141(2) sentence 2 has been transposed into Article 142(2) of the German Transformation Act. The information obligation pursuant to Article 141(3), respectively, was originally transposed into Article 143 of the German Transformation Act, but Article 125 sentence 1 in conjunction with Article 64(1) sentence 2-4 of the German Transformation Act now applies pursuant to the Third Act amending the German Transformation Act. 5 In view of the parallels between the draft terms for mergers and divisions, the Italian transposing provision of Article 2506ter Italian Civil Code largely refers to Article 2501quater and quinquies Italian Civil Code. Article 2501 quarter demands the administrative organ of the company being divided to draw up, in accordance with the rules of the financial statements, the balance sheet of the company. In addition to that, Article 2501 quinquies requires the same administrative body to draw up a detailed report explaining and justifying, from both a legal and economic point of view, the draft terms of division and, in particular, the exchange ratio of the shares or quotas. 6 Article 2:334 g Dutch Civil Code requires the board of directors of each party to the division to provide a forecast of the consequences of the division from a judicial, economic and social perspective. Regarding public and private limited liability companies, Article 2:334 z of the Dutch Civil Code, additionally, requires the board of directors of a public or private limited liability company to provide a written explanation of, among others, the method or methods used to establish the share exchange ratio, whether these methods where appropriate under the given circumstances and the valuation that resulted from the used methods. 3

1 2

704

Article 141(2) sentence 2 Directive EU 2017/1132. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 699.

Klaus Bader and Andreas Börner

Art 142

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

3. Information obligation about substantial changes in assets and liabilities In the event of substantial changes in the assets and liabilities of the company being 7 divided occurring between the date on which the draft terms of division are drawn up and the date of the general meeting deciding upon them, Article 141(3) provides for a general information obligation of the administrative or management bodies of the company being divided towards its shareholders and the management or administrative bodies of the recipient company. However, this obligation to provide timely information does not apply to all participating companies but only to the administrative and management bodies of the company being divided, seeing as its assets are the only ones relevant for the draft terms of division.

III. Written Reports for Group Divisions In contrast to a domestic merger, the draft terms of division are also required for 8 group divisions (unless waived by the parties). This demand results from the fact that the scale of division remains of utmost importance even in the case of group divisions.3 However, in accordance with Article 156(4), a detailed written report is not required for divisions by formation of new companies where the share ratio is preserved.

Article 142 Examination of the draft terms of division by experts 1. One or more experts acting on behalf of each of the companies involved in the division but independent of them, appointed or approved by a judicial or administrative authority, shall examine the draft terms of division and draw up a written report to the shareholders. However, the laws of a Member State may provide for the appointment of one or more independent experts for all of the companies involved in a division if such appointment is made by a judicial or administrative authority at the joint request of those companies. Such experts may, depending on the laws of each Member State, be natural or legal persons or companies or firms. 2. Article 96(2) and (3) shall apply. I. Examination of the Draft Terms of Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Independent Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Material Focus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Content Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Addressees of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Group Divisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 5 6 7 8

I. Examination of the Draft Terms of Division Alongside the draft terms of division and the detailed written report, the examina- 1 tion of the draft terms of division by one or more independent experts represents another important building block of the “European model for structural changes” and is geared towards adequate shareholder protection. This examination serves to protect the members (protection by information) who are to decide on the corporate

3

Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 21, p. 1707.

Klaus Bader and Andreas Börner

705

Art 142 Examination of the draft terms of division by experts restructuring on a sound basis. The independent expert is obliged to draw up a report on the examination and render an opinion on certain key points. 2 The experts’ written report is made available to the shareholders, thus complying with the preliminary information requirements pursuant to Article 143. Just as in respect to mergers, the examination must generally be performed separately for each individual company involved in the division;1 Member States may, however, also permit a joint examination.2 Further, the requirements laid down by Article 142(1) concerning the appointment, qualification and independence of experts also largely correspond to those of Article 91(1) on domestic mergers.

II. The Independent Expert Similar to the merger scenario, one or more independent experts may be appointed in case of a domestic division. The Member State may decide whether the expert may be a legal or a natural person. 4 The procedure for appointing the expert is not laid down in the Directive. In this respect, the Member States enjoy some flexibility. Article 142 pre-supposes that Member States enact rules ensuring the independence of the independent expert and the applicable standard of care while Article 152 requires provisions setting out the expert’s civil liability. 3

III. Material Focus 5

The focus of the examination of the draft terms of division lies on reviewing the share exchange ratio. Again, just as in the case of a merger, no duty to examine the economic expediency of the division was imposed by the European legislator. The Directive does furthermore not require an examination of the detailed written division report; however, national regulation may extend the examination to this area, thus intensifying the protection of shareholders.

IV. Content Requirements 6

With regard to the minimum content of the written report as well as the experts' right to obtain information, the rules applicable to mergers contained in Article 96(2) and (3) apply mutatis mutandis. As such, the report shall in any case state whether, in the opinion of the independent experts, the share exchange ratio can be considered fair and reasonable. To that end, at least the method used to calculate the proposed share exchange ratio, as well as reasons as to why such method or methods are adequate in the case in question shall be indicated.3

V. Addressees of the Report 7

Article 142 clearly states that the independent expert shall act on behalf of the company. Nevertheless, the expert needs to keep in mind that the addressees of his Article 142(1) sentence 1 Directive EU 2017/1132. Article 142(1) sentence 2 Directive EU 2017/1132. 3 Article 96(2) Directive EU 2017/1132. 1 2

706

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 143

written opinion are primarily the members, because the main purpose of the report is to enable them to form their own informed opinion on the division.

VI. Group Divisions In contrast to a merger, the examination of the draft terms of division as well as the 8 resulting report are – subject to a waiver – equally required in the case of intra-group divisions. This because at least the scale/method of division remains problematic and requires further explanation.4 A logical consequence of the detailed written report being superfluous in respect to divisions by formation of new companies further preserving the share ratio is that the respective subsequent examination will not have to be carried out in such situation.5 Due to the parallels to the provisions on mergers, the German legislator simply 9 regulated the examination of the division and transfer agreement by referring to Article 60(9-12) of the German Transformation Act.6 However, Article 9(2) of the German Transformation Act is expressly excluded. Consequently, and thereby in accordance with the Directive, an examination of the aforementioned agreement must always be carried out, even in the case of an intra-group-division. No use has been made of the newly established possibility provided by Article 70(3) to completely waive the examination of contributions in kind whenever a detailed written report has been drawn up. In this respect, the provisions of Article 142(1) of the German Transformation Act have been retained.7 Italy on the other hand made use of its room for interpretation and made Article 10 2506 sexies Italian Civil Code directly applicable to domestic divisions. By reference to Article 2506 ter, the expert report is not required in cases of divisions by formation of one or more new companies in combination with a ratio-preserving allocation of the shares and quotas.

Article 143 Availability of documents for inspection by shareholders 1. All shareholders shall be entitled to inspect at least the following documents at the registered office at least one month before the date of the general meeting which is to decide on the draft terms of division: (a) the draft terms of division; (b) the annual accounts and annual reports of the companies involved in the division for the preceding three financial years; (c) where applicable, an accounting statement drawn up as at a date which shall not be earlier than the first day of the third month preceding the date of the draft terms of division, if the latest annual accounts relate to a financial year which ended more than six months before that date; (d) where applicable, the reports of the administrative or management bodies of the companies involved in the division provided for in Article 141(1); (e) where applicable, the reports provided for in Article 142. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 702. Article 156(4) Directive EU 2017/1132. 6 Article 125 sentence 1 German Transformation Act (UmwG). 7 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 704.

4

5

Klaus Bader and Andreas Börner

707

Art 143 Availability of documents for inspection by shareholders For the purposes of point (c) of the first subparagraph, an accounting statement shall not be required if the company publishes a half-yearly financial report in accordance with Article 5 of Directive 2004/109/EC and makes it available to shareholders in accordance with this paragraph. 2. The accounting statement provided for in point (c) of paragraph 1 shall be drawn up using the same methods and the same layout as the last annual balance sheet. However, the laws of a Member State may provide that: (a) it shall not be necessary to take a fresh physical inventory; (b) the valuations shown in the last balance sheet shall be altered only to reflect entries in the books of account; the following shall nevertheless be taken into account: (i) interim depreciation and provisions, (ii) material changes in actual value not shown in the books. 3. Every shareholder shall be entitled to obtain, on request and free of charge, full or, if so desired, partial copies of the documents referred to in paragraph 1. Where a shareholder has consented to the use by the company of electronic means for conveying information, such copies may be provided by electronic mail. 4. A company shall be exempt from the requirement to make the documents referred to in paragraph 1 available at its registered office if, for a continuous period beginning at least one month before the date fixed for the general meeting which is to decide on the draft terms of division and ending not earlier than the conclusion of that meeting, it makes them available on its website. Member States shall not subject that exemption to requirements or constraints other than those which are necessary in order to ensure the security of the website and the authenticity of the documents, and may impose such requirements or constraints only to the extent that they are proportionate in order to achieve those objectives. Paragraph 3 shall not apply if the website gives shareholders the possibility, throughout the period referred to in the first subparagraph of this paragraph, of downloading and printing the documents referred to in paragraph 1. However, in that case Member States may provide that the company is to make those documents available at its registered office for consultation by the shareholders. Member States may require companies to maintain the information on their website for a specific period after the general meeting. Member States may determine the consequences of temporary disruption of access to the website caused by technical or other factors. I. Comprehensive Information on the Draft Terms of Division . . . . . . . . . . . . . . . . II. Content Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. National Implementation Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 4

I. Comprehensive Information on the Draft Terms of Division 1

As the most important building block of the “European model for structural changes” and central element of shareholder protection, every corporate division requires the approval of the general meeting of each company involved.1

1

708

Article 139(1) sentence 1 Directive EU 2017/1132.

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 144

II. Content Requirements In accordance with Article 143, comprehensive information on the draft terms of 2 division must be provided at least one month before the date of the general meeting, so that shareholders are able to take an informed decision. The provisions set forth under Article 143(1) concerning the required contents and means of communication of such information only establish minimum standards and correspond to a large extent to those of Article 97 for mergers. Every shareholder has to be given the opportunity to inspect at least – the draft terms of division – the three most recent annual accounts and reports of the companies involved in the division – if applicable, an accounting statement drawn up as at a date which shall not be earlier than the first day of the third month preceding the date of the draft terms of division – if applicable, the reports of the administrative or management bodies of the companies involved in the division provided for in pursuance to Article 141(1), and – all reports provided for under Article 142 at the registered office of the corporate entities engaging in this restructuring. All members have the right to review the above-mentioned documents and obtain a 3 copy free of charge.

III. National Implementation Examples Due to the parallels to the information obligations in respect of a merger, the Ger- 4 man legislator has implemented the provisions of Article 143 by referring to Article 63 of the German Transformation Act. Article 2505 ter Italian Civil Code renders Article 2501 septies, regulating the disclo- 5 sure requirements in relation to shareholders of merging companies, directly applicable to domestic divisions. Accordingly, a copy of the draft terms of division together with the expert’s and administrative body’s report, as well as the annual accounts of the past three years and an overview of all assets and liabilities of the company/ companies participating in the division must be deposited at the registered office of the companies involved in the division or respectively being published on their websites, respectively, during the thirty days preceding the decision on the division. In the Netherlands, in addition to the requirement to file the documents with the 6 Dutch Chamber of Commerce, Article 2:334 h (2) requires the board of directors to make the documents available to shareholders and third parties who have a special right against the company, such as a profit distribution or share subscription right. Based on Article 2:334dd, this provision is also applicable to holders of depositary receipts in a public or private limited liability company and to holders of voting rights based on the right of usufruct or right of pledge.

Article 144 Simplified formalities 1. Neither an examination of the draft terms of division nor an expert report as provided for in Article 142(1) shall be required if all the shareholders and the

Klaus Bader and Andreas Börner

709

Art 145 Protection of employees’ rights holders of other securities conferring the right to vote of each of the companies involved in the division have so agreed. 2. Member States may permit the non-application of Article 141 and points (c) and (d) of Article 143(1) if all the shareholders and the holders of other securities conferring the right to vote of each of the companies involved in the division have so agreed. Pursuant to Article 144(1), the examination of the draft terms of division and the expert report as provided for under Article 142(1) are not required if all shareholders and holders of other securities conferring voting rights of all the companies involved in the division have renounced them. 2 Similarly, the Member States may provide for the possibility to waive the necessity of a detailed written report as required by Article 141, as well as the accounting statements and reports of the administrative or management bodies of the companies involved demanded by points (c) and (d) Article 143(1) respectively.1 3 As an example, following Article 2506ter Italian Civil Code, shareholders and holders of other securities conferring voting rights upon them may, by means of unanimous consent, exempt the administrative body from drawing up a written examination and waive the need of an expert report. 4 Article 2:333 of the Dutch Civil Code excludes the applicability of the articles 2:326 up to and including 2:328 if the recipient company merges with a company in which it holds all of the shares or with an association, cooperative or mutual insurance society, of which it is the sole member. 1

Article 145 Protection of employees’ rights Protection of the rights of the employees of each of the companies involved in a division shall be regulated in accordance with Directive 2001/23/EC. The protection of employees in the event of a division is, just as in the case of a merger, ensured by reference of Article 145 to the provisions of Directive 2001/23/EC relating to the safeguarding of employee's rights in the event of transfers of undertakings, businesses or parts thereof. 2 Accordingly, every division is subject to the principle that the rights and obligations arising from an existing employment relationship with the company being divided are automatically transferred to the recipient companies.1 Further, such transfer does not constitute cause for termination on the part of the company being divided or the recipient companies respectively.2 3 German law has transposed the requirements of the Directive into Article 613 a of the German Civil Code. In addition, Articles 126(1)11 and 126(3) German Transformation Act introduced division-specific information rules in favour of employees which go beyond the minimum standards of the Directive. In special instances, Article 134 German Transformation Act provides for joint and several liability towards employees for claims which have arisen 5 years after the division has become effective.3 1

Article 144(2) Directive EU 2017/1132. Article 3(1) sentence 1 Directive 2001/23/EC. 2 Article 4(1) sentence 1 Directive 2001/23/EC. 3 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 714. 1 1

710

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 146

In Dutch law, the rights of employees are protected by Article 7:662 and onwards of 4 the Dutch Civil Code. In the event of a transition of a business the employer’s rights and obligations arising from an employment contract related to that enterprise will transfer to the recipient entity. The employment contract cannot be split up and divided over two or more entities.4

Article 146 Protection of the interests of creditors of companies involved in a division; joint and several liability of the recipient companies 1. The laws of Member States shall provide for an adequate system of protection for the interests of the creditors of the companies involved in a division whose claims antedate publication of the draft terms of division and have not yet fallen due at the time of such publication. 2. For the purpose of paragraph 1, the laws of the Member States shall at least provide that such creditors shall be entitled to obtain adequate safeguards where the financial situation of the company being divided, and that of the company to which the obligation is to be transferred in accordance with the draft terms of division, make such protection necessary, and where those creditors do not already have such safeguards. Member States shall lay down the conditions for the protection provided for in paragraph 1 and in the first subparagraph of this paragraph. In any event, Member States shall ensure that the creditors are authorised to apply to the appropriate administrative or judicial authority for adequate safeguards provided that they can credibly demonstrate that due to the division the satisfaction of their claims is at stake and that no adequate safeguards have been obtained from the company. 3. In so far as a creditor of the company to which the obligation has been transferred in accordance with the draft terms of division has not obtained satisfaction, the recipient companies shall be jointly and severally liable for that obligation. Member States may limit that liability to the net assets allocated to each of those companies other than the one to which the obligation has been transferred. However, they need not apply this paragraph where the division operation is subject to the supervision of a judicial authority in accordance with Article 157 and a majority in number representing three-quarters in value of the creditors or any class of creditors of the company being divided have agreed to forego such joint and several liability at a meeting held pursuant to point (c) of Article 157(l). 4. Article 99(3) shall apply. 5. Without prejudice to the rules governing the collective exercise of their rights, paragraphs 1 to 4 shall apply to the debenture holders of the companies involved in the division except where the division has been approved by a meeting of the debenture holders, if such a meeting is provided for under national laws, or by the debenture holders individually. 6. Member States may provide that the recipient companies shall be jointly and severally liable for the obligations of the company being divided. In such case they need not apply paragraphs 1 to 5. 7. Where a Member State combines the system of creditor protection set out in paragraphs 1 to 5 with the joint and several liability of the recipient companies as 4

Article 2:334 j Dutch Civil Code.

Klaus Bader and Andreas Börner

711

Art 146 Protection of the interests of creditors of companies involved in a division referred to in paragraph 6, it may limit such joint and several liability to the net assets allocated to each of those companies. I. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Protective measure 1: security rights and contingent liability . . . . . . . . . . . . . 2. Protective measure 2: joint and several liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Combination of protective measures 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. National implementation example, Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Debenture Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 5 7 8 9 12

I. Purpose In the draft terms, the company being divided is free to allocate assets and liabilities between itself (in case of a partial division) as well as the various recipient companies as it deems fit. The creditors do not have a right to challenge the approval of the draft terms within the general meeting of shareholders. As such, they face a far more immediate risk of losing access not only to assets available at the time when the division becomes effective, but also to the company’s potential to generate returns in the future. 2 Given that the protection of creditors is an even more critical issue in relation to divisions than for other types of corporate restructurings, Article 146 et seq., while in principle incorporating the protective instruments of Article 99-101 with their distinction between creditors of the companies involved and holders of special rights, adds specific provisions on the liability of recipient companies for the debts incurred by the company being divided in the course of the transaction. This additional protection finds its legitimacy in the increased risk for creditors resulting from the extensive 'freedom of division' and the large degree of freedom to distribute assets and liabilities among the recipient companies. 1

II. Creditors Article 146(1) provides for the general obligation for the Member States to establish an adequate system of protection safeguarding the interests of the creditors of all companies involved in the division. However, only those creditors whose claims antedate the announcement of the draft terms of division and which are not yet due at that time deserve protection.1 4 With regard to the concrete design of aforementioned “adequate protection system”, Article 146 allows Member States to choose between two different protective measures, which may also be combined in accordance with paragraph 7. The European legislator thereby effectively applies different standards of protection to the creditors of the company being divided on the one hand, and the creditors of the recipient companies on the other. The former appeared particularly vulnerable, as they are not only assigned a new debtor without their consent, but are also exposed to the risks of a possibly arbitrary division of assets and liabilities being a direct result of the “freedom of division”. In the light of the foregoing, Article 146(4) allows Member States to apply different standards of protection to the creditors of the recipient company and to the creditors of the company being divided. In addition, as already mentioned above, the Directive itself differentiates between the two groups of creditors, since the 3

1

712

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 715.

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 146

liability elements contained in both protective measures only benefit the creditors of the company being divided in the course of the restructuring process.2

1. Protective measure 1: security rights and contingent liability Pursuant to Article 146(1)-(5), this “protective measure” consists of a right to request 5 adequate safeguards3 combined with, where and if applicable, a joint contingent liability4 of all recipient companies (i.e. without the company being divided) in case of a default by the recipient company to which the liability has been allocated. Pursuant to Article 146(3) sentence 2, Member States may limit this contingent liability to the net assets allocated to the relevant recipient company. Where the division is subject to judicial supervision in accordance with the require- 6 ments of Article 157, the third sentence of Article 146(3) allows Member States to forego their joint and several liability as normally demanded under the “protective measure 2”. This waiver must, however, be agreed upon at a creditors' meeting within the meaning of point (c) of Article 157(1) with a simple majority of the votes cast, who at the same time, must represent at least three-quarters of the total amount of all claims. If there are several groups of creditors, a resolution passed by means of aforementioned “double majority” of each group is required.5

2. Protective measure 2: joint and several liability The protective measure 2 on the other hand does not provide for any specific 7 safeguards. Article 146(6) allows the Member States to establish a generally applicable joint and several liability of all recipient companies in relation to the obligations of the company being divided. The joint and several liability thereby remains completely detached from the default of the company to which the liability has been allocated, but Member States may restrict it to the net assets to be taken over by the recipient companies.6 This provision cuts off creditor’s expectations with regard to being satisfied from income which could reasonably be expected as being generated by any of the companies involved.7

3. Combination of protective measures 1 and 2 Article 146(7) further explicitly allows Member States to combine the two protective 8 measures, i.e. to provide for both a security right as well as general joint and several liability of all recipient companies. If a Member State opts for such a combination, it may limit the general joint and several liability to the net assets allocated to the company concerned.8

2 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 714-715. 3 Article 146(2) Directive EU 2017/1132. 4 Article 146(3) Directive EU 2017/1132. 5 Lutter/Bayer/Schmidt, “Europäische Unternehmens- und Kapitalmarktrecht”, ZRG (6th edn 2017), § 21, p. 725. 6 Article 146(6) Directive EU 2017/1132. 7 Stelmasczyk, 'Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie' ZIP 2019, p. 2445. 8 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 716.

Klaus Bader and Andreas Börner

713

Art 147 Protection of holders of securities, other than shares 4. National implementation example, Germany In view of the risks for creditors associated with a division, the German legislator has opted for a combination of the two protective measures. Article 133(1) of the German Transformation Act provides not only for a general joint and several liability of all participating companies (and not only the recipient companies) in respect of the liabilities of the company being divided, but also for a claim for safeguards. 10 Both the creditors of the company being divided as well as the creditors of the recipient company are equally entitled to the claim for security pursuant to Article 133(1) sentence 2 and Article 125 sentence 1 and 2 of the German Transformation Act. Moreover, German law goes beyond the minimum standard of the Directive in so far as it is sufficient that the claim has arisen at the time the division takes effect. 11 The general joint and several liability pursuant to Article 133(1) sentence 1 of the German Transformation Act was not limited by any amount. The German legislator has furthermore not opted to limit the liabilities to the net assets (Article 146(7)). 9 In addition, the circle of protected creditors – as in the case with the claim for security – was extended beyond the minimum standard of the Directive to all creditors of the company being divided whose liabilities arose before the division became effective.10 9

III. Debenture Holders 12

Article 146(5) extends the scope of the creditor protection pursuant to Article 146 in principle to all debenture holders. However, at the same time the instrument takes into account those national legal systems which make the ultimate division subject to the approval of a meeting of debenture holders.11 The cross-reference to Article 146(3) (which has been explained above) means that this meeting may, by a qualified majority, also waive the joint contingent liability of other recipient companies.

Article 147 Protection of holders of securities, other than shares, to which special rights are attached Holders of securities, other than shares, to which special rights are attached, shall be given rights in the recipient companies against which such securities may be invoked in accordance with the draft terms of division, at least equivalent to the rights they possessed in the company being divided, unless the alteration of those rights has been approved by a meeting of the holders of such securities, if such a meeting is provided for under national laws, or by the holders of those securities individually, or unless the holders are entitled to have their securities repurchased.

I. Purpose 1

Article 147 provides special protection for holders of securities carrying special rights in relation to the company being divided. These rights offering at least equiva-

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 718. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 718. 11 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 719.

9

10

714

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 148

lent protection must be respected by the recipient companies, against whom the affected right holders can assert their demands in accordance with the draft terms of division. 1 In the Netherlands, Article 2:334 o Dutch Civil Code provides that a right of pledge 2 or usufruct on the shares of the company being divided will become a right of pledge or usufruct on which the pledgor or provider of the right of usufruct receives pursuant to the deed of division. If the company being divided continues to exist after its division, the existing rights of pledge or usufruct shall continue to exist in addition thereto.

II. Economically Equivalent Rights This provision thereby effectively protects in particular bonds with conversion or 3 subscription rights in respect of shares, preferential rights to subscribe to the share capital or rights entitling their holders to participate in profits. Thus, whenever Article 147 is applicable, the holders of such special rights must be granted at least (economically) equivalent rights in the recipient company to those they held the company being divided. As an exception, this does not apply whenever a meeting of the holders of such rights, or each individual holder of such rights, has approved the amendment, or whenever such holders are entitled to have their securities repurchased by the recipient company. Thus, neither the company being divided nor the recipient company may make use of said exemption without the consent of the holder of these security rights. 2 In the Netherlands, Article 2:334ee1 provides for the right for holders of shares 4 which do not share in the profits who voted against the division proposal and the holders of non-voting shares to lodge a request for compensation from the company. The request must be made in writing within one month after it has informed the shareholder the he may request such compensation. The amount of the compensation shall be determined by one or more independent experts. The obligation to pay the compensation shall be a joint and several obligation for the company being divided.

Article 148 Drawing up and certification of documents in due legal form Where the laws of a Member State do not provide for judicial or administrative preventive supervision of the legality of divisions or where such supervision does not extend to all the legal acts required for a division, Article 102 shall apply. Ultimately, one of the core elements of the protection instruments in the case of the 1 division is the need for a comprehensive legality check. Article 148 declares Article 102 to be applicable accordingly, thus leaving the Member States the choice, in view of the different legal traditions, whether they implement the legality check (i) by means of a preliminary judicial or administrative review, (ii) by means of a public authentication or (iii) by a combination of both.1 In the interest of the most comprehensive possible protection of shareholders and the 2 legal transaction as such, Germany has continued with the traditional accumulation of notarial certification and control by the registration court in a permissible manner, as provided for in the case of a merger, also for the division.2 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 719. Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 57, p. 1691. 1 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 706. 1

2

Klaus Bader and Andreas Börner

715

Art 150 Publication formalities 3

In the Netherlands, the division shall be implemented by notarial deed. At the foot of the deed the notary must certify that he has established that the procedural requirements for all resolutions required under the Dutch Civil Code for effecting the division and that the relevant other requirements have been duly observed.

Article 149 Date on which a division takes effect The laws of Member States shall determine the date on which a division takes effect.

I. No Harmonized Effective Date The Directive does not harmonize the effective date among the Member States. The effective date for the transfer of all assets and liabilities of the company being divided is determined pursuant to the law of the Member State of the company being divided. 2 Pursuant to Article 149, the date upon which a division takes effect is a matter to be regulated by national law. However, in the interests of legal certainty, the EU legislator obliged its Member States to unambiguously disclose said date ex ante.1 Thus, the rules of the Directive unequivocally require a clear definition of a specific point in time.2 1

II. National Implementation Examples The German legislator has opted for the entry in the register of the company being divided as connecting factor, because this ought to be the simplest way to determine the relevant point in time in a uniform manner.3 4 In contrast, thereby following Article 2506 quarter Italian Civil Code, in Italy the division shall take effect upon the last of the entries of the instrument of division at the office of the registrar in which the recipient companies are registered; a later day may however be fixed, except in cases of divisions by formation of new companies. Any recipient company may carry out the publicity requirements relating to the company being divided. Furthermore, as enshrined in Article 2448 Italian Civil Code, acts which have been entered or filed with the commercial register may only be relied upon as against third parties after said publication, unless it can be proven that the third party was aware of it. 5 Pursuant to Article 2:334 n of the Dutch Civil Code, the division will enter into force on the day following the date on which the deed has been executed. 3

Article 150 Publication formalities 1. A division shall be published in the manner prescribed by the laws of each Member State in accordance with Article 16 in respect of each of the companies involved in a division. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 706. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 706. 2 Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 42, p. 1710. 3 Article 131(1) German Transformation Act (UmwG). 2

1

716

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 151

2. Any recipient company may itself carry out the publication formalities relating to the company being divided. In order to inform the general public about the division, Article 150(1) requires the disclosure of the division, effected by each of the companies involved in the transaction, in accordance with Article 16 regulating disclosure within the commercial- or companies register. However, in order to enhance its practicability, the second paragraph provides for the possibility that each recipient company may itself carry out the publication formalities relating to the company being divided. Due to the parallelism with Article 140(2), the German legislator has implemented the requirements of Article 150 by reference to Article 16(1) Sentence 1 and 19(3) German Transformation Act in conjunction with Article 10 German Commercial Code. The right of each recipient company to register, which already results from Article 125 sentence 1 and Article 16(1) sentence 2 German Transformation Act, was again expressly restated under Article 129 German Transformation Act. 1 Article 2506ter Italian Civil Code renders Article 2502bis directly applicable to domestic company divisions, which in turn refers to Article 2436. As such, the notary, after having verified compliance with the conditions established by law, within thirty days, has to request the registration of the member’s resolution regarding the division of the company with the register of companies. The office of the registrar of companies, after having verified the formal regularity of the documentation, subsequently enters the resolution in the register. Article 2:334n(3) of the Dutch Civil Code requires that within eight days after the execution of the deed, each legal person involved in the division shall procure the registration of the division at the Dutch Chamber of Commerce. This registration must include a certified copy of the deed of division with a notarial certificate at the foot thereof.

Article 151 Consequences of a division 1. A division shall have the following consequences ipso jure and simultaneously: (a) the transfer, both as between the company being divided and the recipient companies and as regards third parties, to each of the recipient companies of all the assets and liabilities of the company being divided; such transfer shall take effect with the assets and liabilities being divided in accordance with the allocation laid down in the draft terms of division or in Article 137(3); (b) the shareholders of the company being divided become shareholders of one or more of the recipient companies in accordance with the allocation laid down in the draft terms of division; (c) the company being divided ceases to exist.

1 Lutter/Bayer/Schmidt, 'Europäisches Kapitalmarkt- und Gesellschaftsrecht' ZGR (6 th edn, 2017), § 21, p. 707.

Klaus Bader and Andreas Börner

717

1

2

3

4

Art 151 Consequences of a division 2. No shares in a recipient company shall be exchanged for shares held in the company being divided either: (a) by that recipient company itself or by a person acting in his own name but on its behalf; or (b) by the company being divided itself or by a person acting in his own name but on its behalf. 3. The foregoing shall not affect the laws of Member States which require the completion of special formalities for the transfer of certain assets, rights and obligations by a company being divided to be effective as against third parties. The recipient company or companies to which such assets, rights or obligations are transferred in accordance with the draft terms of division or with Article 137(3) may carry out those formalities themselves; however, the laws of Member States may permit a company being divided to continue to carry out those formalities for a limited period which may not, save in exceptional circumstances, be fixed at more than six months from the date on which the division takes effect. I. General Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. (Partial) Universal Succession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Company being Divided Ceasing to Exist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 5 7 10

I. General Remarks The legal consequences of divisions are outlined in Article 151. Accordingly, this restructuring measure has, ipso jure, the following three central legal effects: (i) (Partial) universal succession, (ii) acquisition of shares in the recipient company, and (iii) (as the Directive does not cover full divisions1) the company being divided ceasing to exist. 2 The German legislator has, taking into account the parallel structure of the provisions in Articles 151 and 105, regulated the legal consequences of the division in Article 131(1) of the German Transformation Act, which largely corresponds to Article 20 of the same Act. In addition, Article 68(1) sentence 3 of the German Transformation Act introduced an express dispensation from the obligation to grant shares in the event that all shareholders of the legal entity being divided waive this obligation in notarized form. By means of Article 125 sentence 1 of the German Transformation Act, this also applies to the division.2 3 Article 2506quater Italian Civil Code, elaborating on the consequences of a division, directly refers to the rules applicable to domestic mergers.3 Once, in accordance with Article 2506quater Italian Civil Code, the division takes effect, the recipient companies shall assume the rights and obligations of the company being divided, for all legal purposes, including those of a procedural nature. 4 Article 2:334 a Dutch Civil Code provides that a division is either absolute (zuivere splitsing) or partial with a hive-off (afsplitsing). In either case, the recipient company acquires the assets transmitted by general transfer of title (overdracht onder algemene titel) in accordance with the description attached to the deed of division. 1

See → Art 159. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th ed., 2017), § 21, p. 710. 3 Article 2504bis Italian Civil Code. 1

2

718

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 151

II. (Partial) Universal Succession All assets and liabilities of the company being divided are automatically transferred 5 to the recipient companies in accordance with the allocation set out in the draft terms, without any special formalities being required.4 With regard to contracts, the ECJ clarified in its ruling of 7 April 2016 KA Finanz 5 that the universal succession causes the recipient or new companies to assume the contractual position of the company being divided; the ultimate status of the contract remains completely unaffected thereby. As is the case in respect of mergers, fines originally imposed upon the company being divided are also transferred as integral part of the liabilities by way of universal succession. 6 The allocation provided for in the draft terms of division is in principle decisive in 6 determining which assets and liabilities are specifically transferred to which recipient company, while the allocation resulting from the rules laid down in Article 137(3) apply as a fallback. As Article 151(1)a clarifies, partial universal succession applies not only in the relationship between the participating companies themselves but also, in principle, in the relationship with third parties. Against this background, and combined with the lack of harmonization of general civil law, Article 151(3) contains a corresponding reservation in this respect, including some simplifications regarding the execution of correlating formalities provided for under national law.7

III. Transfer of Shares The shareholders of the company being divided shall become shareholders of one 7 or more recipient companies.8 The allocation of shares occurs in accordance with the draft terms of division.9 The share acquisition occurs ipso jure; irrespective of the law otherwise applicable to the transfer, no special transfer act or documentation is required. At the same time, the shares of the company being divided will cease to exist together with the entire corporate entity. Although the Directive does not explicitly regulate the fate of any rights of affected 8 third parties to the shares of the company being divided it is to be assumed – in accordance with the concept of universal succession – that such rights of third parties will continue to apply, ipso jure, to the shares of the recipient company. However, Article 151(2) makes two important exceptions to the acquisition of shares, thereby preventing the creation of own shares: The acquisition of shares is hence excluded in the case of shares held by (i) the recipient company or (ii) the company being divided itself; in order to avoid circumvention, shares held by a person for the account of the company in question are also covered by this exception.10 The Directive does not preclude shareholders from waiving their right to receive 9 shares and, in particular, from waiving their right to such shares under national law.11

Article 151(1) a Directive EU 2017/1132. ECJ of 07.04.2016, KA Finanz, C-483/14, ECLI:EU:C:2016:205. 6 ECJ of 05.03.2015, Modelo Continente Hipermercados, C-343/13, ECLI:EU:C:2015:146. 7 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 708. 8 Article 151(1)b Directive EU 2017/1132. 9 Article 137(2)h Directive EU 2017/1132. 10 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 709. 11 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017) § 21, p. 709. 4

5

Klaus Bader and Andreas Börner

719

Art 152 Civil liability of members of the administrative or management bodies

IV. Company being Divided Ceasing to Exist The company being divided is dissolved ipso jure, without there being any further legal acts required.12 Further, no liquidation procedure is necessary, since all assets and liabilities are transferred to one or more beneficiary companies by way of partial universal succession. 11 The Directive only covers full divisions where the company being divided ceases to exist, leaving it to the Member States on whether and how to implement partial divisions where the company being divided continues to exist with some remaining assets and liabilities.13 10

Article 152 Civil liability of members of the administrative or management bodies of a company being divided The laws of Member States shall at least lay down rules governing the civil liability of members of the administrative or management bodies of a company being divided towards the shareholders of that company in respect of misconduct on the part of members of those bodies in preparing and implementing the division and the civil liability of the experts responsible for drawing up for that company the report provided for in Article 142 in respect of misconduct on the part of those experts in the performance of their duties.

I. Civil Liability 1

The preventive concept “protection by information” is supplemented and thus made more effective by means of liability rules provided in Article 152. The addressees of this provision are the members of the administrative or management bodies of the company being divided as well as the experts who prepare the division report.

II. Only Minimum Standard Article 152 thereby sets a minimum standard, i.e. Member States are free to also provide for a liability of the administrative or management bodies of the recipient company liable and/or to lay down liability rules for the benefit of the shareholders of the recipient companies, the company being divided, or other creditors. Furthermore, Article 152 does not make any concrete stipulations with regard to the ultimate content of liability, meaning that the Member States' room for manoeuvre in this respect only finds its limit in the effet utile.1 3 In light of the parallelism of the guidelines on liability in case of mergers and divisions, the German legislator has implemented Article 152 by referring to Article 25-27 of the German Transformation Act (liability of members of the administrative or management bodies) as well as Article 11(2) of the German Transformation Act in conjunction with Article 323 of the German Commercial Code (expert liability). Thus, 2

Point (c) of Article 151(1) Directive EU 2017/1132. See → Art 159. 1 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 711. 12

13

720

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 153

the offered protection has also been expanded beyond the minimum standard of the Directive in a permissible manner.2 Italy, on the basis of Article 2505ter Italian Civil Code, renders all experts, members 4 and third parties involved in the domestic division liable for damages caused by the company being divided. In the Netherlands, the general provisions relating to liability are applicable, i.e. 5 Article 2:9 and Article 6:162 of the Dutch Civil Code. Book 2 of the Dutch Civil Code does not provide a special clause with regards to liability in relation to a division.

Article 153 Conditions for nullity of a division 1. The laws of Member States may lay down nullity rules for divisions in accordance with the following conditions only: (a) nullity must be ordered in a court judgment; (b) divisions which have taken effect pursuant to Article 149 are declared void only if there has been no judicial or administrative preventive supervision of their legality, or if they have not been drawn up and certified in due legal form, or if it is shown that the decision of the general meeting is void or voidable under national law; (c) nullification proceedings are not initiated more than six months after the date on which the division becomes effective as against the person alleging nullity or if the situation has been rectified; (d) where it is possible to remedy a defect liable to render a division void, the competent court grants the companies involved a period of time within which to rectify the situation; (e) a judgment declaring a division void is published in the manner prescribed by the laws of each Member State in accordance with Article 16; (f) where the laws of a Member State permit a third party to challenge such a judgment, he does so only within six months of publication of the judgment in the manner prescribed by Chapter III of Title I; (g) a judgment declaring a division void does not of itself affect the validity of obligations owed by or in relation to the recipient companies which arose before the judgment was published and after the date referred to in Article 149; (h) each of the recipient companies is liable for its obligations arising after the date on which the division took effect and before the date on which the decision pronouncing the nullity of the division was published. The company being divided shall also be liable for such obligations; Member States may provide that this liability be limited to the share of net assets transferred to the recipient company on whose account such obligations arose. 2. By way of derogation from point (a) of paragraph 1 of this Article, the laws of a Member State may also provide for the nullity of a division to be ordered by an administrative authority if an appeal against such a decision lies to a court. Point (b) and points (d) to (h) of paragraph 1 of this Article shall apply by analogy to the administrative authority. Such nullification proceedings may not be initiated more than six months after the date referred to in Article 149. 2

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 711.

Klaus Bader and Andreas Börner

721

Art 153 Conditions for nullity of a division 3. The foregoing shall not affect the laws of the Member States on the nullity of a division pronounced following any supervision of legality.

I. Limited Number of Cases of Nullity 1

2

3

4

5

Since it is very complicated to unwind a division and to ensure legal certainty as regards the relationships between the public limited liability companies involved in the division, between them and third parties, and between the members, the Directive provides that divisions may only be unwound for the limited reasons expressly set out in Article 153. Limiting the reasons for which a division may be declared null and void in this way ensures legal certainty for the companies involved in the division and the general public. The cases in which nullity can arise have been limited further by providing that defects should be remedied wherever possible and by restricting the period within which nullification proceedings can be commenced.1 Since the problems associated with a reversal of a division are similar to those associated with the (preceding) division, the European legislator considered it imperative to limit the number of cases of nullity. In view of the highly divergent national regulations the EU regulator limited itself to subjecting nullity to strict procedural conditions, establishing a numerus clausus catalogue of grounds for nullity as well as regulations for the protection of legal rights held by affected third parties. Conclusively, a division may only be declared null and void in accordance with the conditions set out therein.2 However, it follows from the minimum-standard-nature of the provision that the Member States are entitled to unilaterally further limit the nullity of the division, as well as to prohibit it altogether.3 Following point (b) of Article 153(1), divisions once having taken effect pursuant to Article 149 may be declared void only if there has been no judicial or administrative preventive supervision of their legality, or if they have not been drawn up and certified in due legal form, or if it is shown that the decision of the general meeting is void or voidable under national law. In light of legal certainty as well as predictability, point (g) of Article 153(1) stipulates that a judgement declaring a division void does not of itself affect the validity of obligations owed by or in relation to the recipient companies which arose before the judgement was published and after the date on which the division took effect. As such, pursuant to point (h) of Article 153(1), each of the recipient companies is liable for its obligations arising after the date on which the division took effect and before the date on which the decision pronouncing the nullity of the division was published. However, Member States may provide that aforementioned liability be limited to the share of net assets transferred to the recipient company on whose account such obligations arose. The third paragraph clarifies that this assertion is without prejudice to the Member States’ powers, inter alia, in relation to criminal law, the prevention and combatting of terrorist financing, social law, taxation and law enforcement. Insofar, authorities in all Member States retain all of their powers to impose measures and penalties, under national law, after the date on which the cross-border division took effect.

Recital 73 Directive 2017/1132. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 710. 3 Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 76, p. 1696. 1

2

722

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 154

II. Examples of Nullity under National Law Germany, making use of its margin of interpretation in a permissible manner, has 6 gone beyond the minimum standard of the Directive and generally ruled out nullity of divisions altogether as soon as the registration has taken place.4A similar implementation was adopted by Italy, however leaving the right to compensation for any damage caused to members or third parties unaffected.5 In the Netherlands, Article 2:323 of the Dutch Civil Code lays down the conditions 7 under which a court may declare a division as null and void. The court may rule the division null, among others, if the notarial deed of division is not an authentic document (2:323 (1) (a)) or if the resolution by the general meeting is considered null and void (2:323 (1)(c)).

Article 154 Exemption from the requirement of approval by the general meeting of the company being divided Without prejudice to Article 140, Member States shall not require approval of the division by the general meeting of the company being divided if the recipient companies together hold all the shares of the company being divided and all other securities conferring the right to vote at general meetings of the company being divided, and the following conditions are fulfilled: (a) each of the companies involved in the operation carries out the publication provided for in Article 138 at least one month before the operation takes effect; (b) at least one month before the operation takes effect, all shareholders of companies involved in the operation are entitled to inspect the documents specified in Article 143(1), at their company’s registered office; (c) where a general meeting of the company being divided, required for the approval of the division, is not summoned, the information provided for in Article 141(3) covers any material change in the asset and liabilities after the date of preparation of the draft terms of division. For the purposes of point (b) of the first paragraph, Article 143(2), (3) and (4) and Article 144 shall apply.

I. Scope of Application Member States should be able to provide that the extensive reporting or information 1 requirements relating to the merger or division of companies, laid down in Chapter I and Chapter III of Title II, need not be complied with where all the shareholders of the companies involved in the merger or division agree that such compliance can be dispensed with.1 In the case of a division where all the shares and other securities conferring voting 2 rights in the company being divided belong to the recipient companies, Article 154 makes a resolution of the general meeting of the company being divided superfluous. Article 131(2) German Transformation Act (UmwG). Article 2504 quater Italian Civil Code. 1 Recital 75 Directive 2017/1132.

4

5

Klaus Bader and Andreas Börner

723

Art 155 Definition of a ‘division by the formation of new companies’ However, this is subject to the condition that (i) the disclosure requirements pursuant to Article 138 have been complied with in respect of all participating companies, and (ii) the shareholders of the participating companies have had the possibility, at least one month prior to the effective date of the division, to access the prior information in accordance with Article 143. Additionally, due to the omission of the resolution of the general meeting, point (c) modifies the obligation to provide information in accordance with Article 141(3). Under these circumstances, the duty applies in respect of all material changes in assets after the date of preparation of the draft terms of division.

II. Division by Acquisition This provision merely applies to cases of division by acquisition, since in the case of divisions by formation of new companies the beneficiary companies are created only during the process of the transaction and therefore divisions where all the shares and other securities conferring voting rights in the company being divided already belong to the recipient companies cannot take place by its very definition.2 4 The German legislator had initially not made use of this previously only optional provision. Due to the upgrade to a mandatory requirement however, a new Article 62(4) of the German Transformation Act was introduced by the Third Act amending the German Transformation Act, which now also applies mutatis mutandis to the division by means of Article 125 sentence 1 of the German Transformation Act. 3 5 In the Netherlands, the company being divided may resolve upon division by a board resolution (instead of a resolution of the general meeting of shareholders) if all recipient entities partaking in the division are companies limited by shares or private companies and the company subject to the division will become the sole shareholder thereof on the division. If the transferring company holds the entire issued capital of the company being divided, then the company being divided may resolve to divide by a management resolution (unless otherwise provided in the articles of association). 3

Section 3 Division by the formation of new companies Article 155 Definition of a ‘division by the formation of new companies’ 1. For the purposes of this Chapter, ‘division by the formation of new companies’ means the operation whereby, after being wound up without going into liquidation, a company transfers to more than one newly-formed company all its assets and liabilities in exchange for the allocation to the shareholders of the company being divided of shares in the recipient companies, and possibly a cash payment not exceeding 10 % of the nominal value of the shares allocated or, where they have no nominal value, of their accounting par value. 2. Article 90(2) shall apply.

2 3

724

Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 52-54, p. 1713. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 723.

Klaus Bader and Andreas Börner

Art 156

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

I. Division by Formation of New Companies The legal concept of division by formation of new companies is defined in Article 1 155(1). Accordingly, the division by formation of new companies is the process by which a company transfers, in exchange for shares of the recipient companies and, where appropriate, possibly a cash payment, all its assets and liabilities to several newly formed entities by way of dissolution without going into liquidation. The difference between a division by acquisition and a division by formation of new companies lies in the fact that that in case of the latter, the recipient public liability companies are only newly founded for the purposes of the division, whereas in the case of a division by acquisition, the recipient companies already exist beforehand.1

II. Characteristics of Division by Formation of New Companies The main characteristics of a division by the formation of new companies are, as in 2 the case of a division by acquisition, (i) partial universal succession, (ii) the dissolution of the company being divided without going into liquidation, as well as (iii) an exchange of shares combined with, if applicable, an additional cash payment. The Directive only covers full divisions where the company being divided ceases to 3 exist, leaving it to the Member States on whether and how to implement partial divisions where the company being divided continues to exist with some remaining assets and liabilities.2

Article 156 Application of rules on divisions by acquisition 1. Articles 137, 138, 139, and 141, Article 142(1) and (2) and Articles 143 to 153 shall apply, without prejudice to Articles 11 and 12, to division by the formation of new companies. For this purpose, the term ‘companies involved in a division’ shall refer to the company being divided and the term ‘recipient companies’ shall refer to each of the new companies. 2. In addition to the information specified in Article 137(2), the draft terms of division shall indicate the form, name and registered office of each of the new companies. 3. The draft terms of division and, if they are contained in a separate document, the memorandum or draft memorandum of association and the articles or draft articles of association of each of the new companies shall be approved at a general meeting of the company being divided. 4. Member States shall not impose the requirements set out in Articles 141 and 142 and in points (c), (d) and (e) of Article 143(1) where the shares in each of the new companies are allocated to the shareholders of the company being divided in proportion to their rights in the capital of that company. I. Application of Rules on Division by Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Content Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Formal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2

1 4 7

Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 50, p. 1712. See → Art 159.

Klaus Bader and Andreas Börner

725

Art 156 Application of rules on divisions by acquisition

I. Application of Rules on Division by Acquisition The procedure for divisions by acquisition also largely applies mutatis mutandis to divisions by way of formation of new companies. As such, Article 156(1) sentence 1 refers explicitly to the provisions of Articles 137 to 139 as well as 143 to 153, making them directly applicable. According to Article 156(1) sentence 2, “companies involved in a division” shall refer to the company being divided and the term “recipient company” refers to any of the newly established entities. By its very nature, no reference is made to Article 140, since in the case of a division by formation there is no recipient company whose consent can be required.1 2 The German legislator has adopted this “referral solution” under Articles 135-137 of the German Transformation Act. Since it is, by its nature, not possible to conclude a division and transfer agreement in the case of a division by formation of new entities, this instrument is effectively replaced by the draft terms of division in accordance with the Directive and pursuant to Article 136 of the German Transformation Act, to which, however, the provisions relating to the division and transfer agreement apply.2 3 The Dutch Civil Code distinguishes between a full division and a partial division with a hive-off. Pursuant to Article 2:334 a (2), a full division is the legal act whereby the property, proprietary rights and interests and the liabilities of a legal person, which ceases to exist on the division, are acquired by general transfer of title by two or more other recipient legal persons. If these other legal persons are incorporated in relation to the division, then such division can be considered as a “division by acquisition” within the meaning of Directive 1132/2017. 1

II. Content Requirements In addition to the content requirements applicable to the draft terms of division as provided for by Article 137, Article 156(2) adds the legal form, company name as well as registered office of each newly founded entity to the list of information to be disclosed. Further, paragraph 3 demands the draft terms of division as well as, in case they are contained in a separate document, the memorandum or draft memorandum of association together with the articles of association of each of the new recipient companies to be approved by the general meeting of shareholders of the company being divided; conclusively, reference to Article 140 and the respective dispensability of a decision of the general meeting enshrined therein would be of no avail.3 5 Article 156(2) was transposed by Article 125 sentence 1 of the German Transformation Act. Article 156(3), on the other hand, is taken into account by Article 125 sentence 1, as well as Article 37 of the German Transformation Act. 6 In the Netherlands, the requirements relating to a full division and a partial division with an hive-off are generally the same. As explained above, the Dutch Civil Code does not explicitly distinguish a division by acquisition from other forms of divisions. 4

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 719. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 721. 3 Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 52-54, p. 1713.

1

2

726

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 157

III. Formal Requirements When compared to the procedure of a division by acquisition, Article 156(4) provides 7 for a peculiarity: Whenever the shares in each of the newly established recipient companies are allocated to the shareholders of the company being divided in proportion to their rights in the capital of that company, the Member States shall neither require a detailed written report,4 nor an examination of the draft terms of division by independent experts5 or general interim accounting statements.6 The underlying reason for this exception is the fact that the standard for the division of shares does not require any further detailed explanation or justification, as the shareholder structure remains completely unaltered.7 As the assets of the company being divided are transferred to the newly established 8 recipient entities as contributions in kind in the event of said divisions by formation of new companies, the pertinent requirements laid down by the provision in accordance with the Codification Directive8 for the capital of public limited liability companies also apply.9

Section 4 Divisions under the supervision of a judicial authority Article 157 Divisions under the supervision of a judicial authority 1. Member States may apply paragraph 2 where division operations are subject to the supervision of a judicial authority having the power: (a) to call a general meeting of the shareholders of the company being divided in order to decide upon the division; (b) to ensure that the shareholders of each of the companies involved in a division have received or can obtain at least the documents referred to in Article 143 in time to examine them before the date of the general meeting of their company called to decide upon the division. Where a Member State makes use of the option provided for in Article 140, the period shall be long enough for the shareholders of the recipient companies to be able to exercise the rights conferred on them by that Article; (c) to call any meeting of creditors of each of the companies involved in a division in order to decide upon the division; (d) to ensure that the creditors of each of the companies involved in a division have received or can obtain at least the draft terms of division in time to examine them before the date referred to in point (b); (e) to approve the draft terms of division. 2. Where the judicial authority establishes that the conditions referred to in points (b) and (d) of paragraph 1 have been fulfilled and that no prejudice would be caused Article 141 Directive EU 2017/1132. Article 142 Directive EU 2017/1132. 6 Article 143(1) Directive EU 2017/1132. 7 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 720. 8 Directive (EU) 2017/1132 of the European parliament and of the Council of 14 June 2017 relating to certain aspects of company law. 9 Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos, 2019), § 55-56, p. 1713. 4

5

Klaus Bader and Andreas Börner

727

Art 157 Divisions under the supervision of a judicial authority to shareholders or creditors, it may relieve the companies involved in the division from applying: (a) Article 138, on condition that the adequate system of protection of the interest of the creditors referred to in Article 146(1) covers all claims regardless of their date; (b) the conditions referred to in points (a) and (b) of Article 140 where a Member State makes use of the option provided for in Article 140; (c) Article 143, as regards the period and the manner prescribed for the inspection of the documents referred to therein. I. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Procedural Facilitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Specific Member State Option Regarding Creditor Protection . . . . . . . . . . . . . . .

1 2 6

I. Purpose 1

Article 157 contains special requirements for the event of a division under the supervision of a judicial authority. These special arrangements were introduced as a concession to the UK, whose legal system did not recognize either mergers or divisions as a separate legal institution.1 As expected, both Germany as well as Italy did not make use of the option of transposing Article 157 into its national legislation; the German legal system does not recognize comparable instruments of judicial control over restructuring operations.2 Similarly, the Dutch Civil Code does not include provisions similar to Article 157 whereby the division is subject to judicial supervision.

II. Procedural Facilitations Pursuant to Article 157(2), this type of division may be eligible for various procedural facilitations. Thus, the preparation of the draft terms of division may be waived if an adequate system of creditor protection is guaranteed.3 Furthermore, no disclosure of the draft terms of conditions or other corresponding preliminary information to be provided to the shareholders is required if the resolution of the general meeting of shareholders of the recipient company is exceptionally dispensable under the national laws of the respective Member State.4 Finally, point (c) Article 157(2) provides for the possibility of waiving the deadline for prior information to be provided to the shareholders as well as their possibility to take note of the relevant documents. 3 In accordance with Article 157(1), such facilitations may only be applied if the court designated to supervise the division has the competence to: (i) call for a general meeting which is to decide upon the ultimate division, (ii) to ensure that that all shareholders of each of the companies involved have received or can at least timely obtain the documents referred to under Article 143, (iii) to actually call any meeting of creditors of each of the companies involved in a division in order to ultimately decide upon the division, (iv) to ensure that the creditors of each of the companies involved in a division 2

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 723. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 725. 3 Article 157(2)a Directive 2017/1132. 4 Article 157(2)b Directive 2017/1132.

1

2

728

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 158

have actually received or can at least timely obtain the draft terms of division, and lastly (v) to approve the draft terms of division. Finally, the Court cannot exempt the companies concerned from the procedural 4 requirements of the Directive in general, but only from the rules exhaustively listed in Article 157(2). Only the following may be exempted (numerus clausus): – from the publication of the draft terms of division in accordance with Article 138 – however only if the “adequate protection system” for creditors within the meaning of Article 146(1) extends to all claims, irrespective of their date of origin; – where a Member State adopts the option under Article 140: the disclosure and prior information referred to in points (a) and (b) of Article 140(1); – from the requirements of Article 143 as regards the time limit and arrangements for the prior information notice (but not the subject matter).5 These stipulations ensure that the designated court is actually deemed fit to exercise 5 effective control over the process of the division. Moreover, said procedural facilitations are not to be applied at the discretion of the court, but subject to the substantive conditions provided for by Article 157(2). An exemption is therefore only permissible if the court satisfactorily determines that the shareholders and creditors cannot suffer any damage as a result of the division.6

III. Specific Member State Option Regarding Creditor Protection If the division is subject to judicial supervision in accordance with the requirements 6 of Article 157, the third sentence of Article 146(3) also enables Member States to allow a qualified majority of creditors to waive default liability under protective measure 1 for creditor protection.7 The waiver must, however, be adopted by a simple majority of creditors at a creditors' meeting within the meaning of point (c) of Article 157(1), which must, however, represent at least three-quarters of the total amount of all claims; if there are several groups of creditors, a decision with such a “double majority” of each group is required.8

Section 5 Other operations treated as divisions Article 158 Divisions with cash payment exceeding 10 % Where, in the case of one of the operations specified in Article 135, the laws of a Member State permit the cash payment to exceed 10 %, Sections 2, 3 and 4 of this Chapter shall apply. With the possibility of an additional cash payment, the Directive – as in the case of 1 mergers – takes account of the fact that a division without this option would often fail in practice because it is the only way to compensate for so-called fractional amounts. As in the case of the merger, however, a limit of 10 % of the nominal value or the calculated 5 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 724-725. 6 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 724. 7 See → Art 146 mn. 5 and 6. 8 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 21, p. 725.

Klaus Bader and Andreas Börner

729

Art 159 Divisions without the company being divided ceasing to exist value of the shares applies here as well. Article 158 allows Member States to permit transactions in which the additional cash payments may exceed 10 %. In order to prevent circumvention they must then apply Sections 2 to 4 of Chapter III of Title II. Similarly to Article 116, Article 158 thus opens up the possibility of a full “division for cash”. 1 2 The Dutch Civil Code does not allow for a cash payment to exceed the 10 % ratio. Pursuant to Article 2:334 x (2), the aggregate amount of a right to a cash payment or receivables pursuant to the share exchange ratio may not exceed one-tenth of the nominal value of the shares allotted to the relevant company.

Article 159 Divisions without the company being divided ceasing to exist Where the laws of a Member State permit one of the operations specified in Article 135 without the company being divided ceasing to exist, Sections 2, 3 and 4 of this Chapter shall apply, except for point (c) of Article 151(1). To the extent the laws of a Member State permit operations which do not result in the divided company ceasing to exist, they must also apply Sections 2 to 4 of Chapter III of Title II, in accordance with Article 159. This is intended to prevent circumvention of the protective provisions of the Directive, as with the parallel provision in Article 117. 2 However, contrary to what is sometimes claimed in the literature, Article 159 is aimed only at operations involving the transfer of all the assets and liabilities of the divided company. This is already clear from the wording of the provision, which expressly refers to an “operation provided for in Article 135”, the essential characteristics of which, according to the legal definitions in Article 136(1) and Article 155(1), include not only the exchange of shares and, where appropriate, a cash payment and the dissolution of the company being divided, but also, in particular, the transfer of all the assets and liabilities of the company being divided. 3 Article 159 therefore does not cover, in particular, operations such as “spin-off ” within the meaning of Article 123(2) German Transformation Act, or “hive-down” within the meaning of Article 123(3) German Transformation Act. Although the Member States are of course free to permit such or other processes similar to a division in their national law, they are then not subject to the obligations of the Directive.1 4 Pursuant to Article 334 c Dutch Civil Code, the company being divided shall cease to exist if all of its property, proprietary rights and interests and all of its liabilities are transferred. However, the company being divided will remain in existence if at least one recipient company, being a public or private limited liability company, is formed on the division and the company being divided acquires all of its shares upon the division. 1

1 1

730

Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 691. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 21, p. 692.

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 a

Section 6 Application arrangements Article 160 Transitional provisions Member States need not apply Articles 146 and 147 as regards the holders of convertible debentures and other securities convertible into shares if, at the time when the provisions referred to in Article 26(1) or (2) of Directive 82/891/EEC came into force, the position of those holders in the event of a division had previously been determined by the conditions of issue.

CHAPTER IV CROSS-BORDER DIVISIONS OF LIMITED LIABILITY COMPANIES Article 160 a Scope 1. This Chapter shall apply to cross-border divisions of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union, provided that at least two of the limited liability companies involved in the division are governed by the laws of different Member States (hereinafter referred to as ‘cross-border division’). 2. Notwithstanding point 4 of Article 160 b, this Chapter shall also apply to crossborder divisions where the law of at least one of the Member States concerned allows the cash payment referred to in points (a) and (b) of point 4 of Article 160 b to exceed 10 % of the nominal value, or, in the absence of a nominal value, 10 % of the accounting par value of the securities or shares representing the capital of the recipient companies. 3. This Chapter shall not apply to cross-border divisions 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. Action taken by such a company to ensure that the stock exchange value of its units does not vary significantly from its net asset value shall be regarded as equivalent to such repurchase or redemption. 4. Member States shall ensure that this Chapter does not apply to companies in either of the following circumstances: (a) the company is in liquidation and has begun to distribute assets to its members; (b) the company is subject to resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU.

Klaus Bader and Andreas Börner

731

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 a

Section 6 Application arrangements Article 160 Transitional provisions Member States need not apply Articles 146 and 147 as regards the holders of convertible debentures and other securities convertible into shares if, at the time when the provisions referred to in Article 26(1) or (2) of Directive 82/891/EEC came into force, the position of those holders in the event of a division had previously been determined by the conditions of issue.

CHAPTER IV CROSS-BORDER DIVISIONS OF LIMITED LIABILITY COMPANIES Article 160 a Scope 1. This Chapter shall apply to cross-border divisions of limited liability companies formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union, provided that at least two of the limited liability companies involved in the division are governed by the laws of different Member States (hereinafter referred to as ‘cross-border division’). 2. Notwithstanding point 4 of Article 160 b, this Chapter shall also apply to crossborder divisions where the law of at least one of the Member States concerned allows the cash payment referred to in points (a) and (b) of point 4 of Article 160 b to exceed 10 % of the nominal value, or, in the absence of a nominal value, 10 % of the accounting par value of the securities or shares representing the capital of the recipient companies. 3. This Chapter shall not apply to cross-border divisions 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. Action taken by such a company to ensure that the stock exchange value of its units does not vary significantly from its net asset value shall be regarded as equivalent to such repurchase or redemption. 4. Member States shall ensure that this Chapter does not apply to companies in either of the following circumstances: (a) the company is in liquidation and has begun to distribute assets to its members; (b) the company is subject to resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU.

Klaus Bader and Andreas Börner

731

Art 160 a Scope 5. Member States may decide not to apply this Chapter to companies which are: (a) the subject of insolvency proceedings or subject to preventive restructuring frameworks; (b) the subject of liquidation proceedings other than those referred to in point (a) of paragraph 4; or (c) the subject of crisis prevention measures as defined in point (101) of Article 2(1) of Directive 2014/59/EU. I. Legislative Purpose of Chapter IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. European Model for Structural Changes and Key Elements of Cross-Border Divisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Limited liability companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Cross-border element . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Established within the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Company statutes of at least two Member States . . . . . . . . . . . . . . . . . . . . . . . . c) Other company statutes within the European Economic Area (EEA) . . . . 3. Cash payments exceeding 10 % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Divisions not within the scope of the 2019 Directive . . . . . . . . . . . . . . . . . . . . . . a) Divisions involving non-EU states . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Divisions involving civil partnerships, cooperatives and other legal entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Sectorial exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Not applicable to operations pursuant to the BRRD Directive . . . . . . . . . . . e) Not applicable to companies in liquidation, where the distribution of assets has begun. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Discretion of the Member States to exclude companies involved in insolvency proceedings, other liquidation proceedings or crisis prevention measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Transposition of the Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Advance effect of the 2019 Directive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Brexit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 6 11 11 12 12 14 18 19 21 21 23 27 30 31 32 33 34 36

I. Legislative Purpose of Chapter IV The Directive amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (the “2019 Directive”)1 for the first time introduces harmonized rules on cross-border divisions. As set out above,2 it builds on the Commission’s proposal 2018/0114(COD) (the “2018 Proposal”).3 2 The 2019 Directive sets forth comprehensive procedures for cross-border divisions and conversions and provides additional rules on cross-border mergers of limited liability companies established in a Member State. It is thereby directed at introducing stronger protection for creditors and minorities while at the same time simplifying cross-border operations and conclusively further dismantling unjustified obstacles to the freedom of establishment of EU companies within the single market (Recital 5). 3 The legislative aim of introducing cross-border divisions are largely the same as for cross-border mergers, which have already been discussed above. Facilitating all types 1

1 Council Directive (EU) 2019/2121 of the European Parliament and of the Council of 27.11.2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions, OJ L321, 12.12.2019. 2 → Art 118 mn. 33. 3 For further background regarding the history of Council Directive (EU) 2019/2121 see → Foreword to Arts 85a-86 u mn. 1-15.

732

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 a

of cross-border operations has been on the Commission’s agenda for more than two decades; on the basis of the freedom of establishment under Article 49, 54 AEUV the ECJ has acknowledged a comprehensive freedom for companies to effect cross-border operations (Umwandlungsfreiheit), without, however, defining requirements for the procedure to be undertaken and guidelines for the adequate protection of the stakeholders involved.4 As the 2019 Directive acknowledges, the absence of a harmonised legal framework 4 for cross-border (conversions and) divisions has led to legal fragmentation and legal uncertainty and thus to barriers to exercising the freedom of establishment; it also leads to a sub-optimal protection of employees, creditors and minority members within the internal market (Recital 5). In practice, the lack of coordination of the applicable procedures has led either to 5 situations where both Member States involved applied a strict test of the substantive and procedural provisions of their own national rules as well as the legal requirements of the respective other state, or worse, where the Member States involved exclusively focused on their domestic laws without awaiting any confirmation from the respective other state that applicable national laws have been respected.5

II. European Model for Structural Changes and Key Elements of Cross-Border Divisions In terms of procedures attached to cross-border operations, the 2019 Directive fol- 6 lows the so called European model for structural changes.6 It has been set out for the first time in the Merger Directive7 and has subsequently been adopted in the SE-Regulation8 and in the Cross-Border Merger Directive.9 Key procedural elements of a crossborder division are, therefore: (i) the draft terms of the cross-border division (Article 160 d); (ii) the report of the management or administrative organ for members and employees (Article 160 e); (iii) the report of the independent expert (160 f); (iv) the disclosure of the draft terms of the cross-border division and additional information (Article 160 g); (v) approval of the draft terms of the cross-border division by the general meeting (Article 160 h); and (vi) two-step legal scrutiny by the departure and the destination Member State (Article 160 m, Article 160 o).10 The regulations on cross-border mergers therefore serve as a basis for the cross- 7 border divisions, requiring the following elements and information requirements:

4 Case C-411/03 SEVIC Systems AG [2005] ECR 2005 I-10805; Case C-378/19 VALE Epitesi kft [2012] ECLI:EU:C:2012:440; Case C-106/16 Polbud Wykonawstwo [2017] ECLI:EU:C:2017:804. 5 Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie‘ ZIP 2019, 2437. 6 Riesenhuber, NZG 2004, p. 15 et. seq.; J. Schmidt, ‘Cross-border mergers and divisions, transfers of seat: Is there a need to legislate?‘ Study for the JURI Committee (2016), 35; Stiegler in: Jung/Krebs/Stiegler, Gesellschaftsrecht in Europa (Nomos 2019), § 32 Rn. 45, § 18, § 75; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (2017), § 30.12. 7 Originally Directive 78/855/EEC; since 1 July 2011 codified as Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies, OJ L 110, 29.4.2011, p. 1. 8 Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), OJ L 294, 10.11.2001. 9 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies, OJ L 310, 25.11.2005. 10 For further information see table → mn. 11.

Klaus Bader and Andreas Börner

733

Art 160 a Scope – – – – – – –

a plan (or draft terms), a report by the administrative or management body, an examination by an independent expert, disclosure, a resolution by the general meeting, scrutiny of legality, and specific rules to protect the key stakeholders, i.e. members, creditors and employees. 8 This basic structure is supplemented by special rules designed to take account of the particularities of cross-border divisions.11 As such, in contrast to the existing rules relating to cross-border mergers, additional information will now be required in the common draft terms relating to the relevant operation and in the report of the management body of the company for its shareholders and employees relating to the impact of the cross-border division on such persons. Shareholders and employees will thus be enabled to present their observations to the general meeting which decides on the operation. 9 Cross-border divisions encounter the same potential issues as divisions in the domestic context, in particular the necessity to specify the assets and liabilities to be transferred, to protect the creditors against a substantial deterioration of their position as compared to the situation prior to the division (as the companies involved are generally free to decide about the allocation of assets), the need to protect the employees’ interests and safeguarding the interests of the members of the companies involved in the division. 10 The table below illustrates the applicable procedure and mechanisms to provide for adequate protection of the stakeholders involved in cross-border divisions: Stage

Content/ remarks

Legal basis

Participating Limited liability companies as defined in Annex Article 160 a (a) entity division II of the Company Law Directive (2017/1132), Article 160 b incorporated under the laws of a Member State; No. 1 Exceptions: Corporations and companies under- Article 160 a going insolvency or preventive restructuring (3)-(5) measures No partnerships Newly formed legal entities (recipient companies)

Corporate entities only (Annex II of the Compa- Article 160 a (1) ny Law Directive 2017/1132), incorporated un- Article 160 b (1) der the laws of a Member State and having its and (3) registered office, central administration or principal place of business within the EU;

11 Bormann and Stelmaszcyk, ‘Grenzüberschreitende Spaltungen und Formwechsel nach dem EUCompany Law Package‘ ZIP (355) 2019, 2.

734

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Stage Types of division

Content/ remarks

Art 160 a Legal basis

Division by formation (transfer of all assets and Article 160 b (4) liabilities to at least two newly formed recipient letter a-c companies); terminology of the Directive: Full division Division by formation (transfer of part of the Article 160 b (4) assets and liabilities to at least one newly formed letter a-c recipient company); terminology of the Directive: Partial division Hive down (transfer of part of the assets and Article 160 b (4) liabilities to at least one newly formed recipient letter a-c company); terminology of the Directive: Division by separation

Compensation

Full division by formation: members of the com- Article 160 b (4) pany being divided receive shares in each newly letter a formed recipient company; the company being divided ceases to exist Partial division by formation: members of the Article 160 b (4) company being divided receive shares in each letter b newly formed recipient company; the company being divided continues to exist Division by separation: The company being di- Article 160 b (4) vided receives shares in the newly formed recipi- letter c ent company(ies)

Draft terms

Preparation by the administrative or manage- Article 160 b (4) ment body of the company being divided, infor- letter a-q mation on the legal form, company name, place, registered office of the company being divided and each newly formed recipient company, exchange ratio and distribution of shares to be granted. Distribution scale, additional cash payments, indicative timetable, balance sheet and division dates and the cut-off date for entitlement to dividends, special rights/ benefits for members and/or members of the administrative or management bodies, creditor guarantees, cash compensation for members (in accordance with Article 160 i), effects on employment relationships and implementation of employee participation (in accordance with Article 160 l); detailed description of the transferred/remaining assets, including information on the valuation of the assets and liabilities allocated to the individual companies; formation act/statutes of each newly formed recipient company; fallback clause for assets not yet known at the time the draft terms were drawn up.

Klaus Bader and Andreas Börner

735

Art 160 a Scope Stage

Content/ remarks

Legal basis

Report(s)

Report of the administrative or management Article 160 e body for members and employees on the impact on future operations; separate section for members: impact on members, cash compensation and members' rights under Article 160 i, share exchange ratio and method of calculation. Report may be waived by members; separate section for employees: effects on employment relationships (also in subsidiaries and branches), not necessary if all employees are members of the administrative or management bodies; separate reports for both groups possible;

Publication requirements

Reports by the administrative or management Article 160 g body: (if not dispensable) to members and employees in electronic form at least 6 weeks before the date of the general meeting referred to in Article 160 h (if available, already together with the draft terms); Draft terms: Plan and offer to members/ cred- Article 160 d itors/ employees (representatives), up to a maximum of 5 days before the resolution of the general meeting; announcements at the latest one month before the resolution is adopted; Possibility of exemption where publication on Article 160 g (2), the website of the company being divided (3), (5) and disclosure to registers with public notice of European interconnection of registers and, where appropriate, the Official Journal or Platform

Expert examination

Examination by independent experts (natural or Article 160 f legal person) and preparation of report; report Article 160 t must be available to members one month before the decision is taken (Article 160 h); contents of report: Valuation method for possible cash compensation, examination of the draft terms Possibility of exemption: single-member compa- Article 160 f (3) ny or exemption by members (form of waiver in the transposition measures of the Member States)

736

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Stage Division approval

Content/ remarks

Art 160 a Legal basis

Resolution approving the draft terms (quorum Article 160 h at least 2/3, max 90 %, but not higher than the threshold for cross-border mergers provided for under national law, e.g. in the case of a German GmbH and AG at least 3/4 majority) Compensation offer for objecting members

Article 160 i

Consent can be made dependent on confirma- Article 160 l tion of the co-determination regulations Articles of As- Determination in the resolution approving the Article 160 h sociation of division on the basis of the draft terms Point (j) of newly formed Article 160 d recipient company(ies) Administrative or management bodies of the newly formed recipient company(ies)

Under domestic law according to the respective e.g. § 35 GmbHG, legal requirements § 78 AktG

Impairment certificate

Proof of value, report on the formation of a Article 160 o (1) company in kind, if required by formation regulations for domestic companies

Employee Participation

Information and consultation rights (employees) Article 160 k Opportunity to submit comments on the report Article 160 k addressed to the members Article 160 g (1) Employee participation (protection of the status Article 160 l quo) and employee involvement

Guarantee

3 months after the publication of the draft terms, Article 160 j upon application by creditors to the competent authority (registration court), if no collateral security is provided on the basis of the draft terms

Declaration of Declaration by the administrative or manage- Article 160 j (3) solvency ment body that there is no reason to believe that the company being divided will not be in a position to meet its liabilities once the division takes effect Privilege of the hive down

Omission of certain details in the draft terms Article 160 s (Article 160 d), no report of the management and administrative body, no expert examination (Article 160 f) and no protection of members pursuant to Article 160 i

Klaus Bader and Andreas Börner

737

Art 160 a Scope Stage

Content/ remarks

Legal basis

Commercial register application of the company being divided

With register courts/register authorities of the Article 160 m (1) company being divided

Preliminary certification by the Member State of the company being divided

After examination of the requirements pursuant Article 160 m to Article 160 d through Article 160 l and fulfilment of all other requirements in the Member State of the company being divided, denial in case of an abuse pursuant to Article 160m(8); submission of an application together with the annexes; Application of the law of the Member State of the company being divided for procedures and formal requirements until the preliminary certification in accordance with Article 160 m is issued by the court / notary public Transmission of the preliminary certificate ex of- Article 160 n ficio to the authority (registration court) of each recipient company At the registry court of the company being di- Article 160 o vided and of each newly formed recipient company; online submission together with annexes Examination of the formation rules for each Article 160 c newly formed recipient company under the substantive and procedural law applicable to each of them

Annexes for registration

738

Draft terms, approval resolution (Article 160 h), Article 160 o (2) articles of association of each newly formed recipient company; proof of value, report on the formation of the company by contribution in kind (if formation regulations so require for domestic company formations)

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Stage Proposal for entry text

Content/ remarks

Art 160 a Legal basis

Company being divided: The company has Article 160 p (2) transferred its assets/parts of its assets and liabilities to the newly formed recipient company by way of a cross-border full division by formation/ partial division by formation/ division by separation (hive down). with its registered office in ... (exact legal designation of the newly formed recipient company).The cross-border full division / partial division / division by separation becomes effective with this entry [or, as the case may be: upon registration [of the deletion / of the division] with the register of the company being divided in its register] Each newly formed recipient company: Depend- e.g. §§ 130, 131 ing on the legal form, with reference to the type UmwG of division and the company being divided (in Germany with reservation of validity with regard to constitutive registration with the register of the company being divided)

Effectiveness Registration of the newly formed recipient company

Authorisation of the cross-border division by Article 160 o (4) the authority (registration court / registration authority) of the Member State of each newly formed recipient company Effectiveness of the registration under the laws Article 160 m, of the Member State of the company being di- Article 160 q, vided, but not before its having received the Article 160 o notification regarding the completion of the formation of each recipient company Irreversibility of registration, but without preju- Article 160 u dice for the exercise of powers under exceptional circumstances (law enforcement, anti-terrorism, social law, tax law)

Publication of registration

According to domestic law

Effect of cross-border division

Transfer of assets in accordance with the draft Article 160 r terms , termination of the company being divided in the event of a full division off, entry into the position of members in each newly formed recipient company, transfer of existing assets and liabilities in accordance with the draft terms, fallback clause for assets not expressly allocated (Article 160r(4))

Klaus Bader and Andreas Börner

Article 160 p (2)

739

Art 160 a Scope

III. Scope of Application 1. Limited liability companies 11

The scope of application is limited to EU limited liability companies as specified in Annex II of the 2019 Directive (Article 160(b)(1)).12

2. Cross-border element a) Established within the European Union Chapter IV only applies where (i) the company being divided has been formed in accordance with the law of a Member State and (ii) has its registered office, central administration or principal place of business within the European Union. 13 Therefore, Chapter IV also applies to companies formed in accordance with the law of a Member State other than the Member State where the company has its registered office, central administration or principal place of business. 12

b) Company statutes of at least two Member States Chapter IV only applies if at least two of the companies involved in the division are governed by the laws of different Member States – otherwise, the cross-border element would be missing. 15 In this respect, the location of the involved companies’ administrative headquarters is not decisive, but solely the applicable company law regimes (lex societatis, company statute).13 16 The division must lead to the formation of a new company under the company statute of a Member State which is different from the company statute of the Member State of the company being divided. 17 Accordingly, the 2019 Directive does not apply where the company being divided has changed its company statute to the law of the Member State which would also be the Member State of the recipient company. 14

c) Other company statutes within the European Economic Area (EEA) 18

Following the adoption of the Joint Committee Decision (JCD) incorporating the act into the EEA Agreement on 10 July 2019 and the ratification by Iceland, Liechtenstein and Norway, as of 1 February 2020, the 2019 Directive also applies where the company being divided was formed in accordance with the law of a member state of the EEA and has its registered office, central administration or principal place of business within the European Union or the EEA,14 and the requirement of multiple company statutes applies.

3. Cash payments exceeding 10 % 19

In parallel to Article 120 for cross-border mergers, Article 160b(1) permits Member States to allow cross-border divisions with a cash payment exceeding 10 % of the recipi-

See → mn. 1-3. → Art 118 mn. 52. 14 EFTA, ‘Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law’ (EFTA) accessed 18 October 2020. 12

13

740

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 a

ent company’s share capital, and requires Member States to allow cross-border divisions involving such payments. As with Article 120, neither the wording nor the purpose of Article 160b(1) imply 20 a certain limit. The reason for this is the need to prevent any circumvention of the safeguards regarding the protection of shareholders and creditors of the corporate entities involved in the division.

4. Divisions not within the scope of the 2019 Directive a) Divisions involving non-EU states The 2019 Directive is not applicable if the cross-border element points to a state that 21 is not a Member State (or an EEA Member State), i.e. if only the company being divided is governed by the laws of a Member State but at least one of the recipient companies is governed by the law of a non-EU state (e.g. Switzerland, the United Kingdom). Member States may extend the scope of application of Chapter IV to divisions 22 involving companies from non-EU states when implementing this 2019 Directive, or when entering into international treaties and agreements with non-EU states. b) Divisions involving civil partnerships, cooperatives and other legal entities Civil partnerships, cooperatives and comparable entities are not covered by the 2019 Directive.15 The Commission justifies this with reference to the fact that the European provisions on company and accounting law only apply to corporations because of their particular relevance for the internal market. In practice, civil partnerships and comparable entities will need to continue carrying out cross-border divisions solely on the basis of national laws as interpreted in accordance with the freedom of establishment laid down in primary EU legislation and as interpreted by the ECJ. For cross-border divisions – even more than for cross-border mergers or conversions – the lack of a harmonized legal basis and the potential incompatibilities of national laws may easily lead to uncertainties as to whether or not assets have been effectively transferred.16 Under European law, Member States may decide to extend the scope of application of the provisions of Chapter IV to other legal entities under the concept of gold-plating. 17

23 24

25

26

c) Sectorial exceptions 27 The sectorial exceptions widely correspond to those of cross-border mergers. 18 In particular, Chapter IV is not applicable to cross-border divisions of undertak- 28 ings for collective investment in transferable securities (UCITS). The reason for this exclusion is that UCITS are subject to Directive 2009/65/EC. UCITS are companies whose objective is the collective investment of capital provided by the public. They operate on the principle of risk-spreading and their units are, at the holder’s request, repurchased or redeemed, directly or indirectly, out of the assets of that company, whereas actions taken by such a company to ensure that the stock exchange value of its → Art 118 mn. 62-65, → Art 86 a mn. 5. Bormann and Stelmaszcyk, ‘Grenzüberschreitende Spaltungen und Formwechsel nach dem EUCompany Law Package’ ZIP (355) 2019,3. 17 → Art 118 mn. 65. 18 Bormann and Stelmaszcyk, ‘Grenzüberschreitende Spaltungen und Formwechsel nach dem EUCompany Law Package’ ZIP (355) 2019, 3. 15

16

Klaus Bader and Andreas Börner

741

Art 160 a Scope units does not vary significantly from its net asset value are regarded as equivalent to such repurchase or redemption (Article 160a(3)). 29 It follows from these limited exceptions that cross-border divisions are available to all other types of companies conducting business in regulated industry sectors, such as banks, insurance companies, energy companies, etc. One of the more difficult questions in this regard is whether and how regulatory permits remain in force for the recipient company. Often, the applicable national administrative law provisions require that the recipient company will have to apply on its own to obtain the regulatory status of the company being divided. In addition, the transfer of certain assets and liabilities may be subject to regulatory approval. d) Not applicable to operations pursuant to the BRRD Directive 30

In parallel with Article 87(4) and point (b) of 120(4), point (b) of Article 160a(4) and point (c) of 160a(5) provide that the present Chapter does not apply to companies which are the subject of recourse to the winding-up instruments, powers and mechanisms provided for in Title IV of the business recovery and resolution Directive 2014/59/ EU.19 e) Not applicable to companies in liquidation, where the distribution of assets has begun.

31

Chapter IV is not applicable to companies in liquidation, where the distribution of assets to the members has already begun (Article 160(4)) without specifying whether the beginning of the distribution must have led to an actual transfer of assets, or whether a decision by the members and/or the administrative or management body to do so already prohibits a cross-border division. The term “liquidation” also relates to proceedings which, under the law of the Member State of the company being divided, do not qualify as insolvency proceedings (Recital 9). f) Discretion of the Member States to exclude companies involved in insolvency proceedings, other liquidation proceedings or crisis prevention measures

32

Pursuant to Article 160(5), Member States can decide not to apply Chapter IV to companies subject to – insolvency proceedings or preventive restructurings20 – liquidation proceedings other than those referred to in paragraph (4), i.e. where the distribution of assets to members has not begun and/or – crisis prevention measures as defined in point (101) of Article 2(1) of Directive 2014/59/EU. Crisis prevention measures are: • the exercise of power to directly remove deficiencies or impediments to recoverability under Article 6(6) BRRD, • the exercise of powers to address or remove impediments to resolvability under Article 17 or 18 BRRD, • the application of an early intervention measure under Article 27 BRRD, • the appointment of a temporary administrator under Article 29 BRRD or • the exercise of the write-down or conversion powers under Article 59 BRRD.

19 20

742

→ Art 120 mn. 17. Regarding the Directive on Restructuring and Insolvency, → Art 86 a mn. 11.

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 a

5. Transposition of the Directive Member States shall bring into force the laws, regulations and administrative provi- 33 sions necessary to comply with this Directive by 31 January 2023.21

6. Advance effect of the 2019 Directive From a practitioner’s point of view, when dealing with the competent authorities in 34 the destination and departure Member State for purposes of effecting a cross-border division prior to expiry of the 2019 Directive’s implementation period on 31 January 2023, it will be relevant to consider under which conditions the directive may have advance effect on existing national law such that the company being divided may invoke the directive’s content vis-à-vis the relevant Member State, its authorities and courts. In line with the ECJ’s judicature22 as developed in case Inter-Environnement Wallonie, 35 the prohibition on frustrating the objective of a directive23 as derived from the obligation not to defeat the object and purpose of a treaty as set out in Article 18 of the Vienna Convention on the law of treaties24, and the duty of loyalty derived from Article 4 (3) EUV (Lisbon) in connection with Article 288 (3) TFEU, Member States must refrain from taking any measures liable seriously to compromise the attainment of the result prescribed by the 2019 Directive during the transposition period. Practical challenges will arise as long as the 2019 Directive has not been transposed into national law: will there be room to apply national rules on cross-border mergers (as implemented as a result of the Cross Border Merger Directive25) mutatis mutandis? Will there be a combination of domestic rules on division (if existent) with national rules on cross-border mergers? Which authority will be the authority competent to issue a “pre-division certificate” and under which conditions? Which elements of the 2019 Directive will be required (whilst still not being transposed into national law) by the competent authority?26

7. Brexit The United Kingdom has left the EU (Brexit) on 31 January 2020. As is the case for 36 cross-border conversions, the effects of the UK Withdrawal Act remain to be seen. 27

Article 3(1) of the 2019 Directive. Case C-129/96 Inter-Environnement Wallonie [1997] ECLI:EU:C:1997:628 § 44 et. seq.; Case C-212/04 Adeneler [2006] ECLI:EU:C:2005:654, § 121 et. seq.; Case C-43/10 Nomarchiaki Aftodioikisi Aitoloakarnanias and Others [2011] ECLI:EU:C:2011:651 § 98 et. seq. 23 See Opinion of the General Advocate Kokott delivered on 17 January 2019 on Case C‑637/17 Cogeco Communications, ECLI:EU:C:2019:32, § 101. 24 United Nations, Treaty Series, vol. 1155, p. 331. 25 Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on crossborder mergers of limited liability companies. 26 For further information on the advance effect of the 2019 Directive → Foreword to Arts 85a-86 u mn.18-20; OLG Saarbrucken, 7.1.2020 – 5 W 79/19, NZG 2020, 390; Fink/ Chilevych, NZG 2020, 544 et. seq. 27 For further information on Brexit → Foreword to Arts 85a-86 u mn. 21. 21

22

Klaus Bader and Andreas Börner

743

Art 160 b Definitions

Article 160 b Definitions For the purposes of this Chapter: (1) ‘company’ means a limited liability company of a type listed in Annex II; (2) ‘company being divided’ means a company which, in the process of a cross-border division, transfers all its assets and liabilities to two or more companies in the case of a full division, or transfers part of its assets and liabilities to one or more companies in the case of a partial division or division by separation; (3) ‘recipient company’ means a company newly formed in the course of a crossborder division; (4) ‘division’ means 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’). I. Limited Liability Companies – Corporations Pursuant to Annex II . . . . . . . . . . II. Three Types of Cross-Border Divisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Cross-border divisions by formation and acquisition . . . . . . . . . . . . . . . . . . . . . 2. Ratio-altering cross-border divisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 8 13

I. Limited Liability Companies – Corporations Pursuant to Annex II 1

The rules on cross-border divisions apply exclusively to limited liability companies as specifically listed in Annex II. This includes all corporations with limited liability, for example: – Germany: Aktiengesellschaft (AG), Kommanditgesellschaft auf Aktien (KGaA) and Gesellschaft mit begrenzter Haftung (GmbH).1 1 Krieger et al., ‘Position Paper of the German Bar Association by the Committee on Commercial Law on the Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards Cross-border conversions, mergers and divisions’, Position Paper No. 31/ 2018, 28, accessed 18 October 2020.

744

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 b

–

France: société anonyme (SA), société en commandite par actions (SCA), société à responsabilité limitée (SARL), société par actions simplifiée (SAS). – Italy: società per azioni (SpA), società in accomandita per azioni (Sapa), società a responsabilità limitata (Srl). – The Netherlands: naamloze vennootschap (NV), besloten vennootschap met beperkte aansprakelijkheid (BV). In contrast to Article 119(1)(b), which also contains a general definition of a limited 2 liability company which can be merged (pursuant to Chapter II), Chapter IV on crossborder divisions exclusively applies to the companies expressly listed in Annex II. As a consequence, there is also no equivalent to the requirement in point (a) of Article 121 that a cross-border division can only take place for companies eligible for a domestic division. Notably, there is no equivalent to the “small general clause” in point (b) of Article 119 3 which allows to apply cross-border mergers to an SE without being listed in Annex II2. Even though this difference is clearly not an oversight, there are, as for cross-border conversions, good arguments in favour of applying the rules of the 2019 Directive to an SE as well.3

II. Three Types of Cross-Border Divisions The 2019 Directive covers three types of divisions: full divisions (point (a) of Article 160b(4)), partial divisions (spin off) (point (b) of Article 160b(4)) and now, in deviation from the 2018 Proposal, divisions by separation (point (c) of Article 160b(4)), which are commonly referred to as “hive down”. This scope goes significantly beyond the types of domestic divisions in Article 135 et seqq., which only deal with divisions involving a transfer of all assets of the company being divided.4 In a full division, the company being divided transfers all its assets and liabilities to two or more recipient companies by way of dissolution without liquidation in exchange for securities or shares in the beneficiary company (and, where appropriate, an additional cash payment) to the shareholders of the company being divided (point (a) of Article 160a(4)). In a partial division, the company being partially divided continues to exist and transfers only part of its assets and liabilities to one or more recipient companies in exchange for securities or shares in the beneficiary companies (and, where appropriate, an additional cash payment) to the shareholders of the company being partially divided (point (b) of Article 160a(4)). In a division by separation, the company being divided also transfers only part of its assets and liabilities to one or more recipient companies; in exchange, securities or shares in the beneficiary companies are transferred directly to the company being divided and not to its members (point (c) of Article 160b(4)). The possibility of forming a company through a division by separation as provided for in the 2019 Directive offers companies a new harmonized procedure in the internal market, as companies should be free to directly set up subsidiaries in other Member States (Recital 8). It is not entirely clear whether or not the 2019 Directive opens up the possibility of a total cross-border

→ Art 119 mn. 7. → Art 86 a mn. 2-4. 4 Council Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law [2017] OJ 169, 30.6.2017, 46-127. 2 3

Klaus Bader and Andreas Börner

745

4

5

6

7

Art 160 c Procedures and formalities hive down, as the clear wording describes the division by segregation as relating to a part of the assets and liabilities.5

1. Cross-border divisions by formation and acquisition The 2019 Directive only covers divisions by formation of new companies. Cross-border divisions in which a company transfers all its assets and liabilities to an existing company are thus not allowed.6 Such divisions by acquisition have been viewed as being very complex, requiring the involvement of competent authorities from several Member States and entailing additional risks in terms of the circumvention of Union and national rules (Recital 8). This is not entirely convincing. Cross-border divisions are always complex transactions and the involvement of authorities from different Member States is always necessary, as is the case with the division by formation of new companies. In addition, a significantly higher risk of abuse can hardly be proven empirically. Even if such risk existed, it would be more appropriate to counter it by means of an adequate regulatory regime and not by leaving these processes without regulations at all. 10 It has been debated amongst scholars whether Article 160 a et seqq. could be applied mutatis mutandis to cross-border divisions with the recipient company being an existing company. An analogous application requires an unintentional gap of the legislator. In view of Recital 8, one could hardly argue that the gap is unintentional, it is a deliberate decision of the legislator to exclude the existing companies as recipient companies from the application of the cross-border division rules. 11 As a consequence, these limitations of the scope of application lead to a somewhat difficult coexistence of cross-border divisions which can be carried out on the basis of the harmonized regulatory regime, and those which would be carried out according to the principles of the ECJ's case law.7 12 The draft does, however, provide for the obligation to re-evaluate the 2019 Directive no later than four years after the transposition deadline has lapsed and this examination shall in particular focus on the potential inclusion of cross-border divisions by acquisition.8 8 9

2. Ratio-altering cross-border divisions 13

Although there is no express provision for a ratio-altering division, this type of restructuring is permissible if all shareholders of the company to be divided so agree. 9

Article 160 c Procedures and formalities In compliance with Union law, the law of the Member State of the company being divided shall govern those parts of the procedures and formalities to be complied 5 Kraft, ‘“Grenzüberschreitende Vorhaben” nach Annahme der Mobilitätsrichtlinie durch das Europäische Parlament’, BB 2019, 1865. 6 Kraft‚ ‘“Grenzüberschreitende Vorhaben” nach Annahme der Mobilitätsrichtlinie durch das Europäische Parlament’, BB 2019, 1865. 7 Bormann and Stelmaszcyk, ‚Grenzüberschreitende Spaltungen und Formwechsel nach dem EU-Company Law Package’ ZIP, No. 355, 2019, 4. 8 Article 4(1) and Article 3 Proposal 2018/0114(COD). 9 Bormann and Stelmaszcyk, ‘Grenzüberschreitende Spaltungen und Formwechsel nach dem EU-Company Law Package’ ZIP (355) 2019, 4.

746

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 c

with in connection with the cross-border division in order to obtain the pre-division certificate, and the laws of the Member States of the recipient companies shall govern those parts of the procedures and formalities to be complied with following receipt of the pre-division certificate. I. Procedures and Formalities Applicable to the Company Being Divided . . . . . II. Procedures and Formalities Applicable to the Recipient Companies . . . . . . . . . III. Ratio of Article 160 c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Scope of the Term “Procedures and Formalities” . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 3 4 6

Art 160 c, which has to be read in conjunction with Article 160 m and Article 160 o of 1 the 2019 Directive, provides for a clear allocation and division of the applicable law and the responsibilities between the jurisdictions involved in the cross-border division.

I. Procedures and Formalities Applicable to the Company Being Divided The procedures and formalities to be fulfilled in order to obtain the pre-division cer- 2 tificate shall exclusively be governed by the Member State of the company being divided. The pre-division certificate (for details → Art 160 m) attests compliance with all relevant conditions and the proper completion of all required procedures and formalities of the Member State of the company being divided.

II. Procedures and Formalities Applicable to the Recipient Companies Correspondingly, the procedures and formalities following the receipt of the pre-div- 3 ision certificate are exclusively governed by the laws of each Member State of each recipient company.

III. Ratio of Article 160 c In the context of cross-border mergers, several instances have been reported, where 4 the national authorities of the recipient companies have disregarded the division of responsibilities and have reviewed the legality of a cross-border operation in toto, i.e. not only from the perspective of the laws applying to the recipient company but also from the perspective of the laws applying to the company being divided.1 The 2019 Directive expressly states that the competent authorities of the recipient 5 company shall accept the pre-division certificate as conclusively attesting the proper completion of the applicable pre-division procedures and formalities in the Member state of the company being divided (Article 160o(5)). The 2019 Directive also provides that the cross-border division cannot be approved by the Member State of the recipient company as long as the pre-division certificate has not been issued.

1 Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’ ZIP 2019, 61-70.

Klaus Bader and Andreas Börner

747

Art 160 d Draft terms of cross-border divisions

IV. Scope of the Term “Procedures and Formalities” As Article 160 c contains a conflict of law provision at the level of European law, the scope of the term “procedures and formalities” needs to be interpreted solely in accordance with European law (as opposed to the law of the Member State of either the company being divided or of the recipient company).2 This principle has various implications which legal authors and courts will need to explore in more depth. In particular, it is uncertain to which extent Member States may have to accept the effect of a cross-border division on an asset or a liability, even if the asset or liability cannot be split under the substantive law of the relevant Member State. This question concerns not just the Member State of the recipient company, but also Member States which consider that their substantive law governs the relevant contract, asset or liability. 7 A similar issue arises in the context of Article 160 r governing the effects of a crossborder division,3 and should hence already be considered in the draft terms.4 6

Article 160 d Draft terms of cross-border divisions The administrative or management body of the company being divided shall draw up the draft terms of a cross-border division. The draft terms of a cross-border division shall include at least the following particulars: (a) the legal form and name of the company being divided and the location of its registered office, and the legal form and name proposed for the new company or companies resulting from the cross-border division and the proposed location of their registered offices; (b) the ratio applicable to the exchange of securities or shares representing the companies’ capital and the amount of any cash payment, where appropriate; (c) the terms for the allotment of securities or shares representing the capital of the recipient companies or of the company being divided; (d) the proposed indicative timetable for the cross-border division; (e) the likely repercussions of the cross-border division on employment; (f) the date from which the holding of securities or shares representing the companies’ capital will entitle the holders to share in profits, and any special conditions affecting that entitlement; (g) the date or dates from which the transactions of the company being divided will be treated for accounting purposes as being those of the recipient companies; (h) any special advantages granted to members of the administrative, management, supervisory or controlling bodies of the company being divided; (i) the rights conferred by the recipient companies on members of the company being divided enjoying special rights or on holders of securities other than shares representing the divided company capital, or the measures proposed concerning them; (j) the instruments of constitution of the recipient companies, where applicable, and the statutes if they are contained in a separate instrument, and any changes

→ Introduction mn. 190. → Art 160 r mn. 10. 4 → Art 160 d mn. 33.

2 3

748

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 d

to the instrument of constitution of the company being divided in the case of a partial division or a division by separation; (k) where appropriate, information on the procedures by which arrangements for the involvement of employees in the definition of their rights to participation in the recipient companies are determined pursuant to Article 160 l; (l) a precise description of the assets and liabilities of the company being divided and a statement of how those assets and liabilities are to be allocated between the recipient companies, or are to be retained by the company being divided in the case of a partial division or a division by separation, including provisions on the treatment of assets or liabilities not explicitly allocated in the draft terms of cross-border division, such as assets or liabilities which are unknown on the date on which the draft terms of cross-border division are drawn up; (m) information on the evaluation of the assets and liabilities which are to be allocated to each company involved in the cross-border division; (n) the date of the accounts of the company being divided used to establish the conditions of the cross-border division; (o) where appropriate, the allocation to the members of the company being divided of shares and securities in the recipient companies, in the company being divided or in both, and the criterion upon which such allocation is based; (p) details of the offer of cash compensation for members in accordance with Article 160 i; (q) any safeguards offered to creditors, such as guarantees or pledges. I. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Legal Nature of the Draft Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Formalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Responsibility of the administrative or management body . . . . . . . . . . . . . . . . 2. Written form requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Content and Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Key information of the company being divided and each recipient company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Share exchange ratio, amount of cash payment, allotment of securities and shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Indicative timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Repercussions on employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Date of entitlement to distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Accounting date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Specification of special advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Specification of special rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. Instruments of constitution of the recipient companies . . . . . . . . . . . . . . . . . . 10. Information on arrangements for the involvement of employees . . . . . . . . 11. Precise description, allocation and valuation of assets and liabilities . . . . . 12. Reporting date of annual accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. Allocation to members of the shares in the recipient companies and/or the company being divided . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. Details of the cash compensation being offered to members . . . . . . . . . . . . . 15. Any safeguard offered to creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Consequence of Non-Compliance with Minimum Terms and Errors within the Draft Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Klaus Bader and Andreas Börner

1 3 6 6 8 9 10 11 13 16 18 19 21 22 24 27 28 30 32 35 36 37 38 41

749

Art 160 d Draft terms of cross-border divisions

I. Purpose The draft terms form the framework for the cross-border division and lay down the essential terms and conditions, on the basis of which the shareholders are to vote at the general meeting. The draft terms are drawn up by the administrative or management body of the company being divided. Points (b), (c), (f), (i), (o) and (p) of Article 160 d do not apply to a division by separation (Article 160 s). 2 The preparation of draft terms for a merger is part of a European model for structural changes,1 which can also be found in other European legal acts.2 The stakeholders involved shall be protected through information rather than by implementing a system of preventive control by governmental authorities.3 Its elements are (→ Art 91 and 122): – the draft terms and their publication (Article 160 d), – the report of the administrative or management body (Article 160 e), – the independent expert report (Article 160 f), – the approval by the general meeting (Article 160 h) and – the scrutiny of the legality of the cross-border division (Articles 160 m and 160 o ). 1

II. Legal Nature of the Draft Terms The term “draft terms of division” implies that this document is meant to be part of a corporate organisational act subject to company law, and not an agreement subject to contract law.4 4 As already stated above in respect of cross-border mergers, it is, nonetheless, questionable whether the term “draft terms of division” was chosen intentionally to make a conclusive statement as to the legal nature of a cross-border divisions as being a purely corporate organizational act.5 As for cross-border mergers, Member States should no longer require a division agreement subject to the contract law of the relevant Member State (as for example the “Spaltungsvertrag” pursuant to Sec. 126 of the German Transformation Act), because there is a particular need for all companies involved in a cross-border division to be subject to a harmonised legal framework.6 5 Irrespective of the legal nature of the draft terms, companies involved in cross-border divisions are to a certain extent free to enter into additional agreements (e.g. business combination agreements).7 3

1 Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 28.21, 668. 2 First introduced by Directive 1978/855/EEC on domestic mergers. See inter alia: former Sixth Council Directive 82/891/EEC of 17.12.1982 based on Article 54(3)(g) of the Treaty, concerning the division of public limited liability companies; Regulation (EC) No 2157/2001 of 8.10.2001 on the Statute for a European company (SE); Regulation (EC) No 1435/2003 of 22.7.2003 on the Statute for a European Cooperative Society (SCE). 3 Riesenhuber, ‚Die Verschmelzungsrichtlinie: Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen‘, NZG, 15, 2004; Behrens, Die grenzüberschreitende Verschmelzung nach der Richtlinie 2005/56/EG (Verschmelzungsrichtlinie) (2007), 65 et seq.; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.32, 744. 4 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.35, 746; Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos 2019), § 24.37, 1728. 5 → Art 122 mn. 3-8. 6 → Art 122 mn. 6. 7 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6 th edn, 2017), § 22.35, 745 and § 22.50, 753; Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (Nomos 2019), § 24.371728.

750

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 d

III. Formalities 1. Responsibility of the administrative or management body The administrative or management body of the company being divided is responsible 6 for drawing up the draft terms of the cross-border division. Chapter IV, however, leaves it up to the Member States to allocate the competences between (and within) these bodies. The administrative or management body should, where provided for in national law 7 and/or in accordance with national practice, include board level employee representatives in the decision on the draft terms for a cross-border operation (Recital 12).

2. Written form requirement Although not explicitly mentioned in Article 160 d, it can be inferred from the nature 8 of the draft terms as a separate document (and the cross-reference to domestic law formalities in Article 160 c, which includes the provisions transposing the written form requirement in Article 137(1)) that this document must be drawn up in written form, or an applicable stricter form provided for by the law of the Member State of the company being divided.8

3. Language The language clause initially included in the 2018 Proposal is no longer reflected in 9 the 2019 Directive. Since cross-border merger practice already today regularly operates without difficulties by means of bilingual plans, such a requirement would only have caused legal uncertainty. Therefore, pursuant to the overall concept of Article 160 c, the laws of the Member States of the company being divided (but not the recipient companies) are decisive for this question, because the draft terms are initially only part of the procedure to obtain the pre-division certificate. However, as Article 160o(2) requires that the draft terms (as approved by the general meeting) also be submitted to the competent authorities of the Member State of each recipient company, Article 160 c would allow these Member States to require a version in their own language.9

4. Disclosure Unlike Article 160 e which concerns the report of the administrative or management 10 body for members and employees and stipulates that the report shall be made available to its addressees not less than six weeks before the date of the general meeting resolving upon the approval of the draft terms of cross-border division (referred to in Article 160 h), Article 160 d does not stipulate a timeline for disclosure. It must therefore be read in conjunction with Article 160g(1) which requires the draft terms of cross-border division being disclosed by the company and made available to the public within the register of the Member State of the company being divided at least one month before the date of the general meeting resolving upon the approval of the draft terms of cross-border division.

8 9

→ Art 122 mn. 12. → Art 122 mn. 13.

Klaus Bader and Andreas Börner

751

Art 160 d Draft terms of cross-border divisions

IV. Content and Confidentiality Article 160 d outlines the minimum standards; the list includes the minimum requirements for domestic divisions pursuant to Article 137 as well as additional aspects to reflect the cross-border nature of the operation. These include, amongst others, information relating to the company (e.g. its legal form), the process (e.g. the indicative timetable, the effective date for accounting purposes), the members of the company (e.g. allotment of shares, entitlement to profits, conversion ratio of company shares as well as potential cash payments), the creditors (e.g. safeguards such as guarantees or pledges), and employees (e.g. co-determination rights). The division-specific disclosure requirements include a precise description and allocation of the assets and liabilities to be transferred (point (i)) and the allocation of the securities and shares to the members of the company being divided, as well as the criterion used for the ultimate allocation (point (o)). Further details may be added by the law of the Member State of the company being divided or (at its own initiative) its administrative or management body.10 12 Recital (15) emphasizes that the information disclosed by the company should be comprehensive and make it possible for stakeholders to assess the implications of the intended cross-border operation but also caveats that companies should not be obliged to disclose confidential information, the disclosure of which would be prejudicial to their business position, in accordance with Union or national law. However, as described in Recital (15), non-disclosure should not be used as an excuse to undermine the requirements established under the 2019 Directive. In that context, Recital (13) expresses that the draft terms of the proposed operation shall contain the most important information about it. From a legal practitioner’s point of view, utmost diligence should therefore be put on the draft terms’ content and structure.11 11

1. Key information of the company being divided and each recipient company The draft terms of the cross-border division shall state the legal form, name and registered office of the company being divided, and the legal form, name and registered office proposed for the recipient company or companies, Article 160d(a). 14 The registered office is particularly relevant not only for accounting and tax purposes, but also to determine the applicable employee representation regime (Article 160l(1)). 15 The choice of legal form for the recipient company may be limited where employee participation in an administrative or supervisory body can only be implemented with a particular legal form (Article 160 l (6)). 13

2. Share exchange ratio, amount of cash payment, allotment of securities and shares 16

Largely identical to point (b) and (c) of Article 91(2) and points (b) and (c) of Article 122, point (b) and (c) of Article 160 d stipulate that the common draft terms of the cross-border division must specify (i) the ratio applicable to the exchange of securities or shares representing the company capital, (ii) the amount of additional cash payments, if any, and (iii) the terms for the allotment of securities or shares representing the capital of the recipient companies or of the company being divided. 10 11

752

→ Art 122 mn. 45-46. → Art 86 d mn. 3.

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 d

All three aspects are closely linked to each other, and must be seen in conjunction 17 with the right of members to tender their shares against payment of a compensation (point (p) of Article 160 d and Article 160(i)). The 2019 Directive does not stipulate the valuation method to be used for determining the share exchange ratio and/or the cash compensation, thereby leaving these questions to the law of the Member State of the company being divided. In contrast to cross-border mergers, the issue of diverging rules on applicable valuation methods12 would only arise in case of a division by acquisition which does not fall within the scope of the 2019 Directive.

3. Indicative timetable One clear difference between the minimum disclosure requirements in case of divi- 18 sions, conversions or mergers is that only the former two require a “proposed indicative timetable” to be included within the draft terms.13 Despite criticism, this requirement was not deleted, but merely weakened. Accordingly, the inclusion of an “indicative timetable” for a cross-border division is still mandatory.14 As such, the timetable is a purely indicative document with no legal consequences attached to it. Yet, drawing up an indicative timetable plays a crucial role in forcing the company’s management and stakeholders to specify relevant key steps, statutory deadlines and underlying action points and thereby contributes to the effective execution of the cross-border division. The indicative timeline will be less complex in case of a single-member company being divided whereas in case of multiple members it may need to reflect additional dates.15

4. Repercussions on employment The draft terms shall include all potential repercussions of the cross-border division 19 on employment. This is an additional requirement without any equivalent in Article 137 on domestic divisions. The members of the company being divided shall be informed about substantial 20 changes and the effects of such changes (e.g. changes to the number of employees and expenses or changes related thereto). The information is hence not directed at the employees who are specifically addressed by the report of the administrative or management body pursuant to Article 160 g (which uses the term “implications for employees” rather than “repercussions for employment”).

5. Date of entitlement to distributions Point (f) of Article 160(d), which is largely identical to Article 122(e) and Article 21 91(2)(d), provides that the common draft terms of the cross-border division must specify (i) the date from which the holding of such securities or shares representing the company capital will entitle the holders to share in profits and (ii) any special conditions affecting that entitlement.

→ Art 122 mn. 22. Bungert, ‘Der finale EU-Richtlinienentwurf zu grenzüberschreitenden Formwechseln, Verschmelzungen und Spaltungen’ Der Betrieb (29) 2019, 1610. 14 Kraft, ‘“Grenzüberschreitende Vorhaben” nach Annahme der Mobilitätsrichtlinie durch das Europäische Parlament’ BB 2019, 1865. 15 → Art 86 d mn. 12-13. 12 13

Klaus Bader and Andreas Börner

753

Art 160 d Draft terms of cross-border divisions 6. Accounting date Due to the absence of European harmonisation, there are different approaches among the Member States for determining the accounting date applicable to the division. In some Member States the accounting date has to be identical to the date upon which the division takes effect; others, such as Germany, permit the accounting date to be at an earlier point in time. Differing accounting dates can obviously lead to friction and cause significant practical problems. As a result, the EU legislator would have been called to reduce resulting obstacles by setting a harmonised accounting date. The suggestion made by the Parliament and the Council to implement a unified accounting date have not been picked up. 23 It follows from the general rule in Article 160 c that, to the extent permitted by the laws of the Member States of the company being divided and the recipient companies, the company being divided is free to set the dates referred to in points (f), (g) and (n) of Article 160 d.16 22

7. Specification of special advantages Point (h) of Article 160 d provides that the draft terms need to specify any special advantages granted to the members of the administrative, management, supervisory, or controlling bodies of the company being divided. A similar provision relating to the independent expert was deleted in the final draft. 25 A special advantage is considered any kind of benefit granted in the course of the cross-border division which cannot be qualified as a compensation or remuneration for the rendering of a specific task.17 26 The rationale behind this requirement is to prevent, or at least reduce abuse by making advantages transparent. Any special advantages granted to such persons can raise doubts as to whether they negotiated the division in the best economic interest of the company or whether they were driven also by their own interest. Considering this rationale, the transparency requirement applies to anyone who is directly involved in the decision-making process, irrespective of whether they are members of statutory or facultative bodies.18 24

8. Specification of special rights 27

Point (i) of Article 160 d, largely identical to point (f) of Article 91(2) and point (g) of Article 122, provides that the draft terms must specify the rights conferred by the recipient company on members of the company being divided enjoying special rights or on holders of securities other than shares representing the company capital, or the measures proposed concerning them. Special rights requiring reporting in the draft terms in accordance with point (e) are any rights contractually agreed between the company and one or more – but not all – members. This may require a careful analysis of various types of arrangements, in particular (but not limited to) the laws of the Member State of the company being divided and the laws of the Member State of each recipient company.19 Where no special rights exist but are proposed to be granted in the recipient company, these considerations will apply mutatis mutandis.20 For further information see → mn. 35. Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.39, 635. 18 → Art 86 d mn. 21-23; Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 20.39, 635. 19 For details → Art 86 d mn. 14-15. 20 For details → Art 86 d mn. 16. 16

17

754

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 d

9. Instruments of constitution of the recipient companies Pursuant to point (j) of Article 160 d, the draft terms need to contain the statutes of 28 the recipient companies. As already stated in the chapter elaborating on cross-border mergers, point (h) of 29 Article 20(1) of the SE Regulation21 has been the model for this provision. Its purpose is to inform the members about the content of the instrument of constitution and the statutes (if any) which are subject to a different law than the company being divided and may therefore be significantly different from the laws they have been subject to before.

10. Information on arrangements for the involvement of employees Pursuant to point (k) of Article 160 d the draft terms must, where appropriate, con- 30 tain “information on the procedures by which arrangements for the involvement of employees in the definition of their rights to participation in the recipient companies are determined pursuant to Article 160l”. The purpose of this provision is to enable the members to be informed of such 31 a procedure, which normally does not begin until after the draft terms have been published. Accordingly, the results of this procedure can normally not form part of the draft terms.

11. Precise description, allocation and valuation of assets and liabilities Point (l) of Article 160 d requires (i) a precise description, and (ii) the allocation of 32 assets and liabilities. Contrary to Article137(3), the fall back rule for the allocation of “forgotten” assets or liabilities is not contained in the 2019 Directive, but must be set out in the draft terms. The 2019 Directive does not indicate if and to what extent the draft terms need to 33 consider whether and how a particular asset or liability can be split between the company being divided and the recipient companies. Articles 160 c and 160 m primarily deal with the compliance of procedures and formalities with applicable law, whereas substantive law issues are only tested as to whether the cross-border division (as a whole) is set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law. Accordingly, it remains uncertain whether (and how) a compliant cross-border division would supersede the rules which under the applicable lex causae determine that a contract, an asset or liability cannot be split or needs to be designated in a specific way.22 The draft terms are, however, the best place to avoid such uncertainties in the first place: the relevant contract, asset or liability should only be allocated to one company if it is likely that the applicable law (from the perspective of any of the relevant jurisdictions) requires the contract, asset or liability to remain undivided. In accordance with point (m) of Article 160 d, the draft terms also need to provide 34 detailed information on the evaluation of the assets and liabilities which are transferred to the recipient companies. Subject to other options available under accounting (and tax) provisions, the information would normally depend on how the transferred assets are carried in the accounts of the company being divided, and whether they are transferred at book value, fair value or an intermediate value. The uncertainties about a potentially wider interpretation (as have arisen in the context of cross-border mergers) are even more relevant in case of a cross-border division.23 21 Council Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE), OJ 294, 10.11.2001, 1-21. 22 → Art 160 r mn. 10.

Klaus Bader and Andreas Börner

755

Art 160 d Draft terms of cross-border divisions 12. Reporting date of annual accounts 35

Pursuant to point (n) of Article 160 d, the draft terms need to contain the date of the accounts of the company being divided used to establish the conditions of the cross-border division. This provision was included because the accounts are of great importance for determining the value of the assets to be allocated to the recipient companies, in particular if such assets are accounted at book value.

13. Allocation to members of the shares in the recipient companies and/or the company being divided 36

Pursuant to point (o) of Article 160 d, the draft terms need to specify “where appropriate” (i.e. in case of a ratio altering division) the allocation to the members of the company being divided of shares and securities, and the criterion upon which such allocation is based. Corresponding to the numerous options available to the company being divided, the provision relates to shares and securities in the recipient companies, in the company being divided or in both.

14. Details of the cash compensation being offered to members 37

The draft terms have to contain details of the cash compensation offered to members. As explained in more detail below (→ Art 160 i), the members objecting to the crossborder division have the right to dispose of their shares in return for an adequate cash compensation. From a legal practitioner’s point of view, the offer of cash compensation will typically be made under the condition of the division taking effect, that means, being registered in the register of the Member State of the recipient company, or only a certain limited number of members opposing the draft terms of the cross-border division.

15. Any safeguard offered to creditors One of the fundamental aims of the 2019 Directive is the protection of a company’s creditors.24 This requirement of the draft terms has to be read in conjunction with the creditor protection set forth in Article 160 j. The draft terms shall illustrate which safeguards have been offered to the creditors. The safeguards are conditional on the crossborder division taking effect in accordance with Article 160 q (Article 160 j (1) subparagraph (3)). 39 To avoid creditors taking legal action against the company being divided in connection with a cross-border division, the company should identify its population of creditors as well as the likelihood of potential requests for safeguards diligently and in a timely manner. To ensure efficient protection of creditors in line with the 2019 Directive’s intentions, the term creditor, in the absence of an explicit definition given by the 2019 Directive, should generally be interpreted widely and may include, for instance, active and former employees, active and former members of management, business partners, and administrative authorities such as tax authorities.25 In terms of timing, only those creditors shall be taken into account whose claims antedate the date of disclosure of the draft terms and have not fallen due at that point of time (Article 160j(1)). 38

→ Art 122 mn. 40. For details → Art 86 d mn. 17-20. 25 See → Art 86 j.

23 24

756

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 e

Examples of safeguards set out in the provision are guarantees and pledges. Other 40 safeguards will also be permitted as long as they are adequate to creditors and this being within the framework of the 2019 Directive and the freedom of establishment.

V. Consequence of Non-Compliance with Minimum Terms and Errors within the Draft Terms The 2019 Directive remains silent as to the consequences of omissions or errors in the 41 draft terms or the additional requirements set forth by the Member States regarding the content of the draft terms. Generally speaking, the purpose of the draft terms for the cross-border division is not 42 to provide specific rights or obligations, but to set out a general framework serving as a basis for the general meeting’s approval. Member States are – within the general limits applicable under European law26 - in 43 principle free to adopt their own rules as to the legal consequences of errors.

Article 160 e Report of the administrative or management body for members and employees 1. The administrative or management body of the company being divided shall draw up a report for members and employees, explaining and justifying the legal and economic aspects of the cross-border division, as well as explaining the implications of the cross-border division for employees. It shall, in particular, explain the implications of the cross-border division for the future business of the companies. 2. The report shall also include a section for members and a section for employees. The company may decide either to draw up one report containing those two sections or to draw up separate reports for members and employees, respectively, containing the relevant section. 3. The section of the report for members shall, in particular, explain the following: (a) the cash compensation and the method used to determine the cash compensation; (b) the share exchange ratio and the method or methods used to arrive at the share exchange ratio, where applicable; (c) the implications of the cross-border division for members; (d) the rights and remedies available to members in accordance with Article 160 i. 4. The section of the report for members shall not be required where all the members of the company have agreed to waive that requirement. Member States may exclude single-member companies from the provisions of this Article. 5. The section of the report for employees shall, in particular, explain the following: (a) the implications of the cross-border division for employment relationships, as well as, where applicable, any measures for safeguarding those relationships;

26

→ Introduction mn. 196-199; → Art 124 mn. 46-47.

Klaus Bader and Andreas Börner

757

Art 160 e Report of the administrative or management body for members and employees (b) any material changes to the applicable conditions of employment or to the location of the company’s places of business; (c) how the factors set out in points (a) and (b) affect any subsidiaries of the company. 6. The report or reports shall be made available in any case electronically, together with the draft terms of the cross-border division, if available, to the members and to the representatives of the employees of the company being divided or, where there are no such representatives, to the employees themselves, not less than six weeks before the date of the general meeting referred to in Article 160 h. 7. Where the administrative or management body of the company being divided receives an opinion on the information referred to in paragraphs 1 and 5 in good time from the representatives of the employees or, where there are no such representatives, from the employees themselves, as provided for under national law, the members shall be informed thereof and that opinion shall be appended to the report. 8. The section of the report for employees shall not be required where a company being divided and its subsidiaries, if any, have no employees other than those who form part of the administrative or management body. 9. Where the section of the report for members referred to in paragraph 3 is waived in accordance with paragraph 4 and the section for employees referred to in paragraph 5 is not required under paragraph 8, the report shall not be required. 10. Paragraphs 1 to 9 of this Article shall be without prejudice to the applicable information and consultation rights and procedures provided for at national level following the transposition of Directives 2002/14/EC and 2009/38/EC. I. Drawing Up of a Report and Consequences of Errors . . . . . . . . . . . . . . . . . . . . . . . . II. Formal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Separate or joint reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Exceptions and waiver of the obligation to draw up a report . . . . . . . . . . . . . . 3. Availability to its addressees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Report addressed to members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Report addressed to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. No disclosure of confidential information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. No report addressed to creditors required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Opinion from the Representatives of the Employees . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 4 7 12 14 15 15 19 22 27 28 32

I. Drawing Up of a Report and Consequences of Errors Except in case of a division by separation (Article 160 s), the administrative or management body of the company being divided shall prepare a report addressing its members and employees explaining and justifying the legal and economic aspects of the cross-border division and the implications of the cross-border divisions for members, creditors and employees. While the draft terms shall explain the effects of the cross-border division on the creditors, no report is required for the creditors of the company being divided. 2 The report is one of the key elements of the European model for structural changes, aiming to protect the relevant stakeholders (shareholders, employee representatives) by providing them with sufficient information about the cross-border division. The report is of particular importance to members, who must, on the basis of the information 1

758

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 e

provided therein, decide on the draft terms and hence on the cross-border division as a whole.1 Beyond the review of the report as part of the scrutiny of legality pursuant to Arti- 3 cle 160 m, Member States are in principle free to adopt their own rules as to the legal consequences of errors.2

II. Formal Requirements 1. Separate or joint reports Initially, the reports for the members and for the employees were governed by two 4 separate provisions within the 2018 Proposal. Subsequently, both Articles were merged as a result of the trilogue process and are now governed by Article 160 e. At the discretion of the Company, the information may be provided either by one 5 single report containing separate sections addressing the members and employees, or by means of two separate reports (subparagraph (2) of Article 160e(2)). The provision also contains various specifications on the mandatory content for each 6 section of the report (Article 160e(3) and (5)).

2. Exceptions and waiver of the obligation to draw up a report No report is required in case of a division by separation (Article 160 s). In case of a full or partial division, the preparation of the report can either be waived or may not be required pursuant to national laws for single member companies in accordance with Article 160e(4), (8) and (9). As far as the members’ section is concerned, a report is not necessary if all members of the company have agreed to waive the report (Article 160e(4)). The consent of each member is required; a majority (or qualified majority) resolution by the members is not sufficient. The section addressing the employees is not required if a company has no employees other than those forming part of the administrative or management body (Article 160e(8)). The requirement to draw up a report for the employees cannot be waived. 3 The preparation of a report is considered as a minimum protection requirement to safeguard the employees’ interests.4 Member States may exclude single-member companies from the provisions of this article (Article 160e(4)). From a literal interpretation of sentence 2, the Member States shall not only have the right to exclude single-member companies from the preparation of the report for the members, but also from the preparation of the report for the employees. Such exception is, however, unjustified as it interferes with the legitimate interests of the employees to be properly informed, 5 irrespective of whether the company has one or several members. Stelmasczyk argues that the requirement of the report for employees was excluded by mistake and therefore advocates an interpretation that Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), § 22.32, 744. → Art 124 mn. 45-47. 3 Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/19 – Teil I: Company Law Package’ BB 2019, pp. 1922, 1928; Schollmeyer, ‘Der Verschmelzungs-, Spaltungs- und Formwechselbericht nach der neuen Umwandlungsrichtlinie’ AG 2019, 541, 547; and Luy, ‘Grenzüberschreitende Umwandlungen nach dem Company Law Package’ NJW 2019, 1905, 1908. 4 Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie- harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’ GmbHR (2) 2020, 61, 68. 1

2

Klaus Bader and Andreas Börner

759

7 8

9

10

11

Art 160 e Report of the administrative or management body for members and employees the report for employees is (apart from the additional exception for companies with no regular employees, as set out in Article 160e(8)) required even for single-member companies.6

3. Availability to its addressees Furthermore, the exact wording of the provision was subject to some fine-tuning. One of the main points of criticism referred to the fact that, in accordance with Article 160e(3) of the 2018 Proposal, the “report shall be made available to the addressees, at least electronically”. As the exact requirements which would have to be imposed for its “electronic” availability have been left untouched, combined with the fact that the words “at least” may also give rise to misunderstandings, the amended version in Article 160e(6) changed this to “the report shall be made available in any case electronically …”.7 13 The report is not included in the disclosure requirements (Article 160g(1)) and does not have to be made available to creditors.8 12

4. Timing 14

The report, together with the draft terms, shall be made available to the members of the company being divided as well as to the respective employee representatives or, in the absence of such representatives, to the employees themselves. The required information must be made available six weeks before the day of the respective general meeting deciding upon the cross-border division (Article 160e(6)).

III. Content 1. General content The report shall explain and justify the legal and economic aspects of the cross-border division as well as the resulting implications for employees; it shall, in particular, explain the implications of the cross-border division for the future business of the companies (Article 160e(1)). 16 As for cross-border mergers, it can be assumed that Member States may extend the content requirements insofar as this complies with the purpose of the provision to protect members, creditors and employees.9 17 Article 160 e does not expressly state the minimum information required to explain and justify the legal and economic aspects of the proposed cross-border division. The content of Article 95(1) can be used as a guideline to explain and justify the legal and economic aspects of the cross-border operation. Taking into account Recital (15), which emphasizes that the information disclosed by the company should be comprehensive 15

5 Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’ GmbHR (2) 2020, 61, 68; Schollmeyer, ‘Der Verschmelzungs-, Spaltungs- und Formwechselbericht nach der neuen Umwandlungsrichtlinie’ AG 2019, 541, 548, Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/19 – Teil I: Company Law Package’ BB 2019, 1922, 1928. 6 Stelmaszcyk, ‘Die neue Umwandlungsrichtlinie – harmonisierte Verfahren für grenzüberschreitende Verschmelzungen, Spaltungen und Formwechsel’ GmbHR (2) 2020, 61, 68. 7 Krieger et al., ‘Position Paper of the German Bar Association by the Committee on Commercial Law on the Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards Cross-border conversions, mergers and divisions’, Position Paper No. 31/ 2018, 9. 8 → Art 124 mn. 4, 33. 9 → Art 124 mn. 18.

760

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 e

and make it possible for stakeholders to assess the implications of the intended crossborder operation, the content relating to the implications of the cross-border division on the company’s future business should be comprehensive and of sufficient substance, taking into account for example the effects of a different legal and regulatory environment on the business model, including for example material contracts, subsidies and arrangements triggering anti-trust considerations.10 Further, Article 160e(3) and Article 160e(5) provide the minimum content for the 18 report addressed to members and employees.

2. Report addressed to members Apart from the general description of the legal and economic aspects of the cross- 19 border division and the implications for the future business of the companies, the section of the report addressed to members shall elaborate on the following (Article 160e(3)): – the cash compensation and the method used to determine the cash compensation; – the share exchange ratio and the method or methods used to arrive at the share exchange ratio, where applicable; – the implications of the cross-border division for members; – the rights and remedies available to members in accordance with Article 160 i. The report shall provide the members with further information compared to the draft 20 terms, so that the members can take a well informed decision. The report shall explain to the members the rights and remedies available to them, i.e. the right to exit the company against cash compensation, to the extent they have objected to the resolution of the general meeting as well as the possibility to ask for a review of the exchange ratio and a corresponding cash compensation claim; for details → Art 160 i. Even if not mentioned in the 2019 Directive, it would be appropriate that the report 21 describes the main legal differences between the applicable legal regime of the company being divided and of each recipient company so that the members can evaluate the differences between the applicable regimes and take a well informed decision. Receiving or giving up influence, e.g., in the sense of having the right to give instructions to the management (an active role) or not (a more passive role), being subject to personal liability in a piercing of the corporate veil scenario, applicable voting thresholds, existing veto rights, minority protection, rights and obligations of directors, and taxation on dividends, specific judicature on relevant aspects of corporate law, just to name a few practical hot topics, may well impact members’ willingness to approve the cross-border conversion.11

3. Report addressed to employees The report addressed to the employees shall elaborate at least on the following (Arti- 22 cle 160 e (3)) also for the subsidiaries: – the implications of the cross-border division for employment relationships, as well as, where applicable, any measures for safeguarding those relationships; – any material changes to the applicable conditions of employment or to the location of the company’s places of business;

10 11

→ Art 86 e mn 8-12. → Art 86 e mn. 15.

Klaus Bader and Andreas Börner

761

Art 160 e Report of the administrative or management body for members and employees Recital 13 contains guidance on the content of the report addressed to employees. The report should explain the implications of the proposed cross-border division on the employment situation. 24 In particular, the report should explain whether there would be any material change to the employment conditions laid down by law, to collective agreements or to transnational company agreements, and in the locations of places of business, such as the location of the head office of the recipient companies, and, in case of a partial division or a division by separation, of the company being divided. 25 In addition, the report should include information on the management body and, where applicable, on staff, equipment, premises and assets before and after the crossborder division and the likely changes to the organisation of work, wages and salaries, the location of specific posts and the expected consequences for the employees occupying those posts, as well as on the company-level social dialogue, including, where applicable, board level employee representation. 26 Further, the report should also explain how those changes as outlined above would affect any subsidiaries of the company being divided. 23

4. No disclosure of confidential information 27

The company being divided is not obliged to disclose confidential information, the disclosure of which would be prejudicial to their business position, in accordance with Union or national law. However, such non-disclosure should not undermine the other requirements provided for in the 2019 Directive (Recital 15).

5. No report addressed to creditors required Under the legal framework of the 2017 Directive, the corresponding report had to explain the implications of the cross-border merger for creditors. 29 Even if the inclusion of such report in the 2019 Directive would have been advisable, a report addressed to creditors is not required. 30 Since cross-border divisions can have a significant impact of the company being divided as well as the recipient companies – in particular the change of debtor and related information (legal form, company name, registered office, minimum capital requirements, specific national laws in favour of creditors in particular insolvency and restructuring laws) and the details of a joint and several liability of the companies being involved in the cross-border division, such information should be part of the report. 31 In view of the protection of creditors under Article 160 j, it would be advisable to include explanatory information for the creditors in the reports, in order to avoid objections to the draft terms by the creditors. 28

IV. Opinion from the Representatives of the Employees The employees' representatives or, if there are no such representatives, the employees themselves have the right to express their views on certain parts of the report by means of a written opinion (Article 160e(7)). 33 It is unclear whether the employee representatives’ opinion merely generally refers to the potential contents of the report, or to the actual report provided by the administrative or management body of the company being divided. A literal interpretation suggests a general and abstract opinion, generally rendered with regard to possible report contents. A right to comment on the specific content of the report would imply that it would have to be forwarded to the employees in advance in order to make the 32

762

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 f

rendering of an opinion possible in the first place. Arguably, the 2019 Directive does not provide for such a duty. There is no pre-defined time limit for the preparation of the opinion. However, a publication together with the report is only possible if the company's administrative or management body receives the opinion in good time “in accordance with national law”. If the opinion is not forwarded to the administrative or management body in good time, the publication of the opinion will arguably no longer be required, the 2019 Directive only provides for publication of the opinion together with the report.12 The opinion on the report’s section setting out the implications of the cross-border 34 division for employees shall be made available to the members and be attached to the report as an appendix. Where the report has been circulated by the company by means of e-mail communication and the opinion can thus not be attached to the report, the opinion will be submitted, within the timeline permitted, as a supplement to the report.13 The employee representatives’ opinion is distinct from the employee information 35 and consultation rights referred to in Article 160k(2) and (3), which require the company being divided to give a reasoned response prior to its general meeting called to approve the draft terms. The opinion is also distinct from the comments from employee representatives (or employees) which the company being divided needs to solicit pursuant to point (b) of Article 160g(1). Member States may clarify whether and how each of the three types of statements by 36 employee representatives can be combined to avoid a purely technical non-compliance with any of the requirements.

Article 160 f Independent expert report 1. Member States shall ensure that an independent expert examines the draft terms of the cross-border division and draws up a report for members. That report shall be made available to the members not less than one month before the date of the general meeting referred to in Article 160 h. Depending on the law of the Member State, the expert may be a natural or legal person. 2. The report referred to in paragraph 1 shall in any case include the expert’s opinion as to whether the cash compensation and the share exchange ratio are adequate. When assessing the cash compensation, the expert shall consider any market price of the shares in the company being divided prior to the announcement of the division proposal or the value of the company excluding the effect of the proposed division, as determined in accordance with generally accepted valuation methods. The report shall at least: (a) indicate the method or methods used to determine the cash compensation proposed; (b) indicate the method or methods used to arrive at the share exchange ratio proposed;

12 Bungert, ‘Der finale EU-Richtlinienentwurf zu grenzüberschreitenden Formwechseln, Verschmelzungen und Spaltungen’, Der Betrieb (29) 2019, 1611. 13 Schollmeyer, ‘Der Verschmelzungs-, Spaltungs- und Formwechselbericht nach der neuen Umwandlungsrichtlinie‘ AG 2019, 541, 547.

Klaus Bader and Andreas Börner

763

Art 160 f Independent expert report (c) state whether the method or methods are adequate for the assessment of the cash compensation and the share exchange ratio, indicate the value arrived at using such methods and give an opinion on the relative importance attributed to those methods in arriving at the value decided on; and (d) describe any special valuation difficulties which have arisen. The expert shall be entitled to obtain from the company being divided all information necessary for the discharge of the duties of the expert. 3. Neither an examination of the draft terms of cross-border division by an independent expert nor an independent expert report shall be required if all the members of the company being divided have so agreed. Member States may exclude single-member companies from the application of this Article. I. Scope of the Examination of the Draft Terms by the Independent Expert . . . II. The Independent Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of the Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Addressees of the Report and Deadline for the Submission . . . . . . . . . . . . . . . . . . V. Public Disclosure of the Expert Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Consequences of Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Waiver of the Obligation to Draw Up an Expert Report and Single Member Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 6 11 13 14 16

I. Scope of the Examination of the Draft Terms by the Independent Expert Except in case of a division by separation (Article 160 s), the draft terms are to be examined by an independent expert. 2 This examination serves to protect the members (protection by information) who are to decide on the corporate restructuring on a sound basis. The independent expert is obliged to draw up a report on the examination and render an opinion on certain key points. However, the independent expert also acts in the interests of the competent authority called to issue the pre-division certificate. According to Article 160t(2), Member States shall ensure that the opinion is impartial and objective and is given with a view to providing assistance to the competent authority in accordance with the independence and impartiality requirements under the law and professional standards to which the expert is subject. 1

II. The Independent Expert Unlike in the merger scenario, however, only one independent expert is appointed in the case of a cross-border division. The Member State of the company being divided may decide whether the expert may be a legal or a natural person, Article 160 f (1). 4 The procedure for appointing the expert is not laid down in the revised 2019 Directive (unlike the 2018 Proposal, according to which the expert was appointed by the competent authority at the request of the company). In this respect, the Member States enjoy some flexibility. Article 160 t requires Member States to enact rules ensuring the independence of the independent expert, the applicable standard of care and setting out its civil liability. Member States should take into account the principles laid down in Articles 22 and 22 b of Directive 2006/43/EC of the European Parliament and of the Council (Recital (14)).1 Point (b) of Article 160t(2) makes it clear that the independent 3

764

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 f

expert owes assistance to the competent authority. This means that the law of the Member State of the company being divided must provide for corresponding duties, which apply regardless of whether the independent expert is commissioned by the company being divided or by the competent authority. Member States also have flexibility with regard to the time of appointment of the 5 independent expert. The 2019 Directive merely stipulates that the report of the independent expert must be made available to the members at least one month before the date of the general meeting of the company being divided (Article 160f(1)). Since the average duration of the examination is expected to be approximately two to four months, the independent expert should be appointed at least five months before the general meeting.2

III. Scope of the Examination As for cross-border mergers, it can be assumed that the independent expert has to review the draft terms for completeness and accuracy.3 Point (b) of Article 160t(2) requires consequences if the opinion is not impartial and objective, or not given with a view to providing assistance to the competent authority (as opposed to providing a service to the company being divided and/or its members). In addition, the subject matter of the examination was significantly expanded when compared to the 2018 Proposal. The report must contain an “opinion” with specific information on the cash compensation as well as the exchange ratio of the company shares and shall at least (Article 160f(2)): – indicate the method(s) used to determine the cash compensation proposed; – indicate the method(s) used to arrive at the share exchange ratio proposed; – state whether the method(s) are adequate for the assessment of the cash compensation and the share exchange ratio, indicate the value arrived at using such methods and give an opinion on the relative importance attributed to those methods in arriving at the value decided on; and – describe any special valuation difficulties which have arisen. Overall, the independent expert has to confirm that both the share exchange ratio and the cash compensation are adequate (Article 160 f (2)). The 2019 Directive no longer requires the independent expert to provide for any information concerning abuse control, as had been – together with a number of other more far-reaching responsibilities4 - set out in the 2018 Proposal.5 The independent expert will therefore decide on its own whether such information is required to mitigate its risks of liability. In order to properly perform its tasks, the independent expert has a comprehensive right to obtain from the company being divided all information necessary for the discharge of its duties (sub-paragraph (2) of Article 160f(2)). 6 This indicates that the independent expert has the right (but – unless required by the law of the Member State

→ Art 86 f mn. 9. Bungert, ‘Der finale EU-Richtlinienentwurf zu grenzüberschreitenden Formwechseln, Verschmelzungen und Spaltungen’ Der Betrieb (29) 2019, 1611. 3 → Art 125 mn. 10. 4 → Art 86 f mn. 2. 5 Bungert, ‘Der finale EU-Richtlinienentwurf zu grenzüberschreitenden Formwechseln, Verschmelzungen und Spaltungen’ Der Betrieb (29) 2019, 1612. 6 → Art 125 mn. 27. 1 2

Klaus Bader and Andreas Börner

765

6

7

8 9

10

Art 160 g Disclosure of the company being divided – not the obligation) to also request, and comment on, the report by the administrative or management body.7

IV. Addressees of the Report and Deadline for the Submission Article 160f(1) states clearly that the report is addressed to the members, so that they can form their own opinion on the cross-border division. 12 The expert report shall be made available to the members not less than one month before the date of the general meeting of the company being divided voting on the cross-border division. 11

V. Public Disclosure of the Expert Report 13

The public disclosure of the independent expert’s report (without any confidential information) depends on whether the Member State of the company being divided has made use of the option to require such a disclosure (Article 160 g (1)).

VI. Consequences of Errors If the independent expert’s report is not properly drawn up (and made available) in accordance with Article 160 f, this will normally be noted in the scrutiny of legality pursuant to Article 160 m, and no pre-division certificate will be issued. 15 The 2019 Directive does not, however, make any statements regarding the consequences of errors in the independent expert’s report which go beyond the compliance with formalities, in particular, errors in content. As required by point (b) of Article 160t(2), the Member State of the company being divided must adopt its own rules as to the legal consequences of errors in content and the like.8 14

VII. Waiver of the Obligation to Draw Up an Expert Report and Single Member Companies The need for an expert examination and resulting report is not required where all members (and not just a majority or qualified majority) waive this requirement. The 2019 Directive does not provide for specific form requirements regarding the waiver; the Member State of the company being divided may, however, provide for the same formal requirements as for the waiver of the report to be prepared pursuant to Article 160 c. 17 In the case of single-member companies, the Member States may exclude these from the obligation to prepare an expert report (Article 160f(4)). 16

Article 160 g Disclosure 1. Member States shall ensure that the following documents are disclosed by the company and made publicly available in the register of the Member State of the com7 8

766

→ Art 125 mn. 11. → Art 125 mn. 32.

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 g

pany being divided, at least one month before the date of the general meeting referred to in Article 160 h: (a) the draft terms of the cross-border division; and (b) a notice informing the members, creditors and representatives of the employees of the company being divided, or, where there are no such representatives, the employees themselves, that they may submit to the company, at the latest five working days before the date of the general meeting, comments concerning the draft terms of the cross-border division. Member States may require that the independent expert report be disclosed and made publicly available in the register. Member States shall ensure that the company is able to exclude confidential information from the disclosure of the independent expert report. The documents disclosed in accordance with this paragraph shall be also accessible through the system of interconnection of registers. 2. Member States may exempt a company being divided from the disclosure requirement referred to in paragraph 1 of this Article where, for a continuous period beginning at least one month before the date fixed for the general meeting referred to in Article 160 h and ending not earlier than the conclusion of that meeting, that company makes the documents referred to in paragraph 1 of this Article available on its website free of charge to the public. However, Member States shall not subject that exemption to any requirements or constraints other than those which are necessary to ensure the security of the website and the authenticity of the documents, and which are proportionate to achieving those objectives. 3. Where the company being divided makes the draft terms of the cross-border division available in accordance with paragraph 2 of this Article, it shall submit to the register, at least one month before the date of the general meeting referred to in Article 160 h, the following information: (a) the legal form and name of the company being divided and the location of its registered office and the legal form and name proposed for the newly created company or companies resulting from the cross-border division and the proposed location of their registered office; (b) the register in which the documents referred to in Article 14 are filed in respect of the company being divided, and its registration number in that register; (c) an indication of the arrangements made for the exercise of the rights of creditors, employees and members; and (d) details of the website from which the draft terms of the cross-border division, the notice referred to in paragraph 1, the independent expert report and complete information on the arrangements referred to in point (c) of this paragraph may be obtained online and free of charge. The register shall make publicly available the information referred to in points (a) to (d) of the first subparagraph. 4. Member States shall ensure that the requirements referred to in paragraphs 1 and 3 can be fulfilled fully online without the necessity for the applicants to appear in person before any competent authority in the Member State concerned, in accordance with the relevant provisions of Chapter III of Title I. 5. Member States may require, in addition to the disclosure referred to in paragraphs 1, 2 and 3 of this Article, that the draft terms of the cross-border division, or the Klaus Bader and Andreas Börner

767

Art 160 g Disclosure information referred to in paragraph 3 of this Article, be published in their national gazette or through a central electronic platform in accordance with Article 16(3). In that instance, Member States shall ensure that the register transmits the relevant information to the national gazette or to a central electronic platform. 6. Member States shall ensure that the documentation referred to in paragraph 1 or the information referred to in paragraph 3 is accessible to the public free of charge through the system of interconnection of registers. Member States shall further ensure that any fees charged to the company by the registers for the disclosure referred to in paragraphs 1 and 3 and, where applicable, for the publication referred to in paragraph 5 do not exceed the recovery of the cost of providing such services. I. Disclosure Concept and Forms of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Submission of Documents by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Documents Not to Be Made Publicly Available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 4

I. Disclosure Concept and Forms of Disclosure The disclosure requirements have been adjusted within the 2019 Directive, now demanding that all documents referred to under Article 160g(1) and (3) must be made publicly available at least one month before the date of the general meeting of the company being divided.1 Following the trilogue process, Article 123 has been amended to largely correspond to Article 160 g, and details set out in the commentary to Article 123 apply accordingly.2 2 The disclosure concept chosen by the 2019 Directive is complex and leaves the Member States a high degree of freedom (1) where (register, website, national gazette, central electronic platform), (2) which information, (3) in which form (electronically, physically), has to be disclosed: – The documents referred to in 160 g(1) ((i) draft terms, (ii) notice to members, creditors and employees that they may submit comments to the draft terms prior to the general meeting and (iii) if provided for under national law, independent expert report) may be made publicly available at least one month before the general meeting voting on the cross-border division either through the public registers or, if the law of the Member State of the company being divided so permits, on its website.3 – If the publication is made on the company’s website, certain information and documents still need to be notified to the public register one month prior to the date of the general meeting, and are then published by the public register (Article 160g(3)). – A third type of publication may be required where the Member State of the company being divided requires publication in its national gazette or through a central electronic platform in accordance with Article 16(3). However, this publication does not need to be initiated by the company being divided, as the public register is responsible for forwarding the information (Article 160g(5)). 1

1 Kraft, ‘“Grenzüberschreitende Vorhaben” nach Annahme der Mobilitätsrichtlinie durch das Europäische Parlament’ BB 2019, 1866. 2 → Art 123. 3 Bungert, ‘Der finale EU-Richtlinienentwurf zu grenzüberschreitenden Formwechseln, Verschmelzungen und Spaltungen’ Der Betrieb (29) 2019, 1612.

768

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 h

II. Submission of Documents by the Company Disclosures are facilitated for the company being divided by requiring Member 3 States to permit an online submission of documents (Article 160g(4)), and to make the documentation accessible through the system of interconnection of registers (Article 160g(6)).

III. Documents Not to Be Made Publicly Available Not all documents prepared in the context of the cross-border division have to be 4 made publicly available. Apart from the draft terms and the notice informing members, creditors, employee 5 representatives of the company being divided that they may submit comments on the draft terms (Article 160g(1)), – the independent expert report only has to be publicly disclosed if required by the laws of the Member State of the company being divided, – the administrative and management body’s report (Article 160 e) for the members and the employees is not to be made publicly accessible. These reports must be available to the members and the employee representatives or employees six weeks prior to the general meeting.4

Article 160 h Approval by the general meeting 1. After taking note of the reports referred to in Articles 160 e and 160 f, where applicable, employees’ opinions submitted in accordance with Article 160 e and comments submitted in accordance with Article 160 g, the general meeting of the company being divided shall decide, by means of a resolution, whether to approve the draft terms of cross-border division and whether to adapt the instrument of constitution, and the statutes if they are contained in a separate instrument. 2. The general meeting of the company being divided may reserve the right to make implementation of the cross-border division conditional on express ratification by it of the arrangements referred to in Article 160 l. 3. Member States shall ensure that the approval of the draft terms of the cross-border division, and of any amendment to those draft terms, requires a majority of not less than two thirds but not more than 90 % of the votes attached either to the shares or to the subscribed capital represented at the general meeting. In any event, the voting threshold shall not be higher than that provided for in national law for the approval of cross-border mergers. 4. Where a clause in the draft terms of the cross-border division or any amendment to the instrument of constitution of the company being divided leads to an increase of the economic obligations of a member towards the company or third parties, Member States may require, in such specific circumstances, that such clause or the amendment to the instrument of constitution of the company being divided be approved by the member concerned, provided that such member is unable to exercise the rights laid down in Article 160 i. 4 Bungert, ‘Der finale EU-Richtlinienentwurf zu grenzüberschreitenden Formwechseln, Verschmelzungen und Spaltungen’ Der Betrieb (29) 2019, 1612.

Klaus Bader and Andreas Börner

769

Art 160 h Approval by the general meeting 5. Member States shall ensure that the approval of the cross-border division by the general meeting cannot be challenged solely on the following grounds: (a) the share exchange ratio referred to in point (b) of Article 160 d has been inadequately set; (b) the cash compensation referred to in point (p) of Article 160 d has been inadequately set; or (c) the information given with regard to the share exchange ratio referred to in point (a) or the cash compensation referred to in point (b) did not comply with the legal requirements. I. Minimum Standard for the Protection of the Members . . . . . . . . . . . . . . . . . . . . . . II. Approval by the General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Information to Be Provided Prior to the General Meeting . . . . . . . . . . . . . . . . . . . IV. Timing of the General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Majority Requirements, Reservations of the General Meeting and Specific Consent Requirements of Certain Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Majority requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Reservation of approval subject to the outcome of the employee participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Specific consent requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Form requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Content of the approval decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI. Challenges of the Resolution of the Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Cross-Border Divisions by Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 6 7 8 9 9 10 13 15 16 19 21

I. Minimum Standard for the Protection of the Members 1 2

3

4

5

The protection of the interests of the members as laid down in Article 160 h and Article 160 i is one of the core elements of the 2019 Directive. As a consequence of a cross-border division, members regularly face situations where the law applicable to their membership changes because they become members of a company governed by the law of the Member State of the recipient company. Taking into account the wide variety of forms of protection of members provided for in the Member States, ranging from no specific protection (e.g. England and Wales) to a very detailed concept to protect the members (e.g. Germany, § 120 h and 120 i UmwG), the intention of the 2019 Directive is to set a minimum standard for all Member States: According to Recital 17, members should be offered the same minimum level of protection regardless of the Member State in which the company is situated. However, Member States should be able to maintain or introduce additional rules on protection of members, unless such rules conflict with those provided for under this 2019 Directive or with the freedom of establishment. (Recital 17). The minimum standard set by the 2019 Directive can be summarised as follows: – Members shall vote on the cross-border division with the vote requiring a supermajority. – At least the members who hold voting rights and voted against the approval of the draft terms shall have the right to exit the company and receive cash compensation for their shares that is equivalent to the value of those shares (Recital 18). – Members who did not have a right to exit the company or did not exercise such right should, nevertheless, have a right to dispute the share exchange ratio (Recital 21).

770

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

–

Art 160 h

The approval of the general meeting cannot be challenged solely on the grounds that the share exchange ratio or the cash compensation was inadequately set. Instead, members are entitled to seek additional compensation.

II. Approval by the General Meeting One of the core principles of European company law is that fundamental decisions 6 have to be made by the shareholders.1 As a result of the cross-border division, members face a situation whereby the law applicable to their membership changes because they become members of a company governed by the law of the Member State of the recipient company. The resulting change of lex societatis entails the amendment of an essential element of the “company contract” and therefore must be approved by the company’s members.2 Accordingly, the general meeting of the company being divided must approve the draft terms (Article 160h(1)).

III. Information to Be Provided Prior to the General Meeting Article 160h(1) provides that the general meeting must decide on the approval of the 7 cross-border division after taking note of the report of the administrative or management body pursuant to Article 160 e and the independent expert report pursuant to Article 160 f. “Taking note” arguably implies a procedure which puts participating members in a position to actually understand the draft terms and reports sufficiently to take an informed decision.3

IV. Timing of the General Meeting In order to comply with the information requirements, the general meeting may 8 only take place after the draft terms, the reports and the expert report have been made available. The report, together with the draft terms, shall be made available to the members of the company being divided as well as to the respective employee representatives or, in the absence of such representatives, to the employees themselves. The required information must be made available six weeks before the day of the respective general meeting deciding upon the cross-border division (Article 160e(6)).

V. Majority Requirements, Reservations of the General Meeting and Specific Consent Requirements of Certain Members 1. Majority requirements Member States must provide for majority requirements of not less than two thirds 9 but never more than 90 % of the votes attached either to the shares or the subscribed capital represented at the general meeting, but in any case the threshold must not be set

1 Riesenhuber, ‘Die Verschmelzungsrichtlinie: Basisrechtsakt für ein Europäisches Recht der Strukturmaßnahmen’ NZG 2004, 15-19. 2 See further as regards to Cross Border Conversions: Garcimartin and Gandía, Cross Border Conversions in the EU – The EU Commission Proposal, 2019. 3 → Art 86 h mn. 4-5.

Klaus Bader and Andreas Börner

771

Art 160 h Approval by the general meeting higher than the one provided for in the law of the Member State of the company being divided for the approval of cross-border mergers (Article 160 h (3)).

2. Reservation of approval subject to the outcome of the employee participation In accordance with Article 160h(2), and as is already provided for in the case of crossborder mergers in Article 126(2), the general meeting may reserve the right to expressly deliberate again on the implementation of the cross-border merger after any employee participation arrangements required under Article 160 l have been finalized. 11 This right protects the interests of members in preventing a cross-border division when no agreement with the employees has been reached, in which case the company would be subject to the application of the standard rules for employees’ participation of the recipient company. 12 The 2019 Directive remains silent on the question as to whether the qualified majority required to approve the draft terms of the cross-border division shall apply to the members’ confirmation of the results of the negotiations on employee participation in the converted company as well. From a German legal perspective, the predominant view in legal literature is to apply the same majority requirement.4 10

3. Specific consent requirement Article 160(h)(4) gives Member States the right to introduce a special consent requirement if the law of the Member State of the company being divided may require separate approval from any member with regard to provisions in the draft terms or in the recipient company’s instrument of constitution which increases the relevant member’s economic obligations towards the company or third parties (Article 160h(4)). However, this special consent requirement must be conditional on the fact that the relevant member does not have, or cannot exercise, its right of withdrawal in exchange for cash compensation. The provision appears to be aimed at providing an alternative protection to members holding non-voting shares in case the Member State of the company being divided does not provide them with an equivalent withdrawal right under subparagraph 2 of Article 160(i). This means that, where the Member State of the company being divided has exercised neither of the two options, certain members of the company being divided may well be exposed to additional economic obligations arising from the law of the Member State of the relevant recipient company. 14 Article 160h(4) leads to the conclusion that the withdrawal right of a member pursuant to Article 160(i) supersedes any veto right or other special consent requirement which may be available under the law of the Member State of the company being divided. 13

4. Form requirements 15

The 2019 Directive does not foresee specific form requirements for the resolution, but leaves it to the Member State of the company being divided to provide for certain form requirements, such as the notarization of the resolution (Recital 18). Furthermore, the company’s statutes will apply with respect to the procedural aspects related to e.g. the form, calling, and convening of a members’ meeting. In terms of language, the draft

4 → Art 86 h mn. 10; Althoff, in Böttcher/Habighorst/Schulte, Umwandlungsrecht (2nd edn, 2019), § 122 g, § 14.

772

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 i

terms of the cross-border division including the instrument of constitution and the statutes of the recipient company, will typically be prepared in a bi-lingual version.5

5. Content of the approval decision The general meeting of the company being divided must approve the cross-border 16 division under the conditions laid down in the draft terms. It is not foreseen that the members can modify the draft terms in the general 17 meeting. A decision amending the common draft terms requires the entire cross-border procedure to restart again.6 This is only logical from a corporate governance perspective as well as to protect the 18 interests of the creditors and the employees: – Allowing the members to modify the draft terms would collide with the allocation of competencies of the bodies involved; solely the administrative or management body is to be responsible for setting up the draft terms. – If the members were able to modify the draft terms in the course of the general meeting, this would disregard the interests of the creditors, the employees, etc., as the amendments to the draft terms could negatively impact on their legal and economic rights without having had the possibility to comment on these.

VI. Challenges of the Resolution of the Members Even if not expressly mentioned, the 2019 Directive leaves it to the discretion of 19 the Member States to decide on which grounds the resolution of the members can be challenged. However, Member States shall ensure that the approval cannot be challenged solely 20 on the basis that the share exchange ratio Article 160 d (d) or the cash compensation (Article 160d(p)) has been inadequately set or the related information provided did not comply with the legal requirements (Article 160h(5)).

VII. Cross-Border Divisions by Acquisition If, in future, cross-border divisions by acquisition were to be included within the 21 scope of application of the 2019 Directive, it would have to be further regulated that the members of the recipient company would also have to consent to the division. With a view to the possible dilution of their shareholdings, they are just as worthy of protection as the members of the recipient company in case of a cross-border merger. 7

Article 160 i Protection of members 1. Member States shall ensure that at least the members of a company being divided who voted against the approval of the draft terms of the cross-border division have the right to dispose of their shares for adequate cash compensation, under → Art 86 h mn. 12. → Art 126 mn. 9. 7 Bormann and Stelmaszcyk, ‘Grenzüberschreitende Spaltungen und Formwechsel nach dem EU-Company Law Package’ ZIP (355) 2019, 9. 5 6

Klaus Bader and Andreas Börner

773

Art 160 i Protection of members the conditions laid down in paragraphs 2 to 6, provided that, as a result of the cross‐border division, they would acquire shares in the recipient companies which would be governed by the law of a Member State other than the Member State of the company being divided. Member States may also provide for other members of the company being divided to have the right referred to in the first subparagraph. Member States may require that express opposition to the draft terms of the cross‐ border division, the intention of members to exercise their right to dispose of their shares, or both, be appropriately documented at the latest at the general meeting referred to in Article 160 h. Member States may allow the recording of opposition to the draft terms of the cross-border division to be considered proper documentation of a negative vote. 2. Member States shall establish the period within which the members referred to in paragraph 1 have to declare to the company being divided their decision to exercise the right to dispose of their shares. That period shall not exceed one month after the general meeting referred to in Article 160 h. Member States shall ensure that the company being divided provides an electronic address for receiving that declaration electronically. 3. Member States shall further establish the period within which the cash compensation specified in the draft terms of the cross-border division is to be paid. That period shall not end later than two months after the cross-border division takes effect in accordance with Article 160 q. 4. Member States shall ensure that any members who have declared their decision to exercise the right to dispose of their shares, but who consider that the cash compensation offered by the company being divided has not been adequately set, are entitled to claim additional cash compensation before the competent authority or body mandated under national law. Member States shall establish a time limit for the claim for additional cash compensation. Member States may provide that the final decision to provide additional cash compensation is valid for all members of the company being divided who have declared their decision to exercise the right to dispose of their shares in accordance with paragraph 2. 5. Member States shall ensure that the law of the Member State of a company being divided governs the rights referred to in paragraphs 1 to 4 and that the exclusive competence to resolve any disputes relating to those rights lies within the jurisdiction of that Member State. 6. Member States shall ensure that members of the company being divided who did not have or did not exercise the right to dispose of their shares, but who consider that the share-exchange ratio set out in the draft terms of the cross-border division is inadequate, may dispute that ratio and claim a cash payment. Proceedings in that regard shall be initiated before the competent authority or body mandated under the law of the Member State to which the company being divided is subject, within the time limit laid down in that national law and such proceedings shall not prevent the registration of the cross-border division. The decision shall be binding on the recipient companies and, in the event of a partial division, also on the company being divided. 7. Member States may also provide that the recipient company concerned and, in the event of a partial division, also the company being divided, can provide shares or other compensation instead of a cash payment.

774

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS I. Protection of Members – The Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Right to Dispose of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Exit right at least for members having voted against the resolution . . . . . . . 3. Exercise of the right to dispose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Payment of cash compensation by the company being divided . . . . . . . . . . . III. Right of the Objecting Member to Challenge the Amount of the Cash Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Right to Challenge the Adequacy of the Share Exchange Ratio . . . . . . . . . . . . . . .

Art 160 i 1 2 2 3 5 12 13 18

I. Protection of Members – The Concept As stated above (→ Foreword to Arts 85 a mn. 15), the 2019 Directive aims at setting 1 a harmonised minimum standard for the protection of the members (for details → Art 160 h), and this minimum standard foresees: – Members shall vote on the cross-border division with the vote requiring a super-majority. – At least the members who hold voting rights and voted against the approval of the draft terms shall have the right to exit the company and receive cash compensation for their shares that is equivalent to the value of those shares (Recital 18). – Members who did not have the right to exit the company or did not exercise such right should, nevertheless, have a right to dispute the share exchange ratio. – The approval of the general meeting cannot be challenged solely on the grounds that the share exchange ratio or the cash compensation was inadequately set. Instead, members are entitled to seek additional compensation.

II. Right to Dispose of Shares 1. Background In order to avoid that members are forced to become subject to membership rights 2 and obligations of the potentially unfamiliar legal system of another Member State, these members have the right to dispose of their shares for adequate cash compensation (Article 160i(1)). With regard to a cross-border division, at least one of the recipient companies will always be subject to the law of another Member State than that of the company being divided. Accordingly, potentially all members acquiring shares in this recipient company are entitled to dispose of their shares for a cash compensation. Article 160 i in the form as adopted by the 2019 Directive is, in a number of respects, less comprehensive and strict than the 2018 Proposal, and gives Member States much more room in terms of timing and deadlines.1

2. Exit right at least for members having voted against the resolution Member States have to ensure that at least the shareholders who voted against the 3 approval of the common draft terms in the general meeting have the right to exit the company. However, not all Member States (e.g. Germany)2 require under their national laws that a negative vote of any specific member is recorded in writing. Therefore, as a 1 → Art 86 i mn. 11; Schurr, ‘Schutzbestimmungen und Verfahrensregeln in der neuen Richtlinie zu grenzüberschreitenden Umwandlungen, Verschmelzungen und Spaltungen’ EuZW 2019, 539, 543. 2 Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’ ZIP 2019, 2437, 2439.

Klaus Bader and Andreas Börner

775

Art 160 i Protection of members result of the trilogue process, Article 160i(1) last sentence provides that Member States may consider the recording of opposition to the draft terms of the cross-border division to be considered proper documentation of a negative vote. 4 As a further option, Member States have the possibility to extend the right to dispose of the shares not only to those members who have voted against or who have recorded their opposition, but also to other members, for example, to members holding shares without voting rights or members who, as a result of a cross-border division, would acquire shares in the recipient company in proportions different from those they held before the operation, or to members for whom there would be no change of applicable law but for whom certain rights would change due to the cross-border division (Recital 18). By making extensive use of the latter options, Member States may even jeopardize the feasibility of cross-border divisions, and in fact force the company being divided to obtain, in accordance with the law of the relevant Member State, waivers from the relevant members upfront. It is, however, not clear whether a member’s waiver would only be valid if declared after the general meeting has voted on the draft terms.

3. Exercise of the right to dispose 5

6

7

8

9

10

In order not to burden the company being divided with uncertainties for an unlimited period of time, members are required to declare whether they intend to exercise their right to dispose of their shares within a period of not more than one month after the general meeting. The exercise period appears to be rather short in view of the objective to adequately protect the members – however, Member States have no flexibility to extend such period, and are bound to the one-month period.3 For the sake of legal certainty, the one month period should be interpreted as preclusive, that means a declaration received by the company after expiry of the one month period will not have any effect at all; the right to dispose of the shares in the company will have lapsed.4 The member must declare the exercise of its right towards the company being divided and Member States shall ensure that the company being divided provides an electronic address for receiving the declaration electronically (Article 160i(2)). Even though the declaration in electronic form must be sufficient (2nd sentence of Article 160i(2)), this requirement should be without prejudice to any formal requirements laid down in national law (Recital 19), such as the need to tender shares in notarised form, as for example under section 15 German Act on Limited Liability Companies (GmbHG). Also regarding the actual transfer of shares, some more onerous formal validity requirements will still apply. Recital 18 states that the 2019 Directive should not affect national rules on the validity of contracts for the sale and transfer of shares in companies or special legal form requirements. Member States should, for example, be able to require a notarial deed or a notarial or digital confirmation of signatures. It appears that the intention of the 2019 Directive is to ensure that the company being divided is informed by its members whether they exercise their right to dispose of their shares; it is not necessary that the declaration itself constitutes a binding offer (or an acceptance of the offer set out in the draft terms as approved by the general meeting), at least in those instances where the transfer requires a specific stricter form. 5 This may, 3 Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’ ZIP 2019, 2437, 2440. 4 Luy, ‘Die Austrittserklärung des Minderheitsgesellschafters nach dem Company Law Package‘ GmbHR 2019, 1105, 1107.

776

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 i

of course, give rise to the question how the company would enforce a disposal of the shares by the minority member who declared its intention to dispose of the shares but ultimately refrains from doing so.6 Vice versa, the Directive is silent on how the member’s right to dispose of its shares 11 is affected by provisions which prevent the company being divided from acquiring (or redeeming) own shares.7 These conflicts will have to be solved by the law of the Member State of the company being divided.

4. Payment of cash compensation by the company being divided The cash compensation has to be paid within a period of not more than two months 12 following the date on which the division has become effective in accordance with Article 160 q (Article 160i(3)). The Member State of the company being divided may provide for a time period of less than two months.

III. Right of the Objecting Member to Challenge the Amount of the Cash Compensation Members who have declared their decision to exercise the right to dispose of their shares, but who consider the cash compensation offered by the company being divided as being inadequate, have the right to claim an additional cash compensation (Article 160i(4)). This does not mean that the entire cash compensation is recalculated, but the objecting member receives an additional cash compensation, i.e. the amount by which the cash compensation offered by the company falls short of the adequate amount. The Member States are free to define the competent authority or body before which the member has to bring its claim. The competent authority may also be an arbitral tribunal (Recital 20). The competent authority will, in addition to what is set out in the opinion of the independent expert (see → Article 160 f), take into account a range of factors.8 The Member State of the company being divided is also free to allow a reformatio in peius,9 and to set out the latest possible date to claim additional cash compensation.10 The decision of the competent body does not have automatically an erga omnes effect for all members who have challenged the adequacy of the cash compensation. The Member State of the company being divided may, however, provide that the final decision to provide additional cash compensation is valid for all members of the company being divided who have validly declared their decision to exercise their disposal right. From an international substantive and international procedural law perspective, Article 160i(5) states that the right to dispose and the right to claim additional cash compensation is governed by the law of the Member State of the company being divided; the exclusive competence to resolve any disputes relating to those rights lies within

5 Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’ ZIP 2019, 2437, 2440; as well as Luy, ‘Die Austrittserklärung des Minderheitsgesellschafters nach dem Company Law Package‘ GmbHR 2019, 1105-1106. See also → Art 86 i mn. 19-20. 6 Luy, ‘Die Austrittserklärung des Minderheitsgesellschafters nach dem Company Law Package‘ GmbHR 2019, 1105, 1109. 7 → Art 86 i mn. 28-29. 8 → Art 86 j mn. 30. 9 → Art 86 j mn. 33. 10 → Art 86 j mn. 31-32.

Klaus Bader and Andreas Börner

777

13

14

15 16

17

Art 160 j Protection of creditors the jurisdiction of that Member State. The provision ensures that applicable law and competent forum are aligned.

IV. Right to Challenge the Adequacy of the Share Exchange Ratio 18

19

20

21

22

23

24

According to Article 160i(6), members of the company being divided who did not have, or did not exercise the right to dispose of their shares, but who consider that the share exchange ratio set out in the draft terms of the cross-border division is inadequate, have the right to dispute that ratio and claim a cash payment. When assessing the adequacy of the share exchange ratio, the competent administrative or judicial authority or a body mandated under national law should also take into account the amount of any complementary cash payment included in the draft terms (Recital 21). The member can only claim a cash payment and cannot claim the transfer of additional shares until the adequate share exchange ratio is reached. The concept of the cash compensation appears to be counterintuitive: The primary interest of a member is to receive an adequate number of shares in the recipient company with all rights attached to the membership (in particular voting right and right to receive dividends), and not to receive a compensation, as the latter does not protect the member from a dilution of its rights. However, the Member States can provide that the recipient company, or in case of a partial division, also the company being divided, may grant shares or “other compensation” instead of a cash payment (Article 160i(7)). One would hope that all Members States make use of this possibility. Similarly to Article 160i(5), for the right of the member to exit the company, Article 160i(6) provides that the proceedings to challenge the share exchange ratio shall be initiated before the competent authority or body mandated under the law of the Member State to which the company being divided is subject. As is the case with regard to additional cash compensation for exiting members, the Member State of the company being divided determines other details, such as the deadline for submitting a claim, a potential erga omnes effect of the decision and the possibility of a reformatio in peius. The decision of the competent body or authority shall be binding on the recipient companies and, in the event of a partial division, also on the company being divided, Article 160i(6). It is important to note that a claim or action challenging the adequacy of the share exchange ratio shall not prevent the registration of the cross-border division.

Article 160 j Protection of creditors 1. Member States shall provide for an adequate system of protection of the interests of creditors whose claims antedate the disclosure of the draft terms of the cross‐border division and have not fallen due at the time of such disclosure. Member States shall ensure that creditors who are dissatisfied with the safeguards offered in the draft terms of the cross-border division, as provided for in point (q) of Article 160 d, may apply, within three months of the disclosure of the draft terms of cross-border division referred to in Article 160 g, to the appropriate administrative or judicial authority for adequate safeguards, provided that such creditors can credibly demonstrate that, due to the cross-border division, the satisfaction of their 778

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 j

claims is at stake and that they have not obtained adequate safeguards from the company. Member States shall ensure that the safeguards are conditional on the cross-border division taking effect in accordance with Article 160 q. 2. Where a creditor of the company being divided does not obtain satisfaction from the company to which the liability is allocated, the other recipient companies, and in the case of a partial division or a division by separation, the company being divided, shall be jointly and severally liable with the company to which the liability is allocated for that obligation. However, the maximum amount of joint and several liability of any company involved in the division shall be limited to the value, at the date on which the division takes effect, of the net assets allocated to that company. 3. Member States may require that the administrative or management body of the company being divided provide a declaration that accurately reflects its current financial status at a date no earlier than one month before the disclosure of that declaration. The declaration shall state that, on the basis of the information available to the administrative or management body of the company being divided at the date of that declaration, and after having made reasonable enquiries, that administrative or management body is unaware of any reason why any recipient company and, in the case of a partial division, the company being divided, would, after the division takes effect, be unable to meet the liabilities allocated to them under the draft terms of the cross-border division when those liabilities fall due. The declaration shall be disclosed together with the draft terms of the cross-border division in accordance with Article 160 g. 4. Paragraphs 1, 2 and 3 shall be without prejudice to the application of the law of the Member State of the company being divided concerning the satisfaction or securing of pecuniary or non-pecuniary obligations due to public bodies. I. General Effects of the Division on Creditors and the New Concept of Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Draft Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Solvency Declaration – Statement Accurately Reflecting the Company’s Financial Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Right to Challenge Safeguards as Inadequate and Request (Additional) Safeguards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Joint and Several Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 8 11 16 24

I. General Effects of the Division on Creditors and the New Concept of Protection In the draft terms, the company being divided is free to allocate assets and liabilities 1 between itself (in case of a partial division) and the various recipient companies as it sees fit. The creditors do not have a right to challenge the general meeting’s approval of the draft terms. They face a far more immediate risk of losing access not only to assets available at the time the division becomes effective, but also to the company’s potential to generate returns in the future. Accordingly, the protection of creditors in a cross-border division is even more 2 critical than in a conversion1 or merger scenario. Potential issues may be in particular:

1

See the examples given at → Art 86 j mn. 3-4.

Klaus Bader and Andreas Börner

779

Art 160 j Protection of creditors –

3

4

5

6

a creditor may have to enforce its claim in another Member State (even though the governing law and the jurisdiction for adjudicating the claim would normally not change); – debt collateral may be more difficult to enforce because of this split; – minimum capital requirements and dividend distribution restrictions of one of the recipient companies may be significantly lower than those of the company being divided; – the secondary liability of members (where applicable, subject to requirements for “piercing the corporate veil”) may be different for the recipient company. Similar to the protection of members, the aim of the 2019 Directive is to introduce a certain harmonized minimum standard as the protection mechanisms for creditors applied by the Member States vary significantly in particular with regard to the commencement of the protection period (ex ante or ex post approach) and in the nature of the system of protection offered to creditors.2 The study by Bech-Bruun/Lexidale provides an overview of the significant differences across Member States.3 Also the 2019 Directive acknowledges that such varying creditor protection rules add significant complexity to the cross-border operation process and lead to uncertainty both for the companies involved and for their creditors in relation to the recovery or satisfaction of their claim (Recital 22). The new minimum standard introduced by the 2019 Directive can be summarized as follows: – information to be provided in the draft terms on securities (proactively) offered to the creditors (Article 160d(q)); – solvency declaration by the administrative or management body (to the discretion of the Member States) (Article 160j(3)); – right of the creditors to challenge the adequacy of securities offered in front of the appropriate administrative or judicial authority (Article 160j(1)); – introduction of a joint and several liability with certain limitations (Article 160j(2)). Compared to the provisions in domestic divisions, the 2019 Directive changes its approach to adequately protect creditors in a number of ways.4 Most importantly, Article 160 j no longer specifies that “guarantees” should be available as a “minimum” safeguard, leaving it to the Member States to apply more stringent provisions.5 Instead, it provides for a secondary and limited joint and several liability of each company involved (Article 160j(2)) and otherwise requires each Member State to provide for an “adequate” system of protection, without specifying either substantive criteria, or a clear allocation of competence (unless creditor protection provisions are qualified as part of “procedures and formalities”, which under Article 160 c are subject to the law of the Member State of the company being divided6). While the 2018 Proposal remained silent on this point, the 2019 Directive now states that the Member State’s system of creditor protection should only be available for claims antedating the disclosure of the draft terms and have not fallen due at the time of such 2 See Recital 22; and Winner, ‘Protection of Creditors and Minority Shareholders in Cross Border Transactions’ ECFR 1-2/2019, 44- 47 et seq. 3 Bech-Bruun, Study on the application of the cross-border mergers directive, Directorate for the Internal Market and Services, European Commission (Lexidale 2013). 4 → Art 86 j mn. 6-10 on the legislative history. 5 See with regard to the concept of actio pauliana ECJ of 30 January 2020, C-394/18. 6 Winner, ‘Protection of Creditors and Minority Shareholders in Cross Border Transactions’ ECFR 1-2/2019, 44, 55.

780

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 j

disclosure.7 Where a Member State extends statutory safeguards to other claims, it may also have to show that the effet utile is not unduly affected. In any case, the protection of public bodies such as tax and social security authorities 7 will remain fully within the discretion of Member States (Article 160j(4)).

II. Draft Terms The draft terms shall contain details regarding any safeguards offered to creditors 8 (point (q) of Article 160 d). In particular in view of the right of creditors to request adequate safeguards from 9 the administrative or judicial authority, the company being divided will normally offer safeguards to eligible creditors within the draft terms. Such safeguards may for example consist of a co-liability or guarantees provided by the company being divided or by third parties, an escrow, collateral over assets (including those transferred to the recipient company), or securities issued by the recipient company. The draft terms are made available to the creditors of the company being divided in 10 the course of the disclosure process (Article 160 g). After the draft terms of the crossborder operation have been disclosed, creditors should be able to take into account the potential impact of the change of jurisdiction and applicable law as a result of the crossborder operation (Recital 24).

III. Solvency Declaration – Statement Accurately Reflecting the Company’s Financial Situation Member States may require the administrative or management body of the company being divided to issue a statement which accurately reflects the financial situation of the company at the time of the declaration which must have an earlier date than one month prior to its disclosure (Article 160j(3)).8 This solvency declaration aims to protect creditors against the risk of the insolvency of the company following a cross-border operation (Recital 25). In the solvency declaration, the administrative or management body of the company being divided shall state that on the basis of the information available to it at the date of the solvency declaration, and after having made reasonable enquiries, it is unaware of any reason why any recipient company and, in the case of a partial division, the company being divided, would, after the division takes effect, be unable to meet the liabilities allocated to them under the draft terms of the cross-border division, when those liabilities fall due (Article 160j(3)). Article 160 j remains silent on the consequences in case the declaration turns out to be wrong, i.e. containing inaccurate or misleading declarations. According to Recital 25, Member States should be able to make the members of the administrative or management body personally liable for the accuracy of that declaration, including the introduction of effective and proportionate penalties and liability in compliance with Union law.

7 Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’ ZIP 2019, 2437, 2445. 8 Kraft, ‘“Grenzüberschreitende Vorhaben” nach Annahme der Mobilitätsrichtlinie durch das Europäische Parlament’ BB 2019, 1867.

Klaus Bader and Andreas Börner

781

11

12 13

14

Art 160 j Protection of creditors 15

Some commentators in the legal literature advocate for not introducing the concept of the solvency declaration into national law.9 The main concern appears to be that such declarations may impede cross-border divisions as the management or administrative bodies, in view of the personal liability, are either not willing or not able to provide for such a far-reaching forward-looking statement.10

IV. Right to Challenge Safeguards as Inadequate and Request (Additional) Safeguards 16

17

18

19

20

21

In order to ensure that creditors have appropriate protection in cases where they are not satisfied with the protection offered in the draft terms and where they may not have found a satisfactory solution with the company, creditors who have notified the company beforehand, should be able to apply for safeguards to the appropriate authority (Recital 23). Against this background, Article 160 j (1) provides that creditors who are dissatisfied with the safeguards offered in the draft terms (Article 160d(q)), may apply, within three months of the disclosure of the draft terms in accordance with Article 160 g, to the appropriate administrative or judicial authority for adequate safeguards; the creditor must credibly demonstrate that, due to the cross-border division, the satisfaction of its claims is at stake and that it has not obtained adequate safeguards from the company. Subparagraph (2) of Article 160j(1) implies, thereby setting for each creditor an (absolute) deadline of three months from the disclosure of the draft terms, that dissatisfied creditors need to take individual action ex ante, without being able to rely on subsequent remedies such as the actio pauliana.11 Further, not all creditors of the company being divided are entitled to challenge the safeguards, only those whose claims antedate the disclosure of the draft terms and have not fallen due at the time of the disclosure (Article 160j(1)). Creditors to be protected could comprise current and former employees with occupational vested pension rights and persons receiving certain occupational pension benefits (Recital 24). Creditors need to “credibly demonstrate” that the satisfaction of their claim is at stake as a result of the cross-border division. The 2019 Directive does not provide for any details when this would be the case. The mere fact that the creditor has a claim against a new debtor who is subject to a different jurisdiction does not suffice to prove that the claim is at stake, because this is a natural consequence of the cross-border division. A claim will be deemed to be at stake, however, if the (recipient) company is subject to a regime providing for less protection for creditors, for example with respect to the minimum share capital or equity capital requirements (i.e. restrictions on repaying the equity capital to the members). Also, different accounting regimes may put claims at stake at least to the extent these allow the company to effect higher distributions to its members. Further, the creditor must also “credibly demonstrate” that the creditors have not obtained adequate safeguards from the company, i.e. the creditor must credibly demonstrate that the safeguards described in the draft terms are not sufficient. Regrettably, the 2019 Directive does not define when the offered safeguard is not sufficient or 9 Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’ ZIP 2019, 2437, 2445. 10 Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’ ZIP 2019, 2437, 2445. 11 See in this respect ECJ of 30 January 2020, C-394/18.

782

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 j

in other words is adequate. Recital 23 at least provides certain guidance in this respect. When assessing such safeguards, the appropriate authority should take into account whether a creditor’s claim against the company or a third party is of at least equivalent value and of commensurate credit quality as it was before the cross-border operation and whether the claim may be brought in the same jurisdiction (Recital 23). Article 160 j does not expressly specify the legal effects of a challenge by the cred- 22 itors, in particular whether such challenge could block the issuance of the pre-division certificate and therefore the cross-border division as a whole. It is unclear whether the adequate protection of creditors is considered as part of the scrutiny of legality under Article 160 m and Article 160 o, and whether Member States would, as is the case for domestic divisions, have the right to grant de facto temporary veto powers to creditors. 12 The programme for the scrutiny of the cross-border division’s legality does not state if and how a creditor's application for additional safeguards needs to be considered.13 Member States will hopefully clarify this in their respective national laws. Member States are unlikely to retain the right to generally require, or empower, the 23 competent authority or body to scrutinize, at its own initiative, the availability and effectiveness of creditor safeguards, other than under the strict conditions of the abuse control set out in Article 160m(9).

V. Joint and Several Liability Irrespective of whether or not a creditor has challenged the adequacy of the safe- 24 guards provided by the company, all creditors are protected by the joint and several liability of the companies involved in the cross-border division. Such protection is of particular relevance as the company being divided is free to 25 allocate assets and liabilities between itself (in case of a partial division) and the various recipient companies as it sees fit. Depending on the allocation of assets and liabilities, creditors may be in a worse position compared to the situation before the division. The joint and several liability of the companies involved is not unconditional and 26 it significantly lowers the quality of protection offered to the creditors in a domestic division scenario: – Firstly, joint and several liability only applies if the creditor of the company being divided does not obtain satisfaction from the company to which the liability is allocated. It remains unclear to which extent legal proceedings against the debtor company under the draft terms must have been pursued. If the recipient company is the primary debtor, the Directive would not provide for a forum in the Member State of the company being divided, as is available in case of a cross-border conversion (Article 86j(4)).14 – Secondly, the maximum amount of joint and several liability of any company involved in the division shall be limited to the value, at the date on which the division takes effect, of the net assets allocated to that company.

12 Winner, ‘Protection of Creditors and Minority Shareholders in Cross Border Transactions’ ECFR 1-2/2019, 44, 57; → Art 86 j mn. 20-22. 13 Bungert, ‚Der finale EU-Richtlinienentwurf zu grenzüberschreitenden Formwechseln, Verschmelzungen und Spaltungen‘ Der Betrieb (29) 2019, 1615. 14 → Art 86 j mn. 27.

Klaus Bader and Andreas Börner

783

Art 160 k Employee information and consultation In contrast to the corresponding provision on domestic divisions in Article 146 – where the introduction of the limitation is at the discretion of the Member State – in a cross-border context such limitation is mandatory. 28 The maximum amount of the joint and several liability is limited to the value of the net assets allocated to the company being divided or the relevant recipient company at the date the division takes effect. This provision cuts off creditor’s expectations with regard to being satisfied from income which could reasonably be expected as being generated by any of the companies involved, and has been rightly criticized.15 Its application will raise difficult procedural issues, as it is not clear how the value of the net assets at the relevant time should be ascertained and, even if it has been duly ascertained, how it should be divided between competing creditors. 29 The 2019 Directive does not foresee a time limitation for the joint and several liability following the effectiveness of the cross-border division or the disclosure of the draft terms. Therefore, the Member State of the company being divided should have the possibility to provide certain time limitations in the interest of the companies involved in the cross-border division.16 27

Article 160 k Employee information and consultation 1. Member States shall ensure that employees’ rights to information and consultation are respected in relation to the cross-border division and are exercised in accordance with the legal framework provided for in Directive 2002/14/EC, and Directive 2001/23/EC where the cross-border division is considered to be a transfer of an undertaking within the meaning of Directive 2001/23/EC, and, where applicable for Community-scale undertakings or Community-scale groups of undertakings, in accordance with Directive 2009/38/EC. Member States may decide that employees’ rights to information and consultation apply with respect to the employees of companies other than those referred to in Article 3(1) of Directive 2002/14/EC. 2. Notwithstanding Article 160e(7) and point (b) of Article 160g(1), Member States shall ensure that employees’ rights to information and consultation are respected, at least before the draft terms of the cross-border division or the report referred to in Article 160 e are decided upon, whichever is earlier, in such a way that a reasoned response is given to the employees before the general meeting referred to in Article 160 h. 3. Without prejudice to any provisions or practices in force more favourable to employees, Member States shall determine the practical arrangements for exercising the right to information and consultation in accordance with Article 4 of Directive 2002/14/EC.

15 Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’ ZIP 2019, 2437, 2445. 16 Stelmasczyk, ‘Der materielle Stakeholderschutz nach der neuen Umwandlungsrichtlinie’ ZIP 2019, 2437, 2445.

784

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 k

I. Employee Consultation Article 160 k contains provisions on the mandatory obligation to consult and inform employees in connection with cross-border divisions. Such provisions were not contained in the 2018 Proposal, but only included on the request of the EU Parliament. 1 In addition to the employee representatives’ (or the employees’) right to comment on both the draft terms and the report by the management or administrative body pursuant to Article 160e(7) and point (b) of Article 160g(1), the employees shall receive a reasoned response by the administrative and management body before the general meeting votes on the cross-border division. This applies not only to national works councils, but also to European works councils and SE works councils.2 Article 160 k does not contain any substantive and/or procedural requirements. Instead, Article 160 k refers to certain existing directives designed to protect the employees: – Directive 2002/14/EC (Information and Consultation of Employees Directive) 3 – Directive 2001/23/EC (Transfers of Undertakings Directive) – Directive 2009/38/EC (European Works Council Directive) While the applicability of each of these directives is subject to a certain minimum number of employees, Article 160k(1) gives Member States the option to apply each directive irrespective of the number of employees. In summary, the substantive and procedural requirements of the information and consultation are set out by combining cross-references to the following legal provisions: – Directives 2002/14/EC, 2001/23/EC and 2009/38/EC (Article 160k(1) and (3)), with regard to the process applicable to the transfer of an undertaking; – where available, more favourable provisions or practices in the law of the Member State of the company being divided (Article 160k(3)), with regard to any practical arrangements for the exercise of the relevant rights; and – Regulation (EC) No. 2157/2001 and Directive 2001/86/EC as regards employee participation rights to be established in the recipient company (Article 160 l). In contrast to the specific cross-border division-related rights, which kick-in (at least) one month before the date of the general meeting as far as the draft terms of the cross-border conversion are concerned (Article 160g(1)) and not less than six weeks before the general meeting as far as the report of the administrative or management body for members and employees are concerned (Article 160e(6)), the general rights

1 European Parliament legislative resolution of 18.04.2019 on the proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (COM(2018)0241 – C8-0167/2018 – 2018/0114(COD)); Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/2019 – Teil I: Company Law Package’ (2019) BB, 1922-1932. 2 Kraft, ‘“Grenzüberschreitende Vorhaben nach Annahme der Mobilitätsrichtlinie durch das Europäische Parlament’ BB 2019, 1868. 3 Directive 2002/14/EC of the European Parliament and of the Council of 11 March 2002 establishing a general framework for informing and consulting employees in the European Community – Joint declaration of the European Parliament, the Council and the Commission on employee representation, Official Journal L 080 , 23/03/2002 P. 0029 – 0034; Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses Official Journal L 082 , 22/03/2001 P. 0016 – 0020; Directive 2009/38/EC of the European Parliament and of the Council of 6 May 2009 on the establishment of a European Works Council or a procedure in Community-scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees (Recast) OJ L 122, 16.5.2009, 28–44.

Klaus Bader and Andreas Börner

785

1

2

3 4

5

6

Art 160 l Employee participation to information and consultation under the referenced directives apply to the preceding decision making phase.4

II. Stronger Rights under Member State Law 7

The 2019 Directive should be without prejudice to Member States’ powers to provide strengthened protection for employees in accordance with the existing social acquis (Recital 11).

Article 160 l Employee participation 1. Without prejudice to paragraph 2, each recipient company shall be subject to the rules in force concerning employee participation, if any, in the Member State where it has its registered office. 2. However, the rules in force concerning employee participation, if any, in the Member State where the company resulting from the cross-border division has its registered office shall not apply where the company being divided has, in the six months prior to the disclosure of the draft terms of the cross-border division, an average number of employees equivalent to four fifths of the applicable threshold, as laid down in the law of the Member State of the company being divided, for triggering the participation of employees within the meaning of point (k) of Article 2 of Directive 2001/86/EC, or where the national law applicable to each of the recipient companies does not: (a) provide for at least the same level of employee participation as operated in the company being divided prior to its cross-border division, measured by reference to the proportion of employee representatives among the members of the administrative or supervisory body or their committees or of the management group which covers the profit units of the company, subject to employee representation; or (b) provide for employees of establishments of the recipient companies that are situated in other Member States the same entitlement to exercise participation rights as is enjoyed by those employees employed in the Member State where the recipient company has its registered office. 3. In the cases referred to in paragraph 2 of this Article, the participation of employees in the companies resulting from the cross-border division and their involvement in the definition of such rights shall be regulated by the Member States, mutatis mutandis and subject to paragraphs 4 to 7 of this Article, in accordance with the principles and procedures laid down in Article 12(2) and (4) of Regulation (EC) No 2157/2001 and the following provisions of Directive 2001/86/EC: (a) Article 3(1), points (a)(i) and (b) of Article 3(2), Article 3(3), the first two sentences of Article 3(4), and Article 3(5) and (7); (b) Article 4(1), points (a), (g) and (h) of Article 4(2), and Article 4(3) and (4); (c) Article 5; (d) Article 6; 4

786

→ Art 86 k mn. 2-4.

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 l

(e) Article 7(1), with the exception of the second indent of point (b); (f) Articles 8, 10, 11 and 12; and (g) point (a) of Part 3 of the Annex. 4. When regulating the principles and procedures referred to in paragraph 3, Member States: (a) shall confer on the special negotiating body the right to decide, by a majority of two thirds of its members representing at least two thirds of the employees, not to open negotiations or to terminate negotiations already opened and to rely on the rules on participation in force in the Member States of each of the recipient companies; (b) may, in the case where, following prior negotiations, standard rules for participation apply and notwithstanding such rules, decide to limit the proportion of employee representatives in the administrative body of the recipient companies. However, if, in the company being divided, employee representatives constituted at least one third of the administrative or supervisory body, the limitation may never result in a lower proportion of employee representatives in the administrative body than one third; (c) shall ensure that the rules on employee participation that applied prior to the cross-border division continue to apply until the date of application of any subsequently agreed rules or, in the absence of agreed rules, until the application of standard rules in accordance with point (a) of Part 3 of the Annex to Directive 2001/86/EC. 5. The extension of participation rights to employees of the recipient companies employed in other Member States, as referred to in point (b) of paragraph 2, shall not entail any obligation for Member States which choose to do so to take those employees into account when calculating the size of workforce thresholds giving rise to participation rights under national law. 6. Where any of the recipient companies is to be governed by an employee participation system in accordance with the rules referred to in paragraph 2, that company shall be obliged to take a legal form allowing for the exercise of participation rights. 7. Where the recipient company is operating under an employee participation system, that company shall be obliged to take measures to ensure that employees’ participation rights are protected in the event of any subsequent conversion, merger or division, be it cross-border or domestic, for a period of four years after the cross‐border division has taken effect, by applying, mutatis mutandis, the rules laid down in paragraphs 1 to 6. 8. A company shall communicate to its employees or their representatives the outcome of the negotiations concerning employee participation without undue delay. I. Conflicting Approaches of Employee Participation . . . . . . . . . . . . . . . . . . . . . . . . . . II. The General Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Four-fifths rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Reduction of employee participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Mechanism for the Involvement of Employees in the Definition of Their Rights to Participation in the Recipient Companies . . . . . . . . . . . . . . . . . . . . . . . . . . V. Four Year Perpetuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Klaus Bader and Andreas Börner

1 2 4 5 6 7 8 13

787

Art 160 l Employee participation

I. Conflicting Approaches of Employee Participation 1

Article 160 l addresses the question of employee participation where the law of Member States is not harmonized, and where material differences are likely to exist between the applicable regimes in the law of the Member State of the company being divided and of the recipient companies.1 This has always been one of the most important issues of cross-border restructuring: how the different approaches of the Member States regarding employee participation are to be dealt with in the course of a cross-border operation.

II. The General Principle In principle, the employee participation regime of the Member State applies (Article 160l(1)), in which the recipient company formed by the cross-border division has its registered office; in this context, the statutory seat is relevant and not the administrative office. Modified elements of the co-determination procedures from the SE Directive 2 and the SE Regulation3 were added to this principle. 3 In order to ensure that employee participation rights are not adversely affected by cross-border divisions, the 2019 Directive establishes a number of protective mechanisms,4 which are summarized in the table set out in the commentary of Article 86 l above (→ Art 86 l mn. 9). 2

III. Exceptions 4

In the following three events, the law of the recipient company is superseded by the European co-determination regime applicable when determining the employee participation rights of the relevant recipient company:

1. Four-fifths rule 5

In the six months prior to the publication of the draft terms of the cross-border division as referred to in Article 160 e, the company being divided has an average number of employees equivalent to (no less than) four fifths of the applicable threshold which triggers the participation of employees under the law of the Member State of the company being divided (Article 160l(2)). This “four-fifths rule” (which derives from the equivalent provision relating to cross-border mergers and the relocation of an SE) serves as a precaution against a manipulation of employee numbers shortly before a contemplated cross-border division with the aim to benefit from (potentially less onerous) provisions under the law of the Member State of the recipient company.5 In certain situations this may, however, lead to a lower standard of employee participation than what the law of the Member State of the recipient company would normally require.6 → Art 86 l mn. 2. Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees. 3 Regulation (EC) No. 2157/2001 of 8.10.2001 on the Statute for a European company (SE), OJ L 294, 10.11.2001, 1-21. 4 Kraft, ‘“Grenzüberschreitende Vorhaben” nach Annahme der Mobilitätsrichtlinie durch das Europäische Parlament’ BB 2019, 1868. 5 Bungert, ‘Der finale EU-Richtlinienentwurf zu grenzüberschreitenden Formwechseln, Verschmelzungen und Spaltungen’ Der Betrieb (29) 2019, 1616. 6 → Art 86 l mn. 11. 1

2

788

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 l

2. Reduction of employee participation The national law applicable to any of the recipient companies does not provide for 6 at least the same level of employee participation as provided for in the company being divided prior to the division, measured by reference to the proportion of employee representatives among the members in any of the relevant bodies (point (a) of Article 160l(2)).

3. Discrimination The law of the Member State of any recipient company does not grant employees of 7 establishments of the recipient companies situated in other Member States the same entitlement to exercise participation rights as is enjoyed by those employees employed in the Member State where the recipient company has its registered office (point (b) of Article 160l(2)). Article 160l(5) clarifies in line with a recent decision by the ECJ that it is sufficient for the relevant Member State to perpetuate equivalent participation rights of employees in other Member States, but does not have to count these employees towards any applicable workforce thresholds giving rise to participation rights.7

IV. Mechanism for the Involvement of Employees in the Definition of Their Rights to Participation in the Recipient Companies With regard to the three cases mentioned above, Article 160l(3) makes (partial) 8 reference to Regulation (EC) No 2157/2001 and Directive 2001/86/EC, essentially requiring the Member State of the recipient company to provide, whether cross-reference or otherwise, for an application of the mechanism developed for the involvement of employees in the definition of their rights to participation in the creation or relocation of an SE. This means that, in principle, negotiations with a special negotiating body must be conducted to jointly deliberate and determine employee participation rights in each of the recipient companies.8 The relevant arrangements already need to be set out in the draft terms (Arti- 9 cle 160d(k)) and the authority issuing the pre-division certificate needs to verify this requirement (Article 160m(5)). This verification includes a summary review as to whether or not a special involvement of employees may be required and of the indication by the company being divided whether the mechanism has been started (Point (b) of Article 160m(6)). It is, however, not clear whether Article 160m(5) and (6) should be understood as limiting the powers of the authority to scrutinise the legality of the envisaged arrangement beyond what is required for a summary review. Article 160l(4) sets out certain minimum standards for the negotiations. In par- 10 ticular, a two-third majority of members representing two thirds of the employees is required for the decision to either not open negotiations or to subsequently terminate ongoing negotiations. Point (b) of Article 160l(4) requires a one-third minimum of employee representatives in the administrative or supervisory body where this proportion already existed in the corresponding bodies of the company being divided. Point (c) of Article 160l(4) perpetuates the existing employee participation until such date when the result of the negotiations has been implemented. This means that the cross-border division can become effective even before the negotiations have been finalized, whereby

7 8

→ Art 86 l mn. 13. → Art 86 l mn. 15 et seq.

Klaus Bader and Andreas Börner

789

Art 160 m Pre-division certificate the legal form of the recipient company must be chosen in such a way that the interim regime can be implemented. 11 Article 160l(8) obliges the company to communicate to its employees or representatives the outcome of the negotiations concerning employee participation without undue delay. If negotiations fail, point (e) of Article 160l(3) requires the Member State of the recipient company to provide that the so-called fall back solution applies, i.e. for each recipient company, the number of employee representatives in the relevant bodies is determined according to the highest proportion of employee representatives applicable prior to the cross-border division (point (b) of Article 7(1) of Directive 2001/86/EC, together with the Annex referred therein).9 12 It is important to note that the legal form of a recipient company may have to be chosen in such a way that the employee participation rights required in any relevant administrative or supervisory bodies can be implemented (Article 160l(6)). 10 To the extent that in the course of negotiations participation rights are determined that deviate from what was expected by the company being divided, the legal form of the recipient company may even have to be changed to accommodate the respective outcome of these negotiations.

V. Four Year Perpetuation 13

Improving participation rights beyond the 2018 Proposal, the 2019 Directive extended from three to four years the period of time during which the employee participation established for the recipient company must not be changed in the course of any subsequent cross-border or domestic reorganization (Article 160l(7)).

Article 160 m Pre-division certificate 1. Member States shall designate the court, notary or other authority or authorities competent to scrutinise the legality of cross-border divisions as regards those parts of the procedure which are governed by the law of the Member State of the company being divided, and to issue a pre-division certificate attesting to compliance with all relevant conditions and to the proper completion of all procedures and formalities in that Member State (‘the competent authority’). Such completion of procedures and formalities may comprise the satisfaction or securing of pecuniary or non-pecuniary obligations due to public bodies or compliance with specific sectoral requirements, including securing obligations arising from ongoing proceedings. 2. Member States shall ensure that the application to obtain a pre-division certificate by the company being divided is accompanied by the following: (a) the draft terms of the cross-border division; (b) the report and the appended opinion, if any, referred to in Article 160 e, as well as the report referred to in Article 160 f, where they are available; (c) any comments submitted in accordance with Article 160g(1); and (d) information on the approval by the general meeting referred to in Article 160 h. 9 Bungert, ‘Der finale EU-Richtlinienentwurf zu grenzüberschreitenden Formwechseln, Verschmelzungen und Spaltungen’ Der Betrieb (29) 2019, 1616. 10 → Art 86 l mn. 23-24.

790

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 m

3. Member States may require that the application to obtain a pre-division certificate by the company being divided is accompanied by additional information, such as, in particular: (a) the number of employees at the time of the drawing up of the draft terms of the cross-border division; (b) the existence of subsidiaries and their respective geographical location; (c) information regarding the satisfaction of obligations due to public bodies by the company being divided. For the purposes of this paragraph, competent authorities may request such information, if not provided by the company being divided, from other relevant authorities. 4. Member States shall ensure that the application referred to in paragraphs 2 and 3, including the submission of any information and documents, may be completed fully online without the necessity for the applicants to appear in person before the competent authority, in accordance with the relevant provisions of Chapter III of Title I. 5. In respect of compliance with the rules concerning employee participation as laid down in Article 160 l, the competent authority of the Member State of the company being divided shall verify that the draft terms of the cross-border division include information on the procedures by which the relevant arrangements are determined and on the possible options for such arrangements. 6. As part of the scrutiny referred to in paragraph 1, the competent authority shall examine the following: (a) all documents and information submitted to the competent authority in accordance with paragraphs 2 and 3; (b) an indication by the company being divided that the procedure referred to in Article 160l(3) and (4) has started, where relevant. 7. Member States shall ensure that the scrutiny referred to in paragraph 1 is carried out within three months of the date of receipt of the documents and information concerning the approval of the cross-border division by the general meeting of the company being divided. That scrutiny shall have one of the following outcomes: (a) where it is determined that the cross-border division complies with all the relevant conditions and that all necessary procedures and formalities have been completed, the competent authority shall issue the pre-division certificate; (b) where it is determined that the cross-border division does not comply with all the relevant conditions or that not all necessary procedures and formalities have been completed, the competent authority shall not issue the pre-division certificate and shall inform the company of the reasons for its decision; in that case, the competent authority may give the company the opportunity to fulfil the relevant conditions or to complete the procedures and formalities within an appropriate period of time. 8. Member States shall ensure that the competent authority does not issue the predivision certificate where it is determined in compliance with national law that a cross-border division is set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes.

Klaus Bader and Andreas Börner

791

Art 160 m Pre-division certificate 9. Where the competent authority, during the scrutiny referred to in paragraph 1, has serious doubts indicating that the cross-border division is set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes, it shall take into consideration relevant facts and circumstances, such as, where relevant and not considered in isolation, indicative factors of which the competent authority has become aware, in the course of the scrutiny referred to in paragraph 1, including through consultation of relevant authorities. The assessment for the purposes of this paragraph shall be conducted on a case-by-case basis, through a procedure governed by national law. 10. Where it is necessary for the purposes of the assessment under paragraphs 8 and 9 to take into account additional information or to perform additional investigative activities, the period of three months provided for in paragraph 7 may be extended by a maximum of three months. 11. Where, due to the complexity of the cross-border procedure, it is not possible to carry out the assessment within the deadlines provided for in paragraphs 7 and 10, Member States shall ensure that the applicant is notified of the reasons for any delay before the expiry of those deadlines. 12. Member States shall ensure that the competent authority may consult other relevant authorities with competence in the different fields concerned by the crossborder division, including those of the Member State of the recipient companies, and obtain from those authorities and from the company being divided information and documents necessary to scrutinise the legality of the cross-border division, within the procedural framework laid down in national law. For the purposes of the assessment, the competent authority may have recourse to an independent expert. I. A Two-Stage Scrutiny of the Legality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. The Competent Authority to Scrutinize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. The First Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Scope of scrutiny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Time limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Abuse control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Individual and collective employee rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Pre-division certificate and judicial review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 5 6 7 9 11 15 16

I. A Two-Stage Scrutiny of the Legality A core objective of the 2019 Directive is to prevent non-compliant cross-border divisions before they take effect. The instrument of pre-certification, already known from cross-border mergers (Article 127), is the means of choice for achieving this objective. At the same time, it avoids the fact that the respective authorities of the Member States have to deal with the intricacies of foreign jurisdictions.1 2 The competent authority reviews not only that all relevant conditions have been complied with, and that all procedures and formalities have been properly completed (Article 160m(1) and (7)). Its scrutiny also allows it to determine ‑ in compliance with its national law ‑ whether the cross-border division should not be allowed to go ahead because it is set up for “abusive or fraudulent purposes”, as further defined in Article 160m(8).2 In this context, the competent authority should ensure that a decision 1

→ Art 127 mn. 1. Kraft, ‘“Grenzüberschreitende Vorhaben” nach Annahme der Mobilitätsrichtlinie durch das Europäische Parlament’ BB 2019, 1867. 1 2

792

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 m

on the approval of a cross-border division is taken in a fair, objective and non-discriminatory manner and on the basis of all relevant elements required by Union and national law (Recital 10). In principle, a two-stage legality check based on the model developed for cross- 3 border mergers takes place in all cases of cross-border divisions. This bifurcated scrutiny of the legality of the cross-border division pursuant to Articles 160 m and 160 o is the final element of the European model for structural changes. It ensures that the legal scrutiny of the division is carried out with appropriate expertise, and that the respective authorities of the Member State responsible for the recipient company do not have to deal with the intricacies of the law of the Member State of the company being divided. The successful completion of these two stages is a requirement for the cross-border 4 division to take effect in accordance with Article 160 q. The first stage respects the principle that each company must be assessed on the basis of its company statute.3 The second stage reflects the fact that the effectiveness of the cross-border division requires compliance with the law of the Member State of the recipient company.4 The scrutiny procedure involves both the competent authorities in the Member State of the company being divided and the Member State(s) of each recipient company.5 This allocation of responsibilities does not mean that each authority operates in its national silo. Rather, they may consult each other as well as other relevant authorities with competence in the different fields concerned by the cross-border division (Article 160m(12) and Recital (37)).

II. The Competent Authority to Scrutinize It is left to the Member States to determine the competent authority for conducting 5 the scrutiny of the legality of the cross-border division. Article 160m(1) only specifies that the relevant authority must be a court, notary or other authority. Specifically, Recital (34) also mentions tax or financial services authorities. In any case, Member States have to designate a single competent authority and cannot split the competence for issuing the pre-division certificate and for the scrutiny of legality between a number of authorities. Where input is required from other authorities, the competent authority has to coordinate (Recital 34).

III. The First Stage Article 160 m governs the first stage, in which the competent authority of the Mem- 6 ber State of the company being divided checks, at the request of the company, that all the relevant conditions are complied with and that all the procedures and formalities in that Member State have been properly completed. It is left to the Member States to determine the relevant authority scrutinizing the legality of the cross-border division. → Art 118 mn. 52. Grundmann, European Company Law. Organization, Finance and Capital Markets (2 nd edn, 2012), § 29.19, 709. 5 Lutter/Bayer/Schmidt, Europäisches Kapitalmarkt- und Gesellschaftsrecht (6th edn, 2017), p. 1930; Schurr, ‚Schutzbestimmungen und Verfahrensregeln in der neuen Richtlinie zu grenzüberschreitenden Umwandlungen, Verschmelzungen und Spaltungen‘ EuZW 2019, 539; Moersdorf, ‚Der Entwurf einer Richtlinie für grenzüberschreitende Umwandlungen – Meilenstein oder Scheinriese?‘ EuZW 2019, 141, 143; Bormann and Stelmaszcyk, ‚Grenzüberschreitende Spaltungen und Formwechsel nach dem EUCompany Law Package‘ ZIP (355) 2019, 358. 3 4

Klaus Bader and Andreas Börner

793

Art 160 m Pre-division certificate 1. Scope of scrutiny The examination by the competent authority of the Member State of the company being divided is aimed at verifying the existence and legality of the draft terms, the division report, the expert report, information elaborating on the consent of the members, potentially available observations of the members, creditors and employees. It draws upon the content of these documents and, where appropriate, any additional information (2nd sentence of Article 160m(3)).6 Arguably, the competent authority primarily verifies whether the relevant stages of the procedure have been completed as required, but normally does not have to carry out a comprehensive examination (internal legality) to determine whether the information provided is correct in every way.7 8 Ultimately, a compliance certificate will be issued by the competent authority, thereby conclusively attesting compliance with the conditions of division as well as the proper completion of, and compliance with, all procedures and formalities in the Member State of the company being divided. The authorities of the Member States of the recipient companies are bound by this decision.8 7

2. Time limits According to Article 160m(7), Member States shall ensure that the assessment is carried out within three months from the date of receipt of the required documents (Recital 34). If the company is not in compliance with the relevant conditions, or necessary procedures and formalities have not been completed, the competent authority shall not issue the pre-conversion certificate and inform the company of the reasons for its decision. The competent authority “may” give the company the opportunity to fulfil the relevant conditions or to complete the procedures and formalities within an appropriate period of time (point (b) of Article 160m(7)). As implied by Article 160m(11), the standard timeline may be extended by the competent authority as a result of the complexity of the cross-border division.9 10 Finally, if the competent authority, upon its scrutiny of legality, has serious doubts that the cross-border division is set up for abusive or fraudulent purposes, the cross-border division shall be subjected to a detailed examination, which may at most last for an additional three months (Article 160m(10)). 9

3. Abuse control 11

Member States shall ensure that the competent authority does not issue a pre-division certificate for cross-border divisions set up for abusive or fraudulent purposes which lead or are intended to lead to the evasion or circumvention of Union or national law or for criminal purposes (Article 160m(8)). The relevant procedures, including any consultations with other authorities and the assessment, should be carried out in accordance with national law (Recital 35). The same recital also elaborates on what is → Art 86 m mn. 10-14. → Art 86 m mn. 8; → Art 127 mn. 8. 8 Krieger et al., ‘Position Paper of the German Bar Association by the Committee on Commercial Law on the Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards Cross-border conversions, mergers and divisions’, Position Paper No. 31/ 2018, 19, last accessed 18 October 2020. 9 → Art 86 m mn. 18. 6

7

794

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 m

typically meant by abusive or fraudulent purposes: the circumvention of the rights of employees, social security payments or tax obligations, and stresses that it is important to counteract “shell” or “front” companies set up for the purpose of evading, circumventing or infringing Union or national law. The abuse-control mechanism was sharply criticized in the 2018 Proposal, but has 12 nevertheless been further tightened in the course of the trilogue process: Recital 40, third sentence, of the 2018 Proposal explicitly provided for the fact that the abuse control ought to be considered as an exception to the freedom of establishment, and must therefore be “narrowly interpreted”. In the revised version amended by the Council and Parliament, this restriction was deleted. As a general rule, the competent authority may consider that if the cross-border 13 division were to result in the company having its place of effective management or place of economic activity in the Member State in which the company or companies are to be registered after the cross-border division, this would be an indication of an absence of circumstances leading to abuse or fraud (Recital 36). This “genuine link” test would typically be met where operations in another country of the company being divided are transferred to a recipient company in this jurisdiction. The unity of the registered office and the head office shall normally be interpreted as an indication that there are no circumstances leading to an abuse or fraud. Otherwise, the 2019 Directive clearly states that the competent authority shall not 14 generally suspect an intention to abuse the cross-border restructuring (which the company being divided would have to dispel). It shall rather conduct the assessment on a case-by-case basis and on the basis of “indicative factors” resulting from an overall assessment of all facts and circumstances (as opposed to facts and circumstances which are not relevant and/or only suspicious when considered “in isolation” (Article 160m(9)). Recital 34 states that the competent authority should extend the threemonths period for issuing the pre-division certificate pursuant to Article 160m(10) only if it has “serious doubts” that the cross-border division is set up for abusive or fraudulent purposes. Article 160m(12) gives the competent authority the possibility to consult other relevant authorities (e.g., tax authorities, insolvency courts, social security providers, municipalities, public prosecutor’s office) as well as the right to engage an independent expert. Nevertheless, it seems fair to say that the competent authority will need to rely extensively on external resources, and may at times reach its limits with certain complexities.

4. Individual and collective employee rights Individual and collective employee rights are clearly a key element of Recital 36, 15 setting out that the assessment should “at a minimum” consider indicative factors relating to the characteristics of the establishment in the Member State in which the company or companies are to be registered after the cross-border division, including the intention of the operation, the sector, the investment, the net turnover and profit or loss, the number of employees, the composition of the balance sheet, the tax residence, the assets and their location, equipment, the beneficial owners of the company, the habitual places of work of the employees and of specific groups of employees, the place where social contributions are due, the number of employees posted in the year prior to the cross-border division (within the meaning of Regulation (EC) No 883/2004 of the European Parliament and of the Council and of Directive 96/71/EC of the European Parliament and of the Council), the number of employees working simultaneously in more than one Member State (within the meaning of Regulation (EC) No 883/2004), and the commercial risks assumed by the company or companies before and after the Klaus Bader and Andreas Börner

795

Art 160 n Transmission of the pre-division certificate cross-border division. Further, the assessment should take into account relevant facts and circumstances related to employee participation rights, in particular as regards the negotiation of such rights where those negotiations were triggered by reaching four fifths of the applicable national threshold. All of the above elements should merely be considered as indicative factors in the overall assessment and should therefore not be regarded in isolation.

5. Pre-division certificate and judicial review Following a positive outcome of the scrutiny of legality, the competent authority issues a pre-division certificate, which is a mandatory prerequisite for the effectiveness of the cross-border division (point (a) of Article 160m(7)). 17 The pre-division certificate thus confirms compliance with the national legal requirements of the Member State of the company being divided and that said Member State will not prevent the cross-border division from being effected. As for cross-border mergers, it is unlikely that Member States have the right to make the pre-division certificate subject to further formal or content-related requirements (e.g. that it has to include facts and merits).10 18 A judicial review of the pre-division certificate is not excluded, and will be subject to the laws of the Member State of the company being divided.11 Recital 40 requires Member States to provide for procedural safeguards in line with the general principles of access to justice, including providing for the possibility of reviewing the decisions of the competent authorities in the proceedings concerning cross-border operations, the possibility of delaying the time when a pre-division certificate takes effect in order to allow parties to bring an action before the competent court and the possibility of having interim measures granted. 16

Article 160 n Transmission of the pre-division certificate 1. Member States shall ensure that the pre-division certificate is shared with the authorities referred to in Article 160o(1) through the system of interconnection of registers. Member States shall also ensure that the pre-division certificate is available through the system of interconnection of registers. 2. Access to the pre-division certificate shall be free of charge for the authorities referred to in Article 160o(1) and for the registers. 1

The pre-division certificate issued as a result of a successful first part of the legality check shall be sent to the competent authority of the Member States of each recipient company for the further review of the legality of the division subject to the applicable national law in respect of each stage of the procedure in accordance with Article 160 o. Member States are required to utilize the system of interconnection of registers for purposes of transmitting and granting public access to the pre-division certificate. 1

→ Art 127 mn. 13. → Art 86 m mn. 25-26. 1 → Art 86 n mn. 1.

10 11

796

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 o

Article 160 o Scrutiny of the legality of the cross-border division 1. Member States shall designate the court, notary or other authority competent 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 governed by the law of the Member States of the recipient companies and to approve the cross‐border division. That authority or authorities shall in particular ensure that the recipient companies comply with provisions of national law on the incorporation and registration of companies and, where appropriate, that arrangements for employee participation have been determined in accordance with Article 160 l. 2. For the purposes of paragraph 1 of this Article, the company being divided shall submit to each authority referred to in paragraph 1 of this Article the draft terms of the cross-border division approved by the general meeting referred to in Article 160 h. 3. Each Member State shall ensure that any application for the purposes of paragraph 1, by the company being divided, including the submission of any information and documents, may be completed fully online without the necessity for the applicants to appear in person before the authority referred to in paragraph 1, in accordance with the relevant provisions of Chapter III of Title I. 4. The authority referred to in paragraph 1 shall approve the cross-border division as soon as it has determined that all relevant conditions have been properly fulfilled and formalities properly completed in the Member States of the recipient companies. 5. The pre-division certificate shall be accepted by the authority referred to in paragraph 1 as conclusively attesting to the proper completion of the applicable pre‐division procedures and formalities in the Member State of the company being divided, without which the cross-border division cannot be approved. I. Second Stage of the Legality Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Competent Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Scope of Scrutiny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Re-Examination of Issues: Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 3 5

I. Second Stage of the Legality Check Article 160 o provides for the second stage of the scrutiny of legality of the cross-bor- 1 der division.

II. Competent Authority Only the competent authority of the Member State of each recipient company is 2 involved in this examination. The comments regarding the competent authority for the pre-division certificate apply accordingly.1

1

→ Art 160 m mn. 5.

Klaus Bader and Andreas Börner

797

Art 160 o Scrutiny of the legality of the cross-border division

III. Scope of Scrutiny At the second stage, the competent authority will not conduct a re-examination as to whether or not all relevant conditions were complied with and procedures and formalities prescribed by the law of the Member State of the company being divided were properly completed. The authority must recognize the pre-division certificate as “conclusively attesting” legality in this respect (Article 160o(5)). This does not only apply to the legal assessment, but also to the underlying information (Recital 45), i.e. the facts collected for purposes of issuing the pre-division certificate. This newly introduced rule prevents a practice sometimes encountered in the case of cross-border mergers, where the authority conducting the second step of the scrutiny of legality has engaged in the re-examination of the first stage. This limitation of authority leads to an acceleration of the procedure and is therefore increasing overall efficiency and certainty.2 4 In this second step, the authority shall check the legality of the cross-border division as regards the procedure for the completion of the division. To this end, the respective authority must in particular ensure that the law of the Member State of the recipient company on the incorporation and registration of companies is complied with and that, where appropriate, arrangements for employee participation have been made in accordance with Article 160 l (subparagraph 2 of Article 160o(1)). These conditions include the requirements to have the head office in the Member State of the recipient company and those relating to the disqualification of directors (Recital 44).3 The wording “in particular” gives Member States leeway to impose additional requirements, e.g., registration with tax authorities, trade authorities, etc., provided that these requirements comply with the freedom of establishment. Article 160 o does not stipulate a timeline for the scrutiny procedure in the Member State of the recipient company, but requires the competent authority to approve the cross-border division as soon as it has determined that all relevant conditions have been properly fulfilled and formalities have been properly completed (Article 160o(4)). 3

IV. Re-Examination of Issues: Exceptions 5

As for cross-border mergers and cross-border conversions, it is uncertain to which extent the competent authority of the Member State of the recipient company is permitted, pursuant to Article 160 o, to check the legality of the pre-division certificate. The threshold for entering into a re-examination may be as low as “reasonable doubt” that the pre-division certificate is not correct,4 to the level required for abuse-control. Recital (45) clearly states that it should not be possible for the competent authorities of the Member State of the recipient company to dispute the information provided by the predivision certificate. On the other hand, as indicated in Article 160 u and Recital 50 with regard to the time after the cross-border division has become valid, a reassessment does not always require the emergence of new substantive information, and also does not always require that the cross-border division was set up for abusive or fraudulent purposes. Accordingly, the scrutiny by the competent authority of the Member State of the recipient company with regard to issues falling within the responsibility of the authority of

2 Bungert, ‘Der finale EU-Richtlinienentwurf zu grenzüberschreitenden Formwechseln, Verschmelzungen und Spaltungen’ Der Betrieb (29) 2019, 1613. 3 → Art 86 o mn. 7. 4 → Art 128 mn. 6.

798

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 p

the Member State of the company being divided cannot be subject to a higher materiality threshold. The 2019 Directive provides for a consultation procedure between the competent 6 authorities in the Member State of the recipient company and the company being divided only for the legality check for the purpose of issuing the pre-division certificate (Article 160m(12)).5 Nevertheless, it would correspond best to the allocation of responsibilities and powers that, at least in a first step, the competent authority of the Member State of the recipient company consults with the authority of the Member State of the company being divided to discuss the impact of any new (or newly discovered) facts, or effects which may not have been fully considered in the first step of the legal scrutiny.

Article 160 p Registration 1. The laws of the Member States of the company being divided and of the recipient companies shall determine, with regard to their respective territories, the arrangements, in accordance with Article 16, for disclosing the completion of the cross-border division in their registers. 2. Member States shall ensure that at least the following information is entered in their registers: (a) in the register of the Member States of the recipient companies, that the registration of the recipient company is the result of a cross-border division; (b) in the register of the Member States of the recipient companies, the dates of registration of the recipient companies; (c) in the register of the Member State of the company being divided in the event of a full division, that the striking off or removal of the company being divided from the register is the result of a cross-border division; (d) in the register of the Member State of the company being divided in the event of a full division, the date of striking off or removal of the company being divided from the register; (e) in the registers of the Member State of the company being divided and of the Member States of the recipient companies, respectively, the registration number, name and legal form of the company being divided and of the recipient companies. The registers shall make the information referred to in the first subparagraph publicly available and accessible through the system of interconnection of registers. 3. Member States shall ensure that the registers in the Member States of the recipient companies notify the register in the Member State of the company being divided, through the system of interconnection of registers, that the recipient companies have been registered. Member States shall also ensure that, in the event of a full division, the company being divided is struck off or removed from the register immediately upon receipt of all those notifications. 4. Member States shall ensure that the register in the Member State of the company being divided notifies the registers in the Member States of the recipient companies, through the system of interconnection of registers, that the cross‐border division has taken effect. 5

→ Art 160 m mn. 4; → Art 86 m mn. 2.

Klaus Bader and Andreas Börner

799

Art 160 p Registration I. Registration and Publication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Notification through the System of Interconnection of Registers . . . . . . . . . . . . III. Removal of the Company Being Divided from its Register . . . . . . . . . . . . . . . . . . .

1 3 5

I. Registration and Publication Article 160 p deals with the publication of information on the cross-border division. In addition to the draft terms, the completion of the cross-border division needs to be published in the respective companies’ commercial register; the exact details of the publication are to be determined in accordance with the law of the Member State of the company being divided and of each recipient company. 2 After having received the pre-division certificate and after having conducted its scrutiny of legality pursuant to Article 160 o with regard to all legal requirements of the Member State of the recipient company, the competent authority must register the recipient company in the register of its Member State. 1

II. Notification through the System of Interconnection of Registers Article 160p(3) provides that the recipient company’s commercial register shall without undue delay, notify the due establishment of the recipient company to the register of the company being divided. This notification must be made through the system of interconnection of registers established in accordance with Article 22 in order to ensure coordination between the Member States. For details, → Art 130.1 4 Point (e) of Article 160p(2) provides that each register must contain certain details of the registers of the other companies involved. Recital 46 emphasises the importance of enhancing the transparency of cross-border divisions and states that the registers of the Member States involved must contain the necessary information from other registers about the companies involved in those operations in order to be able to track the history of those companies. In particular, the file in the register in which the company being divided was registered prior to the cross-border division should contain the new registration number attributed to each recipient company. Similarly, the file in the register of each recipient company needs to contain the initial registration number attributed to the company being divided. 3

III. Removal of the Company Being Divided from its Register In case of a full division, the company being divided must be struck off or removed from the register upon receipt of all notifications listed under Article 160p(2) (Article 160p(3)). The purpose of this provision is that the company being divided is removed from the register only after the registration of each recipient company in the register of its Member State has been effected (Recital 45). 6 However, the removal from the register must occur swiftly to re-establish full legal certainty. A more detailed analysis shows that Articles 160 c, 160 p, 160 q and 160 r do not entirely align the minimum requirements and conflict-of-law provisions authorising Member States to establish additional rules. In theory, this may even lead to a recipient company without shares and assets. Such a legal anomaly can be prevented if the Member State of the recipient company, in accordance with its authority under Article 160 q, 5

1

800

→ Art 130 mn. 6-8.

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 q

allows for a registration of the recipient company stating that the recipient company only becomes effective once the specified step has been completed which, under the laws of the Member State of the company being divided, is necessary for the completion of the cross-border division (e.g. the registration of the cross-border division). 2

Article 160 q Date on which the cross-border division takes effect The law of the Member State of the company being divided shall determine the date on which the cross-border division takes effect. That date shall be after the scrutiny referred to in Articles 160 m and 160 o has been carried out and after the registers have received all notifications referred to in Article 160p(3).

I. No Harmonized Effective Date The 2019 Directive does not harmonize the effective dates among the Member 1 States, but only aims to ensure that they do not conflict.1 The effective date for the transfer of all assets and liabilities of the company being divided is determined pursuant to the law of the Member State of the company being divided (sentence 1 of Article 160 q). The date on which the cross-border division takes effect according to Article 160 q may and will typically be different to the date from which the transactions of the company being divided will be treated for accounting purposes as being those of the relevant recipient company pursuant to point (d) of Article 160 g.2

II. Earliest and Latest Effective Date Sentence 2 of Article 160 q states that the effective date may not be earlier than the 2 date on which the legal scrutiny pursuant to Article 160 m and 160 o has been carried out, and after the registers have received all notifications referred to in Article 160p(3). These notifications cannot occur before the registration of each recipient company under the law of the Member State of the relevant recipient company. Thereafter, it depends on the law of the Member State of the company being divided whether the effective date corresponds to, for example: – the date when the company being divided is struck off from the register (in case of a full division) (sentence 2 of Article 160p(3)), or – when the completion of the (partial) division has been entered in the register of the company being divided, or – after the publication of the relevant entries, or the expiry of a certain period of time from this date. As already mentioned above (→ Art 160 p), the registration of the recipient company 3 should be provided for in a way which clarifies that its substantive law effects are contingent upon the completion of the specific step which, under the law of the Member State of the company being divided, leads to the completion of the cross-border division.3

2 Schollmeyer, ‘Wirksamkeit einer inländischen Registereintragung nach ausländischem Recht: Kann das neue Spaltungsrecht funktionieren?’ IPRax 2020, 297, 299. 1 → Art 129 mn. 1-3. 2 → Art 129 mn. 3.

Klaus Bader and Andreas Börner

801

Art 160 r Consequences of a cross-border division

Article 160 r Consequences of a cross-border division 1. A cross-border full division shall, from the date referred to in Article 160 q, have the following consequences: (a) all the assets and liabilities of the company being divided, including all contracts, credits, rights and obligations, shall be transferred to the recipient companies in accordance with the allocation specified in the draft terms of the cross‐border division; (b) the members of the company being divided shall become members of the recipient companies in accordance with the allocation of shares specified in the draft terms of the cross-border division, unless they have disposed of their shares as referred to in Article 160i(1); (c) the rights and obligations of the company being divided arising from contracts of employment or from employment relationships and existing at the date on which the cross-border division takes effect shall be transferred to the recipient companies; (d) the company being divided shall cease to exist. 2. A cross-border partial division shall, from the date referred to in Article 160 q, have the following consequences: (a) part of the assets and liabilities of the company being divided, including contracts, credits, rights and obligations, shall be transferred to the recipient company or companies, while the remaining part shall continue to be that of the company being divided in accordance with the allocation specified in the draft terms of the cross-border division; (b) at least some of the members of the company being divided shall become members of the recipient company or companies and at least some of the members shall remain in the company being divided or shall become members of both in accordance with the allocation of shares specified in the draft terms of the cross-border division, unless those members have disposed of their shares as referred to in Article 160i(1); (c) the rights and obligations of the company being divided arising from contracts of employment or from employment relationships and existing at the date on which the cross-border division takes effect, allocated to the recipient company or companies under the draft terms of the cross-border division, shall be transferred to the respective recipient company or companies. 3. A cross-border division by separation shall, from the date referred to in Article 160 q, have the following consequences: (a) part of the assets and liabilities of the company being divided, including contracts, credits, rights and obligations, shall be transferred to the recipient company or companies, while the remaining part shall continue to be that of the company being divided, in accordance with the allocation specified in the draft terms of the cross-border division; (b) the shares of the recipient company or companies shall be allocated to the company being divided; 3 Schollmeyer, ‘Wirksamkeit einer inländischen Registereintragung nach ausländischem Recht: Kann das neue Spaltungsrecht funktionieren?’ IPRax 2020, 297, 299.

802

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 r

(c) the rights and obligations of the company being divided arising from contracts of employment or from employment relationships and existing at the date on which the cross-border division takes effect, allocated to the recipient company or companies under the draft terms of the cross-border division, shall be transferred to the respective recipient company or companies. 4. Without prejudice to Article 160j(2), Member States shall ensure that where an asset or a liability of the company being divided is not explicitly allocated under the draft terms of the cross-border division, as referred to in point (l) of Article 160 d, and where the interpretation of those terms does not make a decision on its allocation possible, the asset, the consideration therefor or the liability is allocated to all the recipient companies or, in the case of a partial division or a division by separation, to all the recipient companies and the company being divided in proportion to the share of the net assets allocated to each of those companies under the draft terms of the cross-border division. 5. Where, in the case of a cross-border division, the laws of the Member States require the completion of special formalities before the transfer of certain assets, rights and obligations by the company being divided becomes effective as against third parties, those formalities shall be carried out by the company being divided or by the recipient companies, as appropriate. 6. Member States shall ensure that shares in a recipient company cannot be exchanged for shares in the company being divided which are either held by the company itself or through a person acting in his or her own name but on behalf of the company. I. Consequences of the Cross-Border Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Relevance of Restrictions and Requirements for the Individual Transfer of Assets, Rights, Contracts and Liabilities, and Consequences for “Indivisible” Legal Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. Fall Back Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. Application of the Principle to the Various Types of Cross-Border Divisions 1. Full cross-border division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Partial cross-border division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Cross-border division by separation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 6 11 15 15 16 18

I. Consequences of the Cross-Border Division The legal consequences of the cross-border division take effect ipso iure and simultaneously with the cross-border division becoming effective pursuant to the law of the Member State of the company being divided (Article 160 q sentence 1). The members of the company being divided which have not disposed of their shares (Article 160 i) become, in each case in accordance with the draft terms, members of (all or some) the recipient companies or remain members of the company being divided, or even become members of both. Otherwise, the assets and liabilities and all rights and obligations, including rights and obligations arising from contracts (as well as from acts or omissions of the company being divided) are transferred to the recipient companies in accordance with the allocation specified in the draft terms. As explained above (→ Art 131),1 Member States do not have the authority to exclude certain assets and liabilities from such a transfer nor to limit the transfer to certain 1

→ Art 131 mn. 5.

Klaus Bader and Andreas Börner

803

1

2

3

4

Art 160 r Consequences of a cross-border division defined assets or liabilities. The terms “assets” and “liabilities” are to be interpreted uniformly throughout the European Union. The recipient company automatically replaces the company being divided as a contract party without a novation of the relevant contract and, in principle, also becomes the debtor of fines imposed on the company being divided. 5 Recital 49 specifically highlights that the recipient companies should respect the rights and obligations arising from contracts of employment or from employment relationships including all terms and conditions agreed in any collective bargaining agreement.

II. Relevance of Restrictions and Requirements for the Individual Transfer of Assets, Rights, Contracts and Liabilities, and Consequences for “Indivisible” Legal Positions 6

7

8

9

10

In a cross-border context, partial universal succession in particular raises difficult questions regarding the conflict of laws. The 2019 Directive does not address these issues. Article 160r(5) states that where special formalities must be completed under applicable law before the transfer of certain assets, rights, and obligations of the company being divided becomes effective as against third parties, those formalities shall be carried out by the company being divided or by the recipient companies, as appropriate. This means that the company being divided and the recipient company cannot rely on any effect vis-à-vis third parties before the formality has been completed, regardless of whether or not the third party was, or could have been, aware of the transfer. However, the transfer under the cross-border division is still valid, even where this would not be the case under the law applicable to the relevant asset.2 Transfer requirements or restrictions under the law of a third country applying from the conflict of laws perspective of the relevant Member State, are arguably not affected by the ipso iure effect of the cross-border division. At least where additional requirements are based on European legislation, the effects may need to be taken into account in the context of the scrutiny of legality by the competent authorities of the company being divided. Recital 57 for instance states that Union law regulating credit intermediaries and other financial undertakings, or national rules laid down or introduced pursuant to such Union law, remain unaffected. Otherwise, a definitive general conclusion is not possible at this stage, and legal authors and courts will have to develop criteria to determine if and to what extent the ipso iure effect of the cross-border division supersedes additional requirements under the applicable substantive law (lex causae), for example with regard to any of the following:3 – formalities which apply in case of singular succession (such as notarization and/or register entries) for the validity of the asset transfer (as explicitly referred to in Art 160r(5));4 – the effect of change-of-control clauses in contracts; – mandatory law limitations or requirements of an assignment, for example with regard to strictly personal rights;

→ Art 131 mn. 13. → Art 160 d mn. 32-33. 4 → mn. 7. 2 3

804

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

–

Art 160 r

the requirement to hold a license or permit in order to lawfully acquire or hold an asset or liability (e.g. with regard to credit or insurance portfolios) or to conduct certain operations; legal obstacles to a split of the relevant contract, asset or liability; third party information consent requirements based on confidentiality, data secrecy or data privacy provisions, for example data falling under the secrecy obligations of banks, life insurers, medical or legal services providers.

– –

III. Fall Back Allocation Article 160r(4) sets out two important principles: Firstly, the allocation of assets and liabilities in the draft terms does not always have to be explicit in order to be effective. It is sufficient, if the allocation can be determined by way of interpretation. Secondly, if the interpretation does not make an allocation possible, the asset, the consideration therefor or the liability is allocated to all the recipient companies or, in the case of a partial division or a division by separation, to all the recipient companies and the company being divided in proportion to the share of the net assets allocated to each of those companies under the draft terms of the cross-border division. As already mentioned, such a split may conflict with applicable substantive law provisions.5

11 12

13

14

IV. Application of the Principle to the Various Types of Cross-Border Divisions 1. Full cross-border division In a full cross-border division, the company being divided ceases to exist and all the 15 assets and liabilities of the company being divided, including all contracts, credits, rights, and obligations are transferred to the recipient companies as set out in the draft terms. Furthermore, unless they have disposed of their shares, the members of the company being divided become members of the recipient companies in accordance with the allocation of shares specified in the draft terms.

2. Partial cross-border division In a partial cross-border division, only parts of the assets and liabilities of the compa- 16 ny being divided are transferred to the recipient companies, while the remaining part remains with the company being divided in accordance with the allocation specified in the draft terms (Article 160r(2)). Similarly, only some of the members of the company being divided may become 17 members of the recipient companies while others may remain members only in the company being divided, or also become members of both the company being divided and one or more of the recipient companies.

5

→ Art 160 r mn. 6-10.

Klaus Bader and Andreas Börner

805

Art 160 t Independent experts 3. Cross-border division by separation A cross-border division by separation has the effect of transferring part of the assets and liabilities (including all contracts, credits, rights and obligations) to the recipient company or companies, and the remaining part remains with the company being divided in accordance with the allocation specified in the draft terms (Article 160r(3)). 19 One peculiarity of this type of cross-border division is that all shares of the recipient company or companies are allocated to the company being divided, and not its members (point (b) of Article 160r(3)). 18

Article 160 s Simplified formalities Where a cross-border division is carried out as a division by separation, points (b), (c), (f), (i), (o) and (p) of Article 160 d and Articles 160 e, 160 f and 160 i shall not apply. 1

Article 160 p is intended to facilitate the implementation of cross-border divisions by separation. In this case, the following provisions do not apply: – Article 160 d points (b), (c), (f), (i), (o) and (p) regarding the content requirements of the draft terms; – Article 160 e regarding the report of the administrative or management body to the members and employees; – Article 160 f regarding the independent expert report; and – Article 160 i regarding the protection of members.

Article 160 t Independent experts 1. Member States shall lay down rules governing at least the civil liability of the independent expert responsible for drawing up the report referred to in Article 160 f. 2. Member States shall have rules in place to ensure that: (a) the expert, or the legal person on whose behalf the expert is operating, is independent from and has no conflict of interest with the company applying for the pre-division certificate; and (b) the expert’s opinion is impartial and objective, and is given with a view to providing assistance to the competent authority in accordance with the independence and impartiality requirements under the law and professional standards to which the expert is subject. With regard to the independence of the expert, Member States should take into account the requirements laid down in Articles 22 and 22 b of Directive 2006/43/EC on statutory audits1 (Recital 14). 2 In Germany, Section 11(1) of the German Transformation Act (UmwG) sets out the rights and duties of independent experts largely by cross-reference to the corresponding 1

1 Council Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC, OJ L 157, 9.6.2006, 87.

806

Klaus Bader and Andreas Börner

TITLE II CONVERSIONS, MERGERS AND DIVISIONS

Art 160 u

provisions for auditors and auditing companies within the meaning of Sections 319 et seq. of the German Commercial Code (HGB). It can be expected that a similar method will be applied when transposing the new rules for cross-border divisions. While Article 160 f in its final form does not require an appointment of the indepen- 3 dent expert by the competent authority, point (b) of Article 160t(2) makes it clear that the independent expert provides assistance to the competent authority, and arguably owes its duties not only to the company being divided, but also – or even primarily – to these authorities. Accordingly, Member States may want to establish different rules for the independent expert’s civil liability to the companies involved in the cross-border division, their members and their employees and creditors, and for the independent expert’s responsibility under administrative law provisions.2

Article 160 u Validity A cross-border division which has taken effect in compliance with the procedures transposing this Directive may not be declared null and void. The first paragraph does not affect Member States’ powers, inter alia, in relation to criminal law, the prevention and combatting of terrorist financing, social law, taxation and law enforcement, to impose measures and penalties, under national law, after the date on which the cross-border division took effect.

I. General Principle Since it is very complicated to unwind a division, the 2019 Directive provides in 1 Chapter III that domestic divisions may only be unwound for the limited reasons expressly set out in Article 153. Limiting the reasons for which a division may be declared null and void in this way ensures legal certainty for the companies involved in the cross-border division as well as the general public. Article 160 u goes one big step further for cross-border divisions: a cross-border div- 2 ision which has taken effect as provided for in Article 160 q may not be declared null and void.1 No exceptions are permitted. The provision grants absolute protection against the division being unwound (grandfathering) for whatever reason both ex tunc (from the outset) and ex nunc (from now on).

II. Exceptions The second paragraph clarifies that this assertion is without prejudice to the Member 3 States’ powers, inter alia in relation to criminal law, the prevention and combatting of terrorist financing, social law, taxation and law enforcement. Insofar, authorities in all Member States retain all of their powers to impose measures and penalties under national law after the date on which the cross-border division took effect. This applies “in particular” in the event that the competent authorities (or also any other relevant authorities) establish, “in particular” (i.e. not necessarily) through new substantive information, after the cross-border operation took effect that the cross-border operation was 2 1

→ Art 86 s mn. 4. → Art 134 mn. 2.

Klaus Bader and Andreas Börner

807

Art 160 u Validity set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law or for criminal purposes (Recital 50). Accordingly, it is also permitted to re-assess information which was, or could have been, already available to the competent authority carrying out the scrutiny of legality. 4 In principle, the restrictions for such a re-assessment are subject to the law of the Member State of the competent authority; in the application of this law, the authorities of the Member State of the recipient company are, however, still bound by the pre-division certificate (Article 160o(5)). This is why there must generally at least be some new information shedding new light on the information available when issuing the pre-division certificate. 5 In this context, the competent authorities could also assess whether the applicable national threshold for employee participation of the Member State of the company being divided was met or exceeded in the subsequent years following the cross-border operation (Recital 50).

808

Klaus Bader and Andreas Börner

Accounting and Auditing Law of the European Union A. Introduction It is obvious that harmonised financial statements throughout the European Union 1 (EU) are crucial for the functioning of an internal market as well as the promotion of freedom of establishment and the free movement of capital. Unsurprisingly, the European Commission (Commission) started in the early 1970ies to harmonize accounting and auditing standards. The current regulatory framework is pretty elaborated and not quite easy to understand. Today, accounting by EU-enterprises as well as auditing of their annual accounts is mainly governed by not less than four different European legislative acts: – First, Directive 2013/34/EU1 (EU Accounting Directive – EUAccD) – to be discussed in section B – which is to be considered the Magna Charta of harmonized EU-accounting principles; – Second, Regulation (EC) No 1606/20022 (Interational Accounting Standards Regulation – IAS Regulation) – to be discussed in section C – as far as the application of the International Financial Reporting Standards (IFRS) is concerned; – Third, the Directive 2006/43/EC3 (Statutory Audit Directive – SAD) and – Fourth, Regulation (EU) No 537/20144 (Statutory Audit Regulation – SAR) – which together lay down detailed rules with a view to the auditing in general as well as the auditors of public-interest entities (PIEs). The last two r will be the topic of section D. This quadriga of statutes is the result of nearly four decades of permanent reforms 2 and amendments. And even today, reforms are far from being at an end. A more detailed insight into the historic development will therefore be given in the respective chapters aimed at providing r a better understanding of the status quo. With regard to the presentation of the statutes in their present form, the following text will follow the structure of the respective act as far as possible.

1 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182, 29/6/2013, p. 19. 2 Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, OJ L 243, 11/09/2002, p. 1. 3 Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC last amended by Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, OJ L 158, 27/5/2014, p. 196. 4 Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC, OJ L 158, 27/5/2014, p. 77.

Hanno Merkt

809

Accounting and Auditing Law of the European Union

B. The EU-Accounting Directive 2013/34/EU (EUAccD) I. Overview and Historical Development 1. The Accounting Directives a) Onset 3

The current EUAccD has its roots in the 4th (78/660/EEC)5 and 7th (83/349/EEC)6 Council Directives (the Accounting Directives) concerning an annual and consolidated accounting respectively. These directives marked the beginning of EU-accounting law. Whilst the former was in force by 25 July 1978, it took more than five more years for the latter to enter into force on 13 June 1983. This is little surprise since the proposal for the 7th Company Law Directive was not brought before the Council of the EU (Council) until 4 May 19767 and the proposal for the 4th directive is dated 16 November 19718. What becomes evident, though, is that in both cases it took seven years to find consensus, and in fact negotiations weren’t easy and often on the very verge of failure. The controversies are understandable, as accounting policies such as consolidated statements, auditing and publication as introduced by the Accounting Directives differed considerably from member state to member state or were unknown altogether in some of them. 9 Finally though, by inclusion into the Agreement on the European Economic Area (EEA), their scope of application was extended to all EEA member states as of 1 January 1994. 10 The path to harmonized accounting standards within the Union lay ahead and numerous amendments were to follow. b) Amendments

4

Several amendment directives were passed, the most prominent of which are shown below together with their respective main scopes of application.11 Amendment Directive

Scope

90/604/EEC12

Introduction of facilities for small and medium-sized companies

90/605/EEC13

Extension to companies with limited liability companies as fully liable members

5 Fourth Council Directive 78/660/EEC of 25 July 1978 based on Art 54 (3) (g) of the Treaty on the annual accounts of certain types of companies, OJ L 222, 14/08/1978, p. 11. 6 Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Art 54 (3) (g) of the Treaty on consolidated accounts, OJ L 193, 18/07/1983, p. 1. 7 Proposal for a seventh Directive pursuant to Article 54 (3) (g) of the EEC Treaty concerning group accounts, COM (76) 170 final of 28 April 1976, OJ C 121 of 2 June 1976, p. 2. 8 Proposal for a fourth Directive on the annual accounts of limited liability companies, COM (71) 1232 final of 10 November 1971, Bulletin 12-1971 of the European Communities, Supplement 7/71. 9 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th edn, 2018), 23.6. 10 With the exception of Liechtenstein where application began on 1/5/1995. 11 The other directives mainly concerned the adjustment of thresholds, see infra → mn. 11. 12 Council Directive 90/604/EEC of 8 November 1990 amending Directive 78/660/EEC on annual accounts and Directive 83/349/EEC on consolidated accounts as concerns the exemptions for small and medium-sized companies and the publication of accounts in ecus, OJ L 317, 16/11/1990, p. 57. 13 Council Directive 90/605/EEC of 8 November 1990 amending Directive 78/660/EEC on annual accounts and Directive 83/349/EEC on consolidated accounts as regards the scope of those Directives, OJ L 317, 16/11/1990, p. 60.

810

Hanno Merkt

Accounting and Auditing Law of the European Union Amendment Directive

Scope

2001/65/EC14 Fair Value Directive

Introduction of valuation of financial instruments at fair value

2003/51/EC15

Adjustments to International Accounting Standards

2006/43/EC16

Disclosure of the audit fee and the fee paid for non-audit services

2006/46/EC17

Promotion of credible financial reporting processes, introducing amongst others: – Minimum requirements regarding the responsibility of company bodies towards the company for drawing up and publishing annual accounts and annual reports – Disclosure of related party transactions – Disclosure of off-balance-sheet arrangements – Disclosure of annual corporate governance statements

2009/49/EC18

Introduction of facilities for medium-sized companies regarding disclosure requirements

2012/6/EU19

Introduction of facilities for micro-entities

2. Unification by the EU-Accounting Directive a) Introduction Already in the wake of the IAS Regulation20 in 2002, the Commission envisaged a 5 reform of the Accounting Directives and began conducting consultations.21 Considering the Commission Communication “Smart Regulation in the European Union”22 on the one hand, which aims at designing and delivering a regulatory framework of the highest quality, whilst ensuring proportionate23 administrative burdens in light of their benefits, 14 Directive 2001/65/EC of the European Parliament and of the Council of 27 September 2001 amending Directives 78/660/EEC, 83/349/EEC and 86/635/EEC as regards the valuation rules for the annual and consolidated accounts of certain types of companies as well as of banks and other financial institutions, OJ L 283, 27/10/2001, p. 28. 15 Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings, OJ L 178, 17/07/2003, p. 16. 16 Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC, OJ L 157, 09/06/2006, p. 87. 17 Directive 2006/46/EC of the European Parliament and of the Council of 14 June 2006 amending Council Directives 78/660/EEC on the annual accounts of certain types of companies, 83/349/EEC on consolidated accounts, 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions and 91/674/EEC on the annual accounts and consolidated accounts of insurance undertakings, OJ L 224, 16/08/2006, p. 1. 18 Directive 2009/49/EC of the European Parliament and of the Council of 18 June 2009 amending Council Directives 78/660/EEC and 83/349/EEC as regards certain disclosure requirements for mediumsized companies and the obligation to draw up consolidated accounts, OJ L 164, 26/06/2009, p. 42. 19 Directive 2012/6/EU of the European Parliament and of the Council of 14 March 2012 amending Council Directive 78/660/EEC on the annual accounts of certain types of companies as regards micro-entities, OJ L 81, 21/03/2012, p. 3. 20 See note 2 supra. 21 Cf. Proposal for a Directive of the European Parliament and of the Council on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, 25/10/2011, COM(2011) 684, p. 2 et seq.

Hanno Merkt

811

Accounting and Auditing Law of the European Union and on the other hand the Commission Communication “Think Small First – Small Business Act for Europe”, adopted in June 200824 and revised in February 201125, which acknowledged the central role of small and medium-sized enterprises (SMEs) in the Union economy, the Commission adopted the Communication “Single Market Act”26, in April 2011. The “Single Market Act”, with the “think small first” principle27 as its overriding guiding principle, was aimed at simplifying the Accounting Directives, particularly in regard to reducing administrative burdens and improving the business environment for SMEs, and to promoting their internationalisation. Eventually, this led to a proposal of the Commission for a new accounting directive, which was brought before the Council in November 2011.28 b) EUAccD and First Amendments 6

The EUAccD was finally adopted on 26 June 2013 and its application extended to all EEA-members as of 30 October 2015.29 This Directive has not only unified the provisions of the 4th and 7th Council Directives but also brought about some significant innovations such as the full harmonisation of the categories of undertakings, the implementation of country-by-country reporting for certain companies, a binding definition of materiality and the introduction of the substance over form principle, just to name some of them. Roughly one year after its coming into force, EUAccD was amended by Directive 2014/95/EU,30 also known as the Non-Financial Reporting Directive (NFRD), which from a practical point of view just set the requirement for large companies to include non-financial statements in their annual reports, but more importantly, introduced a new approach to accounting. With the introduction of the stakeholder approach, accounting was no longer limited at the accountability of an undertaking, but was also targeted at a behavioural control. 31 Pertinent adjustments after Croatia’s accession to the Union were effected by Directive 2014/102/EU. 32

22 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – Smart Regulation in the European Union, 08/10/2010, COM(2010) 543. 23 The proportionality principle itself is anchored in Art 5(1) and (4) of the Treaty on European Union (TEU). 24 Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions – “Think Small First” – A “Small Business Act” for Europe, 25/06/2008, COM(2008) 394. 25 Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions – Review of the “Small Business Act” for Europe, 23/02/2011, COM(2011) 78. 26 Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions – Single Market Act Twelve levers to boost growth and strengthen confidence “Working together to create new growth”, 13/04/2011, COM(2011) 206. 27 This principle was to govern the EUAccD as well, see Recital 10 of the Directive. 28 See note 21 supra. 29 Decision of the EEA Joint Committee No 293/2015 of 30 October 2015 amending Annex XXII (Company law) to the EEA Agreement, OJ L 161, 22/6/2017, p. 87. 30 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, OJ L 330, 15/11/2014, p. 1. 31 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht, 23.37. 32 Council Directive 2014/102/EU of 7 November 2014 adapting Directive 2013/34/EU of the European Parliament and of the Council on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, by reason of the accession of the Republic of Croatia, OJ L 334, 21/11/2014, p. 86.

812

Hanno Merkt

Accounting and Auditing Law of the European Union A further amendment aiming to introduce country-by-country tax reporting 7 (CbCR) for large scale multinational companies in order to render them more transparent is planned since 2016 in the context of base erosion and profit shifting (BEPS) countermeasures. Yet, the process has not progressed beyond the proposal of the Commission.33

II. Provisions of the EUAccD34 1. Chapter 1 (Art 1-3) – Scope, definitions, categories a) Scope (Art 1) Regarding its scope, the EUAccD applies to certain undertakings with limited liability 8 such as public and private limited liability companies listed in Annex I (Art 1(1) (a)). Additionally, certain partnerships and limited partnerships as listed in Annex II are subject to the Directive. Such partnerships fall within its scope , whenall of its fully liable members are constituted either as public or private limited liability companies as specified in Annex I or in a comparable legal form of a third country (Art 1(1)(b) (i) and (ii), respectively).35 On the other hand, not-for-profit undertakings are excluded from the scope of the Directive (see Art 50(2) (g) of the Treaty on the Functioning of the European Union (TFEU)). As to its territorial scope, the Directive is applicable throughout the EEA in its entirety, as pointed out before.36 b) Definitions (Art 2) Art 2 contains a catalogue of sixteen definitions, the most novel of which being, 9 as mentioned before, the definition of materiality. Pursuant to Art 2(16), information is material if its omission or misstatement could reasonably be expected to influence decisions that users make on the basis of the financial statements of the undertaking. In addition, the materiality of individual items is to be assessed in the context of other similar items. Further definitions of particular importance are those relevant to groups. A group 10 consists pursuant to the EUAccD of a parent undertaking and all its subsidiary undertakings (definition in Art 3(11)). In turn, a subsidiary undertaking is an undertaking controlled by a parent undertaking, including any subsidiary undertaking of an ultimate parent undertaking (definition in Art 3(10)). As for the concept of control, the relevant provisions in Art 22(1) will be discussed later on. c) Categories of undertakings and groups (Art 3) As its predecessors, the EUAccD distinguishes between small, medium-sized and 11 large undertakings and groups respectively. As far as undertakings are concerned, the additional category of microentity was introduced by Directive 2012/6/EU.37 The assignment to the different categories depends on thresholds defined by three criteria: blance-sheet-total (not defined by European law), net turnover (defined in Art 3(5)) 33 Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches, 12/4/2016, COM(2016) 198. 34 Standards without a separate legal designation are those of the EUAccD. 35 See Recital 5 of the Directive. 36 See note 29 supra. 37 See note 19 supra.

Hanno Merkt

813

Accounting and Auditing Law of the European Union and average number of employees during the financial year.38 If at least two of these thresholds are met, the undertaking or group falls within the respective category. 12 The actually binding thresholds pursuant to Art 3(1)-(4) and (5)-(7) of the Directive are shown below: Categories of undertakings Category

Balance-sheet-total [EUR]

Net turnover [EUR]

Average number of employees

≤ 350.000

≤ 700.000

≤ 10

Small

≤ 4.000.000

≤ 8.000.000

≤ 50

Medium-sized

≤ 20.000.000

≤ 40.000.000

≤ 250

Large

> 20.000.000

> 40.000.000

> 250

Balance-sheet-total [EUR]

Net turnover [EUR]

Average number of employees

Small

≤ 4.000.000

≤ 8.000.000

≤ 50

Medium-sized

≤ 20.000.000

≤ 40.000.000

≤ 250

Large

> 20.000.000

> 40.000.000

> 250

Microentity

Categories of groups Category

13

Irrespective of their actual size in view of the aforementioned thresholds, public interest entities (PIE) are always treated as large undertakings. The category of ‘PIE’ was introduced by the EUAccD itself and applies to the undertakings listed in its Art 2(1).

2. Chapter 2 (Art 4-8) – General provisions In line with the principle of proportionality 39, Chapter II of the Directive establishes minimum legal requirements as regards the extent and content of financial information that should be disclosed to the public. First and foremost, annual financial statements shall constitute “a composite whole and shall for all undertakings comprise, as a minimum, the balance sheet, the profit and loss account and the notes to the financial statements”, Art 4(1) subpara. 1. According to Art 4(1) subpara. 2, Member States may require undertakings other than small undertakings to include other statements in the annual financial statements in addition to the documents referred to in Art 4(1) subpara. 1. 15 Secondly, these statements have to be prepared on a prudent basis as well as be drawn up clearly. They shall give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss, Art 4(2) and (3). 16 The Directive provides for exemptions when the application of the Directive does not give a true and fair view of the undertaking at hand, Art 4(4) subpara. 1. The Member States may define such exceptional cases and lay down the relevant special rules which are to apply in those cases, Art 4(4) subpara. 2. In addition, Member States may require undertakings other than small undertakings to disclose information in their 14

38 39

814

Cf. Recital 12 of the Directive. Referred to in Recital 55 of the Directive; see note 22 supra.

Hanno Merkt

Accounting and Auditing Law of the European Union annual financial statements which is additional to that required pursuant to Art 4(5). By way of derogation from Art 4(5), Member States may require small undertakings to prepare, disclose and publish information in the financial statements which goes beyond the requirements of the Directive, provided that any such information is gathered under a single filing system and the disclosure requirement is contained in the national tax legislation for the strict purposes of tax collection (Art 4(6)). The information required in accordance with Art 4(6) shall be included in the relevant part of the financial statements. Furthermore, the following financial reporting principles have to be observed pur- 17 suant to Art 6(1): Art 6(1)

principle

(a)

going concern principle

(b)

consistency principle

(c)

precautionary principle

(d)

concept of accrual accounting

(e)

balance sheet connection

(f)

separate valuation concept

(g)

gross budget rule

(h)

substance over form

(i)

principle of purchase price or production cost

(j)

materiality principle

Art 7 and 8 permit by way of derogation of Art 6(1) an alternative measurement 18 basis of fixed assets at revalued amounts and of financial instruments and specified categories of assets at fair value.

3. Chapters 3 and 4 (Art 9-14 and 15-18) – Financial statements and notes Under Art 4(1), annual financial statements must consist at least of the balance 19 sheet, the profit and loss account and the notes to the financial statements. a) Financial statements (i) Balance sheet As Art 10 of the Directive lays down, the Member States may prescribe one or both 20 of the layouts set out in Annex III (horizontal layout/account form) and IV (vertical layout/report form). In case both formats are allowed, it is up to the undertakings to choose the layout. It is not possible though to change the layout from one financial year to the next, Art 9(1). This limitation to a specific number of layouts for the balance sheet was considered 21 to be necessary in order to allow users of financial statements to better compare the financial position of undertakings within the Union.40 However, and given the approach of the Directive to set but minimum requirements, this is not supposed to bar the Member States from permitting or requiring modifications of the layout such as a more detailed subdivision (Art 9(2), Art 11), simplifications for small and medium-sized 40

See Recital 20 of the Directive.

Hanno Merkt

815

Accounting and Auditing Law of the European Union undertakings (Art 14), or specific requirements for undertakings of particular economic sectors (Art 9(3) subpara. 1). In view of an electronic filing of financial statements, Member States are also allowed to restrict layouts of the balance sheet and profit and loss account, if necessary (Art 9(4)). (ii) Profit and loss account According to Art 13 of the Directive, for the presentation of the profit and loss account, Member States shall prescribe one or both of the layouts set out in Annexes V and VI. If a Member State prescribes both layouts, it may permit undertakings to choose which of the prescribed layouts to adopt. In addition, Member States may permit or require undertakings to present a statement of performance41 instead of a profit and loss account, provided that the information given is at least equivalent to that required by the latter, Art 13(2). 23 The general provisions of Art 9 apply respectively to the profit and loss account. Simplifications for small and medium-sized undertakings are permissible too, again, under Art 14. 22

b) Notes 24

The function of notes deserves special attention in the context of rendering a true and fair view of the undertaking’s performance. Therefore, additional explanatory information to the balance sheet and to the profit and loss account is to be provided in the notes by means of further disclosures.42 As to the content of the notes, Art 16 sets out the topics that require disclosure of additional information in view of accounting policies (Art 16(1)(a)).43 These topics are listed here: Art 16(1) Disclosure requirement on

25

(a)

accounting policies

(b)

fixed assets measured at revalued amounts

(c)

financial instruments and/or assets other than financial instruments measured at fair value

(d)

off balance sheet commitments, guarantees or contingencies

(e)

advances and credits granted to members of the company’s bodies

(f)

amount and nature of exceptional individual items of income or expenditure

(g)

amounts owed by the undertaking becoming due and payable after more than five years and the undertaking's entire debts covered by valuable security furnished by the undertaking

(h)

average number of employees

This disclosure regime is mandatory for all undertakings, irrespective of their size (Art 16(1)), and shall not be exceeded in regard of small undertakings (Art 16(3)) unless the undertaking itself considers further disclosures to be beneficial. 44 Additional disclosure is established on a mandatory basis for medium-sized and large undertakings Cf. IAS 1.10A, 1.81A. Cf. Recital 23 of the Directive. 43 Cf. Recital 24 of the Directive. 44 Cf. Recital 23 of the Directive. 41

42

816

Hanno Merkt

Accounting and Auditing Law of the European Union as well as for PIEs, cf. Art 17 and 18 of the Directive. This additional disclosure covers e.g. related party transactions (Art 17(1)(r), the net turnover in view of categories of activity and geographical markets (Art 18(1)(a)) and the fees charged by statutory auditors or audit firms (Art 18(1)(b)).

4. Chapter 5 (Art 19-20) – Management report a) Original version The management report is defined as a verbalized portrayal of the annual financial 26 statements.45 As explained in the Recitals of the Directive46 and set out in Art 19, its aim is to provide for a fair review of the development of the business and of its position in a manner consistent with its size and complexity of the business (Art 19(1) subparas 1 and 2). Therefore, in addition to information on financial aspects of the undertaking's business, the management report contains an analysis of environmental and social aspects of the business, necessary for an understanding of the undertaking's development, performance or position (subpara. 3). 27 Pursuant to Art 19(2), the management report has in addition to include: Art 19(2) Issue (a)

the undertaking's likely future development

(b)

activities in the field of research and development

(c)

information concerning acquisitions of own shares47

(d)

branches of the undertaking

(e)

the undertaking's use of financial instruments

So far, the content of the management report is of a mandatory nature for all under- 28 takings with the exception of small and medium-sized ones, Art 19(3) and (4). PIEs as described in Art 2(1)(a) of the Directive, i.e. capital market-oriented PIEs, have further to include a corporate governance statement in their management report, Art 20. The report is required to contain the following information: Art 20(1) Issue (a)

corporate governance code applied/adopted

b)

comply or explain statement

(c)

main features of the undertaking's internal control and risk management systems in relation to the financial reporting process

(d)

information required by Art 10(1) (c), (d), (f), (h) and (i) of Directive 2004/25/EC48

45 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht , 23.27. partnership's obligations. 46 See Recital 26 of the Directive. 47 As prescribed by Art 24(2) of Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Art 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ L 315, 14/11/2012, p. 74, corresponding to Art 63(2) of Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law, OJ L 169, 30/06/2017, p. 46, which repealed Directive 2012/30/EU.

Hanno Merkt

817

Accounting and Auditing Law of the European Union Art 20(1) Issue (e)

operation of the shareholder meeting and its key powers and shareholders' rights and their exercise

(f)

composition and operation of the administrative, management and supervisory bodies and their committees

(g)

diversity policy applied in relation to the undertaking's administrative, management and supervisory bodies with regard to aspects such as, for instance, age, gender, or educational and professional backgrounds49

b) Amendment by NFRD50 29

Introduced by NFRD, Art 19a(1) of the Directive entails the obligation of PIEs meeting the thresholds of large undertakings and occupying over 500 employees to deliver a non-financial statement as a part of the management report, if a separate report is not prescribed by the respective Member State pursuant to Art 19a(4).

5. Chapter 6 (Art 21-29) – Consolidated financial statements and reports a) Underlying principles The provisions of this chapter go back essentially to the 7th Council Directive51 that introduced consolidated accounting for the first time. This Directive was based on the assumption that consolidated accounting would only render a true and fair view of the assets and liabilities, the financial position and the profit and loss of the undertakings consolidated, if all the undertakings of a group were included in the consolidation.52 31 Newly included by means of the EUAccD were however the definitions of the group and its constituents, the parent and the subsidiary undertaking. Accordingly, a group is made up of the parent and all its subsidiary undertakings being, the parent undertaking the one controlling the subsidiary one.53 In turn, the concept of control within the Directive is specified in Art 22. Pursuant to this provision, control is exercised by the parent over the subsidiary undertaking if it has a majority of the shareholders' or members' voting rights in the latter or has the right to appoint or remove a majority of the members of its bodies or has control conveyed via a control agreement, Art 21(1) (so called control concept). Further specifications of control are set out in Art 22(2) and (7). In the case of Art 22(2), control is given where the parent undertaking has the power to exercise or actually exercises dominant influence or control other than that established by Art 22(1) over its subsidiary or both the mentioned undertakings are managed on a unified basis by a parent undertaking. Eventually, an influence within a group relevant enough to the concerns of the Directive is to be assumed in a group of equal subsidiaries managed on a unified basis, Art 22(7). 32 The rationale of consolidated accounting in the EUAccD is the idea that a consolidation of all affiliate undertakings to a group is necessary to render a true and fair view of a group’s financial status. Consolidated financial statements shall therefore present a group as a single economic entity.54 To this end, consolidation shall extend to the fullest,55 30

48 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, OJ L142, 30/4/2004, p. 12. 49 Introduced by NFRD (note 30 supra). 50 See note 30 supra. 51 See note 6 supra. 52 Cf. Recital 5 of Directive 83/349/EEC (note 6 supra). 53 See supra → mn. 10.

818

Hanno Merkt

Accounting and Auditing Law of the European Union i.e. that the assets and liabilities of undertakings included in a consolidation have to be incorporated in their entirety in the consolidated balance sheet, Art 24(2). Specific measurements for jointly managed and associated undertakings are provided in Art 26 and 27 respectively. Finally, parent and subsidiary undertakings shall be consolidated irrespective of where the registered offices of the subsidiary undertakings are located, Art 22(6). b) Scope and exemptions to the requirement of consolidation Art 21 refers in this context to Art 1(1), thereby extending the scope of consolidated 33 financial statements to parent undertakings like those listed in Annexes I and II. This again is just a minimal requirement and in fact, Member States are free to expand the application in view of consolidated accounting to parent undertakings other than those contemplated in the Directive. Consolidation is mandatory in the cases described in Art 22(1), i.e. where parent undertakings exercise control over subsidiary undertakings in the manner described therein.56 In group structures, as set out in Art 22(2) and (7), the decision whether to require consolidated financial statements is up to the Member States. Exemptions are permitted for small (Art 23(1)) as for medium-sized groups (Art 23(2)) on cost/benefit grounds unless a PIE is involved.57 Although subsidiary undertakings which themselves are parent undertakings are committed to consolidated reporting, Member States may exempt such subsidiaries from drawing up the respective statements, Art 23(3). This is common sense, as in larger groups an end-to-end sustained requirement for consolidated financial statements would provoke a cascade of reports beyond reasonable measures. It must be provided though, that the members of the relieved undertaking as well as third parties are sufficiently protected. The applicable set of conditions is provided for in Art 23(4). Further provisions for exemptions within groups with such two-headed undertakings are embodied in Art 23(5) through (8). c) Content and preparation Art 24(1) transposes the provisions of Chapters 2 and 3 into the context of consoli- 34 dated accounting. Correspondingly, consolidated financial statements are composed of a consolidated balance sheet and a consolidated profit and loss account. They have to be accompanied by the respective notes (Art 28) and a consolidated management report (Art 29), which in case of parent undertaking PIEs of a large group shall include a consolidated non-financial report (Art 29 a). The option to require a separate non-financial report is provided in Art 29a(4) respectively. In general, assets and liabilities of consolidated undertakings have to be incorporated 35 in full (Art 24(2)) and shall be measured on a uniform basis and in accordance with Chapter 2, Art 24(10).58 Associated undertakings, however, shall be included in consolidated financial statements by means of the equity method, Art 27. As for jointly managed undertakings, Member States may permit or require a proportionate consolidation within consolidated financial statements, Art 26.

Cf. Recital 31 of the Directive. Cf. Recital 34 of the Directive. 56 See supra → mn. 31. 57 Cf. Recital 33 of the Directive. 58 Member States are allowed to permit the general provisions and principles stated in the Directive to be applied differently in annual financial statements than in consolidated financial statements, Recital 35 of the Directive. 54 55

Hanno Merkt

819

Accounting and Auditing Law of the European Union 6. Chapter 7 (Art 30-33) – Publication As stated in Art 30(1), Member States shall ensure that all undertakings governed by the Directive publish within a period of time no longer than 12 months after the balance sheet date, the duly approved annual financial statements as well as the management report together with the opinion submitted by the statutory auditor or audit firm (Art 34), as laid down by the laws of each Member State in accordance with Chapter 2 of Directive 2009/101/EC59. Simplifications are allowed again for SMEs (Art 31), but also for undertakings referred to in Annex II (Art 30(2) and (3) subpara. 1). 37 Art 33 of the Directive provides that liability for drawing up and publishing the annual financial statements, the management report, the corporate governance statement when provided separately and the report referred to in Art 19a(4) (Art 33(1) (a)) as well as for their consolidated counterparts (see Art 33(1) (b)) lies collectively with the members of the administrative, management and supervisory bodies of the undertaking acting within the competences assigned to them by national law. This liability shall apply at least towards the undertaking, Art 33(2). However, Member States are not prevented from going further and providing for direct responsibility to shareholders or even other stakeholders.60 38 Eventually, Member States are strongly encouraged to implant systems that allow for electronic publication of accounting data.61 36

7. Chapter 8 (Art 34 and 35) – Auditing As established in Art 34(1) subpara. 1, Member States have to ensure that the financial statements of PIEs as well as of medium-sized and large undertakings are audited by one or more statutory auditors or audit firms approved by Member States to carry out statutory audits on the basis of Directive 2006/43/EC.62 In contrast, the annual financial statements of small undertakings are not covered by this audit obligation, because it might be too burdensome for them, and under normal circumstances, interest of third parties in the assurance of financial statements of such undertakings is little. Nonetheless, Member States are allowed to provide for mandatory auditing in small undertakings to a proportionate extent in light of the peculiarities of such undertakings.63 40 Art 34(1) subpara. 2 entails further obligations of the statutory auditors or audit firms in regard of the management report. They shall express an opinion on whether the management report is consistent with the financial statements for the same financial year and whether the management report has been prepared in accordance with the applicable legal requirements (Art 34(1) subpara. 2 (a)). Moreover, they shall state, whether, in the light of the knowledge and understanding of the undertaking and its environment obtained in the course of the audit, he, she or it has identified material64 misstatements in the management report, and shall give an indication of the nature of any such misstatements (Art 34(1) subpara. 2 (b)). 39

59 Directive 2009/101/EC of the European Parliament and of the Council of 16 September 2009 on coordination of safeguards which, for the protection of the interests of members and third parties, are required by Member States of companies within the meaning of the second paragraph of Art 48 of the Treaty, with a view to making such safeguards equivalent, OJ L 258, 01/10/2009, p. 11 repealed by Directive (EU) 2017/1132 (see note 47 supra). 60 See Recital 40 of the Directive. 61 See Recital 39 of the Directive. 62 Note 3 supra, to be discussed in Section D. l. 63 See Recital 43 of the Directive. 64 As defined in Art 2(16) EUAccD, see supra → mn. 9.

820

Hanno Merkt

Accounting and Auditing Law of the European Union According to Art 34(2), the provision of Art 34(1) is applicable mutatis mutandis 41 to consolidated financial statements and consolidated management reports of said undertakings. Art 34 does not apply though to the non-financial statement nor to the consolidated non-financial statement referred to in Art 19a(1) and A29a(1), respectively or to the separate reports referred to in Arts 19a(4) and 29a(4), as provided for in Art 34(3). Hence, auditors are only bound to verify if non-financial reporting has been issued in due form. A substantial audit is waived, as non-financial statements are hardly quantifiable and costs of auditing would therefore increase considerably.65 As far as the content of the audit is concerned, Art 35 of the Directive amends Art 42 28 of Directive 2006/43/EC, as the latter was considered a more appropriate context to provide for regulation in this respect.66

8. Chapter 9 (Art 36-40) – Exemptions Beside the aforementioned simplifications for SMEs, it is especially this chapter that 43 pays tribute to the “think small first-approach” of the Directive and completes the set of rules directed towards the relief of SMEs from accounting and disclosure obligations. Herein contained are several provisions allowing Member States for exemptions 44 regarding micro-undertakings (Art 36), subsidiary undertakings (Art 37), undertakings which are members having unlimited liability of other undertakings (Art 38), and parent undertakings preparing consolidated financial statements (Art 39). At the same time, the Directive disallows Member States the introduction of simplifications for PIEs other than those expressly mentioned in the Directive (Art 40). As mentioned before, Art 40 establishes the treatment of PIE as large undertakings irrespective of their size.

9. Chapter 10 (Art 41-48) – Country-by-Country Reporting (CbCR) In order to provide for enhanced transparency of payments made to governments, 45 large undertakings and public-interest entities active in the extractive industry or in the logging of primary forests are bound to disclose material payments made to governments by the provisions in this chapter.67 A definition of the relevant undertakings is given in Art 41. These undertakings have to furnish (Art 42) and publish (Art 45) reports on payments to governments to the extent described in Art 43, which in turn requires separate reports on an annual basis for each country in which the undertakings operate (Art 43(2)). This holds true as long as the payment or the total amount of a series of related payments exceeds the amount of 100.000 EUR, Art 43(1). Undertakings complying with third-country reporting requirements considered to be equivalent to those of the Directive are relieved from the provisions of Chapter 10 except for the obligtation to publish the reports as laid down by the laws of each Member State in accordance with Chapter 2 of Directive 2009/101/EC (Art 46 and 47). Special rules for consolidated reports are provided for in Art 44. It is noteworthy that CbCR is a novelty introduced with the EuAccD itself. It can be 46 seen as an avatar of the stakeholder approach that was still to come on a much broader basis with the NFRD.68 Therefore, this chapter is subject to review by the Commission who shall report on its implementation and effectiveness, in particular as regards the scope of, and compliance with, the reporting obligations and the modalities of the reporting on a project basis. This is provided for in Art 48. Cf. Recital 16 NFRD (see note 30). Cf. Recital 43 of the Directive. 67 Cf. Recital 44 of the Directive. 68 See note 30 supra. 65

66

Hanno Merkt

821

Accounting and Auditing Law of the European Union

C. The IAS Regulation (EC) No 1606/2002 (IASR) I. Overview and Historical Development 1. Historical development and objectives The Lisbon European Council of March 2000 emphasised the need to accelerate the completion of the internal market for financial services, set the deadline of 2005 to implement the Commission's Financial Services Action Plan and urged that steps be taken to enhance the comparability of financial statements prepared by publicly traded companies.69 This implied not only an increasing convergence of accounting standards on a European but also on a global level, with the ultimate objective of achieving a single set of accounting standards.70 Moreover, on 13 June 2000, the Commission published its Communication on ‘EU Financial Reporting Strategy: the way forward’71 which proposed that all publicly traded Community companies should prepare their consolidated financial statements in accordance with one single set of accounting standards, namely International Accounting Standards (IAS), at the latest by 2005.72 48 It was known by then that the reporting requirements set out in the Accounting Directives73 could not ensure the high level of transparency and comparability of financial reporting from all publicly traded Community companies which was considered to be a necessary condition for building an integrated, efficiently working capital market. Hence, it was necessary to supplement the legal framework applicable to the mentioned companies.74 49 In order to foster this development, the Commission issued a proposal75 for the IASR which was brought before the Council on 29 May 2001 and adopted on 19 February 2002. Its scope was extended to the EEA by the EEA Joint Committee Decision of 14 March 2003.76 47

2. Amendments 50

An amendment of ISAR was executed by Regulation (EC) 297/2008.77 As Decision 1999/468/EC78 which included the procedure for endorsement, was amended by Decision 2006/512/EC79, which introduced the regulatory procedure with scrutiny for the adoption of measures of general scope and designed to amend non-essential elements of a basic instrument adopted in accordance with the procedure referred to in Art 251 of

Recital 1 of the Regulation. Cf. Recital 2 of the Regulation. 71 Communication from the Commission to the Council and the European Parliament EU – Financial Reporting Strategy: the way forward, 13/06/2000, COM(2000) 359. 72 Cf. Recital 6 of the Regulation. 73 See supra → mn. 3. 74 Cf. Recital 3 of the Regulation. 75 Proposal for a Regulation of the European Parliament and of the Council on the application of international accounting standards, COM(2001) 80, OJ 154 E, 29/05/2001, p. 285. 76 Decision of the EEA Joint Committee No 37/2003 of 14 March 2003 amending Annex XXII (Company law) to the EEA Agreement, OJ L 137, 05/06/2003, p. 44. 77 Regulation (EC) No 297/2008 of the European Parliament and of the Council of 11 March 2008 amending Regulation (EC) No 1606/2002 on the application of international accounting standards, as regards the implementing powers conferred on the Commission, OJ L 97, 09/04/2008, p. 62. 78 1999/468/EC: Council Decision of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission, OJ L 184, 17/07/1999, p. 23. 69 70

822

Hanno Merkt

Accounting and Auditing Law of the European Union the Treaty, inter alia, by deleting some of those elements or by supplementing the instrument with new non-essential elements, adjustments in the ISAR were implemented. 80 The Commission was empowered to decide on the applicability within the Commu- 51 nity of International Accounting Standards, and so the pertinent amendments were performed on Art 3 and 6, which form the core part of the endorsement procedure. 81

II. Provisions of the IAS Regulation82 1. Aim, scope and definitions (Art 1, 2, 4, 5 IASR) In line with the historical background described above, Art 1 declares as objective of ISAR the adoption and use of international accounting standards in the Community with a view to harmonising the financial information in order to ensure a high degree of transparency and comparability of financial statements and hence an efficient functioning of the Community capital market as well as of the Internal Market. As Art 2 explains, the envisaged standards are the International Accounting Standards (IAS), the International Financial Reporting Standards (IFRS) and the related Interpretations (SIC-IFRIC interpretations), as well as respective amendments to those standards and related interpretations or future standards and related interpretations, issued or adopted by the International Accounting Standards Board (IASB) (hereinafter collectively referred to as IFRS). As for the companies covered by the IASR, Art 4 requires publicly traded companies83 – and only those – to deliver their for each financial year starting on or after 1 January 2005 consolidated accounts in conformity with the international standards adopted by the Community. Not publicly traded companies, on the contrary, are not subject to any obligation under the IASR. They may voluntarily prepare accounts on the basis of IFRS. This does not, however, relief them from their duties in view of the provisions of the EUAccD on the grounds of European Law. This may be provided for by the Member States. Pursuant to Art 5, the Member States may permit or require companies other than those referred to in Art 4 to prepare their consolidated accounts and/or their annual accounts according to international standards adopted by the Community (Art 5(b)). They may as well permit or require publicly traded companies to prepare their annual accounts on the basis of adopted IFRS (Art 5 (a)). It has to be stressed in this context that the IASR is not conceived as a replacement for the EUAccD. It exclusively addresses the preparation of annual and consolidated financial statements by use of IFRS and only to this extent is an equivalent to such statements prepared pursuant to the EUAccD. Other EUAccD provisions than those referring to annual and consolidated financial statements remain therefore unaffected by the IASR and have to be observed. 79 2006/512/EC: Council Decision of 17 July 2006 amending Decision 1999/468/EC laying down the procedures for the exercise of implementing powers conferred on the Commission, OJ L 200, 22/07/2006, p. 11 implicitly repealed by Regulation (EU) No 182/2011 of the European Parliament and of the Council of 16 February 2011 laying down the rules and general principles concerning mechanisms for control by Member States of the Commission’s exercise of implementing powers, OJ L 55, 28/02/2011, p. 13. 80 Cf. Recital 1 and 2 of Regulation (EC) 297/2008. 81 Recital 4 of Regulation (EC) 297/2008. 82 Standards without a separate legal designation are those of the IAS Regulation. 83 Such, whose securities are admitted to trading on a regulated market of any Member State within the meaning of Art 4(1) Nr. 21 of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II), OJ L 173, 12/06/2014, p. 349.

Hanno Merkt

823

52

53

54

55

Accounting and Auditing Law of the European Union 56

With respect to “IFRS for SME” the Commission performed consultations84 as to whether they should be incorporated into European accounting law. Finally, the incorporation was rejected as these condensed IFRS were considered to contravene the aim of the EUAccD to disburden SME from administrative demands.85

2. Endorsement mechanism (Art 3 and 6) At the heart of the IASR lies the mechanism by which IFRS are adopted and made applicable within the Community. As mentioned above, IASR was not designed to declare IFRS simply and immediately applicable, but sets up a special “endorsement mechanism” by which IFRS are gradually introduced into communitarian law, provided they meet the requirements of proprietary EU accounting rules. 58 Key provisions to this matter are Art 3 and 6 of the Regulation. Art 3(1) confers upon the Commission the decision on the applicability of international accounting standards and Art 3(2) sets out the two basic conditions upon which international accounting standard may be adopted: – First, the international accounting standards are not contrary to the principle set out in Art 4(3) EUAccD (true and fair view) and are conducive to the European public good and, – Second, they meet the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management. 59 In any case, Art 6(1) and, by reference to Decision 1999/468/EC86, Art 6(2) declares the comitology procedure of mandatory application in view of any adoption of international accounting standards. 60 Provided the comitology procedure has been observed, any adopted international accounting standards are endorsed by means of a Commission Regulation which is to be published in full in each of the official languages of the Community, as states Art 3(4). This has led to copious legislation by the Commission.87 57

D. The Statutory Audit Directive 2006/43/EC (SAD) and Statutory Audit Regulation (EU) No 537/2014 (SAR) 61

SAD and SAR are closely interlinked, as the Directive is the groundwork on which SAR is built up. Therefore, they will be discussed jointly, and the discussion will follow the structure of the Directive, providing addenda where the Regulation goes beyond the prescriptions of the former.

84 See European Commission, Summary report of the responses received to the Commission’s consultation in the International Financial Reporting Standard for small and medium-sized entities, 2010. 85 See note 21 supra (proposal EUAccD). 86 As set out above, this Decision was repealed by Regulation (EU) No 182/2011, which contains the presently applicable comitology procedure. 87 An overview of the adopted IFRS is available at https://ec.europa.eu/info/law/international-accounti ng-standards-regulation-ec-no-1606-2002/amending-and-supplementary-acts/acts-adopted-basis-regulat ory-procedure-scrutiny-rps_en#consolidated-version-of-regulation-ec-no-11262008.

824

Hanno Merkt

Accounting and Auditing Law of the European Union

I. Overview and Historical Development 1. Onset Predecessor of SAD and SAR was the 8th Council Directive. 88 At the time, this Direc- 62 tive became necessary, as the 4th Council Directive, in force by then, and the proposed 7th Council Directive89 both required the audit of financial statements, however, no regulation was provided in this respect, neither to the minimum requirements to auditors nor to the auditing standards that were to be met. Auditing, therefore, lacked the comparability that was envisaged in the field of financial reporting by the Accounting Directives, a deficiency that had to be cured. On 24 April 1978, two years after the proposal for the 7th Council Directive, a 63 proposal for the 8th Directive was brought before the Council90 and was finally adopted on 10 April 1984, not even one year after the adoption of the 7th Council Directive.91 As it was the case with the Accounting Directives, it took quite a long time to find consensus. The 8th Council Directive stayed in force unchanged until its repeal by the SAD.

2. Development towards the SAD a) Introduction The further development was initiated, essentially, by a Green Paper of the Commis- 64 sion of 199692 addressing the shortcomings of the 8th Council Directive and pointing out the necessity for further harmonisation in the area of auditing. Spectacular accounting scandals – Enron or WorldCom in the US, Parmalat in Italy, FlowTex in Germany – made the need for high quality auditing utterly evident. In the wake of those scandals, the Commission delivered a Communication aiming at a reinforcement of the statutory audit in the Union93, which finally led to the proposal for the SAD on 16 March 2004.94 b) SAD, amendments and SAR The SAD was finally adopted on 17 May 2006. Its first amendments followed with 65 Directive 2008/30/EC, which brought about minor modifications to the comitology procedure, and with the EUAccD, which harmonised the content of the audit report in Art 28 SAD, as pointed out earlier in this disquisition. Later on, the global financial markets crisis in 2008 fostered further improvements 66 in auditing quality. Another Green Paper of the Commission of 201095 marked the 88 Eighth Council Directive 84/253/EEC of 10 April 1984 based on Art 54 (3) (g) of the Treaty on the approval of persons responsible for carrying out the statutory audits of accounting documents, OJ L 126, 12/05/1984, p. 20. 89 See supra → mn. 3. 90 Proposal for an eighth Directive pursuant to Art 54 (3) (g) of the EEC Treaty concerning the approval of persons responsible for carrying out statutory audits of the annual accounts of limited liability companies, 24/04/1978, COM(78) 168. 91 Its scope was extended to the EEA as of 1.1.1994, for Liechtenstein as of 1.5.1995. 92 Green Paper — The role, the position and the liability of the statutory auditor within the European Union, OJ C 321, 28/10/1996, p. 1. 93 Communication from the Commission to the Council and the European Parliament – Reinforcing the statutory audit in the EU, 21/05/2003, COM(2003) 286. 94 Proposal for a Directive of the European Parliament and of the Council on statutory audit of annual accounts and consolidated accounts and amending Council Directives 78/660/EEC and 83/349/EEC, 16/03/2004, COM(2004) 177. 95 Green Paper – Audit Policy: Lessons from the Crisis, 13/10/2010, COM(2010) 561.

Hanno Merkt

825

Accounting and Auditing Law of the European Union starting point once more. The subsequent proposals for an amendment directive and for the SAR were brought before the Council roughly one year later on 30 November 2011.96 The Amendment Directive 2014/56/EU 97 and the SAR98 were eventually adopted on 16 April 2014, giving European auditing rules its aforementioned structure: SAD as fundament, with SAR complementing in the field of PIEs with higher standards.

II. Provisions of SAD and SAR99 1. Objectives and scope a) Objectives The objectives of the SAD, as its Recitals explain,100 are – to establish the application of a single set of international auditing standards, – the updating of the educational requirements, – the definition of professional ethics and – the technical implementation of the cooperation between competent authorities of Member States and in relations to third countries as well, in order to further enhance and harmonise the quality of statutory audit in the Union so as to strengthen confidence in the statutory audit. 68 As for the SAR, it is targeted at – clarifying and better defining the role of statutory audit regarding public-interest entities, – improving the information that the statutory auditor or the audit firm provides to the audited entity, investors and other stakeholders, – improving the communication channels between auditors and supervisors of publicinterest entities, – preventing any conflict of interest arising from the provision of non-audit services to public-interest entities, – mitigating the risk of any potential conflict of interest due to the existing system whereby the auditee selects and pays the auditor or to the familiarity threat, – facilitating the switching and the choice of a statutory auditor or an audit firm to public-interest entities, – broadening the choice of statutory auditors and audit firms for public-interest entities, and – improving the effectiveness, independence and consistency of the regulation and oversight of statutory auditors and audit firms providing statutory audits to publicinterest entities as well as cooperation at Union level in this regard.101 69 Both Acts emphasize that these objectives are not achievable by regulations of the Member States alone and that harmonised legislature is necessary.102 67

96 Proposal for a directive of the European Parliament and of the Council amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, 30/11/2011, COM(2011) 778 and Proposal for a Regulation of the European Parliament and of the Council on specific requirements regarding statutory audit of public-interest entities, 30/11/2011, COM(2011) 779. 97 Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, OJ L 158, 27/05/2014, p. 196. 98 See note 4. 99 Standards designated as SAD are those of the Statutory Audit Directive, those designated as SAR those of the Statutory Audit Regulation. 100 Cf. Recital 32 SAD. 101 Cf. Recital 34 SAR.

826

Hanno Merkt

Accounting and Auditing Law of the European Union b) Scope The SAD covers the auditing of annual and consolidated accounts, Art 1 SAD, 70 irrespective of the grounds for accounting or the (mandatory or voluntary) nature of the auditing or the nature of the audited undertaking, cf. Art 2(1) SAD. The focus lies exclusively on the auditing process, including statutory auditors and audit firms. The SAR applies likewise to auditing of annual and consolidated financial state- 71 ments of PIEs and the respective statutory auditors and audit firms, Art 1 and 2(1) SAR. Exemptions from SAR regulations are possible for cooperatives and savings banks (Art 2(3) SAR), as these undertakings are in some Member States required by law to carry out the statutory audit by audit associations that act on a non-profit basis without commercial interests. The latter are, therefore, supposed to be independent, rendering the application of SAR dispensable. As for the scope of the statutory audit, Art 28, 10 and 11 SAR apply respectively. Not 72 included within the scope is, however, the assurance on the future viability of the audited entity or on the efficiency or effectiveness of the management’s or administrative body’s future conduction of the affairs of the entity, Art 25 a SAD. c) Relation to EUAccD The provisions of SAD and SAR operate without any prejudice to those of the 73 EUAccD and vice versa. As the former covers only auditing, the preparation of the reports subject to auditing is governed by the latter.

2. Chapter I – Subject matter and definitions (Art 1 and 2 SAD) Chapter I of the SAD deals with its aforementioned subject matter and provides in its 74 Art 2 for definitions, which are also to be applied to the SAR, Art 3 SAR. The notion of ‘competent authority’ is defined separately in Art 20 SAR. A more detailed explanation of the definitions will be given infra.

3. Chapters II and III – Approval, continuing education and mutual recognition and registration (Art 3-20 SAD) a) Approval, continuing education and mutual recognition (Art 3-14 SAD) (i) Approval and continuing education As the statutory audit requires adequate knowledge of matters such as company, 75 fiscal and social law, admission to the audit profession requires academic education and sufficient practical training and experience; for detailed requirements see Art 6 et seq. SAD.103 Approval shall be granted only to natural persons or firms of good reputation, Art 4 SAD. In order to secure and maintain the qualification level required for approval, statu- 76 tory auditors are required to take part in appropriate programmes of continuing education, Art 13 SAD. Failure to respect the continuing education requirements is subject to appropriate sanctions as referred to in Art 30 SAD (see infra 7.)

102 103

Cf. Recital 34 SAR and Recital 31 SAD. See Recital 7 SAD.

Hanno Merkt

827

Accounting and Auditing Law of the European Union (ii) Mutual recognition According to Art 14 SAD, the competent authorities of any Member States shall establish procedures for the approval of statutory auditors who have been approved in other Member States. The aptitude test, which shall be conducted in one of the languages permitted by the language rules applicable in the Member State concerned, shall cover only the statutory auditor's adequate knowledge of the laws and regulations of that Member State in so far as relevant to statutory audits.104 78 Audit firms which have been approved in a Member State shall in turn be entitled to perform statutory audits in another Member State by way of derogation from Art 3(1). The key audit partner who carries out the statutory audit on behalf of the audit firm has to comply with Art 3(4)(a) SAD, i.e., he has to satisfy at least the conditions imposed by Art 4 and 6 through Art 12 SAD in the host Member State. 77

b) Registration (Art 15 SAD) 79

In order to protect third parties, all approved auditors and audit firms have to be entered in a register electronically accessible to the public and containing basic information concerning statutory auditors and audit firms, Art 15(1) SAD. 105

4. Chapter VI – Professional ethics, independence, objectivity, confidentiality and professional secrecy a) Professional ethics and scepticism (Art 21 SAD) 80

In light of the public-interest function and their contribution to the proper functioning of markets, statutory auditors shall adhere to high ethical standards.106 Hence, Art 21 SAD requires Member States to implement rules providing for integrity, objectivity, professional competence and due care of statutory auditors and audit firms. In addition, the Commission may implement measures on professional ethics as minimum standards, if necessary, considering the principles contained in the International Federation of Accountants (IFAC) Code of Ethics.107 b) Independence and objectivity (Art 22, 22 a, 22 b, 24 SAD)

Art 22 SAD is the central provision in regard of the independence of statutory auditors and audit firms, and certainly independence is one of the key concerns of the SAD.108 According to Art 22(1) SAD, Member States have to ensure that any natural person in a position to directly or indirectly influence the outcome of the statutory audit, is independent of the audited entity and is not involved in its decision-taking. Moreover, this independence has to be sustained at least during both the period covered by the financial statements to be audited and the period during which the statutory audit is carried out. The provisions following Art 22 SAD establish cases in which the auditors’ independence can be impaired and prescribe measures to be adopted respectively as well as prohibitions. 82 Art 22 a SAD establishes a lapse of time for a statutory auditor or a key audit partner to take up a key position in the audited entity. Art 22 b SAD provides for a duty of the 81

For the definitions of ‘adaptation period’ and ‘aptitude test’ see Art 3(g), (h) Directive 2005/36/EC. See Recital 6 SAD. 106 Cf. Recital 9 SAD. 107 International Ethics Standard Board for Accountants, International Code of Ethics for Professional Accountants, 2018. Available on www.ifac.org. 108 Cf. Recital 11 SAD. 104

105

828

Hanno Merkt

Accounting and Auditing Law of the European Union statutory auditor or audit firm to assess and document that they meet the requirements for independence of the SAD. Art 24 SAD finally, provides for precautions against owners and shareholders intervening in the execution of a statutory audit. Special requirements for PIEs as to the independence of statutory auditors and audit 83 firms are entailed in several provisions of the SAR. Of particular importance are Art 5, 6, 7, 13 and 17 SAR. Art 5 provides for a prohibition of all non-audit services listed in Art 5(2) subpara. 2 SAR and subordinates all other services of the kind to the consent of the audit committee, Art 5(4) SAR. In addition, Art 17 sets limits to the duration of the audit engagement. In the field of disclosure, Art 6, 7, and 13 SAR provide for extended publication and transparency requirements of auditors of PIEs. Pursuant to Art 6 SAR, PIE auditors have to recurrently assess and document their compliance with the requirements for independence of the SAD and also report irregularities to the PIEs as well as propose countermeasures. Last but not least, statutory auditors and audit firms of PIEs have to submit a transparency report on an annual basis in accordance to Art 13 SAR. c) Confidentiality and professional secrecy (Art 23 SAD) Art 23(1) SAD commits the Member States to ensure that statutory auditors and 84 audit firms respect the privacy of their clients, in binding them by strict rules on confidentiality and professional secrecy, however, without impeding proper enforcement of the SAD or the SAR (Art 23(2) SAD). Therefore, statutory auditors or audit firms which are replaced must provide the incoming statutory auditor or audit firm with all relevant information concerning the audited entity and the most recent audit of that entity, Art 23(3) SAD. Those confidentiality rules apply also to any statutory auditor or audit firm which has ceased to be involved in a specific audit task, Art 23(4) SAD. Specific provisions in the context of confidentiality and secrecy with regard to third countries are provided for in Art 23(5) SAD. d) Internal organisation and organisation of the work (Art 24 a, 24 b SAD) The provisions concerning internal organisation and the auditing process were intro- 85 duced by Directive 2014/56/EU.109 They require statutory auditors and audit firms to comply with several organisational requirements in order to secure audit quality, independence and competence. These provisions deal in part with highly technical matters that go far beyond the scope of this outline. e) Fees (Art 25 SAD) The issue of fees is closely connected to auditor independence. Art 25 SAD requires 86 Member States to ensure that fees for statutory audits are not influenced or determined by additional services to the audited entity and may not be based on any form of contingency, for the level of fees received from one audited entity and/or the fees’ structure can threaten the independence of a statutory auditor or audit firm. 110 The same is true for PIEs and their auditors.111 Art 4(1) SAR prohibits contingent 87 fees. In order to prevent the auditor from becoming dependent on a single client, Art 4(3) SAR establishes thresholds indicating a threat to the independence of the auditor, and consequently establishes the duty for a recurring disclosure. Also, the limitation of See note 97. Cf. Recital 11 SAD. 111 Cf. Recital 7 SAR. 109

110

Hanno Merkt

829

Accounting and Auditing Law of the European Union non-audit services in Art 4(2) SAR to those referred to in Art 5(1) SAR is targeted at safeguarding the auditor’s independence. The requirements of Art 4 SAR, however, are minimum requirements and Member States may establish more stringent standards, Art 4(4) SAR.

5. Chapter V – Auditing standards and audit reporting (Art 26-28 SAD) 88

89

90

91 92

In principle, all statutory audits should be carried out on the basis of international auditing standards (Art 26(1) subpara. 1 SAD) so to ensure consistently high quality in all statutory audits required by Community Law.112 Given the measures referred to in Art 26(3) SAD are applied, the Commission, in accordance with Art 48 a SAD, is empowered by means of delegated acts to adopt such international accounting standards, meaning, as Art 26(2) SAD spells out, the International Standards on Auditing (ISAs), 113 the International Standard on Quality Control (ISQC 1) and other related Standards issued by the International Federation of Accountants (IFAC) through the International Auditing and Assurance Standards Board (IAASB), in so far as they are relevant to the statutory audit. However, since the Commission has not yet made use of its powers conferred in Art 26(3) SAD, national regulations are still in place pursuant to Art 26(1) subpara. 2 SAD.114 Regarding consolidated accounts, a clear definition of responsibilities as between the statutory auditors who audit single member enterprises of the group is important. For this purpose, the group auditor should bear full responsibility for the audit report, Art 27(1) SAD.115 Another central element to the SAD is the audit report. The Commission may adopt a common audit report for the audit of annual or consolidated accounts prepared on the basis of approved international accounting standards, unless an appropriate standard for such a report has been adopted at Community level.116 Since this has not happened yet, Art 28 SAD applies, pursuant to which (Art 28(1) SAD), auditors shall present the results of the statutory audit in an audit report prepared in accordance with the auditing standards referred to in Art 26 SAD. Regarding the content of the audit report, Art 28(2) SAD further establishes minimum requirements, see Art 28(2) subpara. 3 SAD thereby allowing the Member States to enact a stricter regime for the audit report. Undisputed, key element is the audit opinion (Art 28(2)(c) SAD which shall be either unqualified, qualified or an adverse opinion, and shall state clearly the opinion of the statutory auditor(s) or the audit firm(s) as to: – whether the annual financial statements give a true and fair view in accordance with the relevant financial reporting framework; and, – where appropriate, whether the annual financial statements comply with statutory requirements. If the statutory auditor(s) or the audit firm(s) are unable to express an audit opinion, the report shall contain a disclaimer of opinion, Art 28(2)(d) through (g) SAD. Additional requirements for PIEs as far as the content of the audit report is concerned, are provided for in Art 10 SAR. An additional report is to be submitted, no later than the date of submission of the audit report, to the audit committee or, if there Cf. Recital 13 SAD. Portraying the importance of ISAs in Europe and Germany: Merkt, Die Bedeutung der Internationalen Standards on Auditing (ISA) für die Abschlussprüfung in Europa und Deutschland, ZGR 2015, 215. 114 In Germany, for instance, IDW-Standards. 115 Cf. Recital 15 SAD. 116 Cf. Recital 16 SAD. 112

113

830

Hanno Merkt

Accounting and Auditing Law of the European Union is none, to the body performing equivalent functions, Art 11(1) SAR. This report shall explain the results of the statutory audit and pronounce itself at least on the matters referred to in Art 11(2) SAR. If material deficiencies are found in the course of the audit, a report has to be delivered to the supervisors of the audited PIE, Art 12(1) SAR.

6. Chapter VI – Quality assurance (Art 29 SAD) Regular inspections are considered to be a good means of achieving a consistently 93 high quality in statutory audits.117 Therefore, Art 29 SAD submits statutory auditors and audit firms to a system of quality assurance independent of the reviewed auditors and subject to public oversight. For the application of Art 29 SAD, Member States have some discretion on the organisation of the quality assurance system, as long as it is free from undue influence. The Commission has the competence to implement measures in matters relevant to this issue but has not made use of this competence so far. The public oversight systems of Member States are encouraged by the SAD to find a coordinated approach to the performance of quality assurance reviews with a view to avoiding the imposition of unnecessary burdens on the parties concerned.118 Further provisions for PIEs can be found in Art 26 SAR. Pursuant to Art 20(2) SAR, 94 the competent authorities designated under Art 20(1) SAR shall establish an effective system of audit quality assurance and to that end carry out quality assurance reviews of statutory auditors and audit firms that perform statutory audits of PIEs on the basis of an analysis of the risk. Further details are entailed in Art 26(3) through (9) SAR.

7. Chapter VII – Investigations and sanctions (Art 30-30 f SAD) The SAD assumes that investigations and appropriate penalties will help to prevent 95 and amend inadequate execution of a statutory audit.119 Accordingly, Member States shall establish effective systems of investigations and sanctions to detect, correct and prevent inadequate execution of the statutory audit, Art 30(1) and 30 b SAD. A key role in this context plays the publication of sanctions and measures, pursuant to Art 30 c SAD, an instrument better known as ‘naming and shaming’. Another crucial element in relation to enforcement and sanctions is the regime of 96 civil liability. Although statutory auditors and audit firms are responsible for carrying out their work with due care, and thus, should be liable for the financial damage caused by violation of this duty,120 notably, this regime has not been harmonised. Art 32(2) SAD puts it at the discretion of the Member States. In fact, liability of statutory auditors and audit firms is a highly controversial issue121 and has been subject to a consultation on behalf of the Commission, which eventually led to a Recommendation of the Commission122 to limit civil liability of statutory auditors and audit firms.

Recital 17 SAD. To this, as to the aforementioned cf. Recital 17 SAD. 119 Recital 18 SAD. 120 Cf. Recital 19 SAD. 121 Merkt/Osbahr, ‘Summenmäßige Begrenzung der Prüferhaftung’, WPg 2019, 187 (246 et seq.). 122 Commission Recommendation of 5 June 2008 concerning the limitation of the civil liability of statutory auditors and audit firms (notified under document number C (2008) 2274), OJ L 162, 21/6/2008, p. 39. 117

118

Hanno Merkt

831

Accounting and Auditing Law of the European Union 8. Chapter VIII – Public oversight and regulatory arrangements between Member States (Art 32-36 SAD) Pursuant to Art 32(1) and (2) SAD, Member States are required to organise an effective system of public oversight for all statutory auditors and audit firms in accordance with the principles set out in the Art 32(2) through (7) SAD and on the basis of home country control (Art 34(1) SAD). They shall also designate a competent authority ultimately responsible for such oversight which shall be governed by non-practitioners who are knowledgeable in the areas relevant to statutory audit, Art 32(3) and (4) SAD. The regulatory arrangements for public oversight should moreover make effective cooperation at Community level in respect of the Member States' oversight activities possible.123 Provisions in this regard are contained in Art 33 and 36 SAD. 98 As mentioned earlier, the SAR contains specific provisionss as to the competent authorities in it Art 20. Accordingly, competent authorities in public oversight for PIEs can only be designated from amongst those referred to in Art 20(1)(a) through (c) SAR. Exemptions from Art 20(1) SAR are regulated in Art 20(2) SAR. Pursuant to Art 20(5) SAR, Member States shall inform the Commission of the designation of competent authorities for the purposes of the SAR which in turn shall consolidate the information so provided and make it public. 97

9. Chapter IX – Appointment and dismissal (Art 37 and 38 SAD) In order to ensure the independence of the statutory auditor or audit firm, their appointment should be carried out by the general meeting of shareholders or members of the audited entity, Art 37(1) SAD.124 Other processes of appointment are permitted by Art 37(2) SAD as long as the independence of the auditors is observed. 100 In order to protect the independence of the auditors, dismissal should only be possible where proper grounds are at hand and if those grounds are communicated to the authority or authorities responsible for public oversight, Art 38(1) and (2) SAD. 125 Divergence of opinions on accounting treatments or audit procedures shall not be proper grounds for dismissal, Art 38(1). 101 For appointment and dismissal of auditors of PIEs specific rules are provided for in Art 16 SAR. Prior to the appointment, the audit committee has to submit a recommendation to the administrative or supervisory body of the audited entity for statutory auditors or audit firms, Art 16(2) SAR. So called ‘big four only clauses’ and clauses of similar restricting effect to the choice of auditors are prohibited, Art 16(6) SAR. 99

10. Chapter X – Audit committee (Art 39 SAD) 102

Since PIEs have a higher visibility and are economically more important, Art 39 SAD provides for stricter requirements regarding statutory audit of their annual or consolidated accounts.126 The Directive requires the establishment of an audit committee for all PIEs, Art 39(1) subpara. 1 SAD. Incidentally, Art 39(1) SAD also sets out the composition of the audit committee. Art 39(2) through (4) SAD cover exemptions from Art 39(1) SAD regarding the requirement for the establishment of an audit committee as well as its composition, for instance for PIEs which are collective investment undertakings whose transferable securities are admitted to trading on a regulated market. 127 Cf. Recital 20 SAD. See Recital 22 SAD. 125 See Recital 23 SAD. 126 Cf. Recital 23 SAD.

123

124

832

Hanno Merkt

Accounting and Auditing Law of the European Union Finally, Art 39(6) SAD spells out a non-exhaustive enumeration of the functions of the audit committee: Art 39(6) SAD

Function

(a)

Information of the administrative or supervisory body

(b)

Monitoring the financial reporting process and submitting recommendations

(c)

Monitoring the effectiveness of the undertaking's internal quality control and risk management systems and, where applicable, its internal audit

(d)

Monitoring the statutory audit of the annual and consolidated financial statements, in particular, its performance

(e)

Reviewing and monitoring the independence of the statutory auditors or the audit firms

(f)

Responsibility for the procedure for the selection of statutory auditors or audit firms

Audit committees accompanied by an effective internal control system shall help 103 to minimise financial, operational and compliance risks, and enhance the quality of financial reporting. Under no circumstance however, the statutory auditor or audit firm should be subordinated to the committee in regard of its duties referred to in Art 39(6).128

11. Chapter XI – International aspects (Art 44-47 SAD) Taking into account that the complexity of international group audits requires effect- 104 ive cooperation between the competent authorities of Member States and those of third countries, the provisions of this Chapter provide regulation fostering such cooperation. Art 44 and 45 SAD permit for the approval, registration and oversight of auditors and audit entities of third countries, whilst Art 47 SAD establishes rules for the cooperation between the competent authorities of Member States and such countries. Briefly, the objective of the provisions is to facilitate informational exchange between the authorities. In cases of equivalence Member States may disapply or modify provisions for registration and oversight (Art 45 SAD) pursuant to Art 46 SAD. An important criterion for granting access to information is whether the competent 105 authorities in third countries meet the requirements which the Commission has declared adequate. Pending such a decision, Member States may assess whether the requirements are adequate.129 In any case, disclosure of information in the context of Art 47 SAD should be in accordance with the rules laid down in Directive 95/46/EC.130 Cf. Recital 25 SAD. Cf. Recital 24 SAD. 129 Cf. Recital 28 SAD. 130 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, OJ L 281, 23/11/1995, p. 31 repealed by Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation), OJ L 119, 04/05/2016, p. 1; cf. Recital 29 SAD. 127

128

Hanno Merkt

833

Directive 2009/102/EC of the European Parliament and the Council of 16 September 2009 in the area of company law on single-member private limited liability companies Preface* The Directive on single-member private limited liability companies1 establishes the 1 legal framework concerning companies with only one shareholder and allows the limitation of liability of individual entrepreneurs within the European Union. The Directive does not create a new type or form of company but simply adjusts the 2 structure of the limited liability company to enable it to be formed and operated by a single shareholder. The limited liability company may thus be formed and operate with a single shareholder as well as with a plurality of shareholders.2

I. Context and Objective 1. History The prospect of a “European” company law was raised as early as 1959, two years 3 after the signing of the Treaty of Rome establishing the European Economic Community.3 After the first attempts to establish a common company law were doomed to fail, the idea of a “European” company law was believed to be buried for all time.4 Yet, the movement to create a European company law was revived in the late 1980’s: On June 8, 1988, the Commission adopted a memorandum proposing a European Company statute.5 This proposal resulted – inter alia – in the Twelfth Council Company Law Directive 89/667/EEC of 1989 on single-member private limited-liability companies. The model of a company with a single shareholder has always raised conceptual 4 problems. Ever since companies have existed it has been part of the understanding that a company consists of more than one person. This is sufficiently indicated by the terms “articles of association” and “company” as such. The basic idea of internal company resolutions is also based on the idea of several shareholders.6 The Roman legal systems in particular were convinced that a single-member private limited liability company was incompatible with the theoretical concept of the company as a contract between several shareholders.7 The German Gesellschaft mit beschränkter Haftung (GmbH), introduced in 1892, was also initially designed to aim explicitly at medium-sized companies. * I would like to thank Mrs Sina Glahn (Maître en droit) from Düsseldorf for the evaluation and incorporation of the French law and the French legal literature. 1 Directive 2009/102/EC of the European Parliament and of the Council of September 16, 2009 in the area of company law on single-member private limited liability companies. 2 Mousoulas, ‘La société unipersonnelle à responsabilité limitée communautaire – appréciation de la XIIe directive du Conseil en matière de sociétés’ Revue des sociétés 1990, 395, n° 17. 3 Carreau and Lee, ‘Towards a European Company Law’ Northwestern Journal of International Law and Business (1989), 501. 4 Carreau and Lee, ‘Towards a European Company Law’ Northwestern Journal of International Law and Business (1989), 503. 5 Bulletin of the European Communities, Supplement 3/88 [1988] OJ C 131, pp. 19-24. 6 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019) n° 1. 7 Lutter, in: Pfeiffer, Kummer and Scheuch (eds), ‘Das Chaos der Ein-Personen-Gesellschaft in Europa’ Commemorative publication (Festschrift) for Hans Erich Brandner (1996), p. 83.

Dieter Leuering

835

Preface 5

6

7

8

9

The introduction of liability limitations triggered the idea of using liability limitations also as an individual person and to dispense the capital accumulation function typical for several shareholders. Over time, this wish met increasing acceptance. 8 Original structural concerns about the concept and understanding of the company could be abandoned and a one-person company could be permitted.9 However, despite this rethinking, the single-member private limited liability company was only permitted in a few member states of the former EC until the 1980 s. 10 In French law, for example, the single-member private limited liability company has been designed as an exception since its introduction in 1985 and is still an exception today (Art 1832 (2) Code civil). Denmark (since 1973), Germany (since 1980) and the Netherlands (since 1987) allowed the single-member company.11 Furthermore, the legal consequences in the event of a subsequent unification of all the company's shares in one hand differed considerably. Some legal systems sanctioned this with the personal liability of the sole shareholder12, others even with forced liquidation13. Against this background, the Twelfth Council Company Law Directive on single-member private limited liability companies was created, which had the declared aim of strengthening small and medium-sized enterprises (SME).14 In order to promote the creation and development of small and medium-sized enterprises (SME), which not only the Commission explicitly wanted to encourage in its 1986 Action Programme for SMEs15, the Directive aims to open up the access to companies limited by shares to sole entrepreneurs throughout Europe.16 Competitive disadvantages in the internal market should be eliminated and the freedom of establishment for enterprises and entrepreneurs should be secured and facilitated.17 The introduction of the single-member company was designed to provide an agile, streamlined company form for entrepreneurs that would abolish unnecessary procedures and grant efficient decision-making by a single entrepreneur incorporating a limited liability company to avail of the advantages of limited liability.18 Nevertheless, the proposal for a directive19 based on the 1986 Action Programme and presented two years later, met with criticism from the Member States 20 (especially Germany21, but also the United Kingdom and others). The reason for this was in 8 Mousoulas, ‘La société unipersonnelle à responsabilité limitée communautaire – appréciation de la XIIe directive du Conseil en matière de sociétés’ Revue des sociétés (1990), 395, n° 2. 9 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 1. 10 Bulletin of the European Communities, Supplement 5/88 [1988] OJ p. 16. 11 Benoît Lecourt, ‘Faut-il réformer la directive sur les sociétés unipersonnelles?’ Revue des sociétés (2014), 139. 12 E.g. Art 2362 of Italian Codice Civile (old version). 13 Lutter, in: Pfeiffer, Kummer and Scheuch (eds), ‘Das Chaos der Ein-Personen-Gesellschaft in Europa’ Commemorative publication (Festschrift) for Hans Erich Brandner (Dr. Otto Schmidt, 1996) 83; Mousoulas, ‘La société unipersonnelle à responsabilité limitée communautaire – appréciation de la XIIe directive du Conseil en matière de sociétés’ Revue des sociétés 1990, 395, n° 4. 14 Lutter Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 1040; Habersack and Verse, Europäisches Gesellschaftsrecht (4th edn, 2011) 351. 15 Council Resolution of 3 November concerning the action programme for small and medium-sized enterprises (SMEs), [1986] OJ C 287/1; Outin-Adam and Reita-Tran, ‘Après la “Société Européenne” (SE)… Les entreprises attendent la “Société Privée Européenne” (SPE)’ Revue du Marché commun et de l’Union européenne (2007) 233. 16 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 104; Recital n° 4 of the Directive 2009/102/EC. 17 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), para. 10, n°4; Hommelhoff, Zivilrecht unter dem Einfluß europäischer Rechtsangleichung (1992), 72. 18 Ahern, The Societas Unius Personae: Using the Single-Member Company as a Vehicle for EU Private Company Law Reform, Some Critical Reflections on Regulatory Approach (February 19, 2015).

836

Dieter Leuering

Preface

Directive 2009/102/EC

particular the so-called prohibition of second-tier subsidiary (German: Enkelverbot), Art 2 (2), according to which single-member private limited liability companies, whose sole shareholder is a legal person, should be prohibited from being the sole shareholder of another private limited liability company or public limited liability company. In addition, the draft contained a piercing the corporate veil (German: Durchgriffshaftung) at the expense of the sole shareholder of a single-member company, as far as it fulfilled the characteristics of a legal entity, Art 2 (3).22 As a result, both the prohibition of secondtier subsidiary and the group piercing liability were deleted in an amended proposal for a directive of May 1989.23 Further debates followed in the European Parliament and Council.24 In December 1989, the Commission presented a further amended proposal for a directive.25 This was ultimately the basis for the Twelfth Council Company Law Directive concerning private limited liability companies with only one shareholder (Directive on single-member private limited liability companies), which was adopted on 21 December 1989.26

2. Current state of affairs: Directive 2009/102/EC27 Under the EEA Agreement, the scope of the directive on single-member private limi- 10 ted liability companies was extended to the EEA states and adapted and supplemented accordingly following the accession of new member states to the EU.28 In 2009, the Twelfth Directive was recodified for the sake of clarity. 29 No changes of 11 content or further recodification in 2017 were made. The single-member company was not included in the now unified directive relating to certain aspects of company law, which originally consisted of six individual company law directives.30

19 Proposal for a Directive of the European Parliament and of the Council on single-member private limited liability companies, May 1988. 20 Schwarz, Europäisches Gesellschaftsrecht (2000), n° 511; Lutter, Bayer and J. Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (2017), n°27.2, 27.18. 21 Cf. Resolution of the German Federal Council (Bundesrat) from November 4, 1988: BR-Drs. 303/88; Cf. Recommendation for a resolution of the Legal Affairs Committee (Rechtsausschuss) from April 13, 1989, BR-Drs. 11/4346. 22 Statement from the Council on the Proposal for the 12th Company Law Directive on single-member private limited liability companies, 88/C 318/04. 23 Commission Proposal for a Twelfth Council Directive on company law concerning single-member private limited companies; [1988] OJ C 173/10. 24 See Resolution from October 11, 1989 on the common position of the Council regarding the adoption of a twelfth directive in the field of company law on single-member private limited liability companies, ABI. EG from November 20, 1989, C 291/53. 25 Commission Proposal for a Twelfth Council Directive on company law concerning single-member private limited companies; [1988] OJ C 173/10. 26 Twelfth Council Company Law Directive of December 12, 1989 on single-member private limited liability companies [1989] OJ L395/40. 27 Directive 2009/102/EC of the European Parliament and of the Council of September 16, 2009 in the area of company law on single-member private limited liability companies. 28 Decision of the Council and the Commission of December 13, 1993 on the conclusion of the Agreement on the European Economic Area between the European Communities, their Member States and the Republic of Austria, the Republic of Finland, the Republic of Iceland, the Principality of Liechtenstein, the Kingdom of Norway, the Kingdom of Sweden and the Swiss Confederation; [1994] OJ L 1/3; Documents concerning the accession of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic to the European Union, Annex IV [2003] OJ L0236/338; Council Directive 2006/99/EC of November 20 adapting certain Directives in the field of company law, by reason of the accession of Bulgaria and Romania [2006] OJ L 363/137. 29 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), para. 10, n° 1.

Dieter Leuering

837

Preface 3. SUP (Societas Unius Personae) – A European idea realized at the national level Following the failure of the proposal for a Council Regulation on the Statute for a European private company (SPE) in 201131, the European Commission presented a proposal for a Directive of the European Parliament and of the Council on single-member private limited liability companies (Societas Unius Personae) on 9 April 2014, herein referred to as the SUP-Directive.32 In contrast to the other European legal forms, the Commission has opted for the regulatory instrument of a directive rather than a regulation (legal basis: Art 50 (2) lit. f TFEU).33 Instead of proposing a separate Directive for the SUP, the Commission has decided to extend the existing Directive on single-member private limited liability companies.34 It was therefore not intended to change the content of the regulations on the single-member company. According to recital 2 of the SUP-Directive, the old provisions are to be “taken over”. 13 However, there are some sections in the Directive where the provisions of the Directive on single-member private limited liability companies are taken over, but not without modifying them. For example, Article 6 of the Directive on single-member private limited liability companies opens the scope for national public limited liability companies, provided that the law of the Member State permits the creation of a single-member company. The wording of Article 1 (3) SUP-Directive, on the other hand, is no longer limited to the extension to public limited liability companies. Consequently, other companies limited by shares are also covered by its scope.35 Furthermore, Article 1 (1) b. of the SUP-Directive extends the scope of the Directive on single-member private limited liability companies to SUP with the aim of ensuring a uniform European standard.36 Article 4 (2) of the SUP-Directive also permits the electronic storage of resolutions. 14 In alignment with the already existing Societas Europea (SE), the new SUP draft only provided a framework for a “small national company limited by shares”. This contrasts with the idea of a Societas Privata Europaea (SPE), which was designed as a European company form. According to a report published at the time of the SPE draft37, “the defects of the SE should be avoided in the SPE statutes by dropping 12

30 Directive (EU) 2017/1132 of the European Parliament and the Council of June 2017 relating to certain aspects of company law; Kindler in Münchener Kommentar zum BGB (7th edn, 2018), part 10, n° 29. 31 Withdrawl of the proposal in the European Commission’s REFIT exercise, (IP/13/891). 32 Commission of the European Union, Proposal for a Directive on single-member private limited liability companies, COM (2014) 212 final. 33 Cf. European Commission, Proposal for a Directive of the European Parliament and of the Council on single-member private limited liability companies, COM (2014) 212 final, p. 5 f.; Heckschen in: Widmann and Mayer (eds), Umwandlungsrecht (169. EL 2018), para. 1 UmwG n°. 392.15; Omlor, ‘Die Societas Unius Personae (SUP) mit mehreren Gesellschaftern – ein Paradoxon?’, GPR (2015) 158; Critical: European Economic and Social Committee, Statement on the proposal for a Directive on single-member private limited liability companies, December 19, 2014, 2014/C 458/04, C 458/22; German lawyers’ association (Deutscher Anwaltverein), Statement on the proposal for a Directive on single-member private limited liability companies, November 2014, 58/2014, p. 4; Austrian Federal Chamber of Labour (Bundesarbeitskammer Österreich), Statement on the proposal for a Directive on single-member private limited liability companies, June 2014, p. 3; German Legal Affairs Committee (Rechtsausschuss), Recommendation to the German Federal Council on the proposal for a directive on single-member limited liability companies, May 12, 2014, 165/1/14; Beurskens, ‘"Soecietas Unius Personase" – der Wolf im Schafspelz?’, GmbHR (2014) 738 f. 34 Jung, ‘Societas Unius Personae (SUP) – Der neue Konzernbaustein’ GmbHR (2014). 580. 35 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 53. 36 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 52. 37 Report on the proposal for a Council regulation on the Statute for a European private company by the rapporteur Klaus-Heiner Lehne, A6-0044/2009.

838

Dieter Leuering

Preface

Directive 2009/102/EC

references to national laws and creating a unified European legal form.”38 However, the SUP was created as a kind of “hybrid”, leaving the national founding regulations for single-member companies untouched and still introducing the legal form SUP.39 As a consequence, the SUP contributes to a blurring of the distinction between national and European legal forms.40 The aim of the new European legal form for small and medium-sized enterprises 15 without minimum capital in particular is to facilitate the (online) establishment and management of subsidiaries abroad through legal harmonisation.41 The European Commission itself suggests that the SUP could be an interesting instrument for groups. 42 Especially corporate groups use single-member companies as subsidiaries. However, their cross-border foundation and management are cost-intensive. The harmonised rules of the SUP could reduce these costs and give a boost to the single-member company concept.43 Anyhow, the Commission's new proposal again meets with reservations from the 16 Member States. The focus of criticism is on the remaining national differences, the online foundation with insufficient identity verification and the lack of employee participation regulations in the case of a possible seat splitting.44 Within the Council's general approach45, against which Germany, Austria and Spain, among others, voted, the criticised points were partly eliminated, although the possible splitting of seats with conceivable negative effects on employee protection was not revised.46 This is the line taken by the proposals of the second working document of the 17 European Parliament's responsible rapporteur Luis de Grandes Pascual from 2016. 47 It is proposed that in addition to a natural person, only a micro or small enterprise may be a shareholder in the SUP as a legal entity.48 Furthermore, the splitting of the registered office should be excluded49, the verification of the identity of the founding shareholder by the competent authorities in the founding state should be ensured during online registration50 and, finally, the possibility for Member States to dissolve letterbox companies should be provided for51. In addition, de Grandes Pascual proposes leaving all the regulations on internal organisation to the Member States52 and thus goes con38 Outin-Adam and Reita-Tran, ‘Après la “Société Européenne” (SE) … Les entreprises attendent la “Société Privée Européenne” (SPE)’ Revue du Marché commun et de l’Union européenne (2007) 233. 39 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), para. 10, n° 23; Mousoulas, ‘La société unipersonnelle à responsabilité limitée communautaire – appréciation de la XIIe directive du Conseil en matière de sociétés’ Revue des sociétés (1990), 395, n° 11. 40 Jung, ‘Societas Unius Personae (SUP) – Der neue Konzernbaustein‘ GmbHR (2014), 581. 41 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), para. 10, n° 23; Jung, ‘Societas Unius Personae (SUP) – Der neue Konzernbaustein’, GmbHR (2014), 579, 582; Drygala, ‘What’s SUP? Der Vorschlag der EU-Kommission zur Einführung einer europäischen Einpersonengesellschaft (Societas Unius Personae, SUP)’ EuZW (2014) 491. 42 Commission of the European Union, Proposal for a Directive on single-member private limited liability companies, COM (2014) 212 final, 3. 43 Jung, ‘Societas Unius Personae (SUP) – Der neue Konzernbaustein’, GmbHR (2014), 579, 582; Lecourt, ‘Faut-il réformer la directive sur les sociétés unipersonnelles?’ Revue des sociétés (2014) 139. 44 Cf. for Germany: BT-Drucks. 18/4843 p. 3 f. 45 Council of the European Union, Proposal for a Directive of the European Parliament and the Council on single-member private limited liability companies – General approach, 9050/15. 46 Hirte, ‘Die Entwicklung des Unternehmens- und Gesellschaftsrechts im Jahr 2015’ NJW (2015), 1218. 47 European Parliament, Second Working Document on the proposal for a directive of the European Parliament and of the Council on single-member private limited liability companies, JURI_DT (2016) 57503, DT\1084651EN.doc. 48 → Art 8, supra note 42, p. 18. 49 → Art 10, supra note 42, p. 19. 50 → Art 14, supra note 42, p. 20. 51 → Art 28, supra note 42, p. 26.

Dieter Leuering

839

Art 1 [Scope] siderably further than the Council's proposal53 to only delete individual organisational proposals from the Commission. 18 In view of the considerable differences54 between the Council's proposal55 and that of the European Parliament, the Commission has withdrawn the proposal56. Still, it is to be hoped that the Commission will not abandon any project in this area in the future.

II. Interpretation of the Directive 19

The interpretation of the Directive is determined by the rules of European methodology:57 In addition to the wording58, the history of the coming into existence of the Directive must be taken into account; this is expressed in the recitals – in accordance with Art 296 (2) TFEU as part of the Directive – in the legislative intent of the Commission and in the comments of the parties involved in the legal procedure. In addition, those national provisions which are of particular importance in the Member States and relating to the Directive are – in the light of historical interpretation – also to be used.59 Furthermore, the Directive needs to be subject to an interpretation based on the position of a provision in the law and its relationship with other provisions and as well as an interpretation based on the meaning of the provisions (telos). This cannot be done without taking into account the principle of the effet utile, which aims at the practical effectiveness of Community law.

Article 1 [Scope] The coordination measures prescribed by this Directive shall apply to the laws, regulations and administrative provisions of the Member States relating to the types of company listed in Annex I. Annex I reads as follows:

1 – – – – – – – – – – – – –

Belgium: “société privée à responsabilité limitée/besloten vennootschap met beperkte aansprakelijkhei” Bulgaria: “дружество с ограничена отговорност акционерно дружество” Czech Republic: “společnost s ručením omezeným” Denmark: “anpartsselskaber” Germany: “Gesellschaft mit beschränkter Haftung” Germany: “Gesellschaft mit beschränkter Haftung” Estonia: “aktsiaselts osaühing” Greece: “εταιρεία περιορισμένης ευθύνης” Ireland: “private company limited by shares or by guarantee” Greece : “εταιρεία περιορισμένης ευθύνης” Spain: “sociedad de responsabilidad limitada” France: “société à responsabilité limitée” Italy: “società a responsabilità limitata” Cyprus: “ιδιωτική εταιρεία περιορισμένης ευθύνης με μετοχές ή με εγγύηση” Latvia: “sabiedrība ar ierobežotu atbildību”

Chapter 7, “organisation”, supra note 42. Chapter 7, “organisation”, supra note 42. 54 Hirte, ‘Die Entwicklung des Unternehmens- und Gesellschaftsrechts im Jahr 2015’ NJW (2015), 1218. 55 General approach of the Council from May 29, 2015, Doc. 9050/15. 56 Withdrawal of Commission proposals, ABI. 2018/C 233/05. 57 Cf. Judgement of 3 October 2013, C‑583/11 P, EU:C:2013:625, para. 50; Judgement of 21 May 2015, C-65/14, EU:C:2015:339, para. 43. 58 EEC Council: Regulation No 1 determining the languages to be used by the European Economic Community, OJ 17, 6.10.1958, pp. 385-368. 59 Riesenhuber, Europäische Methodenlehre, para. 11, n° 38 f. 52

53

840

Dieter Leuering

Art 1

Directive 2009/102/EC – – – – – – – – – – – – – –

Lithuania: “uždaroji akcinė bendrovė” Luxembourg: “société à responsabilité limitée” Hungary: “korlátolt felelősségű társaság részvénytársaság” Malta: “kumpannija privata/Private limited liability company” The Netherlands: “besloten vennootschap met beperkte aansprakelijkheid”, Austria: “Aktiengesellschaft Gesellschaft mit beschränkter Haftung” Poland: “spółka z ograniczoną odpowiedzialnością” Portugal: “sociedade por quotas” Romania: “societate cu răspundere limittă” Slovenia: “družba z omejeno odgovornostjo”, Slovakia: “spoločnosť s ručením obmedzeným”, Finland: “osakeyhtiö/aktiebolag”, Sweden: “aktiebolag”, United Kingdom: “private company limited by shares or by guarantee”.

According to its title, the Directive applies in the area of company law on single- 2 member private limited liability companies.1 Thus, initially, only the national forms of private limited liability companies were covered. To allow this, the Member States must either permit the single-member company2 or at least allow the formation of single-member enterprises with limited liability3. These include the Spanish S.R.L., the French SARL, the Italian S.R.L., the Polish sp. Z O.O, the Dutch B.V. and the English Limited. In addition, all subtypes of the above companies are within the scope of the directive. In Germany, for example, this is the UG (haftungsbeschränkt), in Spain the S.L.N.E., in Italy the Sociedad de Responsabilidad Limitada and in France the EURL As a consequence of the Brexit, the British Limited are no longer be covered by 3 EU directives. In addition, the English Limited, a far-spread legal form across the EU, may be deprived of its legal personality. Thus, SMEs in particular face cost-intensive challenges.4 The mandatory scope was also extended to the Societas Europaea (SE) by Article 3 4 (2) of the SE-Regulation. According to this article, a subsidiary SE may be formatted by an SE; thus, it has only one shareholder. The single-member SE is then subject to the respective member states' implementing legislation for the Directive on single-member private limited liability companies. With regard to the national public limited liability company, however, it is basically left to the member states whether they allow the single-member public limited liability company.5 If this is the case, the provisions of the Directive on single-member private limited liability companies also apply to the SE with its registered office in the respective member state.

1 Brändel in Gordeler et al. (ed), ‘Die Auswirkungen der 12. Gesellschaftlichen EG-Richtlinie auf die Einmann-AG’, Commemorative publication (Festschrift) for 70th birthday of Alfred Kellermann (1990), p. 15. 2 Art 2 (1) of the Directive 102/2009/EC. 3 Art 7 of the Directive 2009/102/EC. 4 Deutscher Industrie- und Handelskammertag, The Impact of Brexit on German Businesses, Results of the IHK Business Survey “Going International 2019”, 3. 5 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 1043; Lutter, in: Pfeiffer, Kummer and Scheuch (eds), ‘Das Chaos der Ein-Personen-Gesellschaft in Europa’ Commemorative publication for Hans Erich Brandner (1996), p. 81, 95.

Dieter Leuering

841

Art 2 [Legitimacy]

Article 2 [Legitimacy] 1. A company may have a sole member when it is formed and also when all its shares come to be held by a single person (single-member company). 2. Member States may, pending coordination of national laws relating to groups, lay down special provisions or penalties for cases where: (a) a natural person is the sole member of several companies; or (b) a single-member company or any other legal person is the sole member of a company.

1. Original and subsequent single-member company, Art 2 (1) 1

According to Article 2 (1) of the Directive, member states must permit the formation of a single-member private limited liability company (original single-member company) on the one hand, but also the continued existence of the company limited by shares as such in the event of a subsequent merger of all shares in the company in the hands of a single shareholder (subsequent single-member company).1 a) Original formation

Due to the minimum harmonization approach, the directive does not contain any requirements regarding the formation of a single-member company; instead, it leaves this organisational element to the member states.2 The Directive relating to certain aspects of company law on disclosure3, liability of the acting party4 and the capital of public limited liability companies remains unaffected. Furthermore, member states are free to establish rules to counter the risks associated with the existence of a single shareholder. 3 A still common practice is a nominee or “straw man formation” (German: Strohmann-Gründung), i.e. formation of a formally two-tier company with the involvement of another person who becomes a formal shareholder but holds his shares in trust/for the account of the sole economic shareholder.5 That was a widespread practise until the single-member company foundation was approved. It is not regulated by the Directive, so that here too it is left to the member states to formulate rules at national level.6 2

b) Subsequent unification of all shares in one hand 4

With regard to the subsequent creation of a single-member company by a single shareholder holding all the shares, Member States must ensure that the legal entity re1 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), para. 10, n° 7; Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht, 2018) 1044. 2 Recital no. 5 of the Directive 2009/102/EC. 3 Directive (EU) 2017/1132 of the European Parliament and of the Council of June 14, 2017 relating to certain aspects of company law, Articles 16-43. 4 Directive (EU) 2017/1132 of the European Parliament and of the Council of June 14, 2017 relating to certain aspects of company law, Article 7. 5 Habersack and Verse, Europäisches Gesellschaftsrecht (4 th edn, 2011) 354. 6 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), para. 10, n° 10; Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 1045.

842

Dieter Leuering

Art 2

Directive 2009/102/EC

mains existent as a company limited by shares.7 Article 2 (1) of the Directive on singlemember private limited liability companies is in this respect lex specialis to the ground for nullity of Article 11 S. 1 lit. b) vi) of the Directive relating to certain aspects of company law. Mirroring the formation of a single-member company, Member States may not provide for separate sanctions for the subsequent formation of such a company. This applies in particular to the ordering of unlimited personal liability of the single shareholder or the obligation to liquidate. At present, French law provides an exception in special case: Art L. 223-5 of the 5 Code de Commerce prohibits a single-member company from having another singlemember company as single shareholder. In the event of violation of the provisions of the preceding paragraph, any interested party may request the dissolution of irregularly constituted companies. Where the irregularity is the result of all the shares of a company with more than one shareholder being combined in one hand, the request for dissolution may not be made less than one year after the unification of the shares.

2. Special provisions and sanctions, Art 2 (2) a) Background As can be seen from the fifth recital of the Directive, the main objective of the 6 Directive is to allow a sole entrepreneur to limit his or her liability. This is intended in particular to extend the scope of action of small and medium-sized enterprises (SMEs) and to strengthen their position. The possibility of limitation of single-member companies is directly linked to the basic provision contained in Article 2(1), which legally embodies the above-mentioned objective of the Directive.8 This leads to the conclusion that the option in Article 2 (2) was created in order to open up scope for action within diverging legal systems.9 Furthermore, the member states must remain free to ensure adequate equity capitalisation and to prevent abusive arrangements. The regulation was originally intended to compensate for the particularity of some 7 Member States – namely France and Belgium10 – which recognised single-member companies even before the Directive entered into force, but subjected them to special restrictions and sanctions.11 According to the recitals of the older version of the Directive12, the possibility of restriction was only intended to compensate for the “current” differences in national legislation. This led to the partial conclusion13 that only the legal situations in France and Belgium did not have to be modified, so that the other member states could not arbitrarily add such “national specialities” later on. However, the word “current” was deleted from the text of the preamble in the new version of the Directive of 2009. Thus, the individual Member States are now indisputably free to impose certain restrictions on single-member companies in accordance with their respective legal situation. The Directive does not limit the number of single-member companies which a 8 natural or legal person may found or be the sole shareholder of. In this regard, the 7 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2017) n° 27.14. 8 Schwarz, ‘GmbH-Konzernrecht und Europäisches Gemeinschaftsrecht’ Internationales Steuerrecht (1993) 23. 9 Cf. Bruns, Haftungsbeschränkung und Mindesthaftung (2003), p. 129. 10 Cf. France, Journal Officiel de la République Française, Lois et Décrets, July 25 and 26, 1966, 6402. 11 Recital 6 of the Directive 2009/102/EC. 12 Twelfth Council Company Law Directive 89/667/EEC of December 21, 1989 on single-member private limited liability companies. 13 Knobbe-Keuk, ‘Zum Erdbeben “Video”’ Der Betrieb (1992) 1465.

Dieter Leuering

843

Art 2 [Legitimacy] lack of regulation requires appropriate measures by the Member States. However, the fact remains that, under these conditions, the coordination of company law in the area of single-member companies is not completed. The effectiveness of the regulations introduced therefore remains incomplete.14 b) Concrete sanction options Restrictions such as the strict prohibition of second-tier subsidiaries (German: Enkelverbot) and the piercing the corporate veil (German: Durchgriffshaftung) of the sole shareholder were abolished in the course of the directive-making process (see I. History). On the other hand, Article 2(2) allows those Member States which do not make use of the option in Article 7 to adopt special provisions and sanctions until the harmonisation of group law at European level, provided that a natural person is the sole shareholder of several companies (multiple single shareholder) or a single-member company or other legal entity is the sole shareholder (corporate chains). The regulation on corporate chains explicitly refers to cases of a 100 per cent subsidiary company within a group. 10 The limitation of multiple single shareholders (lit. a) is intended to prevent the instrument of the single-member company from being misused by natural persons to split up their assets artificially in a fraudulent manner, thus causing disadvantages for the company's creditors and legal relations.15 11 Due to the absence of concrete specifications on the possibilities of regulation, the Member States can decide whether and, if so, how they want to arrange regulations in this context. Conceivable sanctions are the prohibition of formation, the order of dissolution of a subsequently formed single-member company and the order of unlimited liability of the (remaining) single shareholder.16 9

c) Judge-made law as legal basis It is controversial whether the Member States may only make use of the regulatory option of Art 2 II by means of law or whether national judge-made law is also included. 13 This question is particularly important in the context of the establishment of foreign subsidiaries by a single shareholder (Article 2 II lit. b). Here it is decisive whether the relevant regulations already result from the law or (additionally) by way of a judicial development of law by the highest national courts. 14 The wording of Article 2 II in its various language versions speaks against the applicability of judge-made law. The French (“les législations”), Spanish (“las legislaciónes”) and Italian (“le legislazioni”) versions respectively speak of “laws” and “legal provisions”, similar to the German version. The English version, on the other hand, which speaks of “lay down special provisions”, is to be understood more as normative law. Although the wording is not uniformly clear in this respect, the predominant language versions speak against the inclusion of judicial law.17 Moreover, on the one hand, judge-made law is not sufficient for the implementation of the Directive and, on the other hand, the inclusion 12

14 Mousoulas, ‘La société unipersonnelle à responsabilité limitée communautaire – appréciation de la XIIe directive du Conseil en matière de sociétés’ Revue des sociétés (1990), 395, n° 12. 15 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 1048. 16 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 24. 17 Roth, ‘“Video”-Nachlese oder das (immer noch) vergessene Gemeinschaftsrecht’ Zeitschrift für Wirtschaftsrecht (1992) 1054; Meilicke, ‘Unvereinbarkeit der Video-Rechtsprechung mit EG-Recht‘ Der Betrieb (1992) 1870.

844

Dieter Leuering

Art 2

Directive 2009/102/EC

of judge-made law leads to considerable legal uncertainty. There would be a lack of the necessary transparency of national law for foreign company founders.18 However, the fact that statutory law is also subject to interpretation, is an argument in 15 favour of the inclusion of judge-made law. Thus, it cannot be excluded from the outset. In fact, the preamble in recital n°5 expressly speaks of “legal provisions” which indicates that any national law, including judicial development, may constitute a restriction within the meaning of Article 2 (2).19 This is also supported by the fact that the exemption provision in Article 2(2) is intended to allow Member States such as France and Belgium not to adapt their company law to the Directive but to retain their existing rules. It would then appear contradictory if this “permission to inactivity” were to be seen as a formal criterion in the form of an explicit law.20 As a result, the “special provisions or sanctions” must be sufficiently recognisable for 16 the legal practitioners (both domestic and foreign).21 If this criterion is already fulfilled in the text of the law, there is no need to consult judge-made law.

3. Scope of the Member States' regulatory freedom Furthermore, there is disagreement as to whether Article 2(2) has a final character, so that restrictions can only be made in the cases referred to therein or whether Member States remain free to adopt specific provisions or sanctions for other cases concerning single-member companies. In this respect, the affirmation of a final character is to be approved at first. 22 This follows both from the wording of the article and the objective of the Directive. Only in this way can the envisaged exceptional character of the provision be achieved.23 However, this applies only to the extent that Article 2(2) precludes the regulation of general circumstances concerning single-member companies, the only connecting factor being the existence of such a single-member company. This includes, for example, piercing the corporate veil (German: Durchgriffshaftung) in the case of abusive mingling of assets, interventions which destroy the existence of the company or the general rules on manager liability. In such cases, provisions can be made by the Member States which, under certain conditions in individual cases, lead to certain legal consequences or sanctions. This is generally compatible with the Directive. The reason for this is that, for example, in the event of an abuse of the limitation of liability, a piercing the corporate veil on the sole shareholder or a claim for coverage of losses and compensation of damages should be possible. Such exceptional liability, however, may also have reasons of a group law nature, as long as it does not represent a per se liability of the single shareholder.24 This is justified by the fact that the Directive itself should not regulate group law issues (cf. wording of Art 2(2): “pending coordination Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 26. Drygala, ‘Konzernhaftung und Einmann-Richtlinie’ Zeitschrift für Wirtschaftsrecht (1992) 1532; Kindler, ‘Gemeinschaftsrechtliche Konzernhaftung in der Einmann-GmbH’ (Zeitschrift für das gesamte Handels- und Wirtschaftsrecht (1993) 9. 20 Schwarz, ‘GmbH-Konzernrecht und Europäisches Gemeinschaftsrecht’ Internationales Steuerrecht (1993) 28. 21 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 27; See BGHZ 115, 187-203 (“Video-Urteil”) as an example for a provision laid down by the German Federal Court of Justice. 22 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 1050; Habersack and Verse, Europäisches Gesellschaftsrecht (4th edn, C.H. Beck, 2011) 355. 23 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 29. 24 Drygala, ‘Konzernhaftung und Einmann-Richtlinie’ Zeitschrift für Wirtschaftsrecht (1992) 1532. 18

19

Dieter Leuering

845

17

18

19

20

Art 3 [Disclosure] of national laws relating to groups...”). Recital n°4 of the Directive on single-member private limited liability companies also supports the admissibility of corresponding liability rules. According to the recital, the member states may provide the liability of the single shareholder for the company's obligations “in exceptional cases”, as long as the regulations remain within the scope of what is permitted by the Directive.

Article 3 [Disclosure] Where a company becomes a single-member company because all its shares come to be held by a single person, that fact, together with the identity of the sole member, must either be recorded in the file or entered in the register as referred to in Article 3 (1) and (2) of Directive 68/151/EEC or be entered in a register kept by the company and accessible to the public.

1. Protection provisions of third parties 1

Single-member companies have the special feature that their sole shareholders are not controlled by other shareholders and that they are often at the same time managing directors. Therefore, there is usually a lack of internal company control, i.e. internal supervision. This increases the risk of a mingling of assets and the resulting withdrawal of the liability substrate. In order to counteract the risks for creditors, Articles 3 to 5 of the Directive on single-member private limited liability companies provide for special protective provisions. The aim of these provisions is a harmonised minimum protection of third parties throughout the Union. However, they only have a minimum standard character, so that – within the limits of the effet utile – the Member States may in principle adopt further protective provisions.1

2. Disclosure provisions for the single shareholder If a one-person company is originally founded as such, the general disclosure provisions of the former Disclosure Directive2 apply. The protection in the formation phase is satisfied in the sense of Art 2 lit. a) in conjunction with Art 16 of the Directive relating to certain aspects of company law3 by the disclosure provisions for the requirements on the statutes and the act of establishment. Thus, the need for legal protection is achieved by disclosing the fact of the single-member company.4 3 However, Article 3 does not refer to the establishment of a single-member company. In this respect, the creation of the Directive on single-member private limited liability companies only required an alignment of the disclosure requirements in the case of subsequent formation. If a single-member company is only subsequently created by the unification of all shares in one hand, special disclosure regulations are required to 2

Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 31. Directive 2009/101/EC of the European Parliament and of the Council on coordination of safeguards which, for the protection of the interests of members and third parties, are required by Member States of companies within the meaning of the second paragraph of Article 48 of the Treaty, with a view to making such safeguards equivalent. 3 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law. 4 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), para. 10 n° 16; Brändel in Gordeler et al. (ed) ‘Die Auswirkungen der 12. Gesellschaftlichen EG-Richtlinie auf die Einmann-AG’ Commemorative publication for 70th birthday of Alfred Kellermann (1990), p. 15. 1

2

846

Dieter Leuering

Art 3

Directive 2009/102/EC

inform the public (in the sense of current and potential business partners) about the new situation. This is where the provision of Article 3 of the Directive comes into play: The formation of the single-member company and the identity of the sole shareholder must be disclosed. The Directive itself does not explicitly specify the requirements of the identity of the individual shareholder. Nevertheless, in order to clearly identify the single member, it is likely that information such as surname, first name, date of birth and place of residence will be required in order to meet the information needs of the public (in the sense of current and potential business partners).5 Legal entities as single shareholders must at least state the company name, the legal form supplement, their (commercial) register number (if available), the competent register court and the business address.6 It is up to the Member States to decide on the details of the disclosure and, in particular, where it should be recorded. They can choose between an entry in the commercial register within the meaning of Article 16 of the Directive relating to certain aspects of company law or a note in a publicly accessible register kept by the company. The second alternative is intended to meet the divergent requirements of the individual legal systems. However, it diminishes the practical value of the commercial register. 7 The sanctioning of a breach of the disclosure obligation is at the discretion of the member states, whereby they are always bound to the effet utile. This requires proportional sanctions that encourage compliance and do not undermine the essential purpose of the Directive, namely the promotion of single-member companies. It is questionable whether the following practical case also falls within the scope of Article 3 of the Directive: For example, a second shareholder holds his shares in trust for the co-shareholder as beneficial owner and there is therefore de facto only one shareholder. The wording does not give answers. There is also no possibility of analogy. This can be justified on the one hand by the fact that the formation by a nominee/straw man (German: Strohmann-Gründung) was (deliberately) omitted from the regulation 8, and on the other hand by the fact that Article 3 of the Directive refers to the provisions of the former Publicity Directive (since 2017 part of the Directive relating on certain aspects of company law), according to which only the legal owner(s) are named in the list of shareholders and thus only they become apparent to the the public (in terms of current and potential business partners). The Directive has a gap in this respect. 9 The regard to a German one-person public limited liability company (cf. Artile 6), § 42 AktG states that if all shares are in the hands of one shareholder, a notification must be submitted immediately to the commercial register, stating the name, first name, date of birth and place of residence of the sole shareholder. Likewise, the French Code de commerce provides in its article 227-1 since 1999 an equal legal status for the simplified public limited liability company (société par actions simplifiée, SAS) and the single-member simplified public limited liability company (société par actions simplifiée unipersonelle, SASU). The same rules, with a few exceptions, apply to the multiple member and the single member public limited liability companies. The Directive itself does not contain any explicit provisions on the sanctioning of violations. It is therefore up to the Member States to lay down appropriate penalties for 5 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht, 2018, 1052. 6 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 34. 7 Mousoulas, ‘La société unipersonnelle à responsabilité limitée communautaire – appréciation de la XIIe directive du Conseil en matière de sociétés’ Revue des sociétés (1990), 395, n° 15. 8 Supra note [64], [65]. 9 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 33.

Dieter Leuering

847

4

5

6

7

Art 4 [General Meeting and Decisions] failure to comply with registration obligations. In Germany, a special liability provision has been introduced in § 40 (3) GmbHG for the case of violation of disclosure to the commercial register. 8 According to paragraph 1, the managing directors have the obligation, after the coming into effect of any change in the persons of the shareholders or the extent of their participation, to submit a signed list of shareholders to the commercial register, from which surname, first name, the date of birth and place of residence, the nominal amounts and the serial numbers of the shares taken over by each of them as well as the respective percentage share in the share capital represented by the nominal amount of each share are determinable. In case of a violation of this obligation, the managing directors shall be liable for those whose shareholding has changed and for the creditors of the company as joint and several debtors.

Article 4 [General Meeting and Decisions] 1. The sole member shall exercise the powers of the general meeting of the company. 2. Decisions taken by the sole member in the field referred to in paragraph 1 shall be recorded in minutes or drawn up in writing.

1. Sole shareholder as “shareholders’ meeting”, Art 4 (1) According to Article 4 (1) of the Directive, the sole member possesses the competences of the meeting of shareholders. Against the background of the divergent legal systems within the European Union and the dogmatic ambiguities in some legal systems, the provision makes it clear that even in the context of single-member companies there is a functional separation between the administrative body (managing director) on the one hand and the highest decision-making body (meeting of shareholders) on the other. 1 Even in constellations in which the sole shareholder is also the sole managing director of the single-member company, a distinction must be made between his capacity as managing administrative body and as sole shareholder of the company. 2 In the version of the Commission's original proposal2, Article 4 (1) of the Directive contained a prohibition on the “delegation” of the shareholder's powers. However, the proposal has been so severely criticised that national law can now allow the exercise of the voting rights of the individual shareholder by a representative and can define the scope of the powers. However, in France, for instance, a status model proposed in a decree prohibits a delegation of powers.3 3 The Directive has omitted provisions on the powers of the (single-person) meeting of shareholders.4 Certain other European secondary legislation, however, require approval; see Article 93 of the Directive relating to certain aspects of company law with respect to the merger5 and Article 139 with respect to the division of companies6. 1

1 Habersack and Verse, Europäisches Gesellschaftsrecht (4 th edn., C.H. Beck, 2011), 358; Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 1054. 2 Commission Proposal for a Twelfth Council Directive on company law concerning single-member private limited companies; [1988] OJ C 173/10. 3 French decree n° 2008-1419 from December 19, 2008 relating to the standard statutes of association of limited liability companies whose sole shareholder, a natural person, is personally responsible for their management and amending the Commercial Code, Annexe, Article 9. 4 Mousoulas, ‘La société unipersonnelle à responsabilité limitée communautaire – appréciation de la XIIe directive du Conseil en matière de sociétés’ Revue des sociétés (1990), 395, n° 13.

848

Dieter Leuering

Art 4

Directive 2009/102/EC

However, there are also exceptions to this rule when the beneficiary companies together own all the shares as well as the other shares of the divided company, cf. Art 154 of the Directive7 and Art 111 of the Directive8. In France, the operating rules of the EURL are essentially those of any limited liability 4 company: The sole shareholder had to approve the accounts within six months of the end of the financial year, keep a register of the decisions taken by him, file the clerk's office of the commercial court, publish certain decisions, comply with certain special procedures (in the event of an agreement with the company or losses exceeding half of the capital). Even though these provisions have been eased in the course of reforms whose objective was to enhance the attractiveness of this corporate form, they still represent an “unnecessary burden” and a brake on action leading to many EURLs not being managed in accordance with the law.9 An autonomous structural directive on the powers of the general meetings of public 5 limited companies has not made it beyond the stage of a draft directive.10

2. Shareholder resolutions, Article 4 (2) In order to ensure a minimum of legal certainty, the shareholder resolutions passed 6 by the sole shareholder must be recorded in minutes, i.e. in a protocol of the meeting. It may be assumed that the simple text form is sufficient, which is referred to in more recent EU legal acts11 as “permanent data carrier”.12 The written record firstly aims at compensating for the lack of internal control and secondly to prevent subsequent manipulation.13 The legal consequences of a formal defect as well as the sanctioning of a breach of documentation obligation are determined by national law due to the lack of harmonisation on a European level, whereby the principle of the effet utile must be respected.14 In Germany, § 48 (3) GmbHG states that if all shares of the company are in the hands 7 of one shareholder, a signed minute of the resolution must be recorded immediately. Pursuant to § 130 (1) sent. 2 AktG, the Supervisory Board must sign a minute of the resolution (unless a notary public is required to act). This provision also applies without reservation to the single-member public limited liability company. If this provision is violated, the resolution is null and void pursuant to § 241 no. 2 AktG. In the case of the Former Article 7 of the Merger Directive. Former Article 6 of the Division Directive. 7 Former Article 20 of the Division Directive. 8 Former Article 25 of the Merger Directive. 9 Entire paragraph: Serlooten and Monsèrié-Bon, ‘Entreprise unipersonnelle à responsabilité limitée – EURL’ Répertoire des Sociétés (2012) 11-12, n° 30. 10 Proposal for a fifth Directive to coordinate the safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, as regards the structure of 'societes anonymes' and the powers and obligations of their organs, COM (72) 887. 11 E.g. Art 4 Par. 1 n° 62 of the Directive 2014/65/EU of the European Parliament and of the Council of May 15, 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU; Art 2 No- 10 of the Directive 2001/83/EU of the European Parliament and of the Council of October 25, 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council. 12 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 1055. 13 Supra note [104]. 14 Mousoulas, ‘La société unipersonnelle à responsabilité limitée communautaire – appréciation de la XIIe directive du Conseil en matière de sociétés’ Revue des sociétés (1990) 395, n° 13. 5

6

Dieter Leuering

849

Art 5 [Self-dealing] German private limited liability company (GmbHG), a violation does not lead to invalidity, but it can lead to claims for damages.15 8 In France, the same problem has been identified. Thus, article L. 223-1 Code de commerce states that the sole shareholder shall exercise the powers of the meeting of shareholders. But instead of imposing strict rules on how to ensure the transparency of the decision making, the French legislator delegated the implementation of further details to the executive power. Thus, a decree provides standard statutes but which are not mandatory. Yet, article 9 of the decree provides that the single shareholder’s decisions in his position as general meeting are recorded in a listed and initialled register. Furthermore, he may under no circumstances delegate his powers. 16

Article 5 [Self-dealing] 1. Contracts between the sole member and his company as represented by him shall be recorded in minutes or drawn up in writing. 2. Member States need not apply paragraph 1 to current operations concluded under normal conditions. 1

In principle, a fundamental distinction must also be made in the single-member company between the decision-making body and the management body. However, this does not exclude the appointment of the sole member as sole or joint managing director. Instead, the sole shareholder is entitled to represent the company in accordance with the Directive relating to certain aspects of company law1. Both in German and in France, the single-member company consisting of a single shareholder who, at the same time, assumes the functions of manager is, in practice, the most common situation. 2

1. Mandatory form requirement, Art 5 (1) 2

Article 5 (1) of the Directive contains a protective provision with regard to self-dealing between the sole shareholder and the company represented by him. The reason is that in the constellation of the single-member company there is an increased potential for conflicts of interest to the detriment of the the public (in terms of current and potential business partners), particularly in the context of self-dealing.3 From a practical point of view and with regard to a later potential insolvency of the single-member company, the protective provisions should enable the insolvency administrator to comprehend and check transactions between the company and the managing director as the simultaneous sole shareholder as well as possible (inadmissible) asset transfers.4 However, based on the objective of the Directive to establish single-member companies, self-dealing is in principle considered permissible. Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 41. Décret n° 2008-1419 du 19 décembre 2008 relatif aux statuts types des sociétés à responsabilité limitée dont l'associé unique, personne physique, assume personnellement la gérance et modifiant le code de commerce. 1 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law, Art 9. 2 For France: Serlooten and Monsèrié-Bon, ‘Entreprise unipersonnelle à responsabilité limitée – EURL’ Répertoire des Sociétés (2012) 21, n° 69. 3 Commission Proposal for a Twelfth Council Directive on company law concerning single-member private limited companies [1988] OJ C 173/10. 4 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 42. 15

16

850

Dieter Leuering

Art 5

Directive 2009/102/EC

Notwithstanding, Art 5 (1) guarantees a minimum degree of transparency by requir- 3 ing at least minutes or a written form of the decisions. What is meant is a written record which at least meets the requirements of “durable data carrier” 5. Thus, the original demand of the draft6 to make these decisions dependent on an approval in the statutes or in the constituent act has not been able to assert itself and there is no disclosure requirement.7 According to the Directive, self-dealing is also permissible if the sole shareholder is at the same time the sole managing director8 or at least a managing director with the sole power of representation9, if he concludes the contract by way of joint representation together with a third-party managing director or if he represents the company in his capacity as a shareholder. It cannot be inferred from Article 5 (1) of the Directive on single-member private limited liability companies that the minutes are a prerequisite for the validity of transactions involving the company itself. Instead, the provision is intended to demonstrate the (subsequent) probative force of such agreements. Due to the absence of regulated sanctions for infringements, it is recommended that national legislators to take action.

2. Relaxation of the mandatory form requirement, Art 5 (2) However, Member States are allowed to exempt current operations concluded under 4 normal conditions from the mandatory form requirement of Article 5 (1). This is intended to enable Member States to meet the interests of both the single-member company, which wants to keep bureaucracy to a minimum, and the interests of creditors. The possible exemption can also be justified by the fact that the risk to legal transactions is generally lower.10 The concept of current transactions is not legally defined and is not further described 5 in the legislative material. In view of the normative purpose of Article 5 of the Directive, the current business of the company will at least be understood to be those that contribute to the day-to-day functioning of the company and, from an objective point of view, do not noticeably affect the company's assets.11 In particular, the scope of the transaction, its financial implications for the company and the consequences (if any) associated with the latter must be taken into account. The term “normal conditions” is also not sufficiently defined. These are generally understood to be the agreed conditions of the respective transaction. Furthermore, they must comply with the arm's length principle. “It says that transactions should be valued as if they had been carried out between unrelated parties, each acting in his own best interest”.12 In Germany, for 5 E.g. Art 4 Par. 1 No. 62 of the Directive 2014/65/EU of the European Parliament and of the Council of May 15, 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU; Art 2 No. 10 of the Directive 2001/83/EU of the European Parliament and of the Council of October 25, 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council. 6 Cf. Commission Proposal for a Twelfth Council Directive on company law concerning single-member private limited companies; [1988] OJ C 173/10. 7 Habersack and Verse, Europäisches Gesellschaftsrecht (4 th edn, 2011), 359. 8 Explanatory Memorandum of the Government Draft on the Directive, BT-Drs.184/91. 9 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2017) n° 27.38. 10 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019) n° 44; Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmensund Gesellschaftsrecht (2017) n° 27.39; Grohmann, Das Informationsmodell im Europäischen Gesellschaftsrecht (2006), 305. 11 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 45. 12 https://stats.oecd.org/glossary/detail.asp?ID=7245, last seen January 31, 2020.

Dieter Leuering

851

Art 6 [The one-person public limited liability company] example, the Member State option of Article 5 (2) has not been used due to the high degree of uncertainty regarding the vague legal concepts13.

Article 6 [The one-person public limited liability company] Where a Member State allows single-member companies as defined by Article 2 (1) in the case of public limited companies as well, this Directive shall apply. The Directive applies to public limited liability companies if a member state also permits the single-member company for this type of company.1 However, there is no obligation to establish and/or subsequently create a single-member public limited liability company by combining all shares in the hands of one stakeholder. The introduction of Article 7, which constitutes the second exception to the principle of the single-member company with limited liability, reinforces this position.2 Established standards of protection for the benefit of shareholders and third parties are guaranteed by the corresponding application of the Directive with regard to single-member public limited liability companies3 and the circumvention of the protection regulations by changing to the legal form of a public limited liability company is prevented.4 2 For the raising of the minimum capital, the requirements of the Second Company Law Directive (Capital Requirement Directive) must be observed.5 Over time, an increasing number of member states have approved the single-member public limited liability company, such as the Netherlands, Poland, Sweden, Luxembourg and the United Kingdom. 3 On the other hand, there is disagreement as to whether the Directive applies to the single-member public limited liability company if a member state alternatively permits the formation or subsequent foundation of such a company6 or whether these circumstances must be cumulatively prescribed by the legal system of the Member State. 7 The better arguments speak in favour of the admissibility of alternative possibilities of formation. In the case of the single-member public limited liability company, the same standards of protection should apply in the interest of the shareholders and third parties. Furthermore, there is a need for protection against circumvention even if a Member State allows only one of the two alternatives.8 1

Cf. Explanatory Statement of the German Government Draft, BR-Drs. 184/91, p. 10 f. Brändel in Gordeler et al. (eds), ‘Die Auswirkungen der 12. Gesellschaftlichen EG-Richtlinie auf die Einmann-AG’ Commemorative publication for the 70th birthday of Alfred Kellermann (1990), 15. 2 Mousoulas, ‘La société unipersonnelle à responsabilité limitée communautaire – appréciation de la XIIe directive du Conseil en matière de sociétés’ Revue des sociétés (1990), 395, n° 9. 3 Commission Proposal for a Twelfth Council Directive on company law concerning single-member private limited companies; [1988] OJ C 173/10, p. 9. 4 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 1043. 5 Second Council Directive 2012/30/EU of October 25, 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent. 6 Kindler, ‘Die Aktiengesellschaft für den Mittelstand Das Gesetz für kleine Aktiengesellschaften und zur Deregulierung des Aktienrechts’ NJW (1994) 3042; Eckert, ‘Die Harmonisierung des Rechts der Ein-Personen-GmbH’ Europäische Zeitschrift für Wirtschaftsrecht (1990) 55. 7 Lutter, Europäisches Unternehmensrecht (3rd edn, 1991), 309 ff. 13

1

852

Dieter Leuering

Art 7

Directive 2009/102/EC

Article 7 [Single-member enterprise with limited liability] A Member State need not allow the formation of single-member companies where its legislation provides that an individual entrepreneur may set up an undertaking the liability of which is limited to a sum dedicated to a stated activity, on condition that safeguards are laid down for such undertakings which are equivalent to those imposed by this Directive or by any other Community provisions applicable to the companies referred to in Article 1. In the area of conflict between harmonisation efforts and national sovereignty, the directive attempts to take into account the reservations against the single-member company that prevail in many member states. Article 7 of the Directive therefore states that national law, if it allows at least the one single-member enterprise with limited liability, is subject to the obligation to register the single-member company. Article 7 of the Directive on single-member private limited liability companies is based on Portuguese law, in which a single-member legal form, the E.I.R.L. (estabelecimen-to individual de responsabilida de limitada), already existed in 1986.1 In addition to Portugal, France has had a single-member enterprise (L'entrepreneur individuel à responsabilité limitée – EIRL) since 2011. Both countries can theoretically make use of the option provided by Article 7 of the Directive. However, in practice they have already transposed the single-member private limited liability company into national law, so there is no need for the exemption provision. A German proposal for an entrepreneur with limited liability was published by the Bavarian Ministry of Justice in 2006.2 Although parts of the doctrine were favourable to the proposal, the critical voices predominated and finally led to the rejection of the proposal. It is true that Article 7 to a certain extent equates the single-member enterprise with limited liability and the one-person limited liability company. In practice, however, this cannot be assumed. For reasons of company organisation law, a conversion into a single-member enterprise with limited liability is not advantageous if the last shareholder ceases to exist. In addition, single-member enterprises are not fundamentally suitable as a group module. They often lack the necessary legal personality.3 However, it is not sufficient if the liability of the enterprise is limited to assets which are used for specific purposes. Rather, as a second prerequisite, protective provisions must be established with respect to this enterprise which are equivalent to those of the Directive and other Community Law. Consequently, an equivalent aliud must be established.4 However, these protective provisions need only be enacted if the possibility of a single-member private limited liability company in addition to the sole entrepreneur with limited liability does not exist. 8 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 1043. 1 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th edn, 2019), para. 10, n° 11; Eckert, ‘Die Harmonisierung des Rechts der Ein-Personen-GmbH’ Europäische Zeitschrift für Wirtschaftsrecht (1990) 56. 2 Statement of the Federal Chamber of Lawyers on the draft law introducing the limited liability entrepreneur, July 2006 (BRAK-Stellungnahme-Nr. 24/2006); Wicke, ‘Limited, Ein-Euro-GmbH oder Kaufmann mit beschränkter Haftung? – Überlegungen zur Haftungsbeschränkung für KMU’ ZNotP (2006), 322-324. 3 Jung and Stiegler in Jung, Krebs and Stiegler (eds), Gesellschaftsrecht in Europa (2019), n° 19. 4 Lutter, Bayer and J. Schmidt, ‘Europäisches Unternehmens- und Kapitalmarktrecht’ Zeitschrift für Unternehmens- und Gesellschaftsrecht (2018) 1046.

Dieter Leuering

853

1

2

3

4

Art 7 [Single-member enterprise with limited liability] 5

From today's point of view, Art 7 is no longer of any practical significance, as all member states now permit a single-member private limited liability company.

854

Dieter Leuering

Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies (Shareholder Rights Directive) last amended by Directive 2017/828/EU of the European Parliament and of the Council of 17.5.2017 Bibliography: Amstutz, Globale Unternehmensgruppen (2017); Anzinger, ‘Vorstands- und Aufsichtsratsvergütung: Kompetenzverteilung und Offenlegung nach der zweiten Aktionärsrechterichtlinie’ ZGR 2019, 39; Bachmann, ‘Der beschleunigte Anteilserwerb nach dem Finanzmarktstabilisierungsergänzungsgesetz vor dem Hintergrund des Verfassungs- und Europarechts’ ZIP 2009, 1249; Bachner and Dokalik, ‘Die neue EU-Richtlinie über Aktionärsrechte und ihre Auswirkungen auf das österreichische Aktienrecht’ GesRZ 2007, 104; Balp, ‘Regulating Proxy Advisors Through Transparency: Pros and Cons of the EU Approach’ ECFR 2017, 1; Baums, ‘Zur Deregulierung des Depotstimmrechts’ ZHR 171 (2007), 599; Bayer, ‘Grundsatzfragen der Regulierung der aktienrechtlichen Corporate Governance’ NZG 2013, 1; Bayer and J. Schmidt, ‘Zur Vorwirkung von Art 5 Abs 1 EGRL 36/2007’ EWiR 2010, 289; Bayer and J. Schmidt, ‘BBGesetzgebungs- und Rechtsprechungsreport Europäisches Unternehmensrecht 2013/14’ BB 2014, 1219; Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport Europäisches Unternehmensrecht 2014/15’ BB 2015, 1731; Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport Europäisches Unternehmensrecht 2015/16’ BB 2016, 1923; Bayer and J. Schmidt, ‘BB-Gesetzgebungs- und Rechtsprechungsreport Europäisches Unternehmensrecht 2016/17’ BB 2017, 2114; Bayer and J. Schmidt, ‘BBGesetzgebungs- und Rechtsprechungsreport zum Europäischen Unternehmensrecht 2018/19 – Teil II’ BB 2019, 2178; Bayer and Selentin, ‘Related Party Transactions: Der neueste EU-Vorschlag im Kontext des deutschen Aktien- und Konzernrechts’ NZG 2015, 7; Binder, ‘Krisenbewältigung im Spannungsfeld zwischen Aufsichts-, Kapitalmarkt- und Gesellschaftsrecht’ WM 2008, 2340; Bork, ‘Die Regelungen zu “know-your-shareholder” im Regierungsentwurf des ARUG II’ NZG 2019, 738; Breuer, ‘Der Europäische Gerichtshof für Menschenrechte als Wächter des europäischen Gemeinschaftsrechts’ JZ 2003, 433; Bungert and Wansleben, ‘Umsetzung der überarbeiteten Aktionärsrechterichtlinie in das deutsche Recht: Say on Pay und Related Party Transactions’ DB 2017, 1190; Chiu, ‘Learning from the UK in the Proposed Shareholders’ Rights Directive 2014? European Corporate Governance Regulation from a UK Perspective’ ZVglRWiss 114 (2015), 121; Deilmann and Otte, ‘Auswirkungen des ARUG auf die Feststellung des Beschlussergebnisses in der Hauptversammlung’ BB 2010, 722; Dethomas and Rontchevsky, ‘Un premier pas vers l’exercice effectif des droits des actionnaires des societés cotées dans l’ensemble de l’Union européenne’ Revue Lamy Droit des Affaires 2007, 10; Diekmann, ‘“Say on Pay” – Wesentliche Änderungen bei der Vergütung von Vorständen und Aufsichtsräten aufgrund der geänderten Aktionärsrechterichtlinie’ WM 2018, 796; Dijkhuizen, ‘Report from Europe: The Proposal for a Directive Amending the Shareholders Rights Directive’ ECL 12 (2015), 45; Djankov, La Porta, Lopes-de-Silanes and Shleifer, ‘The law and economics of self-dealing’ Journal of Financial Economics 2008, 430; Eggers and de Raet, ‘Das Recht börsennotierter Gesellschaften zur Identifikation ihrer Aktionäre gemäß der EU-Aktionärsrechterichtlinie’ AG 2017, 464; Einsele, Wertpapierrecht als Schuldrecht (1995); Engert and Florstedt, ‘Geschäfte mit nahestehenden Personen aus empirischer Sicht’ ZIP 2019, 493; Enriques, ‘Related Party Transactions: Policy Options and Real-World Challenges’ EBOR 16 (2015), 1; Enriques and Volpin, ‘Corporate Governance Reforms in Continental Europe’ Journal of Economic Perspectives 21 (2007), 117; Enriques and Romano, Institutional Investor Voting Behavior: A Network Theory Perspective ECGI Law Working Paper No. 393/2018, 15; Fleischer, ‘Zur Rolle und Regulierung von Stimmrechtsberatern (Proxy Advisors) im deutschen und europäischen Aktien- und Kapitalmarktrecht’ AG 2012, 2; Fleischer, ‘Proxy Advisors in Europe: ReformProposals and Regulatory Strategies’ ECL 9 (2012), 12; Fleischer, ‘Related Party Transactions bei börsennotierten Gesellschaften: Deutsches Aktien(konzern)recht und Europäische Reformvorschläge’ BB 2014, 2691; Florstedt, ‘Fristen und Termine im Recht der Hauptversammlung’ ZIP 2010, 761; Foerster, ‘Richtlinienwirkung im Horizontalverhältnis?’ EuR 2012, 190; Foerster, Die Zuordnung der Mitgliedschaft (2018); Foerster, ‘Identifizierung der Aktionäre nach der Änderungsrichtlinie zur Aktionärsrechterichtlinie (2. ARRL) und dem Referentenentwurf ARUG II’ AG 2019, 17; Freitag, ‘Neue Publizitätspflichten für institutionelle Anleger?’ AG 2014, 647; Gaul, ‘Das Vergütungsvotum der Hauptversammlung nach § 120 Abs. 4 AktG im Lichte der Reform der Aktionärsrechte-Richtlinie (§ 120 Abs. 4 AktG)’ AG 2017, 178; Gelter, ‘The Dark Side of Shareholder Influence: Managerial Autonomy and Stakeholder Orientation in Comparative Corporate Governance’ Harvard International Law Journal 50, 129; Götze, ‘Erteilung von Stimm-

Jan Lieder and Martin Bialluch

855

Directive 2007/36/EC rechtsvollmacht nach dem ARUG’ NZG 2010, 93; Grigoleit, ‘Regulierung von Related Party Transactions im Kontext des deutschen Konzernrechts’ ZGR 2019, 412; Grigoleit and Rachlitz, ‘Beteiligungstransparenz aufgrund des Aktienregisters’ ZHR 174 (2010), 12; Grundmann, ‘The renaissance of organized shareholder representation in Europe’, FS Wymeersch (2009), 183; Grundmann, ‘Das neue Depotstimmrecht nach der Fassung im Regierungsentwurf zum ARUG’ BKR 2009, 31; Grundmann and Winkler, ‘Das Aktionärsstimmrecht in Europa und der Kommissionsvorschlag zur Stimmrechtsausübung in börsennotierten Gesellschaften’ ZIP 2006, 1421; Habersack and Tröger, ‘“Ihr naht Euch wieder, schwankende Gestalten ...” – Zur Frage eines europarechtlichen Gleichbehandlungsgebots beim Anteilshandel’ NZG 2010, 1; Hallemeesch, ‘Self-Dealing by Controlling Shareholders: Improving Minority Protection in Light of Article 9 c SRD’ ECFR 2018, 197; Heldt, ‘“Say on Pay” und “Related Party Transactions” im Referentenentwurf des ARUG II aus gesellschaftsrechtspolitischer Sicht’ AG 2018, 905; Hopt, Fleckner, Kumpan and Steffek, ‘Kontrollerlangung über systemrelevante Banken nach den Finanzmarktstabilisierungsgesetzen (FMStG/FMStErgG)’ WM 2009, 821; Jensen and Meckling, ‘Theory of the firm: Managerial behavior, agency costs and ownership structure’ Journal of Financial Economics 3 (1976), 305; Karollus, ‘Der Kommissionsvorschlag für eine Richtlinie zur Ausübung der Stimmrechte durch Aktionäre’ GeS 2006, 99; Kersting, ‘Ausweitung des Fragerechts durch die Aktionärsrichtlinie’ ZIP 2009, 2317; Kersting, ‘Zur Vereinbarkeit der Einschränkung des Fragerechts des Aktionärs durch das Kriterium der Erforderlichkeit mit der Aktionärsrechtsrichtlinie’ ZIP 2013, 2460; Kersting, ‘Erforderlichkeit der Auskunft und Aktionärsrechterichtlinie, FS Hoffmann-Becking (2013), 651; Kleinert and Mayer, ‘Geschäfte der Aktiengesellschaft mit nahestehenden Personen und Unternehmen’ EuZW 2018, 314; Klöhn and Schwarz, ‘Die Regulierung institutioneller Stimmrechtsberater’ ZIP 2012, 149; Knapp, ‘The requirements of the Shareholder Rights Directive’, ERA Forum 2008, 377; Koch, ‘Informationsweitergabe und Informationsasymmetrien im Gesellschaftsrecht’ ZGR 2020,183; Kocher and Lönner, ‘Das Auskunftsrecht in der Hauptversammlung nach der Aktionärsrichtlinie’ AG 2010, 153; Kruchen, ‘Entwurf einer Durchführungsverordnung zur Festlegung von Mindestanforderungen für die Umsetzung der geänderten Aktionärsrechte-Richtlinie’ AG 2018, R 184; Langenbucher, ‘Bankaktienrecht unter Unsicherheit’ ZGR 2010, 75; Leclerc, ‘Bericht über die Diskussion’, ZGR 2020, 248; Leuering, ‘Vorstands- und Aufsichtsratsvergütung in der geänderten Aktionärsrechterichtlinie’ NZG 2017, 646; Lieder, ‘Virtuelle Versammlungen’, FS E. Vetter (2019), 419; Lieder, ‘Unternehmensrechtliche Implikationen der Corona-Gesetzgebung’ ZIP 2020, 837; Lieder and Wernert, ‘Related Party Transactions nach dem Referentenentwurf eines ARUG II’ ZIP 2018, 2441; Lieder and Wernert, ‘Related Party Transactions: Ein Update zum Regierungsentwurf des ARUG II’ ZIP 2019, 989; Lieder and Wernert, ‘Grundsatz- und Anwendungsfragen zu Related Party Transactions nach neuem Aktienrecht’ DB 2020, 882; von der Linden, ‘Anmerkung zum Beschluss des OLG Frankfurt vom 19.6.2017, Az. 5 U 150/16 – Zur Erweiterung der Tagesordnung nach einem statuarischen Record Date’ EWiR 2017, 653; Löbbe and Fischbach, ‘Die Neuregelungen des ARUG II zur Vergütung von Vorstand und Aufsichtsrat börsennotierter Aktiengesellschaften’ AG 2019, 373; Lutter, ‘Nochmal: Die geplante europäische Gesetzgebung zu “related party transactions”‘ EuZW 2014, 687; Melis, ‘Corporate Governance Failures: to what extent is Parmalat a particularly Italian Case?’ Corporate Governance 13 (2005), 478; Merkt, ‘“Know your shareholder” oder: Vom schleichenden Ende der Inhaberaktie’, FS E. Vetter (2019), 447; Mock, ‘Richtlinienwidriges Finanzmarktstabilisierungsrecht’ EuR 2009, 693; H.-F. Müller, ‘Related Party Transactions im Konzern’ ZGR 2019, 97; H.-F. Müller, ‘Die Angemessenheit von Related Party Transactions’, FS E. Vetter (2019), 479; Nietsch, ‘Die Stellung des Aktionärs im europäischen Gesellschaftsrecht – vom Mitglied zum Anleger und wieder zurück?’ ZVglRWiss 112 (2013), 45; Noack, ‘Die Aktionärsrechte-Richtlinie’, FS Westermann (2008), 1203; Noack, ‘Identifikation der Aktionäre, neue Rolle der Intermediäre – zur Umsetzung der Aktionärsrechte-Richtlinie II’ NZG 2017, 561; Ochmann, Aktionärsrechte-Richtlinie (2009); Pälicke, ‘Anregungen zur Umsetzung der Aktionärsrechterichtlinie für Geschäfte börsennotierter Unternehmen mit Organmitgliedern oder ihnen nahestehenden Parteien’ AG 2018, 514; Pälicke, ‘Die Umsetzung der Aktionärsrechterichtlinie in Bezug auf Geschäfte börsennotierter Unternehmen mit deren Großaktionär’ Konzern 2018, 369; Pelzer, Das Auskunftsrecht der Aktionäre in der Europäischen Union (2004); Pluskat, ‘Auswirkungen der Aktionärsrichtlinie auf das deutsche Aktienrecht’ WM 2007, 2135; Pöschke, ‘Auskunft ohne Grenzen? Die Bedeutung der Aktionärsrechterichtlinie für die Auslegung des § 131 Abs 1 S 1 AktG’ ZIP 2010, 1221; Ratschow, ‘Die Aktionärsrechte-Richtlinie – neue Regeln für börsennotierte Gesellschaften’ DStR 2007, 1402; Remien, ‘Die Vorlagepflicht bei Auslegung unbestimmter Rechtsbegriffe’ RabelsZ 2002, 503; Rhiel, Related-Party Transactions im deutschen und US-amerikanischen Recht der Aktiengesellschaft (2014); Röthel, Normkonkretisierung im Privatrecht (2004); J. Schmidt, ‘Die geplante Richtlinie über Aktionärsrechte und ihre Bedeutung für das deutsche Aktienrecht’ BB 2006, 1641; J. Schmidt, ‘Die Umsetzung der Aktionärsrichtlinie 2017: der Referentenentwurf für das ARUG II’ NZG 2018, 1201; J. Schmidt, ‘Gesellschaftsrecht: COVID-19 zwingt zur schnelleren Digitalisierung im Gesellschaftsrecht in Europa’ EuZW 2020, 252; Schneider and Anzinger, ‘Institutionelle Stimmrechtsberatung und Stimmrechtsvertretung – “A quiet gurus enormous clout”’ NZG 2007, 88; Schockenhoff and Nußbaum, ‘Die neuen Transparenzvorschriften für Stimmrechtsberater’ ZGR 2019, 163; Schouten, ‘The Political Economy of Cross-Border Voting in Europe’ Columbia Journal of European Law 16 (2009), 1;

856

Jan Lieder and Martin Bialluch

Art 1

Directive 2007/36/EC

Schuster, ‘Clawback-Klauseln–probates Mittel zukunftsgerechter Gestaltung von Bonus-Vereinbarungen?’, FS Bauer (2010), 973; Seibert, ‘Deutschland im Herbst – Erinnerungen an die Entstehung des Finanzmarktstabilisierungsgesetzes im Oktober 2008, FS Hopt (2010), 2525; Seibert and Florstedt, ‘Der Regierungsentwurf des ARUG – Inhalt und wesentliche Änderungen gegenüber dem Referentenentwurf ’ ZIP 2008, 2145; Seidel, ‘Konzerninterne Related Party Transactions nach der Aktionärsrechte-Richtlinie II’ AG 2018, 423; Seiler and Wittgens, ‘Sonderaktienrecht für den Finanzsektor – Kapitalerhöhungen nach dem Finanzmarktstabilisierungsgesetz’ ZIP 2008, 2245; Spindler and Seidel, ‘Die Zustimmungspflicht bei Related Party Transactions in der konzernrechtlichen Diskussion’ AG 2017, 169; Stiegler, ‘Aktionärsidentifizierung nach ARUG II’ WM 2019, 620; Simons, ‘Zur Begründung(spflicht) bei Gegenanträgen (§ 126 AktG)’ NZG 2019, 127; Stöber, ‘Das Auskunftsrecht der Aktionäre und seine Beschränkungen im Lichte des Europarechts’ DStR 2015, 1680; Tarde, ‘Die verschleierte Konzernrichtlinie’ ZGR 2017, 360; Tarde, Related Party Transactions (2018); Teichmann, ‘Fragerecht und Aktionärsrechterichtlinie’ NZG 2014, 401; Tröger, ‘Die Regelungen zu institutionellen Investoren, Vermögensverwaltern und Stimmrechtsberatern im Referentenentwurf eines Gesetzes zur Umsetzung der zweiten Aktionärsrechterichtlinie (ARUG II)’ ZGR 2019, 126; Veil, ‘Transaktionen mit Related Parties im deutschen Aktien- und Konzernrecht’ NZG 2017, 521; Verse, Der Gleichbehandlungsgrundsatz im Recht der Kapitalgesellschaften (2006); J. Vetter, ‘Regelungsbedarf für Related Party Transactions?’ ZHR 179 (2015), 273; Wettich, ‘Vorstandsvergütung: Bonus-Malus-System mit Rückforderungsmöglichkeit (claw back) und Reichweite des Zuständigkeitsvorbehalts zugunsten des Aufsichtsratsplenums’ AG 2013, 374; Wicke, ‘Flexibilisierung der HV-Teilnahme und Stimmrechtsausübung’, FS Kanzleiter (2010), 415; Wymeersch, ‘Shareholder(s) matter(s)’, FS Hopt (2010), 1565; Zetzsche, ‘Die neue Aktionärs-Richtlinie – Auf dem Weg zur Virtuellen Hauptversammlung’, NZG 2007, 686; Zetzsche, ‘Shareholder Passivity, Cross-Border Voting and the Shareholder Rights Directive’ JCLS 8 (2008), 289; Zetzsche, ‘Pflichten institutioneller Anleger bei der Stimmrechtsausübung’, FS Baums (2017), 1505; Zetzsche, ‘Know Your Shareholder, der intermediärsgestützte Aktionärsbegriff und das Hauptversammlungsverfahren’ ZGR 2019, 1; Zetzsche, ‘Datenschutz und Hauptversammlung’ AG 2019, 233; Ziemons, ‘Kritische Anmerkungen zu den aktien- und kapitalmarktrechtlichen Regelungen des Regierungsentwurfs eines FMStErgG’ NZG 2009, 369.

CHAPTER I GENERAL PROVISIONS Article 1 Subject matter and scope 1. This Directive establishes requirements in relation to the exercise of certain shareholder rights attached to voting shares in relation to general meetings of companies which have their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State. It also establishes specific requirements in order to encourage shareholder engagement, in particular in the long term. Those specific requirements apply in relation to identification of shareholders, transmission of information, facilitation of exercise of shareholders rights, transparency of institutional investors, asset managers and proxy advisors, remuneration of directors and related party transactions. 2. The Member State competent to regulate matters covered in this Directive shall be the Member State in which the company has its registered office, and references to the ‘applicable law’ are references to the law of that Member State. For the purpose of application of Chapter Ib, the competent Member State shall be defined as follows: (a) for institutional investors and asset managers, the home Member State as defined in any applicable sector-specific Union legislative act; (b) for proxy advisors, the Member State in which the proxy advisor has its registered office, or, where the proxy advisor does not have its registered office in a Member State, the Member State in which the proxy advisor has its head office, or, where the proxy advisor has neither its registered office nor its head

Jan Lieder and Martin Bialluch

857

Art 1

Directive 2007/36/EC

Schuster, ‘Clawback-Klauseln–probates Mittel zukunftsgerechter Gestaltung von Bonus-Vereinbarungen?’, FS Bauer (2010), 973; Seibert, ‘Deutschland im Herbst – Erinnerungen an die Entstehung des Finanzmarktstabilisierungsgesetzes im Oktober 2008, FS Hopt (2010), 2525; Seibert and Florstedt, ‘Der Regierungsentwurf des ARUG – Inhalt und wesentliche Änderungen gegenüber dem Referentenentwurf ’ ZIP 2008, 2145; Seidel, ‘Konzerninterne Related Party Transactions nach der Aktionärsrechte-Richtlinie II’ AG 2018, 423; Seiler and Wittgens, ‘Sonderaktienrecht für den Finanzsektor – Kapitalerhöhungen nach dem Finanzmarktstabilisierungsgesetz’ ZIP 2008, 2245; Spindler and Seidel, ‘Die Zustimmungspflicht bei Related Party Transactions in der konzernrechtlichen Diskussion’ AG 2017, 169; Stiegler, ‘Aktionärsidentifizierung nach ARUG II’ WM 2019, 620; Simons, ‘Zur Begründung(spflicht) bei Gegenanträgen (§ 126 AktG)’ NZG 2019, 127; Stöber, ‘Das Auskunftsrecht der Aktionäre und seine Beschränkungen im Lichte des Europarechts’ DStR 2015, 1680; Tarde, ‘Die verschleierte Konzernrichtlinie’ ZGR 2017, 360; Tarde, Related Party Transactions (2018); Teichmann, ‘Fragerecht und Aktionärsrechterichtlinie’ NZG 2014, 401; Tröger, ‘Die Regelungen zu institutionellen Investoren, Vermögensverwaltern und Stimmrechtsberatern im Referentenentwurf eines Gesetzes zur Umsetzung der zweiten Aktionärsrechterichtlinie (ARUG II)’ ZGR 2019, 126; Veil, ‘Transaktionen mit Related Parties im deutschen Aktien- und Konzernrecht’ NZG 2017, 521; Verse, Der Gleichbehandlungsgrundsatz im Recht der Kapitalgesellschaften (2006); J. Vetter, ‘Regelungsbedarf für Related Party Transactions?’ ZHR 179 (2015), 273; Wettich, ‘Vorstandsvergütung: Bonus-Malus-System mit Rückforderungsmöglichkeit (claw back) und Reichweite des Zuständigkeitsvorbehalts zugunsten des Aufsichtsratsplenums’ AG 2013, 374; Wicke, ‘Flexibilisierung der HV-Teilnahme und Stimmrechtsausübung’, FS Kanzleiter (2010), 415; Wymeersch, ‘Shareholder(s) matter(s)’, FS Hopt (2010), 1565; Zetzsche, ‘Die neue Aktionärs-Richtlinie – Auf dem Weg zur Virtuellen Hauptversammlung’, NZG 2007, 686; Zetzsche, ‘Shareholder Passivity, Cross-Border Voting and the Shareholder Rights Directive’ JCLS 8 (2008), 289; Zetzsche, ‘Pflichten institutioneller Anleger bei der Stimmrechtsausübung’, FS Baums (2017), 1505; Zetzsche, ‘Know Your Shareholder, der intermediärsgestützte Aktionärsbegriff und das Hauptversammlungsverfahren’ ZGR 2019, 1; Zetzsche, ‘Datenschutz und Hauptversammlung’ AG 2019, 233; Ziemons, ‘Kritische Anmerkungen zu den aktien- und kapitalmarktrechtlichen Regelungen des Regierungsentwurfs eines FMStErgG’ NZG 2009, 369.

CHAPTER I GENERAL PROVISIONS Article 1 Subject matter and scope 1. This Directive establishes requirements in relation to the exercise of certain shareholder rights attached to voting shares in relation to general meetings of companies which have their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State. It also establishes specific requirements in order to encourage shareholder engagement, in particular in the long term. Those specific requirements apply in relation to identification of shareholders, transmission of information, facilitation of exercise of shareholders rights, transparency of institutional investors, asset managers and proxy advisors, remuneration of directors and related party transactions. 2. The Member State competent to regulate matters covered in this Directive shall be the Member State in which the company has its registered office, and references to the ‘applicable law’ are references to the law of that Member State. For the purpose of application of Chapter Ib, the competent Member State shall be defined as follows: (a) for institutional investors and asset managers, the home Member State as defined in any applicable sector-specific Union legislative act; (b) for proxy advisors, the Member State in which the proxy advisor has its registered office, or, where the proxy advisor does not have its registered office in a Member State, the Member State in which the proxy advisor has its head office, or, where the proxy advisor has neither its registered office nor its head

Jan Lieder and Martin Bialluch

857

Art 1 Subject matter and scope office in a Member State, the Member State in which the proxy advisor has an establishment. 3. Member States may exempt from this Directive the following types of companies: (a) undertakings for collective investment in transferable securities (UCITS) within the meaning of Article 1(2) of Directive 2009/65/EC of the European Parliament and of the Council; (b) collective investment undertakings within the meaning of point (a) of Article 4(1) of Directive 2011/61/EU of the European Parliament and of the Council; (c) cooperative societies. 3 a. The companies referred to in paragraph 3 shall not be exempted from the provisions laid down in Chapter Ib. 4. Member States shall ensure that this Directive does not apply in the case of the use of resolution tools, powers and mechanisms provided for in Title IV of Directive 2014/59/EU of the European Parliament and of the Council. 5. Chapter Ia shall apply to intermediaries in so far they provide services to shareholders or other intermediaries with respect to shares of companies which have their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State. 6. Chapter Ib shall apply to: (a) institutional investors, to the extent that they invest directly or through an asset manager in shares traded on a regulated market; (b) asset managers, to the extent that they invest in such shares on behalf of investors; and (c) proxy advisors, to the extent that they provide services to shareholders with respect to shares of companies which have their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State. 7. The provisions of this Directive are without prejudice to the provisions laid down in any sector-specific Union legislative act regulating specific types of company or specific types of entity. Where this Directive provides for more specific rules or adds requirements compared to the provisions laid down by any sector-specific Union legislative act, those provisions shall be applied in conjunction with the provisions of this Directive.

I. General Information, Purposes and Guiding Principles of the SRD 1. Political and historical outline 1

The initial purpose of the Directive 2007/36/EC (hereinafter: Shareholder Rights Directive – SRD), which is based on the Union’s competencies pursuant to Article 44 and 95 TEC1, was to remove major obstacles to the cross-border exercise of voting rights by shareholders of listed companies.2 Its overall aim is to generally improve the companies’ corporate governance by increasing the number of votes held by foreign Treaty on the Foundation of the European Community of Maastricht, 7.2.1992 (hereinafter: TEC). For more detailed information on the legislative history see Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.1 et seq.; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 1 et seq. with an outlook in mn. 12. 1

2

858

Jan Lieder and Martin Bialluch

Art 1

Directive 2007/36/EC

shareholders.3 To this end, the original 2007 version of the Directive already contained certain minimum standards for informing shareholders in advance of general meetings (Article 5 SRD) and facilitating participation in general meetings, either by the appointment of proxies (Articles 10 et seq. SRD) or by attending the general meeting by electronic means (Article 8 SRD). The Directive also provided for a record date system (Article 7 SRD) and the right of shareholders to ask questions (Article 9 SRD). These minimum standards, however, also apply to purely domestic matters. In this respect, the SRD brings about a partial harmonisation of the law governing general meetings.4 The SRD has been amended by the Directive 2017/828/EU5 (hereinafter: Sharehold- 2 er Rights Directive II – SRD II), which added three entirely new Chapters to its regulatory body:6 Chapter Ia consists of regulations on the identification of shareholders and transmission of information for the facilitation of the exercise of shareholder rights (Articles 3 a–3 f SRD). Chapter Ib contains new transparency standards for institutional investors, asset managers and proxy advisors (Articles 3 g–3 j SRD). In addition, Chapter IIa contains rules about the implementing acts and penalties (Articles 14 a and 14 b SRD). Three major provisions in Articles 9 a–9 c SRD amended the already existing Chapter II. Those provisions shall achieve the SRD’s objectives on remuneration of directors and related party transactions; cf. Article 1(1) SRD. The rather minor amendments of the SRD II concerning Article 1 and 2 SRD were mainly of a technical and editorial nature. The purpose of the SRD II is to encourage shareholders to participate within the 3 corporate governance system, not only more often and more intensively, but on a long-term basis (long-term incentive culture). The second sentence of Article 1(1) SRD emphasises this new objective. See also recital 14 SRD II: “Effective and sustainable shareholder engagement is one of the cornerstones of the corporate governance model of listed companies, which depends on checks and balances between the different organs and different stakeholders”.

Further key regulatory ideas of the SRD are the principle of equal treatment of 4 shareholders (Article 4 SRD) and, as Article 1(1) SRD sums up briefly, transparency with regard to institutional investors, asset managers and proxy advisors, trust in selfregulation by companies, the “know-your-shareholder” approach, the establishment of a “say-on-pay” concept and the handling of related party transactions (RPT). The SRD is applicable within the European Economic Area (hereinafter: EEA). 7 5 This must be considered when interpreting national transposition acts insofar as their wording, e.g., refers only to the Member States of the European Union. These national transpositions must apply in the same meaning – albeit, if needed, with necessary adjustments – in the area of application of the EEA.

Cf. Recital 4 SRD II. Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 2. 5 Directive 2017/828/EU of the European Parliament and of the Council of 17.5.2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, OJ L 132, 20.5.2017, p. 1. 6 On the “fight on the draft of SRD II” see Hopt, NYU Journal of Law & Business, Vol. 12:139. 7 Decision of the EEA Joint Committee No 59/2008 of 25.4.2008 amending Annex XXII (Company law) to the EEA Agreement, OJ L 223, 21.8.2008, p. 60. 3 4

Jan Lieder and Martin Bialluch

859

Art 1 Subject matter and scope 2. Criticism on the legislative technique in the SRD – Interpretation of the SRD’s legal terms For the general purpose of interpreting the SRD, it has to be taken into account that the Directive is drafted quite poorly, to some extent. In particular, the Directive seems to be inconsistent in its wording of several legal terms. This applies first to its legal commands to the Member States, which are in fact the sole addressees of the Directive pursuant to Article 17 SRD (also cf. Article 288 para. 3 TFEU). For example, Article 3d(1) SRD requires that Member States “shall require […]”, while, under Article 3d(2) SRD, Member States are obliged to “ensure” a certain legal effect to apply in national law. The observed inconsistency, however, is obviously due to negligent drafting of the legislation and has no influence on the SRD’s degree of harmonisation (see below → Art 3 SRD). It does not result in any differences as regards the form of the implementation measure. This is confirmed by comparison with other translations of the SRD, which are – in part – more consistent in this respect. While the German version of the SRD is – admittedly – even more inconsistent (“schreiben vor”, “stellen sicher”, “sorgen dafür”), the French version is characterised by a preferable uniformity in wording (“les États membres veillent à ce que”). Similar inconsistencies in language can be observed in the terms of “implementation” and “transposition” (→ Art 15 mn. 2) or the terms of “website” and “Internet site” (→ Art 5 mn. 2). 7 Furthermore, in some instances, the SRD does not seem to contain any mandate instruction for transposition at all but is apparently addressed directly to the companies – almost as if it were directly applicable. That is, of course, by no means the legal rule or meaning of the relevant provisions, as is evident from Article 17 SRD, which expressly addresses the Member States only. 6

II. The SRD’s General Scope of Application (Para. 1) 8

Article 1(1) SRD generally limits the SRD’s scope to certain types of companies (1.) as well as certain types of shares (2.). With regard to Article 3 SRD, however, Member States are free to apply the SRD’s provisions to all other types of companies and all types of shares.8 Special provisions apply for the scope of the SRD’s Chapters Ia and Ib, cf. paragraphs 5 and 6.

1. Personal scope of application 9

According to the definition of Article 2(a) SRD, the term “regulated market” is adopted from the Directive 2014/65/EU (hereinafter: MiFID II).9 As a result, the SRD only provides Member States with requirements for the treatment of listed stock companies. 10 This includes – if listed in such regulated markets – most national legal forms of stock corporations as well as hybrid forms. An extension to non-listed companies or non-voting shares under national law is permitted (see → Art 3 SRD).

Recital 4 s. 5 SRD. See below → Art 2 SRD. 10 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.9; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 18; Kalss and Klampfl, Europäisches Gesellschaftsrecht (2015), mn. 391. 8 9

860

Jan Lieder and Martin Bialluch

Art 1

Directive 2007/36/EC

2. Material scope of application In accordance with the objective of facilitating and promoting shareholder participa- 10 tion with regard to the company’s general meetings, the scope of the Directive is limited to shares that confer voting rights to their holders. Due to the subsequent changes to the SRD implemented by SRD II, Article 1(1) SRD explicitly mentions the long-term incentive approach, which is set out in the newly inserted Chapters Ia and Ib and the provisions in Article 9 a–9 c SRD.

III. The “Competent Member State” and the “Applicable Law” (Para. 2) Paragraph 2 delegates the regulatory competence to the Member State in which the 11 companies to be regulated are domiciled. Contrary to what the German version of the SRD (“derjenige Mitgliedstaat […], in dem die Gesellschaft ihren Sitz hat”) may suggest, the location of the registered office (that may differ from the administrative head office) is decisive.11 The SRD does not provide any conflict-of-law rules in Article 1(2) SRD. As far as conflict of laws in the company law statue is concerned, the SRD implicitly acknowledges the rule of incorporation by stating that references to the applicable law refer to the law of the competent Member State.12 The changes made by SRD II have led to a further clarification of the term “competent 12 Member State” for the purposes of applying the provisions in Chapter Ib. Therefore, point (a) provides a dynamic reference to the sector-specific legislative EU acts concerning institutional investors as defined in Article 2(e) SRD. As far as proxy advisors are concerned, the SRD takes into account the fact that proxy advisors that run a business within the Internal Market are not necessarily registered within the EU. The Member States must consider this while implementing Chapter Ib by creating a type of catch-all rule that ultimately targets proxy advisors with any type of domestic establishment. In the interest of legal certainty and in order to avoid a deviation of obligations in regulatory areas of minimum harmonisation, catch-all rules should, therefore, be designed in such a way that a Member State is only competent if the registered office or the administrative head office is not located in another Member State and the proxy advisor is, therefore, subject to this other Member State’s competence.

IV. Options to Exempt Certain Types of Companies (Para. 3 and 3 a) Again misleading in its wording, paragraph 3 provides the Member States with an op- 13 portunity to exempt certain kinds of companies in the national transposition acts that would normally be within the scope of the SRD pursuant to Article 1(1) SRD. Those are undertakings for collective investment in transferable securities (UCITS) within the meaning of Article 1 no. 2 of Directive 2009/65/EC13 and collective investment undertakings (CIU) within the meaning of Article 4(1)(a) of Directive 2011/61/EU 14. These types of companies are subject to special EU rules. Due to their specific membership 11 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 4; Kalss and Klampfl, Europäisches Gesellschaftsrecht (2015), mn. 391. 12 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.12. 13 Directive 2009/65/EC of the European Parliament and of the Council of 13.7.2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ L 302, 17.11.2009, p. 32.

Jan Lieder and Martin Bialluch

861

Art 1 Subject matter and scope structure,15 cooperative societies may also be excluded from the scope of the national transposition acts. Furthermore, SRD II amended Article 1 SRD by adding paragraph 3 a. It contains a specific reverse exception for the purposes of Chapter Ib.

V. Conflicts with Directive 2014/59/EU (Para. 4) 14

Paragraph 4 was inserted in 2014 by Directive 2014/59/EU (hereinafter: Bank Recovery and Resolution Directive – BRRD).16 It declares the BRRD transposition acts to be higher-ranking in relation to the transposition acts of the SRD.17 Its purpose is to make the winding-up mechanisms provided for by Title IV of the BRRD effective by enabling rapid intervention by the BRRD authorities.18

VI. Scope of Chapter Ia and Chapter Ib (Para. 5 and 6) Paragraphs 5 and 6 were introduced by the SRD II. Intermediaries are covered by the scope of Chapter Ia only to the extent that they provide their services in connection with shares of companies covered by the SRD. This requirement must be read in view of Article 3 e SRD, which extends the scope of Chapter Ia to third country intermediaries (→ Art 3 e mn. 1). 16 This extension of the SRD’s personal scope is subject of the revision clause in → Art 3 f SRD. Furthermore, paragraph 6 states that Chapter Ib of the SRD only applies to institutional investors, asset managers and proxy advisors who have aligned their activities in any way with the shares covered by the general scope of the SRD. 15

VII. Conflicts with Other EU Legislations (Para. 7) 17

Paragraph 7 avoids conflicts with other sector-specific acts of EU legislation. For its interpretation, recital 54 SRD II provides for a precedence rule,19 according to which Article 1(7) SRD must be taken into account when interpreting the colliding acts of EU legislation.20 Such colliding acts are, for example, MiFID II, CRD IV21, Directive 2009/65/EC, Directive 2011/61/EU or the provisions in the directly applicable EU Regulations like CRR22 or MiFIR23.24 Where those are less specific than the SRD’s national transposition acts, both shall apply cumulatively. However, the SRD is completely inapplicable within the scope of paragraph 4.

14 Directive 2011/61/EU of the European Parliament and of the Council of 8.6.2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ L 174, 1.7.2011, p. 1. 15 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.14; cf. EP Committee on Legal Affairs Report, A6-0024/2007, p. 31. 16 Directive 2014/59/EU of the European Parliament and of the Council of 15.5.2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012 of the European Parliament and of the Council, OJ L 173, 12.6.2014, p. 190. 17 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 22. 18 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.16; recital 122 BRRD and recital 124 SRD.

862

Jan Lieder and Martin Bialluch

Art 2

Directive 2007/36/EC

Article 2 Definitions For the purposes of this Directive the following definitions shall apply: (a) ‘regulated market’ means a regulated market as defined in point (21) of Article 4(1) of Directive 2014/65/EU of the European Parliament and of the Council; (b) ‘shareholder’ means the natural or legal person that is recognised as a shareholder under the applicable law; (c) ‘proxy’ means the empowerment of a natural or legal person by a shareholder to exercise some or all rights of that shareholder in the general meeting in his name; (d) ‘intermediary’ means a person, such as an investment firm as defined in point (1) of Article 4(1) of Directive 2014/65/EU, a credit institution as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council and a central securities depository as defined in point (1) of Article 2(1) of Regulation (EU) No 909/2014 of the European Parliament and of the Council, which provides services of safekeeping of shares, administration of shares or maintenance of securities accounts on behalf of shareholders or other persons; (e) ‘institutional investor’ means: (i) an undertaking carrying out activities of life assurance within the meaning of points (a), (b) and (c) of Article 2(3) of Directive 2009/138/EC of the European Parliament and of the Council, and of reinsurance as defined in point (7) of Article 13 of that Directive provided that those activities cover life-insurance obligations, and which is not excluded pursuant to that Directive; (ii) an institution for occupational retirement provision falling within the scope of Directive (EU) 2016/2341 of the European Parliament and of the Council in accordance with Article 2 thereof, unless a Member State has 19 Recital 54 SRD II: “This Directive is without prejudice to the provisions laid down in any sector-specific Union legislative act regulating specific types of company or specific types of entity, such as credit institutions, investments firms, asset managers, insurance companies and pension funds. The provisions of any sector-specific Union legislative act should be considered to be lex specialis in relation to this Directive and should prevail over this Directive to the extent that the requirements provided by this Directive contradict the requirements laid down in any sector-specific Union legislative act. However, the specific provisions of a sector-specific Union legislative act should not be interpreted in a way that undermines the effective application of this Directive or the achievement of its general aim. The mere existence of specific Union rules in a particular sector should not exclude the application of this Directive. Where this Directive provides for more specific provisions or adds requirements to the provisions laid down in any sector-specific Union legislative act, the provisions laid down by any sector-specific Union legislative act should be applied in conjunction with those of this Directive”. 20 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 24. 21 Directive 2013/36/EU of the European Parliament and of the Council of 26.6.2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJ L 176, 27.6.2013, p. 338. 22 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26.6.2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, p. 1. 23 Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15.5.2014 on markets in financial instruments and amending Regulation (EU) No 648/2012, OJ L 173, 12.6.2014, p. 84. 24 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.19; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 24.

Jan Lieder and Martin Bialluch

863

Art 2 Definitions

(f)

(g)

(h) (i)

(j)

1

chosen not to apply that Directive in whole or in parts to that institution in accordance with Article 5 of that Directive; ‘asset manager’ means an investment firm as defined in point (1) of Article 4(1) of Directive 2014/65/EU that provides portfolio management services to investors, an AIFM (alternative investment fund manager) as defined in point (b) of Article 4(1) of Directive 2011/61/EU that does not fulfil the conditions for an exemption in accordance with Article 3 of that Directive or a management company as defined in point (b) of Article 2(1) of Directive 2009/65/EC, or an investment company that is authorised in accordance with Directive 2009/65/EC provided that it has not designated a management company authorised under that Directive for its management; ‘proxy advisor’ means a legal person that analyses, on a professional and commercial basis, the corporate disclosure and, where relevant, other information of listed companies with a view to informing investors’ voting decisions by providing research, advice or voting recommendations that relate to the exercise of voting rights; ‘related party’ has the same meaning as in the international accounting standards adopted in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council; ‘director’ means: (i) any member of the administrative, management or supervisory bodies of a company; (ii) where they are not members of the administrative, management or supervisory bodies of a company, the chief executive officer and, if such function exists in a company, the deputy chief executive officer; (iii) where so determined by a Member State, other persons who perform functions similar to those performed under point (i) or (ii); ‘information regarding shareholder identity’ means information allowing the identity of a shareholder to be established, including at least the following information: (i) name and contact details (including full address and, where available, email address) of the shareholder, and, where it is a legal person, its registration number, or, if no registration number is available, its unique identifier, such as legal entity identifier; (ii) the number of shares held; and (iii) only insofar they are requested by the company, one or more of the following details: the categories or classes of the shares held or the date from which the shares have been held.

Article 2 SRD defines key legal terms for the purposes of the SRD. Other legal terms of the SRD, which are not specifically defined in Article 2 SRD and not subject to the Member States’ mandates for definitions, are subject to the autonomous interpretation of European Union law. In accordance with the general principles of European methodology, an unreflected adoption of national concepts is prohibited. Instead, an independent European perspective must be established and applied. Conversely, national courts must always interpret national terms in the light of and in conformity with the Directive (consistent interpretation).1

1

864

Roth and Jopen in Riesenhuber, European Methodology (2017), § 13.

Jan Lieder and Martin Bialluch

Art 2

Directive 2007/36/EC

The ultimate power of interpretation lies with the European Court of Justice (here- 2 inafter: ECJ). The vague legal terms of the SRD are certainly going to be substantiated by the Member States when they are transposed into national law. Irrespective of this, the ECJ has final jurisdiction over the meaning of any general clauses contained in directives. Anything else would be counterproductive, not only with a view to the desired harmonisation. It would also appear to be extremely unusual to leave the determination of the content of a normative order to the addressees themselves.2

I. Regulated Market (Point (a)) The definition of the regulated market in point (a) is relevant for the scope of applica- 3 tion of the SRD as regulated in Article 1 SRD. The term “regulated market” is adopted from the Definition in MiFID II. It thereby means a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments – in the system and in accordance with its non-discretionary rules – in a way that results in a contract in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with Title III of the MiFID II.

II. Shareholder (Point (b)) The SRD does not define the concept of shareholder separately, but instead refers 4 to the “applicable law”.3 This reference to the applicable law points towards the law of the competent Member State as set out in Article 1(2) SRD. The SRD thereby allows Member States to maintain their legal system of share ownership and does not – in general – impose any new requirements which could affect the national definition of shareholder.4 The reason for the Directive’s reluctance to define the shareholder is that the definition varies between Member States and that otherwise no agreement could have been reached on this in the legislative procedure.5 Although it is, thus, ultimately a matter of the applicable national law, it must be ac- 5 knowledged that by interpretation of national law in conformity with the Directive, intermediaries within the meaning of the SRD’s Chapter Ia must not be regarded as “shareholders”. This applies at least for Chapter Ia.6 The political and legal reason for this is the complexity of cross-border intermediary chains that create a host of issues. One is that the person who is legally entitled as the holder of a share under the applicable law might turn out to be a financial intermediary instead of the ultimate investor.7 This interpretation does not contradict recital 13 SRD II that declares the SRD as not affecting 2 Cf. ECJ, C-240-244/98, Slg. 2000, I-4941; Remien, RabelsZ 2002, 503, 517 et seq.; Röthel, Normkonkretisierung im Privatrecht (2004), p. 355; Verse, Der Gleichbehandlungsgrundsatz im Recht der Kapitalgesellschaften (2006), p. 95. 3 Linking the shareholder status to the “allocation of membership” in national law Foerster, AG 2019, 17, 19. 4 Cf. EP Committee on Legal Affairs Report, A6-0024/2007 p. 13; cf. also recital 13 SRD II. 5 Critical of that Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.13; Noack, Festschrift Westermann (2008), p. 1203, 1218. 6 Lutter, Bayer, J. Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.13; J. Schmidt, NZG 2018, 1201, 1216 fn. 256; Foerster, AG 2019, 17, 19, 21 et seq; cf. also Foerster, Die Zuordnung der Mitgliedschaft (2018), p. 390; Einsele, Wertpapierrecht als Schuldrecht (1995), 552 et. seq.

Jan Lieder and Martin Bialluch

865

Art 2 Definitions “the beneficial owners or other persons who are not shareholders under the applicable national law”. It is, however, supported by the prevailing “know-your-shareholder”-approach of the SRD (→ Art 3 a mn. 1), which would otherwise be undermined. In fact, the know-your-shareholder principle underlying the new SRD II provisions would degenerate into a “know-your-intermediary”-principle. The intermediaries that are considered as shareholders pursuant to national law would be obliged to inform the companies about themselves as “shareholders” within the framework of the SRD’s Chapter Ia. 8 This would make little sense regarding the aim of the Directive. Thus, Recital 13 SRD II merely clarifies in this respect that, in principle the SRD – that is, with the exception made for Chapter Ia – neither provides a harmonised definition of the “shareholder” nor a definition for the term “beneficial owner”.9 So, in the end, only legal entities holding shares who are not holding the shares as intermediaries may be regarded as shareholders within the meaning of Chapter Ia.10 As long as the “formal” or “actual” shareholder under the applicable law is not an intermediary within the meaning of the SRD, a beneficial owner may therefore remain hidden to the company.11 Article 13 SRD shows that this understanding of shareholder status does not apply to the rest of the SRD. Institutional investors as well as asset managers within the meaning of Chapter Ib may also be regarded as “shareholders” within the meaning of the SRD if they are to be regarded as such under the applicable Member State law.12

III. Proxy (Point (c)) 6

The term “proxy” is used in Article 5, 6, 8 SRD and most of all in Articles 10 and 11 SRD. It denotes the authorisation of a natural or legal person by a shareholder to exercise some or all rights of that shareholder in the general meeting in his name. The term must be strictly separated from the definition of “proxy advisor” which is defined in point (g).

IV. Intermediary (Point (d)) 7

Intermediaries are subject to the obligations imposed by Articles 3 a et seq. SRD. In addition, Article 13 SRD is relevant to constellations of voting by intermediaries, although the term defined in point (d) is not used there. An intermediary is a person who provides services of safekeeping of shares, administration of shares or maintenance of securities accounts on behalf of shareholders or other persons. Examples of intermediaries are given in reference with previous EU legislation. Those are investment firms as defined in Article 4(1) MiFID II, credit institutions as defined in Article 4(1) of Regulation 575/2013/EU13 and central securities depositories as defined in Article 2(1) of Regulation 909/2014/EU14. The Commission’s Implementing Regulation 2018/1212/ 7 With an example Schouten, Columbia Journal of European Law 16 (2009), p. 1, 6; cf. Zetzsche, NZG 2007, 686, 687; see also the graphic illustration by Zetzsche, ZGR 2019, 1, 5. 8 Cf. J. Schmidt, NZG 2018, 1201, 1216; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.13. 9 Foerster, AG 2019, 17, 19. 10 Foerster, AG 2019, 17, 21 et seq.; Zetzsche, ZGR 2019, 1, 6. 11 Stiegler, WM 2019, 620, 622; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 30. 12 Cf. Recital 15 SRD II. 13 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26.6.2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.6.2013, p. 1.

866

Jan Lieder and Martin Bialluch

Art 2

Directive 2007/36/EC

EU15 enacted pursuant to Article 3a(8), 3b(6) and 3c(3) SRD also defines the terms “last intermediary” and “first intermediary”. However, these terms are of no direct significance for the application of the SRD. On the relationship of the terms “shareholder” and “intermediary” → mn. 5.

V. Institutional Investor (Point (e)) For the purposes of the application of the SRD, the term “institutional investor” is 8 defined in line with other EU legal acts. The term covers all undertakings carrying out activities of life assurance within the meaning of Article 2(3)(a)–(c) Directive 2009/138/ EC16 and of reinsurance as defined in Article 13(7) of Directive 2009/138/EC. However, the undertaking shall only be covered by the SRD if those activities cover life-insurance obligations and further if it is not excluded pursuant to Directive 2009/138/EC. As institutional investors shall further be regarded any institution for occupational 9 retirement provision (IORP) falling within the scope of Directive 2016/2341/EU 17 in accordance with Article 2 thereof. Member States may choose, however, not to apply that Directive in whole or in part to that institution in accordance with Article 5 Directive 2016/2341/EU. In that case, the SRD shall not apply either.

VI. Asset Manager (Point (f)) Asset managers are subject to the provisions of Articles 3 g et seq. SRD that have been 10 amended by SRD II. Within the meaning of the SRD, the term covers only investment firms as defined in Article 4(1)(1) MiFID II that provide portfolio management services to investors. An alternative investment fund manager (AIFM) as defined in Article 4(1) (b) Directive 2011/61/EU18 does not fulfil the conditions for an exemption in accordance with Article 3 Directive 2011/61/EU. Furthermore, the term covers management companies as defined in Article 2(1)(b) Directive 2009/65/EC 19 and investment companies that are authorised in accordance with Directive 2009/65/EC provided that it has not designated a management company authorised under that Directive for its management.

14 Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23.7.2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012, OJ L 257, 28.8.2014, p. 1. 15 Commission Implementing Regulation (EU) 2018/1212 of 3.3.2018 laying down minimum requirements implementing the provisions of Directive 2007/36/EC of the European Parliament and of the Council as regards shareholder identification, the transmission of information and the facilitation of the exercise of shareholders rights (C/2018/5722), OJ L 223, 4.9.2018, p. 1. 16 Directive 2009/138/EC of the European Parliament and of the Council of 25.11.2009 on the takingup and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ L 335, 17.12.2009, p. 1. 17 Directive (EU) 2016/2341 of the European Parliament and of the Council of 14.12.2016 on the activities and supervision of institutions for occupational retirement provision (IORPs), OJ L 354, 23.12.2016, p. 37. 18 Directive 2011/61/EU of the European Parliament and of the Council of 8.6.2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ L 174, 1.7.2011, p. 1. 19 Directive 2009/65/EC of the European Parliament and of the Council of 13.7.2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ L 302, 17.11.2009, p. 32.

Jan Lieder and Martin Bialluch

867

Art 2 Definitions

VII. Proxy Advisor (Point (g)) 11

Proxy advisors are of specific importance in corporate governance, as they both help to reduce the cost of analysing corporate information and (possibly) significantly influence voting behaviour.20 They are subject to the rule of Article 3 j SRD. The term refers to legal persons that analyse, on a professional and commercial basis (which means not only on the occasion of other commercial activities), the corporate disclosure (e.g., on specific or all agenda items), and, where relevant, other information of listed companies with a view to informing investors’ voting decisions by providing research, advice or voting recommendations that relate to the exercise of voting rights.

VIII. Related Party (Point (h)) The SRD addresses related party transactions in Article 9 c SRD. While the definition of the materiality of such transactions has been left to the Member States, the SRD provides for a dynamic21 reference to the international accounting standards (IAS)22 adopted in accordance with Regulation 1606/2002/EC23. It is advisable to transpose the dynamic referral, otherwise there is a risk that national law will be in breach of the directive when IAS are revised. IAS 24.9 defines a related party as a person or entity that is related to the reporting entity, which is the listed company within the scope of Article 9 c SRD. A person or a close member of that person’s family is related to a reporting entity if that person (i) has control or joint control over the reporting entity; (ii) has significant influence over the reporting entity or (iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity. 13 An entity is related to a reporting entity if any of the following conditions applies: (i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). (ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). (iii) Both entities are joint ventures of the same third party. (iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity. (v) The entity is a post-employment defined benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity. (vi) The entity is controlled or jointly controlled by a person identified as related under IAS. (vii) A person identified to have control or joint control over the reporting entity has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). (viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity. 14 According to IAS 24.11, the following are deemed not to be related: (i) Two entities simply because they have a director or key manager in common; (ii) two venturers who share joint control over a joint venture; (iii) providers of finance, trade unions, public 12

Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.53. Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 55; Lutter/Bayer/ Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.169. 22 Critical with regard to the reference to IAS Lutter, EuZW 2014, 687 who considers it to be too far-reaching a rule; cf. also Vetter, ZHR 179 (2015), 273, 319. 23 Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 197.2002 on the application of international accounting standards, OJ L 243, 11.9.2002, p. 1. 20

21

868

Jan Lieder and Martin Bialluch

Art 3

Directive 2007/36/EC

utilities, and departments and agencies of a government that does not control, jointly control or significantly influence the reporting entity, simply by virtue of their normal dealings with an entity (even though they may affect the freedom of action of an entity or participate in its decision-making process); (iv) a single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts; (v) a significant volume of business merely by virtue of the resulting economic dependence.

IX. Director (Point (i)) The term “director” becomes relevant in Articles 9 a and 9 b SRD on the remuneration 15 policy and the remuneration report as well as the special provision of Article 9 c SRD on related party transactions. As the term covers any member of the administrative, management or supervisory bodies of a company, it suits both, monistic and dualistic board traditions.24 The term is further extended to cover the chief executive officer (CEO) and, if such function exists in a company, the deputy chief executive officer, if those are not members of the administrative, management or supervisory bodies of a company. The Directive is open to all other positions in the company as it allows for Member States to include other persons who perform functions at second or lower management level, but similar to a CEO or board member as directors. Member States can therefore incorporate the SRD implementation into their existing corporate governance structures and traditions with a maximum of flexibility in this respect.

X. Information Regarding Shareholder Identity (Point (j)) The information regarding shareholder identity is of relevance when applying Article 16 3 a SRD, which requires Member States to implement the SRD’s know-your-shareholder concept. For the purpose of applying the SRD and its national transposition acts, three categories of information are included as “information regarding shareholder identity”, which are, in principle, exhaustive: (i) name and contact details (including full address and, where available, e-mail address) of the shareholder (where it is a legal person, also its registration number, or, if no registration number is available, its unique identifier, such as legal entity identifier); (ii) the number of shares held; and (iii) only insofar they are requested by the company also the categories or classes of the shares held or the date from which the shares have been held.

Article 3 Further national measures This Directive shall not prevent Member States from imposing further obligations on companies or from otherwise taking further measures to facilitate the exercise by shareholders of the rights referred to in this Directive. Article 3 SRD explicitly refers to the degree of harmonisation of the SRD, which 1 is limited to minimum harmonisation.1 Member States therefore may go beyond the content of the Directive within the scope of the Directive. In particular, an extension to Cf. Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), mn. 38. On excessive transposition, so called “gold plating”, Habersack and Mayer in Riesenhuber, European Methodology (2017), § 14. 24 1

Jan Lieder and Martin Bialluch

869

Art 3 a Identification of shareholders non-listed companies or non-voting shares is permitted.2 This could help to avoid split interpretations in the application of national law3 and solidification of a double-track approach to (stock) company law. Member States may also – within the scope of their competence – impose further obligations on companies or grant shareholders additional rights in order to strengthen their position and facilitate shareholder participation.4 2 Taking into account the intention of the SRD legislator, which can be seen clearly in recital 55 SRD II, wider-reaching transposition acts “should not, however, hamper the effective application of this Directive or the achievement of its objectives, and should, in any event, comply with the rules laid down in the Treaties”. In other words, any more extensive transposition must always be designed in accordance with the effet utile principle, which is an indisputable key principle of EU primary law.

CHAPTER IA IDENTIFICATION OF SHAREHOLDERS, TRANSMISSION OF INFORMATION AND FACILITATION OF EXERCISE OF SHAREHOLDER RIGHTS Article 3 a Identification of shareholders 1. Member States shall ensure that companies have the right to identify their shareholders. Member States may provide for companies having a registered office on their territory to be only allowed to request the identification of shareholders holding more than a certain percentage of shares or voting rights. Such a percentage shall not exceed 0,5 %. 2. Member States shall ensure that, on the request of the company or of a third party nominated by the company, the intermediaries communicate without delay to the company the information regarding shareholder identity. 3. Where there is more than one intermediary in a chain of intermediaries, Member States shall ensure that the request of the company, or of a third party nominated by the company, is transmitted between intermediaries without delay and that the information regarding shareholder identity is transmitted directly to the company or to a third party nominated by the company without delay by the intermediary who holds the requested information. Member States shall ensure that the company is able to obtain information regarding shareholder identity from any intermediary in the chain that holds the information. Member States may provide for the company to be allowed to request the central securities depository or another intermediary or service provider to collect the information regarding shareholder identity, including from the intermediaries in the chain of intermediaries and to transmit the information to the company. Member States may additionally provide that, at the request of the company, or of a third party nominated by the company, the intermediary is to communicate

2 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), mn. 5; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.20. 3 Cf. Stöber, DStR 2014, 1680, 1681 et seq. 4 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), mn. 5; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.20; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 17.

870

Jan Lieder and Martin Bialluch

Art 3 a Identification of shareholders non-listed companies or non-voting shares is permitted.2 This could help to avoid split interpretations in the application of national law3 and solidification of a double-track approach to (stock) company law. Member States may also – within the scope of their competence – impose further obligations on companies or grant shareholders additional rights in order to strengthen their position and facilitate shareholder participation.4 2 Taking into account the intention of the SRD legislator, which can be seen clearly in recital 55 SRD II, wider-reaching transposition acts “should not, however, hamper the effective application of this Directive or the achievement of its objectives, and should, in any event, comply with the rules laid down in the Treaties”. In other words, any more extensive transposition must always be designed in accordance with the effet utile principle, which is an indisputable key principle of EU primary law.

CHAPTER IA IDENTIFICATION OF SHAREHOLDERS, TRANSMISSION OF INFORMATION AND FACILITATION OF EXERCISE OF SHAREHOLDER RIGHTS Article 3 a Identification of shareholders 1. Member States shall ensure that companies have the right to identify their shareholders. Member States may provide for companies having a registered office on their territory to be only allowed to request the identification of shareholders holding more than a certain percentage of shares or voting rights. Such a percentage shall not exceed 0,5 %. 2. Member States shall ensure that, on the request of the company or of a third party nominated by the company, the intermediaries communicate without delay to the company the information regarding shareholder identity. 3. Where there is more than one intermediary in a chain of intermediaries, Member States shall ensure that the request of the company, or of a third party nominated by the company, is transmitted between intermediaries without delay and that the information regarding shareholder identity is transmitted directly to the company or to a third party nominated by the company without delay by the intermediary who holds the requested information. Member States shall ensure that the company is able to obtain information regarding shareholder identity from any intermediary in the chain that holds the information. Member States may provide for the company to be allowed to request the central securities depository or another intermediary or service provider to collect the information regarding shareholder identity, including from the intermediaries in the chain of intermediaries and to transmit the information to the company. Member States may additionally provide that, at the request of the company, or of a third party nominated by the company, the intermediary is to communicate

2 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), mn. 5; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.20. 3 Cf. Stöber, DStR 2014, 1680, 1681 et seq. 4 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), mn. 5; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.20; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 17.

870

Jan Lieder and Martin Bialluch

Art 3 a

Directive 2007/36/EC

to the company without delay the details of the next intermediary in the chain of intermediaries. 4. The personal data of shareholders shall be processed pursuant to this Article in order to enable the company to identify its existing shareholders in order to communicate with them directly with the view to facilitating the exercise of shareholder rights and shareholder engagement with the company. Without prejudice to any longer storage period laid down by any sector-specific Union legislative act, Member States shall ensure that companies and intermediaries do not store the personal data of shareholders transmitted to them in accordance with this Article for the purpose specified in this Article for longer than 12 months after they have become aware that the person concerned has ceased to be a shareholder. Member States may provide by law for processing of the personal data of shareholders for other purposes. 5. Member States shall ensure that legal persons have the right of rectification of incomplete or inaccurate information regarding their shareholder identity. 6. Member States shall ensure that an intermediary that discloses information regarding shareholder identity in accordance with the rules laid down in this Article is not considered to be in breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision. 7. By 10 June 2019, Member States shall provide the European Supervisory Authority (European Securities and Markets Authority) (ESMA), established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council with information on whether they have limited shareholder identification to shareholders holding more than a certain percentage of the shares or voting rights in accordance with paragraph 1 and, if so, the applicable percentage. ESMA shall publish that information on its website. 8. The Commission shall be empowered to adopt implementing acts to specify the minimum requirements to transmit the information laid down in paragraph 2 as regards the format of information to be transmitted, the format of the request, including their security and interoperability, and the deadlines to be complied with. Those implementing acts shall be adopted by 10 September 2018 in accordance with the examination procedure referred to in Article 14a(2).

I. The Principle of “Know Your Shareholder” Shareholder voting is regarded to be of great importance for good corporate gover- 1 nance in European companies.1 The shares of those companies are often held through complex chains of intermediaries. In corporate legal practice, this kind of mediation may impede the exercise of shareholders’ rights and hinder shareholder participation – especially when the chains of intermediaries are of a cross-border nature. 2 This is because companies are often unable to identify their shareholders in order to enable them to participate at all. The identification of shareholders is regarded as a key prerequisite 1 Schouten, Columbia Journal of European Law 16 (2009), p. 1, 3 (“pivotal role”); Gelter, 50 Harv. Internat. Law Journal 129, 148-152, 156-161 (2009) (contrasting the large degree of autonomy of managers of U.S. firms with the strong influence of shareholders on managers of continental European firms); Stiegler, WM 2019, 620, 621. 2 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.24; Schouten, Columbia Journal of European Law 16 (2009), 1, 5; cf. Wymeersch in Festschrift Hopt (2010), p. 1565, 1567.

Jan Lieder and Martin Bialluch

871

Art 3 a Identification of shareholders for direct communication between shareholders and the company. The SRD therefore deems the companies’ right to shareholder identification to be essential in order to facilitate the exercise of shareholder rights and shareholder participation in accordance with the SRD.3 Chapter Ia aims to remove remaining obstacles in this area by obliging the member states to grant companies a legal claim against intermediaries. The principle of “know your shareholder” applies.4 Although the Directive and the recitals do not mention this, the right to information shall also, to a certain extent, serve to improve the fight against money laundering, terrorist financing and tax evasion within the Internal Market.5 This has not remained without criticism. Legal publications often noted that because of the transposition of the requirements of the SRD’S Chapter Ia a “societé anonyme” could in fact no longer be spoken of.6

II. Personal Scope: Companies, Intermediaries, Shareholders 1. General right to shareholder identification 2

The SRD provides for a general right of companies to identify their shareholders (→ Art 2 mn. 4). In addition to this general claim, there is a necessary supplementary claim against the intermediaries.7 It may be argued from an academic point of view that the right under paragraph 1 and that the general right to shareholder identification are to be realised solely through the claims against the intermediaries pursuant to paragraph 2.8 Recital 4 of SRD II, however, implies a regulatory mandate for additional or further reaching claims pursuant to paragraph 1 under national law in order to effectively enable the company to identify its shareholders.9

2. Further claim against the intermediaries 3

The primary beneficiaries of the claim to shareholder information against the intermediaries are, of course, the companies addressed within the personal scope of the SRD (→ Art 1 mn. 9). However, the Member States must also ensure that the companies may designate a third party who is entitled to make the request to the intermediaries. In this case, the information shall only be passed on to the company. The supplementary claimants shall be the intermediaries (→ Art 2 mn. 7). The SRD allows Member States to provide direct access to every intermediary in a possible chain of intermediaries (→ mn. 8). The SRD does not specify the extent to which shareholders themselves are obliged to provide the company with information about their identity.10

3 Recital 4 SRD II; cf. further Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 28; arguing in favor of regulation Zetzsche, JCLS 8 (2008), p. 289, 335 et. seq. 4 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.25; Bayer and J. Schmidt, BB 2019, 2178, 2181; 2017, 2114, 2115; J. Schmidt, NZG 2018, 1201, 1214; Noack, NZG 2017, 561; with a graphic illustration Zetzsche, ZGR 2019, 1, 15; critical from a Law & Economics point of view: Merkt in Festschrift Eberhard Vetter (2019), p. 447, 458. 5 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.25. 6 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 81; cf. also Merkt in Festschrift Eberhard Vetter (2019), p. 447, 459; for an opposite view, see Noack, NZG 2017, 561, 567. 7 Foerster, AG 2019, 17, 18. 8 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.27; Bork, NZG 2019, 738, 739. 9 Foerster, AG 2019, 17, 18. 10 A corresponding shareholder obligation is demanded by Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 34 et seq.

872

Jan Lieder and Martin Bialluch

Art 3 a

Directive 2007/36/EC

Restricting the right to information to certain types of shares or by other means 4 is incompatible with the SRD.11 All persons deemed to be shareholders under the applicable law (→ Art 2(b) mn. 4) are subject to the companies’ right to information. The only permitted way to restrict the right to retrieve shareholder information is via the threshold option in Article 3a(1) SRD (→ mn. 10).12

III. Material Scope: Information Regarding Shareholder Identity 1. Principal rule In terms of its material content, the claim is addressed to information on the identity 5 of shareholders, which is defined in Article 2(j) SRD as: (i) Name and contact details (including full address and, where available, email address) of the shareholder, and, where it is a legal person, its registration number, or, if no registration number is available, its unique identifier, such as a legal entity identifier; (ii) the number of shares held; and (iii) only insofar they are requested by the company, one or more of the following details: the categories or classes of the shares held or the date since which the shares have been held. The information addressed by this definition in (i) and (ii) is the minimum of 6 information to be disclosed.13 The Member States’ implementing acts must regard a transmission of less information as insufficient to efficiently enable the company to identify its shareholders in order to communicate with them.14 The Directive does not specify how the identification must be arranged in practice.15According to Article 3(2) of the implementing regulation EU/2018/121216 issued by the Commission pursuant to Article 3a(8) SRD, the transmission of information by the intermediaries must comply with the format contained in table 2 of the implementing regulation’s annex. The wording of Article 3 a SRD does not provide for a company’s obligation to ob- 7 tain shareholder information. However, in view of the SRD’s degree of minimum harmonisation (→ Art 3 mn. 1) and the stated objective of promoting shareholder participation,17 there is no compelling reason why Member States should not be entitled to introduce such an obligation.18

2. Chains of Intermediaries (para. 3) As recital 8 SRD II clearly indicates, “the effective exercise of shareholder rights depends 8 to a large extent on the efficiency of the chain of intermediaries”19. To this end, Member States shall provide that in the case of a chain of intermediaries between the shareholder and the company, the company’s request for information must be transmitted immediately (without undue delay)20 between the intermediaries so that, eventually, 11 12

seq.

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 29. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 30, 38 et

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 37. Recital 5 SRD II. 15 Foerster, AG 2019, 17, 18. 16 Commission implementing Regulation 2018/1212/EU of 3.9.2018 laying down minimum requirements implementing the provisions of Directive 2007/36/EC of the European Parliament and of the Council as regards shareholder identification, the transmission of information and the facilitation of the exercise of shareholders rights, OJ L 223, 4.9.2018, p. 1. 17 Recital 7 SRD II. 18 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 33. 19 Recital 8 SRD II. 13

14

Jan Lieder and Martin Bialluch

873

Art 3 a Identification of shareholders the intermediary holding the information communicates it (directly)21 to the company. The same must apply pursuant to Article 3a(3) SRD if a third party appointed by the company has initiated the request for information. 9 The SRD permits two deviations from this fundamental model, which are intended to facilitate the flow of information, especially in the case of long chains of intermediaries. On the one hand (Article 3a(3)(2) SRD), Member States may provide that companies may also deliver their request directly to a central securities depository or another intermediary, which in turn will collect the information within the chain by themselves and then convey it to the company. This ultimately leads to an (additional) complication of the information procurement process. The technical, temporal and economic effort for the requested intermediary will be much higher. Some have therefore argued against implementing this requirement.22 On the other hand (Article 3a(3)(3) SRD), Member States may provide that intermediaries must immediately (without undue delay)23 disclose information about the next intermediary in the chain. This will enable the company itself to speed up the flow of information by making its own requests to the next intermediary.

3. Threshold value exemption (para. 1) Member States may deny the right to information below a threshold, which may not exceed 0.5 percent of the voting rights or of the shares24 if the company has its registered office in that Member State. This option is intended to take into account the fact that such small shareholdings have less economic or corporate governance impact. The legislative decision, therefore, is in favour of protecting privacy and personal data.25 11 As each intermediary is only obliged to provide information for the shares which it has in its custody, it is fair to say that this intermediary cannot make a final statement about whether a threshold has been reached by a specific shareholder if the share portfolios managed by other intermediaries are aggregated. A percentage threshold based on the total shareholdings of an individual shareholder, therefore, is exposed to a considerable legal design fault.26 In other words, it could be quite easy to avoid identification by distributing the total shareholdings amongst several depots held at different intermediaries.27 Member States that provide for such threshold values must provide a solution to this problem, for example, by improving communication within the chain of intermediaries and with the company. The use of new technologies, such as block chain technology, could be beneficial here. 10

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 46 and 51. Cf. graphically illustrated Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 53 et seq. 22 Noack, NZG 2017, 561, 563; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 57; also cf. Eggers and de Raet, AG 2017, 464, 470. 23 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 46 and 51. 24 The problem discussed by Noack, NZG 2017, 561, 563 (see also Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 42) seems to be based on a misunderstanding of the German wording “Prozentsatz an Aktien oder Stimmrechten”. This wording takes on a completely different meaning when a hyphen is added, as with Noack, NZG 2017, 561, 563 (“Aktien- oder Stimmrechten” respectively “Aktienrechten”); clarifying Eggers and de Raet, AG 2017, 464, 468. 25 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.26; J. Schmidt, NZG 2018, 1201, 1215; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 38. 26 Noack, NZG 2017, 561, 563; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 41. 27 Noack, NZG 2017, 561, 563; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 41. 20

21

874

Jan Lieder and Martin Bialluch

Art 3 a

Directive 2007/36/EC

Pursuant to Article 3a(7) SRD, Member States shall provide ESMA with information 12 on whether they have limited the rights to shareholder identification to shareholders holding more than a certain percentage of the shares or voting rights in accordance with Article 3a(1) SRD and, if so, the applicable percentage. ESMA shall publish that information on its website. German law, for example, has not made use of this option,28 as the German legal lit- 13 erature has predominantly opposed the introduction of a threshold.29 In particular, it was noted that the company should be entitled to decide for itself whether to request information on shareholders holding only small amounts of shares. However, this reasoning only applies if the Member State does not implement the requirements of Article 3 a SRD (in a manner that exceeds the SRD’s requirements) as an obligation for companies to obtain shareholder information (→ mn. 5).

IV. Prerequisite of Formal Request (Para. 2) The company or the third party nominated by the company must submit a request. 14 The SRD does not specify the format of such a request or deadlines for its submission. However, special requirements in this regard are to be found in the implementing regulation EU/2018/1212 issued by the Commission pursuant to Article 3a(8) SRD, 30 which provides a model (table 1) for practical use. A separate request shall be made for each ISIN.

V. Data Protection, Privacy and Secrecy Personal data is necessarily processed as part of the shareholder identification pro- 15 cess. Paragraphs 4 and 5, therefore, regulate issues arising in the field of data protection. The Directive is limited to setting up two minimum standards: First, a retention period of 12 months after the company has become aware31 that 16 the person concerned has ceased to be a shareholder (Article 3a(4)(2) SRD), and second, a right for legal persons to rectify inaccurate or incomplete information concerning their shareholder identity (Article 3a(5) SRD). For natural persons, a parallel claim arises from Article 16 GDPR32. As recital 7 SRD II states, the SRD shall be without prejudice to the Member States’ legislation providing for the processing of shareholders’ personal data for other purposes, such as enabling shareholders to cooperate with each other. Paragraph 6 obliges Member States not to make due disclosure of shareholder 17 information unlawful where it is contrary to contractual or statutory confidentiality obligations. This improves the transmission of information along the chain of intermediaries in order to ultimately facilitate the exercise of shareholders’ rights. 33 The provision particularly refers to banking secrecy.34 Cf. with approval of this among others Bork, NZG 2019, 738, 739; Stiegler, WM 2019, 620, 623, 629. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 41. 30 As well as Article 3b(6) and 3c(3) SRD. 31 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 61 also want to extend this requirement to cases in which the company should have been aware of the loss of its shareholder status. 32 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27.4.2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation – GDPR), OJ L 119, 4.5.2016, p. 1. 28

29

Jan Lieder and Martin Bialluch

875

Art 3 b Transmission of information

VI. ESMA-Reporting and Commissions Implementing Regulation (Para. 7 and 8) The provision in paragraph 7 is of relevance in the context of the threshold option in paragraph 1 (→ mn. 10 et seq.). According to the ESMA Report (draft) published on August 31, 2020, 35 Austria, Italy, the Netherlands and Slovakia have introduced a threshold of 0.5%. In contrast, Belgium, Bulgaria, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta and Romania have opted against a threshold. This is also the case in Estonia, although a threshold of 0.5% shall apply if identification is requested from holders of nominee accounts. Other Member States and EEA members have not yet transposed the revised SRD. The report is available online and includes references to the respective transposition acts. 19 The Commission has issued the implementing Regulation EU/2018/121236 pursuant to paragraph 8.37 The minimum requirements for the format of a request for disclosure of information on the identity of shareholders pursuant to Article 3a(1) of the SRD are set out in table 1 of the Regulation’s annex, cf. Article 3(1) Regulation 2018/1212/EU. The minimum requirements for the format of the response of intermediaries to a request referred to in paragraph 1 are correspondingly set out in table 2 of the Regulation’s annex, cf. Article 3(2) Regulation 2018/1212/EU. 18

Article 3 b Transmission of information 1. Member States shall ensure that the intermediaries are required to transmit the following information, without delay, from the company to the shareholder or to a third party nominated by the shareholder: (a) the information which the company is required to provide to the shareholder, to enable the shareholder to exercise rights flowing from its shares, and which is directed to all shareholders in shares of that class; or (b) where the information referred to in point (a) is available to shareholders on the website of the company, a notice indicating where on the website that information can be found. 2. Member States shall require companies to provide intermediaries in a standardised and timely manner with the information referred to in point (a) of paragraph 1 or the notice referred to in point (b) of that paragraph. 3. However, Member States shall not require that the information referred to in point (a) of paragraph 1 or the notice referred to in point (b) of that paragraph be transmitted or provided in accordance with paragraphs 1 and 2 where companies send that information or that notice directly to all their shareholders or to a third party nominated by the shareholder. Cf. Recital 8 SRD II. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 55; Eggers and de Raet, AG 2017, 464, 469; Noack, NZG 2017, 561, 562. 35 ESMA32-380-143, https://www.esma.europa.eu/sites/default/files/library/esma32-380-143_national_thresholds_for_shareholder_identification_under_the_revised_srd.pdf (8.3.2021). 36 Summarizing critics to its draft: Kruchen, AG 2018, R184. 37 As well as Article 3b(6) and 3c(3) SRD. 33 34

876

Jan Lieder and Martin Bialluch

Art 3 b

Directive 2007/36/EC

4. Member States shall oblige intermediaries to transmit, without delay, to the company, in accordance with the instructions received from the shareholders, the information received from the shareholders related to the exercise of the rights flowing from their shares. 5. Where there is more than one intermediary in a chain of intermediaries, information referred to in paragraphs 1 and 4 shall be transmitted between intermediaries without delay, unless the information can be directly transmitted by the intermediary to the company or to the shareholder or to a third party nominated by the shareholder. 6. The Commission shall be empowered to adopt implementing acts to specify the minimum requirements to transmit information laid down in paragraphs 1 to 5 of this Article as regards the types and format of information to be transmitted, including their security and interoperability, and the deadlines to be complied with. Those implementing acts shall be adopted by 10 September 2018 in accordance with the examination procedure referred to in Article 14a(2). Based on the assumption that the effective exercise of shareholder rights depends to a 1 considerable extent on the efficiency of the chain of intermediaries,1 Article 3 b SRD provides for further duties of intermediaries regarding the transmission of information from the companies to the shareholders (bottom up) and vice versa (top down).2 The provisions in Article 3 b SRD promote the general objective of the SRD to facilitate the exercise of shareholder rights and to promote their participation by standardising the transmission of information. Its purpose is to further strengthen the shareholders’ status through effective shareholder information.

I. Subject of the Transmission of Information As a basic rule, intermediaries should without (undue)3 delay provide the sharehold- 2 er or a third party nominated by the shareholder with the information they need to exercise their shareholder rights, cf. Article 3b(1)(a) SRD. If this information has been made public on the company's website, it shall be sufficient to send a notice where this information can be found, cf. Article 3b(1)(b) SRD. The SRD does not contain any specifications as to what specific (minimum) content 3 this information must have. The Member States may adopt this indeterminacy. However, as it is a matter of exercising shareholder rights, the provision’s subject must in any case include sufficient information about the general meeting (in terms of convocation, participation and procedure).4 The general meeting is the forum for exercising these rights. This information is indispensable to “enable” the shareholders in the meaning of Article 3b(1)(a) SRD.

Cf. Recital 8 SRD II. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.31 et seq.; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 71. 3 Cf. for Article 3 a SRD Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 46 and 51. 4 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 66. 1 2

Jan Lieder and Martin Bialluch

877

Art 3 b Transmission of information

II. Ways of Transmitting Information 4

Article 3 b SRD provides the member states with guidelines in two respects. First, the flow of information from the company via intermediaries to shareholders (1.). Second, provisions for the transmission of information from the shareholders via the intermediaries to the company (2.).

1. Transmission of information to the shareholders “bottom up” (para. 1–3) Paragraphs 1 to 3 regulate the minimum requirements that Member States must provide for the transmission of information from the company to its shareholders. 5 The literature using corporate terminology also refers to this as the “bottom up” flow of information.6 In order for the intermediary to be able to fulfil its obligations under national law, the Member States must in return also oblige the companies to transmit this information to the intermediaries. For this to be done in a timely manner and in a standardised form (see also infra IV.) must be provided for by the Member States in accordance with Article 3b(2) SRD. 6 However, the member states must relieve the intermediaries of their obligations in the case that the companies transmit the same content directly to their shareholders, cf. Article 3b(3) SRD. This is intended to reduce the burden on the intermediaries. 7 As there is an explicit reference to a “direct” transmission, a simple publication on the company’s website is not sufficient in this respect. This results quite obviously from a comparison with the systematic structure of the aforementioned Article 3b(1)(b) SRD. A direct communication to the shareholder about where the actual information can be found on the company’s website would, on the other hand, be sufficient and appropriate.8 5

2. Transmission of information to the company “top down” (para. 4) 7

In addition, Article 3 b SRD contains requirements for the transmission of information from the shareholder to the Company (“top down”).9 Member State law must always provide for the intermediaries’ obligation to provide information subject to the shareholder’s instructions. In particular, this means that intermediaries may not act in this direction unsolicited.10

III. Chains of Intermediaries (Para. 5) 8

Article 3b(5) SRD addresses the problem of intermediary chains (→ Art 3 a mn. 8). 11 In principle, the Member States must ensure that information referred to in paragraphs 1 and 4 shall be transmitted between intermediaries immediately. This applies to both the information flow “bottom up” and “top down”. A question has been raised as to the For a graphic illustration of the flow of information, see Zetzsche, ZGR 2019, 1, 26. See Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.31 et seq.; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 71. 7 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 68; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.33. 8 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 68. 9 For a graphic illustration for the flow of information, see Zetzsche, ZGR 2019, 1, 31. 10 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 69. 11 For a graphic illustration for the flow of information, see Zetzsche, ZGR 2019, 1, 26, 31. 5

6

878

Jan Lieder and Martin Bialluch

Art 3 c

Directive 2007/36/EC

extent to which Member States are permitted to provide that individual intermediaries within the chain may be skipped in this process.12 This is not only supported by most of the SRD’s language versions, but the SRD’s character of minimum harmonisation stipulated in Article 3 SRD also argues in favour of the Member States being able to make such practices possible, provided that this promotes the objective of the Directive, for example by speeding up the flow of information. However, the obligation to pass on information within the chain must be dispensed with by Member State law if the information can be provided directly.

IV. Commissions Implementing Regulation (Para. 6) The Commission has issued the implementing Regulation EU/2018/1212 pursuant 9 to Paragraph 6.13 The minimum requirements regarding the types and format of information to be transmitted in accordance with Article 3b(1), (2), (3) and (5) SRD with respect to the convocation of general meetings shall be as set out in table 3 of the annex to this Regulation.

Article 3 c Facilitation of the exercise of shareholder rights 1. Member States shall ensure that the intermediaries facilitate the exercise of the rights by the shareholder, including the right to participate and vote in general meetings, which shall comprise at least one of the following: (a) the intermediary makes the necessary arrangements for the shareholder or a third party nominated by the shareholder to be able to exercise themselves the rights; (b) the intermediary exercises the rights flowing from the shares upon the explicit authorisation and instruction of the shareholder and for the shareholder’s benefit. 2. Member States shall ensure that when votes are cast electronically an electronic confirmation of receipt of the votes is sent to the person that casts the vote. Member States shall ensure that after the general meeting the shareholder or a third party nominated by the shareholder can obtain, at least upon request, confirmation that their votes have been validly recorded and counted by the company, unless that information is already available to them. Member States may establish a deadline for requesting such confirmation. Such a deadline shall not be longer than three months from the date of the vote. Where the intermediary receives confirmation as referred to in the first or second subparagraph, it shall transmit it without delay to the shareholder or a third party nominated by the shareholder. Where there is more than one intermediary in the chain of intermediaries the confirmation shall be transmitted between intermediaries without delay, unless the confirmation can be directly transmitted to the shareholder or a third party nominated by the shareholder. 3. The Commission shall be empowered to adopt implementing acts to specify the minimum requirements to facilitate the exercise of shareholder rights laid down in 12 13

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 70. As well as Article 3a(8) and 3c(3) SRD.

Jan Lieder and Martin Bialluch

879

Art 3 c Facilitation of the exercise of shareholder rights paragraphs 1 and 2 of this Article as regards the types of the facilitation, the format of the electronic confirmation of receipt of the votes, the format for the transmission of the confirmation that the votes have been validly recorded and counted through the chain of intermediaries, including their security and interoperability, and the deadlines to be complied with. Those implementing acts shall be adopted by 10 September 2018 in accordance with the examination procedure referred to in Article 14a(2). 1

According to recital 10 SRD II, the SRD aims to “ensure that shareholders who engage with an investee company by voting know whether their votes have been correctly taken into account”. Article 3 c SRD is intended to fulfil this objective.

I. Regulatory Options to Improve Shareholder Rights (Para. 1) 2

Member States shall require intermediaries to take at least one of the measures set out in Article 3c(1)(a) and (b) SRD to facilitate the exercise of shareholder rights. In accordance with recital 9 SRD II, Member States will have to implement both options and put the final selection in the individual case at the discretion of shareholders.1 Otherwise, one of the two options would be completely cut off from the shareholder. This would contradict the legal objectives of the SRD.

1. Necessary arrangements for shareholders or nominated third parties (point (a)) 3

By referring to “the necessary arrangements”, the Directive once again makes use of a vague set of legal terms. The question of what is “necessary” must be answered autonomously under European law (→ Art 2 mn. 1).2 When implementing this requirement in national laws, the Member States may limit themselves to a direct adoption of this vagueness. The Member State may also list individual measures, which are considered to appear “necessary” on a regular basis. However, the scope for action available in this respect does not allow for Member States to set out an exhaustive list. 3 Such regulatory behaviour, under certain circumstances, could restrict the blanket clause that is part of the minimum harmonisation programme of the SRD in a manner contrary to EU primary law.

2. Intermediaries exercising shareholder rights (point (b)) 4

In the case of point (b), the intermediary itself acts with the explicit approval of the shareholder. Therefore, the intermediary must be available as a proxy within the scope of this provision. The intermediary must be bound by the shareholder’s instructions under national law, however, only insofar as such instructions exist.4 The intermediary must also be obliged to exercise the shareholders’ rights for their “benefit”. However, it is unclear what the sentence “shareholder’s benefit” actually means. The literature offers several interpretations.5 1 Dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 74. 2 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 75. 3 Dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 75. 4 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 76.

880

Jan Lieder and Martin Bialluch

Art 3 c

Directive 2007/36/EC

To avoid normative contradictions, as far as the relationship to the intermediaries’ 5 obligation to follow instructions (as governed by the same provision) is concerned, at least any behaviour in compliance with the instructions must be understood as being in line with the shareholders’ benefit.6 A more subjective understanding would not only overburden the intermediary who typically does not and cannot know the ultimate personal preferences of its customers. Moreover, the shareholders’ right to give instructions already takes sufficient account of their subjectivity. The question of a shareholder’s benefit, thus, only becomes relevant in the case of a shareholder’s representation without corresponding instructions. In practice, this may well be the case when a decision is made in a general meeting on motions that were made “on the spot”. To avoid imposing excessive liability risks on intermediaries, it must therefore be sufficient for the intermediaries’ activity without such instructions when the exercise of the shareholders’ rights is in an “objective” (reasonable) shareholder’s interest. 7

II. Voting Confirmation (Para. 2) Paragraph 2 reflects the need for legal certainty.8 On the one hand, the Member States 6 must enable anyone who votes in a general meeting to request confirmation that their votes have been validly recorded and counted by the company (2.). On the other hand, in the case of electronic voting, electronic confirmations of receipt must be issued (1.).

1. Electronic confirmation of receipt of electronic votes (subpara. 1) Unlike in the following Article 3c(2)(2) SRD, the SRD does not refer to the share- 7 holders themselves (or a person nominated by the shareholder). Therefore, the “person that casts the vote” does not necessarily have to be the shareholder or such nominated third party. In the case of proxy voting (→ Art 10 and 13 SRD), for example, the SRD requires the confirmation of receipt of electronic votes to be sent to the proxy, which can also be a “nominated” person.9 The existence of Article 3c(2)(3) SRD does not contradict with this, because the rule has to be understood as exclusively referring to cases of Article 3c(1)(b) SRD where intermediaries are exercising the shareholders’ rights (→ mn. 4.).10 Unlike subparagraph 2 (→ mn. 9), this provision only applies in the case of votes that 8 have been cast electronically. It takes the electronic transmission risk into account. 11 This risk does not exist (at least not to the same extent) when voting in person at the general meeting. The confirmation itself must also be issued in electronic form, for example by e-mail12. 5 For an overview, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 76, who leave the question unresolved. 6 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 76. 7 Cf. Noack, NZG 2017, 561, 566. 8 Cf. Recital 10 SRD II; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.36; Bayer and J. Schmidt, BB 2017, 2114, 2115; 2014, 1219, 1222; cf. also J. Schmidt, NZG 2018, 1201, 1217. 9 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.36; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 77. 10 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 81, but also see mn. 77. 11 Cf. recital 10 SRD II; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 77. 12 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 78.

Jan Lieder and Martin Bialluch

881

Art 3 d Non-discrimination, proportionality and transparency of costs 2. Confirmation that votes have been validly recorded and counted (subpara. 2) 9

Member States may link the information claim pursuant to subparagraph 2 to a corresponding request or set it up as an initial obligation of the company (“at least upon request”). It does not matter whether a vote was taken electronically or whether the general meeting was attended in person. An information being “already available” presupposes at least that the effectiveness of the vote can be recognised on an individual basis.13 Member States may establish a deadline for requesting confirmations pursuant to Article 3c(2)(2) SRD. Such a deadline shall not be longer than three months from the date of the vote.

3. Chains of intermediaries (subpara. 3) 10

Subparagraph 3 addresses the phenomenon of intermediary chains. In the context of the confirmations pursuant to Article 3 c SRD, the flow of information should not be subject to any obstacle arising from shareholdings being held through chains of intermediaries. However, the SRD is misleading when – as in other translations as well – it declares the obligation of intermediaries to forward the confirmation as dependent on the fact that the confirmation “can” also be sent directly to the shareholder. This wording, if read accordingly, allows no confirmation at all to find its way to the shareholder under certain circumstances. The mere possibility of direct transmission cannot relieve the intermediaries from their obligations in this respect. Therefore, the terminology of the SRD “can” must be read as “is”.14

III. Commissions Implementing Regulation (Para. 3) 11

The Commission has issued the implementing Regulation EU/2018/121215 pursuant to Paragraph 3. Articles 7 and 9(5) Regulation EU/2018/1212 in conjunction with tables 6 and 7 of the Regulation’s annex govern the detailed requirements for the format and deadline of the confirmations pursuant to Article 3 c SRD.

Article 3 d Non-discrimination, proportionality and transparency of costs 1. Member States shall require intermediaries to disclose publicly any applicable charges for services provided for under this Chapter separately for each service. 2. Member States shall ensure that any charges levied by an intermediary on shareholders, companies and other intermediaries shall be non-discriminatory and proportionate in relation to the actual costs incurred for delivering the services. Any differences between the charges levied between domestic and cross-border exercise of rights shall be permitted only where duly justified and where they reflect the variation in actual costs incurred for delivering the services. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 79. For the German, French, Dutch, Spanish, Italian and Polish equivalent wording, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 81. 15 Commission implementing Regulation 2018/1212/EU of 3.9.2018 laying down minimum requirements implementing the provisions of Directive 2007/36/EC of the European Parliament and of the Council as regards shareholder identification, the transmission of information and the facilitation of the exercise of shareholders rights. 13

14

882

Jan Lieder and Martin Bialluch

Art 3 d

Directive 2007/36/EC

3. Member States may prohibit intermediaries from charging fees for the services provided for under this Chapter.

I. Disclosure of Charges (Para. 1) In order to promote equity investment throughout the EU and to facilitate the exer- 1 cise of rights related to shares, the SRD aims to establish a high degree of transparency with regard to charges, including prices and fees, for the services provided by intermediaries.1 Unless a Member State prohibits the charging of costs altogether (→ mn. 3), it must oblige intermediaries to disclose all costs charged for services provided for under Chapter Ia. This applies exclusively to the services of transmitting information on the shareholder identity (Article 3 a SRD), transmission of information pursuant to Article 3 b SRD as well as the services owed under Member State law in transposition of Article 3c(1) and (2) SRD. The disclosure pursuant to paragraph 1 shall be provided publicly and separately. In line with the general approach of the SRD, publication on the website of the intermediary will be sufficient. However, Member States may also set requirements that are more detailed in this respect.

II. Non-Discrimination, Proportionality and Transparency (Para. 2) Recital 11 SRD II considers any discrimination (which is expressed, for example, 2 in different prices) between the charges levied for the exercise of shareholder rights domestically and on a cross-border basis as a deterrent to cross-border investment and the efficient functioning of the Internal Market. Therefore, any such behaviour should be prohibited by the transposition acts in the national laws. An exception may only be provided for where differences between the charges levied for the domestic and the cross-border exercise of shareholder rights are duly justified and reflect the variation in actual costs incurred for delivering the services by intermediaries.2 However, this does not necessarily lead to a synchronisation of the actual costs and the charged costs. An intermediary’s permission to additional charging under Member State law is not prohibited by the SRD.3

III. Member State Option (Para. 3) Member States may prohibit intermediaries from charging fees for the services pro- 3 vided for under Chapter Ia. This exclusively refers to the services of transmitting information on shareholder identity (Article 3 a SRD), transmission of information pursuant to Article 3 b SRD as well as the services owed under Member State law in transposition of Article 3c(1) and (2) SRD.4

Recital 11 SRD II. Cf. Recital 11 SRD II. 3 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 84. 4 For a critical view, see Noack, NZG 2017, 561, 564 asking why intermediaries should work for the company at no charge. 1

2

Jan Lieder and Martin Bialluch

883

Art 3 f Information on implementation

Article 3 e Third-country intermediaries This Chapter also applies to intermediaries which have neither their registered office nor their head office in the Union when they provide services referred to in Article 1(5). 1

Article 3 e SRD is related to Article 1(5) SRD, which states that the provisions laid down in Chapter Ia shall apply to intermediaries in so far as they provide services to shareholders or other intermediaries with respect to shares of companies, which have their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State.1 The Member States must therefore implement the SRD’s obligations for intermediaries provided by Chapter Ia as part of their substantive national law applicable to foreign entities (Fremdenrecht). However, there is no provision for unequal treatment of the foreign intermediaries. Neither Article 3 e SRD nor Article 1(5) SRD contain a conflict-of-laws provision. The same applies to Article 3j(4) SRD.

Article 3 f Information on implementation 1. Competent authorities shall inform the Commission of substantial practical difficulties in enforcement of the provisions of this Chapter or non-compliance with the provisions of this Chapter by Union or third-country intermediaries. 2. The Commission shall, in close cooperation with ESMA and the European Supervisory Authority (European Banking Authority), established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council, submit a report to the European Parliament and to the Council on the implementation of this Chapter, including its effectiveness, difficulties in practical application and enforcement, while taking into account relevant market developments at the Union and international level. The report shall also address the appropriateness of the scope of application of this Chapter in relation to third-country intermediaries. The Commission shall publish the report by 10 June 2023. 1

As the innovations introduced by SRD II were not at all uncontroversial in 2017,1 the revision clause provided by Article 3f(2) SRD stipulates that the Commission shall, in close cooperation with ESMA and the European Supervisory Authority, submit a report to the European Parliament and to the Council on the implementation (transposition) of Chapter Ia, including its effectiveness, difficulties in practical application and enforcement, while taking into account relevant market developments on a European Union and international level. This is intended in particular to identify any need for revision. The report shall also be based, inter alia, on the information provided by the competent authorities pursuant to paragraph 1.

1 1

884

For examples, see Zetzsche, ZGR 2019, 1, 11. See Bayer and J. Schmidt, BB 2017, 2114, 2115.

Jan Lieder and Martin Bialluch

Art 3 g

Directive 2007/36/EC

CHAPTER IB TRANSPARENCY OF INSTITUTIONAL INVESTORS, ASSET MANAGERS AND PROXY ADVISORS Article 3 g Engagement policy 1. Member States shall ensure that institutional investors and asset managers either comply with the requirements set out in points (a) and (b) or publicly disclose a clear and reasoned explanation why they have chosen not to comply with one or more of those requirements. (a) Institutional investors and asset managers shall develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement in their investment strategy. The policy shall describe how they monitor investee companies on relevant matters, including strategy, financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance, conduct dialogues with investee companies, exercise voting rights and other rights attached to shares, cooperate with other shareholders, communicate with relevant stakeholders of the investee companies and manage actual and potential conflicts of interests in relation to their engagement. (b) Institutional investors and asset managers shall, on an annual basis, publicly disclose how their engagement policy has been implemented, including a general description of voting behaviour, an explanation of the most significant votes and the use of the services of proxy advisors. They shall publicly disclose how they have cast votes in the general meetings of companies in which they hold shares. Such disclosure may exclude votes that are insignificant due to the subject matter of the vote or the size of the holding in the company. 2. The information referred to in paragraph 1 shall be available free of charge on the institutional investor’s or asset manager’s website. Member States may provide for the information to be published, free of charge, by other means that are easily accessible online. Where an asset manager implements the engagement policy, including voting, on behalf of an institutional investor, the institutional investor shall make a reference as to where such voting information has been published by the asset manager. 3. Conflicts of interests rules applicable to institutional investors and asset managers, including Article 14 of Directive 2011/61/EU, point (b) of Article 12(1) and point (d) of 14(1) of Directive 2009/65/EC and the relevant implementing rules, and Article 23 of Directive 2014/65/EU shall also apply with regard to engagement activities.

I. Comply or Explain (Para. 1) The SRD regards institutional investors as well as asset managers (both defined by the 1 SRD, → Art 2 mn. 8, 10) as an important category of shareholders in listed companies in the European Union.1 These types of shareholders play an important role in the corporate governance of those companies, but also more generally with regard to their 1

Recital 15 SRD II; comprehensively, with a specific view on German law, see Tröger, ZGR 2019, 126.

Jan Lieder and Martin Bialluch

885

Art 3 g Engagement policy strategy and (financial and non-financial) long-term performance, the improvement of which is a (new) key purpose of the SRD (→ Art 1 mn. 1).2 2 Chapter Ib, thus, stands for self-regulation (Article 3 g SRD) and transparency (Article 3 h and 3 i SRD) regarding these types of shareholders.3 The provisions of Chapter Ib are modelled after the UK Stewardship Code4 that also aims to enhance the quality of engagement between investors and companies to help improve long-term risk-adjusted returns to shareholders.5 Following this model in conjunction with the FCA’s Conduct of Business Rules,6 the SRD provides for Member States to enact a soft-law-like comply-orexplain mechanism to address institutional investors and asset managers within the European Union.7 3 These types of “professional shareholders” must be obliged by the Member States to either comply with paragraph 1 points (a) and (b) by drawing up a so-called engagement policy and disclose annual reports on the implementation and their compliance thereto or to publish a clear and reasoned statement as to why they have chosen not to fulfil one or more of the requirements set out in paragraph 1 points (a) and (b). In accordance with the wording and the purpose of this rule, Member States shall provide for a cumulative implementation of both the provisions of point (a) and (b).8 Otherwise it necessarily has to be provided for by domestic law that institutional investors and asset managers follow the “explain”-command.

1. Engagement policy (point (a)) As a part of the “comply” command of paragraph 1, its point (a) deals with questions arising in cases where an engagement policy is being established and, if so, its minimum content. Member States shall in any event provide these engagement policies to be publicly disclosed. The list of minimum content in point (a) is not exhaustive (cf. the wording “including”).9 5 The engagement policy in terms of point (a) is ultimately a soft-law instrument. This has led to some criticism. In particular, there is a concern that the expected benefits of this soft-law model will be disproportionate to the additional costs that the companies whose long-term success is at stake will ultimately have to bear.10 There are further worries that company secrets will have to be disclosed without good reason.11 Future devel4

Recital 15 SRD II. For a graphical illustration of the Chapter Ib rules, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 381. 4 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 84 et seq.; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 363; Lutter/Bayer/ Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.41; Bayer and J. Schmidt, BB 2017, 2114, 2115; J. Schmidt, NZG 2018, 1201, 1218. 5 Cf. https://www.frc.org.uk/investors/uk-stewardship-code (9.10.2020). 6 Cf. https://www.handbook.fca.org.uk/handbook/COBS.pdf (9.10.2020). 7 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 85; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.42; cf. Dijkhuizen, ECL 12 (2015), 45, 47. 8 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.42; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 365. 9 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 366. 10 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.41; Bayer and J. Schmidt, BB 2017, 2114, 2115; Zetzsche in Festschrift Baums (2017), p. 1505, 1518. 11 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.41; Freitag, AG 2014, 647, 652. 2

3

886

Jan Lieder and Martin Bialluch

Art 3 h

Directive 2007/36/EC

opments, however, will either way depend on the result of the revision pursuant to Article 3 k SRD.

2. Annual implementation report (point (b)) The annual report under point (b) may exclude insignificant votes. The meaning 6 of “insignificant” requires further clarification. Only Recital 18 mentions the example of voting on “purely procedural matters” and voting in companies in which the investor has a “very minor stake” compared to the investor’s holding in other investee companies.12 In accordance with the soft law character of this provision, it also follows from this recital that the addressed institutional investors may and should be enabled by Member State law to set their own criteria regarding which votes are insignificant on the basis of the subject matter of the vote or the size of the holding in the company, and then “apply them consistently”.13

II. Format and Costs of Disclosure (Para. 2) The information referred to in paragraph 1 must be published on the company’s 7 website. In addition, the SRD provides the Member States with the option of allowing further or different “easily accessible” online media. However, costs must not be charged under any circumstances. Paragraph 2 subpara. 2 takes into account the fact that institutional investors may also have their participation policy implemented by asset managers. In this case, a reference must be made to their published information.

III. Relationship to Other EU Legal Acts (Para. 3) Particularly with regard to conflicts of interest, paragraph 3 extends the enumerated 8 sector-specific provisions applicable to institutional investors and asset managers to engagement activities pursuant to Article 3 g et seq. SRD.

Article 3 h Investment strategy of institutional investors and arrangements with asset managers 1. Member States shall ensure that institutional investors publicly disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilities, and how they contribute to the medium to long-term performance of their assets. 2. Member States shall ensure that where an asset manager invests on behalf of an institutional investor, whether on a discretionary client-by-client basis or through a collective investment undertaking, the institutional investor publicly discloses the following information regarding its arrangement with the asset manager: (a) how the arrangement with the asset manager incentivises the asset manager to align its investment strategy and decisions with the profile and duration of the liabilities of the institutional investor, in particular long-term liabilities; 12 13

Recital 18 s. 3 SRD II. Recital 18 s. 4 SRD II.

Jan Lieder and Martin Bialluch

887

Art 3 h Investment strategy of institutional investors and arrangements with asset managers (b) how that arrangement incentivises the asset manager to make investment decisions based on assessments about medium to long-term financial and non-financial performance of the investee company and to engage with investee companies in order to improve their performance in the medium to long-term; (c) how the method and time horizon of the evaluation of the asset manager’s performance and the remuneration for asset management services are in line with the profile and duration of the liabilities of the institutional investor, in particular long-term liabilities, and take absolute long-term performance into account; (d) how the institutional investor monitors portfolio turnover costs incurred by the asset manager and how it defines and monitors a targeted portfolio turnover or turnover range; (e) the duration of the arrangement with the asset manager. Where the arrangement with the asset manager does not contain one or more of such elements, the institutional investor shall give a clear and reasoned explanation why this is the case. 3. The information referred to in paragraphs 1 and 2 of this Article shall be available, free of charge, on the institutional investor’s website and shall be updated annually unless there is no material change. Member States may provide for that information to be available, free of charge, through other means that are easily accessible online. Member States shall ensure that institutional investors regulated by Directive 2009/138/EC are allowed to include this information in their report on solvency and financial condition referred to in Article 51 of that Directive.

I. Long-Term Performance Report (Para. 1) 1

Article 3 h SRD deals solely with obligations of institutional investors. A medium to long-term approach is viewed as “a key enabler of responsible stewardship of assets”.1 In accordance with the SRD’s overall guideline objective of improving the long-term performance of companies and thereby strengthening the shareholder position (→ Art 1 mn. 3), paragraph 1 requires Member States to provide for an obligation of institutional investors to disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilities, and how they contribute to the long-term performance of their assets. The obligation for annual publication results from paragraph 3. In the event of material changes, the Member States must prescribe an early renewal.

II. Investments on Behalf of Institutional Investors (Para. 2) 2

Paragraph 2 provides a list of minimum contents for a special public disclosure obligation (→ Art 3), which must be provided for in the event that an asset manager (see above → Art 2 SRD) invests on behalf of an institutional investor (see above → Art 2 SRD). The aim of this rule is to “contribute to a proper alignment of interests between the final beneficiaries of institutional investors, the asset managers and the investee companies and potentially to the development of longer-term investment strategies and longer-term relationships with investee companies involving shareholder engagement”.2 In addition to 1 2

888

Recital 19 SRD II. Recital 19 SRD II.

Jan Lieder and Martin Bialluch

Art 3 i

Directive 2007/36/EC

the goal of increasing transparency, the SRD aims to integrate the elements mentioned in points (a) to (e) into the agreements with asset managers.3 This goal has become normative in subparagraph 2 of paragraph 2.4 An obligation for annual publication arises from paragraph 3. In the event of 3 material changes, the Member States must prescribe an early renewal. Within the private law relationship between the asset manager and the institutional investor, a report in accordance with Article 3i(1) SRD is to be required by the Member States. According to Article 3i(2)(2) SRD, this private report shall not be required by Member States if the information is already publicly available anyway.

III. Format and Costs of Disclosure (Para. 3) The information referred to in paragraphs 1 and 2 has to be issued on the institu- 4 tional investor’s website or through other means that are easily accessible online. The annual reporting cycle is part of minimum harmonisation. Therefore, the Member States may provide for shorter cycles as well as special obligations to provide information ad hoc.5 However, in the event of material changes, Member States will have to provide for an obligation for ad hoc information. Information must in any case be made available free of any charges. To avoid unnecessary report duplications which could complicate legal interactions, 5 subparagraph 2 requires Member States to allow institutional investors governed by Directive 2009/138/EC6 (hereinafter: Solvency II) to include the information in their report on solvency and financial condition referred to in Article 51 Solvency II.

Article 3 i Transparency of asset managers 1. Member States shall ensure that asset managers disclose, on an annual basis, to the institutional investor with which they have entered into the arrangements referred to in Article 3 h how their investment strategy and implementation thereof complies with that arrangement and contributes to the medium to long-term performance of the assets of the institutional investor or of the fund. Such disclosure shall include reporting on the key material medium to long-term risks associated with the investments, on portfolio composition, turnover and turnover costs, on the use of proxy advisors for the purpose of engagement activities and their policy on securities lending and how it is applied to fulfil its engagement activities if applicable, particularly at the time of the general meeting of the investee companies. Such disclosure shall also include information on whether and, if so, how, they make investment decisions based on evaluation of medium to long-term performance of the investee company, including non-financial performance, and on whether and, if so, which conflicts of interests have arisen in connection with engagements activities and how the asset managers have dealt with them. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 374. For a critical view, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 374; Freitag, AG 2014, 647, 652; Chiu, ZVglRWiss. 114 (2015), 121, 153; European Company Law Experts, Shareholder engagement and identification (2015), p. 4. 5 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 375. 6 Directive 2009/138/EC of the European Parliament and of the Council of 25.11.2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ L 335, 17.12.2009, p. 1. 3

4

Jan Lieder and Martin Bialluch

889

Art 3 i Transparency of asset managers 2. Member States may provide for the information in paragraph 1 to be disclosed together with the annual report referred to in Article 68 of Directive 2009/65/EC or in Article 22 of Directive 2011/61/EU, or periodic communications referred to in Article 25(6) of Directive 2014/65/EU. Where the information disclosed pursuant to paragraph 1 is already publicly available, the asset manager is not required to provide the information to the institutional investor directly. 3. Member States may where the asset manager does not manage the assets on a discretionary client-by-client basis, require that the information disclosed pursuant to paragraph 1 also be provided to other investors of the same fund at least upon request.

I. Transparency Requirements (Para. 1) The recitals of the SRD II accept the principle that the private law relationship between the asset manager and the institutional investor is a matter for bilateral contractual arrangements1 and that there is also hardly any connection with shareholder rights.2 “However, although big institutional investors may be able to request detailed reporting from the asset manager, especially if the assets are managed on the basis of a discretionary mandate, for smaller and less sophisticated institutional investors it is crucial to set a minimum set of legal requirements, so that they can properly assess, and hold to account, the asset manager.”3 This aim has led to paragraph 1, which requires Member States to ensure that asset managers disclose to the institutional investor, with which they have entered into the arrangements referred to in Article 3 h SRD, how their investment strategy and implementation thereof complies with that arrangement, and contributes to the medium to long-term performance of the assets of the institutional investor or of the fund. This report is to be issued annually. 2 Paragraph 1 contains a non-exhaustive4 list of minimum contents of such reports. The “non-financial performance” mentioned in sentence 3 also covers social, environmental and governance matters.5 Conflicts of interest must also be explicitly disclosed. For example, conflicts of interests may prevent the asset manager from voting or from engaging at all.6 3 The listed information is to be provided for as mandatory. The reporting asset manager may not be allowed to withhold individual aspects because he wishes to wait for ongoing developments and/or negotiations or because he fears that a disclosure might harm a certain economic or competitive position.7 If a Member State nevertheless provides for such relief for the asset manager, that Member State does not act within the boundaries of Article 3 SRD. 1

Recital 20 SRD II. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 376 referring to Recital 15 SRD II. 3 Recital 20 SRD II. 4 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 378. 5 Recital 22 SRD II. 6 Recital 23 SRD II. 7 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 379. 1

2

890

Jan Lieder and Martin Bialluch

Art 3 j

Directive 2007/36/EC

II. Format and Costs of Disclosure (Para. 2) As paragraph 1 provides for reports on an annual basis, paragraph 2 provides for 4 a Member State option to allow a combination with the annual report referred to in Article 68 of Directive 2009/65/EC8 or in Article 22 of Directive 2011/61/EU9, or periodic communications referred to in Article 25(6) MiFID II. Furthermore, where the information disclosed pursuant to paragraph 1 is already publicly available, the asset manager is not required to provide the information to the institutional investor directly.

III. Disclosure to Other Investors of the Same Fund (Para. 3) Where the assets of an institutional investor are not managed on an individual and 5 discretionary client-by-client basis but are pooled together with assets of other investors and managed via a fund, Paragraph 3 provides Member States with an option to require information to be provided to other investors, at least upon request, in order to allow all investors of the same fund to be able to receive that information.10 However, this is not a mandatory requirement (cf. the wording “may”) of the SRD. If Member States opt for this solution, they are not obliged to make the flow of information dependent on a request (cf. the wording “at least”). Such a restriction, which serves to avoid an unreasonable increase in the effort and cost burden for the asset manager,11 is also completely optional.

Article 3 j Transparency of proxy advisors 1. Member States shall ensure that proxy advisors publicly disclose reference to a code of conduct which they apply and report on the application of that code of conduct. Where proxy advisors do not apply a code of conduct, they shall provide a clear and reasoned explanation why this is the case. Where proxy advisors apply a code of conduct but depart from any of its recommendations, they shall declare from which parts they depart, provide explanations for doing so and indicate, where appropriate, any alternative measures adopted. Information referred to in this paragraph shall be made publicly available, free of charge, on the websites of proxy advisors and shall be updated on an annual basis. 2. Member States shall ensure that, in order to adequately inform their clients about the accuracy and reliability of their activities, proxy advisors publicly disclose on an annual basis at least all of the following information in relation to the preparation of their research, advice and voting recommendations: (a) the essential features of the methodologies and models they apply; (b) the main information sources they use; 8 Directive 2009/65/EC of the European Parliament and of the Council of 13.7.2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ L 302, 17.11.2009, p. 32. 9 Directive 2011/61/EU of the European Parliament and of the Council of 8.6.2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ L 174, 1.7.2011, p. 1. 10 Cf. Recital 24 SRD II. 11 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 380.

Jan Lieder and Martin Bialluch

891

Art 3 j Transparency of proxy advisors (c) the procedures put in place to ensure quality of the research, advice and voting recommendations and qualifications of the staff involved; (d) whether and, if so, how they take national market, legal, regulatory and company-specific conditions into account; (e) the essential features of the voting policies they apply for each market; (f) whether they have dialogues with the companies which are the object of their research, advice or voting recommendations and with the stakeholders of the company, and, if so, the extent and nature thereof; (g) the policy regarding the prevention and management of potential conflicts of interests. The information referred to in this paragraph shall be made publicly available on the websites of proxy advisors and shall remain available free of charge for at least three years from the date of publication. The information does not need to be disclosed separately where it is available as part of the disclosure under paragraph 1. 3. Member States shall ensure that proxy advisors identify and disclose without delay to their clients any actual or potential conflicts of interests or business relationships that may influence the preparation of their research, advice or voting recommendations and the actions they have undertaken to eliminate, mitigate or manage the actual or potential conflicts of interests. 4. This Article also applies to proxy advisors that have neither their registered office nor their head office in the Union which carry out their activities through an establishment located in the Union.

I. Code of Conduct – Comply or Explain (Para. 1) Many institutional investors and asset managers use the services of proxy advisors, e.g. big US firms like ISS or Glass Lewis,1 which provide research, advice and recommendations on how to vote in general meetings of listed companies. Thus, proxy advisors play an important role in matters of corporate governance. By contributing to reducing the costs of the analysis related to company information,2 they may also have an important influence on the voting behaviour of investors. In particular, investors with highly diversified portfolios and many foreign shareholdings heavily rely on proxy advisor recommendations.3 2 In view of this, the SRD subjects proxy advisors to certain transparency requirements. Article 3 j SRD is thereby somewhat disconnected from the system of the above rules in Article 3g-3 i SRD4 as it deals with proxy advisors who, unlike institutional investors (Article 3 g, 3 i SRD) and asset managers (Article 3 g, 3 j SRD), are not at all “shareholders” themselves, but rather external parties.5 This can also be seen in the definition of Article 2(g) SRD, which describes proxy advisors as legal persons that analyse, on a professional and commercial basis, the corporate disclosure and, where relevant, other information of listed companies with a view to informing investors’ voting deci1

1 Comprehensively Schockenhoff and Nußbaum, ZGR 2019, 163; for a critical view on their development and role, see Schneider and Anzinger, NZG 2007, 88. 2 Enriques and Romano, ‘Institutional Investor Voting Behavior: A Network Theory Perspective’, ECGI Law Working Paper No. 393/2018, p. 15. 3 Recital 25 SRD II. 4 For a graphical illustration of the Chapter Ib rule system, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 381. 5 On the important role of proxy advisors, see Recital 25 SRD II; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.53.

892

Jan Lieder and Martin Bialluch

Art 3 j

Directive 2007/36/EC

sions by providing research, advice or voting recommendations that relate to the exercise of voting rights. On the other hand, Article 3 j SRD contains a comply-or-explain model similar to 3 the provisions in Article 3 h and 3 i SRD.6 Originally, rather “hard” requirements were intended to govern here.7 However, after an intense discussion8, it was decided to implement a soft-law model, which fits into the overall regulatory framework of the SRD’s new Chapter Ib. Information referred to in paragraph 1 shall be made publicly available, free of charge, on the websites of proxy advisors and shall be updated on an annual basis.

II. Transparency of Proxy Advisors In addition to the above-mentioned comply-or-explain model, Member States shall 4 oblige proxy advisors to be transparent with regard to their working methods (para. 2) and with regard to any conflicts of interest (para. 3).

1. Public annual reports (para. 2) Contrary to what was provided for in the Commission’s draft,9 the SRD does not 5 oblige Member States to provide for material standards of duty for the relationship of the proxy advisors to their clients. In the interest of transparency, the wording now adopted is limited to a reporting obligation. The proxy advisors must publish an annual report on how they prepare their research, their advice and their voting recommendations. Points (a)–(g) provide for a standard of minimum content of these reports. At least all aspects mentioned there must be included cumulatively10. Particular criticism was levelled at the disclosure of the proxy advisors methods and models (point (a)). This requirement will have to be implemented restrictively in order not to jeopardise the protection of business secrets and not to de facto annihilate the entire field of business activity of the proxy advisor.11 Member States are obliged to prescribe that this information shall be made publicly 6 available on the websites of proxy advisors and shall remain available free of charge for at least three years from the date of publication. Member States law within the boundaries of Article 3 SRD can provide for a longer period or further requirements of minimum content. 12 To avoid confusion due to doubling of information, Member States shall also provide that information does not need to be disclosed separately where it is already available as part of the comply-or-explain disclosure under paragraph 1.

6 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.54; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 352 et seq. 7 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.54. 8 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.54; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 348; Bayer and J. Schmidt, BB 2015, 1731, 1733; Balp, ECFR 2017, 1, 19 et seq.; Fleischer, AG 2012, 2, 4 et seq.; Fleischer, ECL 9 (2012), 12, 14; Klöhn and Schwarz, ZIP 2012, 149, 152 et seq. 9 Article 3 i of the Draft, COM(2014) 213 final. 10 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 356. 11 Balp, ECFR 2017, 1, 26; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 357. 12 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 356.

Jan Lieder and Martin Bialluch

893

Art 3 j Transparency of proxy advisors 2. Conflicts of interests (para. 3) Proxy advisors operating on a larger scale are subject to conflicts of interest. In order to handle these conflicts of interest, the SRD requires Member States to oblige proxy advisors to identify and disclose without delay to their clients any actual or potential conflicts of interests or business relationships that may influence the preparation of their research, their advice or their voting recommendations and the actions they have undertaken to eliminate, mitigate or manage the actual or potential conflicts of interests. 8 Due to the vague wording, there is a certain degree of regulatory freedom left for the Member States as to the extent to which they provide for an enforcement, especially for the identification of conflicts of interest. Should errors occur in the identification of conflicts of interest for which proxy advisors are responsible and which result in an erroneous recommendation, Member States must take effective, proportionate and dissuasive measures in accordance with Article 14 b SRD. 13 In this respect, claims for damages under private law could be adequate – provided such claims do not exist under applicable national law anyway. 9 The phrase “without delay” is to be interpreted autonomously (→ Art 2 mn. 1). Some regard the last admissible point in time for disclosure to be the time of the actual voting recommendation.14 However, if this point in time is too close to the relevant general meeting so that there is no time to obtain new advice free of conflicts of interest, this should be seen as a breach of obligation on the part of the proxy advisor burdened with the conflict of interest. Therefore, the latest possible time for the disclosure of a conflict of interest should in some way relate to the time of the subsequent casting of votes. The provision’s purpose shall be taken into account to the extent that there should still have to be sufficient time to obtain a new recommendation elsewhere (cf. also Article 6(4) SRD). In the end, it is up to the Member States whether they specify a fixed period when transposing the Directive or whether they adopt the general clause of the Directive unchanged. 7

III. Extension to Third-Country Proxy Advisors (Para. 4) 10

The vast majority of large proxy advisors are based in the US. A rule that does not cover these EU foreigners would be practically ineffective and could hardly realise the interests of the Internal Market.15 Therefore, paragraph 4 aims to ensure a level playing field between European Union based and third-country based proxy advisors.16 Paragraph 4 is related to Article 1(6)(c) SRD, which states that the provisions laid down in Chapter Ib shall apply to proxy advisors in so far as they provide services to shareholders with respect to shares of companies which have their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State. The Member States must therefore implement the (soft) obligations for proxy advisors provided for by Chapter Ib as foreign law (Fremdenrecht). However, there is no provision for unequal treatment of the foreign proxy advisors. Neither Article 3j(4) SRD nor Article 1(6)(c) SRD contain a conflict-of-laws provision.

Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 358. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 358; Zetzsche in KölnerKommentar-AktG (2016), Nach § 135 mn. 83. 15 Cf. Balp, ECFR 2017, 1, 22; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 359. 16 Recital 27 SRD II. 13

14

894

Jan Lieder and Martin Bialluch

Art 4

Directive 2007/36/EC

Article 3 k Review 1. The Commission shall submit a report to the European Parliament and to the Council on the implementation of Articles 3 g, 3 h and 3 i, including the assessment of the need to require asset managers to publicly disclose certain information under Article 3 i, taking into account relevant Union and international market developments. The report shall be published by 10 June 2022 and shall be accompanied, if appropriate, by legislative proposals. 2. The Commission shall, in close cooperation with ESMA, submit a report to the European Parliament and to the Council on the implementation of Article 3 j, including the appropriateness of its scope of application and its effectiveness and the assessment of the need for establishing regulatory requirements for proxy advisors, taking into account relevant Union and international market developments. The report shall be published by 10 June 2023 and shall be accompanied, if appropriate, by legislative proposals. Uncertainty as to whether or not a real impact could be achieved1 has led to the deci- 1 sion that – just like Chapter Ia (see above → Art 3 f SRD) – Chapter Ib is subject to a European Parliament’s revision as well. The Commission (para. 1 and 2) and ESMA (para. 2) shall draw up reports in this regard. No reports pursuant to Article 3 k SRD have been published yet. The deadline for reporting has not yet expired.

CHAPTER II GENERAL MEETINGS OF SHAREHOLDERS Article 4 Equal treatment of shareholders The company shall ensure equal treatment for all shareholders who are in the same position with regard to participation and the exercise of voting rights in the general meeting. Article 4 SRD sets out another key principle1 of the SRD. That is the equal treatment 1 of all shareholders. 2 This overall principle is not an inevitable consequence of EU primary law,3 but is expressed in various pieces of secondary law (cf. Article 85 Directive 2017/1132/EU4, Article 17(1) Directive 2004/109/EG5, Article 3(1) Directive 2004/25/ Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.41. 1 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.22; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 86; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 7. 2 For details, see Verse, Der Gleichbehandlungsgrundsatz im Recht der Kapitalgesellschaften (2006), p. 67 et seq., on union law 94 et seq., on comparative aspects 114 et seq. 3 ECJ C-101/08, ECLI:EU:C:2009:626; Habersack and Tröger, NZG 2010, 1 et seq.; Klöhn, LMK 2009, 294692. 4 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14.6.2017 relating to certain aspects of company law, OJ L 169, 30.6.2017, p. 46. 5 Directive 2004/109/EC of the European Parliament and of the Council of 15.12.2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004, p. 38. 1

Jan Lieder and Martin Bialluch

895

Art 4

Directive 2007/36/EC

Article 3 k Review 1. The Commission shall submit a report to the European Parliament and to the Council on the implementation of Articles 3 g, 3 h and 3 i, including the assessment of the need to require asset managers to publicly disclose certain information under Article 3 i, taking into account relevant Union and international market developments. The report shall be published by 10 June 2022 and shall be accompanied, if appropriate, by legislative proposals. 2. The Commission shall, in close cooperation with ESMA, submit a report to the European Parliament and to the Council on the implementation of Article 3 j, including the appropriateness of its scope of application and its effectiveness and the assessment of the need for establishing regulatory requirements for proxy advisors, taking into account relevant Union and international market developments. The report shall be published by 10 June 2023 and shall be accompanied, if appropriate, by legislative proposals. Uncertainty as to whether or not a real impact could be achieved1 has led to the deci- 1 sion that – just like Chapter Ia (see above → Art 3 f SRD) – Chapter Ib is subject to a European Parliament’s revision as well. The Commission (para. 1 and 2) and ESMA (para. 2) shall draw up reports in this regard. No reports pursuant to Article 3 k SRD have been published yet. The deadline for reporting has not yet expired.

CHAPTER II GENERAL MEETINGS OF SHAREHOLDERS Article 4 Equal treatment of shareholders The company shall ensure equal treatment for all shareholders who are in the same position with regard to participation and the exercise of voting rights in the general meeting. Article 4 SRD sets out another key principle1 of the SRD. That is the equal treatment 1 of all shareholders. 2 This overall principle is not an inevitable consequence of EU primary law,3 but is expressed in various pieces of secondary law (cf. Article 85 Directive 2017/1132/EU4, Article 17(1) Directive 2004/109/EG5, Article 3(1) Directive 2004/25/ Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.41. 1 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.22; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 86; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 7. 2 For details, see Verse, Der Gleichbehandlungsgrundsatz im Recht der Kapitalgesellschaften (2006), p. 67 et seq., on union law 94 et seq., on comparative aspects 114 et seq. 3 ECJ C-101/08, ECLI:EU:C:2009:626; Habersack and Tröger, NZG 2010, 1 et seq.; Klöhn, LMK 2009, 294692. 4 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14.6.2017 relating to certain aspects of company law, OJ L 169, 30.6.2017, p. 46. 5 Directive 2004/109/EC of the European Parliament and of the Council of 15.12.2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004, p. 38. 1

Jan Lieder and Martin Bialluch

895

Art 5 Information prior to the general meeting EG6).7 Even if Article 4 SRD is worded as if it directly binds companies, it must nevertheless be interpreted as a transposition requirement (→ Art 1 mn. 7). This results from Article 17 SRD as well as the general understanding of EU Directives binding only the Member States, which is provided for by Article 288 para. 3 TFEU (→ Art. 17 mn. 2). 2 Like other European regulations on the principle of equal treatment, Article 4 SRD contains an inherent restriction. In particular, it only concerns shareholders who are in the “same position” with regard to participation and the exercise of voting rights in the general meeting. Consequently, it follows from this restrictive wording (“same position with regard to participation and the exercise of voting rights in the general meeting”) that objectively justified differences of treatment are permissible. 8 Therefore, the granting of multiple or maximum voting rights is generally compatible with the SRD.9 There is no principle of “one share one vote” under European law.10

Article 5 Information prior to the general meeting 1. Without prejudice to Articles 9(4) and 11(4) of Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, Member States shall ensure that the company issues the convocation of the general meeting in one of the manners specified in paragraph 2 of this Article not later than on the 21 st day before the day of the meeting. Member States may provide that, where the company offers the facility for shareholders to vote by electronic means accessible to all shareholders, the general meeting of shareholders may decide that it shall issue the convocation of a general meeting which is not an annual general meeting in one of the manners specified in paragraph 2 of this Article not later than on the 14th day before the day of the meeting. This decision is to be taken by a majority of not less than two thirds of the votes attaching to the shares or the subscribed capital represented and for a duration not later than the next annual general meeting. Member States need not apply the minimum periods referred to in the first and second subparagraphs for the second or subsequent convocation of a general meeting issued for lack of a quorum required for the meeting convened by the first convocation, provided that this Article has been complied with for the first convocation and no new item is put on the agenda, and that at least 10 days elapse between the final convocation and the date of the general meeting. 2. Without prejudice to further requirements for notification or publication laid down by the competent Member State as defined in Article 1(2), the company shall be required to issue the convocation referred to in paragraph 1 of this Article in a 6 Directive 2004/25/EC of the European Parliament and of the Council of 21.4.2004 on takeover bids, OJ L 142, 30.4.2004, p. 12. 7 Habersack and Tröger, NZG 2010, 1, 4 et seq. 8 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.22; cf. further Götze in MüKo-AktG (5th ed. 2019), § 53 a mn. 17 et seq. 9 Bachner and Dokalik, GesRZ 2007, 104, 105; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 17, 33; Zetzsche, NZG 2007, 686, 691; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.22; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 87; Kalss and Klampfl, Europäisches Gesellschaftsrecht (2015), mn. 394. 10 Cf. Impact Assessment on the Proportionality between Capital and Control in Listed Companies, SEC (2007) 1705; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.22, 13.97.

896

Jan Lieder and Martin Bialluch

Art 5

Directive 2007/36/EC

manner ensuring fast access to it on a non-discriminatory basis. The Member State shall require the company to use such media as may reasonably be relied upon for the effective dissemination of information to the public throughout the Community. The Member State may not impose an obligation to use only media whose operators are established on its territory. The Member State need not apply the first subparagraph to companies that are able to identify the names and addresses of their shareholders from a current register of shareholders, provided that the company is under an obligation to send the convocation to each of its registered shareholders. In either case the company may not charge any specific cost for issuing the convocation in the prescribed manner. 3. The convocation referred to in paragraph 1 shall at least: (a) indicate precisely when and where the general meeting is to take place, and the proposed agenda for the general meeting; (b) contain a clear and precise description of the procedures that shareholders must comply with in order to be able to participate and to cast their vote in the general meeting. This includes information concerning: (i) the rights available to shareholders under Article 6, to the extent that those rights can be exercised after the issuing of the convocation, and under Article 9, and the deadlines by which those rights may be exercised; the convocation may confine itself to stating only the deadlines by which those rights may be exercised, provided it contains a reference to more detailed information concerning those rights being made available on the Internet site of the company; (ii) the procedure for voting by proxy, notably the forms to be used to vote by proxy and the means by which the company is prepared to accept electronic notifications of the appointment of proxy holders; and (iii) where applicable, the procedures for casting votes by correspondence or by electronic means; (c) where applicable, state the record date as defined in Article 7(2) and explain that only those who are shareholders on that date shall have the right to participate and vote in the general meeting; (d) indicate where and how the full, unabridged text of the documents and draft resolutions referred to in points (c) and (d) of paragraph 4 may be obtained; (e) indicate the address of the Internet site on which the information referred to in paragraph 4 will be made available. 4. Member States shall ensure that, for a continuous period beginning not later than on the 21 day before the day of the general meeting and including the day of the meeting, the company shall make available to its shareholders on its Internet site at least the following information: (a) the convocation referred to in paragraph 1; (b) the total number of shares and voting rights at the date of the convocation (including separate totals for each class of shares where the company’s capital is divided into two or more classes of shares); (c) the documents to be submitted to the general meeting; (d) a draft resolution or, where no resolution is proposed to be adopted, a comment from a competent body within the company, to be designated by the applicable law, for each item on the proposed agenda of the general meeting; moreover,

Jan Lieder and Martin Bialluch

897

Art 5 Information prior to the general meeting draft resolutions tabled by shareholders shall be added to the Internet site as soon as practicable after the company has received them; (e) where applicable, the forms to be used to vote by proxy and to vote by correspondence, unless those forms are sent directly to each shareholder. Where the forms referred to in point (e) cannot be made available on the Internet for technical reasons, the company shall indicate on its Internet site how the forms can be obtained on paper. In this case the company shall be required to send the forms by postal services and free of charge to every shareholder who so requests. Where, pursuant to Articles 9(4) or 11(4) of Directive 2004/25/EC, or to the second subparagraph of paragraph 1 of this Article, the convocation of the general meeting is issued later than on the 21st day before the meeting, the period specified in this paragraph shall be shortened accordingly. 5. Member States shall ensure that for the purposes of Directive 2014/59/EU the general meeting may, by a majority of two-thirds of the votes validly cast, issue a convocation to a general meeting, or modify the statutes to prescribe that a convocation to a general meeting is issued, at shorter notice than as laid down in paragraph 1 of this Article, to decide on a capital increase, provided that that meeting does not take place within ten calendar days of the convocation, that the conditions of Article 27 or 29 of Directive 2014/59/EU are met, and that the capital increase is necessary to avoid the conditions for resolution laid down in Articles 32 and 33 of that Directive. 6. For the purposes of paragraph 5, the obligation on each Member State to set a single deadline in Article 6(3), the obligation to ensure timely availability of a revised agenda in Article 6(4) and the obligation on each Member State to set a single record date in Article 7(3) shall not apply.

I. General Scope Article 5 SRD sets out minimum standards for the convocation of general meetings. The requirements here go beyond the basic rules already laid down in Article 17 Directive 2004/109/EG1 for all companies within the SRD’s scope.2 As recital 6 of the SRD states, shareholders should be able to cast informed votes at, or in advance of, the general meeting, no matter where they reside. They shall have sufficient time to consider the documents intended to be submitted to the general meeting and determine how they will vote. To this end, timely notice of the general meeting has to be given, and shareholders must be provided with the complete information intended to be submitted to the general meeting.3 Therefore, the SRD explicitly refers to the “possibilities which modern technologies offer to make information instantly accessible”4, which basically refers to the company’s internet presence.5 2 The SRD’s wording is, however, inconsistent at this point. The term “Internet site” within the meaning of Article 5 SRD in fact means the same as “website” in the Chapters Ia and Ib or in Article 9a(7), 9b(5) SRD. This difference of wording in the provisions amended by SRD II can only be explained by the fact that, when the SRD II was adopted 1

1 Directive 2004/109/EC of the European Parliament and of the Council of 15.12.2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004, p. 38. 2 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.58. 3 Recital 6 SRD. 4 Recital 6 SRD. 5 Recital 6 SRD: “This Directive presupposes that all listed companies already have an Internet site”.

898

Jan Lieder and Martin Bialluch

Art 5

Directive 2007/36/EC

in 2017, there was simply no consideration given to bringing the wordings in line with the previous version of the Directive (→ Art 1 mn. 6; Art 15 mn. 2). This frequent carelessness is a general problem with European legislation.

II. Convocation Period (Para. 1) As far as the convocation period is concerned, a rule-and-exception model can be observed.6 As a rule, the general meetings must be convened at least 21 days prior to the date of the meeting. Due to the character of minimum harmonisation of the SRD (→ Art 3 mn. 1), however, longer periods of notice are always in accordance with the SRD.7 Germany, for example, has prescribed a period of 30 days (sec. 123(1) AktG) which is in line with the SRD’s requirements.8 Incidentally, a period of 30 days was also envisaged in the Commission’s draft.9 According to the temporary special regulation supporting companies affected by the COVID-19-pandemic of 2020, the board can call the general meeting on the 21st day before the day of the general meeting.10 Member States may deviate from this rule in the following cases: First, in order to allow rapid interventions in urgent cases,11 companies may be permitted to convene extraordinary general meetings with a 14-day notice period (Article 5(1)(2) SRD). This also applies to the cases regulated in Article 9(4) and 11(4) of the Takeover Directive 2004/25/EC12, in which, due to the special urgency, the 14-day period defined there is decisive.13 The company’s decision to allow shorter periods pursuant to Article 5(1)(2) SRD must be linked by the transposition acts to at least a 2/3 majority and an annual renewal.14 Then all shareholders must be given the opportunity to participate electronically. The SRD assumes that all companies concerned have an internet presence. 15 However, it cannot be inferred from this that all shareholders will have internet-enabled terminal equipment. This raises the question of the scope of obligations for companies to provide access to their shareholders. In this respect, the historical background and purpose of the Directive has arrived in the digital age, which means that companies can assume that shareholders themselves are connected to the internet. Electronic participation, in other words, does not oblige companies to do more than they would have had to do in the analogue world, where the transport to the physical location of the AGM would also be left to each shareholder. Secondly, Member States may provide for exceptions to the rule for so-called followup meetings (“general meeting issued for lack of a quorum required for the meeting 6 Graphically displayed at Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 99. 7 Cf. Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 9. 8 On the effect of the SRD on the exact period calculation Florstedt, ZIP 2010, 761 et seq. 9 COM (2005), 685, p. 14; cf. further Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.59. 10 Article 2 section 1(3)(1) of Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht vom 27.3.2020, BGBl. I, p. 569. 11 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.61; cf. further Grundmann, Europäisches Gesellschaftsrecht (2011), mn. 414; Knapp, ERA Forum (2008), p. 377, 381. 12 Directive 2004/25/EC of the European Parliament and of the Council of 21.4.2004 on takeover bids, OJ L 142, 30.4.2004, p. 12. 13 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 9. 14 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.61; cf. further Bachner and Dokalik, GesRZ, 2007, 104, 106. 15 Recital 6 SRD.

Jan Lieder and Martin Bialluch

899

3

4

5

6

Art 5 Information prior to the general meeting convened by the first convocation”). However, no new agenda item may be added and the first convocation must have met the requirements of the respective basic rule of the national implementing laws. 7 Following the need for systematic unity and consistency of European secondary law, the provisions in Article 9(4) and Article 11(4) of Directive 2004/25/EC that allow shorter convocation periods have priority over the SRD. The first Munich district court (LG München I) had asked the ECJ to what extent shorter convocation periods introduced during the transposition period would conflict with the SRD.16 The ECJ had denied its jurisdiction.17 In any case, this question became irrelevant when the transposition deadline expired.18 For stabilisation measures involving the Financial Market Stabilisation Fund and the Economic Stabilisation Fund, the newly adopted Economic Stabilisation Fund Act of 2020 provides for a notice period of only 14 days.19 This violates the requirements of paragraph 1.20

III. Modalities of Convocation (Para. 2) The SRD also sets minimum requirements for the methods of the convocation of the general meeting. Meticulous attention must be paid to compliance with these requirements, as formally incorrect notices of meeting are one of the most frequent reasons for legal action for rescission after a general meeting.21 Therefore, the Directive and its implementing acts are of enormous practical relevance. 9 Paragraph 2 provides for a “targeted push system” modelled after Article 21 Directive 2004/109/EG.22 As the SRD is particularly concerned with promoting cross-border shareholder activity (→ Art 1 mn. 1), the use of solely domestic media must be prohibited. As far as print media are concerned, they must be distributed throughout Europe. Regional newspapers are not suitable. Internet media are generally available across borders. 10 The SRD does not require translation into other national languages.23 Such a provision was discussed.24 However, it did not make it into the final version that was adopted later. A Commission recommendation on this is still to be issued.25 Therefore, the publication in the native language must not be understood as “discriminatory”. As far 8

LG München, ZIP 2010, 779; cf. Bayer and J. Schmidt, EWiR 2010, 289. ECJ, C-194/10, ECLI:EU:C:2011:182; as to the question of direct applicability of European Directives in this context, see Foerster, EuR 2012, 190. 18 For a violation of EU law principles, see Bachmann, ZIP 2009, 1249, 1250; Becker and Mock, FMStG 2009, § 7 mn. 8; Binder, WM 2008, 2340, 2345; Seiler and Wittgens, ZIP 2008, 2245, 2252; Ziemons, NZG 2009, 369 et seq.; for an opposing view, see Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.64; Hopt, Fleckner, Kumpan and Steffek, WM 2009, 821, 828; Langenbucher, ZGR 2010, 75, 93 et seq.; Mock, EuR 2009, 693, 699; Seibert in Festschrift Hopt (2010), p. 2525, 2545. 19 See section 7(1)(1) Wirtschaftsstabilisierungsbeschleunigungsgesetz in the version of the Gesetz zur Errichtung eines Wirtschaftsstabilisierungsfonds vom 27.3.2020, BGBl. I, p. 543. 20 Lieder, ZIP 2020, 837, 846. 21 E.g. OLG Frankfurt, ZIP 2017, 1714; von der Linden, EWiR 2017, 653; Ruppert in Schaaf, Praxis der Hauptversammlung (2011), mn. 125. 22 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.65; critics by Noack, Festschrift Westermann (2008), p. 1203, 1208; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 50. 23 COM (2005), 685, p. 3; Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 10; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.79; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 103. 24 SEC (2006), 181, p. 8 et seq. 25 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.79. 16

17

900

Jan Lieder and Martin Bialluch

Art 5

Directive 2007/36/EC

as transmission to the relevant media is concerned, companies may comply with the implementing provisions of Article 21 Directive 2004/109/EG.26 Subparagraph 2 states that Member States need not apply the first subparagraph to 11 companies that are able to identify the names and addresses of their shareholders from a current register of shareholders, provided that the company is under an obligation to send the convocation to each of its registered shareholders. In fact, this subparagraph must be interpreted as restricted by its purpose. It can only be applied as worded if the company can reach all of its shareholders directly. Even if there is no provision setting up an obligation to keep a register in Chapter Ia of the SRD, the company’s right to identify its shareholders offers a certain support here.27 However, a threshold value can be set in accordance with Article 3a(1) SRD. Shareholders within this threshold must be informed in accordance with the first subparagraph of Article 5(2) SRD. Member States must consider this in their national transposition acts. The second subparagraph may be applied by analogy provided that Member States 12 lay down a global obligation for companies to identify their shareholders pursuant to Chapter Ia.28 They may then invite any shareholder directly, comparable to the state of a current register of shareholders. The costs of convocation shall be borne by the company. Member States shall ensure that the company may not charge any specific cost for issuing the convocation, subpara. 3.

IV. Minimum Content of Information 1. Requirements for the convocation itself (para. 3) Minimum requirements of the convocation’s content are laid down in points (a)–(e). 13 Companies that are subject to the scope of the Directive 2004/109/EG must cumulatively comply with the provisions of Article 17(2) Directive 2004/109/EG.

2. Requirements for the related internet information (para. 4) In addition to the information contained in the invitation itself (see above), the 14 information referred to in paragraph 4 points (a)–(e) must also be made available on the company’s website. If no website exists, a website must be set up.29 The website, thus, is to a certain extent the company’s “centre of information”30. Because of the SRD’s character of minimum harmonisation (→ Art 3 mn. 1) and the particular wording (“at least”), the Member States may define further aspects of minimum content. The publication period, which has also been set at 21 days – just as in paragraph 15 1 –, does not necessarily have to be implemented in national laws in correspondence with paragraph 1. Member States may provide for a longer convocation period pursuant to paragraph 1 than for a publication period pursuant to paragraph 4. The reverse case, however, cannot occur in practice, since the convocation itself is also part of the publication pursuant to paragraph 4. 26 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.65; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 100. 27 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 101. 28 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 101. 29 Cf. Recital 6 SRD; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.75. 30 Zetzsche, NZG 2007, 686, 688; Noack, Festschrift Westermann (2008), p. 1203, 1210; Lutter/Bayer/ Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.75; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 103.

Jan Lieder and Martin Bialluch

901

Art 6 Right to put items on the agenda of the general meeting and to table draft resolutions 16

However, where, pursuant to Article 9(4) or 11(4) of Directive 2004/25/EC, or to the second subparagraph of paragraph 1, the convocation of the general meeting is issued later than on the 21st day before the meeting, the publication period of paragraph 4 shall be shortened accordingly.

V. Special Provisions Concerning Directive 2014/59/EU (BRRD) (Para. 5 and 6) Article 121(2) BRRD inserted paragraphs 5 and 6 subsequently in order to enable capital increase measures to be effectively implemented in accordance with the BRRD by means of early intervention. In this respect, paragraph 1 does not apply. Shorter convocation periods may apply as a result.31 This must indeed apply mutatis mutandis to the respective website publication period referred to in paragraph 4. 18 Paragraph 6 correspondingly states that the obligation on each Member State to set a single deadline in Article 6(3) SRD, the obligation to ensure timely availability of a revised agenda stipulated by Article 6(4) SRD and the obligation on each Member State to set a single record date under Article 7(3) SRD shall also not apply. 17

Article 6 Right to put items on the agenda of the general meeting and to table draft resolutions 1. Member States shall ensure that shareholders, acting individually or collectively: (a) have the right to put items on the agenda of the general meeting, provided that each such item is accompanied by a justification or a draft resolution to be adopted in the general meeting; and (b) have the right to table draft resolutions for items included or to be included on the agenda of a general meeting. Member States may provide that the right referred to in point (a) may be exercised only in relation to the annual general meeting, provided that shareholders, acting individually or collectively, have the right to call, or to require the company to call, a general meeting which is not an annual general meeting with an agenda including at least all the items requested by those shareholders. Member States may provide that those rights shall be exercised in writing (submitted by postal services or electronic means). 2. Where any of the rights specified in paragraph 1 is subject to the condition that the relevant shareholder or shareholders hold a minimum stake in the company, such minimum stake shall not exceed 5 % of the share capital. 3. Each Member State shall set a single deadline, with reference to a specified number of days prior to the general meeting or the convocation, by which shareholders may exercise the right referred to in paragraph 1, point (a). In the same manner each Member State may set a deadline for the exercise of the right referred to in paragraph 1, point (b). 4. Member States shall ensure that, where the exercise of the right referred to in paragraph 1, point (a) entails a modification of the agenda for the general meeting 31 Cf. Recital 124 BRRD; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.80.

902

Jan Lieder and Martin Bialluch

Art 6

Directive 2007/36/EC

already communicated to shareholders, the company shall make available a revised agenda in the same manner as the previous agenda in advance of the applicable record date as defined in Article 7(2) or, if no record date applies, sufficiently in advance of the date of the general meeting so as to enable other shareholders to appoint a proxy or, where applicable, to vote by correspondence.

I. Minority Rights Corresponding With the (Annual) General Meeting (Para. 1) Article 6 SRD complements the provisions of Article 5 SRD that deal with procedural 1 issues in the preparation of general meetings with certain minimum rights (cf. Article 3 SRD) of minority shareholders in connection with annual general meetings. While Article 5 SRD deals with formal requirements for the convocation by the company, Article 6 SRD regulates the legal conditions under which Member States must enable shareholders to add items to the companies’ initial agenda by virtue of their own power as shareholders and propose their own resolutions as well as the formal requirements to be met for this purpose. The rights granted to minority shareholders by these means are also granted to majority shareholders.1 However, the SRD does not provide for a shareholder’s right to initiate a convocation 2 of a company’s general meeting.2 Despite this, such a feature can be found in many EU legal systems even without being prescribed by the SRD.3 With regard to Article 3 SRD, the Directive does not conflict with this either. Therefore, Member States such as Germany (sec. 122(1) AktG) may provide for this in order to improve the position of the shareholders. In such cases, the national law may also stipulate that minority rights apply only to the annual general meeting (→ mn. 5 ).

II. Limitation The actual substantive scope of the minimum standard is determined by the numer- 3 ous possibilities for restricting minority rights, which the SRD either expressly allows or which result from general principles of European law.

1. Minority rights as individual “or” collective rights The wording of Article 6 SRD may in principle also be understood as allowing 4 Member States to choose to organise shareholder rights under Article 6 SRD as either individual rights or collective rights. This may be interpreted restrictively as a mere clarification that the individual rights granted should also be granted jointly. Alternatively, quorums in particular could be permitted as a prerequisite. Ultimately, the reference to the collective exercise of rights would be rather meaningless if this restriction had not been intended. Therefore, a complete exclusion of individual rights would also be compatible with the requirements of the SRD.4

Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 108. Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 13; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 109. 3 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 109. 4 Cf. Ochmann, Aktionärsrechte-Richtlinie (2009), p. 90; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.83. 1

2

Jan Lieder and Martin Bialluch

903

Art 6 Right to put items on the agenda of the general meeting and to table draft resolutions 2. Restriction of shareholders’ right to put items on the agenda of the general meeting 5

A first inherent limitation option can be found in the wording of Article 6(1)(a) SRD itself, according to which the right to add items to the agenda must only be granted if the respective motions are accompanied by a justification and a draft resolution. Furthermore, it is expressly permitted by Article 6(1)(2) SRD that Member States provide that this right may only be exercised in relation to the annual general meeting. However, this shall only apply if shareholders, acting individually or collectively, are granted, under national law, the right to call, or to require the company to call, a general meeting, which is not an annual general meeting with an agenda including at least all the items requested by those shareholders. This takes into account the urgent character of extraordinary general meetings.5 A delay caused by minority shareholders can be avoided here. Where the national law provides for such shareholder rights (e.g. in Germany, sec. 122 AktG), minority shareholders are less in the need of protection. In these cases, the company retains its sovereignty over the content of the agenda of extraordinary general meetings. With regard to the express wording (“individually or collectively”) and recital 7 of the SRD, according to which the SRD takes “different […] modalities which are currently in use across the Community” into account, this also applies to the extent that the shareholders must meet certain quorums for this purpose under national law.

3. Restrictions of shareholders’ right to draft resolutions for items included or to be included on the agenda 6

Apart from the possibility of establishing a general threshold for the exercise of minority rights in accordance with paragraph 2, the SRD does not provide explicitly for any restrictions on the shareholders’ right to draft resolutions for items included or to be included on the agenda. However, such restrictions may be justified under strict presumptions in view of general principles of European Union law according to which abusive practises are not tolerable. Recital 7 of the SRD accepts “different […] modalities” of the exercise of the shareholders’ rights “which are currently in use across the Community”. This may be understood as an indication of permission for the member states to further restrict minority rights, even beyond the provisions of Article 6 SRD. In specific cases, an interpretation or further development of the law in line with the Directive6 must be considered. This is referred to in German publications, for example, by a minority legal opinion to justify the requirement that countermotions must be substantiated or the requirement that a main motion is to be filed at all in the context of § 126(1) AktG. 7

4. Restriction to exercising of shareholders’ rights in writing 7

Member States may provide that those rights shall be exercised in writing. The term “in writing” used in Article 6(1)(3) SRD is to be interpreted autonomously. The SRD does not stipulate a written form requirement in the strict sense, i.e., with a manual signature. Just as in other EU legislations (e.g. Article 4(1) no. 62 MiFID II, Article 2(1)(m) Directive 2009/65/EC, Article 2 no. 10 CRD8), this refers to a mere text form.9 5 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 111; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 90. 6 On this legal method in dealing with European Directives, see Möllers, Juristische Methodenlehre, 2nd ed., 2019), p. 412. 7 Simons, NZG 2019, 127, 129 et seq.; dissenting prevailing opinion Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 15; Koch in Hüffer and Koch, AktG, 14th ed. 2020, § 126 mn. 3.

904

Jan Lieder and Martin Bialluch

Art 6

Directive 2007/36/EC

In fact, this also follows without doubt from the addition of brackets in the text of the Directive (“submitted by postal services or electronic means”). This bracket addition, however, does not contain any legal definition or anything similar as one might assume. For a parallel issue of interpretation → Art 11 mn. 2.

5. Threshold value for quantity of shareholdings (para. 2) The SRD leaves it to the legislative discretion of the Member States to determine the 8 quantity of the shareholdings above which these rights should apply. It is limited to the extent that no threshold higher than 5 % of the share capital may be set for the exclusion of minority rights.10 However, this threshold refers to the number of shares and not to the monetary amount of the capital measured in Euro. If Member States provide for further minority quorums, e.g. in Germany with shareholdings exceeding 500,000 Euro, cf. sec. 122(2) AktG, this corresponds to the possibility of a more extensive transposition granted by Article 3 SRD to the extent that such thresholds aim to entitle minorities whose shareholding is less than 5 % or below the threshold value that has been set up in percent pursuant to Article 6(2) SRD, e.g.e.g. in case of a share capital of more than 10 million Euro. A circumvention of the maximum 5 % limit is not permitted.

6. Time limits on the exercise of minority rights (para. 3) Paragraph 3 contains important distinctions for the limitation of minority rights 9 under national law, in particular in terms of the degree of harmonisation that applies to the limitation of the different rights mentioned in Article 6(1)(1)(a) and (b) SRD. The exercise of the shareholders’ right to put items on the agenda (Article 6(1)(1)(a) 10 SRD) must be subjected to a time limit in national law (“Each Member State shall set […]”). This serves not only the specific interest of the companies or the main shareholders, but also the general interest in legal clarity, which is also in favour and in the interest of all parties concerned including the minority of shareholders.11 Such a limitation period for exercising the said shareholder rights has to be set out in a specified number of days12 prior to the general meeting or the convocation. It is advisable to set the end of the deadline for submitting motions for amendments to the agenda prior to the latest date on which the new agenda is published in accordance with paragraph 4 (→ mn. 14). In contrast, the right to draft resolutions for agenda items (point (b)) may be re- 11 stricted. This difference in the harmonisation degree is probably due to the fact that the amendment of the entire agenda on the basis of a motion within the meaning of paragraph 1 point (a) entails further legal consequences in the regulatory structure of the SRD (cf., for example, paragraph 4). 8 Directive 2011/83/EU of the European Parliament and the Council of 25.10.2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council, OJ L 304, 22.11.2011, p. 64. 9 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.83; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 111; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 90; Zetzsche, NZG 2007, 686, 689; Zetzsche, JCLS 8 (2008) 289, 322; Ziemons in Schmidt and Lutter, AktG (3rd ed., 2015), § 122 mn. 36. 10 For a critical view, see Ochmann, Aktionärsrechte-Richtlinie (2009), p. 90: Limit is too high. 11 Cf. recital 7 SRD: “all shareholders should in every case receive the final version of the agenda in sufficient time to prepare for the discussion and voting on each item on the agenda”. 12 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 113: at least one week.

Jan Lieder and Martin Bialluch

905

Art 6 Right to put items on the agenda of the general meeting and to table draft resolutions Further time restrictions on minority rights under national laws, such as the 90-day period of prior possession required in Germany (sec 122(1) AktG), initially seem to contradict the regulatory content of Article 6 SRD. They can, however, be justified in the light of general principles of European Union law according to which abusive practises are not tolerable. Recital 7 of the SRD accepts “different time-frames and modalities” of the exercise of the shareholders’ rights, “which are currently in use across the Community”. This may be understood as an indication of permission for Member States to further restrict minority rights, even beyond the provisions of Article 6 SRD. 13 The question as to whether this is permissible in the light of Art 7(2) SRD if the minority rights in the preparation of the General Meeting under Article 6 SRD are understood as part of a shareholders’ “participation” in the general meeting has not been raised yet. 13 Member States shall forthwith communicate the number of days specified under Article 6(3) SRD and any subsequent changes thereof to the Commission, which shall publish this information in the Official Journal of the European Union (see → Art 15). The last report is dated from 2010.14 The Commission drew up the list published in its annex based on information supplied by the Member States. Various regulatory concepts can be observed here. While the vast majority of Member States set the deadline in days prior to the general meeting or the record date,15 Spain, Italy, Latvia, Hungary, Romania and Slovenia in particular pursued a model that provides for an expiry period linked to the date of the convocation or its publication. The latter is compatible with the SRD, as its wording explicitly mentions the convocation as a reference point for the deadline. In this respect, the word “prior” logically refers to the general meeting only. 12

III. Obligation to Provide a Revised Agenda (Para. 4) Paragraph 4 is intended to ensure legal clarity and legal certainty. In practice, it enables shareholders to respond to the supplementary motions and to increase their own share of voting rights in advance of the meeting by purchasing or lending additional shares.16 However, paragraph 4 does not apply in the special cases which are covered by the BRRD pursuant to Article 5(5) SRD. The reasoning expressed in paragraph 4, namely that shareholders must have sufficient time to organise a proxy, can be used as a basis for interpretation and analogy for the purposes of clarifying such vague terms as “without delay” in Article 3 j SRD. 15 Furthermore, according to a decision of the Higher Regional Court of Frankfurt (OLG Frankfurt am Main), the first sentence of Article 6(4) SRD is neither directly applicable nor applicable by analogy to non-listed companies. For the purposes of German law, companies that are not listed may, under the conditions of sec. 122(2) AktG, extend the agenda of their general meeting even after a statutory record date. 17 14

13 Noack and Zetzsche in KölnKommAktG (3rd ed., 2011), § 122 mn. 31; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 15; dissenting Ziemons in Schmidt and Lutter, AktG (3rd ed., 2015), § 122 mn. 34. 14 OJ 21.10.2010, C 285/2. 15 The deadlines vary from 60 days prior to the general meeting in the Netherlands to 7 days in Denmark; cf. OJ 21.10.2010, C 285/2. 16 Rieckers in Spindler and Stilz, AktG (4. ed., 2019), § 122 mn. 44; Seibert and Florstedt, ZIP 2008, 2145, 2149. 17 Higher Regional Court of Frankfurt (OLG Frankfurt), ZIP 2017, 1714, mn. 13; von der Linden, EWiR 2017, 653.

906

Jan Lieder and Martin Bialluch

Art 7

Directive 2007/36/EC

Article 7 Requirements for participation and voting in the general meeting 1. Member States shall ensure: (a) that the rights of a shareholder to participate in a general meeting and to vote in respect of any of his shares are not subject to any requirement that his shares be deposited with, or transferred to, or registered in the name of, another natural or legal person before the general meeting; and (b) that the rights of a shareholder to sell or otherwise transfer his shares during the period between the record date, as defined in paragraph 2, and the general meeting to which it applies are not subject to any restriction to which they are not subject at other times. 2. Member States shall provide that the rights of a shareholder to participate in a general meeting and to vote in respect of his shares shall be determined with respect to the shares held by that shareholder on a specified date prior to the general meeting (the record date). Member States need not apply the first subparagraph to companies that are able to identify the names and addresses of their shareholders from a current register of shareholders on the day of the general meeting. 3. Each Member State shall ensure that a single record date applies to all companies. However, a Member State may set one record date for companies which have issued bearer shares and another record date for companies which have issued registered shares, provided that a single record date applies to each company which has issued both types of shares. The record date shall not lie more than 30 days before the date of the general meeting to which it applies. In implementing this provision and Article 5(1), each Member State shall ensure that at least eight days elapse between the latest permissible date for the convocation of the general meeting and the record date. In calculating that number of days those two dates shall not be included. In the circumstances described in Article 5(1), third subparagraph, however, a Member State may require that at least six days elapse between the latest permissible date for the second or subsequent convocation of the general meeting and the record date. In calculating that number of days those two dates shall not be included. 4. Proof of qualification as a shareholder may be made subject only to such requirements as are necessary to ensure the identification of shareholders and only to the extent that they are proportionate to achieving that objective.

I. Prohibition of the Mandatory Deposit and Share Blocking (Para. 1) In order to achieve unhindered participation of shareholders in the general meetings, 1 all national measures that declare either the participation or the exercise of voting rights in the general meeting to be dependent on the shares being deposited with another natural or legal person prior to the general meeting, in particular the obligation to obtain a special deposit certificate (or equivalent), are inadmissible pursuant to Article 7(1)(a) SRD.1 The legal purpose of the prohibition of any type of share blocking (Article 7(1)(b) SRD) is to remove the previously observed obstacles to the exercise of shareholder rights, particularly in cross-border situations.2 Within the scope of application of the SRD, therefore, not only direct legal regulations under national law are prohibited. 1

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 116.

Jan Lieder and Martin Bialluch

907

Art 7 Requirements for participation and voting in the general meeting Rather, the Member States must also ensure that provisions in the companies’ articles of association may not contain any such restrictions.

II. Record Date (Para. 2) 2

Member States shall provide that the rights of a shareholder to participate in a general meeting and to vote in respect of her shares shall be determined with respect to the shares held by that shareholder on a specified date prior to the general meeting – the record date. In particular, the record date rule will apply in the event of changes in the number of shares held by a shareholder who remains a shareholder until the date of the general meeting. In such cases, the shareholder status that is required by Article 7 SRD may not be denied nor completely re-established. Under the record date rule of Article 7(2) SRD, only those votes and participation rights that represent a difference from the earlier record date are cut off or allocated to this shareholder.

1. Participation and voting of non-shareholders The prevailing opinion on this issue further assumes that it is conceivable in the SRD’s regulatory concept that parties who are no longer shareholders at the time of the general meeting (e.g. because they sold their shares after the record date) nevertheless participate in the general meeting and exercise voting rights which no longer exist in their person.3 This problem has been recognised by the lawmaker and accepted.4 Furthermore it is assumed that the purpose of a record date otherwise would be missed. 5 The prevailing opinion is convincing if shareholders and those who are interested in becoming shareholders can easily adapt to the exact delimitation based on a record date and align their own intentions for the acquisition or sale of shares with it. This is in line with the principles of legal certainty and legal clarity, which are needed especially in cross-border shareholder transactions and is, thus, appropriate. 4 However, this interpretation of Article 7(1)(b) and 7(2) SRD that, admittedly, refers to the right to participate in a general meeting “and to vote”, loses sight of an important aspect of the SRD: Article 2(b) and 1(2) SRD clearly leave the question of the shareholder status to the discretion of Member States. Therefore, Article 7(2) SRD deals with the transposition requirement of a rule only for determining the extent of a shareholder’s power, but not with a constitutive specification as to the regulation of the shareholder status itself.6 Article 7 SRD, in other words, only specifies the content (the “how”) of shareholders’ rights, not the “whether”. In particular, the fact that Article 7(2) SRD presupposes the status of shareholder (“[…] that the rights of a shareholder to participate in a general meeting and to vote in respect of his shares shall be determined with respect to the shares held by that shareholder […]”) means that Member States do not have 3

2 Cf. SEC (2006), 181, p. 11 et seq.; Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 17; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 116; Grundmann and Winkler, ZIP 2006, 1421, 1425; J. Schmidt, BB 2006, 1641, 1642. 3 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 17; Ratschow, DStR 2007, 1402, 1404 et. seq; Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 118. 4 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 17; Ratschow, DStR 2007, 1402, 1404 et. seq. 5 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 118. 6 For an opposing view, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 117: “Das Recht eines Aktionärs […] ergibt sich daraus, dass ihm Aktien zu einem bestimmten Zeitpunkt gehören bzw. zustehen”.

908

Jan Lieder and Martin Bialluch

Art 7

Directive 2007/36/EC

to ensure that persons who have been shareholders on the record date and have since ceased to be shareholders may participate in the general meeting and cast votes. Within the scope of application of the Directive, Article 7 SRD does not imply a prohibition to link participation and voting at the general meeting to the actual shareholder status at the time of the general meeting. This remains a matter of national law of the Member States. This view is also in line with the general corporate law principle, according to which only those persons should decide on the fate of the company who are actually entitled shareholders at the time of the general meeting and the passing of a resolution. 7 Furthermore, it is often pointed out that the period between the record date and the general meeting is used by entitled shareholders for preparation purposes, for example to reclaim lent shares.8 However, this only has meaning if the ownership on the day of the general meeting may (and should) be a prerequisite for exercising voting rights under national law.

2. Non-application of the record date Member States need not apply the record date rule to companies that are able to 5 identify the names and addresses of their shareholders from a current register of shareholders on the day of the general meeting. In particular, the Directive refers to companies which issue registered shares.9 The legal requirement of a stop to re-registration (“Umschreibestopp”) in national law is considered to comply with the SRD.10 Questions arise where the provision covers not only the cases of registered shares, but 6 also companies that can identify their shareholders entirely under the information requirements introduced by SRD II. Although this would have seemed obvious, SRD II has not made any changes in this regard. An analogous application of the rule that has been provided for the case of registered shares to cases of shareholder identification pursuant to Article 3 a et seq SRD may not be justified from a methodological point of view.11 Article 7(2) SRD would otherwise no longer have a relevant scope of application, as every company covered by the Directive is entitled the information rights under Article 3 a et seq. SRD.

III. Differences Depending on the Type of Share (Para. 3) The SRD itself does not set a specific record date or a specific period of time for the 7 transposition of the record date. Rather, Article 7(3) SRD leaves scope for reasonable discretion, which may be applied by each Member State according to national practice and preferences.12 Paragraph 3, however, provides some framework conditions. Very 7 In this sense also Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 118. 8 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 117; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 102; Dethomas and Rontchevsky, Revue Lamy Droit des Affaires 2007, 10, 15. 9 Ochmann, Aktionärsrechte-Richtlinie (2009), p. 101; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 17; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.92; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 117. 10 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.92 and 29.94 (German law). 11 Dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 117, accepting comparable forms of registers. 12 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.90; Bachner and Dokalik, GesRZ 2007, 104, 110; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 101.

Jan Lieder and Martin Bialluch

909

Art 8 Participation in the general meeting by electronic means different regulatory models exist for these applications.13 The Commission also provides a comparative overview of the transposition of this framework.14 Germany and the ESMA have asked the Commission to submit a proposal for the EU-wide harmonisation of the record date period.15

IV. Proof of Shareholder Qualification (Para. 4) 8

The problem of proportionate shareholder identification16 for determining shareholder legitimacy has largely been defused by the introduction of Article 3 a et seq. SRD within the “know your shareholder” framework of SRD II. Proof of shareholder status can be provided using the channels of information pursuant to the transposition requirements provided for there (→ Art 3 a). Where data protection issues are concerned, the SRD has a legitimising effect with regard to the GDPR17.18

Article 8 Participation in the general meeting by electronic means 1. Member States shall permit companies to offer to their shareholders any form of participation in the general meeting by electronic means, notably any or all of the following forms of participation: (a) real-time transmission of the general meeting; (b) real-time two-way communication enabling shareholders to address the general meeting from a remote location; (c) a mechanism for casting votes, whether before or during the general meeting, without the need to appoint a proxy holder who is physically present at the meeting. 2. The use of electronic means for the purpose of enabling shareholders to participate in the general meeting may be made subject only to such requirements and constraints as are necessary to ensure the identification of shareholders and the security of the electronic communication, and only to the extent that they are proportionate to achieving those objectives. This is without prejudice to any legal rules which Member States have adopted or may adopt concerning the decision-making process within the company for the introduction or implementation of any form of participation by electronic means.

Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.93. OJ 21.10.2010, C 285/2. 15 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.93; BR-Drs. 569/15; ESMA 31-54-435 of 5 April 2017, mn. 28. 16 Ochmann, Aktionärsrechte-Richtlinie (2009), p. 102 et seq. 17 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27.4.2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation – GDPR), OJ L 119, 4.5.2016, p. 1. 18 Zetzsche, AG 2019, 233, 237. 13

14

910

Jan Lieder and Martin Bialluch

Art 8

Directive 2007/36/EC

I. Regulatory Purpose A further key instrument for removing obstacles to the cross-border exercise of 1 shareholder rights lies in the rules on participation in general meetings and the exercise of voting rights in absentia in Article 8 and 12 SRD,1 which complement each other in terms of regulation (on the relation of the two provisions → Art 12 mn. 1). According to the overall intention of the SRD, their goal is to facilitate the exercise of (foreign) shareholders’ rights of membership (→ Art 1 mn. 1 et seq.). From a law & economics perspective, there is reason to believe that the time and cost efficient electronic participation in meetings as well as voting by electronic means are suitable for overcoming the rational apathy of (foreign) shareholders.2 Where data protection issues are concerned, the SRD has a legitimising effect with regard to the GDPR3.4

II. Participation by Electronic Means (Para. 1) Under the SRD, the standard case of a general meeting is an assembly in presence. 5 2 The complete abolition of the meeting in presence is not in accordance with the Directive.6 There is, however, a lot of political movement in the EU. Given the current trends, the possibility of mandatory online participation does not seem to be ruled out.7 Nevertheless, the SRD is opening European company law to the digital age by implementing participation by electronic means, which essentially means exercising any type of shareholders’ rights by electronic means.8

1. The right of the company to enable any form of electronic participation For that purpose, the Directive adopts the concept of an “enabling minimum stan- 3 dard”9, which means that Member States must only enable the offering of the possibility of electronic participation by the company to their shareholders, for example through respective regulations in the statutes of the company. In other words, shareholder rights are realised indirectly by establishing the companies’ right to offer their shareholders electronic participation. Pursuant to Article 8(1) SRD, companies must be enabled to offer their shareholders 4 any form of participation by electronic means. This very broad wording refers to the “legal” forms of participation (e.g. spectating, raising questions, voting) but not to every technically possible implementation of these forms of participation. Since the SRD does not autonomously define what is meant by “participation”, it is reasonable to extend its scope to cover all legal forms of participation under national company law. A similar Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.95. Lieder in Festschrift Eberhard Vetter (2019), p. 419, 429. 3 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27.4.2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation – GDPR), OJ L 119, 4.5.2016, p. 1. 4 Zetzsche, AG 2019, 233, 237. 5 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.95. 6 On this aspect with regard to German company law, see Lieder in Festschrift Eberhard Vetter (2019), p. 419, 431. 7 Cf. COM (2016) 710 Annex 1, p. 3; Recommendations 26 and 28 of the ICLEG, Report on digitalisation in company law, 2016; cf. further Bayer and J. Schmidt, BB 2016, 1923, 1927 et seq.; in general Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.96. 8 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.95. 9 SEC (2006) 181, p. 32. 1

2

Jan Lieder and Martin Bialluch

911

Art 8 Participation in the general meeting by electronic means approach is taken by the Directive on the interpretation of the concept of shareholder (→ Art 2 mn. 4). 5 However, a Member State does not violate Article 4 SRD nor the requirements of Article 8(1) SRD, if the companies are not forced to introduce all forms of participation by national law.10 Rather, the SRD provides for the companies to be given the choice of introducing one or all forms of participation by electronic means. To create this option is the sole regulatory content of Article 8 SRD. As a result, the company may disadvantage electronic participants compared to participants in presence. They are considered not to be in the “same position” with regard to Article 4 SRD (→ Art 4 mn. 2). For example, the right to information and the right to speak can be excluded, while online voting is enabled.11 6 Article 8(1) SRD lists certain forms of electronic participation in points (a)–(c). However, the rule leaves room for discussion. First of all, the given list is not exhaustive (cf. the wording “any form” and “notably”). In any case, the Member States will fulfil their obligation to transpose the SRD if they limit themselves to directly adopting the general principle of permissibility of “any form” of participation from the Directive to a general rule in national law without expressly mentioning “any or all” of the forms mentioned in Article 8(1)(a)–(c) SRD. In view of the reference in the first half-sentence of Article 8(1) SRD to “any form of participation” as well as the purpose of the SRD (→ Art 1 mn. 1), it is specifically not the case that the Member States must only open up one of the forms of participation mentioned in the list.12 On the contrary, the entire list of options to participate electronically must be made available for companies to offer, but it is up to them to decide whether and which options they make available to their shareholders.13 However, the implementation of a general clause in national law achieves precisely this. The enumeration in points (a)–(c) is of a merely declaratory function, rather similar to the recitals. This is because it was not possible for European politics to reach consensus on more stringent requirements.14 The testing of digital tools at the general meeting will therefore have to be carried out mainly on a voluntary basis.15

2. Virtual general meetings 7

Virtual meetings are widely discussed in legal studies, as they are already permissible in some forms of non-listed legal entities.16 Nevertheless, they are not intended as an explicit option by the SRD’s current harmonisation target. However, an opening for virtual meetings in national law is compatible with the SRD. De lege lata it is therefore left to the discretion of the Member States to allow entirely virtual general meetings. The implementation of the SRD II has not changed this.17 10 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 20; Kalss and Klampfl, Europäisches Gesellschaftsrecht (2015), mn. 403; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 127. 11 For the prevailing opinion, see Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 20 et seq.; Kalss and Klampfl. Europäisches Gesellschaftsrecht (2015), mn. 403; for the opposing view, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 127; cf. also Nietsch, ZVglRWiss 112 (2013), 45, 59. 12 Dissenting Spindler in Schmidt and Lutter, AktG (3rd ed., 2015), § 134 mn. 67. 13 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 125. 14 SEC (2006) 181, p. 32; Grundmann and Winkler, ZIP 2006, 1421, 1426; Pluskat, WM 2007, 2135, 2137; J. Schmidt, BB 2006, 1641, 1643; cf. further Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.95. 15 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.95. 16 With a broader comparative view Lieder in Festschrift Eberhard Vetter (2019), p. 419 et seq.; also Lieder, ZIP 2020, 837. 17 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 12, 123.

912

Jan Lieder and Martin Bialluch

Art 8

Directive 2007/36/EC

The legal discourse has been accelerated by the debate on digitisation in company 8 law. In the wake of the COVID-19-pandemic, the issue is more topical than ever, as for the first time European legislators are explicitly opening the way for virtual meetings: Namely Germany18, Austria19, France20, Italy21, Luxembourg22, Norway23, Switzerland24 and Spain25 have taken temporary legislative measures enabling companies to hold virtual meetings.26 This is a step worthy of support in the direction of digitising the general meeting – albeit under unfortunate circumstances. The Member States including Germany should consider making virtual general meetings a permanent solution. The same legal and economic reasons arguing in favour of the introduction of electronic participation instruments apply to the introduction of fully virtual general meetings (→ mn. 1).27 Therefore, the admission of a fully virtual general meeting would only be consistent and the “final step” in the building of the digital general meeting.28 The next revision of the SRD will have to seize the opportunity to set a new European minimum standard in this respect, according to which Member States shall provide companies with the possibility to conduct general meetings fully virtually, at least in the form of optional statutory openings.29

III. Requirements and Constraints in National Law (Para. 2) The use of electronic means for the purpose of enabling shareholders to participate 9 in the general meeting may be subject only to such requirements and constraints as are necessary to ensure the identification of shareholders and the security of the electronic communication, and only to the extent that they are proportionate to achieving those objectives. This is intended to prevent their use being made unrealistic by prohibitive formal hurdles.30 As Article 8(2)(2) explicitly clarifies, subparagraph 1 refers exclusively to require- 10 ments and restrictions regarding electronic participation or the exercise of voting rights itself. This is without prejudice to any legal rules, which Member States have adopted or may adopt concerning the decision-making process within the company for the introduction or implementation of any form of participation by electronic means

18 Article 2 § 1 of the Gesetz über Maßnahmen im Gesellschafts-, Genossenschafts-, Vereins-, Stiftungsund Wohnungseigentumsrecht zur Bekämpfung der Auswirkungen der COVID-19-Pandemie of 27 March 2020, BGBl. I, p. 569, 570; for details, see Lieder, ZIP 2020, 837. 19 COVID-19-Gesetz of 21 March 2020, BGBl I Nr. 16/2020. 20 Ordonnance n° 2020-321 of 25 March 2020. 21 Decreto-Legge 17 marzo 2020, n. 18 of 17 March 2020. 22 Mémorial A n° 171 du 20 Mars 2020 of 20 March 2020. 23 Midlertidig forskrift om unntak fra reglene om fysisk møte i stiftelser som følge av utbruddet av covid-19 of 27 March 2020. 24 Verordnung 2 über Maßnahmen zur Bekämpfung des Coronavirus of 13 March 2020. 25 Real Decreto-ley 8/2020, de 17 de marzo, de medidas urgentes extraordinarias para. hacer frente al impacto económico y social del COVID-19. 26 J. Schmidt, EuZW 2020, 252; Lieder, ZIP 2020, 837, 838. 27 Cf. Lieder in Festschrift Eberhard Vetter (2019), p. 419, 432. 28 Lieder in Festschrift Eberhard Vetter (2019), p. 419, 432; cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 128. 29 Lieder in Festschrift Eberhard Vetter (2019), p. 419, 444; Lieder, ZIP 2020, 837, 851; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 12; ICLEG, Report on digitalisation in company law, Recommendation 26 [URL: https://ec.europa.eu/info/sites/info/files/icleg-report-on -digitalisation-24-march-2016_en_1.pdf]. 30 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.98.

Jan Lieder and Martin Bialluch

913

Art 9 Right to ask questions (e.g. requirement of a provision in the articles of association, qualified majority or “supervisory board approval”)31.

Article 9 Right to ask questions 1. Every shareholder shall have the right to ask questions related to items on the agenda of the general meeting. The company shall answer the questions put to it by shareholders. 2. The right to ask questions and the obligation to answer are subject to the measures which Member States may take, or allow companies to take, to ensure the identification of shareholders, the good order of general meetings and their preparation and the protection of confidentiality and business interests of companies. Member States may allow companies to provide one overall answer to questions having the same content. Member States may provide that an answer shall be deemed to be given if the relevant information is available on the company’s Internet site in a question and answer format.

I. Shareholders’ Right to Ask Questions and to Obtain Information 1. Purpose and linking to agenda items The right to ask questions shall enable the shareholders, in addition to the information and documents already required to be disclosed, to make a proper and informed decision on how to exercise their voting rights.1 Since the intention is to create a basis of information with regard to the vote on certain agenda items, the minimum standard of harmonisation by Article 9 SRD is quite limited.2 On the other hand, shareholders must be entitled by national law to put items on the agenda pursuant to → Art 6. This is compensation, to a certain extent, for the inherent restriction of the right to ask questions provided by the SRD. The right pursuant to Article 9 SRD shall be granted for all general meetings, whether they are annual general meetings or not. 2 The reference to the agenda is the only inherent restriction of the right to ask questions pursuant to Article 9(1) SRD. The provision is subject to autonomous interpretation. Some authors argue that it requires the requested information to be objectively necessary from the perspective of a reasonable shareholder in order to form an informed and appropriate judgment with regard to the respective agenda item (“material connection”).3 As a general rule, the model of the reasonable shareholder is used as the relevant criterion here, also with regard to the subjective characteristics of the shareholders’ interest in asking a specific question and its relation to the agenda.4 This interpretation 1

Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.98. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.105. 2 With reference to German law, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 137. 3 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.105; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 137; Teichmann, NZG 2014, 401, 407. 4 Kalss and Klampfl, Europäisches Gesellschaftsrecht (2015), mn. 405; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.105; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 137. 31

1

914

Jan Lieder and Martin Bialluch

Art 9

Directive 2007/36/EC

is based on observations regarding the development history of the SRD and is intended to prevent excessive and abusive questions and requests for information. While it is undisputed that the shareholders’ questions must be related to the agenda, 3 the aforementioned interpretation is to be reconsidered to the extent that the total exclusion of subjective shareholder interests is concerned. For the purpose of an autonomous interpretation of the SRD, not only questions that are objectively necessary, but also any question in connection with the exercise of voting rights is sufficient.5 First, this can be derived from the general scope of the Directive (see the reference in Article 1 SRD to “voting shares”) and the wording of Article 9 SRD in several other language versions (“questions concernant des points inscrits á l'ordre du jour”, “preguntas relacionadas con los puntos del orden del día”, “porre domande connesse con i punti all'ordine del giorno”).6 It is further derived from the fact that not every shareholder pursues the average interest alone and that his individual right of membership must not degenerate into a right to pursue the majorities’ interest. That would not be in line with the regulatory and harmonising intention of the SRD. On the contrary, the SRD rather considers it to be favourable, especially for the corporate governance of the company, if each individual shareholder pursues his or her own individual interests. This implies the admissibility of questions based on entirely subjective interests. It is, however, without prejudice to general provisions of national law that are intended to prevent an abuse of the law. In this context, the expressly permitted provisions on maintaining the “good order of the general meeting” (→ mn. 13) may apply.7 In particular, restrictions outside of the scope of Article 9 SRD may also result from the duty of loyalty, which is intended to prevent abuse of rights under national private or company law.

2. Further material scope Every shareholder shall be entitled individually by the rules implemented under 4 Article 9(1) SRD.8 Member States may not make the right to ask questions subject to thresholds of certain capital quorums or the ownership of a minimum number of shares.9 Shareholders who are not present at the general meeting shall not lose the right to ask questions either, provided a proxy represents them. Their proxy holder shall enjoy the same right to ask questions pursuant to Article 10(1) SRD. The exercise of the right to ask questions is deemed a form of “participation” within 5 the meaning of Article 8 SRD. Online participants of a general meeting may therefore also be entitled to ask questions,10 if their companies provide for this. Member States must in any case provide for this in their national law (Art 8 mn. 1 et seq.). Special regulations adopted in response to the COVID-19-pandemic therefore pose a problem where the management board is to be entitled to decide at their discretion which shareholders’ questions asked before or during a virtual general meeting to answer, as shareholders shall have no right to an answer.11 Hence, this provision contradicts Article

5 Kersting in KölnKommAktG (3rd ed., 2011), § 131 mn. 113; Kersting, ZIP 2009, 2317, 2318 et seq.; Kocher and Lönner, AG 2010, 153, 154; Stöber, DStR 2014, 1680, 1682; cf. further German Federal Court of Justice (BGH), 5. 11. 2013 – II ZB 28/12 mn. 21. 6 Kersting in Festschrift Hoffmann-Becking (2013), p. 651, 653. 7 Cf. BGH, 5. 11. 2013 – II ZB 28/12 mn. 27; dissenting Teichmann, NZG 2014, 401, 404 et seq. 8 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 23; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 132 et seq. 9 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 23. 10 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 132. 11 Official Statement, Bundestagsdrucksache 19/18110, p. 26.

Jan Lieder and Martin Bialluch

915

Art 9 Right to ask questions 9(1) SRD12, because the obligation to reply is only limited where the implementation of the virtual general meeting is impaired according to Article 9(2).

3. Transposition into national law Even if Article 9(1) SRD had been worded as though it entitled the shareholders to ask questions and bound the companies directly to giving answers, it would nonetheless have to be interpreted as a transposition requirement (→ Art 1 mn. 7). This follows from Article 17 SRD as well as the general understanding of Directives binding solely the Member States, which is provided for by Article 288 para. 3 TFEU (→ Art 17 mn. 2). 7 A more extensive shareholder right to ask questions, for example prior to or in the course of a general meeting and without reference to the agenda was rejected after an intense political debate.13 However, Member States may provide for more extensive or additional rights to ask questions (→ Art 31)14 or limitations. Member States, for example, may stipulate that the right to ask questions may only be exercised during or prior15 to the general meeting and whether certain formal requirements must be followed.16 Ultimately, the legal and practical details on how and when questions are to be asked and answered are left to be determined by national legislature.17 6

II. Companies’ Obligation to Answer 8

In line with the SRD’s concept, the shareholders’ right to ask questions corresponds to an obligation of the companies to answer the questions submitted by their shareholders. Once again, this is in particular because some Member States had not provided for such an obligation in the past or in any case had not expressly prescribed it.18 Member States may limit the obligation to reply to questions which are not in line with the requirements of Article 9(1)(1) SRD, i.e., if the question lacks a connection to agenda items provided for within the context of the minimum standard of harmonization of Article 9 SRD. Conversely, national laws may also stipulate more extensive obligations to reply (cf. Article 3 SRD).

1. General approach 9

The obligation to reply to each question asked is not necessarily or solely considered to be based on the individual interest of a single shareholder. Rather, it is also understood as aiming to facilitate the shaping of co-shareholders’ opinions.19 Thus, some scholars question the compatibility of national laws approving answers to questions asked in advance of the general meeting that have not been communicated to all shareholders.20 This approach is incorrect, as the Directive leaves the regulation of For a detailed analysis, see Lieder, ZIP 2020, 837, 841 et seq. Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.105; J. Schmidt, BB 2006, 1641, 1643; further on comparative aspects Grundmann, Europäisches Gesellschaftsrecht (2011), mn. 422; Pelzer, Das Auskunftsrecht der Aktionäre in der Europäischen Union (2004), p. 17 et seq. 14 Possibly dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 137 (“wobei gleichwohl weiterhin ein objektiver Sachzusammenhang zur Tagesordnung bestehen muss”). 15 Cf. for example the French law in Article L225-108, R225-84 Code de Commerce. 16 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 134. 17 Cf. Recital 8 SRD. 18 Cf. Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 23. 19 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 135. 12

13

916

Jan Lieder and Martin Bialluch

Art 9

Directive 2007/36/EC

such specific questions regarding the right to ask and the corresponding obligation to answer to the discretion of the Member States and their respective national laws. Admittedly, a certain limit is set by the general legal requirement of equal treatment pursuant to Article 4 SRD (→ Art 4), which also extends to equal treatment with regard to information.21 This is derived from recital 8 of the SRD and is implied by the existence of the specific limitations mentioned in paragraph 2. Furthermore, the right to ask questions is primarily provided for as an individual shareholder’s right in the SRD.

2. Overall answer to questions having the same content In practice, it is common for different shareholders to ask questions of the same 10 content. The Directive therefore stipulates that national law must accept aggregate overall answers on such questions. National law may not impose any formal obstacles in this respect. As the wording in Article 9 SRD indicates, it is the content of the questions that matters, not their specific formulation or form. Therefore, it makes no difference whether questions are submitted in person or via electronic communication (→ Art 8 mn. 1 et seq.).

3. (Fictional) response by web-based FAQs Member States may provide for national rules according to which answers shall be 11 deemed given if the relevant information is available on the company’s website in a question and answer format. In practice, these “FAQs” are already very popular as a practical tool for “detoxifying”22 the general meeting.23 This is not a restriction of the right to ask questions,24 but merely a regulation of the answering modality.25 The term “internet site” within the meaning of Article 9 SRD is synonymous with 12 “website” within the meaning of the Chapters Ia and Ib or in Article 9a(7), 9b(5) SRD (→ Art 5 mn. 2). The difference in wording in the provisions amended by SRD II is explained by the fact that, when the SRD II was adopted in 2017, there was simply no focus on bringing the wording in line with the previous Directive (→ Art 1 mn. 6).

III. Expressively Permitted Limitations under National Law The European legislator was aware, however, that the right to ask questions, which 13 serves to meet legitimate information interests, can conflict with other legitimate company and shareholder interests.26 Further limitations are therefore permitted, in particular according to paragraph 2. It contains an exhaustive27 catalogue of regulatory purposes which may justify a restriction of the shareholders’ right to ask questions 20 21

seq.

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 135. Cf. Koch, ZGR 2020, 183 et seq.; also see the related discussion provided by Leclerc, ZGR 2020, 248 et

Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.106. Cf. COM (2005) 685, p. 7; Grundmann, Europäisches Gesellschaftsrecht, 2nd ed. 2011, mn. 421; Grundmann and Winkler, ZIP 2006, 1421, 1426; J. Schmidt, BB 2006, 1641, 1643; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 135. 24 Dissenting Kersting, ZIP 2013, 2460, 2461; Kersting, in Festschrift Hoffmann-Becking (2013), p. 651, 652. 25 Stöber, DStR 2014, 1680, 1683. 26 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.107. 27 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.107; Kalss and Klampfl, Europäisches Gesellschaftsrecht (2015), mn. 406; Zetzsche, NZG 2007, 686, 688; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 139. 22

23

Jan Lieder and Martin Bialluch

917

Art 9 Right to ask questions and the companies’ obligation to reply. All of these are highly unspecified and, thus, generally subject to autonomous interpretation. Autonomous interpretation, however, reveals that the catalogue’s terms are blanks and that their final meaning is mainly dependent on further completion by provisions of national law. 14 On the one hand, the identification of shareholders, for example, may justify the linking of the right to ask questions to proof of shareholder status (on the relevance of the record date regulations pursuant to Article 7 SRD and the debate on non-shareholder participation → Art 7 mn. 2).28 The goal of maintaining good order in general meetings and their preparation may, on the other hand, justify, e.g., disciplinary measures on individual shareholders during the meeting as well as time limits and restrictions on the number of questions.29 It also allows for the exclusion of questions that are only of minor importance, especially in Germany30.31 Finally, the protection of confidentiality and business interests enables Member States and companies to restrict, for example, requests for information regarding the disclosure of internal calculations, pending negotiations or the area of research and development.32 Banking secrecy or similarly privileged professional secrets are also covered where national laws provide for them. 15 Restrictive measures, whether taken by the Member States themselves or by the companies under national law, must always be in proportion to the objective of Article 9(1) SRD.33 Even if, unlike Article 12 SRD, Article 9 SRD does not explicitly stipulate this, it follows from general principles of EU law.

IV. Sanctions for Violations of the Right on Information 16

The initial version of the SRD did not stipulate any penalties for breaching national laws transposing the right to ask questions and the obligation to reply. In this respect, the principle of effet utile was applicable.34 Now, Article 14b(1) SRD obliges Member States to impose sanctions that must be “effective, proportionate and dissuasive” (→ Art 14 a and 14 b mn. 1).35 As far as data protection issues are concerned, the SRD legitimises the use of data with regard to Article 6(1)(c) GDPR36.37

28 The problem of shareholder identification has been largely defused by the introduction of Article 3 a et seq. SRD within the “know your shareholder” framework of SRD II. Proof of shareholder status can be provided using the channels of information pursuant to the transposition requirements provided there. As far as data protection issues are concerned, the SRD has a legitimizing effect with regard to the GDPR, cf. Zetzsche, AG 2019, 233, 237. 29 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.107; cf. further Pöschke, ZIP 2010, 1221, 1222. 30 BGH, 5. 11. 2013 – II ZB 28/12 mn. 28. 31 Cf. Stöber, DStR 2014, 1680, 1683. 32 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.107. 33 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.107. 34 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.108. 35 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 140. 36 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27.4.2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation – GDPR), OJ L 119, 4.5.2016, p. 1. 37 Zetzsche, AG 2019, 233, 237.

918

Jan Lieder and Martin Bialluch

Art 9 a

Directive 2007/36/EC

Article 9 a Right to vote on the remuneration policy 1. Member States shall ensure that companies establish a remuneration policy as regards directors and that shareholders have the right to vote on the remuneration policy at the general meeting. 2. Member States shall ensure that the vote by the shareholders at the general meeting on the remuneration policy is binding. Companies shall pay remuneration to their directors only in accordance with a remuneration policy that has been approved by the general meeting. Where no remuneration policy has been approved and the general meeting does not approve the proposed policy, the company may continue to pay remuneration to its directors in accordance with its existing practices and shall submit a revised policy for approval at the following general meeting. Where an approved remuneration policy exists and the general meeting does not approve the proposed new policy, the company shall continue to pay remuneration to its directors in accordance with the existing approved policy and shall submit a revised policy for approval at the following general meeting. 3. However, Member States may provide for the vote at the general meeting on the remuneration policy to be advisory. In that case, companies shall pay remuneration to their directors only in accordance with a remuneration policy that has been submitted to such a vote at the general meeting. Where the general meeting rejects the proposed remuneration policy, the company shall submit a revised policy to a vote at the following general meeting. 4. Member States may allow companies, in exceptional circumstances, to temporarily derogate from the remuneration policy, provided that the policy includes the procedural conditions under which the derogation can be applied and specifies the elements of the policy from which a derogation is possible. Exceptional circumstances as referred to in the first subparagraph shall cover only situations in which the derogation from the remuneration policy is necessary to serve the long-term interests and sustainability of the company as a whole or to assure its viability. 5. Member States shall ensure that companies submit the remuneration policy to a vote by the general meeting at every material change and in any case at least every four years. 6. The remuneration policy shall contribute to the company’s business strategy and long-term interests and sustainability and shall explain how it does so. It shall be clear and understandable and describe the different components of fixed and variable remuneration, including all bonuses and other benefits in whatever form, which can be awarded to directors and indicate their relative proportion. The remuneration policy shall explain how the pay and employment conditions of employees of the company were taken into account when establishing the remuneration policy. Where a company awards variable remuneration, the remuneration policy shall set clear, comprehensive and varied criteria for the award of the variable remuneration. It shall indicate the financial and non-financial performance criteria, including, where appropriate, criteria relating to corporate social responsibility, and explain how they contribute to the objectives set out in the first subparagraph, and the methods to be applied to determine to which extent the performance criteria have been

Jan Lieder and Martin Bialluch

919

Art 9 a Right to vote on the remuneration policy fulfilled. It shall specify information on any deferral periods and on the possibility for the company to reclaim variable remuneration. Where the company awards share-based remuneration, the policy shall specify vesting periods and where applicable retention of shares after vesting and explain how the share based remuneration contributes to the objectives set out in the first subparagraph. The remuneration policy shall indicate the duration of the contracts or arrangements with directors and the applicable notice periods, the main characteristics of supplementary pension or early retirement schemes and the terms of the termination and payments linked to termination. The remuneration policy shall explain the decision-making process followed for its determination, review and implementation, including, measures to avoid or manage conflicts of interests and, where applicable, the role of the remuneration committee or other committees concerned. Where the policy is revised, it shall describe and explain all significant changes and how it takes into account the votes and views of shareholders on the policy and reports since the most recent vote on the remuneration policy by the general meeting of shareholders. 7. Member States shall ensure that after the vote on the remuneration policy at the general meeting the policy together with the date and the results of the vote is made public without delay on the website of the company and remains publicly available, free of charge, at least as long as it is applicable.

I. The SRD’s “Say on Pay” Concept Articles 9 a to 9 c SRD deal with shareholder rights and the protection of shareholders in connection with special resolution items, namely the policy and reports on directors’ remuneration and related party transactions. They are therefore systematically (structurally) set out in the SRD’s Chapter II on the general meeting of shareholders. The implementation requirements of Article 9 a and 9 b SRD providing for a ‘say on pay’ of shareholders were inserted into the Directive by SRD II.1 They impose a coherent regulatory system of transparency mechanisms, consisting of a prospective and retrospective2 dichotomy of policy and report (→ Art 9 b SRD). Clearly, UK law has been the blueprint for this legislative model.3 The Commission demanded the principle of remuneration transparency as early as 2004.4 For the finance sector in particular, the provisions of CRD IV5 and the guidelines of the European Banking Authority (EBA) apply.6 2 In view of the crucial role of directors in companies, the SRD emphasises the importance of the remuneration policy of companies being determined “in an appropriate 1

Article 1(4) SRD II. Löbbe and Fischbach, AG 2019, 373, 374. 3 Ss. 420 422 a, 439-440 CA 2006; The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, SI 2008/401; cf. further Lutter/Bayer/Schmidt, Europäisches Unternehmensund Kapitalmarktrecht (6th ed., 2018), mn. 29.113; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 37; Hannigan, Company Law (2018), 18-39 et seq.; for an comparative analysis, see Anzinger, ZGR 2019, 39. 4 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.112; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 39. 5 Directive 2013/36/EU of the European Parliament and of the Council of 26.6.2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJ L 176, 27.6.2013, p. 338. 6 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 40. 1

2

920

Jan Lieder and Martin Bialluch

Art 9 a

Directive 2007/36/EC

manner by competent bodies within the company and that shareholders have the possibility to express their views regarding the remuneration policy of the company”. The explicit objective of the new Internal-Market-wide ‘say on pay’ concept is to enable shareholders within the scope of the SRD to better monitor remuneration, which is considered to be a key instrument for companies to align their interests with those of their directors’. 7 Consequently, the European lawmaker expects an overall improvement of corporate governance with a focus on a remuneration system that is geared towards the creation of longer-term value and links remuneration to actual performance. The new SRD discourages short-term approaches.8 This rationale is also clearly expressed in Article 9a(6) SRD when it states: “The remuneration policy shall contribute to the company’s business strategy and long-term interests and sustainability”. The remuneration policy is to be arranged as an abstract framework.9 The corre- 3 sponding report is to contain detailed information on the actual remuneration. The report serves as a basis of information for the verification of compliance with the policy. The Directive sets minimum requirements for the content of the report and policy, but not for the substance of the remuneration itself.10 Private autonomy is not restricted by SRD in this respect. Nor do the shareholders have any right to determine the exact amount or other individual details of the specific remuneration. Rather, it is merely a matter of transparency. It is obvious from the Directive that the mere fact of including detailed information in the remuneration policy and report will raise the awareness of the shareholders’ and public concerns (e.g. CSR).11 However, the Directive does not provide for a real ‘say on pay’. The SRD rather provides for a “say on remuneration policy”12 and transparency by comprehensive reporting. As far as formal aspects of the uniformity of reporting are concerned, the Commission has issued supplementary guidelines pursuant to Article 9b(6) SRD.

II. Establishment of the Remuneration Policy and Shareholders’ Right to Vote (Para. 1) Member States are to ensure that companies establish a remuneration policy regard- 4 ing their directors’ remuneration and that shareholders have the right to vote on the remuneration policy at the general meeting. The remuneration policy itself is necessary and, thus, determined in a fully harmonised manner. Member States only have an option as to the legal effects of the shareholders’ resolution (→ mn. 7). However, they must always provide for a companies’ obligation to establish such a policy. In accordance with general principles of law, the initial establishment of a remuneration policy is required as soon as the implementation of the Directive in the relevant applicable law comes into force (on the legal effects of non-transposition → Art 15 mn. 3). It is also mandatory to provide for the right of shareholders to vote on the policy. In 5 view of the further paragraphs, this certainly cannot lead to Member States merely stipuRecital 28 SRD II. Cf. recital 29 SRD II. 9 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.139; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 147; also J. Schmidt, NZG 2018, 1201, 1202. 10 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 42; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 147; Bayer and J. Schmidt, BB 2017, 2114, 2116; Leuering, NZG 2017, 646. 11 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 42. 12 Recital 29 SRD II. 7

8

Jan Lieder and Martin Bialluch

921

Art 9 a Right to vote on the remuneration policy lating a right of initiative for a shareholders’ resolution. Rather, the Directive’s approach requires companies to regularly and voluntarily submit the remuneration policy to the shareholders for supervision. Again, Member States may not provide for an exception to this rule.13 6 The SRD provides a legal definition of the term “director” and thus the personal reference point of the remuneration policy in Article 2(i) SRD. It includes in particular supervisory board members in dualistic board structures (→ Art 2 mn. 15).

III. Binding Effect of the Shareholders’ Vote and Payments Prerequisites (Para. 2) 1. General principle of a binding effect Member States shall ensure that the vote on the remuneration policy at the general meeting is legally binding. In some jurisdictions, especially those traditionally anchored in the dualistic board system, this leads to a significant shift of competences. Hence, there was plenty of political debate and criticism on this issue, especially in Germany.14 Excessive remuneration is, however, still prevalent in the Internal Market. In addition, despite the Commission’s recommendations and the urgent reminders sent out by politicians, companies have so far failed to set directors’ remuneration at a level that is acceptable in the public debate.15 Yet, the binding effect of the vote is dispensable. Member States may choose to provide for a mere “advisory” effect of the shareholders’ vote under paragraph 3 (→ mn. 13 et seq.). 8 The binding effect implies that companies shall at least be bound to an approved remuneration policy. They shall “pay remuneration to their directors only in accordance with a remuneration policy that has been approved by the general meeting”. What Member States must provide for in the event that there is no shareholder approval is laid down in the two subparagraphs of paragraph 2. 7

2. Lack of shareholders’ approval (freezing effect) 9

If there is no approval by the shareholders, two fallback scenarios are to be distinguished. First, where no remuneration policy has been approved (yet) and the general meeting does not approve the proposed policy, the company may continue to pay remuneration to its directors in accordance with the “existing practices”. Irrespective of the fact that existing practice may also consist of decisions on remuneration issues being taken on a case-by-case basis and not of a de facto remuneration policy as envisaged by the Directive, this can lead to a “freezing”16 of the actual remuneration. Paradoxically, the remuneration is then not based on any remuneration policy, contrary to the concept behind the SRD. However, this would still comply with the Directive.17 Second, where an approved remuneration policy exists and the general meeting does not approve the proposed new policy, the company shall continue to pay remuneration to its directors in accordance with the existing approved policy. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 149. In summary Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.114; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 156. 15 Bayer, NZG 2013, 1, 14 states that publicly acceptable remuneration is “miles away”; Lutter/Bayer/ Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.114. 16 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 158. 17 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 158. 13

14

922

Jan Lieder and Martin Bialluch

Art 9 a

Directive 2007/36/EC

In both events, the company shall submit a revised policy for approval at the “follow- 10 ing general meeting”. Member States have no room for interpretation as regards the date of the following general meeting. It means the next immediately following meeting. The term also covers any kind of extraordinary general meetings.18 National laws which only require the remuneration policy to be submitted to the next annual general meeting, are in conflict with the Directive.19 With this mandatory requirement, the European legislator demonstrates the political importance of the SRD’s ‘say on pay’ concept. The quality of the policy’s revision is not defined. It is only stipulated at the end of 11 Article 9a(6)(10) SRD that “where the policy is revised, it shall describe and explain all significant changes and how it takes into account the votes and views of shareholders on the policy and reports since the most recent vote on the remuneration policy by the general meeting of shareholders”. This, however, does not say anything about the quality of the revision, nor does it follow from the purpose of the Directive that there must be any change in the content.20 The soft-law-like approach of the ‘say on pay’ concept is aimed at self-regulation through strict transparency rules. Member States may therefore allow companies to simply state that there have been no changes and that no shareholder interests have been taken into account in the course of the revision. Only time will tell whether companies are going to do so in practice. In any case, such a practice does not serve the long-term success of the company nor the company’s reputation in the public debate. The limit of such practices is the abuse of rights, which is not regulated by the SRD, but in most national regimes, general principles of law will be sufficient to deal with such practical problems. An abuse of rights is not considered to occur, for instance, in the case of extraordinary general meetings held very shortly after the previous meeting, as these are urgent general meetings where there may not have been time to revise the remuneration policy due to a company’s crisis.

3. Delegation to the companies Where Member States provide for a merely advisory effect of the vote, they leave 12 the choice of making its effect binding to the companies.21 The two regulatory tracks provided by the SRD in Article 9a(2) and (3) SRD do not appear to be incompatible. Therefore, by a combination of those mechanisms, Member States may provide a mechanism for companies to legally bind themselves voluntarily. This is due to the EU primary law nature of a Directive, which is binding as “to the result to be achieved […] but shall leave to the national authorities the choice of form and methods”, cf. Article 288 TFEU. The “result” of shareholder participation in remuneration matters can be achieved by such combination. This delegation is further justified by the legal rationale of Article 3 SRD and the fact that a binding effect is indeed supposed to be the rule, but at the same time is not part of the SRD’s minimum standard of harmonisation programme.

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 153. Dissenting Bayer and J. Schmidt, BB 2019, 2178, 2179. 20 Anzinger, ZGR 2019, 39, 77. 21 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 157. 18

19

Jan Lieder and Martin Bialluch

923

Art 9 a Right to vote on the remuneration policy

IV. Member States Options (Para. 3 and 4) 1. Dispensing with the policy’s binding effect (para. 3) 13

The binding effect of the shareholders’ vote may be waived. However, this does not mean that the shareholders’ votes no longer have any legal effect.22 As with binding votes, a rejection leads to the obligation to revise the remuneration policy and to resubmit it to the next general meeting. If Member States choose to opt-out of the binding effect prerequisite, the remuneration policy itself, which has been submitted to the vote, shall become binding as regards the actual payment of directors’ remunerations. Unlike in the case of the rejection of a binding vote, no continuation of the existing practice shall be allowed.23 The result, one might say, is that advisory votes are not actually advisory, but that they are, in the case of rejection by the general meeting, even more binding than in the scenario of true “binding” votes pursuant to Article 9a(2) SRD. This is, however, not to be seen as a legal inconsistency.24 The default mechanism, which refers to the existing remuneration practice, is not intended to improve the position of the company and is not meant to be understood as a correlate for a worse position in the scenario of binding votes.

2. Remuneration in exceptional circumstances (para. 4) Another option for the Member States is addressed by paragraph 4. In exceptional circumstances, companies may get the opportunity, by national law, to derogate temporarily from the remuneration policy. Derogations from the policy are conceivable in both quantitative directions, up- and downwards. In practical terms, the upward deviations are particularly relevant. A possible example of an upward deviation would be the offering of special financial incentives to be able to hold an experienced manager in an unforeseen crisis or takeover situation.25 15 Member States must ensure that the policy must include the procedural conditions under which the derogation can be applied and must specify the elements of the policy from which a derogation is possible. There is, however, no true derogation from the policy. Rather, it requires the separation of the remuneration policy into a standard scope and an exceptional scope. With regard to national regulations according to which remuneration is to be reduced in certain events or must be reduced by the company’s supervisory board regardless of the remuneration policy (e.g. sec. 87(2) of the German Stock Corporation Act), these do not contradict the objective of Article 9 a SRD: First, paragraph 4 describes an area of optional regulation. Second, SRD only sets forth minimum requirements about the remuneration policy of companies. Mandatory statutory exceptions on the specific remuneration are not affected by the scope of the Directive. Such rules deal with non-self-defined (“true”) derogations from the companies’ remuneration policy. The derogations regulated in Article 9a(4) SRD are, in contrast, self-determined (“false”) deviations from the standard remuneration policy. 14

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 160. For a graphical illustration, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 162. 24 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.135: “de-construction” of the harmonization. 25 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.135; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 165; Anzinger, ZGR 2019, 39, 78. 22

23

924

Jan Lieder and Martin Bialluch

Art 9 a

Directive 2007/36/EC

The specification should take into account the exceptional nature of the derogation. 16 In order to achieve the objectives of the Directive – above all: transparency – a mere listing of all (or nearly all) elements of the remuneration policy must be deemed an unacceptable circumvention and therefore inadmissible under national law.26 The idea, which might seem obvious in practice, ultimately leads to the remuneration policy only being artificially inflated and thus becoming unclear and incomprehensible. Moreover, elements are not “specified” if a catch-all clause is provided.27 The procedural conditions may, in contrast, contain case-by-case decision models 17 delegated, e.g., to the supervisory board or specific parts of the board of directors. 28 Again, this is primarily a matter of transparency, and any type of procedure may therefore be acceptable under national law, although Member States may also prescribe further and more specific rules on this requirement, cf. Article 3 SRD. Exceptional circumstances shall only cover situations in which the derogation from 18 the remuneration policy is necessary to serve the long-term interests and sustainability of the company as a whole or to ensure its viability. The translations of the Directive differ widely on all these rather vague terms. While in principle each translation claim to be valid throughout the EU, some try to identify errors in translation29. As there is no apparent reason as to why one or the other language should be more legally relevant than the others, the terms must be interpreted consistently on the basis of the purpose of the SRD (→ mn. 1 and → Art 1 mn. 1). As far as the serving of long term interests, sustainability and ensuring viability are concerned, the SRD is to be interpreted as a suggestion of downward derogations from the remuneration policy for the purpose of preventing (imminent) insolvencies and winding-up scenarios, because and to the extent that this is in the interest of shareholders and therefore the company as a whole, by means of reducing excessive remuneration in advance.

V. Voting Schedule (Para. 5) 1. Regular voting cycle The regular voting cycle for the remuneration policy shall be four years. In consid- 19 eration of Article 3 SRD, Member States may set shorter periods in order to enable shareholders to exercise more frequent control. The Directive contains no transposition requirement for an obligation of the company to present a new, i.e., substantially revised policy to shareholders every 4 years. Within the scope of the SRD’s minimum harmonisation standard, it is therefore permissible to resubmit a previously approved policy.30 It is also possible to have a vote outside of the 4-year voting cycle if shareholders exercise their right to add items onto the agenda pursuant to Article 6 SRD 31 or if the management itself decides to do so under the terms of national law. In accordance with general principles of law, a first shareholder vote on the remu- 20 neration policy is required as soon as the implementation of the Directive enters into force in the respective Member State.32 There are two exceptions to the regular voting 26 Dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 166. 27 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 166. 28 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 166. 29 E.g., Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 165. 30 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 151. 31 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 152. 32 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 150.

Jan Lieder and Martin Bialluch

925

Art 9 a Right to vote on the remuneration policy cycle. The first one regards the case of material changes of the policy (→ mn. 21). The second concerns rejections of a policy in accordance with Article 9a(2) SRD. In the latter case, a new decision has to be taken at the following general meeting (→ mn. 10)

2. Triggering of the voting by material changes in the policy Member States shall provide for a companies’ obligation to submit the remuneration policy to a vote by the general meeting at every material change. The term is not defined by the SRD and is therefore subject to autonomous interpretation of European Union law. Member States must at least adopt this general clause as an open rule. They may, however, specify examples for cases of material changes; and they may stipulate that a new decision is necessary in other cases, e.g., even for minor changes (cf. Article 3 SRD). 22 Concerning the term of “material” changes, it is clear that the point of reference for the legal assessment always has to be the last policy (the status quo ante) that has been submitted to the general meeting. It is also clear that this rule is only applicable to changes of the remuneration policy and not to changes of the specific remuneration. The latter become relevant in the remuneration report within the scope of Article 9 b SRD. 33 Beyond that, the interpretation of the term “material” seems controversial. Some authors assume that changes in the policy’s specifications on fixed and variable remuneration or the vesting periods implemented in share-based remunerations are always material. 34 Others argue that a change that only refers to “details” should not be considered material.35 A change in remuneration of 3–5 % is considered marginal and therefore not relevant.36 This does not seem appropriate. Taking into consideration the autonomous interpretation of the term, the distinction should not be made quantitatively, but substantively. From a teleological point of view, the question is whether the new remuneration policy contains a change of incentive from the shareholders’ perspective.37 Thus, a broad interpretation must apply whereby anything that concerns the compulsory components of policy according to the minimum standard of harmonisation (see paragraph 6) shall be “material”, irrespective of the quantitative dimension of the change. Such an interpretation creates the necessary legal certainty for Member States, but especially for companies and shareholders. At the same time it strengthens shareholders’ interests, which is paramount to the protective purpose of the SRD. 21

VI. Content of the Remuneration Policy (Para. 6) 23

Article 9a(6) SRD lays down rules on how Member States must define the content requirements for the remuneration policy. In this respect, it is irrelevant whether the policy is of binding or advisory effect. Moreover, the requirements are subject to minimum harmonisation and can therefore be extended and supplemented by further requirements in national laws.38

See Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 152. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.136. 35 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 152. 36 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 152. 37 Cf. Anzinger, ZGR 2019, 39, 78. 38 Cf. further Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 175; more restrictive Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.117, who fear a “flood of information”. 33

34

926

Jan Lieder and Martin Bialluch

Art 9 a

Directive 2007/36/EC

1. General prerequisites (subpara 1) Article 9a(6) SRD stipulates that a remuneration policy drawn up by companies shall 24 contribute to a company’s business strategy, long-term interests and sustainability and shall contain an explanation on how it achieves this.39 This does not at all rule out the possibility that short-term objectives are pursued. Long-term company objectives must, however, be made a constituent part of the remuneration policy.40 The Directive does not impose an obligation to draw up a business strategy, not even implicitly.41 It only concerns the remuneration policy in which a reference to a non-existent corporate strategy would be sufficient from the perspective of the SRD. However, it is unclear from the wording of the Directive whether this and the further 25 requirements in paragraph 6 are material constitutive requirements to be transposed by the Member States for the admissibility of the policy.42 If so, a policy that does not meet this requirement cannot be regarded as having been submitted to a vote. This would be of relevance, for example, if, in the event of an advisory vote, a new policy was to be submitted that was later rejected by the vote. It would then only still apply pursuant to Article 9(3) SRD if it were a validly submitted policy. Otherwise, the previous policy would continue to apply. The Directive does not provide any guidance in this respect. National laws will therefore have to clarify this question. The remuneration policy shall further be clear and understandable. The reference 26 point for this is the reasonable expectation of the addressees,43 i.e., the public and in particular the shareholders, future investors and other stakeholders. In any case, basic rules of orderly presentation (structuring according to sections, explanation of technical terms, highlighting, etc.) must be observed. A continuous text without paragraphs and punctuation marks, for example, would be inadequate. The policy shall describe the different components of fixed and variable remuneration, including all bonuses and any other benefits which can be awarded to directors and indicate their relative proportion. The term “other benefits” serves as a catch-all provision,44 so that any kind of allocation – possibly also indirect allocations – of benefits are covered. This term should be interpreted in the widest possible sense in view of the Directive’s declared aim of self-regulation through transparency. It also shows that the SRD assumes that companies should not be restricted in their private autonomy and their freedom of contract. This ‘say-on-pay’ concept is merely about disclosure. In accordance with the character of the remuneration policy as a framework (→ mn. 1), the relative proportion can be represented by a “range of relative proportions”.45 These must, however, be quantified.46

2. Employment conditions (subpara 2) The remuneration policy shall explain how the pay and employment conditions of 27 employees of the company were taken into account when establishing the remuneration policy. This is not necessarily meant to provide for the disclosure of the relationship between the remuneration of the board of directors and that of employees (vertical See Diekmann, WM 2018, 796, 797 with proposals for practical implementation. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 176. 41 Dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 177. 42 Anzinger, ZGR 2019, 39, 70. 43 Anzinger, ZGR 2019, 39, 84. 44 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 179. 45 Recital 29 SRD II. 46 Cf. recital 29 SRD II; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 180. 39

40

Jan Lieder and Martin Bialluch

927

Art 9 a Right to vote on the remuneration policy remuneration comparison). However, this can still be provided for within the scope of the Member States’ competence to go beyond the Directive, cf. Article 3 SRD. 47 It goes without saying that there is also no material standard in this respect for the actually paid remuneration in the SRD (→ mn. 1) There is also no requirement for Member States to oblige companies to take these aspects into account. Furthermore, there is no requirement for Member States to oblige companies to consider these aspects. It would therefore be sufficient in practice, in the context of minimum harmonisation, to limit the content of the remuneration policy to stating the fact that payment and employment conditions have not been taken into account at all. However, the rule is intended to encourage self-reflection.48

3. Variable remuneration (subpara 3) 28

In accordance with the declared purposes of the SRD (→ Art 1 mn. 1), the prerequisite of clear, comprehensive and varied criteria for the award of a variable remuneration is fulfilled if the criteria are understandable for reasonable small and foreign investors. 49 It shall further indicate financial and non-financial performance criteria, including, where appropriate, CSR criteria (“environmental, social and governance factors”50). Member States will have to decide whether, in the interest of clarity and transparency, they want to allow dynamic references to companies’ self-designed codes of conduct or other directives.51 In addition, the remuneration policy shall explain how these performance criteria contribute to the company’s business strategy, long-term interests and sustainability as well as the methods applied in determining to which extent the performance criteria have been fulfilled. It shall specify information on any deferral periods and on the possibility for the company to reclaim variable remuneration (claw back52).53

4. Share-based remuneration (subpara 4) 29

In cases of share-based remuneration, the policy shall specify vesting periods and, where applicable, periods of retention of shares after vesting and explain how the sharebased remuneration contributes to the company’s business strategy, long-term interests and sustainability. Within the meaning of the Directive, purely contractual arrangements and simulations of transfers of shares (so called ‘virtual shares’ or ‘phantom stocks’) as well as stock appreciation rights are also to be considered share-based.54 Vesting periods do not necessarily have to be part of the remuneration policy.55 However, if there are no vesting periods during the remuneration period, this must be declared pursuant to the transposition requirements of Article 9a(6)(4) SRD.

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 181. Anzinger, ZGR 2019, 39, 71. 49 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 182. 50 Recital 29 SRD II. 51 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 182. 52 See Gaul, AG 2017, 178, 183; Schuster in Festschrift Bauer (2010), p. 973 et seq.; Wettich, AG 2013, 374 et seq. 53 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.123 et seq.; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 182. 54 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.126; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 183; Anzinger, ZGR 2019, 39, 72; Diekmann, WM 2018, 796, 797. 55 Dissenting Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.127; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 183. 47

48

928

Jan Lieder and Martin Bialluch

Art 9 a

Directive 2007/36/EC

5. Aspects of duration of the remuneration policy (subpara 5) The remuneration policy shall further indicate the duration of the contracts or 30 arrangements with directors and the applicable notice periods, the main characteristics of supplementary pension or early retirement schemes, the terms of termination and, in particular, payments linked to termination. This shall cover contractual compensation mechanisms, e.g. ‘golden handshakes’ and ‘golden parachute structures’.56 The transparency requirements of the SRD are complemented by point 3.5 of Recom- 31 mendation 2009/385/EC.57 According to these non-binding rules (cf. Article 288 TFEU), there is an upper limit of a maximum of two annual incomes from fixed remuneration on a regular basis; in the event of termination of the contract due to inadequate performance, directors should not be paid at all. Subparagraph 5 does not – in general – require disclosure of contracts or detailed elements of contracts.

6. Explanatory aspects on the formation of the remuneration policy (subpara 6) The explanation of the decision-making process that is followed for determination, 32 review and implementation of the policy is intended to provide, in particular, foreign investors who are not familiar with the intra-company board responsibilities in different national legal traditions with information on who is responsible (in terms of personnel) for drawing up the remuneration policy.58 There should be an explanation, in particular, on measures taken to avoid or manage conflicts of interests and, where applicable, the role of the remuneration committee or other committees concerned. For a more specific definition of the concept of “conflicts of interest”, the personal relationships from the non-exhaustive list of examples in Article 10(3) SRD provide some guidance. Again, the SRD only requires Member States to provide for transparency in this regard.

7. Revision of the remuneration policy (subpara 6) Paragraph 6 further provides for rules on minimum features and on the procedure for 33 the revision of a remuneration policy that has been rejected by the shareholders’ vote at the general meeting. Such revision shall describe and explain all significant changes and how it takes into account the votes and views of shareholders on the rejected policy and the corresponding reports (see → Art 9 b SRD) since the most recent vote on the remuneration policy by the general meeting. This appeals to the companies’ ability to self-regulate, without prescribing a “correct” remuneration policy in terms of content. In line with the above-mentioned comments on the concept of “material” changes within the meaning of Article 9a(5) SRD, the “significant” changes mentioned here, particularly those affecting the minimum harmonised content of the policy, are not, however, deemed to be only changes that are (in)significant in quantitative terms (cf. → mn. 21).59 Member States should in any case provide scope for case-by-case assessments in their transposition acts. However, they can provide non-exhaustive lists of examples. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 184. Commission Recommendation 2009/385/EC of 30.4.2009 complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies, OJ L 120, 15.5.2009, p. 28; cf. further Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.128. 58 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 185. 59 Cf., however, dissenting in the context of Article 9a(5) SRD Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 193. 56

57

Jan Lieder and Martin Bialluch

929

Art 9 a Right to vote on the remuneration policy It is not clear from the Directive how the shareholders’ “views” shall be taken into account.60 The Directive does not contain a harmonisation mandate for a specific evaluation procedure. Member States are therefore free to provide for one, or to leave it entirely up to the companies to evaluate the views of their shareholders themselves. In order to avoid legal inconsistencies, an exemption to the obligation of taking into account shareholders’ votes on the remuneration report should be made for SME within the meaning of Article 9b(4) SRD (on this issue see also → Art 9 b SRD). 35 Member States may also provide for ad hoc revisions at the same general meeting, 61 if the company manages to fulfil all requirements that are set out for a valid revision under national law. With regard to the requirement of the “following general meeting” in Article 9a(2) SRD, ad hoc revisions are a permissible excessive transposition of the minimum requirements of the SRD, cf. Article 3 SRD. Whether they are feasible in practice is another issue. Finally, there is no claim to a shareholder’s approval. The shareholders can therefore reject any ad hoc revisions by power of their vote. Allowing this practical tool therefore poses no risk to the shareholder’s interest. 34

VII. Publication on the Company’s Website (Para. 7) Member States shall ensure that after each shareholders’ vote on the remuneration policy at the general meeting, the policy together with the date and the results of the vote is made public immediately on the website of the company. This is intended to facilitate a public debate on remuneration policies. In addition, mutual inspiration (“circolazione di modelli”62) might occur that can lead to a distinct best practice culture. Regarding this minimum requirement, Member States may require information that is more detailed or additional means of information, such as transmission by e-mail, push message or letter; cf. Article 3 SRD. 37 The term “website” within the meaning of the Chapters Ia and Ib has the same meaning as “internet site” within the meaning of the SRD’s other Chapters’ provisions. This difference of wording in the provisions amended by SRD II is explained by the lack of focus on bringing the wordings of SRD II in line with the previous directive (→ Art 1 mn. 6 and Art 5 mn. 2). 38 The remuneration policy shall remain publicly available, free of charge for anyone (not only for shareholders), for at least as long as it is applicable. With regard to the questions of when a policy becomes applicable and for how long it remains applicable, a distinction must be made as to whether the shareholder vote is required by the Member States (or by companies, → mn. 7) as a binding vote or whether it is merely advisory in nature pursuant to Article 9a(3) SRD. A binding remuneration policy becomes applicable once the shareholders at the general meeting approve it. It remains valid for as long as it is not replaced by a new policy that has been approved, cf. Article 9a(2) SRD. The advisory policy, in contrast, is applicable as soon as it is submitted to a vote, cf. Article 9a(3) SRD (on the question of contradicting values → mn. 13 et seq.). A proposed remuneration policy that has not become applicable may be the subject of publication requirements under national law.63 36

Cf. DAV, NZG 2015, 54, 61. Cf. Bungert and Wansleben, DB 2017, 1190, 1192; for a dissenting view, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 200. 62 Anzinger, ZGR 2019, 39, 79. 63 Some consider this a minimum requirement of the Directive, e.g., Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 201. 60

61

930

Jan Lieder and Martin Bialluch

Art 9 b

Directive 2007/36/EC

This requirement relates only to remuneration policies as defined in Article 9 a SRD. 39 The “existing practice” within the meaning of paragraph 2 is therefore not subject to the disclosure requirement. However, the existing practice of payment will be accessible in the remuneration reports, which must be published in accordance with → Art 9 b.

VIII. Sanctions Article 14 b requires Member States to stipulate effective, proportionate and dissua- 40 sive measures and penalties for all regulations within the SRD. This includes, with regard to the SRD's ‘say on pay’ concept, national provisions on penalty fines for directors64 or the dismissal of directors as ultima ratio.65 As the Directive is value-neutral with regard to the content of the specific remuneration and to individual questions of the abstract remuneration policy and only requires a shareholder vote as such, Member States do not have to provide for sanctions in case of repeated refusal of the remuneration policy by shareholders. A freeze of the previous practice under Article 9a(2) SRD is therefore compliant with the Directive.

Article 9 b Information to be provided in and right to vote on the remuneration report 1. Member States shall ensure that the company draws up a clear and understandable remuneration report, providing a comprehensive overview of the remuneration, including all benefits in whatever form, awarded or due during the most recent financial year to individual directors, including to newly recruited and to former directors, in accordance with the remuneration policy referred to in Article 9 a. Where applicable, the remuneration report shall contain the following information regarding each individual director’s remuneration: (a) the total remuneration split out by component, the relative proportion of fixed and variable remuneration, an explanation how the total remuneration complies with the adopted remuneration policy, including how it contributes to the longterm performance of the company, and information on how the performance criteria were applied; (b) the annual change of remuneration, of the performance of the company, and of average remuneration on a full-time equivalent basis of employees of the company other than directors over at least the five most recent financial years, presented together in a manner which permits comparison; (c) any remuneration from any undertaking belonging to the same group as defined in point (11) of Article 2 of Directive 2013/34/EU of the European Parliament and of the Council; (d) the number of shares and share options granted or offered, and the main conditions for the exercise of the rights including the exercise price and date and any change thereof; (e) information on the use of the possibility to reclaim variable remuneration; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 205. As for example in Australia, cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.113. 64

65

Jan Lieder and Martin Bialluch

931

Art 9 b Information to be provided in and right to vote on the remuneration report (f) information on any deviations from the procedure for the implementation of the remuneration policy referred to in Article 9a(6) and on any derogations applied in accordance with Article 9a(4), including the explanation of the nature of the exceptional circumstances and the indication of the specific elements derogated from. 2. Member States shall ensure that companies do not include in the remuneration report special categories of personal data of individual directors within the meaning of Article 9(1) of Regulation (EU) 2016/679 of the European Parliament and of the Council or personal data which refer to the family situation of individual directors. 3. Companies shall process the personal data of directors included in the remuneration report pursuant to this Article for the purpose of increasing corporate transparency as regards directors’ remuneration with the view to enhancing directors’ accountability and shareholder oversight over directors’ remuneration. Without prejudice to any longer period laid down by any sector-specific Union legislative act, Member States shall ensure that companies no longer make publicly available pursuant to paragraph 5 of this Article the personal data of directors included in the remuneration report in accordance with this Article after 10 years from the publication of the remuneration report. Member States may provide by law for processing of the personal data of directors for other purposes. 4. Member States shall ensure that the annual general meeting has the right to hold an advisory vote on the remuneration report of the most recent financial year. The company shall explain in the following remuneration report how the vote by the general meeting has been taken into account. However, for small and medium-sized companies as defined, respectively, in Article 3(2) and (3) of Directive 2013/34/EU, Member States may provide, as an alternative to a vote, for the remuneration report of the most recent financial year to be submitted for discussion in the annual general meeting as a separate item of the agenda. The company shall explain in the following remuneration report how the discussion in the general meeting has been taken into account. 5. Without prejudice to Article 5(4), after the general meeting the companies shall make the remuneration report publicly available on their website, free of charge, for a period of 10 years, and may choose to keep it available for a longer period provided it no longer contains the personal data of directors. The statutory auditor or audit firm shall check that the information required by this Article has been provided. Member States shall ensure that the directors of the company, acting within its field of competence assigned to them by national law, have collective responsibility for ensuring that the remuneration report is drawn up and published in accordance with the requirements of this Directive. Member States shall ensure that their laws, regulations and administrative provisions on liability, at least towards the company, apply to the directors of the company for breach of the duties referred to in this paragraph. 6. The Commission shall, with a view to ensuring harmonisation in relation to this Article, adopt guidelines to specify the standardised presentation of the information laid down in paragraph 1.

932

Jan Lieder and Martin Bialluch

Art 9 b

Directive 2007/36/EC

I. The Remuneration Report (Para. 1) The remuneration report that Member States must require companies to draw up for 1 each financial year is the second component of the SRD’s ‘say on pay’ concept. The objective behind the SRD is once again to facilitate control through corporate transparency and to exert factual pressure to enhance the “accountability of the directors” 1 through self-regulation of the company management in terms of remuneration. The remuneration report must be distinguished from the remuneration policy. However, regularly they will refer to each other. Unlike the remuneration policy, the remuneration report is retrospective.2 Its purpose is to enable shareholders to monitor whether the remuneration policy (→ Art 9 a mn. 1 et seq.) has been respected and implemented in the past. 3 In turn, the remuneration policy must take account of the shareholders’ reactions (vote and view) to the remuneration reports as part of its revision, cf. Article 9a(6) SRD. The remuneration report is due each year and reports on the previous financial year. 2 Some reference must even be made to earlier financial years. In the first financial year with reporting duties, it may therefore be the case that the company does not have all the information required for the remuneration report readily available because they had not been collected in anticipation of a reporting obligation. In such cases, unless otherwise required by national law, the Commission accepts that companies provide information on previous financial years by way of estimates, clearly indicating this by way of a note, or omit the information for the financial years where the reporting obligation had not yet applied.4

1. General requirements as regards the preparation of the report Member States must ensure that the remuneration report is drawn up clearly and un- 3 derstandable (for the parallel interpretation in the policy → Arti. 9 a mn. 26) and that it provides a comprehensive overview of the remuneration. To achieve a standardised practice in this respect, the Commission has submitted a first draft 5 for its guidelines to paragraph 6, which also call for the report to be concise and meaningful.6 The report should be “self-standing” and contain all the “necessary information” in one place.7 The Commission also states that this should be taken into account when companies assess the need to include additional information not explicitly required by the Directive in their report. Explanations are encouraged where they facilitate the understanding of the reported information.8 For information, which is seriously prejudicial to the company’s business position and thus may require confidentiality, the Commission leaves some flexibility to companies and does not require detailed information in the report.9 The key issue is to ensure that the report is not overloaded or distorted. The SRD does not clearly address whose responsibility it is to prepare the report. 4 Article 9b(1) SRD only refers to the corporate competence of the legal entity of the company as such.10 Paragraph 5, however, stipulates the overall liability of all directors. Recital 33 SRD II. Cf. Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 48. 3 Cf. Article 9b(1) SRD as well as Recital 33 SRD II. 4 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 18. 5 Supra mn. 34. 6 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 3. 7 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 4. 8 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 4. 9 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 4; see also Recital 45 SRD II. 10 Cf. Bayer and Scholz in BeckOGK AktG (2020), § 162 mn. 16. 1

2

Jan Lieder and Martin Bialluch

933

Art 9 b Information to be provided in and right to vote on the remuneration report However, this does not mean that all directors should draw up the report. Member States are free to regulate this, but they may also and in particular – depending on the corporate governance structures of the individual Member States’ legal traditions 11 – provide for internal delegation powers to individual board members, other organs or subordinate employees of the board. In any case, the ultimate responsibility for the reports lies with all directors.12

2. Minimum content of the report The report provides information on the remuneration of each individual director within the meaning of Article 2 SRD (→ Art 2 mn. 15). The SRD’s legal concept of remuneration includes all benefits in whatever form (including in particular benefits in kind and transfers for use, e.g. motor vehicles 13), awarded or due during the most recent financial year to individual directors, including newly recruited and former directors, in accordance with the remuneration policy14. In other words, the aim is to show the remuneration awarded to all directors over a certain period, regardless of their current status and the current composition of the board. It is irrelevant whether the company was already listed on the stock exchange during the time of any previous board members’ term or whether members of the board were appointed before a conversion of the company’s corporate form.15 6 Member States may therefore not limit the scope of the report to individual directors, nor may they allow companies to aggregate individual directors or otherwise distort the report by not distinguishing each individual director. Companies are not allowed to make their directors anonymous for the purposes of reporting on their remuneration (see below on the data protection aspects of paragraph 2 and 3). In particular, the gender of the directors must be identifiable so that potential discrimination at management level is made transparent for public debate. This necessarily leads to very comprehensive reports because reporting is no longer limited to the disclosure of total remuneration in the annex to the annual or consolidated financial statements as it was previously the case under the application of Articles 17(1)(d) and 28(1) Directive 2013/34/EU16.17 Publication of individual listings is, however, necessary in order to enable not only shareholders, but also potential investors and stakeholders to assess to what extent the individual director’s remuneration is linked to the performance of the company.18 5

11 There is no breach of dualistic corporate governance traditions implied here, for Germany see Bayer and Scholz in BeckOGK AktG (2020), § 162 mn. 15. 12 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 218. 13 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.141. 14 The reference to the remuneration policy does not imply that the report could omit elements of remuneration that are not paid in accordance with the remuneration policy, cf. Article 9b(1)(f) SRD; see also Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 223. It merely illustrates the systematic connection between policy and report; cf. Bayer and Scholz in BeckOGK AktG (2020), § 162 mn. 34. 15 Bayer and Scholz in BeckOGK AktG (2020), § 162 mn. 41. 16 Directive 2013/34/EU of the European Parliament and of the Council of 26.6.2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182, 29.6.2013, p. 19. 17 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.139. 18 Recital 33 SRD II; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.139.

934

Jan Lieder and Martin Bialluch

Art 9 b

Directive 2007/36/EC

If remuneration is awarded later than it was due, it must nevertheless be included in 7 the report as soon as it is due. The Commission’s understanding so far is that this refers to all benefits actually paid or assigned, but also to those decided to be given or paid, or owed to the directors during the financial year, i.e., where the director has fulfilled the conditions future payment or allocation but where such payment or allocation has not materialized during the reported financial year.19 Member States may determine that the components of the remuneration which are going to be paid in a later reporting period, need to be presented separately in the report or do not need to be reported twice, as this could distort the report and thus contradict the general requirement of a “clear” and “understandable” report within the meaning of paragraph 1.20

3. Further information required mandatorily to be contained in the report Other mandatory disclosures are those mentioned in (a) to (f), but they have to be 8 included only to the extent that they occurred (“where applicable”),21 as aspects that are not applicable would contradict the idea of a clear and comprehensible report. The information in the remuneration report represents the directors’ remuneration in detail for the last financial year and is therefore not necessarily congruent with the information required in the abstract remuneration policy.22 Monetary amounts in the report should be presented as gross figures.23 The Directive distinguishes between two categories: information and explanation. This duality has to be adopted by the Member States as part of the SRD’s minimum harmonisation standard. a) Mandatory information referred to in point (a) The report has to provide information on the total remuneration broken down into 9 its components, the relative proportion of fixed and variable (which means reclaimable, cf. point (e)) remuneration. The Commission recommends that the reporting shall be done in tabular form, possibly accompanied by an explanatory description.24 In any case, Member States shall provide for an explanation of companies on the compliance of the total remuneration with the adopted remuneration policy, including how it contributes to the long-term performance of the company, and information on how the performance criteria were applied. Report and policy shall always refer to the other, cf. also Article 9a(6) SRD. b) Mandatory information referred to in point (b) The annual change of directors’ remuneration is included in the report in a clear 10 and understandable manner if the information is presented in two ways, by absolute numbers and by percentages. Where Member States do not provide for specific rules, companies are encouraged by the Commission to provide the information for all individual directors in a consistent manner.25 This is to avoid confusing reports. 19 20

seq.

Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 3. As to the German transposition act, see Bayer and Scholz in BeckOGK AktG (2020), § 162 mn. 42 et

21 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.142; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 49. 22 For critical view, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 232. 23 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 4. 24 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 6 et seq. 25 Cf. Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 17.

Jan Lieder and Martin Bialluch

935

Art 9 b Information to be provided in and right to vote on the remuneration report The performance of the company can be expressed through various key economic figures, such as the market value of the company, sales, earnings before taxes, EBITDA, adjusted net income26. Member States may provide for mandatory requirements in this respect. The Commission recommends a presentation of net profits or losses but at the same time has no objections to additional performance figures.27 12 The average remuneration on a full-time equivalent basis of employees of the company other than directors is quite an unclear specification.28 Ultimately, it is about the average earnings of all employees working full-time. For those who work part-time, extrapolation will be necessary. However, the target of the extrapolation (the precise number of working hours in “full time”) is not determined by SRD. Different standards of employment law may apply, depending on the Member State. The Commission is aiming to ensure clarity in the calculation of this figure through its guidelines under paragraph 6. The provision of point (b) is deemed to enable a vertical comparison.29 Only the reporting entity’s (not group’s30) employees are covered, regardless of where in the world these employees work and regardless of the terms of their remuneration. 31 The SRD’s transparency requirements also include employees in low-wage countries. 32 Companies can only meet the transparency interests of shareholders, potential investors, stakeholders and the public if all employees are included. 13 The requirement of reporting over at least the five most recent financial years refers to all three aforementioned parameters, as it must be read together with the subsequent specification that the relevant information has to be presented together in a manner which permits comparison. Only by looking at the whole picture in comparison, a connection and linkage between remuneration structure and performance can be deduced by shareholders, potential investors or other stakeholders as well as the public. In the Commission’s view, the comparison is facilitated in particular when the information is presented in tabular form.33 11

c) Mandatory information referred to in point (c) The report shall further contain remuneration from any undertaking belonging to the same group as defined in Article 2(11) Directive 2013/34/EU, which refers to subsidiary companies of the reporting legal entity only. This is to prevent the risk of circumvention of the requirements laid down by the SRD by way of providing directors with hidden remuneration via a controlled legal entity. Shareholders, potential investors or other stakeholders as well as the public would not have a full and reliable picture of the remuneration granted to directors by the company and the objectives pursued through the SRD would not be achieved.34 15 Under the current draft of the guidelines (cf. paragraph 6), the Commission will allow the components of group remuneration to be included in the total sum under 14

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 226. Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 17. 28 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.145. 29 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.144; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 226. 30 However, Member States may in the case of the implementation under Article 3 SRD, also include employees of the entire group. Companies must then explain the figures included in the comparison, dissenting Anzinger, ZGR 2019, 39, 89. 31 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.145; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 226. 32 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.145. 33 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 17. 34 Recital 35 SRD II. 26

27

936

Jan Lieder and Martin Bialluch

Art 9 b

Directive 2007/36/EC

point (a).35 In order not to distort the comparison with the employees’ remuneration, Member States should provide that all employees of subsidiary companies are to be included in the report as employees within the scope of point (b) as well. d) Mandatory information referred to in point (d) In accordance with the purpose of the Directive, point (d) refers to share-based 36 16 remuneration. The companies shall at least be held to present the number of shares and share options granted or offered. By offered shares, the Directive means shares that have been promised, i.e., the offer has become binding.37 In accordance with the SRD’s purpose and legal result to be achieved, “where applicable”, also covers grants of virtual shares (phantom stocks) or virtual share options38 as well as stock appreciation rights and warrants.39 Member States shall further provide for companies to present the main conditions for the exercise of the rights including the exercise price and date and any change thereof. The Commission has envisaged the required, albeit very complex, presentation in tabular format.40 e) Mandatory information referred to in point (e) According to the current guideline draft of the Commission, information on the 17 “use” of the possibility to reclaim variable remuneration shall include: the name of the director subject to the reclaim, the amount reclaimed and the year in which the variable remuneration was awarded or due.41 It should make no difference how the reclaim is structured or executed under the law of obligations (e.g. by offsetting maluses or by claw back mechanisms). As in the German language version of the Directive, it must be explained “how” (i.e., the contractual mechanism) the possibility to reclaim was used. Companies are not allowed to limit their reports to “whether” this mechanism has been used.42 f) Mandatory information referred to in point (f) Finally, the report mandatorily must contain information on any deviations from the 18 companies’ procedure for the implementation of the remuneration policy referred to in Article 9a(6) SRD. The Commission stresses in particular that the procedure used to achieve the targets included in the remuneration policy instead should be described as well.43 The rule must not be misunderstood as referring to deviations from a procedure for implementing a remuneration policy that is allegedly regulated by Article 9a(6) SRD.44

Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 6. This is in line with Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 9. 37 For example, this is clarified in the German transposition; cf. Bayer and Scholz, in BeckOGK AktG (2020), § 162 mn. 96. 38 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 228. 39 Cf. Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 9; dissenting Bayer and Scholz in BeckOGK AktG (2020), § 162 mn. 98. 40 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 10 et seq. 41 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 12 et seq. 42 Dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 230. 43 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 16. 44 As indicated by Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 231. 35 36

Jan Lieder and Martin Bialluch

937

Art 9 b Information to be provided in and right to vote on the remuneration report 19

It shall further present information about any derogations applied in accordance with Article 9a(4) SRD, including an explanation of the nature of the “exceptional circumstances” and an indication of the specific elements derogated from. In the current Commission draft for the guidelines pursuant to paragraph 6, this includes (i) an indication of the specific elements deviated or derogated from and a confirmation that the remuneration policy allows these elements to be deviated or derogated from; (ii) an explanation of the nature of the exceptional circumstances including an explanation on why the deviation or derogation is necessary to serve the long-term interest and sustainability of the company as a whole or to assure its viability;45 (iii) information on the procedure followed and a confirmation that this procedure complies with the procedural conditions that are specified in the policy for these exceptional circumstances. 46

II. Shareholders’ ‘Say on Pay’ in the Context of the Remuneration Report (Para. 4) 1. General principle: Advisory nature of the shareholders’ vote Unlike the remuneration policy, the vote on the remuneration report must always be provided for in the form of an advisory vote. The SRD’s aim is to bring about transparency and self-regulation and not to deprive remuneration of its legal basis or even render it legally void through a shareholders’ vote.47 In this respect, the advisory nature of the vote has to be interpreted as a harmonised standard from which the Member States must not deviate in their transposition acts. Again, unlike with the remuneration policy, Member States must stipulate that the vote on the remuneration report is part of the annual general meeting. 21 The advisory effect is therefore autonomous from and not comparable with the “advisory” effect under the Member State’s option according to Article 9a(3) SRD, which for its part unfolds certain binding effects (→ Art 9 a mn. 7 et seq.). The companies shall only be obliged to explain in each report how the vote on the last report has been taken into account. There is no requirement in the SRD that Member States should provide for companies to effectively take account of shareholders’ votes, for example, by way of a change in remuneration.48 In the minimum harmonised standard of the SRD, the shareholders’ ‘say on pay’ is only a matter of transparency. The actual directors’ remuneration can therefore completely contradict the ideas of the shareholders. Moreover, the provision only refers to the “vote” of the shareholders. The “views” of shareholders, contrary to Article 9a(6) SRD, do not need to be taken into account.49 20

2. Option: Discussions at the annual general meeting of small and mediumsized companies 22

Subparagraph 2, however, provides for a single exception to this standard of full harmonisation and at the same time supports the hypothesis that the aforementioned rule of subparagraph 1 is mandatory. Member States may provide for small and medi45 Cf. also Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 231. 46 Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 15 et seq. 47 Cf. Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 50; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 210. 48 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 212. 49 However, they shall be taken into account when revising the remuneration policy, cf. above → Article 9 a SRD.

938

Jan Lieder and Martin Bialluch

Art 9 b

Directive 2007/36/EC

um-sized companies (SME) as defined in Article 3(2) and (3) of Directive 2013/34/ EU50 by the numbers of balance sheet total, net turnover and the average number of employees during the financial year, that as an alternative to a vote, the remuneration report of the most recent financial year has to be submitted for discussion in the annual general meeting as a separate item of the agenda. The company shall explain in the following remuneration report how the discussion in the general meeting has been taken into account. It is, however, questionable how well this exemption for SMEs will serve in practice,51 23 as it is unclear how a discussion would lead to a simplification. A discussion becomes expendable when a vote at the annual general meeting, which is held anyway, would be quite easy to carry out and can immediately give the company a simple coded opinion (yes or no) of the shareholders without a discussion being necessary. The discussion is potentially even more diverse and therefore, with the prescribed way in which the discussion has to be taken into account, necessarily involves more effort for SMEs, which are supposed to benefit from this rule. Where national laws are being transposed pursuant to the second subparagraph, it should therefore be interpreted in a practical manner in line with this purpose and the discussion should not be subject to excessively rigid standards. This becomes all the more evident when we realise that the SRD does not generally provide for the report to take into account the shareholders’ opinion. However, a discussion serves only to explore these opinions. In this respect, there is no reason to deviate from the general rule. Otherwise, SMEs would be subject to more stringent obligations than large companies. The SRD presents a clear contradiction here, which does not have to be perpetuated in the national laws.52

III. Processing of Personal Data (Para. 2 and 3) Due to the requirement of publishing individual directors’ remuneration details in 24 the report, data protection rules have been added to the Directive. These rules also regulate the SRD’s relation to the General Data Protection Regulation53. Unlike the SRD, the provisions of the GDPR are directly applicable in the Member States.54 Nevertheless, the SRD intends to ensure that adequate account is taken of the protection of personal data.55 Paragraph 2 provides for a prohibition of the inclusion and publication of personal 25 data referring to the family situation of individual directors as well as personal data within the meaning of Article 9(1) GDPR, which applies to data revealing racial or 50 Directive 2013/34/EU of the European Parliament and of the Council of 26.6.2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182, 29.6.2013, p. 19. 51 Cf. also Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 208. 52 This contradiction is reinforced where SMEs are at the same time supposed to take these views into account when revising the policy, cf. Article 9a(6) SRD, which does not distinguish between SMEs and other companies. 53 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27.4.2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation), OJ L 119, 4.5.2016, p. 1. 54 On the consequences in regulatory effects, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 235. 55 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.151.

Jan Lieder and Martin Bialluch

939

Art 9 b Information to be provided in and right to vote on the remuneration report ethnic origin, political opinions, religious or philosophical beliefs, trade union memberships (which may apply for employee representatives on the supervisory board), genetic data, biometric data for the purpose of uniquely identifying a natural person, data concerning health or data concerning a natural person’s sex life or sexual orientation. The prohibition is absolute and only refers to the GDPR for the scope of the term “personal data” in Article 9(1) GDPR. The exceptions in Article 9(2) GDPR are not triggered by the reference, nor can Member States relativise this prohibition in the context of their transposition acts. 26 Even though data which refers to the “family situation” must not be listed, the remuneration report shall, in accordance with recital 36 SRD II, disclose, where applicable, the amount (i.e., the cash sum) of remuneration granted “on the basis of the family situation” of individual directors and it should therefore also cover, where applicable, remuneration components such as family or child allowance. To protect particularly sensitive personal data, the report should disclose only the amount of the remuneration and not the grounds on which it was granted.56 27 Paragraph 3 justifies the processing of directors’ personal data (cf. Article 6(3) GDPR) for the purpose of increasing corporate transparency as regards directors’ remuneration with the view to enhance directors’ accountability and shareholder oversight over directors’ remuneration. At the same time, it is stipulated in subparagraph 3 that Member States may also provide for processing of the personal data of directors for other purposes. All national transposition acts constitute lawfulness of data processing within the meaning of Article 6(1)(c) GDPR.57 Member States must in any case require the deletion of personal data from published reports after a period of 10 years. The reports can remain online in revised form, and they must continue to do so if national laws provide for this in accordance with paragraph 5 (→ mn. 28). However, the practical effectiveness of this removal may be questioned.58

IV. Publication on the Company’s Website (Para. 5) 28

The annual remuneration report must be published on the company’s website (→ Art 9 a mn. 36) after the general meeting. Again, the publication serves the purpose of transparency not only for shareholders, “potential investors and stakeholders”59 but also for the purpose of public debate, which can cause public pressure in favour of selfregulation and self-education.60 Against this background, the Member States should oblige companies to publish the report without undue delay.61 The voting results are not mentioned, unlike in the case of Article 9 a SRD. Within the framework of Article 3 SRD, however, Member States may also require disclosure of results in the voting pursuant to paragraph 4 on the company’s website.

Recital 36 SRD II. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 235 et seq. 58 Cf. on the difficulties with the wide understanding of the legal term of personal data Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 233; Klabunde in: Ehmann and Selmayr, DSGVO (2nd ed., 2018), Art Art 4 mn. 15 et. seq.; Klar and Kühling in Kühling and Buchner, DSGVO/BDSG (2nd ed., 2018), Art 4 Nr. 1 mn. 20 et seq. and 32; Ernst in Paal and Pauly, DSGVO/BDSG (2nd ed., 2018), Art Art 4 mn. 10. 59 Recital 32 SRD II. 60 On the combination of policy and report, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 252. 61 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 248. 56

57

940

Jan Lieder and Martin Bialluch

Art 9 b

Directive 2007/36/EC

Unlike for the remuneration policy, there is a minimum publication period of 10 29 years.62 For the purpose of aligning directors’ remuneration with the medium-to-longterm development of the company,63 it is essential to assess the remuneration and the performance of directors not only annually but over an “appropriate time period”64 (i.e., up to 7 to 10 years plus deferral periods). This is to allow for a thorough assessment as to whether the remuneration rewards long-term performance and to measure the mid-to-long-term evolution in directors’ performance and remuneration, in particular in relation to company performance. The SRD takes into account that in many cases, it will take years until it is possible to evaluate with certainty whether the remuneration granted was in line with the long-term interests of the company.65 It shall also be possible to assess the remuneration of a director over the entire period of their directorship on a particular company’s board.66 Member States can also raise this threshold if the report no longer contains directors’ personal data. The report has to be published free of charge, not only for the company’s shareholders but also for the public (cf. the wording “publicly available”). The provision of paragraph 5, in as far it concerns the remuneration report being published on the company’s website, is without prejudice to further publication or disclosure requirements in advance of the general meeting under Article 5(4) SRD.

V. Enforcement and Sanctions (Para. 5) 1. Audit In the “hodgepodge”67 of Article 9b(5) SRD, it is further stipulated that Member 30 States shall provide for a check by a statutory auditor or audit firm that the information required by Article 9 a SRD (→ mn. 5 et seq) has been provided. Within the framework of the SRD’s minimum harmonised standard, this examination only has to establish whether the required information has been provided. There is no examination of the material correctness and especially (a fortiori) no assessment of the economic appropriateness of the remuneration structure.68 There are no instructions in the SRD about the appropriate time for this examina- 31 tion. The systematic positioning of this provision within the structure of the SRD might suggest that the existing report, which has already been voted on by the shareholders and is published on the company’s website is subject to the check pursuant to Article 9b(5) SRD. However, the SRD’s provisions are largely devoid of structurally systematic ‘fine-tuning’ anyway. Furthermore, an audit after publication makes little sense in practice, as the companies within the scope of the SRD (→ Art 1 SRD) will typically consult auditors and lawyers in the preparation of the report. Instead, it would be advisable and 62 On practical issues of comprehensive publication over this period, see Bayer and Scholz in BeckOGK AktG (2020), § 162 mn. 166. 63 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.157; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 249. 64 Recital 38 SRD II. 65 Recital 38 SRD II. 66 See Recital 39 SRD II according to which the directors remain on a company board for a period of six years on average, although in some Member States that period exceeds eight years. 67 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 245. 68 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.159; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 48; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 246; Bayer and J. Schmidt, BB 2017, 2114, 2117.

Jan Lieder and Martin Bialluch

941

Art 9 b Information to be provided in and right to vote on the remuneration report in the interest of the company and its shareholders for Member States to legislate for the report to be audited before it is presented to the general meeting pursuant to Article 5(4) SRD in their respective national laws.

2. Directors’ duties and liability 32

The minimum standard for the enforcement of reporting obligations in Article 9a(5) SRD provides for a board member’s liability at least where the internal legal relationship with the company is concerned. This liability refers only to those directors’ duties that Member States have implemented to ensure that the remuneration report is drawn up and published in accordance with the requirements of the SRD. Where national laws already contain such liability provisions within general corporate or private law, there is no need to create an additional rule. It would be sufficient if, for example, a general legal obligation that establishes the liability of the directors is regulated, such as, for example, the ‘legality obligation’ (“Legalitätspflicht”) of directors that is commonly assumed under German stock corporation law.69 This is because according to Article 288 TFEU, the Directive is only of a binding nature in terms of the goals to be achieved.

3. Further sanctions 33

Member States are required to provide for measures and penalties pursuant to → Art 14 b SRD.

VI. Commission’s Guidelines (Para. 6) As noted in recital 49 of the Directive, the existing standards and practices in the Member States vary greatly in terms of the presentation of information included in the remuneration report. They therefore provide an “uneven level of transparency and protection for shareholders and investors”70. These beneficiaries of the protective purpose of the Directive may incur difficulties and costs when they want to understand and monitor the implementation of the remuneration policy and engage with the company on that specific issue, in particular in the case of cross-border investments. 71 Therefore, the commission is authorised to submit “guidelines” pursuant to paragraph 6. On the one hand, these guidelines aim to ensure “harmonisation”, which, according to recital 49, means a “more comparable and consistent presentation”72 of the remuneration report. On the other hand, the guidelines aim to provide legal certainty for companies who may face measures and penalties under Article 14 b SRD as well as board members who might be liable pursuant to paragraph 5 for a breach of obligations related to the remuneration reports. 35 The Commission has suggested to consult the Member States, as far as this is appropriate, before adopting its guidelines.73 A first draft has been published so far.74 In 34

69 Cf. Fleischer in Spindler and Stilz, AktG (4th ed., 2019), mn. 14 et. seq.; Spindler in MüKo AktG (5th ed., 2019), mn. 86 et. seq.; Krieger and Sailer-Coceani in Schmidt and Lutter, AktG (3 rd ed., 2015), § 93 mn. 7 et. seq. 70 Recital 49 SRD II. 71 Recital 49 SRD II. 72 Recital 49 SRD II. 73 Recital 49 SRD II: when preparing the recent draft, the Commission has consulted stakeholders both through the Commission Expert Group on Technical Aspects of Corporate Governance Processes and thereafter convening the Member States in a meeting of the Company Law Expert Group in compliance with Recital 49 SRD II.

942

Jan Lieder and Martin Bialluch

Art 9 c

Directive 2007/36/EC

particular, it provides further clarification on the reporting format and clarifies certain terms of the SRD’s remuneration report concept (→ mn. 8 et seq.). However, a final version is still pending.75 As far as the legal nature of these guidelines is concerned, the Directive does not 36 set out any specifications. In particular, it is not clear whether they are binding and to whom the guidelines are addressed.76 Thus, a classification according to the available categories of primary law (cf. Article 288 TFEU) is not an easy task. The existing communication of the Commission, however, does not seem to assume a binding effect of the guideline. At least the Commission’s own understanding (although this may not be the determining factor) neither implies a “Regulation”-like character nor a classification as a “Decision”, nor is the guideline to be transposed into national law like a Directive would have to be. However, the concern of the Directive (cf. recital 49) would not necessarily be satisfied by a binding effect alone. Classification as a non-binding sui generis legal form77 is therefore appropriate, at least for practical reasons, as it provides the necessary flexibility and at the same time achieves the desired standardisation of reporting practice. The guidelines do not aim to provide a “one-size-fits-all approach”.78 In any case, the guideline itself, its legal nature as well as the SRD’s transposition acts of the Member States are subject to legal control by the European Court of Justice. Institutions defined in point 3 of Article 4(1)(3) Regulation (EU) 575/2013, which are subject to the Directive 2013/36/EU, should also apply the Remuneration Guidelines by the European Banking Authority.

Article 9 c Transparency and approval of related party transactions 1. Member States shall define material transactions for the purposes of this Article, taking into account: (a) the influence that the information about the transaction may have on the economic decisions of shareholders of the company; (b) the risk that the transaction creates for the company and its shareholders who are not a related party, including minority shareholders. When defining material transactions Member States shall set one or more quantitative ratios based on the impact of the transaction on the financial position, revenues, assets, capitalisation, including equity, or turnover of the company or take into account the nature of transaction and the position of the related party. Member States may adopt different materiality definitions for the application of paragraph 4 than those for the application of paragraphs 2 and 3 and may differentiate the definitions according to the company size. 2. Member States shall ensure that companies publicly announce material transactions with related parties at the latest at the time of the conclusion of the transaction. The announcement shall contain at least information on the nature of the related 74 Communication of the Commission of 3.1.2019, Guidelines on the standardised presentation of the remuneration report under Directive 2007/36/EC, as amended by Directive (EU) 2017/828 as regards the encouragement of long-term shareholder engagement, URL: https://ec.europa.eu/info/sites/info/files/rrg_ draft_21012019.pdf. 75 For a critical view, see Mutter, AG 2019, R112. 76 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 242 et seq. 77 Ruffert in Calliess and Ruffert, AEUV (5th ed., 2016), Art Art 288 mn. 98 et seq. 78 Cf. Commissions Communication of 3.1.2019 (DG JUST/A.3), p. 2.

Jan Lieder and Martin Bialluch

943

Art 9 c Transparency and approval of related party transactions party relationship, the name of the related party, the date and the value of the transaction and other information necessary to assess whether or not the transaction is fair and reasonable from the perspective of the company and of the shareholders who are not a related party, including minority shareholders. 3. Member States may provide for the public announcement referred to in paragraph 2 to be accompanied by a report assessing whether or not the transaction is fair and reasonable from the perspective of the company and of the shareholders who are not a related party, including minority shareholders, and explaining the assumptions it is based upon together with the methods used. The report shall be produced by one of the following: (a) an independent third party; (b) the administrative or supervisory body of the company; (c) the audit committee or any committee the majority of which is composed of independent directors. Member States shall ensure that the related parties do not take part in the preparation of the report. 4. Member States shall ensure that material transactions with related parties are approved by the general meeting or by the administrative or supervisory body of the company according to procedures which prevent the related party from taking advantage of its position and provide adequate protection for the interests of the company and of the shareholders who are not a related party, including minority shareholders. Member States may provide for shareholders in the general meeting to have the right to vote on material transactions with related parties which have been approved by the administrative or supervisory body of the company. Where the related party transaction involves a director or a shareholder, the director or shareholder shall not take part in the approval or the vote. Member States may allow the shareholder who is a related party to take part in the vote provided that national law ensures appropriate safeguards which apply before or during the voting process to protect the interests of the company and of the shareholders who are not a related party, including minority shareholders, by preventing the related party from approving the transaction despite the opposing opinion of the majority of the shareholders who are not a related party or despite the opposing opinion of the majority of the independent directors. 5. Paragraphs 2, 3 and 4 shall not apply to transactions entered into in the ordinary course of business and concluded on normal market terms. For such transactions the administrative or supervisory body of the company shall establish an internal procedure to periodically assess whether these conditions are fulfilled. The related parties shall not take part in that assessment. However, Member States may provide for companies to apply the requirements in paragraph 2, 3 or 4 to transactions entered into in the ordinary course of business and concluded on normal market terms. 6. Member States may exclude, or may allow companies to exclude, from the requirements in paragraphs 2, 3 and 4: (a) transactions entered into between the company and its subsidiaries provided that they are wholly owned or that no other related party of the company has an interest in the subsidiary undertaking or that national law provides for adequate protection of interests of the company, of the subsidiary and of their

944

Jan Lieder and Martin Bialluch

Art 9 c

Directive 2007/36/EC

(b)

(c) (d) (e)

shareholders who are not a related party, including minority shareholders in such transactions; clearly defined types of transactions for which national law requires approval by the general meeting, provided that fair treatment of all shareholders and the interests of the company and of the shareholders who are not a related party, including minority shareholders, are specifically addressed and adequately protected in such provisions of law; transactions regarding remuneration of directors, or certain elements of remuneration of directors, awarded or due in accordance with Article 9 a; transactions entered into by credit institutions on the basis of measures, aiming at safeguarding their stability, adopted by the competent authority in charge of the prudential supervision within the meaning of Union law; transactions offered to all shareholders on the same terms where equal treatment of all shareholders and protection of the interests of the company is ensured.

7. Member States shall ensure that companies publicly announce material transactions concluded between the related party of the company and that company’s subsidiary. Member States may also provide that the announcement is accompanied by a report assessing whether or not the transaction is fair and reasonable from the perspective of the company and of the shareholders who are not a related party, including minority shareholders and explaining the assumptions it is based upon together with the methods used. The exemptions provided in paragraph 5 and 6 shall also apply to the transactions specified in this paragraph. 8. Member States shall ensure that transactions with the same related party that have been concluded in any 12-month period or in the same financial year and have not been subject to the obligations listed in paragraph 2, 3 or 4 are aggregated for the purposes of those paragraphs. 9. This Article is without prejudice to the rules on public disclosure of inside information as referred to in Article 17 of Regulation (EU) No 596/2014 of the European Parliament and of the Council.

I. Overview on Related Party Transactions in the SRD 1. Purpose and political background The insufficient protection of companies and their (minority) shareholders against 1 transactions with related parties that could lead to a transfer of assets and income from the company to controlling shareholders and members of its management bodies (tunneling) is a serious corporate governance deficit that is now being addressed by recent changes implemented in the course of SRD II. The dangers of tunneling are identified in legal and economic literature as one of the major corporate governance issues of our time.1 This issue was recognised by the European Corporate Governance Forum (ECGF) and later by the European Commission.2 Calls for more intensive regulation, 1 Cf. Djankov, La Porta, Lopez-de-Silanes and Shleifer, Journal of Financial Economics (2008), 430, 462: “self-dealing is the central problem of corporate governance in most countries, the law’s effectiveness in regulating this problem is the fundamental element of shareholder protection”. Cf. further Enriques and Volpin, Journal of Economic Perspectives 21 (2007), 117, 138: “far too little has been done to resolve the problem of related-party transactions, which is the most common form of self-dealing for dominant shareholders in Europe”; with further evidence Lieder and Wernert, ZIP 2018, 2441.

Jan Lieder and Martin Bialluch

945

Art 9 c Transparency and approval of related party transactions however, go back to major accounting scandals in the 2000 s.3 In order to strengthen the overall corporate governance regime with regard to preserving the capital of listed companies in the Internal Market, Article 9 c SRD now addresses transactions with related parties as a uniform regulatory problem.4 In contrast to, for example, former German law, the SRD does not differentiate between transactions with members of executive bodies and influential shareholders. Two protective mechanisms are to be transposed as integral parts of the harmonised regulatory concept. First, the obligation to obtain approval (→ mn. 25 et seq.) by outside (minority) shareholders, and second, a requirement to publicly announce material related party transactions (→ mn. 14 et seq.), which is intended to benefit shareholders, creditors, employees and other interested parties. 5 The key purpose of this regime of approval and announcement is to avoid tunneling in order to adequately protect the legitimate interests of the company and its shareholders, i.e. the minority shareholders.6

2. Systematic and regulatory structure The provision is located in the SRD’s Chapter II on the shareholders’ general meeting. Together with the provisions on the ‘say-on-pay’ concept (Articles 9 a and 9 b SRD), Article 9 c SRD forms a subsection on items of special resolution. However, in contrast to the seemingly clear structural position, the power of approval may also be assigned to the supervisory or administrative body of a company, which can lead to a system of rules on approval that is entirely outside of the sphere of the general meeting of shareholders (→ mn. 25 et seq.). 3 The overall lack of systematic comprehensiveness can hardly be disregarded. The mandatory material requirements of approval and announcement are contained in paragraphs 2, 7 and 4. Several parts of the provision (paragraphs 3, 5 and 6 SRD) deal with exceptions and Member State’s options, which are intended to take account of the different regulatory philosophies in the Member States and the prevailing differences of the corporate governance structures. This trade-off character7 makes Article 9 c SRD so cumbersome. As a result, the provision contains what could be described as a “modular system” according to which the Member States can put together their system of rules on related party transactions.8 4 Article 2 (h) SRD defines the term related party related party within the meaning of the provision with reference to the international accounting standards adopted in accordance with Regulation (EC) No 1606/2002 (→ Art 2 mn. 12). The “relation” between the company and the related party within the meaning of this term only refers to the company within the scope of the SRD (→ Art 1 mn. 1 et seq.). This is 2

2 For details, see J. Vetter, ZHR 179 (2015), 273, 274 et seq.; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 257. 3 Lieder and Wernert, ZIP 2018, 2441, 2442; for an in-depth analysis, see Tarde, Related Party Transactions (2018), p. 1 et seq.; on the infamous Italian Parmalat case, see Melis, Corporate Governance 13 (2005), 478. 4 Cf. Recital 42 SRD II; Lieder and Wernert, ZIP 2018, 2441; Bayer and Selentin, NZG 2015, 7; for comparative aspects, see Fleischer, BB 2014, 2691, 2692 et seq.; Veil, NZG 2017, 521, 524; on Germany and the US Rhiel, Related-Party Transactions im deutschen und US-amerikanischen Recht der Aktiengesellschaft (2014), p. 190; Hallemeesch, ECFR 2018, 197; Pälicke, AG 2018, 514 (on Delaware); cf. also Pälicke, Konzern 2018, 369. 5 Cf. Recital 42 SRD II; Lieder and Wernert, ZIP 2018, 2441 et seq. 6 Cf. Recital 42 SRD II; Lieder and Wernert, ZIP 2018, 2441, 2442; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.163. 7 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 54. 8 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 329.

946

Jan Lieder and Martin Bialluch

Art 9 c

Directive 2007/36/EC

true in particular for the purposes of the application of paragraph 7, which extends the disclosure requirement to transactions of subsidiaries with related parties of the respective company. Nevertheless, note the special considerations for the application of paragraph 8 (→ mn. 11).

3. Material transactions (para. 1) Article 9c(1) SRD adopts a transaction-based approach.9 The reference point shall 5 always be the individual “material” transaction. During the process of drafting the SRD, an intense debate was about exemptions from the requirements of approval and announcement. On these exemption clauses that declare several types of “transaction” to be excluded from the SRD’s scope or provide such options for Member States (i.e., paragraph 5 and 6 SRD), → mn. 33. In defining the term transactions, which is subject to autonomous interpretation10, it 6 is reasonable to refer to the definitions of IAS (i.e., IAS 24.9 and the catalogues in IAS 24.21).11 According to this definition, a transaction is any transfer of resources, services, or obligations between related parties, regardless of whether a price is charged. Depending on the legal traditions of each Member State, transactions can be both contractual and in rem. European law does not recognise this separation and has thus deliberately chosen the extensive umbrella term “transactions”. The catalogue of optional exemptions in Article 9c(6) ARRL indicates that the legislator intended the term “transaction” to be understood very broadly. 12 In principle, this also reflects the IAS definition. This not only reduces the burden on the companies as the rules can be applied even before the transaction has come to its closing stage, but also increases the clarity and comprehensibility of the disclosure obligation for the benefit of the addressees of the information. 13 In addition to transactions of legal nature, factual actions can also be transactions.14 Finally, organisational measures (e.g., a capital increase with exclusion of subscription rights for the minority)15 as well as cash pool payments within a corporate group16 are “transactions” within the meaning of Article 9 c SRD. Omissions are only covered in the context of excessive implementation by Member 7 States (→ Art 3). By including omissions within the scope of protection of minimum harmonisation, considerable friction in national corporate governance structures would be caused, especially where national legal traditions provide for a dualistic board system. In particular, it would indirectly impose far-reaching requirements to change national corporate governance structures. The SRD is, however, not intended to give the supervisory board a right to issue instructions to the management board, which acts Lieder and Wernert, ZIP 2018, 2441, 2443. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.177; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 262. 11 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 58; Lutter/Bayer/ Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.178; Amstutz, Globale Unternehmensgruppen (2017), p. 119; dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 262. 12 Lieder and Wernert, ZIP 2018, 2441, 2443; Lieder and Wernert, DB 2020, 882, 883; cf. further Tarde, Related Party Transactions (2018), p. 212; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.178. 13 Lieder and Wernert, ZIP 2018, 2441, 2443. 14 Lieder and Wernert, ZIP 2018, 2441, 2443. 15 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 58; cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 262; dissenting Bungert and Wansleben, DB 2017, 1190. 16 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 262; Tarde, ZGR 2017, 360, 364. 9

10

Jan Lieder and Martin Bialluch

947

Art 9 c Transparency and approval of related party transactions autonomously under national corporate governance rules. This would, however, be the consequence if omissions always had to be regarded as transactions.17 8 According to Article 9c(1) SRD, the Member States determine the materiality threshold of the transaction. They shall take into account (a) the influence that the information about the transaction may have on the economic decisions of shareholders of the company, as well as (b) the risk that the transaction creates for the company and shareholders who are not a related party, including minority shareholders. Therefore, Member States are not bound by fixed thresholds, but at the same time are not given full discretion. The boundaries set up for their scope of transposition in point (a) and (b) reflect the protective purpose of Article 9 c SRD.18 The “economic” decisions of shareholders referred to in point (a) relate to the question of whether a shareholder wishes to sell or hold her shares in view of the relevant information. In contrast, the decision on the future exercise of voting rights is not genuinely an economic one. 19 Point (b) refers to the minority shareholders in particular. Thus, a threshold should cover transactions that involve an increased risk of a significant shift of assets in favour of the related party (tunneling).20 Ultimately, the scope for flexibility is quite wide here. 9 Member States shall set one or more quantitative ratios based on the impact of the transaction on the financial position, revenues, assets, capitalisation, including equity, or turnover of the company, or take into account the nature of the transaction and the position of the related party (subpara 2). Furthermore, Member States may adopt definitions different from those for the application of paragraphs 2 and 3 for the application of paragraph 4, and may differentiate the definitions according to company size. In this respect, Member States are not obliged to set different benchmarks for the approval and notification requirements.21 A differentiation is optional.22 A gradation seems particularly appropriate if Member States assign the power of approval to the general meeting pursuant to paragraph 4. However, uniform threshold values provide for the advantage of reducing complexity and at the same time improve the comprehensibility and manageability of the Member States’ regulations on related party transactions. Every threshold value is arbitrary to a certain extent.23 A threshold value that is set clearly too low or too high24 may be contrary to the objective of the Directive and the practical effectiveness of the European requirements (effet utile). The European average threshold lies between 1-5 % of total fixed and current assets of the company.25 Such simple thresholds have been criticised for favouring large companies while, conversely, small and mediumsized enterprises, especially start-ups from the technology sector, would be disadvantaged. However, an empirical study has shown that there is no privileged treatment of large companies under simple quantitative values.26 10 The term “material” further indicates that the purpose is to cover only particularly important transactions, i.e., transactions of decisive importance. The differentiation Lieder and Wernert, DB 2020, 882, 883 et seq.; for a critical view, see Grigoleit, ZGR 2019, 412, 419. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.174. 19 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 270. 20 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 271. 21 Cf. also Lieder and Wernert, ZIP 2018, 2441, 2444. 22 For examples see Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.176. 23 Lieder and Wernert, ZIP 2018, 2441, 2444. 24 E.g., 95 % of the company’s gross assets, Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.175. 25 Fleischer, BB 2014 2691, 2692; Tarde, Related Party Transactions (2018), p. 213; Lieder and Wernert, ZIP 2019, 989, 992. 26 See Engert and Florstedt, ZIP 2019, 493, 501; Lieder and Wernert, ZIP 2019, 989, 992. 17

18

948

Jan Lieder and Martin Bialluch

Art 9 c

Directive 2007/36/EC

according to the “nature of the transaction” or the “position of the related party” alone is therefore not sufficient.27 The aggregation clause of paragraph 8 only serves a purpose if quantitative thresholds are set.28 The two criteria of the nature of the transaction or the position of the related party therefore may only be used in addition to a general threshold value,29 for example, for real estate transactions or securities trading or transactions with board members or a majority shareholder30 as well as transactions within contractual groups.

4. Circumvention (para. 8) In accordance with paragraph 8, Member States shall ensure that transactions with 11 the same related party which have been concluded in any 12-month period or in the same financial year and have not been subject to the obligations listed in paragraph 2, 3 or 4 are aggregated for the purposes of those paragraphs. The European concept on related party transactions thereby identifies the obvious risk of circumvention. It provides for double protection: On the one hand, a splitting up into different relatively “immaterial” transactions should not allow for circumvention of the materiality threshold pursuant to paragraph 1. On the other hand, the concept of the “same” related party must be understood as a basis for a broad autonomous interpretation according to which not artificially breaking it down into personnel can lead to circumvention, too. Under the autonomous European approach, different subsidiaries of the related party and, in the case of natural persons, different family members of a related party are also deemed to be the “same” related party. Neither a personnel nor a factual split must lead to a circumvention of the related party transaction rules transposed in accordance with the SRD.31 This is all the more convincing as each of these persons or entities are generally also related parties within the incorporated meaning of the IAS. This poses no threat of over-regulation32, as Member States do not necessarily need 12 to establish separate rules if the applicable law has sufficiently effective general legal mechanisms to achieve the prevention of circumvention, e.g. prohibitions of abuse of rights under general private law. The Directive imposes only the obligation to achieve the objective stated therein, and does not specify the precise means of achieving this objective; cf. Article 288 TFEU. The transposed rules of national law shall not apply until the last transaction aggre- 13 gated with others that exceeds the threshold is concluded.33 Transactions within the meaning of paragraph 5 and, where applicable, paragraph 6 are not subject to the aggregation mechanism pursuant to paragraph 8. Therefore, they cannot be aggregated with immaterial transactions they do not cover, as the normative function of protection against circumvention is not affected if the quantitative threshold would be irrelevant anyway.34

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 274. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 274. 29 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 274; dissenting Tarde, ZGR 2017, 360, 365 et seq. 30 J. Vetter, ZHR 179 (2015), 273; cf. for a critical view Osterloh-Konrad, ZHR 179 (2015), 385. 31 Cf. with the same values on the German transposition drafts Grigoleit, ZGR 2019, 412, 425 et seq.; dissenting Heldt, AG 2018, 905, 919. 32 For a critical view on that aspect, see J. Vetter, ZHR 179 (2015) 273, 322. 33 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 60. 34 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 60. 27

28

Jan Lieder and Martin Bialluch

949

Art 9 c Transparency and approval of related party transactions

II. Public Announcement of Material Related Party Transactions 14

The SRD requires Member States to oblige companies to publicly announce related party transactions. The requirements for this disclosure are set out in two passages of Article 9 c SRD, namely paragraph 2 and paragraph 7. Both may be accompanied by a report that assesses whether or not the transaction is “fair and reasonable” – a so called ‘fairness opinion’.

1. Related party transactions of the company (para. 2) The announcement pursuant to paragraph 2, as a minimum standard (“at least”), shall contain information on the nature of the parties’ relationship (→ Art 2 mn. 12 et seq.). It shall further contain the name of the related party, the date and the value of the transaction. Finally, the SRD provides for the transposition of an open catch-all clause that requires companies to disclose “other information” necessary to assess whether or not the transaction is “fair and reasonable” from the perspective of the company and of those shareholders who are not a related party, including minority shareholders. This is linked systematically to the optional fairness opinion in paragraph 3, which can be verified based on this information. Thus, “other information” can mean detailed information.35 If, for example, a property is sold to a related party, information on the market value of the property (and, if applicable, the calculation method) will be required to enable an assessment as to whether a fair market price was paid. Thus, the specific information required depends on the individual case.36 Member States must preserve this flexibility when transposing the SRD into national law. 16 However, the SRD provides no definition of the meaning of fair and reasonable for the purpose of the application of the national transposition acts.37 Some form of comparison and balancing of interests must be made possible for identifying fairness and reasonability under national law at the latest. The fairness of a transaction, for example, can be determined based on evaluating certain (business) interests (e.g. business continuity) and by means of hypothetical and actual comparative transactions (both internal in comparison to the company and external in comparison to completely uninvolved third parties according to the ‘arm’s length’ principle38).39 Less clear and hardly distinguishable from fairness is the concept of reasonability of transactions. The term cannot be synonymous with fairness. Otherwise, it would be simply redundant. It may be seen as a reference to a certain business judgement, as unfair (not ‘at arm’s length’) transactions may still be reasonable.40 However, in practice their meanings will run parallel. The related party may achieve both fairness and reasonability through compensatory measures such as guarantees or loss indemnity commitments. 41 15

2. Related party transactions of subsidiary companies (para. 7) 17

As a minimum standard of harmonisation, Member States shall further ensure that companies publicly announce material transactions concluded between the related parCf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 311. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.180. 37 For the German transposition, see H.-F. Müller in Festschrift Eberhard Vetter in (2019), p. 479, 482 et seq. 38 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 61. 39 Cf. H.-F. Müller in Festschrift Eberhard Vetter (2019), p. 479, 482 et seq. 40 Hallemeesch, ECFR 2018, 197, 227 with a reference to the Rozenblum doctrine. 41 Cf. H.-F. Müller in Festschrift Eberhard Vetter (2019), p. 479, 485. 35

36

950

Jan Lieder and Martin Bialluch

Art 9 c

Directive 2007/36/EC

ty of the company and the company’s subsidiaries. For transposing the obligation of paragraph 7, the provisions of paragraph 3 apply mutatis mutandis.42 An explicit reference to paragraph 3 is missing. This is because the rule must be interpreted as a structurally (‘systematically’) misplaced clause to prevent circumvention43, which in fact supplements the scope of the application of paragraph 2. Otherwise, the wording in paragraph 5, for example, would not make much sense as only paragraphs 2, 3 and 4 are inapplicable, but not paragraph 7. There is no clear definition of subsidiaries, but the term reasonably includes indi- 18 rectly linked structures of control in a company’s group. Second tier subsidiaries and other connected lower tier entities controlled by sub-subsidiaries are also included. This interpretation is due to the ‘systematic’ character of paragraph 7 as a clause designed to protect against circumvention. It is further consistent with the principle of effectiveness of the European law as well as the general understanding underlying the European legislator elsewhere, namely according to Directive 2013/34/EU44.45

3. Format and time of the announcement The announcement can be made publicly available, for example on the company’s 19 website or, according to the recitals, by other “easily available means”. This public disclosure requirement reflects the need to inform “shareholders, creditors, employees and other interested parties” about the potential impact that such transactions may have on the value of the company.46 A comparison with the wording of Article 3g(2) SRD indicates that the disclosure requirement does not necessarily only refer to online media. It is sufficient for the publication to be made on the website of the stock exchange or in a company’s register.47 Member States must ensure that the announced information remains available for a reasonable period of time.48 With regard to the deadline for the announcement, the Directive does not distin- 20 guish between the obligations under paragraphs 2 and 7. The different wording, i.e., the past tense “concluded” in paragraph 7 might suggest that the related party transactions within the scope of paragraph 2 must generally be announced before the transaction is concluded, or at the latest at the time of the conclusion of the transaction, whereas transactions under paragraph 7 are only to be published after the conclusion of the transaction. This divergence is due to an editorial mistake. According to the provisions of the Directive in both regulatory contexts, it shall be sufficient under national law for the transaction to be disclosed ex ante or at the same time as the transaction is concluded. For practical reasons, publication shortly thereafter is also considered to comply with the Directive.49

Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.201; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 63; dissenting Tarde, ZGR 2017, 360, 383. 43 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 264. 44 Directive 2013/34/EU of the European Parliament and of the Council of 26.6.2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L 182, 29.6.2013, p. 19. 45 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 64. 46 Recital 44 SRD II. 47 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.179. 48 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 315. 49 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 61; Lieder and Wernert, ZIP 2018, 2441, 2451. 42

Jan Lieder and Martin Bialluch

951

Art 9 c Transparency and approval of related party transactions 21

The Directive does not permit a delay of the disclosure. As the SRD pursues other protective purposes, mainly to avoid ‘tunneling’, than, for instance, the MAR which aims for stability and transparency in the capital markets,50 a transfer of the mechanisms of delay for ad hoc announcements under the MAR is not conceivable without further ado.51 Moreover, the point in time of the occurrence of insider information within the meaning of Article 17(4) and (5) MAR is usually long before the relevant point in time of the “conclusion” of related party transactions under the SRD. A delay according to the MAR will therefore practically no longer be feasible at the time relevant for the announcement of the related party transaction pursuant to the SRD.

4. (Optional) accompanying report – fairness opinion (para. 3 and 7) Member States may provide for the announcements pursuant to paragraphs 3 and 7 to be accompanied by reports assessing whether or not the transaction is fair and reasonable (→ mn. 15) from the perspective of the company and of the shareholders who are not a related party, including minority shareholders, and explaining the assumptions it is based upon together with the methods used. Further rules on this so-called fairness opinion are specified in paragraph 3. However, the requirements set out there also apply to the report on subsidiaries’ related party transactions within the scope of paragraph 7. Again, the explicit reference to paragraph 3 is missing because the rule must be understood as a structurally (‘systematically’) misplaced clause to prevent circumvention, which in fact supplements the scope of application of paragraph 2 (also → mn. 17). As the report must accompany the announcement, it must be provided for publication at the same time as the announcement. The fairness opinion serves to create transparency and better verifiability of the fairness and reasonability of the transaction, especially for minority shareholders.52 It is intended to have a simplifying effect. 23 Unlike with preliminary drafts of the SRD, the fairness opinion is optional.53 In addition, the question of who is in charge of preparing such a fairness opinion is open. The Member States must allow for the report to be prepared by an independent third party, the administrative or supervisory body of the company, an audit committee, or any committee with a majority of independent directors. Delegating the decision to someone who answers to the company is also permissible.54 Where the usefulness of the report is generally questioned, it should be noted that the fairness opinion can be made available to shareholders much earlier than other information (e.g. annual reports of a supervisory board) and can have a further informative input character for shareholders, especially in the case of the fairness opinions being prepared by independent third parties.55 24 In any event, to avoid conflicts of interest, Member States shall ensure that the related parties do not take part in the preparation of the report. However, it is considered permissible to exert indirect influence on the reporting.56 It is unclear whether Member States can set a different, higher threshold for the reporting obligation than for the 22

Dissenting J. Schmidt, NZG 2018, 1201, 1213. Dissenting Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 62 a; J. Schmidt, NZG 2018, 1201, 1213. 52 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 317. 53 Whether a Member State will opt for such a report may depend on the company organ to which the approval is delegated, cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 318. 54 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.183. 55 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 317. 56 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 321. 50

51

952

Jan Lieder and Martin Bialluch

Art 9 c

Directive 2007/36/EC

announcement itself. As this is an area of optional harmonisation, it is only reasonable to conclude that such regulatory behavior is in line with the SRD.57

III. Requirement of Approval for Related Party Transactions (Para. 4) The European lawmaker considers transparency requirements to be insufficient to 25 control the risk of tunneling in transactions with related parties.58 Therefore, the approval of such transactions is the second key element of the SRD’s regime on related party transactions.

1. Competency prerequisites As the second component of the SRD’s related party transactions regime, Member 26 States must provide for approval of the transaction by the general meeting or by the administrative or supervisory body of the company. The Member States shall carry out the assessment of “organ adequacy”. This rule has a trade-off character. 59 Contrary to earlier drafts, which made it mandatory to have a general meeting’s vote on related party transactions, the SRD is open to different board structures and corporate governance traditions in the Member States.60 It is also possible to combine both the approval of the general meeting with the approval of the companies’ administrative or supervisory body.61 The board of executive directors is, however, not eligible.62 As paragraph 4 deals with the assignment of overall responsibility, Member States may at least allow a preparatory committee to be formed, as this is merely an internal matter for the administrative or supervisory body.63 E contrario to Article 9c(7) SRD, unlike the disclosure requirement provided for 27 there, the requirement of approval only applies to transactions of the company itself, not to transactions of subsidiaries with related parties of their parent company. 64 This is due to the fact that in most company law traditions it would be difficult to reconcile the approval of the parent company’s general meeting with the principle of legal autonomy of the subsidiary in mind.65 As an option, Member States may provide for shareholders to have the right to vote 28 on material transactions with related parties, which have been approved by the administrative or supervisory body of the company in the general meeting. The shareholder vote then has priority over the previous approval.

57 Dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 280. 58 Cf. also Enriques, EBOR 16 (2015), 1, 21. 59 Cf. Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.167; Hallemeesch, ECFR 2018, 197, 230 et seq. 60 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 67; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 322. 61 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.184; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 324. 62 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 322. 63 On this issue from a German point of view, see Spindler and Seidel, AG 2017, 169, 174; cf. further Lieder and Wernert, ZIP 2019, 989, 994; dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 323. 64 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 67. 65 Tarde, ZGR 2017, 360, 370.

Jan Lieder and Martin Bialluch

953

Art 9 c Transparency and approval of related party transactions 2. Procedural prerequisites The approval must be established according to procedures under national law, which prevent the related party from taking advantage of its position and provide adequate protection for the interests of the company and of shareholders who are not a related party, including minority shareholders. The purpose of this provision is to provide rules on exclusion due to conflicts of interest. As paragraph 4 in its entirety shows, exceptions are permitted. However, in view of the many ambiguities contained in paragraph 4, it is advisable to lay down strict rules on impartiality in the national transposition acts. 30 Where the related party transaction involves a director or a shareholder, the director or shareholder shall not take part in the approval or the vote. The question of whether a director or shareholder is “involved” within this meaning depends on whether or not the relevant person is the respective related party facing the company in the transaction. Even if the SRD’s protective purpose and the admittedly clearer wording in paragraph 5 (“The related parties shall not take part in that assessment”) may argue for such a view, merely indirect connections do not cause impartiality. This is apparent not only from the history of the provision66, but becomes even more clear from the wording of the following subparagraph 4 according to which Member States may optionally re-allow the “shareholder who is a related party” to take part in the vote. This is the case provided that national law ensures appropriate safeguards67 which apply before or during the voting process to protect the interests of the company and of the shareholders who are not a related party, including minority shareholders, by preventing the related party from approving the transaction despite the opposing opinion of the majority of the shareholders who are not related parties or despite the opposing opinion of the majority of the independent directors. It would be quite a paradox if a shareholder who is only indirectly related could not be granted such an exception. However, the restrictive interpretation of subparagraph 3 is rebalanced by the general requirement of subparagraph 1, according to which procedures under national law must still prevent the related party from “taking advantage of its position”. In other words, the Directive is very unclear as to the material legal and factual problem of conflicts of interests and impartiality. Member States therefore should not allow indirectly related persons to be part of the procedures of approval pursuant to Article 9c(4) SRD.68 They may only do so in accordance with the transposition mandate provided for in paragraph 4 subparagraph 1. 31 The third subparagraph provides for an optional exemption from the strict impartiality requirements. This option does not apply for directors but for shareholders only. However, in view of the wording “or despite the opposing opinion of the majority of the independent directors”, this issue is seen differently by some authors.69 Ultimately, it is consistent with the purpose of the Directive to maintain the principle of comprehensive impartiality rules. 32 The SRD does not specify when the approval is to be made. Member States are able to make their own arrangements.70 In view of the SRD’s purpose of protection 29

66 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 68; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 326; dissenting Tarde, Related Party Transactions (2018), p. 228 et seq. 67 Recital 43 SRD II: “Such as for example a higher majority threshold for the approval of transactions”. 68 Cf. Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 69; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 326; on aspects of employee participation on the supervisory board, see Spindler and Seidel, AG 2017, 169, 173. 69 Cf. Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 70. 70 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 328.

954

Jan Lieder and Martin Bialluch

Art 9 c

Directive 2007/36/EC

by maximising transparency, however, not much time should be allowed to elapse. For example, approvals at the general meeting – if applicable – shall be obtained at the next general meeting at the latest.

IV. Transactions in the Ordinary Course of Business and Concluded on Normal Market Terms (Para. 5) The SRD’s concept of approval, announcement and report (paragraphs 2, 3 and 4) 33 shall not apply to transactions that have been cumulatively entered into in the ordinary course of business and concluded on normal market terms.71 This provision is justified by the fact that even such transactions may exceed the Member State’s materiality threshold defined in accordance with paragraph 1, particularly in the context of aggregation pursuant to paragraph 8. To determine the scope of application of paragraph 5, it should be reasonable to refer to the interpretation of the term “normal course of the company's business” within the meaning of Article 52(2) Directive (EU) 2017/1132. 72 Even drawing this reference, however, the increase in clarity for the autonomous meaning of the SRD terminology is quite small. In any case, national law must allow decisions on an individual case-by-case basis. Member States may also provide for negative delimitations and non-exhaustive lists of examples for exceptional transactions, e.g., permanent supply or service relationships by long-term agreements73 or contractual group obligations74 (infra V.2.). The “normal market conditions” will have to be determined by way of a third-party comparison, because transactions ‘at arm’s length’ are not harmful to the company or its (minority) shareholders, as they would have been conducted with any third party that is not a related party as well.75 If there is no market, there will be no market conditions. In these cases, an approval of the transaction will therefore be all the more important.76 However, the administrative or supervisory body of the company shall establish 34 an internal procedure to periodically assess whether these conditions are fulfilled. Random checks are considered sufficient in this respect.77 A complete audit of all transactions which have been considered to be covered by this exception, seems also possible. While this may involve some practical effort, this may be necessary in order to achieve the purpose of the Directive. Clear rules of impartiality must apply in national law: Related parties must be prohibited from taking part in that assessment (paragraph 5 subpara 1). The SRD does not provide for full harmonisation here. Rather, subparagraph 2 stipulates an “opt-in”78, according to which Member States may provide for companies to apply the requirements in paragraph 2, 3 or 4 to such transactions. If Member States choose to do so, the requirement for a compliance system pursuant to subparagraph 1 sentence 2 is waived.79 71 On different previous drafts, see Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 285. 72 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 72. 73 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 286. 74 Dissenting for German group law Grigoleit, ZGR 2019, 412, 433. 75 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.187. 76 Cf. in a different context Hallemeesch, ECFR 2018, 197, 229. 77 Dissenting Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 287; Jung, WM 2014, 2351, 2356; Kleinert and Mayer, EuZW 2018, 314, 322. 78 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 285. 79 By tendency also Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 285.

Jan Lieder and Martin Bialluch

955

Art 9 c Transparency and approval of related party transactions

V. Optional Exemptions (Para. 6) The SRD provides for a whole series of further optional exemptions, which allow the Member States to reconcile European requirements with their respective national regulatory approaches and legal traditions. The provision of Article 9 c SRD achieves a particular degree of flexibility by the fact that – unlike most provisions of the SRD – it contains an opening for statutory rules in the articles of association of companies. Therefore, Member States do not have to make a general legislative decision but can shift the definitive decision to the companies’ discretion. In view of the overall flexibility approach, these exceptions can also be provided for individual parts of the SRD’s related party transaction concept, for example only for the approval obligation or only for the announcement.80 36 The missing reference to paragraph 5 does not mean that a compliance system must always be set up for cases covered by paragraph 6 in accordance with the paragraph 5, subparagraph 1, sentence 2. This is only the case to a certain extent,81 namely as long as the relevant Member States have not made use of the option pursuant to paragraph 5 subparagraph 2. 35

1. Transactions entered into between the company and its subsidiaries (point (a)) Transactions entered into between the company and its subsidiaries may be excluded from the scope of approval and announcement. The provision covers downstream transactions only. An analogy for upstream transactions cannot be drawn in accordance with common legal methodology as this scenario was deliberately omitted in Article 9 c SRD.82 38 National law may cover three scenarios: (1.) The subsidiary is wholly owned (by 100 %83). In such cases, there are no outside shareholders. Thus tunneling cannot occur at the expense of the company. (2.) No other related party of the company has an interest in the subsidiary undertaking. No particular proximity of the parent company to the outside shareholders of the subsidiary can be identified in these cases. The European legislator assumes that there is at least a lower probability of tunneling effects in these cases.84 (3.) In all other cases where national laws provide for adequate protection of interests of the company, of the subsidiary and of their shareholders who are not related parties, including minority shareholders. Here, too, the autonomously interpreted term “subsidiary” includes indirectly controlled second-tier subsidiaries and other lower tier companies.85 Practical cases of application of the third variant are, for example, contractual group constellations86 as well as cases in which the related party has an (indirect) interest in the subsidiary that is larger than its interest in the company.87 E.g., if the relat37

Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 293. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 294. 82 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 75; Lutter/Bayer/ Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.195; Lieder and Wernert, ZIP 2018, 2441, 2446; Tarde, ZGR 2017, 360, 384; cf. further Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 295. 83 Cf. also Lieder and Wernert, ZIP 2018, 2441, 2446. 84 Highlighting discrepancies in comparison to the German language version Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 298. 85 On this → mn. 17; cf. further Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 73. 86 Cf. Lieder and Wernert, ZIP 2018, 2441, 2446; Lutter/Bayer/Schmidt, Europäisches Unternehmensund Kapitalmarktrecht (6th ed., 2018), mn. 194. 80

81

956

Jan Lieder and Martin Bialluch

Art 9 c

Directive 2007/36/EC

ed party holds 60 % of the capital of the company while the company itself holds 60 % of the subsidiary and the related party the remaining 40 %, the related party benefits from the transfer of assets from the company to the subsidiary, as the related party has accumulated a 76 % share in the subsidiary, i.e., to a greater extent than in the company.88

2. Transactions approved by the general meeting (point (b)) Depending on the Member State, clearly defined types of transactions for which na- 39 tional law requires approval by the general meeting may include, for example, squeezeouts, capital increases in favour of a related party with an exclusion of subscription rights for minority shareholders, as well as transfers of assets between the company and a related party by way of merger or division or the conclusion of a control-and-profittransfer agreement with a (controlling) related party.89 In the latter case, all transactions within the established contractual group may be 40 included in the approval under national law.90 Even if the transactions in the contract group are not considered as an approved unit. This is still true, because, unlike elsewhere in Article 9 c SRD, point (b) expressly mentions the plural “type” of transactions. This does not contradict the wording of the SRD, which demands clearly defined competencies of the general meeting.91 At this point, the SRD’s underlying approach of referring to individual transactions (transaction-based approach → mn. 5) is pierced. Thus, a more pluralistic approach in transposing this optional exemption is permissible. Furthermore, Member States may address this type of transaction by means of a quantitative ratio when defining the materiality threshold (→ mn. 8). Upstream transactions may also be exempted under point (b).92 This interpretation is supported by the value judgment reflected in the option of shifting the decision to the company offered by the Directive (→ mn. 35 et seq.). In any event, the Member States must provide for the fair treatment of all sharehold- 41 ers and the interests of the company and of shareholders who are not related parties, including minority shareholders. As the national provisions shall explicitly address this adequate protection pursuant to point (b), Member States must provide for specific rules for this purpose and cannot refer to uncodified but generally applicable legal principles. In this respect, they are limited in their discretion as to the means of transposition.

3. Remuneration of directors (point (c)) Transactions regarding remuneration of directors, or certain elements of remunera- 42 tion of directors, awarded or due in accordance with Article 9 a SRD, may be exempted from the scope of application of Article 9 c SRD. The reasoning behind the exemption of point (c) is that an adequate protection may already be provided by the special rules for 87 For a critical view, see Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 74; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 295; J. Vetter, ZHR 179 (2015), 273, 320 et seq. 88 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 74. 89 Lieder and Wernert, ZIP 2018, 2441, 2447 et seq; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 77. 90 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.197; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 78; for comprehensive information on the legal situation in Germany, see H.-F. Müller, ZGR 2019, 97, 110 et seq. 91 Cf. H.-F. Müller, ZGR 2019, 97, 112; dissenting, however, Tarde, Related Party Transactions (2018), p. 227. 92 Cf. Lieder and Wernert, ZIP 2018, 2441, 2447; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 78.

Jan Lieder and Martin Bialluch

957

Art 9 c Transparency and approval of related party transactions self-control transposed in accordance with Article 9 a SRD. 93 In addition, the remuneration of a company’s directors should, in all likelihood, not regularly exceed the materiality threshold set out pursuant to paragraph 1.94 In any case, it follows from this rule that directors’ remuneration in principle can constitute a (material) related party transaction.

4. Authority approved transactions of credit institutions (point (d)) 43

A further optional exemption concerns transactions entered into by credit institutions on the basis of measures aiming at safeguarding their stability that have been adopted by the relevant authority in charge of prudential supervision within the meaning of Union law. It is justified by the fact that the transaction serves the overall objective of financial stability and has been approved by the competent authority.95

5. Equal treatments (point (e)) 44

Finally, transactions offered to all shareholders on the same terms that ensure equal treatment of all shareholders and protection of the interests of the company may be excluded. Companies are hereby complying with the SRD’s guiding principle of equal treatment96 (→ Art 4 mn. 1), which implies that such transactions do not bear the risk of tunneling due to the use of certain controlling powers. Examples of practical applications are equal dividend distribution resolutions or capital increases with subscription rights for all shareholders.97

VI. Rule of Conflicts in relation to Article 17 MAR (Para. 9) 45

Article 9 c SRD is without prejudice to the rules on public disclosure of insider information as referred to in Article 17 of Regulation (EU) No 596/2014. If insider information has already been made public in accordance with the requirements of Article 9 c, no further (double) announcement is required.98

VII. Enforcement and Sanctions 46

Article 9 c SRD itself, like most provisions of the SRD, does not regulate specific legal penalties for breach of the obligations imposed on the companies. However, Article 14b(2) SRD generally stipulates that measures and penalties for the prevention of infringements must be “effective, proportionate and dissuasive”. Even though recital 44 SRD II explicitly addresses “challenges to the transaction, including by means of legal action”, this does not imply a requirement for the defective transactions with related parties to be void or challengeable under national laws.99 Instead, Member States may provide that such deficiencies in the internal relationship do not affect the power of agency or effectiveness in the external relationship (with the related party).100 In the event of a breach Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 198. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 303. 95 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 199. 96 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 200. 97 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 79; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 305. 98 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 66. 99 Lieder and Wernert, ZIP 2018, 2441, 2450; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 71; see also Seidel, AG 2018, 423, 428; Kleinert and Mayer, EuZW 2018, 314, 322. 100 Lieder and Wernert, ZIP 2018, 2441, 2450. 93

94

958

Jan Lieder and Martin Bialluch

Art 10

Directive 2007/36/EC

of the transposed provisions, sanctions may be laid down for the board members, such as fines. Liability under private law for damages towards the company can also be considered, especially if the decision-making body of the board is incorrectly staffed or if a board member takes part in the vote despite being banned from voting.101 Liability of controlling shareholders who benefited from improper or illegally undisclosed related party transactions would also be consistent with the Directive.

Article 10 Proxy voting 1. Every shareholder shall have the right to appoint any other natural or legal person as a proxy holder to attend and vote at a general meeting in his name. The proxy holder shall enjoy the same rights to speak and ask questions in the general meeting as those to which the shareholder thus represented would be entitled. Apart from the requirement that the proxy holder possess legal capacity, Member States shall abolish any legal rule which restricts, or allows companies to restrict, the eligibility of persons to be appointed as proxy holders. 2. Member States may limit the appointment of a proxy holder to a single meeting, or to such meetings as may be held during a specified period. Without prejudice to Article 13(5), Member States may limit the number of persons whom a shareholder may appoint as proxy holders in relation to any one general meeting. However, if a shareholder has shares of a company held in more than one securities account, such limitation shall not prevent the shareholder from appointing a separate proxy holder as regards shares held in each securities account in relation to any one general meeting. This does not affect rules prescribed by the applicable law that prohibit the casting of votes differently in respect of shares held by one and the same shareholder. 3. Apart from the limitations expressly permitted in paragraphs 1 and 2, Member States shall not restrict or allow companies to restrict the exercise of shareholder rights through proxy holders for any purpose other than to address potential conflicts of interest between the proxy holder and the shareholder, in whose interest the proxy holder is bound to act, and in doing so Member States shall not impose any requirements other than the following: (a) Member States may prescribe that the proxy holder disclose certain specified facts which may be relevant for the shareholders in assessing any risk that the proxy holder might pursue any interest other than the interest of the shareholder; (b) Member States may restrict or exclude the exercise of shareholder rights through proxy holders without specific voting instructions for each resolution in respect of which the proxy holder is to vote on behalf of the shareholder; (c) Member States may restrict or exclude the transfer of the proxy to another person, but this shall not prevent a proxy holder who is a legal person from exercising the powers conferred upon it through any member of its administrative or management body or any of its employees. A conflict of interest within the meaning of this paragraph may in particular arise where the proxy holder:

101

Lieder and Wernert, ZIP 2018, 2441, 2450.

Jan Lieder and Martin Bialluch

959

Art 10 Proxy voting (i)

is a controlling shareholder of the company, or is another entity controlled by such shareholder; (ii) is a member of the administrative, management or supervisory body of the company, or of a controlling shareholder or controlled entity referred to in point (i); (iii) is an employee or an auditor of the company, or of a controlling shareholder or controlled entity referred to in (i); (iv) has a family relationship with a natural person referred to in points (i) to (iii). 4. The proxy holder shall cast votes in accordance with the instructions issued by the appointing shareholder. Member States may require proxy holders to keep a record of the voting instructions for a defined minimum period and to confirm on request that the voting instructions have been carried out. 5. A person acting as a proxy holder may hold a proxy from more than one shareholder without limitation as to the number of shareholders so represented. Where a proxy holder holds proxies from several shareholders, the applicable law shall enable him to cast votes for a certain shareholder differently from votes cast for another shareholder.

I. System of Proxy Voting in the SRD 1. General scope and role of proxy voting According to the SRD’s mission statement, the corporate governance of a company improves the more their shareholders are involved in opinion and decision making in the company. Especially minority shareholders and in particular (small) foreign shareholders, tend to behave with rational apathy.1 For many shareholders, the cost and benefits of participating in the general meeting are simply disproportionate. Therefore, major shareholders who become the masters of the company’s fortunes by obtaining the majority of the present votes often dominate (annual) general meetings. In practice, proxy voting can address this deficiency: “Good corporate governance requires a smooth and effective process of proxy voting.”2 Since the Member States have implemented different regulatory philosophies in the past,3 the SRD now sets minimum harmonisation (→ Art 3) requirements for proxy voting throughout the Internal Market in Articles 10, 11 and 13 SRD. 2 The provisions of Article 10(1) to (3) SRD contain a full harmonisation (numerus clausus) of permissible restrictions concerning the person of the proxy holder within the special regulatory area of proxy voting, cf. the requirement to “abolish any legal rule” 1

1 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 333; Grundmann, BKR 2009, 31, 33; Zetzsche, JCLS 8 (2008), 289, 298 et seq.; cf. further Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 26; Easterbrook and Fischel, The economic structure of corporate law, p. 66; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 150. 2 Recital 10 SRD; cf. also on the balance of shareholder activism and protection of shareholders’ anonymity Ochmann, Aktionärsrechte-Richtlinie (2009), p. 150 et seq. 3 SEC (2006) 181, p. 10, 14, 26 et seq., 96 et seq.; Grundmann, Europäisches Gesellschaftsrecht (2011), mn. 429; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 25; Lutter/Bayer/ Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.209; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 333; Ochmann, AktionärsrechteRichtlinie (2009), p. 148 et seq. (in particular on France and the UK).

960

Jan Lieder and Martin Bialluch

Art 10

Directive 2007/36/EC

in Article 10(1)(2) SRD.4 General provisions on the validity of the proxy under national civil law, however, remain unaffected. On formal requirements, → Art 11 mn. 2.

2. System of multi-person voting in the SRD Articles 10, 11 and 13 SRD address the issue of shareholder proxy voting and should 3 be systematically covered together. Article 10 and 11 SRD cover direct shareholder representation5, i.e., cases in which the true shareholder authorises another person (the proxy holder) who verifiably exercises the shareholder’s rights on his behalf. Article 10 SRD provides material requirements for this scenario. Article 11 SRD, in contrast, deals with formal hurdles for direct shareholder representation. The rules on direct shareholder representation are supplemented by the provisions of 4 Article 13 SRD, which are intended to remove obstacles to the exercise of shareholder rights by indirect representation (on the legal relationship of the share’s beneficial owner and the true shareholder under the applicable law see below → Art 13 SRD; see also above → Art 2 SRD).6 Finally, the proxy holder is not equivalent to the proxy advisor (see → Art 2 SRD). For the SRD’s regulatory programme regarding proxy advisors, → Art 3 j mn. 1 et seq.

II. Proxy Holder Rights (Para. 1) Article 10(1) SRD contains a mandatory requirement that every shareholder must 5 have the right to appoint any other natural or legal person as a proxy holder to attend and vote at a general meeting in her name under national law. This right to proxy voting is a “shareholders’ fundamental right”7. It is first indicated in Article 10(1) SRD by requiring the Member States to grant at least the same rights to speak and ask questions at the general meeting (→ Art 9 mn. 1 et seq.) to designated proxy holders as for the shareholders themselves. Contrary to the Official Journal’s title of Article 10 SRD, the provision is not only about proxy voting, but also about the representation of the shareholders at the general meeting in general.8 Natural and legal persons must be admitted as authorised representatives under na- 6 tional law. The concept of the legal person is autonomous and must be interpreted quite broadly. It covers any type of entity with legal capacity regardless of its specific form of association in national law.9 This result is clarified in subsection 2, which confirms that “apart from the requirement that the proxy holder possess legal capacity, Member States shall abolish any legal rule which restricts, or allows companies to restrict, the eligibility of persons to be appointed as proxy holders”. The SRD’s recitals do not suggest any other interpretation either. 4 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.209; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 152 et seq. 5 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 334 et seq. 6 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.244; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 345 et seq.; cf. further Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 26. 7 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.209. 8 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 27; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 335; Ochmann, AktionärsrechteRichtlinie (2009), p. 152. 9 Cf. Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 27; Lutter/Bayer/ Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.217; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 152.

Jan Lieder and Martin Bialluch

961

Art 10 Proxy voting 7

Restrictions of the shareholders’ right to appoint proxies are generally prohibited. The remaining paragraphs of Article 10 SRD deal with the narrow range of permissible restrictions. On formal restrictions on proxy voting, see below → Art 11 mn. 2.

III. Restrictions under National Law 1. Time limitations and limitations for multiple proxies (para. 2) Member States may provide for the appointment of a proxy to be subject to time limits. They may in particular limit the legal validity of the appointment of a proxy holder to a single general meeting, or to such meetings as may be held during a specified period (Article 10(2)(1) SRD), for example, until the end of the next annual general meeting. Such rules may help to prevent conflicts of interest and extensive proxy collecting (cf. recital 10 SRD), as the proxy holders are confronted with the need to carry out conflict checks when reappointment is mandatory. However, Member States may also waive this restriction entirely. 9 Furthermore, Member State law may limit the number of persons that a shareholder may appoint as proxy. Within their scope of transposition, Member States may also grant companies the power to limit the number of proxy holders per shareholder. However, if the shareholder is acting as a trustee, she still must be given the opportunity to appoint a separate proxy holder for each of her trustors (→ Art 13 mn. 8). Nor may shareholders be prohibited from having the voting rights for shares from different securities accounts exercised by different proxies. 10 Split voting (“casting of votes differently in respect of shares held by one and the same shareholder”) is not covered by the regulatory context of the SRD. Member States are therefore free to allow split voting or impose restrictions on split voting at their discretion.10 A different rule applies to split voting of the proxy holder (→ mn. 20). 8

2. Conflicts of interest (para. 3) 11

Apart from this, proxy voting may only be restricted in order to avoid conflicts of interest between the shareholder and her proxy holder. This is due to awareness of the principal agent conflict, which is inherent in every form of legal representation. 11 The Member States’ measures against potential abuse of the proxy holders’ powers shall “ensure an adequate degree of reliability and transparency”.12 In particular, Member States may adopt measures against persons “who actively engage in the collection of proxies or who have in fact collected more than a certain significant number of proxies”.13 In these cases, a conflict of interest is statistically indicated. a) Possible restrictions under Member State law

12

Therefore, it seems reasonable to lay down more stringent requirements for the identification of conflicts. This can be achieved in particular by linking the regulatory 10 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.221; Jung and Stiegler in: Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 339. 11 Ochmann, Aktionärsrechte-Richtlinie (2009), p. 153; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.226; on the legal economic point of view Jensen and Meckling, Journal of Financial Economics 3 (1976), 305 et seq.; Towfigh and Petersen, Ökonomische Methoden im Recht (2nd ed., 2017), mn. 304. 12 Recital 10 SRD. 13 Recital 10 SRD.

962

Jan Lieder and Martin Bialluch

Art 10

Directive 2007/36/EC

framework to the person of the proxy holder and their duties. Pursuant to Article 10(3) SRD Member States may (a) prescribe that the proxy holder disclose certain specified facts, which may be relevant for the shareholders in assessing any risk that the proxy holder might pursue and any interest other than the interest of the shareholder, (b) restrict or exclude the exercise of shareholder rights through proxy holders without specific voting instructions for each resolution in respect of which the proxy holder is to vote on behalf of the shareholder, and (c) restrict or exclude the transfer of the proxy to another person (subagency). Restrictions on subagencies shall not prevent a proxy holder who is a legal person from exercising the powers conferred upon it through any member of its board members or employees. The typology of measures mentioned in point (a)– (c) is exhaustive.14 Accordingly, it would be inadmissible, for example, if Member States required proxy holders to be shareholders under the applicable law, or if members of the executive board, credit institutions or other professional proxies were excluded from being effectively admitted as proxy holder.15 b) Conflict of interest The requirements for the occurrence of a conflict of interest are not exhaustively 13 defined in the SRD.16 It provides, however, several indicative rules, which can be adopted by the Member States. In the SRD’s system, these examples do not necessarily lead to material conflicts of interest. Rather, the SRD envisages a regime of examples that is open to a case-by-case analysis.17 In particular, a conflict of interest may arise where a proxy holder is simultaneously 14 directly or indirectly (by intermediation of a “controlled entity”) a controlling shareholder, a member of the management or administrative board, an employee or an auditor of the company or a “family member” of one of the aforementioned. The legal terms are to be interpreted autonomously under European Union law, and are therefore not left to the discretion of each individual Member State.18 In this regard, the protective purpose of the SRD must be taken into account, which requires a strict approach to conflicts of interest in order to achieve a high level of corporate governance and to strengthen shareholder rights to the maximum extent possible. Therefore, “controlled entity” within the meaning of Article 10(3) SRD does not necessarily mean a majority shareholding but, in accordance with the EC Merger Regulation19 depending on the circumstances of the individual case, a shareholding well below this threshold.20 The term “family members” within the autonomous meaning of the SRD covers all persons in the family circle, regardless of whether they are related by blood, married or adopted.

14 Grundmann, Europäisches Gesellschaftsrecht (2011), mn. 428; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 341; Kalss and Klampfl, Europäisches Gesellschaftsrecht (2015), mn. 409; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.227; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 152. 15 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.231; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 157; Grundmann in Festschrift Wymeersch (2009), 183, 197 et seq. 16 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 28; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 153. 17 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 341. 18 Dissenting Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.232 et seq. 19 Council Regulation (EC) No 139/2004 of 20.1.2004 on the control of concentrations between undertakings (the EC Merger Regulation), OJ L 24, 29.1.2004, p. 1. 20 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.232.

Jan Lieder and Martin Bialluch

963

Art 10 Proxy voting 15

The SRD also demands that other (unnamed) cases of conflicts of interest apart from ‘rule examples’ (examples specified in the code), as well as any kind of circumvention of the rules against such conflicts must be ruled out. This is particularly true for the extension to family members of the persons referred to in (i) to (iii) as well as the reference to indirect control mechanisms. However, Member States do not have to provide for an enumeration of countless examples or an explicit rule to prevent circumvention in their national law. In most legal systems, this follows by virtue of the legal methods practised in dealing with general legal principles, and at least from the principle of interpretation of transposition acts in conformity with the respective Directive. An unnamed case, for example, may also be assumed if a credit institution has a substantial self-interest, which may result from its ownership of a larger equity holding, from its role as creditor and from the acquisition of a large number of voting proxies.21

3. Restrictions effects in national private law relationships 16

Considering the dichotomy of internal and external relations in the law of proxy that exists in some Member States’ legal systems, there is controversy in the literature on Article 10 SRD on how far-reaching the envisaged restrictions in the law of proxy may be. It has been argued that the provided restrictions on the limitation of proxy voting rights relate solely to the external relationship.22 According to a more extensive interpretation, the provisions of the SRD on restrictions for proxy voting also concern the validity of proxy voting in the internal relationship.23 Both interpretations can reasonably be argued under the text of the Directive.24 Admittedly, a higher level of shareholder support is achieved by a broader interpretation, which in principle makes it superior in terms of arguments. However, ultimately the SRD shows no clear intention to establish a uniform autonomous European rule on this issue. It remains at the Member States’ discretion to achieve the objective of the SRD within the applicable national law (cf. Article 288 TFEU).

IV. Shareholders’ Right to Instruct the Proxy Holder (Para. 4) 1. Mandatory instructions 17

Where the proxy holder receives instructions from the shareholder, these instructions shall be binding under national law pursuant to Article 10(4) SRD. If the proxy holder receives no instructions, his representation is nevertheless legally valid. The shareholder may delegate the decision to the discretion of the proxy holder. This follows from recital 10 SRD (“bound to observe any instructions he may have received”)25 as well as the autonomy of the shareholders and the practical need to be able to react to the actual events at the general meeting.26

Grundmann, BKR 2009, 31, 34 et seq.; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 153. Baums, ZHR 171 (2007), 599, 611. 23 Ochmann, Aktionärsrechte-Richtlinie (2009), p. 169. 24 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 30. 25 On the French language version, see Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.213. 26 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.213; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 335. 21

22

964

Jan Lieder and Martin Bialluch

Art 10

Directive 2007/36/EC

2. Duty to keep a record Member States may require proxy holders to keep a record of their voting instruc- 18 tions for a defined minimum period and to confirm on request that the voting instructions have been carried out. This obligation exclusively affects the proxy holder. The SRD still does not “impose any obligation on companies to verify that proxy holders cast votes in accordance with the voting instructions of the appointing shareholders.” However, this has no effect on the intermediaries’ obligation to confirm electronic votes by means of a voting receipt pursuant to Article 3 c SRD, which was introduced by the SRD II.27 Member States may also waive this suggestion entirely. If they, however, provide for such proxy holders’ duties, effective, proportionate and dissuasive sanctions and penalties for breach of duty shall be provided for in accordance with Article 14 b SRD.

V. Multiple Proxy Holdings (Para. 5) A proxy holder shall be allowed to hold a proxy from more than one shareholder 19 without a limitation as to the number of shareholders represented, Article 10(5) SRD. This is particularly important for organised proxy voting by representatives appointed by the company, credit institutions, shareholder associations or professional proxies and intermediaries.28 However, according to recital 10 SRD, proxy holders “who actively engage in the collection of proxies or who have in fact collected more than a certain significant number of proxies” are likely to be involved in a conflict of interest (→ mn. 11) and thus subject to restrictions under national law. Correspondingly, the SRD stipulates that where one person holds proxies from sever- 20 al shareholders, the applicable law shall enable her to cast votes for a certain shareholder differently from votes cast for another shareholder (split voting). Apart from group representation cases pursuant to Article 10(5) SRD, split voting by the shareholders themselves is not covered by the SRD (→ mn. 10).

VI. Sanctions The SRD has not provided specific provisions for sanctions on proxy holders. The Di- 21 rective still does not affect “any rules or sanctions that Member States may impose on such persons where votes have been cast by making fraudulent use of proxies collected”.29 Within the scope of Article 14 b SRD such rules or sanctions are, however, precisely what is required. In particular where protection or conflicts of interest in connection with a principal agent conflict of proxy holders are concerned, the Member States are required to ensure effective, proportionate and dissuasive measures and penalties.

27 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.215; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 336. 28 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 27; Lutter/Bayer/ Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.224; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 342. 29 Recital 10 SRD.

Jan Lieder and Martin Bialluch

965

Art 11 Formalities for proxy holder appointment and notification

Article 11 Formalities for proxy holder appointment and notification 1. Member States shall permit shareholders to appoint a proxy holder by electronic means. Moreover, Member States shall permit companies to accept the notification of the appointment by electronic means, and shall ensure that every company offers to its shareholders at least one effective method of notification by electronic means. 2. Member States shall ensure that proxy holders may be appointed, and that such appointment be notified to the company, only in writing. Beyond this basic formal requirement, the appointment of a proxy holder, the notification of the appointment to the company and the issuance of voting instructions, if any, to the proxy holder may be made subject only to such formal requirements as are necessary to ensure the identification of the shareholder and of the proxy holder, or to ensure the possibility of verifying the content of voting instructions, respectively, and only to the extent that they are proportionate to achieving those objectives. 3. The provisions of this Article shall apply mutatis mutandis for the revocation of the appointment of a proxy holder.

I. Proxy Appointment and Revocation thereof by Electronic Means (Para. 1) 1

The provisions of Article 11 SRD supplement the substantive provisions on proxy voting in Article 10 SRD with formal requirements of validity in proxy voting. They aim to reduce excessive formal barriers in the Member States’ law on proxy voting.1 This is achieved by addressing the use of electronic means of communication for the appointment of proxies as well as the revocation thereof (Article 11(3) SRD). Moreover, Member States shall permit companies to accept the notification of the appointment and of its revocation (cf. Article 11(3) SRD) by electronic means and shall ensure that every company offers its shareholders at least one effective method of notification by electronic means. By implication of this rule, the national law must give legal effect to both external and internal appointments of proxies.2 For a systematic overview on the SRD’s concept for proxy voting, see above → Art 10 mn. 1.

II. Formal Requirements for Legal Acts in the Context of Proxy Voting (Para. 2) 2

At the same time, however, Article 11(2) SRD establishes a text form requirement as a fixed standard.3 This requirement is not originally for the benefit of the shareholders but offers legal certainty in particular for the proxy holders4, as well as for the companies. As with Article 6 of the Directive (→ Art 6 mn. 7), the due interpretation of the formal requirement of proxy appointment in “writing” is that the term neither requires a handwritten signature nor an electronic signature according to the former Electronic Signature Directive5 or eIDAS Regulation6. Rather, in the field of regulation harmonised by the SRD, any form of electronic communication which is of documentary quality7, 1 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.238; Bachner and Dokalik, GesRZ 2007, 104, 114. 2 Götze, NZG 2010, 93; Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 31. 3 Ochmann, Aktionärsrechte-Richtlinie (2009), p. 171. 4 Cf. Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 343.

966

Jan Lieder and Martin Bialluch

Art 12

Directive 2007/36/EC

i.e., is expressed in text and allows the sender and recipient to be identified, shall be sufficient, in particular e-mails, computer screen forms, internet dialogues, SMS or other instant messages.8 This shall apply mutatis mutandis for the revocation of the appointment of a proxy holder, Article 11(3) SRD. Beyond this “basic formal requirement”, the shareholders’ right to proxy voting shall 3 only be subject to further formal hurdles under national law if these are necessary to ensure the identification of the shareholder and of the proxy holder, or to ensure the possibility of verifying the content of voting instructions, and only to the extent that they are proportionate to achieving these objectives. Such further formal requirements in Member State law – according to the exhaustive list of Article 11(2) SRD – may solely be stipulated with respect to the appointment, its revocation or notifications thereof to the company as well as the issuing of the shareholders’ voting instructions. Further formal hurdles in other aspects of proxy voting, which are outside of this rather narrow scope of Article 11 SRD, would violate the harmonisation mandate of Article 10 SRD.

Article 12 Voting by correspondence Member States shall permit companies to offer their shareholders the possibility to vote by correspondence in advance of the general meeting. Voting by correspondence may be made subject only to such requirements and constraints as are necessary to ensure the identification of shareholders and only to the extent that they are proportionate to achieving that objective.

I. General Scope and Relation to Article 8 SRD Article 12 SRD supplements the requirements of Article 8 SRD with the possibility 1 for shareholders to vote by correspondence before the general meeting (→ Art 8 mn. 1). Article 8 SRD covers the rights of shareholders during the general meeting, while Article 12 SRD refers to voting before the general meeting. The first difference between the two regulations is therefore a temporal one. Furthermore, Article 12 SRD only refers to the right to vote, while Article 8 SRD covers all forms of participation (→ Art 8 mn. 4) in the general meeting.

II. “Correspondence” in Advance of the General Meeting Given the various translations of the SRD, it is not entirely certain which forms of 2 correspondence are covered here. However, the question is only relevant within the framework of the minimum harmonisation objective. Member States may go beyond 5 Directive 1999/93/EC of the European Parliament and of the Council of 13.12.1999 on a Community framework for electronic signatures, OJ L 13, 19.1.2000, p. 12. 6 Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23.7.2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC, OJ L 257, 28.8.2014, p. 73. 7 Cf. further Ochmann, Aktionärsrechte-Richtlinie (2009), p. 172; Ratschow, DStR 2007, 1402, 1407. 8 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.240; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 31; cf. also Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 343; Ochmann, AktionärsrechteRichtlinie (2009), p. 171; Zetzsche, NZG 2007, 686, 690.

Jan Lieder and Martin Bialluch

967

Art 13 Removal of certain impediments to the effective exercise of voting rights the possibility of postal voting in their transposition, even under the narrowest interpretation of Article 12 SRD (→ Art 3). 3 It is the German version of the SRD in particular which explicitly refers to a postal vote. Many see postal voting (by letter) as part of the minimum harmonisation programme of Article 12 SRD.1 This may be deduced from the development of the Directive.2 Others have interpreted the provision rather broadly, to also include electronic correspondence in advance of the general meeting, e.g., e-mail. 3 This is supported by the terminology of most translations of the SRD. From a practical and economic point of view, it does indeed seem contradictory to deny voting in advance of the general meeting in digital technology. Member States should therefore allow prior voting by means of electronic communication.

Article 13 Removal of certain impediments to the effective exercise of voting rights 1. This Article applies where a natural or legal person who is recognised as a shareholder by the applicable law acts in the course of a business on behalf of another natural or legal person (the client). 2. Where the applicable law imposes disclosure requirements as a prerequisite for the exercise of voting rights by a shareholder referred to in paragraph 1, such requirements shall not go beyond a list disclosing to the company the identity of each client and the number of shares voted on his behalf. 3. Where the applicable law imposes formal requirements on the authorisation of a shareholder referred to in paragraph 1 to exercise voting rights, or on voting instructions, such formal requirements shall not go beyond what is necessary to ensure the identification of the client, or the possibility of verifying the content of voting instructions, respectively, and is proportionate to achieving those objectives. 4. A shareholder referred to in paragraph 1 shall be permitted to cast votes attaching to some of the shares differently from votes attaching to the other shares. 5. Where the applicable law limits the number of persons whom a shareholder may appoint as proxy holders in accordance with Article 10(2), such limitation shall not prevent a shareholder referred to in paragraph 1 of this Article from granting a proxy to each of his clients or to any third party designated by a client.

I. General Scope und Systematic Context 1. Scope of regulation (para. 1) 1

Article 13 SRD deals with indirect proxy voting. Unlike most other Articles in the SRD, it begins with a definition of its own scope of application. Apart from this regulatory peculiarity, paragraph 1 contains neither substantive material provisions nor a specific implementation mandate. Rather, paragraph 1 serves to clarify and demarcate 1 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 22; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.99: achieve electronic voting in advance by reference to Article 8 SRD. 2 For details, see Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.99. 3 Ochmann, Aktionärsrechte-Richtlinie (2009), p. 140; Wicke in Festschrift Kanzleiter (2010), p. 415, 424.

968

Jan Lieder and Martin Bialluch

Art 13

Directive 2007/36/EC

the scope of this Article from other regulatory aspects of the SRD, in particular those on direct proxy voting under Article 10 and 11 SRD. In continuation of the legal purposes realised there, Article 13 SRD also aims to remove further obstacles, which may impede the exercise of voting rights.1 Although not explicitly mentioned in the Directive, it primarily covers (professional) 2 intermediaries, in particular “financial intermediaries”2 like credit institutions or collective/central securities depositories (see → Art 2 SRD), which are essential for the crossborder exercise of shareholders’ rights. 3 Full legal trusteeship constellations are also covered.4 On the intermediaries’ duties in the context of the SRD’s ‘know-your-shareholder’ concept, see → Art 3 a. Unlike the provisions in Chapter Ia, Article 13 SRD does not provide any legal 3 solutions on chains of intermediaries.5 However, Member States are permitted under Article 3 SRD to provide for certain rules on chains of intermediaries. This also extends to indirect proxy voting, e.g., in order to bring about contact between legal and beneficial owners more quickly.

2. Intermediaries as “shareholders” under the applicable law The legal objective of the SRD is to ensure that the true shareholder ultimately 4 decides on the exercise of voting rights. Article 13 SRD does not dictate to Member States whether to permit third-party registration for registered shares in the first place, but deals only with the subsequent question of restrictions to which the exercise of voting rights may be subject in the case of permitted third-party registration. 6 The (professional) intermediaries or trustees are indirect proxy holders of the true 5 shareholders. They act on behalf of their “client” who is in fact merely a beneficial owner. However, in relation to the company (i.e., in the general meeting of shareholders) they act in their own name, that is, as the “legal owner” and therefore as shareholders under the applicable law.7 By being classified as shareholders under the applicable law, intermediaries within the scope of Article 13 SRD are to be regarded as “institutional proxy holders”8. In particular, Article 13 SRD thus covers cases where national law for registered shares provides that a person entered in the register of shareholders is deemed to be the shareholder, but this person actually acts as a mere “nominee” (→ Art 2 mn. 5).9 However, Article 13 SRD regulates only selected individual voting aspects of the entire “intermediaries problem” because it was not possible to agree on further harmonisation when the SRD was adopted.10 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 345. Recital 11 SRD. 3 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 33; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 345. 4 Zetzsche, NZG 2007, 686, 687; Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 33. 5 Ochmann, Aktionärsrechte-Richtlinie (2009), p. 177. 6 Habersack and Verse, Europäisches Gesellschaftsrecht (5 th ed., 2019), § 7 mn. 35. 7 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.245; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 345; Bachner and Dokalik, GesRZ 2007, 104, 116. 8 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 345. 9 Ochmann, Aktionärsrechte-Richtlinie (2009), p. 176; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.246; for Germany, see Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 33; Grigoleit and Rachlitz, ZHR 174 (2010) 12, 39 et seq.; for the UK, see Gower and Davies, Gower’s principles of modern company law (10 th ed., 2016), 15-31 et seq. 10 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.244. 1

2

Jan Lieder and Martin Bialluch

969

Art 13 Removal of certain impediments to the effective exercise of voting rights

II. Disclosure Requirements and Further Formal Requirements under National Law (Para. 2 and 3) Where the applicable law imposes disclosure requirements as a prerequisite for the exercise of voting rights by an indirect voting proxy within the scope of Article 13(1) SRD, such requirements “shall not go beyond a list” disclosing to the company the identity of each true shareholder and the number of shares voted on her behalf. This demand for maximum harmonisation reflects the interest of true shareholders in maintaining their anonymity as well as the companies’ interest in transparency.11 Conversely, this means that there is no obligation for such disclosure. It is therefore at the discretion of the Member States to impose requirements of disclosure by means of a list. They may also waive any requirements for disclosure altogether.12 7 The formal requirements for indirect proxy holders correspond to those of the direct proxy voting rules in Article 11 SRD.13 Where the applicable law imposes formal requirements on the authorisation of the legal shareholder to exercise voting rights on behalf of her client, or on her voting instructions, such formal requirements “shall not go beyond what is necessary to ensure the identification of the client, or the possibility of verifying the content of voting instructions”; Article 13(3) SRD. Formal requirements in this respect must always be proportionate to achieving those objectives. In this respect, a national requirement for the “writing” form is also permissible here.14 6

III. Split Voting and Proxy Voting (Para. 4 and 5) Split voting of individual shareholders was not permitted in all Member States.15 As professional intermediaries who are shareholders under the applicable law (→ mn. 4 and → Art 2 mn. 4 et seq.) would thereby face virtually insurmountable practical obstacles for their business (most notably, they could not follow different instructions from different beneficial owners16), the SRD provides that they shall be permitted to split voting (Article 13(4) SRD). 9 Article 13(5) SRD further provides that the intermediary may appoint a separate proxy for each of her clients, irrespective of any limitations on the number of proxies imposed by national law pursuant to Article 10(2) SRD. However, national law must then also permit arrangements in which the legal owners (as shareholders within the meaning of Article 10 SRD) appoint the respective beneficial owner as proxy so that she can then exercise “her” rights by herself,17 albeit by taking the legal detour of proxy voting. 8

Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.247. Ochmann, Aktionärsrechte-Richtlinie (2009), p. 176. 13 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.249. 14 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 346; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.249. 15 Ochmann, Aktionärsrechte-Richtlinie (2009), p. 177. 16 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.251; Bachner and Dokalik, GesRZ 2007, 104, 117 et seq.; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 177. 17 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.253. 11

12

970

Jan Lieder and Martin Bialluch

Art 14

Directive 2007/36/EC

Article 14 Voting results 1. The company shall establish for each resolution at least the number of shares for which votes have been validly cast, the proportion of the share capital represented by those votes, the total number of votes validly cast as well as the number of votes cast in favour of and against each resolution and, where applicable, the number of abstentions. However, Member States may provide or allow companies to provide that if no shareholder requests a full account of the voting, it shall be sufficient to establish the voting results only to the extent needed to ensure that the required majority is reached for each resolution. 2. Within a period of time to be determined by the applicable law, which shall not exceed 15 days after the general meeting, the company shall publish on its Internet site the voting results established in accordance with paragraph 1. 3. This Article is without prejudice to any legal rules that Member States have adopted or may adopt concerning the formalities required in order for a resolution to become valid or the possibility of a subsequent legal challenge to the voting result.

I. Establishment of the Voting Results (Para. 1) 1. Scope and purpose Article 14 SRD marks the final element in the material regulatory regime of the 1 SRD harmonisation mandate and requirements.1 Recital 13 specifies in this context that companies shall establish the voting results by “methods that reflect the voting intentions” expressed by shareholders, and they should be made transparent after the general meeting at least through the company’s website. The provision further ensures that all shareholders can use the accessible results to ascertain the fact that the company has considered their votes. This applies in particular to those who have exercised their voting rights electronically, by post or by means of a proxy.2

2. Contents to be established The national laws must require the companies to determine the number of shares for 2 which votes have been validly cast, the proportion of the share capital represented by those votes, the total number of votes validly cast as well as the number of votes cast in favour of and against each resolution and, where applicable, the number of abstentions. These are the elements of the material minimum harmonisation (cf. the wording “at least” and Article 3 SRD). The French version of the SRD indicates that the “proportion of the share capital” refers to the entire share capital, i.e., not only the capital represented at the general meeting at the time the relevant resolution is voted on.3

Cf. Ochmann, Aktionärsrechte-Richtlinie (2009), p. 183. Cf. COM (2005) 685, p. 9; Grundmann, Europäisches Gesellschaftsrecht (2011), mn. 430; Lutter/Bayer/ Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.255; Kalss and Klampfl, Europäisches Gesellschaftsrecht (2015), mn. 414; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 383; J. Schmidt, BB 2006, 1641, 1645. 3 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.255; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 383; dissenting Deilmann and Otte, BB 2010, 722, 725. 1

2

Jan Lieder and Martin Bialluch

971

Art 14 Voting results 3

The method used for counting the votes is not subject to harmonisation.4 The only reference to the “methods” of establishment is in recital 13, without providing further details. In particular, the calculation of votes for and against may be calculated by subtracting one counted type of vote from the total number of cast votes (subtraction method).5

3. Dispensation rule (subs. 2) 4

National particularities6 have led to a special provision in subsection 2. Member States may provide or allow companies to provide that, if no shareholder requests a full account of the voting, it shall be sufficient to establish the voting results only to the extent needed to ensure that the required majority threshold is reached for each resolution. Conversely, each shareholder shall have the right to request a transparent establishment pursuant to paragraph 1 subpara 1.7 Apart from that, the provision does not intend to render established counting methods of the Member States inadmissible. 8

II. Online Publishing (Para. 2) 5

The obligation to publish the voting report on the website, which has been in place since the the first version of the SRD was published, is in line with the increasing trend towards digitalisation in the SRD. In particular, this results in very low costs for companies.9 The time limit for publication provided under national law may not exceed 15 days. A shorter period is at the legislative discretion of the Member States (cf. also Article 3 SRD). On the inconsistencies regarding the use of the term “website”, → Art 5 mn. 2.

III. Conflict Rule for National Law Governing Resolutions (Para. 3) 6

The duty to establish the voting result is to be transposed without prejudice to any legal rules that Member States have adopted or may adopt concerning the formalities required in order for a resolution to become valid or the possibility of a subsequent legal challenge to the voting result. As the individual national legal systems are highly diverse in these matters, it would have been very difficult to fully harmonise them, especially in view of the complex interrelations with national civil procedure law. But it also did not appear to be absolutely necessary to harmonise these issues for the purposes of the SRD.10 Furthermore, the SRD makes no provision that infringements upon Article 14 SRD must not constitute legal grounds for annulment or rescission.11 Rather, it remains 4 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 384; Lutter/ Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.257 et seq.; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 183. 5 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.257; Ochmann, Aktionärsrechte-Richtlinie (2009), p. 184; dissenting with regard to the SRD draft Karollus, GeS 2006, 99, 103. 6 See Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.258. 7 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.258. 8 Ochmann, Aktionärsrechte-Richtlinie (2009), p. 183. 9 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.260; cf. further COM (2005) 685, p. 9; J. Schmidt, BB 2006, 1641, 1645. 10 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.256. 11 For a discussion of this aspect, see Pluskat, WM 2007, 2135, 2139.

972

Jan Lieder and Martin Bialluch

Art 14 b

Directive 2007/36/EC

a matter of the applicable national law to define that.12 An EU-wide harmonisation of the shareholders’ right of appeal is still pending.13

CHAPTER IIA IMPLEMENTING ACTS AND PENALTIES Article 14 a Committee procedure 1. The Commission shall be assisted by the European Securities Committee established by Commission Decision 2001/528/EC. That committee shall be a committee within the meaning of Regulation (EU) No 182/2011 of the European Parliament and of the Council. 2. Where reference is made to this paragraph, Article 5 of Regulation (EU) No 182/2011 shall apply.

Article 14 b Measures and penalties Member States shall lay down the rules on measures and penalties applicable to infringements of national provisions adopted pursuant to this Directive and shall take all measures necessary to ensure that they are implemented. The measures and penalties provided for shall be effective, proportionate and dissuasive. Member States shall, by 10 June 2019, notify the Commission of those rules and of those implementing measures and shall notify it, without delay, of any subsequent amendment affecting them.

I. Chapter IIa – Implementing Acts and Penalties Until Chapter IIa was incorporated by the SRD II, there was no provision for har- 1 monising sanctions for breaches of the requirements imposed under national law on the different parties covered by the SRD. The provision of Article 14 b SRD shall cover “any infringement”1 of requirements of the SRD. As a consequence of the general principle of effet utile,2 Article 14b(2) SRD stipulates that the measures and penalties provided for shall be effective, proportionate and dissuasive. However, the European lawmaker is leaving the details of these sanctions to the 2 discretion of the Member States.3 Conceivable types of regulatory measures and penalties might be fines or the stipulation of legal grounds for nullity and rescission of 12 Cf. Grundmann, Europäisches Gesellschaftsrecht (2011), mn. 432; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.256; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 36; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 385; Zetzsche, NZG 2007, 686, 689. 13 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 385; cf. further Nietsch, ZVglRWiss 112 (2013), 45, 62. 1 Recital 50 SRD II: “In order to ensure that the requirements set out in this Directive or the measures implementing this Directive are applied in practice, any infringement of those requirements should be subject to penalties. To that end, penalties should be sufficiently dissuasive and proportionate.” 2 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.262. 3 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 386.

Jan Lieder and Martin Bialluch

973

Art 14 b

Directive 2007/36/EC

a matter of the applicable national law to define that.12 An EU-wide harmonisation of the shareholders’ right of appeal is still pending.13

CHAPTER IIA IMPLEMENTING ACTS AND PENALTIES Article 14 a Committee procedure 1. The Commission shall be assisted by the European Securities Committee established by Commission Decision 2001/528/EC. That committee shall be a committee within the meaning of Regulation (EU) No 182/2011 of the European Parliament and of the Council. 2. Where reference is made to this paragraph, Article 5 of Regulation (EU) No 182/2011 shall apply.

Article 14 b Measures and penalties Member States shall lay down the rules on measures and penalties applicable to infringements of national provisions adopted pursuant to this Directive and shall take all measures necessary to ensure that they are implemented. The measures and penalties provided for shall be effective, proportionate and dissuasive. Member States shall, by 10 June 2019, notify the Commission of those rules and of those implementing measures and shall notify it, without delay, of any subsequent amendment affecting them.

I. Chapter IIa – Implementing Acts and Penalties Until Chapter IIa was incorporated by the SRD II, there was no provision for har- 1 monising sanctions for breaches of the requirements imposed under national law on the different parties covered by the SRD. The provision of Article 14 b SRD shall cover “any infringement”1 of requirements of the SRD. As a consequence of the general principle of effet utile,2 Article 14b(2) SRD stipulates that the measures and penalties provided for shall be effective, proportionate and dissuasive. However, the European lawmaker is leaving the details of these sanctions to the 2 discretion of the Member States.3 Conceivable types of regulatory measures and penalties might be fines or the stipulation of legal grounds for nullity and rescission of 12 Cf. Grundmann, Europäisches Gesellschaftsrecht (2011), mn. 432; Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6th ed., 2018), mn. 29.256; Habersack and Verse, Europäisches Gesellschaftsrecht (5th ed., 2019), § 7 mn. 36; Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 385; Zetzsche, NZG 2007, 686, 689. 13 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 385; cf. further Nietsch, ZVglRWiss 112 (2013), 45, 62. 1 Recital 50 SRD II: “In order to ensure that the requirements set out in this Directive or the measures implementing this Directive are applied in practice, any infringement of those requirements should be subject to penalties. To that end, penalties should be sufficiently dissuasive and proportionate.” 2 Lutter/Bayer/Schmidt, Europäisches Unternehmens- und Kapitalmarktrecht (6 th ed., 2018), mn. 29.262. 3 Jung and Stiegler in Jung, Krebs and Stiegler, Gesellschaftsrecht in Europa (2019), § 30 mn. 386.

Jan Lieder and Martin Bialluch

973

Art 15 Transposition resolutions where a company has breached its obligations in connection with the general meeting under national private law. Furthermore, in view of the SRD’s purpose, claims for damages by shareholders as part of a private enforcement mechanism as well as (supplementary) supervisory enforcement would also be feasible. 3 The Commission shall be notified of any implemented rules and of implemented measures as well as of any subsequent amendment affecting them (Article 14b(2) SRD). In all matters concerning the SRD, the Commission is advised by the European Securities Committee (committee procedure) in accordance with Article 14a(1) SRD. This applies, for example, to the process of implementing regulations under Article 3a(8), 3b(6), 3c(3) SRD.4 The provision of Article 14a(2) SRD does not serve much purpose from a regulatory perspective. The reference to the committee procedure according to Regulation EU/182/2011 could also have been regulated directly in Article 3a(8), 3b(6), 3c(3) SRD, which are the only provisions that refer to this paragraph 2.

II. Article 14 b SRD beyond the Scope of Minimum Harmonisation Article 14 b SRD itself is mandatory. It binds Member States with regard to all national provisions “adopted pursuant to this Directive”. Thus, even if the relevant provisions of national law were based on an optional provision of the SRD, they would still be considered “adopted” within the meaning of Article 14 b SRD and will therefore have to be made subject to measures and penalties under national law. A differentiation must, however, be observed with regard to the protective purpose of the relevant optional provision. Thus, the rule of Article 14 b SRD applies to the extent that the adopted provisions enhance the position of shareholders or facilitate the exercise of shareholder rights in accordance with the protective purpose of the SRD (see above → Art 1 SRD). If an optional provision of the SRD does not serve the aforementioned protective objectives of the SRD, the violation of its national transposition is not covered by Article 14 b SRD. 5 In some jurisdictions, Article 14 b SRD does not require special transposition acts. Rather, the provisions of general civil or sometimes of special (public) sanctions law could already be sufficient to enable the enforcement of shareholder rights as required by Article 14 b SRD. This can also be achieved by interpreting existing national blanket clauses in accordance with the Directive. 4

CHAPTER III FINAL PROVISIONS Article 15 Transposition Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 3 August 2009 at the latest. They shall forthwith communicate to the Commission the text of those measures. Notwithstanding the first paragraph, Member States which on 1 July 2006 had in force national measures restricting or prohibiting the appointment of a proxy holder in the case of Article 10(3), second subparagraph, point (ii), shall bring into force the laws, regulations and administrative provisions necessary in order to comply with

4

974

Cf. Recital 13 Regulation 2018/1212/EU.

Jan Lieder and Martin Bialluch

Art 15 Transposition resolutions where a company has breached its obligations in connection with the general meeting under national private law. Furthermore, in view of the SRD’s purpose, claims for damages by shareholders as part of a private enforcement mechanism as well as (supplementary) supervisory enforcement would also be feasible. 3 The Commission shall be notified of any implemented rules and of implemented measures as well as of any subsequent amendment affecting them (Article 14b(2) SRD). In all matters concerning the SRD, the Commission is advised by the European Securities Committee (committee procedure) in accordance with Article 14a(1) SRD. This applies, for example, to the process of implementing regulations under Article 3a(8), 3b(6), 3c(3) SRD.4 The provision of Article 14a(2) SRD does not serve much purpose from a regulatory perspective. The reference to the committee procedure according to Regulation EU/182/2011 could also have been regulated directly in Article 3a(8), 3b(6), 3c(3) SRD, which are the only provisions that refer to this paragraph 2.

II. Article 14 b SRD beyond the Scope of Minimum Harmonisation Article 14 b SRD itself is mandatory. It binds Member States with regard to all national provisions “adopted pursuant to this Directive”. Thus, even if the relevant provisions of national law were based on an optional provision of the SRD, they would still be considered “adopted” within the meaning of Article 14 b SRD and will therefore have to be made subject to measures and penalties under national law. A differentiation must, however, be observed with regard to the protective purpose of the relevant optional provision. Thus, the rule of Article 14 b SRD applies to the extent that the adopted provisions enhance the position of shareholders or facilitate the exercise of shareholder rights in accordance with the protective purpose of the SRD (see above → Art 1 SRD). If an optional provision of the SRD does not serve the aforementioned protective objectives of the SRD, the violation of its national transposition is not covered by Article 14 b SRD. 5 In some jurisdictions, Article 14 b SRD does not require special transposition acts. Rather, the provisions of general civil or sometimes of special (public) sanctions law could already be sufficient to enable the enforcement of shareholder rights as required by Article 14 b SRD. This can also be achieved by interpreting existing national blanket clauses in accordance with the Directive. 4

CHAPTER III FINAL PROVISIONS Article 15 Transposition Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 3 August 2009 at the latest. They shall forthwith communicate to the Commission the text of those measures. Notwithstanding the first paragraph, Member States which on 1 July 2006 had in force national measures restricting or prohibiting the appointment of a proxy holder in the case of Article 10(3), second subparagraph, point (ii), shall bring into force the laws, regulations and administrative provisions necessary in order to comply with

4

974

Cf. Recital 13 Regulation 2018/1212/EU.

Jan Lieder and Martin Bialluch

Art 15

Directive 2007/36/EC

Article 10(3) as concerns such restriction or prohibition by 3 August 2012 at the latest. Member States shall forthwith communicate the number of days specified under Articles 6(3) and 7(3), and any subsequent changes thereof, to the Commission, which shall publish this information in the Official Journal of the European Union. When Member States adopt the measures referred to in the first paragraph, they shall contain a reference to this Directive or shall be accompanied by such reference on the occasion of their official publication. The methods of making such reference shall be laid down by the Member States.

I. Transposition of SRD I and SRD II According to Article 288(3) TFEU, the Directive is an instrument of indirect or 1 cooperative two-stage legislation.1 A directive is legally binding as to its objective or result upon each Member State to which it is addressed (see → Art 17 SRD). Like every directive, the SRD (and SRD II) contains a deadline for transposition. The transposition deadline for the amended provisions of SRD II expired at the end of 10 June 2019. The SRD uses the terms “implementation” and “transposition” almost synonymously 2 (see → Art 3 f and 3 k SRD). The latter term, on the one hand, always refers to the transposition of the Directive’s provisions into the national law of the Member States. The term “implementation”, on the other hand, has a double meaning. In the context of the SRD’s ‘say-on-pay’ concept, it also stands for the actual implementation of the remuneration policy by the companies. The same can be observed with regard to the “investment strategy and implementation thereof” pursuant to Article 3 i SRD. In this context, the European legislator might be accused of negligence (cf. → Art 1 mn. 6 and 5 mn. 2 SRD).

1. Legal effects of non-transposition Even before the expiry of the transposition deadline, a directive can produce legal 3 effects, as Member States are required to refrain from legal acts which may frustrate the directive’s objectives.2 The ECJ has further created various ways of overcoming transposition deficits by means of judicial innovation, namely interpretation in conformity with directives and the direct effect of directives. It also recognises a state liability claim based on European Union law.3 Under certain conditions, the non-transposition of directives can even be challenged before the ECHR.4

2. Direct legal effect of directives The ECJ ruled that directives could have a direct legal effect in certain constellations. 5 4 According to established case law on the matter, one prerequisite is that the directive was not transposed in time.6 Default is equivalent to insufficient (deficient) transposition.7 These considerations are based on the principle of the practical effectiveness of Ruffert in Calliess and Ruffert (5th ed., 2016), AEUV, Art Art 288 mn. 23 et seq. ECJ, C-129/96, ECR 1997, I-7411, mn. 45 (Inter-Environnement Wallonie/Région Wallonne). 3 Ruffert in Calliess and Ruffert (5th ed., 2016), AEUV, Art Art 340 mn. 36 et seq. 4 Case of S.A. Dangeville v. France, no. 36 677/97, (16. 4. 2002), Reports of Judgments and Decisions, 2002-III, 71; Breuer, JZ 2003, 433. 5 For details, see Ruffert in Calliess and Ruffert (5th ed., 2016), AEUV, Art Art 288 mn. 48. 6 ECJ, C-148/78, ECR 1979, 1629, mn. 43 et seq. (Ratti). 1

2

Jan Lieder and Martin Bialluch

975

Art 17 Addressees European Union law (effet utile)8 and the fact that Member States cannot rely on their own failure to transpose the directive into national law. The Directive must therefore be regarded as directly enforceable against them after the deadline has expired (estoppel). 9 5 The content of the relevant provision must be “unconditional and sufficiently precise”.10 A provision is unconditional if it is applicable without reservation or condition and does not require further action by the institutions of the Member States or the Union.11 It is therefore irrelevant whether the Member States have been given options in the statute or whether the statute provides for the adoption of accompanying rules to simplify its application.12 The provision is sufficiently precise if it unambiguously creates an obligation, i.e., if it is legally self-contained and can be applied as such by any court.13 Indefinite legal concepts alone do not prevent direct effect.14 Thus, the SRD may be applied directly in large parts if, contrary to the requirement of Article 15 SRD, it is (partly) not implemented correctly or is implemented late.

II. Further Provisions for Transposition (Para. 2 and 3) 6

Paragraph 2 provide for special requirements concerning the transposition of Article 10 SRD. The latest date for the implementation of the objectives regulated there has already passed. For the report of the Commission pursuant to Paragraph 3,15 see above → Art 6 and Article 7 SRD.

Article 16 Entry into force This Directive shall enter into force on the 20th day following its publication in the Official Journal of the European Union.

Article 17 Addressees This Directive is addressed to the Member States. 1

The content of Article 17 follows the EU primary law’s definition of a directive under Article 288(3) TFEU, according to which a directive shall be binding as to the result to ECJ, C-152/84, ECR 1986, 723, mn. 46 (Marshall I). ECJ, C-41/74, ECR 1974, 1337, mn. 12 (van Duyn/Home Office); C-51/76, ECR 1977, 113, mn. 20/29 (Nederlandse Ondernemingen); C-38/77, ECR 1977, 2203, mn. 9/10 (Enka). 9 ECJ, C-148/78, ECR 1979, 1629, mn. 22 (Ratti); C-8/81, ECR 1982 (53, mn. 24 (Becker); C-70/83, ECR 1984, 1075, mn. 3 (Kloppenburg/Finanzamt Leer). 10 ECJ, C-148/78, ECR 1979, 1629, mn. 23 (Ratti); C-88/79, ECR 1980, 1827, mn. 14 (Staatsanwaltschaft/Grunert); C-8/81, ECR 1982, 53, mn. 25 (Becker); See for detailed information Ruffert in Calliess and Ruffert (5th ed. 2016), AEUV, Art Art 288 mn. 53 et seq. 11 ECJ, C-41/74, ECR 1974, 1337, mn. 13/14 (van Duyn/Home Office); Verb. C-372 bis 374/85, ECR 1987, 2141, mn. 25 (Traen); C-31/87, ECR 1988, 4635, mn. 43 (Beentjes). 12 ECJ, C-8/81, ECR 1982, 53, mn. 30 und 33 (Becker); C-286/85, ECR 1987, 1453, mn. 15 (McDermott and Cotter); C-C-374/97, ECR 1999, I-5153, mn. 24 (Feyrer). 13 ECJ, C-50/88, ECR 1989, 1925, mn. 26 (Kühne/Finanzamt München III); C-131/79, ECR 1980, 1585, mn. 13 (Santillo). 14 Ruffert in Calliess and Ruffert (5th ed., 2016), AEUV, Art Art 288 mn. 54. 15 OJ 21.10.2010, C 285/2. 7

8

976

Jan Lieder and Martin Bialluch

Art 17

Directive 2007/36/EC

be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods. Nevertheless, Article 17 SRD has its raison d'être when considering the trend towards enhanced cooperation of only a few Member States. Article 17 SRD addresses all Member States. The SRD is, however, also applicable within the EEA, and thus binding for all EEA-Members as well.1 The sometimes misleading wording of the SRD (→ Art 1 mn. 6 et seq), which sug- 2 gests direct validity comparable to a European Regulation (Article 288 subs. 2 TEUF), is clarified at the very latest in the context of Article 17 SRD. Article 17 SRD therefore helps to overcome the dogmatically and methodologically unsatisfactory wording of the Directive. On possible direct legal effects of directives, see above → Art 15 mn. 4. In contrast, where the Commission has the power to adopt further executive acts, this 3 directly provides for the competence of the Commission. There is no need for national acts in this respect, nor would they make any sense, as the Member States have no competence to give the Commission such powers.

1 Decision of the EEA Joint Committee No 59/2008 of 25.4.2008 amending Annex XXII (Company law) to the EEA Agreement, OJ L 223, 21.8.2008, p. 60.

Jan Lieder and Martin Bialluch

977

Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids Introduction Directive 2004/25/EC, which was passed on 21.04.2004 addresses takeover bids that 1 concern companies subject to the laws of a Member State of the European Union.

I. Core of the Directive The Directive deals with four different areas: (1) The regulation of voluntary takeover 2 bids (→Art. 1 mn. 4) and especially the creation of a transparent and fair procedure (equal treatment of the shareholders, → Art. 3 mn. 7), as well as the adherence to certain frameworks in regards to time (→ Art. 7 mn. 4). (2) The introduction of mandatory bids according to which an offeror who acquired a percentage of shares that gives him or her control over the company, is required to make an mandatory bid on all remaining shares (→ Art. 5 mn. 5 et seqq.). (3) The creation of a level playing field with regards to takeover barriers by application of the reciprocity rule and the breakthrough rule (→ Art. 11 mn. 5 et seqq.) as far as these rules are applied by the Member States and/or the companies. (4) The creation of regulations for situations of squeeze-out and sell-out after the takeover bid (→ Art. 15 mn. 4 and Art. 16 mn. 4).

II. Compromise Proposal The text of the takeover directive as we know it today was highly debated. At the core of the debate was the question – pushed by the commission at the time of negotiation in 2002 – of how a level playing field could be created within the framework of Europe by cutting back takeover barriers and opening up the market.1 This was promptly followed by the question if this should also facilitate the acquisition of European companies by investors from third countries (like the US, China and Japan). The answer to this question was negativ and unanimous among the Member States: There should be no mandatory cut back on takeover barriers and hence no mandatory opening of the market of Europe vis-à-vis third states. Rather the Member States in the end decided on an options model regarding Art 9 (duty of neutrality) and Art 11 (breakthrough rule), within which the Member States can decide in a first step if the duty of neutrality or takeover barriers like maximum-voting rights might be deviated from temporarily for a bid procedure. If the Member State in question does not dictate the application of these regulations, the companies can in turn decide, if they want the duty of neutrality and the breakthrough rule to apply. This model is completed by the reciprocity rule of Art 12 (3), which makes the applicability of measures contingent upon whether or not the opposing party does apply them. Other regulations of the directive regarding the procedure of a bid, like the competent supervisory authorities, squeeze-out and sell-out as well as the regulations for the protection of the shareholders (Art 5) were to be debated among the Member States as well, but there was much more consensus than there was with Arts 9, 11 and 12.

1

Proposal for a Directive on takeover bids (EU) 534/2002.

Silja Maul and Larissa Furtwengler

979

3

4

5

6

Introduction

III. Development of the Directive 7

The history of the takeover directive goes back to the 1970’. It began with the “Report on takeover and other General Bids” by Professors Robert Pennington in 1974 2 which was commissioned by the Commission. The Commission then presented a first draft in 19893 which was amended 19904 and 19965. On 21 June 1999 a political agreement was finally reached, but not upheld because Spain had reservations due to the Gibraltar question. In 2002 the Commission presented a new draft6 that included a duty of neutrality and a form of breakthrough-lite regulation that incorporated a limited number of cut backs on takeover barriers. The Member States could not reach an agreement on the proposed text, since also third countries would have profited from the cut back on takeover barriers. It was only after the delegation of Portugal proposed the now Art 12 optional arrangements, that a final consensus could was reached on 30 April 2004.

IV. Harmonization 8

The Directive sets in almost all areas it touches upon a baseline for the regulations of the Member States. The level of protection can thus be increased by the Member States national legislation except for Art 6 (2)(2) (incorporation of additional criteria into the offer document) and Art 15 (2) sentence 3 (percentage in squeeze-out that may not be exceeded), which already codify maximum standards. According to Art 5 (6) Member States may provide for further instruments intended to protect the interests of the holders of securities but only in so far as those instruments do not hinder the normal course of a bid.

V. Need for Reform 9

In 2007 the Commission presented a report on the implementation of the Directive that concludes that in general takeover barriers were upheld in the Member States if not even increased.7 In 2012 the Commission presented a report on the need to reform the Directive, exercising its obligation for revision in Art 20 of the Directive. 8 The following areas of potential revision were determined: (1) legal certainty of the concept of "acting in concert" and its application by national regulators (2) wide range of national derogations to the mandatory bid rule (3) avoiding low balling and creeping in and (4) to better protect the legal position of employees in cases of takeovers.

Report on takeover and other bids – Dok. XI/56/74. COM (1988) 823 final, ABl. C 64 v. 14.3.1989, p. 8 et seq. 4 COM (1990) 416 final, ABl. C 240 v. 26.9.1990, p. 7 et seq. 5 COM (1995) 0655 final, ABl. C 162 v. 6.6.1996, p. 5 et seq. 6 COM (2002) 534 final. 7 Report on The Implementation of the Directive on Takeover Bids, 21.2.2007, SEC (2007) 268; Hopt, in: Essays in honour of E. Wymeersch, 2009, 272, 278 et seq. 8 COM (2012) 347 final – Report, Application of Directive 2004/25/EC on takeover bids. 2

3

980

Silja Maul and Larissa Furtwengler

Art 1

Directive 2004/25/EC

Article 1 Scope 1. This Directive lays down measures coordinating the laws, regulations, administrative provisions, codes of practice and other arrangements of the Member States, including arrangements established by organisations officially authorised to regulate the markets (hereinafter referred to as ‘rules’), relating to takeover bids for the securities of companies governed by the laws of Member States, where all or some of those securities are admitted to trading on a regulated market within the meaning of Directive 93/22/EEC in one or more Member States (hereinafter referred to as a ‘regulated market’). 2. This Directive shall not apply to takeover bids for securities issued by companies, the object of which is the collective investment of capital provided by the public, which operate 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 those companies. Action taken by such companies to ensure that the stock exchange value of their units does not vary significantly from their net asset value shall be regarded as equivalent to such repurchase or redemption. 3. This Directive shall not apply to takeover bids for securities issued by the Member States' central banks.

I. General Features 1. Overview Art 1 sets out the material and territorial scope of the Directive. Paragraph 1 lays 1 down measures coordinating the laws, regulations, administrative provisions, codes of practice and other arrangements of the Member States including arrangements established by organizations officially authorized to regulate the markets (‘rules’) relating to takeover bids for securities of companies governed by the laws of Member States. Paragraph 2 and 3 stipulate exceptions to the scope of application of the Directive.

2. Background Art 1 defines the unitary scope of application of the Directive to assure the im- 2 plementation of Art 50 (2)(g) TFEU (former Art 44 (2)(g) TEU) by which certain safeguards for the protection of the interests of Members and others are foreseen. It aims at harmonizing the duties and rights in situations of takeover bids within the European Union.

3. Relation to other provisions Art 1 determines in which cases the provisions of the Directive shall apply and 3 therefor forms the basis of the Directive as such. It is closely related to Art 2 (1)(a) which defines the nature of the bids regulated. It is further related to Art 4 (5) that allows for derogations of the scope of application of the Directive.

Silja Maul and Larissa Furtwengler

981

Art 1 Scope

II. Scope of Application (Art 1 (1)) 4

To fall under the purview of the Directive the following criteria defined by Art 1 (1) have to be met: – Firstly, there must be a bid which is made by an offeror for the acquisition of part or all of the securities of the offeree company. It is not decisive, if the bid is voluntary or mandatory; the Directive covers both: voluntary and mandatory bids (see also Art 2 (1)(b)). With respect to voluntary bids the offeror does not need to extend the bid to all shares. A partial offer is allowed if it is not prohibited by the Member States in question. The special regulations related to mandatory bids apply once the offeror has acquired control of the offeree company. In this case the requirements set for mandatory bids in Art 5 (1) are triggered (mandatory bid, → Art. 5 mn. 5 et seq.) for all remaining securities, if the exception of Art 5 (2) does not apply; Example:

–

The Directive covers both cases: 1. If the offeror acquires through his bid 30 % of the securities with voting rights (assuming that this percentage is sufficient to gain control in the Member State concerned) the offeror then subsequently is required to make a mandatory bid for the remaining securities 2. If the offeror holds 5 % of the securities with voting rights and acquires through her bid a further 25 % (assuming that this percentage is sufficient to gain control in the Member State concerned) the Directive implies that the offeror is then subsequently obliged to make a mandatory bid for all remaining securities, if the exception of Art 5 (2) does not apply.

Secondly the securities on which the bid is made must be transferable securities carrying voting rights (see Art 2).1 Therefore, profit certificates or convertible bonds are not covered by the Directive.2 – Thirdly all or some of the securities must be admitted to trading on a regulated market in accordance with Art 1 No. 13 of Directive 93/22/EEC in one or more Member States. A definition of the term regulated market and a list can be found in Art 1 No. 13 of the Securities Service Directive (93/22/EEC). – Fourthly the securities must be the ones of a company that is governed by the laws of Member States; a question which is to be determined by the private international law regulations of the respective Member State. – Fifthly the relevant bid has to be by a third party and not the company itself. 5 Geographically the Directive applies to bids which are made for securities of a company that is subject to the law of a Member State, if all or a part of the securities are admitted to trading on a regulated market in one or more Member States (Art 1 (1)). This includes the case in which the registered office of a company is in a different Member State than the one in which the securities are admitted to trading. 6 Example:

7

The Directive applies if the company is registered in Luxembourg and the securities are admitted to trading in Germany.

The same holds true for cases in which the securities are partially admitted to trading on the stock exchange of a non- EU country. In this case it might be necessary to make an additional bid according to the laws of the third state.

1 However, in accordance with No. 11 of the Reasons for Considerations and Art 4 (5) there is the possibility for the Member States to derogate from the Directive and extend the material scope of application to include also securities which carry voting rights only in specific circumstances or which do not carry voting rights. 2 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon (eds), Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 56.

982

Silja Maul and Larissa Furtwengler

Art 2

Directive 2004/25/EC

The scope of application of the Directive is not limited with regards to the offerors 8 (Art 2 (1) (c)), and therefore includes all bids made to companies that fall under the above described purview and thus apply also to offerors from non-EU countries.3

III. Exceptions to the Scope of Application (Art 1 (2), (3)) 9 Art 1 (2) and (3) stipulate that the Directive shall not apply To takeover bids for securities issued by companies, the object of which is the collective investment of capital provided by the public, which operate 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 those companies. Action taken by such companies to ensure that the stock exchange value of their units does not vary significantly from their net asset value shall be regarded as equivalent to such repurchase or redemption, – To takeover bids for securities issued by the Member States’ central banks.

–

Article 2 Definitions 1. For the purposes of this Directive: (a) ‘takeover bid’ or ‘bid’ shall mean a public offer (other than by the offeree company itself) made to the holders of the securities of a company to acquire all or some of those securities, whether mandatory or voluntary, which follows or has as its objective the acquisition of control of the offeree company in accordance with national law; (b) ‘offeree company’ shall mean a company, the securities of which are the subject of a bid; (c) ‘offeror’ shall mean any natural or legal person governed by public or private law making a bid; (d) ‘persons acting in concert’ shall mean natural or legal persons who cooperate with the offeror or the offeree company on the basis of an agreement, either express or tacit, either oral or written, aimed either at acquiring control of the offeree company or at frustrating the successful outcome of a bid; (e) ‘securities’ shall mean transferable securities carrying voting rights in a company; (f) ‘parties to the bid’ shall mean the offeror, the members of the offeror’s board if the offeror is a company, the offeree company, holders of securities of the offeree company and the members of the board of the offeree company, and persons acting in concert with such parties; (g) ‘multiple-vote securities’ shall mean securities included in a distinct and separate class and carrying more than one vote each. 2. For the purposes of paragraph 1(d), persons controlled by another person within the meaning of Article 87 of Directive 2001/34/EC (12) shall be deemed to be persons acting in concert with that other person and with each other.

3 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon (eds), Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 53.

Silja Maul and Larissa Furtwengler

983

Art 2 Definitions

I. General Features 1. Overview 1

Art 2 (1) defines the terms ‘takeover bid’ and ‘bid’, ‘offeree company’, ‘offeror’, ‘persons acting in concert’, ‘securities’, ‘parties to the bid’, and ‘multiple vote securities’. Paragraph 2 further defines ‘persons acting in concert’. However, the term control is notably not defined by Art 2 or elsewhere in the Directive. Art 5 (3) confers this mandate to the Member State in which the company has its registered office.

2. Background 2

Art 2 aims at assuring a uniform European interpretation of the relevant terms of the Directive throughout the Member States, which would otherwise most likely be defined with recourse to the respective terms in national languages as well as laws and therefore might vary significantly in meaning.

3. Relation to other provisions Art 2 contains the relevant definitions for a number of provisions of the Directive.

3

II. Definitions 4

–

– – –

– –

–

The text of Art 2 defines the terms as follows: ‘takeover bid’ or ‘bid’ shall mean a public offer (other than by the offeree company itself) made to the holders of the securities of a company to acquire all or some of those securities, whether mandatory or voluntary, which follows or has as its objective the acquisition of control of the offeree company in accordance with national law (Art 2 (1)(a), see also above under Art 1 → mn. 4); ‘offeree company’ shall mean a company, the securities of which are the subject of a bid (Art 2 (1)(b)); ‘offeror’ shall mean any natural or legal person governed by public or private law making a bid (Art 2 (1)(c)); ‘persons acting in concert’ shall mean natural or legal persons who cooperate with the offeror or the offeree company on the basis of an agreement, either express of tacit, either oral or written, aimed either at acquiring control of the offeree company or at frustrating the successful outcome of a bid (Art 2 (1)(d)); ‘securities’ shall mean transferrable securities carrying voting rights in a company (Art 2 (1)(e), see also under Art 1 → mn. 4); ‘parties to the bid’ shall mean the offeror, the members of the offeror’s board if the offeror is a company, the offeree company, holders of securities of the offeree company and the members of the board of the offeree company, and persons acting in concert with such parties (Art 2 (1)(f)); ‘multiple-vote securities’ shall mean securities included in a distinct and separate class and carrying more than one vote each (Art 2 (1)(g)).

984

Silja Maul and Larissa Furtwengler

Art 3

Directive 2004/25/EC

III. Persons Controlled by Another Person as Persons Acting in Concert (Art 2 (2)) According to Art 2 (2) for the purposes of paragraph 1 (d) persons controlled by 5 another person within the meaning of Art 87 of Directive 2001/34/EC1 shall be deemed to be persons acting in concert with that other person and with each other.

Article 3 General principles 1. For the purpose of implementing this Directive, Member States shall ensure that the following principles are complied with: (a) all holders of the securities of an offeree company of the same class must be afforded equivalent treatment; moreover, if a person acquires control of a company, the other holders of securities must be protected; (b) the holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly informed decision on the bid; where it advises the holders of securities, the board of the offeree company must give its views on the effects of implementation of the bid on employment, conditions of employment and the locations of the company’s places of business; (c) the board of an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid; (d) false markets must not be created in the securities of the offeree company, of the offeror company or of any other company concerned by the bid in such a way that the rise or fall of the prices of the securities becomes artificial and the normal functioning of the markets is distorted; (e) an offeror must announce a bid only after ensuring that he/she can fulfil in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the implementation of any other type of consideration; (f) an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities. 2. With a view to ensuring compliance with the principles laid down in paragraph 1, Member States: (a) shall ensure that the minimum requirements set out in this Directive are observed; (b) may lay down additional conditions and provisions more stringent than those of this Directive for the regulation of bids.

1 Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities (OJ L 184, 6.7.2001, p. 1) Directive last amended by Directive 2003/71/EC (OJ L 345, 31.12.2003, p. 64).

Silja Maul and Larissa Furtwengler

985

Art 3 General principles

I. General Features 1. Overview Art 3 (1) lays down certain general principles which are to be adhered to in any case – even if a derogation from a rule like for example Art 4 (5) of the Directive is applied. 2 Art 3 (2) requires the Member States to ensure that the minimum requirements set out in this Directive are observed (Art 3 (2)(a)) and allows in Art 3 (2)(b) for more stringent conditions and provisions than those of the Directive to be laid down by the Member States. 1

2. Background 3

Art 3 of the Directive is supposed to be a sort of catch all clause for the protection of the holders of securities, which also applies to exceptional circumstances.

3. Relation to other provisions The principles that are laid down in Art 3 are to guide the interpretation of the Directive as a whole.1 This underlines the outline character of the Directive and the leeway left to the Member States in its implementation.2 5 Art 3 is closely related to Art 4 (5), which allows for the Member States to derogate from the provisions of the Directive but only if the derogation in turn is still in accordance with the general principles set forth in Art 3. 4

II. General Principles 6

The general principles of Art 3 are the principle of equal treatment Art 3 (1)(a), the duty to provide information to the holders of securities Art 3 (1)(b), the commitment to the interests of the company Art 3 (1)(c), the avoidance of the distortion of markets Art 3 (1)(d), the fulfillment of consideration Art 3 (1)(e) and the protection of the offeree company Art 3 (1)(f).

1. The principle of equal treatment (Art 3 (1) (a)) 7

Art 3 (1) (a) holds that all holders of securities of an offeree company of the same class must be afforded equal treatment. The aim of the principle is to ensure that e.g. minority shareholders are treated the same way as are shareholders of a large proportion or shareholders that are especially connected to the market like institutional shareholders. Their difference of leverage in negotiations would otherwise lead to unequal outcomes and would discourage further investments of shareholders.3 Furthermore, under the principle it is assured that all holders of securities can decide without pressure: since this way quota restrictions are prevented, there is no danger of drops in value of the shares when it becomes clear that control is sought by the offer, which in turn would lead the holders of securities to be inclined to sell as fast as possible to not lose money. 4 Habersack/Verse, p. 461, mn. 12. Habersack/Verse, p. 461, mn. 12. 3 Silja Maul and Danièle Muffat-Jeandet, ‘Die EU-Übernacherichtlinie – Inhalt und Umsetzung in nationales Recht (Teil I)’, Die Aktiengesellschaft 5 (2004), p. 226. 4 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon (eds), Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 67. 1

2

986

Silja Maul and Larissa Furtwengler

Art 3

Directive 2004/25/EC

The principle applies to voluntary and mandatory bids alike – for the latter Art 5 of the Directive holds special provisions.5 Moreover, as reads the second part of the provision, if a person acquires control of a company, the other holders of securities must be protected. The Court of Justice of the European Union found that there is no general principle 8 to be deducted from Art 3 (1)(a) or Art 5 of the Directive or any other European Union equal treatment right that would require a control premium to be divided equally among all shareholders outside the scope of the Directive.6

2. The duty to provide information to holders of securities (Art 3 (1)(b)) The second principle stipulates that the shareholders should be provided with suffi- 9 cient time and information to enable them to reach a properly informed decision on the bid. The details of this principle are laid down in Arts 6, 7 and 8. The second part of Art 3 (1)(b) clarifies the obligation of the board that is codified in Art 9 (5), ‘to make public a document setting out its opinion of the bid and the reasons on which it is based, including its views on the effects of the implementation of the bid on the company’s interests and specifically employment’ (Art 9 (5) of the Directive). In the two-tier system this means a statement of the management board, not the supervisory board, as can be concluded with view of Art 9 (6), where it is made clear that for the purposes of Art 9 (2) ‘board’ shall mean management board and supervisory board alike.7

3. The commitment to the interests of the company (Art 3 (1)(c)) General principle 3 addresses the commitment of the board of the offeree company 10 to the interests of the company as a whole, which therefore shall not deny the holders of securities the opportunity to decide on the merits of the bid. Thus the board may not undertake actions that are in its interest and not the interests of the company. This principle might conflict with the neutrality of the board (Art 9 (2) and (3)) in cases of defensive measures, since here the company’s interests do not necessarily correspond with those of the shareholders; but since the shareholders are to judge the merits of the bid, this conflict would be resolved.8

4. The avoidance of the distortion of markets (Art 3 (1)(d)) Art 3 (1)(d) is aimed at avoiding the distortion of the market by artificially influenc- 11 ing share prices or the creation of a false market by any company concerned with the bid. The transparency obligation in Art 8 is one way of assuring this principle is adhered to, together with the market abuse Directive (Directive 2014/57/EU).

5. The fulfillment of consideration (Art 3 (1) (e)) The requirement that the offeror is able to fulfill any consideration is aimed at 12 protecting the offeree company, the shareholders, but also the market from artificial bids. An offeror must ensure that he/she can fulfill in full any cash consideration if such

Habersack/Verse, p. 462, mn. 13. Judgement of the Court of Justice of 15 October 2009, Audiolux, C-101/08, ECLI:EU:C:2009:626, para. 50. 7 Habersack/Verse, p. 463, mn. 14. 8 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon (eds), Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 72. 5

6

Silja Maul and Larissa Furtwengler

987

Art 4 Supervisory authority and applicable law is offered, and after taking all reasonable measures to secure the implementation of any other consideration.

6. The protection of the offeree company (Art 3 (1)(f)) 13

Art 3 (1)(f) stipulates that an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid made on its securities. Art 7 serves to uphold this principle by regulating the allowed time for acceptance. Otherwise, the competitors could – due to the obligation of neutrality – use bids to unnecessarily paralyze a competing company.

III. Article 3 (2) 14

Art 3 (2) stipulates that the Member States shall ensure that the minimum requirements set out in the Directive are observed and allows for them to lay down additional conditions and provisions that are more stringent than those of this Directive for the regulation of bids.

Article 4 Supervisory authority and applicable law 1. Member States shall designate the authority or authorities competent to supervise bids for the purposes of the rules which they make or introduce pursuant to this Directive. The authorities thus designated shall be either public authorities, associations or private bodies recognised by national law or by public authorities expressly empowered for that purpose by national law. Member States shall inform the Commission of those designations, specifying any divisions of functions that may be made. They shall ensure that those authorities exercise their functions impartially and independently of all parties to a bid. 2. (a) The authority competent to supervise a bid shall be that of the Member State in which the offeree company has its registered office if that company’s securities are admitted to trading on a regulated market in that Member State. (b) If the offeree company’s securities are not admitted to trading on a regulated market in the Member State in which the company has its registered office, the authority competent to supervise the bid shall be that of the Member State on the regulated market of which the company’s securities are admitted to trading. If the offeree company’s securities are admitted to trading on regulated markets in more than one Member State, the authority competent to supervise the bid shall be that of the Member State on the regulated market of which the securities were first admitted to trading. (c) If the offeree company’s securities were first admitted to trading on regulated markets in more than one Member State simultaneously, the offeree company shall determine which of the supervisory authorities of those Member States shall be the authority competent to supervise the bid by notifying those regulated markets and their supervisory authorities on the first day of trading.

988

Silja Maul and Larissa Furtwengler

Art 4

Directive 2004/25/EC

If the offeree company’s securities have already been admitted to trading on regulated markets in more than one Member State on the date laid down in Article 21(1) and were admitted simultaneously, the supervisory authorities of those Member States shall agree which one of them shall be the authority competent to supervise the bid within four weeks of the date laid down in Article 21(1). Otherwise, the offeree company shall determine which of those authorities shall be the competent authority on the first day of trading following that four-week period. (d) Member States shall ensure that the decisions referred to in (c) are made public. (e) In the cases referred to in (b) and (c), matters relating to the consideration offered in the case of a bid, in particular the price, and matters relating to the bid procedure, in particular the information on the offeror’s decision to make a bid, the contents of the offer document and the disclosure of the bid, shall be dealt with in accordance with the rules of the Member State of the competent authority. In matters relating to the information to be provided to the employees of the offeree company and in matters relating to company law, in particular the percentage of voting rights which confers control and any derogation from the obligation to launch a bid, as well as the conditions under which the board of the offeree company may undertake any action which might result in the frustration of the bid, the applicable rules and the competent authority shall be those of the Member State in which the offeree company has its registered office. 3. Member States shall ensure that all persons employed or formerly employed by their supervisory authorities are bound by professional secrecy. No information covered by professional secrecy may be divulged to any person or authority except under provisions laid down by law. 4. The supervisory authorities of the Member States for the purposes of this Directive and other authorities supervising capital markets, in particular in accordance with Directive 93/22/EEC, Directive 2001/34/EC, Directive 2003/6/EC and Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading shall cooperate and supply each other with information wherever necessary for the application of the rules drawn up in accordance with this Directive and in particular in cases covered by paragraph 2(b), (c) and (e). Information thus exchanged shall be covered by the obligation of professional secrecy to which persons employed or formerly employed by the supervisory authorities receiving the information are subject. Cooperation shall include the ability to serve the legal documents necessary to enforce measures taken by the competent authorities in connection with bids, as well as such other assistance as may reasonably be requested by the supervisory authorities concerned for the purpose of investigating any actual or alleged breaches of the rules made or introduced pursuant to this Directive. 5. The supervisory authorities shall be vested with all the powers necessary for the purpose of carrying out their duties, including that of ensuring that the parties to a bid comply with the rules made or introduced pursuant to this Directive. Provided that the general principles laid down in Article 3(1) are respected, Member States may provide in the rules that they make or introduce pursuant to this Directive for derogations from those rules:

Silja Maul and Larissa Furtwengler

989

Art 4 Supervisory authority and applicable law (i)

by including such derogations in their national rules, in order to take account of circumstances determined at national level and/or (ii) by granting their supervisory authorities, where they are competent, powers to waive such national rules, to take account of the circumstances referred to in (i) or in other specific circumstances, in which case a reasoned decision must be required. 6. This Directive shall not affect the power of the Member States to designate judicial or other authorities responsible for dealing with disputes and for deciding on irregularities committed in the course of bids or the power of Member States to regulate whether and under which circumstances parties to a bid are entitled to bring administrative or judicial proceedings. In particular, this Directive shall not affect the power which courts may have in a Member State to decline to hear legal proceedings and to decide whether or not such proceedings affect the outcome of a bid. This Directive shall not affect the power of the Member States to determine the legal position concerning the liability of supervisory authorities or concerning litigation between the parties to a bid.

I. General Features 1. Overview 1 2

Bids are overseen by the supervisory authority established in Art 4 (1). Art 4 (2) sub paragraph 3 then goes on to regulate situations of norm conflict, while according to paragraph 4 holds that Member States shall ensure that their employees are bound by professional secrecy. Paragraph 5 lays down possible exceptions that may be made by the supervisory authorities or national legislation, as well as the necessary competences of the supervisory authorities to fulfill its obligations. Paragraph 6 regulates the responsibilities regarding judicial proceedings.

2. Background 3

Art 4 of the Directive is central to the universality of the Directive, since the seat of the offeror company and the relevant securities can be located in different Member States. Due to its importance Art 4 itself is the outcome of long and in parts difficult negotiations. Some of the Member States – including e.g. the United Kingdom – proposed to tie the applicable law to the offeree company. The other Member States supported the variation that is now codified in Art 4, in which the applicable law follows the international jurisdiction of the supervisory authority. This means that it depends on whether the questions posed are of a capital market nature or rather a corporate nature: for the latter the seat of the company would determine the applicable law, for the former the marketplace. Art 4 of the Directive was favored by the majority of the Member States, since it avoids situations in which a national authority has to apply foreign law.1 Art 4, in accordance with Art 12, does not necessarily oblige Member States to create a public authority. Rather it is possible and was crafted especially in this way, to account

1 Silja Maul and Danièle Muffat-Jeandet, ‘Die EU-Übernacherichtlinie – Inhalt und Umsetzung in nationales Recht (Teil I)’, Die Aktiengesellschaft 5 (2004), p. 227. 2 “[…] codes of practice and other arrangements”.

990

Silja Maul and Larissa Furtwengler

Art 4

Directive 2004/25/EC

for ‘private authorities’ like they exist in the United Kingdom and therefore include regulations like the London City Code on Takeovers and Mergers.3

3. Relation to other provisions Art 4 is closely related to the other procedural rules, namely Art 6, 7 and 8, as well as 4 the rule relating to the bid, insofar as Art 4 lays the ground rules for the authorities that are tasked with overseeing the implementation of the Directive in the closest way.

II. Supervisory Authorities – Designation by the Member States (Art 4 (1)) According to Art 4 (1) Member States shall designate the authority or authorities 5 competent to supervise bids and the related processes. This can either be a public authority or any association or private body recognized by national law or by public authorities expressly empowered for that purpose by national law. One example for such a private body are takeover panels as regulated in the London City Code on takeovers and mergers.

III. Competency of the Supervisory Authority and Applicable Law (Art 4 (2)) Art 4 of the Directive is twofold in the sense that it regulates not only which super- 6 visory authority is competent, but also which law is to be applied by the competent authority to the case in question.

1. Competent supervisory authority As a general rule Art 4(2)(a) stipulates, that in cases in which the registered office 7 and place of trading (where the securities are admitted to trade) are located in the same Member State, then the supervisory authority of that Member State is competent.

3

Habersack/Verse, p. 464, mn. 16.

Silja Maul and Larissa Furtwengler

991

Art 4 Supervisory authority and applicable law 8

If the registered office of the offeree company and the place of trading of it’s securities lie in two different Member States, the competent authority is according to Art 4 (2)(b) the one of the Member State in which the securities are admitted to trading.

9

If the securities are admitted to trading in a number of Member States the supervisory authority of the Member State in which the securities were first admitted to trading is responsible according to Art 4 (2)(b) Var. 2.

10

In cases in which a timely distinction cannot be made due to the securities being admitted to trading on more than one market simultaneously, how to proceed depends first of all on the implementation period of the Directive: if the securities were admitted to trading on those markets after the implementation period it is up to the offeree company to decide on the competent authority (Art 4 (2)(c) sentence 1).

11

If on or by 20. May 2006 the securities were already admitted to trading on regulated markets, according to Art 4 (2) (c) sentence 2 the supervisory authorities of those 992

Silja Maul and Larissa Furtwengler

Art 4

Directive 2004/25/EC

Member States shall decide amongst them which one shall be responsible. An agreement of this kind had to be reached 4 weeks after 20. May 2006. If an agreement of this kind was not reached within the timeframe of Art 4 (2)(c) it is put to the offeree company to determine the competent authority. Either decision had to be made public.

2. The applicable law Naturally, in the case of Art 4 (2)(a) where the registered office of the offeree compa- 12 ny and the place of trading of its securities are in the same Member State, the law of that Member State is applied by the supervisory authority (which is also in that Member State). If the place of the registered office and the place of trading are diverging, the applica- 13 ble law is decided as follows according to Art 4 (2)(e): – According to Art 4 (2)(e) sentence 2, if matters relate to company or employment law, then the competency and applicable law remain with the supervisory authorities of the Member State, in which the registered office4 lies; – for the questions relating to the bid procedure itself or the fulfillment of consideration then the applicable law and the competent supervisory authority are of that Member State in which the securities are admitted, i.e. the place of trading, as is stated in Art 4 (2)(e) sentence 1.

IV. Secrecy (Art 4 (3)) Art 4 (3) stipulates that all persons employed or formerly employed by their super- 14 visory authorities are bound by professional secrecy. No information covered by professional secrecy may be divulged to any person or authority except under provisions laid down by law.

4 A crucial detail that has to be kept in mind is that the term “registered office” like it is used in the English version of the Directive is not used in other language versions. In the English version it is used to refer to the location fixed in the articles of association and has hence been understood to mean the equivalent in the other versions.; s. Habersack/Verse, p. 464, mn. 17.

Silja Maul and Larissa Furtwengler

993

Art 5 Protection of minority shareholders, the mandatory bid and the equitable price

V. Cooperation (Art 4 (4)) Paragraph 4 of the article urges supervisory authorities and other authorities tasked with supervising capital markets to cooperate. This is of special importance in cases of cross-border transactions. This applies in particular in cases where the registered office and the place of trading do not coincide. The authorities are then required to exchange the relevant information required by the Directive. Hence the Directive operates on the level of the supervisory authorities here and does not itself allow one supervisory authority to have access to a company in another country.5 The same goes e.g. for the case the Market Abuse Directive. 16 According to Art 4 (4) cooperation shall include the ability to serve legal documents necessary to enforce measures taken by the competent authorities in connection with bids – which would otherwise be hindered by the principle of sovereignty and the fact that a foreign authority does not have jurisdiction – as well as such other assistance as may reasonably be requested. The information collected then again falls under the purview of paragraph 3 and is therefore secret. 15

VI. Derogations (Art 4 (5)) 17

The fifth paragraph of Art 4 of the Directive was introduced under the Italian presidency. It limits the possibility for Member States to derogate from the Directive in two ways. They may include derogations in their national rules to take account of circumstances determined at national level and/or they may grant their supervisory authorities (where they are competent) the authority to waive such national rules to take account of such circumstances. The latter is limited by the requirement of a reasoned decision. In both cases of potential derogations, it is presupposed in the chapeau that the general principles of Art 3 of the Directive are respected.6

VII. Authorities Dealing with Disputes (Art 4 (6)) 18

Art 4 (6) states that the Directive shall not affect the power of Member States to designate judicial or other authorities responsible for dealing with disputes.

Article 5 Protection of minority shareholders, the mandatory bid and the equitable price 1. Where a natural or legal person, as a result of his/her own acquisition or the acquisition by persons acting in concert with him/her, holds securities of a company as referred to in Article 1(1) which, added to any existing holdings of those securities of his/hers and the holdings of those securities of persons acting in concert with him/her, directly or indirectly give him/her a specified percentage of voting rights in that company, giving him/her control of that company, Member States shall ensure that such a person is required to make a bid as a means of protecting the minority 5 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon (eds), Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 97. 6 See also Silja Maul and Danièle Muffat-Jeandet, ‘Die EU-Übernacherichtlinie – Inhalt und Umsetzung in nationales Recht (Teil I)’, Die Aktiengesellschaft 5 (2004), p. 229.

994

Silja Maul and Larissa Furtwengler

Art 5

Directive 2004/25/EC

shareholders of that company. Such a bid shall be addressed at the earliest opportunity to all the holders of those securities for all their holdings at the equitable price as defined in paragraph 4. 2. Where control has been acquired following a voluntary bid made in accordance with this Directive to all the holders of securities for all their holdings, the obligation laid down in paragraph 1 to launch a bid shall no longer apply. 3. The percentage of voting rights which confers control for the purposes of paragraph 1 and the method of its calculation shall be determined by the rules of the Member State in which the company has its registered office. 4. The highest price paid for the same securities by the offeror, or by persons acting in concert with him/her, over a period, to be determined by Member States, of not less than six months and not more than 12 before the bid referred to in paragraph 1 shall be regarded as the equitable price. If, after the bid has been made public and before the offer closes for acceptance, the offeror or any person acting in concert with him/her purchases securities at a price higher than the offer price, the offeror shall increase his/her offer so that it is not less than the highest price paid for the securities so acquired. Provided that the general principles laid down in Article 3(1) are respected, Member States may authorise their supervisory authorities to adjust the price referred to in the first subparagraph in circumstances and in accordance with criteria that are clearly determined. To that end, they may draw up a list of circumstances in which the highest price may be adjusted either upwards or downwards, for example where the highest price was set by agreement between the purchaser and a seller, where the market prices of the securities in question have been manipulated, where market prices in general or certain market prices in particular have been affected by exceptional occurrences, or in order to enable a firm in difficulty to be rescued. They may also determine the criteria to be applied in such cases, for example the average market value over a particular period, the break-up value of the company or other objective valuation criteria generally used in financial analysis. Any decision by a supervisory authority to adjust the equitable price shall be substantiated and made public. 5. By way of consideration the offeror may offer securities, cash or a combination of both. However, where the consideration offered by the offeror does not consist of liquid securities admitted to trading on a regulated market, it shall include a cash alternative. In any event, the offeror shall offer a cash consideration at least as an alternative where he/she or persons acting in concert with him/her, over a period beginning at the same time as the period determined by the Member State in accordance with paragraph 4 and ending when the offer closes for acceptance, has purchased for cash securities carrying 5 % or more of the voting rights in the offeree company. Member States may provide that a cash consideration must be offered, at least as an alternative, in all cases. 6. In addition to the protection provided for in paragraph 1, Member States may provide for further instruments intended to protect the interests of the holders of securities in so far as those instruments do not hinder the normal course of a bid.

Silja Maul and Larissa Furtwengler

995

Art 5 Protection of minority shareholders, the mandatory bid and the equitable price

I. General Features 1. Overview 1

Art 5 (1) holds one of the central principles of the Directive: the obligation to submit a bid to all holders of securities upon reaching majority control. Paragraph 2 stipulates an exception of the obligation to make a mandatory bid. Paragraph 3 deals with the percentage of voting rights and the method of its calculation and refers insofar back to national law. Paragraph 4 regulates the payment of an equitable price to the holders of those securities. Paragraph 5 deals with the consideration to be paid and paragraph 6 allows Member States to provide for further instruments to protect the holders of securities.

2. Background 2

The regulations of Art 5 are aimed at the protection of minority shareholders and their equal treatment and in doing so also further the uniformity of the European capital market. While the mandatory bid itself was already included in the common viewpoint, the requirement of an equitable price in Art 5 (1) and (4) was first mentioned in the proposal of the Commission for the Directive in 20021 upon the insistence of the European Parliament.

3. Relation to other provisions 3

Art 5 is by its nature one of the core regulations leading to the obligation for a mandatory bid. Many regulations of the Directive are therefore subordinated to Art 5.

II. The Mandatory Bid 1. Triggers for a mandatory bid (Art 5 (1)) If one shareholder, especially one with differing and at times diverging economic interests, holds a percentage of shares that gives him/her control over the company, this might influence the company and with it in particular minority shareholders negatively. 5 Art 5 (1) determines that, an obligation for a mandatory bid is triggered in cases in which a natural or legal person holds the percentage voting rights that gives him/her directly or indirectly control of the company within the scope of the Directive defined in Art 1 and Art 2 (for the definition of ‘control’ see under → Art. 2 mn. 5). If the shares of the offeree company are hence traded on a regulated market in a Member State and are subject to the jurisdiction of a Member State, a bid must be addressed to all the holders of securities at a equitable price. 4

1

996

(EU) 534/2002.

Silja Maul and Larissa Furtwengler

Art 5

Directive 2004/25/EC

In the case of a ‘person acting in concert’ the question arises, which person has to 6 make the mandatory bid. Art 5 (1) sentence 1 only stipulates that Member States shall ensure that ‘such a person’ is required to make a bid. Therefore, if the acting in concert leads to one person in a position to decide over the exercise of the voting rights, this person has to make the bid. If the persons acting in concert can only exercise the voting rights together, they shall make a bid together.

2. Exception in cases of a voluntary bid (Art 5 (2)) Art 5 (1) does according to paragraph 2 not apply, if the control was gained following 7 a voluntary bid, made in accordance with the Directive to all the holders of securities for all their holdings. A mandatory bid would be redundant, since a bid according to its standards has already been made in these cases.

3. Determination of control and method of calculation (Art 5 (3)) Art 5 (3) stipulates that the law of the Member State in which the offeree company 8 has its registered office determines the percentage of voting rights necessary to confer control for the purposes of Art 5 (1). Regarding control According to Art 2 (1) (d) ‘persons acting in concert’ shall mean natural or legal persons who cooperate with the offeror or the offeree company on the basis of an agreement, either express of tacit, either oral or written, aimed either at acquiring control of the offeree company or at frustrating the successful outcome of a bid (with respect to plans to precise this definition see under Introduction → mn. 9). 9 Protection of minority shareholders Furthermore, Art 5 (3) stipulates that the law of the Member State in which the offeree company has its registered office determines the method for calculating the equitable price in accordance with Art 5 (4).

4. Equitable price (Art 5 (4)) The price offered for the shares has to be ‘equitable’. ‘Equitable’ according to Art 5 (4) 10 is the highest price paid for the same securities by the offeror, or by persons acting in concert with him/her over a period of not less than six months and not more than 12 Silja Maul and Larissa Furtwengler

997

Art 5 Protection of minority shareholders, the mandatory bid and the equitable price months before the bid. It is up to the Member States to determine the exact timeframe. For offers during the bid procedure: if the offeror acquires shares for a higher price between the publication of the bid and the closing of the bid for acceptance, he/she has to raise the bid to that higher price. 11 Art 5 (4) sub paragraph 2 allows for very limited exceptions to this general rule in cases in which its application would lead to an unreasonable result.2 According to Art 5 (4) sub paragraph 2 Member States are vested with the power to set up a list of circumstances for their supervisory authorities in which they name the circumstances under which they may adjust the price. The Directive gives the following examples: – if the purchaser and seller have jointly agreed on a highest price – if the market prices of the respective securities have been manipulated – if the market prices have been influenced in general or in particular by extraordinary events (e.g. following the collapse of the stock exchange or if considerable losses in the accounts have come to light) – to be able to rescue a company which has run into difficulties. 12 In these cases, the Member States may also determine criteria for calculating the price like the average market value within a certain period, or the value of the liquidation of the company. According to Art 4 (4) of the Directive the supervisory authority must make its decision to adjust the equitable price public and substantiate it. 13 According to a judgement of the EFTA court of 20103, legislation that resorts to declaring a higher “market price” without specifying its methods of calculation, is not in accordance with Art 5 (4). The court finds: ‘The second subparagraph of Article 5(4) of Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids precludes national legislation which provides that the price to be offered in a mandatory bid must be adjusted to be at least as high as the ‘market price’ in situations where it is clear that the ‘market price’ is higher than the price calculated according to the main rule prescribed in accordance with the first subparagraph of Article 5(4), without further clarification of the term ‘market price’. In particular, further clarification is needed of the time interval relevant for determining the ‘market price’, whether or not the ‘market price’ must be calculated on the basis of a volume-weighted average, and whether actual trades are necessary or standing buy or sell orders suffice in order to establish a ‘market price’.4

14

It was however questioned, if the Norwegian market price regulations even falls under the purview of Art 5 (4) or if it’s a matter of Art 3 (2)(b). 5

5. Consideration (Art 5 (5)) 15

The Directive does not only regulate at which level the consideration should be, but also what form a consideration should take. It can be made up of either securities, cash or a combination of both. However, it is made clear in Art 5 (5) that where the consideration is not made of liquid securities admitted to trading on a regulated market, it shall include a cash alternative. It is nonetheless left to the Member States to require the offeror in all cases to offer a cash alternative. This was supported in particular by the United Kingdom.6 It is seen to offer a greater protection to the holders of securities by giving them choices when making their decisions. 2 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon (eds), Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 129. 3 EFTA Court, E-1/10. 4 EFTA Court, E-1/10, p. 13. 5 Habersack/Verse, p. 470, mn. 25. 6 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon (eds), Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 126.

998

Silja Maul and Larissa Furtwengler

Art 6

Directive 2004/25/EC

In two cases it is mandatory to offer cash according to the Directive

16

1. if the consideration does not consist of liquid securities admitted to trading on a regulated market. The Directive itself does not define the threshold between liquid and non-liquid, this will be a matter of national law; 2. in cases in which over a period of time, beginning at the same time as the period for previous acquisitions and ending when the offer closes, the offeror has purchased for cash securities 5 % or more of the voting rights of the company. The holders of securities who sell their shares later shall be given equal treatment.

6. Further protection (Art 5 (6)) Art 5 (6) leaves it to the Member States to create more protection for minority 17 shareholders, since it allows further measures that do not interfere with the normal course of the bid.

Article 6 Information concerning bids 1. Member States shall ensure that a decision to make a bid is made public without delay and that the supervisory authority is informed of the bid. They may require that the supervisory authority must be informed before such a decision is made public. As soon as the bid has been made public, the boards of the offeree company and of the offeror shall inform the representatives of their respective employees or, where there are no such representatives, the employees themselves. 2. Member States shall ensure that an offeror is required to draw up and make public in good time an offer document containing the information necessary to enable the holders of the offeree company’s securities to reach a properly informed decision on the bid. Before the offer document is made public, the offeror shall communicate it to the supervisory authority. When it is made public, the boards of the offeree company and of the offeror shall communicate it to the representatives of their respective employees or, where there are no such representatives, to the employees themselves. Where the offer document referred to in the first subparagraph is subject to the prior approval of the supervisory authority and has been approved, it shall be recognised, subject to any translation required, in any other Member State on the market of which the offeree company’s securities are admitted to trading, without its being necessary to obtain the approval of the supervisory authorities of that Member State. Those authorities may require the inclusion of additional information in the offer document only if such information is specific to the market of a Member State or Member States on which the offeree company’s securities are admitted to trading and relates to the formalities to be complied with to accept the bid and to receive the consideration due at the close of the bid as well as to the tax arrangements to which the consideration offered to the holders of the securities will be subject. 3. The offer document referred to in paragraph 2 shall state at least: (a) the terms of the bid; (b) the identity of the offeror and, where the offeror is a company, the type, name and registered office of that company; (c) the securities or, where appropriate, the class or classes of securities for which the bid is made; Silja Maul and Larissa Furtwengler

999

Art 6 Information concerning bids (d) the consideration offered for each security or class of securities and, in the case of a mandatory bid, the method employed in determining it, with particulars of the way in which that consideration is to be paid; (e) the compensation offered for the rights which might be removed as a result of the breakthrough rule laid down in Article 11(4), with particulars of the way in which that compensation is to be paid and the method employed in determining it; (f) the maximum and minimum percentages or quantities of securities which the offeror undertakes to acquire; (g) details of any existing holdings of the offeror, and of persons acting in concert with him/her, in the offeree company; (h) all the conditions to which the bid is subject; (i) the offeror’s intentions with regard to the future business of the offeree company and, in so far as it is affected by the bid, the offeror company and with regard to the safeguarding of the jobs of their employees and management, including any material change in the conditions of employment, and in particular the offeror’s strategic plans for the two companies and the likely repercussions on employment and the locations of the companies' places of business; (j) the time allowed for acceptance of the bid; (k) where the consideration offered by the offeror includes securities of any kind, information concerning those securities; (l) information concerning the financing for the bid; (m) the identity of persons acting in concert with the offeror or with the offeree company and, in the case of companies, their types, names, registered offices and relationships with the offeror and, where possible, with the offeree company; (n) the national law which will govern contracts concluded between the offeror and the holders of the offeree company’s securities as a result of the bid and the competent courts. 4. The Commission shall adopt rules for the application of paragraph 3 in accordance with the procedure referred to in Article 18(2). 5. Member States shall ensure that the parties to a bid are required to provide the supervisory authorities of their Member State at any time on request with all the information in their possession concerning the bid that is necessary for the supervisory authority to discharge its functions.

I. General Features 1. Overview 1

Art 6 standardizes the regulations of the information concerning bids. Paragraph 1 addresses the publication of the bid, paragraph 2 obliges the Member States to assure that the offeror puts together an offer document that is in accordance with the Directive and is publicized to the relevant persons. Paragraph 3 lays out detailed criteria for the offer document which are all according to paragraph 4 subject to comitology. Paragraph 5 is concerned with the transfer of information to the relevant authority.

2. Background 2

Art 6 serves to assure a unitary European framework for the contents of an offer document and its publication. These regulations ensure a proper procedure and unified 1000

Silja Maul and Larissa Furtwengler

Art 6

Directive 2004/25/EC

information for shareholders throughout Europe. Furthermore, it improves the position of the offeror since an offer that was once approved by a supervisory authority has to be accepted in other Member States as well.

3. Relation to other provisions Art 6 is closely related to Art 7 and Art 8 of the Directive. Art 6 obliges the offeror to 3 include certain information in the offer document, Art 7 regulates the time allowed for acceptance and Art 8 details disclosure. These provisions ensure that proper procedure is followed for bids throughout Europe.

II. Offer-Publication and content (Art 6 (1)) Art 6 (1) places the obligation on Member States to ensure that the decision to make a 4 bid is made public and the supervisory authority is informed. With the timely disclosure of the bid the possibility for insider trading is minimized.1 Furthermore, Art 6 (2) then stipulates that the governing or managing body shall 5 inform the labor representative of the company or in want of such the employees themselves.

III. Offer Document (Art 6 (2)) Art 6 (2) lays down that:

6

‘Member States shall ensure that an offeror is required to draw up and make public in good time an offer document containing the information necessary to enable the holders of the offeree company’s securities to reach a properly informed decision on the bid.’

The offer document has to be communicated to the supervisory authority before 7 being publicly disclosed. Art 6 (2) sub paragraph 4 addresses the question, if an offer document that was 8 approved in one Member State still needs the approval of another Member State. The directive decided against this: If the offer document was communicated to the supervisory authority and was approved, it is – pending potential translation that might be requested by the Member State – to be accepted by any other Member States. The procedure is therefore facilitated immensely, especially in cases in which the securities are traded on stock-exchanges of different Member States.2 The competent supervisory authority may only request additional information to 9 be included in the offer document if such information is specific to the market of a Member State or Member States on which the offeree company’s securities are admitted to trading and relates to the formalities to be complied with to accept the bid and to receive the consideration due at the close of the bid, as well as to the tax arrangements to which the consideration offered to the holders of the securities will be subject.

1 See also Silja Maul and Danièle Muffat-Jeandet, ‘Die EU-Übernacherichtlinie – Inhalt und Umsetzung in nationales Recht (Teil I)’, Die Aktiengesellschaft, /5 (2004), p. 232. 2 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon (eds), Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 143.

Silja Maul and Larissa Furtwengler

1001

Art 6 Information concerning bids

IV. Contents of the Offer Document (Art 6 (3)) 10

According to Art 6 (3) the offer document referred to in paragraph 2 shall state at least: (a) the terms of the bid; (b) the identity of the offeror and, where the offeror is a company, the type, name and registered office of that company; (c) the securities or, where appropriate, the class or classes of securities for which the bid is made; (d) the consideration offered for each security or class of securities and, in the case of a mandatory bid, the method employed in determining it, with particulars of the way in which that consideration is to be paid; (e) the compensation offered for the rights which might be removed as a result of the breakthrough rule laid down in Article 11(4), with particulars of the way in which that compensation is to be paid and the method employed in determining it; (f) the maximum and minimum percentages or quantities of securities which the offeror undertakes to acquire; (g) details of any existing holdings of the offeror, and of persons acting in concert with him/her, in the offeree company; (h) all the conditions to which the bid is subject; (i) the offeror’s intentions with regard to the future business of the offeree company and, in so far as it is affected by the bid, the offeror company and with regard to the safeguarding of the jobs of their employees and management, including any material change in the conditions of employment, and in particular the offeror’s strategic plans for the two companies and the likely repercussions on employment and the locations of the companies’ places of business; (j) the time allowed for acceptance of the bid; (k) where the consideration offered by the offeror includes securities of any kind, information concerning those securities; (l) information concerning the financing for the bid; (m) the identity of persons acting in concert with the offeror or with the offeree company and, in the case of companies, their types, names, registered offices and relationships with the offeror and, where possible, with the offeree company; (n) the national law which will govern contracts concluded between the offeror and the holders of the offeree company’s securities as a result of the bid and the competent courts.

V. Comitology (Art 6 (4)) 11

Art 6 (4) was amended by the Regulation (EC) 219/2009 and prescribes, that the Commission may adopt rules modifying the list in paragraph 3 and that measures, designed to amend nonessential elements of the Directive, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Art 18 (2).

1002

Silja Maul and Larissa Furtwengler

Art 7

Directive 2004/25/EC

VI. Information for the Supervisory Authority (Art 6 (5)) Art 6 (5) obliges the Member States to assure that the parties to a bid provide the 12 competent supervisory authority – that is to be determined according to Art 4 – with all the relevant information regarding the bid at all times so it can fulfill its duties.

Article 7 Time allowed for acceptance 1. Member States shall provide that the time allowed for the acceptance of a bid may not be less than two weeks nor more than 10 weeks from the date of publication of the offer document. Provided that the general principle laid down in Article 3(1) (f) is respected, Member States may provide that the period of 10 weeks may be extended on condition that the offeror gives at least two weeks' notice of his/her intention of closing the bid. 2. Member States may provide for rules changing the period referred to in paragraph 1 in specific cases. A Member State may authorise a supervisory authority to grant a derogation from the period referred to in paragraph 1 in order to allow the offeree company to call a general meeting of shareholders to consider the bid.

I. General Features 1. Overview Art 7 (1) contains regulations regarding the time allowed to pass for acceptance of 1 the bid. Art 7 (2) then proceeds to allow for the Member States to deviate from the ascribed time in paragraph 1 in specific cases, most notably to call a general meeting of shareholders to consider the bid.

2. Background Art 7 aims at unifying the regulations regarding the time limits on the bids through- 2 out Europe.

3. Relation to other provisions The regulation on the time allowed for acceptance is closely related to Arts 6 and 8. 3 Together they ensure the adherence to a uniform procedure within the Union.

II. Time Allowed for Acceptance Art 7 (1) contains the framework regulation according to which Member States have 4 to set a time within which it is allowed to accept the offer: it may not be less than two weeks nor more than 10 weeks from the date of publication. Art 7 (2) provides for exceptions to this rule.

Silja Maul and Larissa Furtwengler

1003

Art 8 Disclosure

III. Exceptions (Art 7 (2)) The Member States may deviate from the framework set in Art 7 (1) in specific cases. Cases of competing offers for example, if the time of acceptance of the first offer runs out before the time of acceptance of the second or the offeree company calls a general meeting of shareholders in connection with the bid. 6 They may also authorize the supervisory authority to grant a derogation in order to allow the offeree company to call a general meeting of shareholders to consider the bid. 5

Article 8 Disclosure 1. Member States shall ensure that a bid is made public in such a way as to ensure market transparency and integrity for the securities of the offeree company, of the offeror or of any other company affected by the bid, in particular in order to prevent the publication or dissemination of false or misleading information. 2. Member States shall provide for the disclosure of all information and documents required by Article 6 in such a manner as to ensure that they are both readily and promptly available to the holders of securities at least in those Member States on the regulated markets of which the offeree company’s securities are admitted to trading and to the representatives of the employees of the offeree company and the offeror or, where there are no such representatives, to the employees themselves.

I. General Features 1. Overview 1

Art 8 (1) dictates how and to whom the offer document has to be disclosed, Art 8 (2) addresses the manner in which the disclosure has to be executed.

2. Background 2

Art 8 makes sure, that the same standards for contents, form and disclosure of the offer document are applied throughout the Member States and that the proper procedure is followed. Furthermore, it facilitates operating Europe-wide for offerors, since an offer document that was approved by one supervisory authority has to be accepted in other Member States.

3. Relation to other provisions 3

The regulation on the time allowed for acceptance is closely related o Art 6 and Art 7. Together they ensure the adherence to a uniform procedure within the Union.

II. Making Public of the Bid (Art 8 (1)) 4

According to Art 8 (1) Member States shall ensure that the bid is made public in such a way as to ensure market transparency and integrity for the securities of the offeree company, of the offeror and of any other company affected by the bid, in particular in order to prevent the publication or dissemination of false information.

1004

Silja Maul and Larissa Furtwengler

Art 9

Directive 2004/25/EC

III. Disclosure of all Information Required by Art 6, Art 8 (2) Paragraph 2 then proceeds to oblige Member States to provide for the disclosure of 5 all information and documents required by Art 6 in such a manner, as to ensure that they are both readily and promptly available to the holders of securities at least in those Member States on the regulated markets of which the offeree company’s securities are admitted to trading and the the representatives of the employees of the offeree company and the offeror or, where there are no such representatives, to the employees themselves. How the disclosure has to be executed in detail is not regulated by the directive and is 6 thus to be determined by the Member States. They are to be provided on the internet, in authorized journals of mandatory stock exchange announcements or any other suitable place.

Article 9 Obligations of the board of the offeree company 1. Member States shall ensure that the rules laid down in paragraphs 2 to 5 are complied with. 2. During the period referred to in the second subparagraph, the board of the offeree company shall obtain the prior authorisation of the general meeting of shareholders given for this purpose before taking any action, other than seeking alternative bids, which may result in the frustration of the bid and in particular before issuing any shares which may result in a lasting impediment to the offeror’s acquiring control of the offeree company. Such authorisation shall be mandatory at least from the time the board of the offeree company receives the information referred to in the first sentence of Article 6(1) concerning the bid and until the result of the bid is made public or the bid lapses. Member States may require that such authorisation be obtained at an earlier stage, for example as soon as the board of the offeree company becomes aware that the bid is imminent. 3. As regards decisions taken before the beginning of the period referred to in the second subparagraph of paragraph 2 and not yet partly or fully implemented, the general meeting of shareholders shall approve or confirm any decision which does not form part of the normal course of the company’s business and the implementation of which may result in the frustration of the bid. 4. For the purpose of obtaining the prior authorisation, approval or confirmation of the holders of securities referred to in paragraphs 2 and 3, Member States may adopt rules allowing a general meeting of shareholders to be called at short notice, provided that the meeting does not take place within two weeks of notification’s being given. 5. The board of the offeree company shall draw up and make public a document setting out its opinion of the bid and the reasons on which it is based, including its views on the effects of implementation of the bid on all the company’s interests and specifically employment, and on the offeror’s strategic plans for the offeree company and their likely repercussions on employment and the locations of the company’s places of business as set out in the offer document in accordance with Article 6(3)(i). The board of the offeree company shall at the same time communicate that opinion to the representatives of its employees or, where there are no such representatives, to the employees themselves. Where the board of the offeree company receives in good

Silja Maul and Larissa Furtwengler

1005

Art 9 Obligations of the board of the offeree company time a separate opinion from the representatives of its employees on the effects of the bid on employment, that opinion shall be appended to the document. 6. For the purposes of paragraph 2, where a company has a two-tier board structure ‘board’ shall mean both the management board and the supervisory board.

I. General Features 1. Overview 1

The directive assumes a duty of neutrality on the part of the board of the offeree company, that prohibits it from employing defensive measures without the prior authorization of the general meeting of the shareholders. If this is upheld in light of Art 9 being part of the options model and the reciprocity rule of Art 12, will depend on whether or nor not Member States reserve the right not to apply Art 9 (2) and Art 9 (3) (Art 12 (1), compare under → mn. 4) or, in a second step, if the companies decide to apply them (opt-in by the company). Furthermore, if so foreseen by the Member States, Art 12 (3) will be applied, according to which the offeree company only has a duty to neutrality if the offeror company does as well. Art 9 (2) regulates the scope and timely frame of the application of the duty of neutrality. Paragraph 3 addresses cases in which the decisions have not yet been implemented as far as it pertains to decisions that do not form part of the normal course of the company’s business and the implementation of which may frustrate the bid. Paragraph 4 is concerned with the deadline to call a general meeting of shareholders and paragraph 5 deals with the statement of the board. Paragraph 6 then closes by defining the meaning of ‘board’ in paragraph 2.

2. Background 2

The principle of neutrality is a principle that was already existent in numerous Member States before the directive was implemented, like France, Italy, Spain, Ireland, Sweden, as well as the United Kingdom that was still part of the European Union at the time. For them – in particular the United Kingdom – the introduction of the duty of neutrality was an essential condition.1 The principle serves the protection of the minority shareholders as well as strengthening a shareholder democracy. However, this is slightly mitigated by the incorporation of Art 9 in the options model of Art 12 (→ Art. 12 mn. 4 et seqq.).

3. Relation to other provisions 3

This regulation is closely connected to Art 12, since Art 9 prescribes a general duty of neutrality all the while Art 12 allows for Member States not to require to adhere to the duty of neutrality or – as far the Member States have opted out – allows the companies to apply the duty of neutrality regardless (opt-in, Art 12 → mn. 5).

II. Duty of Neutrality with Regards to the Obligations of the Board of the Offeree Company (Art 9 (1)) 4

The first paragraph of Art 9 obliges the Member States to ensure that paragraphs 2 to 5 are adhered to. 1

Silja Maul, ‘Die Übernahmerichtlinie – ausgewählte Fragen’, NZG 2005, 151.

1006

Silja Maul and Larissa Furtwengler

Art 9

Directive 2004/25/EC

III. Duty of Neutrality – Subject Matter (Art 9 (2)) If the duty of neutrality is applied the board can only take measures that might frus- 5 trate the bid if it was authorized by the general meeting of shareholders. This does not apply to cases in which the board is looking for a competing bid, this can be done without prior authorization by the general meeting of shareholders (Art 9 (2) subparagraph 1). With regards to the timing, according to Art 9 (2) subparagraph 2 a resolution of the general meeting of shareholders is required for defensive measures as soon as the board received the information of the publication of the bid according to Art 6 (1). The Member States may nonetheless require the authorization earlier, for example as soon as the board of the offeree company becomes aware that the bid is imminent. For the possibility of a last-minute calling of a general shareholders meeting see below → mn. 8. With regards to the subject matter every action that might frustrate the bid falls 6 under Art 9 (2), except for the aforementioned search for a competing bid. If the duty of neutrality applies no anticipatory resolution regarding defensive measures might be taken, nor may substantial parts of the companies be sold.2 The increase of capital from authorized capital is also prohibited. For all those measures an authorization of the general meeting of shareholders would be required, which in turn may only be issued after the publication of the bid.

IV. Time (Art 9 (3)) Art 9 (3) extends the duty of neutrality to decisions before the publication of the 7 offer documents in Art 6, that have not or only in part been implemented, if they do not form part of the normal course of the company’s business and the implementation of which may result in the frustration of the bid. This could be for example already initiated increases in capital or the conditional contracts to transfer substantial parts of the company.

V. Calling of a General Meeting (Art 9 (4)) According to paragraph 4 Member States may foresee provisions by which a general 8 meeting of shareholders can be called with short notice, provided that the meeting does not take place within two weeks of notification’s being given.

VI. Statement of the Board (Art 9 (5)) The board of the offeree company shall draw up and make public a document setting 9 out its opinion of the bid and the reasons on which it is based, including its views on the effects of implementation of the bid on all the company’s interests and specifically employment, and on the offeror’s strategic plans for the offeree company and their likely repercussions on employment and the locations of the company’s places of business as set out in the offer document in accordance with Article 6(3)(i). The board of the offeree company shall at the same time communicate that opinion to the representatives of its employees or, where there are no such representatives, to the employees themselves. 2 See also Silja Maul and Danièle Muffat-Jeandet, ‘Die EU-Übernacherichtlinie - Inhalt und Umsetzung in nationales Recht (Teil II)’, Die Aktiengesellschaft 6 (2004), p. 311.

Silja Maul and Larissa Furtwengler

1007

Art 10 Information on companies as referred to in Article 1(1) Where the board of the offeree company receives in good time a separate opinion from the representatives of its employees on the effects of the bid on employment, that opinion shall be appended to the document.

VII. Ratio Personae (Art 9 (6)) 10

The ratio personae of Art 9 is to include in a dualistic system the managing board as well as the supervisory board, as is defined down in paragraph 6.

Article 10 Information on companies as referred to in Article 1(1) 1. Member States shall ensure that companies as referred to in Article 1(1) publish detailed information on the following: (a) the structure of their capital, including securities which are not admitted to trading on a regulated market in a Member State, where appropriate with an indication of the different classes of shares and, for each class of shares, the rights and obligations attaching to it and the percentage of total share capital that it represents; (b) any restrictions on the transfer of securities, such as limitations on the holding of securities or the need to obtain the approval of the company or other holders of securities, without prejudice to Article 46 of Directive 2001/34/EC; (c) significant direct and indirect shareholdings (including indirect shareholdings through pyramid structures and cross-shareholdings) within the meaning of Article 85 of Directive 2001/34/EC; (d) the holders of any securities with special control rights and a description of those rights; (e) the system of control of any employee share scheme where the control rights are not exercised directly by the employees; (f) any restrictions on voting rights, such as limitations of the voting rights of holders of a given percentage or number of votes, deadlines for exercising voting rights, or systems whereby, with the company’s cooperation, the financial rights attaching to securities are separated from the holding of securities; (g) any agreements between shareholders which are known to the company and may result in restrictions on the transfer of securities and/or voting rights within the meaning of Directive 2001/34/EC; (h) the rules governing the appointment and replacement of board members and the amendment of the articles of association; (i) the powers of board members, and in particular the power to issue or buy back shares; (j) any significant agreements to which the company is a party and which take effect, alter or terminate upon a change of control of the company following a takeover bid, and the effects thereof, except where their nature is such that their disclosure would be seriously prejudicial to the company; this exception shall not apply where the company is specifically obliged to disclose such information on the basis of other legal requirements;

1008

Silja Maul and Larissa Furtwengler

Art 10

Directive 2004/25/EC

(k) any agreements between the company and its board members or employees providing for compensation if they resign or are made redundant without valid reason or if their employment ceases because of a takeover bid. 2. The information referred to in paragraph 1 shall be published in the company’s annual report as provided for in Article 46 of Directive 78/660/EEC (13) and Article 36 of Directive 83/349/EEC (14). 3. Member States shall ensure, in the case of companies the securities of which are admitted to trading on a regulated market in a Member State, that the board presents an explanatory report to the annual general meeting of shareholders on the matters referred to in paragraph 1.

I. General Features 1. Overview Art 10 requires companies that fall under the scope Art 1 (1) of the directive to 1 publish a wide range of detailed information in regards to their capital and control structures and defensive measures. They are to be published yearly in in the company’s annual report as provided for in Article 46 of Directive 78/660/EEC and Article 36 of Directive 83/349/EEC (Art 10 (2)).

2. Background The provision aims at furthering transparency for a potential offeror by allowing him 2 or her to survey the control and capital structures as well as the defensive measures.

3. Relation to other provisions Art 10 is not connected to any other provisions of the directive, other than Art 1 3 (1) defining the scope of application. It is however related to Directive 78/660/EEC and Directive 83/349/EEC.

II. Information to be Disclosed by the Companies The following information is to be disclosed by the company

4

(a) the structure of their capital, including securities which are not admitted to trading on a regulated market in a Member State, where appropriate with an indication of the different classes of shares and, for each class of shares, the rights and obligations attaching to it and the percentage of total share capital that it represents; (b) any restrictions on the transfer of securities, such as limitations on the holding of securities or the need to obtain the approval of the company or other holders of securities, without prejudice to Article 46 of Directive 2001/34/EC; (c) significant direct and indirect shareholdings (including indirect shareholdings through pyramid structures and cross-shareholdings) within the meaning of Article 85 of Directive 2001/34/EC; (d) the holders of any securities with special control rights and a description of those rights; (e) the system of control of any employee share scheme where the control rights are not exercised directly by the employees;

Silja Maul and Larissa Furtwengler

1009

Art 11 Breakthrough (f) any restrictions on voting rights, such as limitations of the voting rights of holders of a given percentage or number of votes, deadlines for exercising voting rights, or systems whereby, with the company’s cooperation, the financial rights attaching to securities are separated from the holding of securities; (g) any agreements between shareholders which are known to the company and may result in restrictions on the transfer of securities and/or voting rights within the meaning of Directive 2001/34/EC; (h) the rules governing the appointment and replacement of board members and the amendment of the articles of association; (i) the powers of board members, and in particular the power to issue or buy back shares; (j) any significant agreements to which the company is a party and which take effect, alter or terminate upon a change of control of the company following a takeover bid, and the effects thereof, except where their nature is such that their disclosure would be seriously prejudicial to the company; this exception shall not apply where the company is specifically obliged to disclose such information on the basis of other legal requirements; (k) any agreements between the company and its board members or employees providing for compensation if they resign or are made redundant without valid reason or if their employment ceases because of a takeover bid.

III. Disclosure of the Management Report (Art 10 (2)) 5

The aforementioned information has to be published in the company’s annual report as provided for in Article 46 of Directive 78/660/EEC (1) and Article 36 of Directive 83/349/EEC (2). Ultimately these obligations are to be examined by an auditor, who does not need to check for comprehensiveness.1

IV. Report of the Board 6

According to Art 10 (3) the board is obliged to present an explanatory report to the annual general meeting of shareholders on the matters referred to in paragraph 1. The shareholders shall be informed on the existing structures and defensive measures to be able to properly assess them.

Article 11 Breakthrough 1. Without prejudice to other rights and obligations provided for in Community law for the companies referred to in Article 1(1), Member States shall ensure that the provisions laid down in paragraphs 2 to 7 apply when a bid has been made public. 2. Any restrictions on the transfer of securities provided for in the articles of association of the offeree company shall not apply vis-à-vis the offeror during the time allowed for acceptance of the bid laid down in Article 7(1).

1 Lanfermann/Maul, ‘EU-Übernahmerichtlinie: Aufstellung und Prüfung des Lageberichts’, BB 2004, 1517.

1010

Silja Maul and Larissa Furtwengler

Art 11

Directive 2004/25/EC

Any restrictions on the transfer of securities provided for in contractual agreements between the offeree company and holders of its securities, or in contractual agreements between holders of the offeree company’s securities entered into after the adoption of this Directive, shall not apply vis-à-vis the offeror during the time allowed for acceptance of the bid laid down in Article 7(1). 3. Restrictions on voting rights provided for in the articles of association of the offeree company shall not have effect at the general meeting of shareholders which decides on any defensive measures in accordance with Article 9. Restrictions on voting rights provided for in contractual agreements between the offeree company and holders of its securities, or in contractual agreements between holders of the offeree company’s securities entered into after the adoption of this Directive, shall not have effect at the general meeting of shareholders which decides on any defensive measures in accordance with Article 9. Multiple-vote securities shall carry only one vote each at the general meeting of shareholders which decides on any defensive measures in accordance with Article 9. 4. Where, following a bid, the offeror holds 75 % or more of the capital carrying voting rights, no restrictions on the transfer of securities or on voting rights referred to in paragraphs 2 and 3 nor any extraordinary rights of shareholders concerning the appointment or removal of board members provided for in the articles of association of the offeree company shall apply; multiple-vote securities shall carry only one vote each at the first general meeting of shareholders following closure of the bid, called by the offeror in order to amend the articles of association or to remove or appoint board members. To that end, the offeror shall have the right to convene a general meeting of shareholders at short notice, provided that the meeting does not take place within two weeks of notification. 5. Where rights are removed on the basis of paragraphs 2, 3, or 4 and/or Article 12, equitable compensation shall be provided for any loss suffered by the holders of those rights. The terms for determining such compensation and the arrangements for its payment shall be set by Member States. 6. Paragraphs 3 and 4 shall not apply to securities where the restrictions on voting rights are compensated for by specific pecuniary advantages. 7. This Article shall not apply either where Member States hold securities in the offeree company which confer special rights on the Member States which are compatible with the Treaty, or to special rights provided for in national law which are compatible with the Treaty or to cooperatives.

I. General Features 1. Overview Art 11 is concerned with the question of a possible cut back of defensive measures, 1 which is especially important in cases of hostile takeovers. Art 11 foresees a two tier model with regards to who has to decide over the deconstruction of defensive measures. The model assumes the application of Art 9 (2) – the duty of neutrality – and Art 11 the breakthrough of certain takeover barriers like maximum voting rights, multiple voting rights and voting agreements. If the principle is upheld is decided in a first step by the Member States themselves, since Art 12 (1) allows them to not require the application of Art 9 (2) and/or Art 11 (opt-out, see → mn. 4). If a Member State does not require the

Silja Maul and Larissa Furtwengler

1011

Art 11 Breakthrough application of one or both of the regulations, the second tier of the model is triggered, which allows the companies to decide to opt-in (Art 12 (2) see → mn. 5). 2 The options model ins flanked by the reciprocity rule of Art 12 (3) in as far as it is required by the Member States. According to this rule the offeree company is only subject to the duty of neutrality or the breakthrough rule if the offeror applies the respective rules.

2. Background 3

The background of Art 11 was the wish for a level playing field, achieved through the deconstruction of takeover barriers in Europe and thereby opening the markets. This has only partially materialized in the directive. Due to the numerous and wide ranging traditions in Member States as well as the fact that third states (like the United States) would profit from a level playing field if it were achieved through the deconstruction of defensive measures and the opening of the European market.1 This was the reason why Member States could only agree on the options model of Art 12 for the directive and not to an obligatory deconstruction of defensive measures and opening of the market vis-à-vis third states.

3. Relation to other provisions 4

Art 11 is closely related to Art 12, since Art 11 foresees the breakthrough of certain takeover barriers, but Art 12 leaves it up to the Member States to uphold those barriers as they see fit.

II. Breakthrough of Takeover Barriers 5

Art 11 (1) stipulates that after the publication of a bid Paragraphs 2 to 7 of Art 11 of the directive have to be applied. These paragraphs regulate different stages of the bid and determine if and if so how the breakthrough rule shall be applied.

III. Breakthrough During the Time for Acceptance (Art 11 (2)) The first part of the breakthrough-regulations (paragraph 2) refers to any restrictions on the transfer of securities provided for in the articles of association of the offeree company or in contractual agreements between holders of the offeror company and holders of its securities and prescribes that these restrictions shall not apply vis-à-vis the offeror during the time allowed for acceptance of the bid: 7 If Art 11 (2) is applicable2 – No restrictions on the transfer of securities provided for in the articles of association of the offeree company shall apply vis-à-vis the offeror. This applies to the so called ‘ownership caps’, that prohibit a shareholder to hold more than a certain percentage of the stock of a company. These restrictions – that can be found in Italy and the Netherlands – cannot be held against the offeror, which leads him or her being able to hold a higher percentage of shares than is allowed in the articles of association. 6

1 See also Silja Maul and Danièle Muffat-Jeandet, ‘Die EU-Übernacherichtlinie – Inhalt und Umsetzung in nationales Recht (Teil II)’, Die Aktiengesellschaft 6 (2004), p. 310; Habersack/Verse, p. 473, mn. 31. 2 See for the possibility of Member States not to prescribe Art 11 (2), Art 12 under → mn. 4 et seqq.

1012

Silja Maul and Larissa Furtwengler

Art 11

Directive 2004/25/EC

–

No restrictions on the transfer of securities provided for in contractual agreements between the offeree company and holders of its securities, or in contractual agreements between holders of the company’s securities entered into after the adoption of this Directive, shall apply vis-à-vis the offeror. Ultimately if Art 11 applies shareholders may sell shares to the offeror without being bound by contractual agreements.

IV. Breakthrough During the Vote on Defensive Measures (Art 11 (3)) The second complex of Art 11 relates to restrictions of voting rights and prescribes 8 that these restrictions shall not have effect at the general meeting of shareholders which decides on defensive measures in accordance with Article 9 (see for the possibility of Member States not to prescribe Art 11 (3), Art 12 under → mn. 4). 9 It stipulates that: – Restrictions on voting rights provided for in the articles of association of the offeree company shall have no effect, in so far as a monetary advantage was not granted. This leads to Art 11 (6). – Restrictions on voting rights provided for in contractual agreements between the offeree company and holders of its securities, or in contractual agreements between holders of the offeree company’s securities entered into after the adoption of this Directive, shall not have effect. This means shareholders can vote without being bound to the contractual agreements. – Multiple-vote securities – like they can be found in Sweden, Finland or Denmark – only carry one vote. All other votes fall away in votes on defensive measures.

V. Breakthrough after a Successful Bid (Art 11 (4)) The third complex addresses the time in which the offeror, as a result of the bid, holds 10 75 % of the securities that carry voting rights. If this percentage was reached the offeror has the right to convene a general meeting of shareholders at short notice in order to amend the articles of association or to remove or appoint board members, during which within the scope of Art 113: – No restrictions on the transfer of securities provided for in the articles of association or provided for in contractual agreements shall apply as referred to in Art 11 (3). – No restrictions on voting rights that are based on the articles of association shall apply as referred to in Art 11 (3) subparagraph (1). – No restrictions on voting rights resulting from contractual agreements that were concluded after the entry into force of the directive shall apply as referred to in Art 11 (3) subparagraph (2). – No extraordinary rights of shareholders concerning the appointment or removal of board members provided for in the articles of association of the offeree company shall apply. – Multiple-vote securities shall carry only one vote each at the first general meeting of shareholders following closure of the bid called by the offeror in order to amend the articles of association or to remove or appoint board members.

3

See for the possibility of Member States not to prescribe Art 11 (3), Art 12 under → mn. 4 et seqq.

Silja Maul and Larissa Furtwengler

1013

Art 12 Optional arrangements 11

Due to his or her majority and the ‘redistribution’ of voting rights offeror can ultimately always change the articles of association, He or she may also change statutory barriers to get his or her representative into the board.

VI. Compensation (Art 11 (5)) 12

The directive foresees a compensation for shareholders that loose their legal statuses due to the breakthrough rule. The terms for determining such compensations and the arrangements for repayment are to be decided by the Member States.

VII. Exception of Monetary Compensation (Art 11 (6)) 13

According to paragraph 6 paragraph 4 and 5 do not apply to securities where the restrictions on voting rights are compensated for by specific pecuniary advantages.

VIII. Further exceptions Art 11 (7) 14

Art 11 is not applied to so called golden shares that are held by a Member State, if they are held by law. With regards to rights of Member States that are derived from the articles of association it is decisive if they are in accordance with the EC Treaty, especially with the free movement of capital. If they are – based on a judgement of the ECJ or a decision of the Commission – they are not within the scope of the Directive. Furthermore, Art 11 is not applied to cooperatives.

Article 12 Optional arrangements 1. Member States may reserve the right not to require companies as referred to in Article 1(1) which have their registered offices within their territories to apply Article 9(2) and (3) and/or Article 11. 2. Where Member States make use of the option provided for in paragraph 1, they shall nevertheless grant companies which have their registered offices within their territories the option, which shall be reversible, of applying Article 9(2) and (3) and/or Article 11, without prejudice to Article 11(7). The decision of the company shall be taken by the general meeting of shareholders, in accordance with the law of the Member State in which the company has its registered office in accordance with the rules applicable to amendment of the articles of association. The decision shall be communicated to the supervisory authority of the Member State in which the company has its registered office and to all the supervisory authorities of Member States in which its securities are admitted to trading on regulated markets or where such admission has been requested. 3. Member States may, under the conditions determined by national law, exempt companies which apply Article 9(2) and (3) and/or Article 11 from applying Article 9(2) and (3) and/or Article 11 if they become the subject of an offer launched by a company which does not apply the same Articles as they do, or by a company controlled, directly or indirectly, by the latter, pursuant to Article 1 of Directive 83/349/ EEC.

1014

Silja Maul and Larissa Furtwengler

Art 12

Directive 2004/25/EC

4. Member States shall ensure that the provisions applicable to the respective companies are disclosed without delay. 5. Any measure applied in accordance with paragraph 3 shall be subject to the authorisation of the general meeting of shareholders of the offeree company, which must be granted no earlier than 18 months before the bid was made public in accordance with Article 6(1).

I. General Features 1. Overview The options model is especially relevant for hostile takeovers since it regulates in 1 how far companies are obliged to drop takeover barriers or are free not to. The comprehensive model assumes the application of Art 9 (2) – the duty of neutrality – and Art 11 – the deconstruction of certain barriers. Art 12 (1) now allows the Member States to retain the right not to prescribe the Art 9 (2)/(3) and/or Art 11. This procedure is called opt-out. If a Member State has made use of the possibility to opt-out 1, the second step of the model is triggered and the companies in question may chose to subject themselves to the Articles in question nonetheless (Art 12 (2)). This procedure is called opt-in. The rule of reciprocity in Art 12 (3) – if applied by the Member State in question – complements the first and second step of the options model by stipulating that the offeree is only subject to Art 9(2)/(3) and Art 11 if the offeror is as well. Art 12 (4) regulates the disclosure of the provisions applicable to the respective companies. Art 12 (5) requires the approval of the general meeting of shareholders for the application of the rule of reciprocity.

2. Background The background of Art 12 is manifold. The following three reasons were central in 2 its formulation and negotiation: First of all, no agreement on a strict duty of neutrality could be reached. The national laws of some Member States like the United Kingdom, Italy, Spain and France foresee a duty of neutrality, so naturally its inclusion was a central requirement on their part. Germany was opposed to the introduction of a duty of neutrality and in the beginning only agreed to its adoption under certain conditions, like the inclusion of multiple/double voting rights in the breakthrough rule. Giving up anticipatory resolutions in turn was made contingent upon the expansion of the breakthrough rule.2 This proposal by Germany, later supported by the United Kingdom, was rejected by the Nordic states and France, which predominantly know the aforementioned take barriers. The disputed positions were extremely contradictory: to agree on a breakthrough rule, the duty of neutrality necessarily had to be eroded. Again, no majority could be found. This stalemate could finally only be resolved due to the concern that third state investors like e.g. the United States would be able to take over European companies easier, all the while for takeovers of companies in third states the status quo would remain. Since political and legal reasons did not allow for excluding third states from the breakthrough rule the majority of Member States preferred then not to be forced to deconstruct takeover barriers. The reciprocity rule was added to archive more balance among the Member States.3 All this led to the options model now 1 According to the study of Marcus Partners, The Takeover Bids Directive, Assessment Report 2012, p. 195, only Estonia (completely) and France and Italy (partly) apply the breakthrough rule. 2 Silja Maul, ‘Die Übernahmerichtlinie – ausgewählte Fragen’, NZG 2005, 151.

Silja Maul and Larissa Furtwengler

1015

Art 12 Optional arrangements codified in Art 12. While the commission was not in favor of this solution, it was the only that found acceptance among the Member States.

3. Relation to other provisions 3

Art 12 is closely connected to Art 11, since Art 11 allows for the breakthrough of certain takeover barriers, while Art 12 allows for Member States to opt-out and companies to then again choose to opt-in.

II. First Step: Opt-out by Member States (Art 12 (1)) 4

At the outset, the Directive assumes the application of Art 9 (2) – the duty of neutrality – and Art 11 – the breakthrough rule –. According to Art 12 (1) the Member State now may reserve the right to not apply Art 9 (2)/(3) or Art 11. This procedure is called opt-out of the Member State. So every Member State may decide not to apply those rules to the effect that they are not applicable to companies that are subject to their respective laws.4

III. Second Step: Opt-in by Companies (Art 12 (2)) 5

If a Member State does not dictate the duty of neutrality or breakthrough rule, the second step of the option model is triggered by which companies can decide whether or not to apply the duty of neutrality or the breakthrough rule. This decision of the company shall be taken by the general meeting of shareholders, in accordance with the law of the Member State in which the company has its registered office in accordance with the rules applicable to amendment of the articles of association.5 This procedure is called opt-in of the company. The decision to opt-in is reversible with the required majority. If the company does not opt-in, the laws of the Member State apply and the articles of association remain the same.

3 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon  eds ,   Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008, mn. 32; Silja Maul, ‘Die Übernahmerichtlinie – ausgewählte Fragen’, NZG 2005, 151; Silja Maul and Danièle Muffat-Jeandet, ‘Die EU-Übernacherichtlinie - Inhalt und Umsetzung in nationales Recht (Teil I)’, Die Aktiengesellschaft, /5 (2004), p. 222; Habersack/ Verse, p. 455, mn. 4. 4 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon  eds ,   Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 217; Silja Maul, ‘Die Übernahmerichtlinie – ausgewählte Fragen’, NZG 2005, 151. 5 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon  eds ,   Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 220; Silja Maul, ‘Die Übernahmerichtlinie – ausgewählte Fragen’, NZG 2005, 151.

1016

Silja Maul and Larissa Furtwengler

Art 12

Directive 2004/25/EC

IV. Reciprocity Rule (Art 12 (3)) The reciprocity rule complements the option model. Like is already in its name, it 6 makes the applicability of a certain measure contingent upon its application by the other side. This is achieved by a double opt-in. In a first step Member States can decide to release offeree companies from the application of Art 9 (2)/(3), Art 11 in cases in which the offeror company does not apply the rule in question. If a Member States decides to opt-in the reciprocity rule, both, companies that are subjected to the rules in question by law (Art 12 (1)), as well as such companies that have decided to opt-in voluntarily (Art 12 (2)) are affected.6 If the offeror company is one that is directly or indirectly controlled by another 7 company, for the question of application of Art 9(2)/(3), Art 11 the controlling company is relevant. 8

Examples: – –

If a company that is subject to the laws of Member State A, which applies Art 11 makes a bid on a company in Member State B which also applies Art 11, the company of Member State B could not invoke the reciprocity rule. The breakthrough rule of Art 11 will apply. If on the other hand, Member State A would have opted out of the application of Art 11 or the company in State A would not have opted in, the company of state B could invoke the reciprocity rule.

V. Disclosure (Art 12 (4)) Member States shall ensure that the provisions applicable to the respective companies 9 are disclosed without delay. 6 Silja Maul, Danièle Muffat-Jeandet, and Joëlle Simon  eds ,   Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008, mn. 223; Silja Maul, ‘Die Übernahmerichtlinie – ausgewählte Fragen’, NZG 2005, 151.

Silja Maul and Larissa Furtwengler

1017

Art 13 Other rules applicable to the conduct of bids

VI. Authorization of the General Meeting of Shareholders (Art 12 (5)) Art 12 (5) stipulates, that for the application of the rule of reciprocity, apart from the opt-in of the Member State, the authorization of the general meeting of shareholders is required. Ultimately this leaves it up to the general meeting of shareholders to decide whether or not the reciprocity rule will be applied on a case by case basis when the company becomes subject to a takeover bid. The general meeting of shareholders has to authorize every individual case, but it is possible to grant the authorization 18 months before the disclosure of the bid according to Art 6 (1) due to reasons of practicability. Anticipatory resolutions are thus possible. 11 The question of whether offerors from outside of Europe are subjected to the reciprocity rule arises. It remains questionable that the reciprocity rule can be extended to include these cases in as far as the regulations of the GATT, especially the most favoured nation clause, are applied. This holds especially true, since respecting international agreements is underlined in the reasons for consideration (Reasons for Consideration 21 of the Directive). 10

Article 13 Other rules applicable to the conduct of bids Member States shall also lay down rules which govern the conduct of bids, at least as regards the following: (a) (b) (c) (d) (e)

the lapsing of bids; the revision of bids; competing bids; the disclosure of the results of bids; the irrevocability of bids and the conditions permitted.

I. General Features 1. Overview 1

Art 13 obliges Member States to regulate rules which govern the conduct of a bid, namely the lapsing of bids, the revision of bids, competing bids, the disclosure of the results of bids and the irrevocability of bids and the conditions permitted.

2. Background 2

Art 13 aims at expanding the regulations regarding takeover bids by referring to the competence of Member States to legislate. Since Member States are bound by the general principles of Art 3, especially the principal of equality, this approach seems sensible.

3. Relation to other provisions 3

The regulation is closely related to Art 3 that sets out the general principles Member States have to adhere to as a bare minimum when implementing the Directive.

1018

Silja Maul and Larissa Furtwengler

Art 14

Directive 2004/25/EC

II. Additional Procedural Rules for Takeover Bids (Art 13) 4 Art 13 reads as follows: Member States shall also lay down rules which govern the conduct of bids, at least as 5 regards the following:

(a) (b) (c) (d) (e)

the lapsing of bids; the revision of bids; competing bids; the disclosure of the results of bids; the irrevocability of bids and the conditions permitted

When crafting these regulations, the general principles of Art 3 have to be applied.

6

Article 14 Information for and consultation of employees' representatives This Directive shall be without prejudice to the rules relating to information and to consultation of representatives of and, if Member States so provide, co-determination with the employees of the offeror and the offeree company governed by the relevant national provisions, and in particular those adopted pursuant to Directives 94/45/EC, 98/59/EC, 2001/86/EC and 2002/14/EC.

I. General Features 1. Overview Art 14 is concerned with regulations pertaining to the information and consultation 1 of employees’ representatives. Art 14 does not introduce new regulations, it clarifies that the existing regulations are not affected by the Directive.

2. Background The express consideration of employee’ affaires is at the centre of Art 14.

2

3. Relation to other provisions Art 14 does not create new obligations, it refers to the already existing rights of 3 employees in situations of takeovers, like Directive 94/45/EC, 98/59/EC, 2001/86/EC and 2002/14/EC.

II. Information for and Consultation of Employees’ Representatives Art 14 does not create new rights or obligations, it underlines that this Directive 4 shall be without prejudice to the rules relating to information and to consultation of representatives of and, if States so provide, co-determination with the employees of the offeror and the offeree company governed by the relevant national provisions, and in particular those adopted pursuant to Directives 94/45/EC, 98/59/EC, 2001/86/EC and 2002/14/EC.

Silja Maul and Larissa Furtwengler

1019

Art 15 The right of squeeze-out

Article 15 The right of squeeze-out 1. Member States shall ensure that, following a bid made to all the holders of the offeree company’s securities for all of their securities, paragraphs 2 to 5 apply. 2. Member States shall ensure that an offeror is able to require all the holders of the remaining securities to sell him/her those securities at a fair price. Member States shall introduce that right in one of the following situations: (a) where the offeror holds securities representing not less than 90 % of the capital carrying voting rights and 90 % of the voting rights in the offeree company, or (b) where, following acceptance of the bid, he/she has acquired or has firmly contracted to acquire securities representing not less than 90 % of the offeree company’s capital carrying voting rights and 90 % of the voting rights comprised in the bid. In the case referred to in (a), Member States may set a higher threshold that may not, however, be higher than 95 % of the capital carrying voting rights and 95 % of the voting rights. 3. Member States shall ensure that rules are in force that make it possible to calculate when the threshold is reached. Where the offeree company has issued more than one class of securities, Member States may provide that the right of squeeze-out can be exercised only in the class in which the threshold laid down in paragraph 2 has been reached. 4. If the offeror wishes to exercise the right of squeeze-out he/she shall do so within three months of the end of the time allowed for acceptance of the bid referred to in Article 7. 5. Member States shall ensure that a fair price is guaranteed. That price shall take the same form as the consideration offered in the bid or shall be in cash. Member States may provide that cash shall be offered at least as an alternative. Following a voluntary bid, in both of the cases referred to in paragraph 2(a) and (b), the consideration offered in the bid shall be presumed to be fair where, through acceptance of the bid, the offeror has acquired securities representing not less than 90 % of the capital carrying voting rights comprised in the bid. Following a mandatory bid, the consideration offered in the bid shall be presumed to be fair.

I. General Features 1. Overview 1

Art 15 implements a squeeze-out procedure subsequent to the takeover bid, if the offeror holds a relatively high percentage of securities (Art 15 (1)). Art 15 (2) then leaves it up to the Member States to choose between a squeeze-out (a) subsequent to the bid that is connected to holding a certain percentage of securities or (b) that is based on the subsequent acquisition of a certain number of securities to the bid. Paragraph 3 leaves it to the Member States to define the rules according to which the calculations in regard to the threshold are made. Furthermore, it grants special rights to Member States where the offeree company has issued more than one class of shares. According to paragraph 4 the squeeze-out is to be executed within 3 weeks of the acceptance (Art 1020

Silja Maul and Larissa Furtwengler

Art 15

Directive 2004/25/EC

7). If a squeeze-out is executed the holders of securities are forced out of the company against compensation. Paragraph 5 addresses the considerations of adequacy of the compensation.

2. Background The possibility of a squeeze-out aims to facilitate restructuring measures by excluding 2 minority shareholders from the company.

3. Relation to other provisions Art 15 provides for a squeeze-out in takeover situations and is closely related to the 3 sell-out rule of Art 16.

II. Squeeze-Out after a Takeover (Art 15 (1)) According to Art 15 Member States shall assure that following a bid made to all the 4 holders of the offeree company’s securities for all of their securities, paragraphs 2 to 5 apply.

III. Squeeze-Out, Threshold, Franchise (Art 15 (2)) Paragraph 2 of Art 15 allows the offeror a squeeze-out that is specific to situations 5 of takeovers, in cases, in which Art 15 (1) applies. The Member States may choose between two methods of calculation to decide if the threshold that triggers the right to squeeze-out is reached: – where the offeror holds securities representing not less than 90 % of the capital carrying voting rights and 90 % of the voting rights in the offeree company for which the exact threshold is according to paragraph 3 to be determined by each Member State or – where, following acceptance of the bid, he/she has acquired or has firmly contracted to acquire securities representing not less than 90 % of the offeree company’s capital carrying voting rights and 90 % of the voting rights comprised in the bid.1 In the case referred to in (a), Member States may set a higher threshold that may not, 6 however, be higher than 95 % of the capital carrying voting rights and 95 % of the voting rights. The fact that it shall suffice that the acquirement is firmly contracted goes back to a wish the United Kingdom, which alluded to the fact that the transfer of securities might take some time and hence might not be finalized by the time the bid closes.

IV. Calculation of Threshold and Exclusion (Art 15 (3)) Art 15 (3) stipulates, that Member States shall ensure that rules are in force that make 7 it possible to calculate when the threshold is reached. It is at their discretion to foresee a squeeze-out only for certain classes of securities. In these cases, the right of squeeze-out can be exercised only in the class in which the threshold laid down in paragraph 2 has 1 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon  eds ,   Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 276.

Silja Maul and Larissa Furtwengler

1021

Art 16 The right of sell-out been reached. If Member States decide on a regulation for this kind, the question of the threshold and its achievement is relevant for each class separately.

V. Time Limit on Executing a Squeeze-Out Art (15 (4)) 8

Art 15 (4) sets the time limit for squeeze-outs at three months after the time limit of the bid (Art 7) has run out.

VI. Compensation (Art 15 (5)) Shareholders, who are excluded due to a squeeze-out are entitled to an appropriate compensation (Art 15 (5)). Here the Directive does not foresee a certain method of calculation, rather Art 15 (5) holds certain presumptions regarding the form of the compensation and it’s amount. Regarding the form of the compensation – money or shares – the directive stipulates that it shall either be money or the form of the preceding bid. Germany pushed a regulation, by which the Member States may dictate that money is at least one of the options.2 10 The presumptions of the directive differentiate between mandatory and voluntary bids. In cases of mandatory bids, the compensation follows the price of the bid. For voluntary bids the directive contains a “fast track”. Here the compensation follows the bid if the offeror acquired securities that represent not less than 90 % of the capital carrying voting rights comprised in the bid. 11 The presumptions are refutable. If the excluded shareholder refutes that the presumption leads to an appropriate price, he or she may resort to a judicial procedure. 9

Article 16 The right of sell-out 1. Member States shall ensure that, following a bid made to all the holders of the offeree company’s securities for all of their securities, paragraphs 2 and 3 apply. 2. Member States shall ensure that a holder of remaining securities is able to require the offeror to buy his/her securities from him/her at a fair price under the same circumstances as provided for in Article 15(2). 3. Article 15(3) to (5) shall apply mutatis mutandis.

I. General Features 1. Overview 1

The sell-out rule in Art 16 allows minority shareholders to demand from the offeror to buy their shares after a bid, in cases in which the threshold for a squeeze-out is reached (Art 15 (1)). The regulations regarding the appropriate price, threshold and presumptions follow the equivalent rules in Art 15.

2

Silja Maul, ‘Die Übernahmerichtlinie – ausgewählte Fragen’, NZG 2005, 157.

1022

Silja Maul and Larissa Furtwengler

Art 17

Directive 2004/25/EC

2. Background The idea of a sell-out rule stems from the Nordic countries and is especially useful 2 where the market is narrow.

3. Relation to other provisions Art 16 mirrors the provisions in Art 15 and provides the minority shareholders with 3 an equivalent right like the one foreseen in Art 15 for the offeror.

II. Sell-Out after a Takeover (Art 16 (1)) Art 16 subjects the sell-out right to the requirement, that the offeror previously made 4 a bid on all securities. In this case Art 15 and with it Art 16 apply.

III. Sell-Out Threshold (Art 16 (2)) According to Art 16 (2) shareholders who did not accept the initial bid and stayed on 5 as shareholders of the offeree company may demand from the offeror to buy their shares. This is especially relevant in cases, in which the market is narrow or there is no market for the trade of the shares.1 Regarding the threshold to trigger a right to sell-out Art 16 (2) refers to Art 15, the explanations above under Art. 15 → mn. 5 et seqq. apply respectively.

IV. Price Presumptions and Nature of the Consideration Art 16 (3) refers to the application of Art 15 (3)-(5) mutatis mutandis. Hence the 6 same distinction between mandatory and voluntary bids has to be made (compare above Art. 15→ mn. 7 et seq.). The rules of the squeeze-out do also apply in regard to the nature of the compensation (compare above Art. 15 → mn. 9 et seq.). Even the time limit is the same: a shareholder has to exercise his or her right to sell-out within 3 months of the time of acceptance (Art 7).

Article 17 Sanctions Member States shall determine the sanctions to be imposed for infringement of the national measures adopted pursuant to this Directive and shall take all necessary steps to ensure that they are put into effect. The sanctions thus provided for shall be effective, proportionate and dissuasive. Member States shall notify the Commission of those measures no later than the date laid down in Article 21(1) and of any subsequent change thereto at the earliest opportunity.

1 Silja Maul, Danièle Muffat-Jeandet and Joëlle Simon  eds ,   Takeover bids in Europe: The Takeover Directive and its Implementation in the Member States (2008), mn. 295.

Silja Maul and Larissa Furtwengler

1023

Art 18 Committee procedure

I. General Features 1. Overview 1

Art 17 obliges the Member States to determine sanctions to be imposed for infringement of the national measures adopted pursuant to this Directive. In addition, Member States have to take measures to guarantee the enforcement of the sanctions.

2. Background 2

The Directive lays down a frame of regulations that are to be implemented into national law by the Member States. Regarding sanctions of the infringement of regulations that were implemented in national law but deriving from the Directive, the Member States may provide their own enforcement mechanisms.

3. Relation to other provisions 3

Art 17 is incremental for the effectiveness of all other provisions of the Directive that provide for obligations to be translated into national law, since it assures its enforcement through sanctions.

II. Sanctions (Art 17) 4

Art 17 reads as follows: Member States shall determine the sanctions to be imposed for infringement of the national measures adopted pursuant to this Directive and shall take all necessary steps to ensure that they are put into effect. The sanctions thus provided for shall be effective, proportionate and dissuasive. Member States shall notify the Commission of those measures no later than the date laid down in Article 21(1) and of any subsequent change thereto at the earliest opportunity.

Article 18 Committee procedure 1. The Commission shall be assisted by the European Securities Committee established by Decision 2001/528/EC (hereinafter referred to as ‘the Committee’). 2. Where reference is made to this paragraph, Articles 5 and 7 of Decision 1999/468/EC shall apply, having regard to Article 8 thereof, provided that the implementing measures adopted in accordance with this procedure do not modify the essential provisions of this Directive. The period referred to in Article 5(6) of Decision 1999/468/EC shall be three months. 3. Without prejudice to the implementing measures already adopted, four years after the entry into force of this Directive, the application of those of its provisions that require the adoption of technical rules and decisions in accordance with paragraph 2 shall be suspended. On a proposal from the Commission, the European Parliament and the Council may renew the provisions concerned in accordance with the procedure laid down in Article 251 of the Treaty and, to that end, they shall review them before the end of the period referred to above.

1024

Silja Maul and Larissa Furtwengler

Art 19

Directive 2004/25/EC

I. General Features 1. Overview Art 18 of the Directive stipulates that for Art 6 (2) of the Directive the European 1 Securities Committee established by Decision 2001/528/EC (hereinafter referred to as ‘the Committee’) shall oversee changes and amendments in the information of the offer document.

2. Background Initially Art 5 (4), which contains a list of exceptions to the price regulation, was 2 also intended to be subject to the committee procedure. This proposal failed due to a lack of consensus among the Member States. The European Parliament opposed a broad application of the committee procedure, since it wanted to practice restraint in the delegation of its competences. Art 3 in therefore contains a sunset clause which provides that the delegation of competences to the committee is limited to 4 years, after which it can be renewed by the parliament.

3. Relation to other provisions The committee according to Art 18 has to be distinguished from the contact commit- 3 tee in Art 19.

II. Committee Procedure (Art 18) Art 18 provides that the Commission shall be assisted by the European Securities 4 Committee established by Decision 2001/528/EC (hereinafter referred to as ‘the Committee’). The scope of application of Art 18 is limited to Art 6 (2). The committee examines if in application of the principle behind Art 6 (2) changes according to Art 6 (5) have to be made.

Article 19 Contact committee 1. A contact committee shall be set up which has as its functions: (a) to facilitate, without prejudice to Articles 226 and 227 of the Treaty, the harmonised application of this Directive through regular meetings dealing with practical problems arising in connection with its application; (b) to advise the Commission, if necessary, on additions or amendments to this Directive. 2. It shall not be the function of the contact committee to appraise the merits of decisions taken by the supervisory authorities in individual cases.

I. General Features 1. Overview In Art 19 the Directive provides for the establishment of a contact committee, which 1 oversees the implementation of the Directive into national law.

Silja Maul and Larissa Furtwengler

1025

Art 20 Revision 2. Background 2

Art 19 furthers the aim of universal implementation of the Directive.

3. Relation to other provisions 3

Art 19 applies to all provisions of the Directive.

II. Contact Committee (Art 19) 4

The contact committee that is foreseen in Art 19 consists of representatives of the Member States and the Commission. It’s main focus is a unitary implementation throughout the Member States. The committee also advises the Commission regarding changes and amendments.

Article 20 Revision Five years after the date laid down in Article 21(1), the Commission shall examine this Directive in the light of the experience acquired in applying it and, if necessary, propose its revision. That examination shall include a survey of the control structures and barriers to takeover bids that are not covered by this Directive. To that end, Member States shall provide the Commission annually with information on the takeover bids which have been launched against companies the securities of which are admitted to trading on their regulated markets. That information shall include the nationalities of the companies involved, the results of the offers and any other information relevant to the understanding of how takeover bids operate in practice. The Commission shall examine the Directive until 2011. The directive as a whole is subject to this provision. The Member States shall convey information on takeover bids that were made yearly. The information must contain the nationality of the companies, the outcome of the bid and any other relevant information which is relevant for understanding the bid (like for example defensive measures). The examination encompasses also control structures and takeover barriers that fall outside the purview of the directive. 2 In 2011 the Commission ordered a study, which was submitted in 20121, even though the examination was set to be done until 2011. Based on this report the Commission proposed in a report guidelines for the application of the directive.2 In this report the Commission reaches the conclusion that in general the functioning of the directive is satisfactory except for a few parts in which further investigation and analysis is required. Despite calls for a revision the Commission did not presented an amending directive. Already in 2007 the Commission presented a report on the implementation of the directive. There the Commission determined that numerous Member States did implement the Directive rather protectionist and announced to monitor this development. 3 1

Marcus Partners, The Takeover Bids Directive, Assessment Report 2012. Marcus Partners, The Takeover Bids Directive, Assessment Report 2012. 3 Commission of the European Communities, Report of the implementation of the Directive on Takeover Bids SEC (2007) 268. 1

2

1026

Silja Maul and Larissa Furtwengler

Art 23

Directive 2004/25/EC

Article 21 Transposition 1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive no later than 20 May 2006. They shall forthwith inform the Commission thereof. When Member States adopt those provisions, they shall contain a reference to this Directive or shall be accompanied by such reference on the occasion of their official publication. The methods of making such reference shall be laid down by the Member States. 2. Member States shall communicate to the Commission the text of the main provisions of national law that they adopt in the fields covered by this Directive.

Article 22 Entry into force This Directive shall enter into force on the 20th day after that of its publication in the Official Journal of the European Union.

Article 23 Addressees This Directive is addressed to the Member States.

Silja Maul and Larissa Furtwengler

1027

Index Italic roman numbers refer to the main parts: no roman number: Directive (EU) 2017/1132 relating to certain aspects of company law I: Accounting and Auditing Law II: Directive 2009/102/EC on single-member private limited liability companies III: Directive 2007/36/EC on the exercise of certain rights of shareholders IV: Directive 2004/25/EC on takeover bids Bold numbers refer to the articles, normal ones refer to the margin number. Abuse – cross-border division 160m 2 f. – of law 68 20 ff. – of rights III 9 3, 9a 11 Abuse control – cross-border division 160m 11 ff. – Independent expert 160f 9 Accounting Intro 13, 23, 62, 78, 31 1 – harmonisation Intro 96 – member states’ option to provide (branch) 38 8 – third country companies 37 37 Accounting date – cross-border merger 122 27 ff. – draft terms 160d 22 Accounting Directives I 3 – amendments I 4 Accounting documents 32 3, 38 1 – disclosure (branch) 30 26, 31 1 ff. – disclosure under national law 31 9 – language and translation (branch register) 32 1 ff. – language of disclosure (branch) 38 11 – limits on disclosure (branch) 31 5 ff. – member States’ option to not provide for disclosure 31 10 – relating to the activities of the branch 38 1 – third country company (disclosure) 38 1 ff. – translation (branch) 38 11 Accounts – disclosure (branch) pre 28a-42 23 – disclosure (third country companies) pre 28a-42 28 – translation requirements (branch) pre 28a-42 24 Acquisition of own shares 60 1 ff., 61 1 ff. – by a subsidiary 67 1 ff. – unlawful acquisition of own shares 62 1 ff. Action Plan 2003 Intro 147 ff. Action Plan 2012 Intro 152 ff. – overview Intro 154 Ad impossibilia nemo tenetur – disclosure 37 11 Address of the branch – disclosure 37 6 Address of the company – disclosure 30a 10 Addressees III 17 1

Adequate cash compensation – additional cash compensation 86i 30 – cash compensation 86i 24 – erga omnes effect 86i 33 – fixed price per share 86i 24 – payment period 86i 25 – payment terms 86i 24 – reformatio in peius 86i 33 – time limitation for additional cash compensation 86i 31 Advance 64 12 Advance effect 85a-86u 18 – gaps in stakeholder protection 85a-86u 20 – German Higher Regional Court of Saarbrucken 85a-86u 20 – inter-environnement Wallonie 85a-86u 19 – practical challenges 85a-86u 19 – prohibition on frustrating the objective of a directive 85a-86u 19 Advisory effect III 9a 7, 38 – report III 9b 20 ff. Agency – applicable law 30 22, 37 31 Agenda III 6 14 Agenda items III 9 1 AGM III 5 1, 6 1, 9 1, 9b 20, 22 Aim of the division directive Intro 202, 135 2 Aktiengesellschaft Intro 2, 19, 28, 35, 42, 61, 67, 76, 117, 173, 36 14 Aktiengesetz Intro 29, 32, 38, 200 Aktienschwindel (Germany) Intro 29 ‘All in One Star Ltd’ (judgment of the CJEU) pre 28a-42 4, 28a 21, 30 36, 44 Allocation – of power of representation 9 3 – of shares 160d 36 Amendment III 1 2 Annual accounts – draft terms 160d 35 Annual general meeting Intro 38 Applicable law III 1 11, 2 4 f. – cross-border division 160c 2 ff. Appointment of auditor – PIE I 101 Approval – by autorities III 9c 43

1029

Index Approval (of the division) 139 1 ff. – competent body 139 1 – form requirements 139 7 f. – general meeting 139 1 – majority requirements 139 2 – protection of minority shareholders 139 10 ff. Approval by the general meeting 154 1 ff.; III 9c 39 – agreement of all shareholders 154 1 ff. – division by acquisition 154 3 – exemptions 154 1 ff. Approval by the shareholders meeting 140 1 f. – derogation 140 1 f. Approval of the draft terms – comments by stakeholders 86h 4 – conditioned approval 86h 9 – debate 86h 4 – discussion 86h 4 – economic obligations vis-à-vis the company 86h 7 – economic obligations vis-à-vis third parties 86h 7 – educated discussion 86h 4 – form requirements 86h 11 – general meeting 86h 1 – grounds eligible to contest the approval 86h 13 – language requirements 86h 12 – majority 86h 5, 9 – members affected from an increase of their economic obligations 86h 7 – qualified majority 86h 5 – ratification of arrangements on employee participation 86h 9 – taking note 86h 4 Articles of association – disclosure 30 30 ff. Asset manager – definition III 2 10 – disclosure III 3i 4 f. – engagement policy III 3g 1 ff. – self regulation III 3g 2 – transparency III 3g 2, 3i 1 ff. Assets and liabilities – allocation in draft terms 160d 32 ff. Assignability of shares (limitations) – small corporation Intro 140 Attributes of membership – small corporation Intro 143 Audit III 9b 30 f. Audit committee – composition I 102 – exemptions I 102 – function I 102 – internal control system I 103 Audit report – audit opinion I 90 – disclaimer of opinion I 91 – disclosure (branch) 31 8, 38 9

1030

– PIE I 92 Auditor Intro 32 – appointment I 99 – dismissal I 100 – external control institution Intro 62 – registration I 79 Authorised capital 3 8, 68 27 ff. Autonomous interpretation (EU law) Intro 190 Balance sheet – disclosure (branch) 31 8, 38 9 – electronic filing I 21 – exemptions to layout limitation I 21 – layout limitation I 20 f. – test 56 7 Banking secrecy III 3a 17, 9 14 Behavioural theory Intro 43 Beneficial owner III 2 5 Bids – content IV 6 10 – offer document IV 6 10 Big four only clause I 101 Binding effect III 9a 7 ff., 38 – dispensability III 9a 13 Board of directors Intro 25, 44, 14 6 Branch Intro 78, 97 ff., 146, pre 28a-42 1 ff., 11, 21, 30 1, 30 ff., 30a 1, 35 1, 36 1, 39 1 – activity (disclosure) 37 7 – activity of the 30 7 – address 30 1, 6 – closure 28c 1 ff. – compulsory items of disclosure 30 6 ff. – concept pre 28a-42 13, 29 5, 36 7 – disclosure Intro 99, pre 28a-42 15 ff., 29 1 ff., 30a 13 – disqualification of directors pre 28a-42 4, 28a 19 ff. – duration of the registration procedure 28a 14 – entry in the register (declaratory effect) pre 28a-42 19 – exchange of information between national registers 28a 15 ff. – general duty to disclose 29 4 ff. – instruments of constitution 30 30 ff. – items to be disclosed (companies from third countries) pre 28a-42 25 ff. – items to be disclosed (EU companies) pre 28a-42 20 ff. – legal personality 37 39 – name of the 30 1 – objects of the company 30 7 – of the company's choice 33 1 – online filing of documents and information 28b 1 ff. – optional items of disclosure 30 29 ff. – persons carrying out disclosure formalities 41 1 ff.

Index – protection of persons who deal with companies through their branches pre 28a-42 21 – register 34 1, 35 9 f. – register of origin 29 17 – striking-off from the register 34 10 ff. – transposition of EU rules in Member States pre 28a-42 9 – unique identifier 29 1, 16 f. – website 35 6 f. – winding up of the 37 39 Branch (accounting) – member states’ option to provide 38 8 Branch (closure) – duty to acknowledge receipt and record 28c 7 ff. Branch (disclosure) 29 7 – accounting documents 30 26, 31 1 ff. – balance sheet 31 8 – changes to documents and information of the company 30a 1 ff. – closure 30 27 f. – diverging disclosure requirements 29 12 – documents and particulars to be disclosed 30 1 ff. – exhaustive lists of items of disclosure 30 36 ff. – impossibility 37 11 – language 37 14 – language and translation 30 31 – legal form of the company 30 9 ff. – letters and order forms 35 1 ff. – lex societatis 29 9 – name of the 30 12 – name of the company 30 9 ff. – persons authorised to represent the company 30 13 ff. – register and registration number of the company 30 8 – securities on the company's property 30 34 – signature of any person having the power to represent the company 30 29 – types of companies addressed 29 7 f. – winding-up and insolvency 30 23 Branch number 29 17 – disclosure 35 9 f. ‘Brass-plate companies’ Intro 178, pre 28a-42 5 Breakdown of assets and liabilities 137 7 Breakthrough – background IV 11 3 – compensation IV 11 12 – exception of monetary compensation IV 11 13 – further exceptions IV 11 14 – overview IV 11 1, 2 – relation to other provisions IV 11 4 – restriction of voting rights IV 11 8 – restrictions IV 11 7 – successful bid IV 11 10, 11 – takeover barriers IV 11 5

– time of acceptance IV 11 6 – vote on defensive measures IV 11 9 Brexit Intro 67, 78 ff., 84 ff., 100, 178, pre 28a-42 14, 2 1, 87 17, 118 59 ff.; II 1 3 – branches of UK companies in the EU pre 28a-42 14 – cross-border division 160a 36 – pre-exit case law 85a-86u 21 – UK Companies House 85a-86u 21 – UK European Union (Withdrawal) Act 2018 85a-86u 21 BRRD III 1 14, 6 14 Business Registers Interconnection System Intro 156, 25 2, 28c 5, 36 3 – cross-border merger 130 3, 8 – documents and particulars relating to a branch 29 14 ff. Cadbury Schweppes Intro 2, 19, 22, 177 ‘Cadbury-Schweppes’ judgment (CJEU) Intro 2 Capital alterations Intro 91, 150 Capital increase 68 1 ff. – contribution in kind 70 1 ff. – division 70 8 ff. – due date of contributions 69 1 ff., 70 1 ff. – intragroup 70 11 – merger 70 8 ff. – public offer 70 8 ff. Capital maintenance Intro 3, 42, 76 ff., 84, 94, 150, 175 – insolvency Intro 162 ff. – small corporation Intro 142 Capital markets law Intro 63 Capital reduction 73 1 ff. – minimum capital 77 1 ff. – safeguards for creditors 75 1 ff., 76 1 ff. – several classes of shares 74 1 ff. Capital requirements Intro 3, 20 – small corporation Intro 138, 142 Capital structure Intro 41 ff. Cartesio – connecting factor 85a-86u 9 – cross-border transfer of seat 85a-86u 9 – freedom of establishment 85a-86u 9 Cash compensation – cross-border merger 125 17 – draft terms 160d 16, 37 – independent expert 160f 7 f. – report of the administrative or management body 160e 19 Cash payments 158 1 ff. – cross-border merger 120 1 ff., 5 – in excess of 10 % 158 1 f. Categories of undertakings and groups – PIE I 13 – thresholds I 11 f. Central securities depository III 3a 9

1031

Index Centre of main interests (COMI) 37 36 – disclosure (branch) 37 17 – insolvency 37 17, 34 – insolvency proceedings 30a 8 Centros Intro 2, 22, 100, 178, 194 – foreign branch registration 85a-86u 4 – freedom of establishment 85a-86u 4 ‘Centros’ (judgment of the CJEU) Intro 2, 178 Chains of intermediaries III 3a 1, 8 f., 13 3 Chairman Intro 32 Changes to documents and information of the company – disclosure (branch) 30a 1 ff. – ex officio notification 30a 5 ff. Charges III 3d 1 ff. Choice-of-law rules – in the EU Member States Intro 66 ff. Circumvention III 9b 14, 9c 11, 17 Civil law notary Intro 17, 27 Civil liability 152 1 ff. – minimum standard 152 2 f. – of independent experts 152 1 ff. – of members of administrative bodies 152 1 ff. – of members of management bodies 152 1 ff. CJEU Intro 100, 178, 183, 187 Claw back III 9a 28 Closed-ended investment companies 2 13 Closure of branch 28c 1 ff. – disclosure 30 27 f. – duty to inform 28c 3 – penalties in the event of failure to inform 28c 4 – third country companies 37 38 Code of conduct III 3j 1 Co-determination 118 6 ff., 10 – cross-border merger 118 25, 133 3 ff., 10 ff. – Germany Intro 33 ff. Codification of EU Company Law 1 3 – shortcomings Intro 159 Collective employee rights – cross-border division 160m 15 f. Commercial register Intro 18, 29 Commission III 3k 1, 9c 1, 17 3 – guidelines III 9b 15, 34 – report III 3f 1 Committee procedure IV 18 4 – background IV 18 2 – overview IV 18 1 – relation to other provisions IV 18 3 Common draft terms of the cross-border merger 122 1 ff. – accounting date 122 27 ff. – cash compensation 122 43 – content 122 15 ff., 26 ff., 46 ff. – date of profit entitlement 122 26 – disclosure 123 4

1032

– language 122 13 f. – responsibility 122 9 f. – safeguards offered to creditors 122 44 – special rights 122 31 ff. – written form requirement 122 11 f. Companies – branch register 36 9 ff. – from third countries Intro 69, 78, 82 f. Companies House – disclaimer on accuracy of information published Intro 59 Company 30 1, 15, 35 – change in the legal form of the 34 1 – change of address 30a 10 – change of the applicable law 30a 9 – division of the 34 1 – duration 3 13 – insolvency of the 37 1, 35 – legal form of the 30 1, 30a 1, 37 1 – merger of the 34 1 – name 2 8, 3 5, 30 1, 30a 1, 37 1 – object 3 6 – organ 30 1 – property of the 30 1 – register of the 30 7, 34 1 – registered office of the 30a 1 – registration number 30a 1, 39 1 – single shareholder II Preface 4 – situation of property 30 35 – type 2 4, 3 5 – website of the 35 6 f., 39 7 – winding-up of the 30 1, 34 1, 37 1 Company conflicts of laws – connecting factors Intro 66 ff. Company file 16 2 Company Law Directive pre 7 12 – consolidation pre 7 6 – subject matter 1 1 ff. Company Law Package Intro 161 – parts pre 7 7 Company management Intro 46 Company organ 37 1 – disclosure in branch register 30 13 ff. – responsibility for disclosure (branch) 41 5 – third country companies 37 23, 25 ff. – twin role 37 30 Company register Intro 61 Company size III 9c 9 Company statute 88 3 – cross-border merger 118 52, 53 – small corporations Intro 139 Competent Member State III 1 11 f. Competition among legal systems Intro 1, 5, 15, 18 Compliance III 9c 36 Comply or explain III 3g 1 ff., 3j 1, 3 Compulsory disclosure 30 1 – branch 30 6 ff.

Index Concession system Intro 26, 29 Conduct of bids IV 13 5 – background IV 13 2 – general principles IV 13 6 – overview IV 13 1 – procedural rules IV 13 4 – relation to other provisions IV 13 3 Confidential information – draft terms 160d 11 – protection of creditors 160e 28 ff. – report of the administrative or management body 160e 27 Confidentiality III 9 14 Conflict of interest III 3i 2, 3j 7, 9a 32, 10 8, 11 ff. – identification III 10 12 Consequences of division 151 1 ff. – allocation of shares 151 7 – assumption of contractual position 151 5, 160r 6 ff. – dissolution ipso jure 151 10 f. – partial universal succession 151 5 f., 160r 6 ff. – universal succession 151 5 f., 160r 6 ff. Consequences of errors – cross-border merger report 125 30 ff. – merger report of cross-border mergers 124 45 ff. Consequences of the cross-border conversion – altering of “legal clothes” 86r 1 – Commission proposal 86r 2 – continuity of legal identity 86r 1 – corporate offices 86r 1 – development of the provision 86r 2 – permits, licenses 86r 1 Consideration – experts’ report 49 1 ff., 50 1 – in cash 48 4 – in kind 4 12, 48 4 – money-market instruments 50 5 – premium 48 22 – transferable securities 50 5 Consolidated accounting – auditing I 41 – content I 33 ff. – jointly managed undertakings I 35 – measurement I 35 – scope I 33 ff. – true and fair view I 32 Consolidated financial statements – disclosure (branch) 31 2, 8, 38 9 Consolidated management reports – disclosure (branch) 31 8, 38 9 Contact committee 43 1; IV 19 4 – background IV 19 2 – overview IV 19 1 – relation to other provisions IV 19 3 Continental European regulatory policy Intro 19

Continental law initiative (Germany/France) Intro 16 f. Contracting failure Intro 13 Contractual group III 9c 40 Contributable assets 46 1 ff. Contribution – in cash 48 4 ff. – in kind 48 4 ff., 52 1 ff. – of claims 48 9 ff. – principle of effective capital contribution 53 2 – time of payment 48 18 ff. Control – entity III 10 14 – groups of companies Intro 107 ff., 190 Control concept – consolidated financial statements Intro 111 – Insolvency Intro 111 Controlling influence – consolidated financial statements Intro 111 – groups of companies Intro 109 Controlling shareholder III 10 14 Conversion 54 2 ff. Convertible securities 68 32 f. Convocation III 5 3 – agenda III 6 14 – costs III 5 12 – information III 5 13 – legal action III 5 8 – modalities III 5 8 – publication period III 5 15 – short periods III 5 7 Cooperatives 2 14 ff., 44 11 – cooperative societies III 1 13 – cross-border merger 118 62, 120 6 ff. Corporate capital – small corporations Intro 138 Corporate chains II 2 9 Corporate constituencies Intro 41, 185, 201 Corporate domicile Intro 4 Corporate governance Intro 22, 47, 135, 146, 150, 154; III 1 1, 9c 1 ff. – Action Plan 2003 Intro 147 ff. – harmonisation Intro 152 ff. Corporate governance statement I 28 Corporate mobility 1 11 f., 13g 1 Corporate social responsibility III 9a 28 Corporations 135 7 – cross-border merger 119 1 ff. Correspondence III 12 2 COVID-19 III 5 3, 8 8, 9 5 – European Company Intro 171 Credit institution 31 1, 42 1; III 10 19 – disclosure 38 1 – disclosure of accounting (branches) 42 1 ff. – disclosure of accounting documents (limits) 42 4

1033

Index Creditors – draft terms 160d 38 ff. – non-adjusting Intro 9 – protection of Intro 6, 15, 19 ff., 32, 42 Cross-border conversion Intro 2, 97, 100, 178, 1 11 f., 30a 9 – and division Intro 54, 74, 161 – Annex II Company Law Directive 86a 1, 4 – civil partnerships 86a 5 – COMI-shift 86a 10 – credit institutions and investment firms 86a 9 – cross-border transfer of seat and head office 86a 2 – directive on restructuring and insolvency 86a 10 – disclosure in branch register 34 17 f. – EFTA States 86a 6 – extra-EU inbound or outbound conversions 86a 1 – insolvency proceedings 86a 10 – intra-EU cross-border conversion 86a 1 – lack of legal certainty 86a 5 – lex specialis 86a 2 – limited liability companies 86a 1 – liquidation 86a 8 – Member State option 86a 10 – preventive restructuring scenarios 86a 10 – SE as a public limited liability company 86a 4 – SE-Regulation 86a 2 – societas europaea 86a 2 – solvent liquidation 86a 8 – transfer of SE’s registered office and head office vs. cross-border conversion 86a 3 – UCITS 86a 7 – voluntary liquidation 86a 8 Cross-border division Intro 100, 1 11 f. – advance effect of 2019 Directive 160a 34 ff. – applicable law 160c 2 ff., 6 ff. – assets and liabilities 160r 4 – Brexit 160a 36 – cash payment 160a 19 – change-of-control clauses 160r 10 – conflict of laws 160r 7 ff. – consultation between authorities 160o 6 – contracts 160r 4 – cooperatives 160a 23 ff. – data privacy provisions 160r 10 – disclosure 160g 1 – division by separation 160b 7 – draft terms 160d 1 ff. – effective date 160q 1 ff. – employee participation 160l 1 ff. – general meeting 160h 1 ff. – independent expert 160f 1 ff. – insolvent companies 160a 32 – joint and several liability 160j 24 ff. – legal consequences 160r 1 ff. – legality check 160m 1 ff., 160o 1 ff. – limited liability companies 160b 1 – liquidation 160a 31

1034

partnerships 160a 23 ff. permits 160r 10 preventive restructuring 160a 32 procedures and formalities 160c 2 ff. proection of creditors 160j 1 ff. protection of members 160i 1 ff. ratio altering division 160b 13 registration 160p 1 ff. report of the administrative or management body 160e 1 ff. – sectorial exceptions 160a 27 – transfer formalities 160r 7 – types of division 160b 4 – UCITS 160a 28 – unwinding 160u 1 – validity 160u 1 Cross-border exercise of voting rights III 1 1 Cross-border merger Intro 54, 74, 85, 100, 102, 161, 1 11 f., 118 35 ff., 42 f., 45, 119 8 f., 121 6, 9 – 100% subsidiaries 124 36 – 1972 Convention 118 5 – 90% upstream merger 132 10 ff. – adressees of merger report 124 43 – approval by general general meeting 126 1 ff., 9 ff., 20 f. – Brexit 118 59 ff. – BRIS 130 3, 8 – cash compensation 122 43, 125 17, 126a 1 ff., 10 ff. – cash payments 120 1 ff. – co-determination 118 25 ff., 133 3 ff., 10 ff. – common draft terms of the cross-border merger 122 1 ff. – company statute 118 52 f. – consequences of errors 124 45 ff., 125 30 ff. – content of merger report 124 17 ff. – control agains abuse and fraudulent purposes 127 29 ff. – cooperatives 118 62, 120 6 ff. – corporations 119 1 ff. – creditors 124 33 f. – deadline and timing of scrutiny of legality 128 8 f. – deadline of expert report 125 22 f. – deadline of merger report 124 44 – deletion of old registration 130 9 – Directive 1978/855/EEC 118 11 f. – Directive 2001/23/EC 126c 2 – Directive 2002/14/EC 126c 2 – Directive 2005/56/EC 118 27, 44 – Directive 2009/109/EC 118 30 – Directive 2009/38/EC 126c 2 – Directive 2012/17/EU 118 31 ff., 130 3, 8 – Directive 2014/59/EU 118 32, 120 11 ff. – Directive 2017/1132/EU 118 28 – disclosure of documents 123 1 ff., 10 ff. – dissolution of the company being acuired 131 11 – domestic mergers 121 4 f. – EEA 118 59 ff., 70 f. – EEC Treaty 118 4

– – – – – – – – –

Index – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

effective date 129 1 ff. EFTA 118 59 ff. employee consultation 126c 1 ff. employee information 126c 1 ff. employee participation 118 6 f., 9 f., 18, 25 ff., 133 1 ff. employees 122 24 f., 36 f., 124 35, 131 15 f. EU Company Law Package 118 33 evaluation of assets and liabilities 122 38 ff. examination of merger report 125 1 ff. exchange of shares 131 7 ff. exit right 126a 1 ff. expert report 125 1 ff. form of expert report 125 21 form of merger report 124 14 general meeting 126 1 ff. gold-plating 118 65 grandfathering 134 3 incorporation theory 118 54 f. legal consecuences 131 1 ff. legislative history 118 1 ff. lex soceietatis 118 52 ff. liability 133a 1 f. liability of experts 133a 1 f. majority requirement 126 18 f. merger by acquisition 119 11 f. merger by formation of a new company 118 66 ff., 119 13 f. merger control 121 7 f. merger report 124 1 ff., 125 1, 35 mergerers 118 41 non-EU Member States 118 70 f. online publication 123 25 f. operations comparable to mergers 120 3 partnerships 118 62, 119 4 parts of merger report 124 15 f. PLCs 118 46 pre-merger certification 127 1 ff., 9 ff., 127a 1 ff. proposals 118 14 ff. protection of creditors 126b 1 ff. protection of shareholders 118 39, 126a 1 ff. publication 123 13, 130 1 ff. real seat theory 118 54 f. registration 130 1 ff., 9 Regulation (EC) No. 139/2004 121 7 f. reporting date 122 42 represenatatives of employees 124 39 right to challenge share exchange ratio 126a 16 ff. safeguards for creditors 122 44, 126b 1 ff. scope of application 118 46 ff., 120 6 ff., 121 1 ff. scope of scrutiny 127 6 ff. scrutiny of legality 127 1 ff., 128 1 ff. SE negotiation model 133 6 ff., 18 separate or joint reports 124 10 f., 125 5 ff. SEVIC decision 118 40, 63 share exchange ratio 122 20 ff., 125 10, 18 f. side-step mergers 119 16 ff. small general clause 119 5 ff.

– transmission of pre-merger certificate 127a 1 ff. – Überseering decision 118 58 – UCITS 120 9 f. – universial succession 131 4 ff. – update of merger report 124 40 f. – upstream merger 119 10, 15, 124 38, 125 36 ff., 126 12, 132 1 ff. – validity 134 1 ff. – validity in relation to third parties 131 12 ff. – voluntary additions to the minimum content 122 45 ff. Cross-border merger directive Intro 146 Cross-border mobility Intro 85 Cross-border mobility of corporate entities – cross-border conversion 85a-86u 2 – public consultation (2017) 85a-86u 2 – study by the EU Commission (2016) 85a-86u 2 Cross-border transfer of registered office – disclosure in branch register 34 17 f. Current business II 5 5 Current transactions II 5 5 ‘Daihatsu’ (judgment of the CJEU) Intro 186 Data protection III 7 8, 8 1, 9 16, 9b 24 De facto member of the management body – groups of companies Intro 118 ff. De facto remuneration policy III 9a 9 Deadline III 9c 20 Decision-making process III 9a 32 Decisive influence Intro 109 – groups of companies Intro 118 ff. Declaration to exercise the right to dispose of the shares – informative nature 86i 20 – legal nature 86i 19 – timing 86i 22 – unbinding statement 86i 20 Definitions III 2 1; IV 2 3 – Annex II of the Company Law Directive 86b 1 – background IV 2 2 – company 86b 1 – converted Company 86b 1 – creditor 86b 2 – cross-border conversion 86b 1 – departure Member State 86b 1 – destination Member State 86b 1 – legal mobility vs. physical mobility 86b 1 – limited liability company 86b 1 – multiple-vote securities IV 2 4 – offeree company IV 2 4 – offeror IV 2 4 – overview IV 2 1 – parties of the bid IV 2 4 – persons acting in concert IV 2 4 – persons controlled by another person IV 2 5 – polbud 86b 1

1035

Index – procedures and formalities 86b 2 – safeguards 86b 2 – securities IV 2 4 – special rights 86b 2 – takeover bid IV 2 4 Delay of disclosure III 9c 21 Delegation III 9a 12, 9b 4 Deregulation Intro 3, 22 Development of the directive IV Intro 7 Digital Tools Directive (2019) pre 28a-42 10, 29 1 – disclosure of accounting documents 31 4 Digitalization Directive 1 7 – entry into force pre 7 11 – key regulations pre 7 8 – overall objective pre 7 10 – scope pre 7 9 Direct applicability pre 44-85 64 Direct effect pre 44-85 64 – of Directives Intro 203; III 15 3 Director – accountability III 9b 27 – definition III 2 15 – duties and qualification (third country companies) 37 40 – remuneration III 9a 1 ff., 9b 5, 9c 42 Disclosure Intro 38, 78, 84, 91 f., 99, pre 28a-42 2, 6, 21, 26, 28a 1, 30 1, 31 1, 37 1; III 13 6 – accounting documents Intro 186 – activities of the branch 37 7 – branch (extent) pre 28a-42 2 – branch address 37 6 – branch details 30 1 – branch number 35 9 f. – branch register 35 9 f. – branches Intro 99, pre 28a-42 1 ff. – BRIS 86g 1 – Commission proposal 86g 4 – company’s website 86g 1 – compulsory 33 1, 38 1 – confidential documents 160g 4 ff. – cross-border division 160g 1 – development of the provision 86g 4 – diverging requirements of 36 17 – documents and particulars relating to a branch 29 1 ff. – draft terms of the cross-border conversion 86g 1 – duties of 29 8 – failure of 40 1 – formalities 41 1 – format and costs III 3g 7 – impossibility 39 11 – in cases of multiple branches 38 1 – insolvency Intro 99 – letters and order forms 35 5 – means and effects (branch) pre 28a-42 15 ff. – National Gazette 86g 1 – notice to stakeholders 86g 1

1036

– – – – –

of accounting documents 42 1 of accounts (branch) pre 28a-42 23 of charges (Art 3d) III 3d 1 ff. overview pre 7 20 persons authorised to represent the company 37 23 – primary means of (branch) pre 28a-42 15 ff. – register of the company 37 9 – register of the departure Member State 86g 1 – registration number of the company 37 9 – requirements of 29 1 – right to submit comments on the draft terms 86g 1 – secondary means of (branch) pre 28a-42 15 ff. – timeline 86g 1 Disclosure (branch) – accounting documents 30 26, 31 1 ff. – application and implementing arrangements 40 1 ff. – articles of association 30 30 ff. – balance sheet 31 8 – changes to documents and information of the company 30a 1 ff. – closure 30 27 f. – diverging disclosure requirements 29 12 – documents and particulars to be disclosed 30 1 ff. – exhaustive lists of items of disclosure 30 36 ff. – failure of 40 1 ff. – impossibility 37 11 – infringements 40 5 ff. – items to disclose 29 4 ff. – language and translation 30 31 – language of 37 14 – letters and order forms 35 1 ff. – memorandum of association 30 30 ff. – penalties 29 10 f., 40 1 ff. – securities on the company's property 30 34 – signature of any person having the power to represent the company 30 29 Disclosure formalities – branch (responsibilities) 41 1 ff. Disclosure infringements (branch) – personal liability of the persons who acted for the company 40 11 ff. Disclosure of documents – cross-border merger 123 1 ff. Disclosure of the bid IV 8 5 f. – background IV 8 2 – making public of the bid IV 8 4 – overview IV 8 1 – relation to other provisions IV 8 3 Discretion Intro 19 Dismissal of auditor – PIE I 101 Disposal of the shares – acquisition of own shares 86i 28

Index – national law 86i 27 – notarization 86i 27 – share transfer 86i 27 Dissolution of the company being acuired – cross-border merger 131 11 Distribution 56 1 ff. – capitalisation of reserves 56 14 – disguised distributions 56 5 ff. – groups of companies 56 19 – Issuer liability 56 20 – unlawful distribution 56 7, 57 1 ff. Division Intro 97 Division by acquisition 136 1 ff., 160b 8 ff. – common features of divisions 136 4 – definition 136 1 ff. – division by formation 136 10 – draft terms of division 137 1 ff. – European model for structural changes 137 1 – non-proportional division 136 11 – ratio-altering division 136 11 – ratio-preserving division 136 11 Division by separation 160b 7 – simplified formalities 160p 1 Division of the company – disclosure in branch register 34 16 Divisions under the supervision of a judicial authority 157 1 157 – creditor protection 157 6 – facilitations 157 2 ff. – purpose 157 1 Documents and particulars 37 1 Documents for inspection 143 1 f. – minimum standard 143 2 Domestic merger 88 2, 4 f., 13, 89 8 f., 11 – 2001/23/EC 98 1, 3 – accounting statement 97 7, 15 – acquis communautaire 87 3 – Action Plan on European Company Law and Corporate Governance 87 4 – adequate security 99 14 f. – administrative board 106 1, 3 ff. – aproval 93 1 ff., 94 1 ff., 8 – besloten vennootschap met beperkte aansprakelijkheid, BV (Netherlands) 87 13 – Brexit 87 17 – cash payment 88 12, 116 1 ff., 117 1 ff. – certification 102 1 ff. – civil liability 95 17, 106 1 ff., 107 1 ff. – cooperatives 87 18 – creditors 99 1 ff. – cross-border merger 121 4 f. – d&o liability 106 1, 3 ff. – Daihatsu case 87 6 – debenture holders 100 1 ff., 101 1 ff. – derogation from approval requirement 94 1 ff. – Directive (EU) 2019/2121 87 5 – Directive 2014/59/EU 87 12, 19 f.

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

Directive 2017/1132/EU 87 3 dissolution 105 15 draft terms of merger 91 1 ff., 92 1 ff. EEA 87 15 EEA Joint Committee 87 16 effective date 103 1 ff. EFTA 87 15 employee participation rights 101 5 employees 98 1 ff. employees' rights 98 1 ff. exchange of shares 105 2 expert report 96 1 ff. experts 107 1 ff. experts' liability 107 1 ff. formation of a new company 88 1 general meeting 93 1 ff., 94 1 ff., 111 1 ff. Germany 87 22 GmbH Gesellschaft mit beschränkter Haftung (GmbH) 87 13 gold-plating 87 21 holders of special rights 101 1 ff. Iceland 87 15 insolvent 87 19 f. inspection by shareholders 97 1 ff. inspection right 94 5 interest of creditors 99 1 ff. interests of debenture holders 100 1 ff. legal consequences 105 1 ff. legal entities 87 10, 11 legislative aim 87 6 ff. legislative history 87 1 f. Liechtenstein 87 15 liquidation 87 19 f. majority requirements 93 6 ff. management board 106 1, 3 ff. merger by acquisition 89 1 ff., 10, 12 f., 91 1, 14 merger by formation of a new company 90 1 ff., 94 8, 97 23, 99 18, 109 1 ff. merger report 95 1 ff. Norway 87 15 nullity of mergers 108 1 ff. other operations treated as mergers 88 11 PLC 87 13 f. principle of totality of transfer 89 6 protection of creditors 99 1 ff. protection of debenture holders 100 1 ff. protection of employee's rights 98 1 ff. protection of holders of special rights 101 1 ff. protection of minority shareholders 94 6 public limited liability companies 87 13 f. publication 104 1 ff. rescue merger 89 10 safeguards 87 8 f., 99 1 ff., 100 1 ff., 101 1 ff. scope of application 87 10 f. share exchange 105 9 ff. share exchange-ratio 96 11 f. société à responsabilité limitée, (S.à.r.l.) 87 13 stock options 101 5

1037

Index – supervision by authorities or judiciary 102 1 ff. – universial succession 89 7, 105 2 ff. – upstream-merger 88 6 ff., 97 24, 98 5, 99 18, 110 1 ff., 112 1 ff., 114 1 ff., 115 1 ff. – virtual share options 101 6 Dominant influence – groups of companies Intro 114 ff. Draft terms – accounting date 160d 22 – allocation of shares 160d 36 – cash compensation 160d 37 – confidential intormation 160d 11 – creditors 160d 38 ff. – cross-border division 160d 1 ff. – disclosure 160d 10 – distribution of dividends 160d 21 – employees 160d 19 ff., 30 – errors 160d 41 – form 160d 8 – language 160d 9 – legal nature 160d 3 – modification by general meeting 160h 17 – responsible body 160d 6 – special advantages 160d 24 ff. – special rights 160d 27 – timetable 160d 18 Draft terms of cross-border conversion – basic rule 86d 29 – change of corporate governance 86d 11 – comprehensive information 86d 1 – confidential information 86d 1 – corporate information 86d 10 – creditor 86d 17 – creditor protection 86d 17 – delegation 86d 7 – disclosure 86d 1, 8 – employee participation 86d 7, 29 – employment conditions 86d 27 – equal treatment of shareholders 86d 14 – existing corporate details 86d 10 – form requirements 86d 5 – golden handshake 86d 21 – guarantees 86d 17 – holders of special rights 86d 14 – immaterial advantages 86d 21 – impact Assessment 86d 27 – incentives 86d 24 – incorporation of the converted company 86d 11 – indicative timetable 86d 12 – instrument of constitution and statutes 86d 11 – key steps 86d 12 – language requirements 86d 6 – location of branches 86d 27 – location of head office 86d 27 – location of subsidiaries 86d 27 – minimum information 86d 8 – most important information 86d 1 – negative statement 86d 15, 17, 21, 29

1038

– – – – – – – – – – – – –

non voting shares 86d 15 offer of cash compensation 86d 25 one-tier system 86d 7 participation agreement 86d 29 pledges 86d 17 preferred shares 86d 15 proposed corporate details 86d 10 protection of employees 86d 27 protection of minority members 86d 25 public creditors 86d 24 repercussions on employment 86d 27 responsibility 86d 7 rights to designate and appoint board members 86d 15 – safeguards 86d 17 – scrutiny procedure 86d 1, 29 – securities other than shares 86d 14 – special advantages 86d 21 – special negotiation body 86d 29 – special rights 86d 15 – standard rules 86d 29 – subsidies 86d 24 – timetable single-member company 86d 13 – two-tier system 86d 7 Draft terms of division 137 4 f. – content 137 6 ff. – division-specific requirements 137 6 – examination 142 1 f. – formal requirements 137 4 f. – written form 137 4 Draft terms of merger 91 1 ff., 92 15 – accounting date 91 15 – allotment of shares 91 14 – appointment of experts 96 8 f. – central electronic platform 92 12 – content 91 9 ff. – deadline for publication 92 5 ff., 9 – durable medium 91 7 – examination 96 1 ff. – experts 91 17 – form requirement 91 6 ff. – publication 92 1 ff., 94 4 – qualifications of experts 96 10 – responsiblity 91 5 – share exchange ratio 91 13 – special advantages 91 17 f. – special rights 91 16 – upstream-merger 91 19 – website 92 8 f., 13 f. Dualistic board III 9c 7 Dualistic management structure Intro 40 Dualistic system Intro 25, 46 – Austria Intro 45 – Germany Intro 45 – Italy Intro 45 f. – shareholders‘ right to choose Intro 149 “Durable data carrier” II 5 3 Duty of loyality III 9 3 Duty to acknowledge record 28c 1

Index Duty to inform – closure of branch 28c 3 ECJ – Centros, Überseering, Inspire Art 85a-86u 3 – cross-border conversions 85a-86u 7 – cross-border merger 85a-86u 7 – cross-border mobility 85a-86u 3 – freedom of establishment 85a-86u 3, 7 – SEVIC, Cartesio, VALE 85a-86u 7 – Trilogy 85a-86u 3 EEA Agreement pre 44-85 6, pre 28a-42 14, 2 5, 44 3 f., 5, 118 59 ff.; III 17 1 – application III 1 5 – cross-border division 160a 18 EEA Member States – cross-border merger 118 70 f. EEC Treaty 118 2 ff. Effective date 149 1 ff. – cross-border division 160q 1 ff. – cross-border merger 129 1 ff. – domestic merger 103 1 ff. – draft terms 160d 22 – no harmonization 149 1 ff. – registration 86q 1 Effective shareholder information III 3b 1 Effects of nullity 12 2 Effet utile pre 44-85 62 f.; III 3 2, 9 16, 9c 9, 14b 1, 15 4 EFTA 118 59 ff. eIDAS 13b 3 E-Justice-portal pre 7 5 Electronic means III 8 2 ff. Electronic participation III 5 5, 8 1 ff. – requirements and constraints III 8 9 f. Electronic publication I 38 Electronic register pre 7 3 Electronic transmission III 3c 8 Electronic votes III 3c 7 f. E-Mail III 3c 8, 12 3 Employee consultation – cross-border division 160k 1 ff. – cross-border merger 126c 1 ff. – Directive 2002/14 EC 86k 1 – Directive 2009/38/EC 86k 1 Employee information – cross-border division 160k 2 ff. – cross-border merger 126c 1 ff. – Directive 2002/14 EC 86k 1 – Directive 2009/38/EC 86k 1 Employee participation Intro 47, 50, 60 34 f., 84 1 ff. – at the board level Intro 49 – board level employee representation 86l 1 – co-determination of employees at board level 86l 1 – Commission proposal 86l 4 – cross-border divisions 160l 1 ff.

– cross-border merger 118 6 ff., 18, 25, 133 1 ff. – development of the provision 86l 4 – different rules of employee participation 86l 2 – existence of employee participation 86l 2 – fall back solution 160l 11 – impact assessment 86l 2 – in company organs Intro 48 – in various EU Member States Intro 51 – lex societatis 86l 3 – mechanism 160l 9 ff. – protection of employees 86l 1 Employees – cross-border merger 122 36 f., 131 15 f. – draft terms 160d 30 – involvement of Intro 41, 43, 48 – participation, four year perpetuation 160l 13 – participation of Intro 53 – protection of Intro 19 – report of the administrative or management body 160e 22 ff. – representatives of Intro 49, 51 – rights 145 1 ff. Employees’ representatives – background IV 14 2 – consultation IV 14 4 – overview IV 14 1 – relation to other provisions IV 14 3 Employee’s representatives – report of the administrative or management body 160e 32 f. Employment conditions III 9a 27 ‘Enabling law’ (groups of companies) Intro 105 Engagement policy – disclosure III 3g 4 – minimum content III 3g 4 Entrepreneurial company (Germany) Intro 145 Entrepreneurial freedom of design Intro 17 Equal treatment 85 1 ff.; III 4 1, 9 9, 9c 44 ‘Erzberger’ (judgment of the CJEU) Intro 36 ESMA III 3a 12, 18, 3k 1 – report III 3f 1 Establishment Intro 96, 105, 107, pre 28a-42 1 – cross-boarder pre 28a-42 1 – right of pre 28a-42 1 Estoppel III 15 4 EU letterbox companies 40 2 EuAccD – amendments I 6 f. – audit content I 42 – auditing I 39 ff. – categories of undertakings and groups I 11 f. – control concept I 31 – country-by-country reporting I 45 f. – definitions I 9 – enactment I 6 – exemptions I 43 f.

1039

Index – financial reporting principles I 17 – historical background I 3 – parent undertaking I 31 – preliminaries I 5 – principle of proportionality I 14 – scope I 8 – subsidiary undertaking I 31 – true and fair view I 15 European central plattform 25 1 European co-determination scheme – cross-border divsion 160l 4 ff. European Commission Intro 6, 22, 80, 154 European company Intro 6, 8, 18, 22, 44, 46, 48, 51, 63, 76, 90 f., 97, 119, 135, 146, 151, 154, 168 ff., 175 f., 180 ff., 186, 189, 191, 197, 200 f., 203 – involvement of employees Intro 49, 53 European company law Intro 22, 42, 135, 152, 154; II Preface 3 – material scope Intro 86 ff. – package 118 33 f. European company law package – 2019 Directive 85a-86u 1 – Commission proposal 85a-86u 1 – company law directive 85a-86u 1 – legal framework on cross-border conversions 85a-86u 1 European Cooperative Society Intro 54, 172 ‘European Corporate Governance Framework’ (Green Paper 2011) Intro 151 European currency unit 45 4 European Economic Interest Grouping Intro 166 f. European e-Justice Portal 17 1, 25 1 European Group for Private International Law Intro 71 European Model Company Act pre 44-85 44, Intro 153 European Model for Structural Changes – approval of the draft terms 85a-86u 16 – cross-border divisions 160a 6 f. – cross-Border Merger Directive 85a-86u 16 – draft terms 160d 2 – draft terms of cross-border conversion 85a-86u 16 – key procedural elements 85a-86u 16 – merger directive 85a-86u 16 – report of the independent expert 85a-86u 16 – report of the management or administrative organ 85a-86u 16 – SE-Regulation 85a-86u 16 – two-step legal scrutiny 85a-86u 16 European private company Intro 173 European system of interconnection of registers 25 1 European unique identifier 16 4 European units of account 45 3

1040

European works council – cross-border division 160k 3 Evaluation of assets and liabilities – cross-border merger 122 38 ff. Ex officio notification of changes (branch) 30a 5 ff. – items 30a 5 ff. – procedural steps 30a 14 ff. Examination of draft terms 144 1 ff. – division by separation 160p 1 – simplified formalities 144 1 f. – waiver 144 2 Exception for abuse of power of representation – collusion 9 20 – conflict of interest 9 21 ff. – mala fide exception 9 19 f. Exceptional circumstances III 9b 19 Excessive remuneration III 9a 7 Exchange of shares – cross-border merger 131 7 ff. Existing practice III 9a 9, 39 Exit right – cross-border merger 126a 1 ff. Expert report 96 5 ff. – cross-border merger 125 1 ff. – deadline 96 13 – domestic merger 96 1 ff. – examination of draft terms of merger 96 1 ff. – form 96 14 – joint report 96 3 – liability 96 21 – merger by acquisition 96 1 – merger by formation of a new company 96 22 – option to waive 96 19 f. – qualification of experts 96 5 f. – scope of examination 96 11 f. – separate reports 96 3 – share exchange-ratio 96 11 ff. – upstream merger 96 23, 125 36 ff. Experts – liability 96 21 Facilitation of the exercise of shareholder rights – necessary arrangements III 3c 3 – options III 3c 2 Factual justification 72 36 ff. Fair treatment III 9c 41 Fair value I 18 Fairness opinion III 9c 14 ff., 22 Family situation III 9b 25 ff., 26 Fees III 3d 3 Financial assistance 64 1 ff. – conflict of interest 65 1 ff. Financial information – Extent, content I 14

Index Financial institution 31 1 – corporate governance Intro 146 – disclosure 38 1 – disclosure of accounting (branches) 42 1 ff. – disclosure of accounting documents (limits) 42 4 Financial intermediaries III 13 2 Financial reporting – groups of companies Intro 107 ff. Financial reporting principles I 17 Financial statements – content I 19 Fines – disclosure infringements (branch) 40 9 ff. First Directive – history pre 7 1 – minimum level of protection pre 7 2 – purpose pre 7 2 – regulatory scope pre 7 1 Flexibility Intro 6, 17 ‘Flexibility clause’ (TFEU) Intro 187 f. Follow-up meeting III 5 6 Forced liquidation II Preface 7 Foreign entities III 3e 1 Foreign law III 3e 1, 3j 10 Foreign shareholders III 10 1 Foreseeability – standards of disclosure (branch) 36 19 Formal control – groups of companies Intro 132 Formation – division 49 23 – merger 49 23 Formation of new companies 155 1 ff., 156 1 ff. – application of rules on divisions by acquisition 156 1 f. – characteristics 155 2 f. – draft terms 156 4 – legal concept 155 1 Formation rules – small corporations Intro 139 Foundation requirements – tightening of the Intro 30 Founders 4 13 Freedom of capital movements Intro 177, 193 ff., 197 Freedom of choice of legal form Intro 4 Freedom of contract of the shareholders Intro 4 Freedom of establishment Intro 22, 74 ff., 81, 100, 177 ff., 178, 193 ff., 197, 160a 3 f. – restrictions on Intro 77, 184 Freedom of movement Intro 36 Freedom to contract theory Intro 10 f. Freedom to design the articles of association Intro 4

Freezing effect III 9a 9 Full division 160b 5 – Deletion of company being divided 160p 5 f. Full harmonisation Intro 200 ff.; III 10 2 Full-time equivalent III 9b 12 Fundamental freedoms (TFEU) Intro 177 ff. Further National measures III 3 1 Gender balance (non-executive directors) Intro 157 General German Commercial Code Intro 26 General meeting – agenda III 6 1, 14 – convocation III 5 1 ff. – convocation Period III 5 3 – cross-border division 160h 1 ff., 6 – cross-border merger 126 1 ff. – digital III 8 1 ff. – electronic participation III 5 5, 8 1 ff. – following GM III 9a 10 – follow-up meeting III 5 6 – good order III 9 3 – participation III 7 1 ff. – right to ask questions III 9 1 ff. – timing 160h 8 – virtual III 8 7 – voting requirements 83 1 ff. General meeting approval – challenge 160h 20 General principles – avoidance of the distortion of markets IV 3 11 – catch all clause IV 3 3 – commitment to the interests of the company IV 3 10 – control premium IV 3 8 – derogations IV 3 5 – duty to provide information to holders of securities IV 3 9 – fulfillment of consideration IV 3 12 – minimum requirements IV 3 2, 14 – overview IV 3 1, 6 – principle of equal treatment IV 3 7 f. – protection of the offeree company IV 3 13 – relation to other provisions IV 3 4 German Commercial Code 1861 Intro 28 – influence on EU Company Law Intro 26 German Constitutional Court – workers’ co-determination Intro 35 German Council for Private International Law Intro 70 German Transformation Act 87 22 Gesellschaft mit beschränkter Haftung Intro 2, 18, 20, 25, 27, 31, 39, 62, 76, 140, 161 Gold plating 118 65 – employee protection 160k 7 – protection of creditors 160j 5

1041

Index – report of the administrative or management body 160e 16 Golden handshake III 9a 30 Golden parachute III 9a 30 Grace period 16 16 Grandfathering – cross-border merger 134 3 Green Paper on a general corporate governance framework (2011) Intro 146 Green Paper on corporate governance for financial institutions (2010) Intro 146 Green Paper on the core issues of corporate law (2011) Intro 135 Group Intro 26, 42, 94, 109, 175 – auditor I 89 – definition I 10 – divisions 142 8 – interest Intro 153 – law issues II 2 20 Groups of companies pre 44-85 43 ff., Intro 23, 38, 64, 97, 105 ff. – German law Intro 120 – interest of the group Intro 105 – shadow director (UK) Intro 123 ‘Gründerzeit’ (Germany) Intro 29 Gründungstheorie 37 35 Guidelines III 9b 15, 34 – legal nature III 9b 36 Handelsregister versus Grundbuch 16 11 Harmonisation Intro 1, 6, 45, 66, 75, 100, 122, 129, 185; III 1 1; IV Intro 8 – degree III 3 1 – full harmonisation Intro 200 ff. – involvement of employees Intro 52 – minimum harmonisation Intro 200 ff. Harmonization of cross-border corporate mobility – connecting factor 85a-86u 12 – forum shopping 85a-86u 12 – general permissibility 85a-86u 12 – legal framework 85a-86u 12 – principles 85a-86u 12 – right to convert 85a-86u 12 Hidden contributions in kind (minimum harmonisation) Intro 200 f. High level group pre 44-85 10 – of company law experts Intro 148, 152 ff. Hive down – cross-border division 160b 4 Holding of own shares 63 1 ff. IASR III 2 12 f., 9c 6 – amendments I 50 – endorsement mechanism I 57 ff. – historical background I 47 ff. – scope I 52 ff.

1042

Identification of shareholders III 3a 1, 7 6, 9 14 – companies’ obligation III 3a 7 – companies’ right to III 3a 2 f. – data protection, privacy, secrecy III 3a 15 ff. – formal request III 3a 14 – restrictions III 3a 4 – retention period III 3a 16 – threshold III 3a 10 ff. Idryma Typou Intro 93, 177 Impartiality III 9c 30 ff. Implementing acts III 14b 1 Implementing regulation – Art 3a III 3a 18 – Art 3b III 3b 9 – Art 3c III 3c 11 Inapplicability of national law (if contrary to EU law) Intro 193 ff. Incorporation Intro 4, 69, 84, 175, 178 Incorporation doctrine Intro 66 ff., 68 f., 71 Incorporation theory – cross-border merger 118 54 f. Independent expert 142 3 f. – appointment 142 4 – cross-border division 160f 1 ff. – focus of examination 142 5 – independence 160f 4 – information requests 160f 10 – liability 160t 1 ff. – report 142 7 – scope of review 160f 6 Independent expert report – addressees 160f 11 – disclosure 160f 13 – errors 160f 14 – waiver 160f 16 Indirect proxy voting III 13 1 – disclosure III 13 6 Information concerning bids – additional information IV 6 9 – background IV 6 2, 3 – comitology IV 6 11 – information labor representative IV 6 5 – offer document IV 6 6 ff. – offer publication IV 6 4 – overview IV 6 1 – supervisory authority IV 6 12 Information on companies – background IV 10 2 – information to be disclosed IV 10 4 – managementreport IV 10 5 – overview IV 10 1 – relation to other provisions IV 10 3 – report of the board IV 10 6 Information regarding shareholder identity III 3a 5 ff. – definition III 2 16 In-kind contributions – small corporations Intro 139

Index ‘Innoventif ’ (judgment of the CJEU) pre 28a-42 3 Insolvency Intro 19 f., 39, 64 f., 162, 175, 135 11 – and company law Intro 162 ff. – communication between registers 34 6 ff. – directors’ duties to file for proceedings Intro 163 – disclosure Intro 99 – disclosure (branch) 34 1 ff. – third country companies 37 32 ff. Insolvency code Intro 20 Insolvency law Intro 19 f., 63 ff. Insolvency proceedings – registered office 30a 8 Insolvent companies – cross-border division 160a 32 Inspection by shareholders 143 1 f. Inspire Art Intro 2, 18, 100, 178, 193, 194, 196 ff. – freedom of establishment 85a-86u 6 – national disclosure requirements 85a-86u 6 ‘Inspire Art’ (judgment of the CJEU) Intro 2, pre 28a-42 3 Institutional framework (of European company law) Intro 176 ff. Institutional investor – arrangements with asset managers III 3h 1 ff. – charges III 3h 4 – competent Member State III 1 12 – definition III 2 8 f. – disclosure III 3h 4 f. – engagement policy III 3g 1 ff. – investment strategy III 3h 1 ff., 2 – public disclosure III 3h 2 – self regulation III 3g 2 – transparency III 3g 2 Instrument of incorporation 3 4 Instruments of constitution 32 3 – disclosure (branch) 30 30 ff. – language and translation (branch register) 32 1 ff. Insurance company 31 1, 42 1 – disclosure 38 1 – disclosure of accounting documents (limits) 42 5 f. – disclosure of accounting documents for branches 42 1 ff. Intangibilité du capital Intro 24 Interaction between EU and Member States’ Law Intro 176 ff. Interedil Intro 19 Inter-instrumental interpretation (EU law) pre 28a-42 13 Intermediary III 3a 1, 10 19, 13 5 – chains of III 3a 1 – definition III 2 7

– exercise of shareholder rights III 3c 4 – first, last intermediary III 2 7 – third-country intermediaries III 3e 1 International company law – connecting factors Intro 66 ff. Internet site III 1 6, 5 2, 9 12, 9a 37 Interpretation III 1 6 – autonomous interpretation III 2 1 – consistent interpretation III 2 1 – final jurisdiction III 2 2 – grammatical meaning pre 44-85 49 f. – historical interpretation pre 44-85 52 ff. – in conformity with the directivee III 15 3 – legal system pre 44-85 51 – methodology III 2 1 – of European (secondary) company law Intro 189 ff. – of national law, EU conformity Intro 181 ff. – teleological interpretation pre 44-85 58 Intra-Union transactions – disclosure (branch) 36 3 Investment companies with a fixed capital 44 10 Investment companies with variable capital 2 10 ff., 44 9 Investment screening Intro 73 Investment strategy – annual publication III 3h 3 Involvement of employees Intro 49, 53 f. – European Company Intro 49, 53 – harmonisation Intro 52 Issuer liability pre 44-85 46 ff. Italian law – dualistic system Intro 46 – influence on EU company law Intro 26 ff. Joint and several liability – cross-border division 160j 24 ff. Key drivers behind the 2019 Directive – impact assessment 85a-86u 13 – lack of harmonized rules 85a-86u 13 – lack of legal certainty 85a-86u 13 – Polbud 85a-86u 13 Know-your-shareholder III 2 5, 3a 1 Kornblum Intro 18, 77 Kornhaas Intro 64 ‘Kornhaas’ (judgment of the CJEU) Intro 64 Language of disclosure (branch) – accounting documents 38 11 Latin notary Intro 58 Legal capacity III 10 6 Legal capital 45 1 ff. Legal certainty III 6 14, 9b 34 Legal entities 13g 5 Legal form Intro 2, 27, 31, 48, 175 – change (disclosure in branch register) 34 14

1043

Index – choice of the Intro 14 – disclosure Intro 99 – disclosure of change (branch) 30a 12 Legal fragmentation – suboptimal protection of employees, creditors and minority members 85a-86u 14 Legal person III 10 6 Legal policy – EU company law Intro 74 ff., 134 ff. Legal protections Intro 21 Legal successor (of the company) – branch (disclosure) 34 11 ff. Legality check – re-examination 160o 5 f. – scope 160o 3 ff. – scope of scuritny 160m 7 – time limits 160m 9 – two-stage process 160m 4 Legislative history – 1985 Proposal 118 14 ff. – 2003 Proposal 118 20 ff. – cross-border merger 118 1 ff. – Directive 2005/56/EC 118 27 – Directive 2009/109/EC 118 30 – Directive 2017/1132/EU 118 28 ‘Letterbox companies’ Intro 178, pre 28a-42 5 Letters and order forms 35 1, 7, 39 1, 7 – additional particulars of disclosure (branch) 35 1 ff. – items to disclose (branch) 35 8 ff. – omission of particulars (branch) 40 7 f. – third country companies (branch) 39 1 ff. – used by a branch 35 1 ff. Lex causae – cross-border division 160d 32, 160r 10 Lex societatis 88 3 – branch register 36 9 ff. – cross-border division 160a 15 – cross-border merger 118 52 ff. – disclosure 37 31 – employee participation 160l 2 Liability – cross-border merger 133a 1 f. Liability of experts – cross-border merger 133a 1 f. Liability of the independent expert – absence of conflict of interest 86s 1 – civil liability 86s 1 – civil liability vs. administrative, profession or criminal liability 86s 4 – Commission proposal 86s 3 – development of the provision 86s 3 – impartial 86s 8 – independence 86s 8 – independence from the company 86s 1 – liability vis-à-vis members 86s 6 – liability vis-à-vis the company 86s 5 – liability vis-à-vis the company’s employees and creditors 86s 7

1044

– objective 86s 8 Liability of the sole shareholder II Preface 7 Limited Intro 3, 18, 31, 64, 111, 140, 144, 145, 174, 175, 200 – Germany Intro 39 – UK Intro 20 Limited liability Intro 91 – (not a) principle of EU Company Law Intro 93 – Individual entrepeneurs II Preface 1 Limited liability company Intro 2, 24 f., 27 ff., 40, 54, 59, 74, 76 f., 89, 102, 174 f., 187, 36 14, 135 6 – cross-border division 160b 1 Liquidation – cross-border division 160a 31 – measures pre 44-85 39 ff. Longer-term value III 9a 2 Long-term engagement of shareholders Intro 158 Long-term incentive III 1 3, 10 Long-term interests III 9a 18, 24 Long-term performance III 3g 1, 3h 1 long-term risk-adjusted III 3g 2 Long-term survivability of enterprises – reflection group Intro 153 Loss of subscribed capital 58 1 ff. Low capitalisation Intro 39 Luxembourg – employee participation Intro 51 Majority of shareholders – judicial review of decisions Intro 56 Majority requirement – approval of cross-border merger 126 18 – EU legislation Intro 187 f. Management board Intro 30, 32, 40, 51 Management report – content I 26 – corporate governance statement I 28 – disclosure (branch) 38 9 – disclosure in branch register 31 8 – material misstatements I 40 – non-financial statement I 29 Mandate theory 9 1 Market Abuse Directive pre 44-85 46 Market Abuse Regulation III 9c 45 Marleasing Intro 180, 183, 203 ‘Marleasing’ (judgment of the CJEU) Intro 203 Material changes III 9a 21 f. Material transaction III 9c 5 ff. Materiality – definition I 9 – threshold III 9c 8 ff. Media III 5 9 Medium to long-term development III 9b 29

Index Medium to long-term performance III 3i 1 Melloni Intro 183 Membership rights – small corporations Intro 140 Memorandum of association – disclosure (branch) 30 30 ff. Merger Intro 97 Merger by acquisition 88 1, 89 1 ff., 8, 11 ff. – cash payment 89 7, 9 – cross-border merger 119 11 f. – liquidation 89 10 – principle of totality of transfer 89 6 – universial succession 89 7 Merger by formation of a new company 88 1, 90 1 ff. – approval 94 8 – civil liability 106 11, 107 5 – companies in liquidation 90 4 – cross-border merger 118 66 ff., 119 13 f. – domestic merger 99 18, 100 6, 101 14, 102 9, 104 4, 105 16, 109 1 ff. – experts' liability 107 5 – general meeting 94 8 – nullity 108 20, 109 4 Merger control – cross-border merger 121 7, 8 Merger of companies – disclosure in branch register 34 15 Merger report – civil liability 95 17 – content 95 9 – cross-border merger 124 1 ff., 125 1, 35 – deadline 95 8, 10 ff. – domestic merger 95 1 ff. – form 95 4 – joint report 95 6 f. – legal and economic reasons 95 10 ff. – material changes 95 13 f. – option to waive report 95 15 f. – responsibility 95 3, 5 – separate reports 95 6 f. – update 95 13 f. – upstream-merger 95 18 Mergers and divisions Intro 100 f. – Cross-border Intro 102 MiFID II III 1 9, 2 3 Minimum capital Intro 3, 20, 24, 42, 94, 193, 194, 45 1 ff. – European Company Intro 171 – small corporations Intro 138 Minimum harmonisation Intro 200 ff.; III 9 7 Minimum protection 7 4 Minority interests Intro 41, 54, 55 ff. Minority rights – agenda items III 6 1 ff. – convocation III 6 2 – formal rights Intro 55 ff. – introduction of Intro 30

– limitability III 6 3 ff. – resolutions III 6 1 ff. – threshold III 6 8 Minority shareholders Intro 4, 23, 28, 38, 41, 47 – groups of companies Intro 105 ff. Mobility Directive Intro 100, 161 Mobility of companies – involvement of employees Intro 54 Modern technologies III 5 1 Modernisation of company law Intro 147 ff. Multi-person formations 13g 4 Multi-person voting III 10 3 Multiple branches – disclosure (infringements) 40 6 – disclosure of the instruments of constitution and of accounting documents 33 1 ff. – third country companies 38 12 – third country company 38 1 Multiple single shareholder II 2 9 Name of the company – disclosure Intro 99 – ex officio notification (branch register) 30a 5 National law – EU conform interpretation Intro 181 ff. Nexus of contracts Intro 12 Non-adjusting creditor Intro 9, 43 Non-allocated items 137 8 Non-Discrimination III 3d 2 Non-discrimination principle (EU law) Intro 195 Non-listed companies III 6 15 Non-shareholders III 7 3 Notarial certification Intro 60 Notary – civil law notary Intro 61 Notes to the financial statements – disclosure (branch) 38 9 – disclosure in branch register 31 8 Nullity of a division 153 1 ff. – limited cases 153 1 f. Nullity of mergers – domestic merger 108 1 ff. – merger by formation of a new company 108 20 Nullity of the company – purpose pre 7 18 Number of the branch – third country companies 39 8 ff. Object of the company – disclosure (branch) 37 18 Objective shareholder’s interest III 3c 5 Obligation to answer III 9 8

1045

Index Obligations of the board of the offeree company – background IV 9 2 – duty of neutrality IV 9 4 ff. – overview IV 9 1 – ratio personae IV 9 10 – relation to other provisions IV 9 3 – statement of the board IV 9 9 Omissions III 9c 7 Once-only principle 30a 1 – disclosure 30a 1 ‘One euro company’ (Germany) Intro 145 Online filing of documents and information – branches 28b 1 ff. Online formation pre 7 21 – of companies Intro 174 f. Online participants III 9 5 Online registration procedure – branch 28a 1 ff., 4 ff. Open-ended investment companies 2 13 Operations similar to mergers 88 11 Operations treated as mergers 116 1, 2 ff., 117 1 ff. Option bonds 68 32 f. Options model – authorization IV 12 10 – background IV 12 2 – breakthrough rule IV Intro 4 – disclosure IV 12 9 – duty of neutrality IV Intro 4 – non-EU offerors IV 12 11 – opt-in by companies IV 12 5 – opt-out by Member States IV 12 4 – overview IV 12 1 – reciprocity rule IV Intro 5, 12 6 ff. – relation to other provisions IV 12 3 Ordre public – disapplication of foreign law Intro 72 Organ – adequacy III 9c 26 – allocation of power of representation 9 5 – definition 9 6 – extended scope 9 7 f. – function 9 4 – shareholder meeting 9 9 – theory 9 1 Parent undertaking – groups of companies Intro 111 Partial division 160b 6 Participation III 8 2 – in the General Meeting III 7 1 ff. Partnerships Intro 31, 74, 75, 89, 178, 135 7 – as distinguished from companies 36 13 f. – cross-border merger 118 62, 119 4 Penalties – disclosure infringements (branch) 40 9 ff. – failure to inform of closure of branch 28c 4

1046

– third country companies (failure to disclose) 36 16 f. Period of ‘share-based fraud’ Germany Intro 29 Permanent representatives 30 1, 37 1 – appointment 30 19 – disclosure in branch register 30 13 ff., 17 ff. – disqualification 30 20, 37 29 – responsibility for disclosure (branch) 41 6 – third country companies 37 23, 26 Personal allocation of power of representation by the articles – general rule 9 24 Personal data III 9b 24 Personal liability – disclosure infringements (branch) 40 11 ff. Phantom stocks III 9a 29, 9b 16 PIE-auditors I 83 Place of incorporation theory Intro 4 Polbud Intro 66, 100 – abuse 85a-86u 11 – cross-border conversion 85a-86u 11 – forum shopping 85a-86u 11 – freedom of establishment 85a-86u 11 – isolated transfer of registered office 85a-86u 11 – liquidation procedure 85a-86u 11 ‘Polbud’ (judgment of the CJEU) Intro 100 Portal 17 1, 25 1 Power of control Intro 38 – roups of companies Intro 120 Power of representation – disclosure Intro 99 Pre-certification – cross-border division 160m 1 ff. Pre-conversion certificate – abusive purposes 86m 19 – circumvention of Union Law 86m 19 – collaboration amongst competent authorities 86m 1 – Commission proposal 86m 3 – competent authority 86m 6 – compliance with relevant conditions 86m 7 – conclusive attest of proper completion of pre-conversion procedures and formalities 86m 27 – criminal purposes 86m 19 – development of the Provision 86m 3 – evasion of Union law 86m 19 – examination of documents and information 86m 13 – extended timelines 86m 15 – fraudulent purposes 86m 19 – identification of abusive, fraudulent or criminal purposes 86m 21 – issuance 86m 27 – judicial review 86m 25 – Member States’ option for additional information 86m 10

Index – no uniform template 86m 27 – potential outcome of the scrutiny procedures 86m 15 – proper completion of formalities 86m 7 – refusal 86m 19 – scope of scrutiny 86m 7 – standard timeline 86m 15 – supplementary documentation 86m 10 – timeline 86m 15 – two-step scrutiny procedure 86m 1 Predictability Intro 17 Pre-division certificate 160c 5 – competent authority 160o 2 – judicial review 160m 17 Pre-emption right 72 1 ff. – exclusion of pre-emptive rights 72 23 Pre-Incorporation period 7 7 Pre-merger certificate – cross-border merger 127 1 ff., 9 ff., 127a 1 ff. Pre-merger squeeze out 114 8 Preventive restructuring – cross-border division 160a 32 – frameworks Intro 64 f., 162 ff. Primacy of application of EU law Intro 181 ff. Primary markets Intro 63 Principal agent conflict Intro 44; III 10 11 Principal place of business – disclosure (branch) 37 17 Principle of conferral Intro 183 Principle of equal treatment III 4 1 Principles of competition Intro 9 Private autonomy Intro 13 f.; III 9a 3 Private limited company Intro 2, 20, 31, 45, 93, 36 14 – low degree of ‘Europeanization’ Intro 136 ff. Procedure of a bid IV Intro 6 Procedures and formalities – consecutive application of two national laws 86c 1 – VALE 86c 1 Professional ethics I 80 Professional intermediaries III 13 2 Professional proxies III 10 19 Profit and loss account – disclosure (branch) 31 8, 38 9 – general provisions I 23 – layout limitation I 22 – simplifications I 23 Property of the company – disclosure (branch) 30 35 Proportionality III 3d 2, 9 15 Protection for employees Intro 6 Protection of creditors 146 1 ff. – additional safeguards 160j 17 – adequate system of creditor protection 86j 15

– – – – – – – – – – – – – –

allocations of assets and liabilities 146 1 claims 86j 27 combination of protective measures 146 8 Commission proposal 86j 5 credible demonstration 86j 17 creditor protection rules 86j 1 cross-border division 160j 1 ff. cross-border merger 86j 2, 126b 1 ff. date of disclosure of the draft terms 86j 13 debenture holders 146 12 definition of creditors 86j 12 development of the provision 86j 5 different protective measures 146 4 discontinuity in the applicable corporate law 86j 3 – dissatisfied creditors 86j 15 – draft terms 160j 9 – eligible claims 160j 6 – ex-ante system 86j 5 – ex-post system 86j 5 – impact assessment 86j 5 – joint and several liability 146 7 – lack of harmonized rules 86j 5 – legal economics 86j 8, 18 – liability of recipient company 146 2 – minimum harmonization 86j 8 – minimum standard 160j 4 – place of jurisdiction 86j 27 – preservation of members’ status quo 86j 3 – rebuttable presumptions 86j 8 – reduced likelihood of creditors’ taking legal action 86j 25 – security rights and contingent liability 146 5 f. – small creditors 86j 18 – solvency declaration 86j 8, 11, 23 – special rights holders 147 1 – strong role of independent expert 86j 8 – time limits 160j 29 – transaction certainty 86j 25 Protection of employee participation – basic rule 86l 7 – “before-and-after” principle 86l 12 – branch offices 86l 13 – communication 86l 27 – Erzberger 86l 14 – establishments 86l 13 – exceptions to the basic rule 86l 8, 10 – four-fifth rule 86l 10 – lowering the number of employees 86l 10 – modifications to principles and procedures under the SE-Directive 86l 19 – mutatis mutandis approach 86l 17 – negotiation 86l 15 – negotiations with employees 86l 10 – options for employee participation 86l 9 – outcome 86l 27 – perpetuation of an existing system of employee participation 86l 25 – procedural aspects 86l 17 – registration in the destination Member State 86l 16

1047

Index – – – – – –

scenarios 86l 9 scrutiny procedure 86l 16 SE-Directive 86l 15, 17 SE-Regulation 86l 15 special negotiation body 86l 15 status quo of co-determination vs. legal target status of co-determination 86l 23 – suitable legal forms 86l 23 Protection of employees 145 1 ff. – report of the administrative or management body 160e 15 Protection of members – additional cash compensation 160i 14 ff. – adequate cash compensation 86i 23 – cash compensation 86i 1, 160i 12 – change of applicable law 86i 2 – company’s obligation to pay an adequate cash compensation 86i 12 – cross-border division 160i 1 ff. – declaration to exercise the right to dispose of the shares 86i 18 – division by separation 160p 1 – eligible members 160i 3 ff. – exercise of rights 160i 6 ff. – exit right 86i 1, 12, 14 – governing law 86i 35 – holders of non-voting shares 86i 14 – holders of voting shares 86i 14 – independent expert 160f 2 – individual consent 160h 13 – opposition to the draft terms 86i 16 – reformatio in peius 160i 15 – report of the administrative or management body 160e 19 – right to contest the adequacy of the cash compensation 86i 12 – right to dispose of shares 86i 1, 12 – share exchange ratio 160i 18 – timeline 86i 18 – vote against the draft terms 86i 1 Protection of minority shareholders IV 5 1 ff., 11 – determinantion of control IV 5 8 – equal treatment IV 5 2 – equitable price IV 5 10 ff. – exceptions IV 5 7, 12 – judgement EFTA Court IV 5 13 – mandatory bid IV 5 4 ff. – person acting in concert IV 5 6 – relation to other provisions IV 5 3 – trigger IV 5 5 Protection of shareholders – cross-border merger 126a 1 Proxy III 10 1 ff. – definition III 2 6 Proxy advisor III 10 4 – Competent Member State III 1 12 – comply or explain III 3j 3 – conflict of interest III 3j 7 ff. – definition III 2 11 – report III 3j 5

1048

– transparency III 3j 1 ff. Proxy appointment III 11 1 ff. Proxy holder rights III 10 5 Proxy revocation III 11 1 ff. Proxy voting III 10 1 ff. – confirmation of receipt III 3c 7 f. – conflict of interests III 10 8 – instructions III 10 17 – multiple proxy holdings III 10 19 – record III 10 18 – sanctions III 10 21 – time limits III 10 8 – validity in private law III 10 16 Public announcement III 9c 14 ff. Public debate III 9a 36, 9b 6, 28 Public limited liability company Intro 1 f., 20, 24 f., 27 ff., 37, 40, 42, 45, 59, 67, 74, 76 f., 89, 94, 101, 142, 150, 200 – as distinguished from private limited liability company 36 14 Public policy – disapplication of foreign law Intro 72 Publication I 36 ff.; III 9b 29 – cross-border division 160g 2 – cross-border merger 130 1 ff., 6 ff. – liability I 37 Publication of division 150 1 ff. – formalities 150 1 Publication of draft terms of division 138 1 ff. – company registers 138 10 – exemption 138 8 – form of publication 138 3 ff. – modalities 138 9 f. – purpose 138 1 – websites 138 10 Publication tools – register 16 7 Quantitative ratios III 9c 9 Raising capital Intro 42 f. – small corporations Intro 139 Ratio-altering division 160b 13 Rational apathy III 10 1 Real seat Intro 2, 67, 69, 80, 82, 178 – doctrine Intro 66 ff. – reqirement Intro 72 – theory 118 54 f. Receipt of confirmation III 3c 7 f. Record date III 7 2 ff. – non-application III 7 5 – proof of shareholder qualification III 7 8 – register of shareholders III 7 5 Redeemable shares 82 1 ff. Redemption of capital 78 1 ff. – several classes of shares 81 1 ff. ‘Reflection Group’ Intro 152 ff.

Index Register pre 28a-42 2, 26, 16 9, 31 1, 35 1, 39 1 – companies 30a 1 – interconnection 25 1 – interoperation 25 1 – of origin 29 1 – of shareholders III 5 11, 7 5 – system of interconnection 28c 1, 5, 29 1, 30a 1 – system of interconnection (branch) 29 14 ff. Register of charges – British and Irish company law pre 28a-42 22 Register of the branch – third country companies 39 8 ff. Registered office Intro 2, 100, 195, 4 7 – European company Intro 171 – ex officio notification (branch register) 30a 6 ff. – insolvency proceedings 30a 8 – jurisdiction 30a 7 – transfer of the 30a 9 Registration I 79 – cross-border division 160p 1 ff. – cross-border merger 130 1 ff., 9 Registration number of the company – disclosure of change (branch) 30a 11 Registration of the cross-border conversion – harmonized minimum information 86p 1 – sequence of registration 86p 1 Regulated market III 1 9, 2 3 Regulatory approach Intro 23 Regulatory competition Intro 7, 18 Regulatory framework Intro 4, 9 f., 14 Regulatory policy model Intro 15 Relate party transactions – approval III 9c 39 Related party – definition III 2 12 f. Related party transaction III 9c 1 ff. – announcement III 9c 19 – approval III 9c 25 – circumvention III 9c 11 – conclusion III 9c 21 – conflicts with MAR III 9c 45 – delay of disclosure III 9c 21 – excemptions III 9c 33 ff. – impartiality III 9c 30 – material transaction III 9c 5 ff. – omissions III 9c 7 – procedural prerequisites III 9c 29 – public announcement III 9c 14 – remuneration III 9c 42 – sanctions and enforcement III 9c 46 – subsidiaries III 9c 17 f., 37 f. – systematic overview III 9c 2 – up-stream III 9c 40 Remuneration III 9a 1 ff. – existing practice III 9a 9, 39 – share-based III 9a 29, 9b 16

Remuneration committee III 9a 32 Remuneration policy – ad hoc revisions III 9a 35 – delegation to companies III 9a 12 – derogation III 9a 15 – duration III 9a 30 – establisment III 9a 4 ff. – exceptional circumstances III 9a 14 – freezing effect III 9a 9 – material changes III 9a 21 f. – personal reference point III 9a 6 – publication III 9a 36 f. – revision III 9a 11, 33 f. – right to vote on III 9a 4 ff. – shareholders’ vote III 9a 7 ff. – voting Schedule III 9a 19 f. Remuneration report III 9b 1 ff. – annual change III 9b 10 – audit III 9b 30 – delegation III 9b 4 – general requirements III 9b 3 – mandatory content III 9b 8 ff. – minimum content III 9b 5 – preparation III 9b 3 – publication III 9b 28 Report – annual implementation report III 3g 6 – chapter Ia III 3f 1 – proxy advisors III 3j 5 Report of the administrative or management body 86e 5 – addressees 86e 5 – adequate compensation 86e 14 – amount per share 86e 14 – business judgement rule 86e 8 – cash compensation 86e 14 – change of applicable corporate law 86e 15 – change of the applicable corporate law 86e 13 – changes to the location of the company’s place of business 86e 17 – company 86e 8 – confidential information 160e 27 – continuity of employment relationships 86e 19 – cross-border division 160e 1 ff. – disclosure 160e 12 – discounted cash flow method 86e 14 – employee information and consultation rights 160e 36 – employee participation at board level 86e 15 – employee’s right to render an opinion on the report 86e 23 – errors 160e 3 – generally accepted valuation methods 86e 14 – implications for employment conditions 86e 21 – implications for members 86e 15 – information and protection 86e 1 ff. – listed company 86e 14

1049

Index – material changes to employment conditions 86e 17 – minority shareholder protection 86e 13 – one-tier corporate governance 86e 15 – protection of employees 86e 17, 160e 15, 22 ff. – responsibility 86e 3 – rights and remedies available to members 86e 16 – section for employees 86e 17 – section for members 86e 13 – single member company 160e 8, 11 – single report 160e 4 f. – structuring options 86e 21 – timeline 86e 4 – timeline for comments 86e 23 – timing 160e 14 – two-tier corporate governance 86e 15 – unlisted company 86e 14 – waiver 160e 7 – waiver by members 160e 9 – waiver of the entire report 86e 5 Report of the independent expert – abusive scenarios 86f 2 – artificial arrangements 86f 2 – Commission proposal 86f 2 – development of the provision 86f 2 – disclosure 86f 1 – examination of the draft terms 86f 1 – methods used to determine the cash compensation 86f 5 – protection of members 86f 1 – report for members 86f 1 – special valuation difficulties 86f 5 – statement as to the adequacy of the cash compensation 86f 5 – strong role of the independent expert 86f 2 – value of the cash compensation 86f 5 Report on the recognition of the interest of the group (2016) Intro 105 Report to the members and employees – division by separation 160p 1 Reporting date – cross-border merger 122 42 Representation of the company Intro 91 – disclosure in branch register 30 13 ff. Representatives of employees – cross-border merger 124 39 Required minimum capital Intro 42 Requirements for formation Intro 3 Re-registration III 7 5 Rescission III 5 8 Responsibility for disclosure (branch) – company organ 41 5 – permanent representatives 41 6 – shareholders 41 7 Restrictions of fundamental freedoms – prohibition of Intro 196 ff. Restructuring proceedings 135 11

1050

Retention period III 3a 16, 9a 29 Revaluated amount I 18 Revision IV 20 1 – report IV 20 2 Revision Clause III 3k 1 Right of membership III 9 3 Right of pre-emption (full harmonisation) Intro 200 f. Right to ask questions – limitability III 9 13 ff. – linking to agenda items III 9 1 ff. – material scope III 9 4 – transposition III 9 6 f. Right to information (German Ltd.) Intro 39 Risk research Intro 43 Rule of incorporation 37 35; III 1 11 SAD – amendments I 65 f. – appointment of auditor I 99 – audit report I 90 – auditing standards I 88 ff. – auditor’s Fees I 86 – consolidated accounts I 89 – definitions I 74 – dismissal of auditor I 100 – enforcement I 95 f. – historical background I 62 ff. – independence I 81 ff. – internal organisation I 85 – international aspects I 104 f. – liability of auditors I 96 – objectives I 67 – privacy of auditees I 84 – professional ethics I 80 – professional requirements I 75 ff. – public oversight I 97 – quality assurance I 93 – relation to EUAccD I 73 – scope I 70 ff. – third countries I 104 f. Safeguards – adequacy as a condition 86j 21 – adequacy of safeguards subject to scrutiny 86j 20 Safeguards to members – Commission proposal 86i 10 – development of the provision 86i 10 – draft terms of the cross-border conversion 86i 4 – exit right 86i 8 – report of the company’s administrative or management body for members 86i 5 – report of the independent expert 86i 6 – right to dispose of the sahres 86i 8 – substantive protection 86i 8 Sanctions III 9 16, 9a 40, 9b 30 ff., 33, 9c 46, 10 21; IV 17 4 – background IV 17 2 – overview IV 17 1

Index – relation to other provisions IV 17 3 SAR – audit report I 92 – auditor’s fees I 87 – historical background I 62 ff. – objectives I 68 – public oversight I 98 – quality assurance I 94 – relation to EUAccD I 73 – scope I 71 f. Say on Pay III 9a 1 ff. – Member States options III 9a 13 ff. – remuneration policy III 9a 1 ff. – report III 9b 1, 20 SCE (2003) Intro 146 Scope pre 7 16, 7 2 Scope of application – chapter Ia and chapter Ib III 1 15 f. – colliding acts III 1 17 – example IV 1 6 – exceptions IV 1 9 – general III 1 8 ff. – geographically IV 1 5 – intermediaries III 1 15 f. – mandatory bid IV 1 4 – material scope III 1 10 – non-listed Companies III 3 1 – offeror IV 1 8 – personal Scope III 1 9 – securities traded in non-EU country IV 1 7 – voluntary bid IV 1 4 Scope of the Directive – background IV 1 2 – material scope IV 1 1 – relation to other provisions IV 1 3 – territorial scope IV 1 1 Scrutiny by the destination Member State – arrangements for employee participation 86o 8 – binding nature of the pre-conversion certificate 86o 11 – competent authority 86o 4 – connecting factor 86o 5 – development of the provision 86o 2 – incorporation requirements 86o 5 – scope of scrutiny 86o 5 – supplementary documentation 86o 8 – two-step scrutiny procedure 86o 1 Scrutiny of legality – cross-border merger 127 1 ff., 128 1 ff. SE negotiation model – cross-border merger 133 6 ff. Second Directive pre 44-85 2 ff. – Directive 77/91/EEC pre 44-85 2 ff. Secondary law of the European Union Intro 179 Secrets III 9 14 Securities Intro 63 – disclosure (branch) pre 28a-42 22

Securities on the company's property of the company – disclosure 30 34 Security Intro 17, 64 14 Self-conrol III 9c 42 Self-regulation III 9a 11 Sell-out – after takeover IV 16 4 – background IV 16 2 – overview IV 16 1 – price presumptions IV 16 6 – telation to other provisions IV 16 3 – threshold IV 16 5 Service on the company – address of the branch 37 6 SEVIC – cross-border merger 85a-86u 8 – decision 118 40, 63 – freedom of establishment 85a-86u 8 Shadow director (UK) – groups of companies Intro 123 Share – bearer share 4 10 – blocking III 7 1 – class 4 8 f. – nominal value 4 8 – registered share 4 10 – transfer 4 9 Share capital 47 5 ff. – nominal value 47 6 Share exchange ratio 96 14 ff., 142 5 – cross-border division 160i 18 – cross-border merger 125 10, 18 f. – draft terms 160d 16 – independent expert 142 5, 160f 7 f. – report of the administrative or management body 160e 19 Share-based remuneration III 9a 29, 9b 16 Share-exchange ratio 96 11 f. Shareholder Intro 20, 22 f., 41, 46, 55, 57, 65, 82, 88, 154, 185, 186, 202 – benefit III 3c 5 – ‘constitutional’ rights of Intro 94 – definition III 2 4 f., 13 4 – identification Intro 158; III 3a 1 – intermediaries III 2 5 – long-term engagement Intro 158 – minimum number Intro 93 – minority III 10 1 – proof of qualification III 7 8 – protection for Intro 6 – protection of Intro 1, 19, 20, 31 f., 38 ff., 42, 47, 186 – protective standards for Intro 30 – record date III 7 4 – responsibility for disclosure (branch) 41 7 – subjective interest III 9 3 Shareholder associations III 10 19 Shareholder identification III 11 3

1051

Index Shareholder meeting – recorded in minutes II 4 6 ff. Shareholders (maximum number) – small corporations Intro 140 Shareholders’ liability 30 11, 37 16 Shareholders’ Rights Directive (2007/36/EC) Intro 146 Shares Intro 63 – classes of shares 68 16 ff., 72 18 ff. – issue at discount 47 2 ff. – no-par value 47 2 ff. – own shares as security 66 1 ff. – par value 47 2 ff. – premium 47 3 Side-step mergers – cross-border merger 119 16 ff. Siemens v Henry Nold Intro 200, 202 Silence of the register 16 9 Single market Intro 9, 80, 83 Single-member company II 2 8 – Belgium II 2 7 – competitive disadvantages should be eliminated II Preface 8 – conflict between harmonisation efforts and national sovereignty II 7 1 – conflicts of interest II 5 2 – current operations II 5 4 – “delegation” of the shareholder’s powers II 4 2 – disclosure II 3 4, 6 – “durable data carrier” II 5 3 – Durchgriffshaftung II Preface 9, 2 9, 19 – EEA agreement II Preface 10 – Enkelverbot II Preface 9, 2 9 – equity capitalisation II 2 6 – formation phase II 3 2 – formationIdentity II 3 3 – France II 2 7 – French law II 2 5 – general rules on manager liability II 2 19 – independent expert report 160f 16 – internal market II Preface 8 – interventions which destroy the existence of the company II 2 19 – lack of internal company control II 3 1 – liability of the sole shareholder II Preface 8 – limitation of multiple single shareholders II 2 10 – meeting of shareholder II 4 1 – Member States II 1 2 – not included in the unified directive II Preface 11 – penalties for failure to comply with registration obligations II 3 7 – piercing the corporate veil II Preface 9, 2 9, 19 – prohibition of second-tier subsidiary II Preface 9 – promotion of single-member companies II 3 4

1052

– protective provisions II 7 4 – second-tier subsidiaries II 2 9 – separation between administrative body and highest decision-making body II 4 1 – shareholder holds his shares in trust for the co-shareholder II 3 5 – sole entrepeneurs II Preface 8 – special protective provisions II 3 1 – the decision-making body and the management body II 5 1 – transparency II 5 3 Single-member private limited liability company – France II 7 2 – Portugal II 7 2 Single-member public limited liability company II 6 1 – minimum capital II 6 2 Single-membered company Intro 88, 174 f. SLIM initiative pre 44-85 9, pre 28a-42 6 f., 7 SLIM working group pre 44-85 9 Small and medium-sized enterprise (SME) II 2 6; III 9b 22 f. Small company 14 10 Small corporation – EU legal policy Intro 134 ff. – harmonisation (overview) Intro 137 – low degree of ‘Europeanization’ Intro 136 ff. – organisational rights Intro 134 Small general clause – cross-border division 160b 3 Small reform Intro 37 Social efficiency Intro 15 Societas Europaea (SE) Intro 168 ff.; II 1 4 Societas Privata Europaea (SPE) Intro 173; II Preface 14 Societas Unius Personae (SUP) Intro 105, 107, 144, 173 ff., 187 f., 13g 1; II Preface 12 ff. – legal harmonisation II Preface 15 – national differences II Preface 16 Société anonyme Intro 2, 24 f., 42, 76 Société à responsabilité limitée 36 14 Società a responsabilità limitata 36 14 Sole entrepreneur – limit his or her liability II 2 6 Solvency certificate – liability 160j 14 Solvency declaration – cross-border division 160j 11 Solvency test 45 9 Special advantages – cross-border merger 122 32 f. – draft terms 160d 24 ff. Special rights – cross-border merger 122 31 – draft terms 160d 27 Split voting III 10 20, 13 8

Index Squeeze-out Intro 150 – after takeover IV 15 4 – background IV 15 2 – compensation IV 15 9 ff. – exclusion IV 15 7 – fast-track IV 15 10 – overview IV 15 1 – presumptions IV 15 11 – relation to other provisions IV 15 3 – threshold IV 15 5 f. – threshold calculation IV 15 7 – time limit IV 15 8 Stakeholder protection – high level of discretion 85a-86u 15 – lost opportunity 85a-86u 15 – minimum harmonization approach 85a-86u 15 State regulatory policy theory Intro 10 Statement of performance I 22 Statutory Audit Directive (2006) Intro 146 Striking-off of the branch from the register 34 10 ff. Striking-off of the company from the register – disclosure (branch) 34 1 ff. Structure of the company Intro 95 Subagency III 10 12 Subjective shareholder interest III 9 3 Subscribed capital 3 7, 46 1 ff. – disclosure (branch) 37 19 Subscription – full subscription 71 1 ff. – of own shares 59 1 ff. Subsequent single-member company II 2 1 Subsidiary pre 28a-42 1, 5; III 9c 17 f., 37 f. Subsidiary undertaking – definition I 10 – groups of companies Intro 118 ff. Substantive control – groups of companies Intro 132 Substantive judicial review 72 36 ff. Supervisory authority IV 4 2, 17 f. – applicable law IV 4 12 f. – background IV 4 3 – competency IV 4 6 – competent authority IV 4 7 ff. – cooperation IV 4 15 f. – derogations IV 4 17 – designation by the Member States IV 4 5 – disputes IV 4 18 – overview IV 4 1 – relation to other provisions IV 4 4 – secrecy IV 4 14 Supervisory board Intro 12, 25, 30, 40, 45, 47 ff., 51, 57 Supranational entities created (or planned) by the EU Intro 166 ff. Sustainability III 9a 24

System of interconnection of business registers (‘BRIS’) Intro 156 – cross-border division 160p 3 f. System of normative conditions with compulsory registration Intro 29 Takeover Intro 97 Takeover bids Intro 88, 104; IV Intro 1 ff. Takeover Directive (2004/25/EC) Intro 146 Targeted push III 5 9 Test of accordance – accounting documents 38 10 Test of equivalency – accounting documents 38 10 Text form III 6 7, 11 2 TFEU – impact on EU company Law Intro 181 Think small first I 5 Third country – coss-border division 160a 21 Third country company – accounting (disclosure) 37 37, 38 1 ff. – activities of the branch 37 7 – articles of association (disclosure) 37 12 – branch address 37 6 – closure of the branch 37 38 – company organ 37 25 – directors’ duties and qualification 37 40 – disclosure (branch) 36 1 ff., 37 1 ff. – disclosure of EU branch pre 28a-42 11 – diverging requirements of disclosure 36 18 – electronic communication (branch) 39 5 – extention of disclosure 36 5 ff. – insolvency 37 36 – insolvency (disclosure) 37 32 ff. – instruments of constitution (disclosure) 37 12 – items of disclosure (branch) 37 6 ff. – items to disclose (branch) 36 5 ff. – legal form (disclosure) 37 15 ff. – letters and order forms (branch) 39 1 – lex societatis (disclosure) 37 8 – memorandum of association (disclosure) 37 12 – multiple branches 38 12 – name of the branch (disclosure) 37 20 ff. – name of the company (disclosure) 37 20 ff. – number of the branch 39 8 ff. – permanent representative 37 28 – persons authorised to represent the company (disclosure) 37 23 – principal place of business (disclosure) 37 15 ff. – register (disclosure) 39 10 f. – register of the branch 39 8 ff. – register of the company 37 9 – registration number 37 9, 39 10 f. – subscribed capital (disclosure) 37 15 ff. – winding up (disclosure) 37 32 ff.

1053

Index Third country context – cross-border divisions 160a 12 f. Third party – insider 9 10 ff. – meaning 9 10 Third-country proxy advisors III 3j 10 Threshold III 3a 10 – 5 percent III 6 8 – related Party Transactions III 9c 24 Time allowed for acceptance IV 7 4 – background IV 7 2 – exceptions IV 7 5 f. – overview IV 7 1 – relation to other provisions IV 7 3 Timeline – interaction between pre-conversion certificate and approval of the conversion 86o 10 ‘Trabrennbahn’ (judgment of the German Federal Court of Justice) – real seat doctrine in international company law Intro 67 Transaction-based approach III 9c 5 Translation III 5 10 – accounting documents (branch) 38 11 – disclosure (infringements) 40 6 – requirements (branch) pre 28a-42 24 Transmission of information III 3b 1 – bottum up III 3b 5 f. – minimum content III 3b 3 – subject III 3b 2 – top down III 3b 7 Transparency Intro 20, 55, 112 ff.; III 3d 2, 9a 3, 16, 9b 1, 21, 27 f., 9c 22, 14 1 – report III 3i 2 f. – requirements in capital markets Intro 112 ff. Transparency Directive pre 44-85 46 Transposition III 1 6 f., 3 2, 15 1 – of the 2019 Directive 85a-86u 17 Trasmission of information – chains of intermediaries III 3b 8 True and fair view Intro 190 – exemptions I 16 Trusteeship III 13 2 Tunneling III 9c 1, 8 Two-tier board 3 10 Two-track solution Intro 45 Überseering Intro 2 – decision 118 58 – doctrine of incorporation 85a-86u 5 – freedom of establishment 85a-86u 5 – legal capacity 85a-86u 5 – reincorporation 85a-86u 5 ‘Überseering’ (judgment of the CJEU) Intro 2 UCITS III 1 13 – cross-border merger 120 9 f. – vross-border division 160a 28 Ultima ratio III 9a 40

1054

Unique identifier – branch 29 16 f. Universal succession 105 2 ff. – cross-border merger 131 4 ff. Unrestricted and “unrestictable” power to represent the company 9 2 Unrestricted power to bind the company – extent 9 17 – general rule 9 14, 16 – “objecitve” and “subjective” limits 9 17 f. – Restrictions via the objects 9 15 Unternehmergesellschaft Intro 18, 145 f. Upstream merger 88 6, 7 ff., 91 19 – approval 93 14 – civil liability 106 11, 107 5 – cross-border merger 119 10, 15, 124 38, 125 36 ff., 126 12, 132 1 ff. – domestic merger 99 18, 100 6, 101 14, 102 9, 104 4, 105 16, 110 1 ff., 112 1 ff., 113 1 ff., 114 1 ff., 115 1 ff. – draft terms of merger 110 4 – employees' rights 98 5 – expert report 96 23, 110 5, 125 36 ff. – experts' liability 107 5 – general meeting 93 14 – inspection by shareholders 97 24 – merger report 95 18, 110 5 – nullity 108 20 – share exchange-ratio 110 4 Upstream transactions III 9c 40 USA – Treaty of Friendship with the FRG (1954) Intro 69 VALE Intro 2, 22 – actual pursuit of economic activity 85a-86u 10 – cross-border conversion 85a-86u 10 – deregistration 85a-86u 10 – freedom of establishment 85a-86u 10 – predecessor in law 85a-86u 10 ‘Vale’ (judgment of the CJEU) Intro 2 Validity 160u 1 – cross-border merger 134 1 ff. – grandfathering 86t 1 – legal certainty 86t 1 – of the company Intro 91 Validity of obligations – commercial certainty pre 7 17 – purpose pre 7 17 Valuation – draft terms 160d 32 ff. – independent expert 160f 7 Vertical comparison III 9b 12 Vesting periods III 9a 29 Virtual general meeting III 8 7 f., 9 5 – COVID-19 III 8 8 Virtual shares III 9a 29, 9b 16

Index Vote – chains of intermediaries III 3c 10 – confirmation III 3c 9 – confirmation of receipt III 3c 7 f. – insignificant III 3g 6 Voting III 7 1 ff. – by correspondence III 12 1 – counting III 14 3 – instructions III 10 12, 11 3 – of non-shareholders III 7 3 – record date III 7 2 ff. – results III 14 1 f. – schedule III 9a 19 f. Voting confirmation III 3c 6 ff. – chains of Intermediaries III 3c 10 Website III 1 6, 5 2, 9 12, 9a 37, 9c 19 – branch (disclosure) 39 6 f. – disclosure (branch) 39 6 f. Website of the company – disclosure 35 6 f. – letters and order forms (branch) 35 6 f. Winding up III 1 14 – and insolvency (branch, disclosure) 30 23

– communication between registers 34 6 ff. – disclosure Intro 99 – disclosure (branch) 34 1 ff. – third country companies 37 32 ff. ‘Winter Group’ Intro 148 Withdrawl of shares 79 1 ff., 80 1 ff. – several classes of shares 81 1 ff. Workers’ co-determination – German Constitutional Court Intro 35 Workers’ shares 84 1 ff. Works councils – cross-border division 160k 3 Writing III 6 7, 11 2 Written report 141 1 ff. – content requirements 141 2 – formal requirements 141 3 ff. – group divisions 141 8 – informatio obligation 141 7 – joint reports 141 3 – minimum requirements 141 2 – purpose 141 1 – separate reports 141 3

1055