Cross-Border Mergers, Divisions and Conversions

Cross border conversions, mergers and divisions: the new framework

Cross border conversions allow a company to move its registered seat to another EU or EEA Member State and continue as a company governed by that state's law, without being dissolved and re-formed. Since 2023, German law regulates cross border conversions, cross-border divisions and cross-border mergers in a uniform way in the Transformation Act (Umwandlungsgesetz, UmwG), following the implementation of the EU Mobility Directive (Directive (EU) 2019/2121) by the Act implementing the Conversion Directive (Gesetz zur Umsetzung der Umwandlungsrichtlinie, UmRUG).

The reform codified what the CJEU had allowed under freedom of establishment, added a procedure for divisions across borders, and introduced protective mechanisms for shareholders, creditors and employees, including a mandatory review of whether the operation is abusive.

This briefing explains the three types of operation, the procedure, the abuse review by the register court, the protection of minority shareholders and creditors, employee participation and realistic timelines.

Three types of cross-border operation

In principle, the rules apply to corporations (GmbH, AG, KGaA and SE in some respects) and, for mergers, also to certain partnerships. Each operation is governed by the law of both states: the departing state controls the procedure up to the issue of a pre-transformation certificate, and the receiving state controls the remaining steps and the effective date. German law for cross border conversions therefore needs to be coordinated with the law of the other Member State from the outset.

Divisions across borders are, for now, mainly available as divisions to newly formed companies; divisions by absorption into existing foreign companies are possible only to a limited extent (§ 320(1) and § 332 UmwG). Third-country companies, including UK companies after Brexit, are outside the scope of the regime.

Procedure: plan, reports and resolutions

The management prepares a plan for the operation, which must contain the information required by the Directive and the UmwG, including the proposed timetable, the effects on employees and the cash compensation offer.

The plan or its draft must be filed with the commercial register and published, and the shareholders' meeting may resolve on it at the earliest one month after publication (§ 308(1) UmwG). Management also prepares a report for shareholders and employees, which must be made available to the works council, or to the employees where there is none, and to the shareholders at least six weeks before the shareholders' meeting (§ 310 UmwG). The works council can comment on the report, and shareholders must be informed of an opinion submitted in time.

An independent expert audits the plan unless all shareholders waive the audit, which is common in wholly owned group structures. The shareholders approve the plan by notarised resolution with the majorities required for domestic transformations, and they may make approval subject to their later confirmation of the employee participation arrangements.

The company then applies to the German register court for the pre-transformation certificate. The court checks within three months whether the German requirements are fulfilled (§ 316(1) UmwG for mergers, with corresponding rules for divisions and conversions). After the certificate is issued, it is transmitted electronically through the EU's interconnected business registers to the register in the other Member State, which completes the operation.

The abuse review

A central innovation of the reform is the abuse review. The register court must examine, where there are indications, whether a cross-border operation is being carried out for abusive or fraudulent purposes, in order to evade or circumvent EU or national law, or for criminal purposes, and must refuse the certificate if this is the case (§ 316(3) UmwG for mergers, applied correspondingly to divisions and cross border conversions). If additional information or investigations are needed, the three-month review period can be extended by up to three months.

The law lists indications that trigger closer scrutiny, including:

• negotiations on employee participation were only initiated at the court's request;
• the number of employees is at least four fifths of the threshold for board-level co-determination, no value is created in the destination state and the administrative seat remains in Germany;
• other indications listed in the statute, such as a foreign company becoming the debtor of significant liabilities or the company being in financial difficulty.

An indication does not mean that the operation is abusive. Companies can rebut it with a coherent business rationale and evidence of genuine activity in the destination state, such as staff, premises, customers or management functions located there. Documenting the commercial reasons in the plan and the report is therefore advisable.

Protection of shareholders and creditors

Shareholders who object to the resolution for the record are entitled to sell their shares to the company for appropriate cash compensation, which the plan must offer where the company will be governed by foreign law (§ 313(1) UmwG). The adequacy of the compensation and of any exchange ratio is reviewed in appraisal proceedings, not through actions against the resolution.

Creditors are protected before the operation takes effect. A creditor whose claim arose before the publication of the plan and is not yet due can demand security if it shows that fulfilment of its claim is endangered by the operation; the claim must be asserted in court within three months of publication (§ 314 UmwG). The register court may not issue the certificate until this period has expired or pending claims have been resolved. In addition, management must declare that the company is not aware of indications that it will be unable to meet its liabilities after the operation.

Employee participation

Board-level co-determination is the most sensitive issue in cross border conversions involving German companies. A company subject to the One-Third Participation Act or the Co-determination Act could otherwise escape co-determination by moving to a Member State without such rules. The Directive and the German implementing legislation therefore require negotiations with a special negotiating body of employees where certain conditions are met, with statutory fallback rules if no agreement is reached.

For cross-border mergers, the rules are in the Act on Employee Co-determination in Cross-Border Mergers (MgVG); for cross border conversions and divisions, a separate act, the MgFSG, applies. The negotiations can take up to six months, extendable, which often determines the overall timetable.

Employees are also protected through the employee report and, in Germany, through the rules on transfers of undertakings and works council rights where operations are affected. Our pages on board-level co-determination and the SE and co-determination explain the related questions.

Choosing the right structure

Cross border conversions are not the only way to reorganise across borders. Groups usually compare several routes:

• Cross-border merger of a German company into an existing company in another Member State, or vice versa. Useful where a group wants to reduce the number of entities, for example after an acquisition.
• Cross-border conversion where the company should keep its legal identity, contracts, permits and tax history as far as possible while changing its governing law. This is often attractive where many contracts or licences would otherwise need consent.
• Cross-border division to separate a business line into a new company abroad, for example before a sale or to create a regional holding.
• European Company (SE), which can move its seat within the EU under the SE Regulation and offers a negotiated employee participation model.
• Asset or share transfers combined with the liquidation of the old company, where the formal procedure would be disproportionate or the other state is outside the EU.

The choice depends on contracts and permits, tax consequences, co-determination, creditor relationships and the time available. Universal succession is a major advantage of the statutory routes, but it comes with the abuse review, creditor periods and employee procedures described above.

Illustration: a hypothetical German GmbH with 450 employees, most of them working in Germany, plans to convert into a Dutch BV and move its registered seat to the Netherlands while keeping its management and operations in Germany. Because its headcount exceeds four fifths of the 500-employee threshold for one-third co-determination, no value is created in the Netherlands and the administrative seat stays in Germany, the register court will treat the case as showing indications of abuse. The company should expect closer scrutiny and must be able to show legitimate business reasons, or reconsider the structure.

Timeline and tax for cross border conversions

A realistic timeline for cross border conversions and mergers is four to nine months, depending on the employee participation procedure, the length of the abuse review and the speed of the foreign register. The main steps are: structuring and tax analysis; drafting of the plan and reports; filing and publication; six-week report period and one-month waiting period; shareholder resolution; three-month creditor period; register review and certificate; completion in the destination state.

Tax consequences must be analysed separately. A move of the registered seat can lead to exit taxation of hidden reserves where Germany loses the right to tax them, while assets remaining in a German permanent establishment generally stay taxable in Germany. The Reorganisation Tax Act (UmwStG) provides tax-neutral options under conditions. Real estate transfer tax, VAT and the treatment of tax losses also need attention.

Tax rulings from the competent tax office can provide certainty before the operation is implemented, but they take time and should be requested early. Banks, insurers and key customers should also be informed in good time, because the change of governing law may affect account mandates, policies and supplier qualifications. Domestic transformations are covered in our briefing on UmwG mergers and spin-offs.

How TRW & Co helps

We advise companies and groups on cross border conversions, mergers and divisions involving Germany: structuring with tax advisers, drafting plans and reports, preparing the abuse-review documentation, coordinating employee participation negotiations, managing creditor claims and working with counsel in the other Member State and with the German register court. Our M&A team handles the corporate side, and our employment lawyers lead the co-determination workstream. Contact us to discuss a cross-border operation.