Cross-Border Change of Legal Form - New Legal Framework in Germany because of Implementation of the EU Conversion Directive
If a German company wishes to transfer its registered office to a country abroad, this requires a change of legal form to a legal form under the foreign law applicable at the new registered office. Cross-border changes of legal form therefore are time and again of importance in practice. However, the procedure is not that simple.
This is illustrated by a recent decision of the Zweibrücken Higher Regional Court (Oberlandesgericht "OLG", decision dated July 11, 2022 - 3 W 12/22). The OLG Zweibrücken ruled that the mere entry of a German limited liability company (GmbH) in the Turkish register as Limited sirketi (Turkish limited liability company) does not lead to an effective, form-changing transfer of the registered office (please refer to the article "No transfer of registered office by mere registration of a limited liability company in Turkey" by Meike Kapp-Schwoerer and Maximilian Fessel).
The European Court of Justice has confirmed the general possibility and permissibility of a cross-border change of legal form within the European Union on the basis of the freedom of establishment pursuant to Articles 49, 54 Treaty on the Functioning of the European Union (TFEU). In Germany, however, rules for a cross-border change of legal form had – so far – not formed part of the German Transformation Act ("UmwG"). This led to significant legal uncertainties in practice, especially after the EU Conversion Directive (Directive (EU) 2019/2121) came into force in January 2020. The Higher Regional Court of Saarbrücken (OLG Saarbrücken) (decision dated January 7, 2020 - 5 W 79/19) ruled that, in addition to the national provisions of sections 122a et seq. UmwG, the requirements of the EU Conversion Directive shall also be met even before its transposition into German law.
On March 1, 2023, the Conversion Directive Implementation Act ("UmRUG") finally came into force. The EU legal requirements for the harmonization of cross-border conversions, changes of legal form, mergers and divisions for corporations and thus the cross-border change of legal form are thereby implemented for the first time in Germany in Sections 333 ff. UmwG as amended.
According to the new provisions, corporations (e.g. stock corporations or limited liability companies) shall – in the first instance – draw up a plan for the change of legal form, which requires notarization and shall contain, inter alia, information on an indicative timetable, the participation of existing shareholders, the securities to be offered to creditors, the anticipated effects on employees and details on the offer of a cash settlement. The plan for the change of legal form or its draft shall be published by way of filing with the commercial register (Sections 336, 308 para. 1 UmwG). One month after this publication the shareholders may resolve on the change of legal form (Section 308 para. 1 sentence 4 UmwG). Furthermore, from the date of publication of the plan for the change of legal form, the creditors of the form-changing company have three months to claim security for their claims under certain conditions and to assert these claims in court.
In principle, a report on the change of legal form is also required. This report shall be sent to the shareholders and the employees or their representatives no later than four weeks prior to the resolution on the approval of the change of legal form by the shareholders. The report for the shareholders by way of exception is not required if there is only one shareholder or if all shareholders waive the report. The report for the employees is dispensable if the form-changing company and its subsidiaries, if any, have no employees other than those who belong to the representative body, i.e. managing directors or members of the board of management. Against that background the report on the change of legal form is for example dispensable in case of holding companies which have only one shareholder and no employees other than the members of the management.
An audit of the plan for the change of legal form or its draft shall also be carried out, unless the shareholders waive it or the audit is otherwise dispensable under the general provisions of the UmwG.
Finally, the shareholders shall approve the change of legal form by resolution and the approval shall be filed with the commercial register of the register court where the form-changing company was previously registered. After such approval the register court will have three months to verify that the requirements for the change of legal form have been met and if so, issues a certificate of change of legal form, which it also forwards to the register court abroad that is responsible for the company’s new registered office.
Against that background, the new provisions create more legal certainty for cross-border changes of the legal form. This is also accompanied by new regulations for the protection of shareholders, employees as well as creditors. It can be assumed that the practical relevance of such transactions will continue to increase as a result of the newly created legal framework. However, it must be pointed out that the new provisions only apply to corporations and not to partnerships.
17th April 2023