Redomiciliation in the EU

In the series of articles on redomiciliation, we have endeavoured to draw your attention to the specific procedures applicable in various jurisdictions. However, redomiciliation is not a unique procedure specific to only a few countries. Legislation on redomiciliation is also adopted at the level of intergovernmental organizations, such as the European Union (EU). This article focuses on the redomiciliation procedures undertaken within the EU.

On November 27, 2019, the Directive of the European Parliament and the Council of the EU was adopted. This Directive governs relations concerning the implementation of cross-border operations, i.e., operations leading to a change in the jurisdiction of a company. The Directive, however, primarily contains fundamental provisions regarding cross-border operations and is not a directly applicable document. Other words, it required EU countries to adopt national legislation by January 31, 2023 that would more specifically regulate the procedures it outlines in each EU country.

In accordance with this document, all cross-border operations are carried out only within the EU. In other words, the Directive regulates relations concerning the change of a company’s jurisdiction from one EU country to another EU country. It should be taken into consideration that the Directive applies only to limited liability companies (i.e., its provisions do not extend to public companies (those listed on the stock exchange), partnerships, etc.). 

The Directive established the basic approaches to redomiciliation and other cross-border operations within the EU. Cross-border operations are not limited to the simple relocation of a company from one country to another. Each operation has its own specific characteristics, based on which the Directive distinguishes between conversion, merger, and division. 

Cross-border conversion

Cross-border conversion can be characterized as “classic” redomiciliation within the EU. In other words, during a cross-border conversion, a company changes its jurisdiction without going into liquidation, “relocating” from the state where it was registered before the cross-border conversion to another state where it will be registered as a result of the cross-border conversion. The results of the cross-border conversion are the following:

• All assets and liabilities of the “relocating” company, including all rights and obligations, debts, etc. (including those arising from employment contracts), are transferred to the “relocated” company.
   
• All shareholders of the company remain after its “relocation,” except in cases where they have exited the company due to their disagreement with the cross-border conversion (this exception also applies to other operations).

Cross-border merger 

Cross-border merger involves changing the jurisdiction of a company by either merging a company from one state with a company registered in another state or merging companies from different states. A cross-border merger can take several forms: 

• the merger of a company from one state with an existing company from another state; 
• the merger of two or more companies from different states to form a new company; 
• the merger of a subsidiary company from one state with its parent company located in another state. In all types of cross-border mergers, all rights and obligations of the companies involved in such operations are transferred to the successors in another EU state.

Cross-border division

Cross-border division involves redomiciliation in three forms: full division, partial division and division by separation.

Full division involves a situation where a company transfers all its assets and liabilities to two or more newly formed companies, after which the original company ceases to exist. One of the resulting companies must remain in the state where the dividing company was registered, while the others may “relocate” to other EU countries. In a partial division, the legal entity transfers part of its assets and liabilities to one or more newly created companies but continues to exist. Finally, in a division by separation, the company creates a new subsidiary in which it becomes the sole participant. This subtype of cross-border division features a simplified procedure and requires fewer formalities. 
 

As mentioned above, the specifics of conducting cross-border operations are determined by individual acts of each EU member state, however, the Directive outlines the basic steps. It is important to note that in a cross-border merger, the steps outlined below are carried out by each individual company participating in the cross-border merger. 

1. The first step in the process of “relocating” a company from one state to another is for the company’s management body to prepare a draft of the preliminary terms for the cross-border operation. This document includes information on the estimated timeline for the cross-border operation, its consequences, and other details specific to the particular form of the cross-border operation.
    
2. The next step is for the company’s management body to prepare a report for the members and employees. This report should clarify and justify the legal and economic aspects underlying the company’s decision to proceed with the cross-border operation. It must also include an explanation of the implications of such a “relocation” for the company’s shareholders and employees.
    
3. Next, an independent expert is appointed to review the draft  terms of cross-border operation and prepare a report for the shareholders and employees based on the findings. The report must include, at a minimum, information on the compensation due to shareholders and employees in connection with the “relocation” (including the method of calculation) if these individuals disagree with the relocation and wish to leave the company. The expert’s review of the draft is conducted with regard to the specifics of the particular cross-border operation. For example, if a cross-border merger is chosen, each company involved hires one or more experts, meaning both the merging company and the company being merged, or all companies involved in the cross-border merger, may engage experts. Alternatively, it is also permissible to appoint one or more experts who can prepare a single report for all participants in the cross-border merger.
    
4. The draft terms of cross-border operations, as well as the notice to members, employees, and creditors that they may provide comments on the draft, must be disclosed and published with the registering authority at least one month prior to the general meeting where the approval of the draft will be decided. The company may be exempt from this disclosure requirement if it provides free access to the necessary information on its official website.  
    
5. Following the completion of the mentioned steps, a general meeting of the company must be convened to decide whether to approve the draft terms. If the draft is approved at the general meeting, the company must apply to the registering authority of the country where it is currently registered. This authority is responsible for verifying the legality of the cross-border operation and issuing a certificate of preliminary approval (pre-conversion/pre-merger/pre-division certificate). If no violations are found during the document review, the certificate is transmitted through the system of interconnection of registers to the registering authorities of the country to which the company is “relocating.” These authorities in the “receiving state” then verify the legality of the cross-border operation according to their national legislation and, based on the results of their review, either approve or reject the cross-border operation.
    
6. Once the cross-border operation is approved by the registering authority of the “receiving state”, the relevant information is recorded in the respective registers of the states involved. The state to which the company has “relocated” ensures that details about the company’s registration date and its status as a result of the cross-border operation are entered into the appropriate register. Conversely, the state from which the company has “relocated” ensures that details about the company’s removal date from the register and the fact that the removal is due to the cross-border operation are recorded in the appropriate register.
    

As described, a relocation from one EU member state to another is possible not only in the form of a “standard” relocation but also through cross-border procedures such as cross-border mergers, acquisitions, divisions, and spin-offs. 

Redomiciliation beyond the EU is not within the scope of the Directive. Such procedure is governed by local legislation; for example, Cyprus has established its own procedures beyond the Directive’s regulation, allowing companies from Cyprus to “relocate” not only within the EU but also beyond its borders.

Authors:
Egor Zelianouski, Talkanitsa Mikita

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