Germany will implement the EU company law directive (EU) 2017/1132 (latest government proposal: https://dserver.bundestag.de/btd/20/038/2003822.pdf). The new law will serve as a basis for EU-wide corporate mergers, divisions and transformations of German companies. In addition, it will provide for essential improvements to mergers and other company reorganizations. Below are some key topics and changes.
In accordance with the directive, cross-border mergers, divisions and transformations of companies will be regulated by the new German law in a separate chapter of the German Umwandlungsgesetz. Eligible to participate in EU cross-border mergers, divisions and transformations are – in principle – all corporations within the meaning of the company law-directive as amended, which have been established in a EU- or EEA-member state and which have their corporate seat, their place of management or their main branch in the EU- or an EEA-member state (EU companies). The new German regime restricts the application for certain constellations to protect co-determination rights (see below).
Shareholder Opt Out for Cross-Border Transactions
A company proposing to change its nationality by means of a merger, division or transformation (e.g., a German stock corporation – AG – wants to change its legal structure to become a French SA) must offer dissenting shareholders the option to redeem their shares for adequate compensation.
Shareholders of Surviving Company
Under the current merger rules, the shareholders of the surviving company need to challenge the validity of the merger resolution in court, even if their only concern was relating to the level of compensation being adequate. The shareholders of the company, which merged into the surviving company, were barred from challenging the merger resolution in court by virtue of compensation deficiencies but could use the appraisal process (Spruchverfahren) to have the compensation reviewed. Under the new law, both shareholder groups will be treated equally. No shareholder may challenge the validity of the merger resolution just for inadequacy of the compensation and all shareholders may call for an appraisal process.
Shareholders Compensation – Retrospective Adjustments
Stock corporations will have more flexibility to offer additional shares in lieu of cash, where the post-transaction appraisal process requires an adjustment of the conversion rate due to amended evaluations of the relevant businesses. The new law provides for an option to issue and/or sell reserved shares to shareholders to establish participations as if the appraisal court’s final assessment of the adequate compensation ratio had been applied when the transaction was executed. Thus, stock corporations can avoid having to hold large cash reserves for potential adjustments of the compensation by an appraisal court.
Technical Reorganizations – Group Internal and Young Stock Corporations
A lot of international groups are organized through various jurisdictions in the EU. Changing the company structure within the same group of companies throughout the EU will be made easier. In the course of a group reorganization reporting, evaluation and other formal requirements, and the requirements for capital raises and the issuance of new shares, may be waived, which the new law makes clear for even more scenarios.
Under the current law, stock corporations could not be merged into other companies prior to their second anniversary of registration. This will be amended to allow mergers of stock corporations regardless of their age.
If a company divides to create and transfer its assets to several new or existing companies, the debt will be transferred in accordance with the division scheme to just one entity, the liability of the other entities will be extended for five years but will be capped by the net asset value of the business transferred in the course of the division. Interestingly, neither Directive (EU) 2017/1132 nor the German law define the term “net asset value”. It is therefore unclear which accounting and which evaluation rules will need to be applied to determine the net asset value for the purposes of the new provision.
Creditors of foreign companies which are merged into German companies will need to apply for securities in course of the formal merger, division or transformation procedure, if the financial situation of the merging companies requires their claims to be safeguarded. This right to obtain protection, where the need for securities has been demonstrated by the creditor, will expire three months after the publication of the merger plan. Creditors of participating German companies can still file for securities up to six months after the publication of the registration of the transaction, if they can demonstrate that settlement of their claims is at risk.
The new law aims to harbor co-determination (Unternehmensmitbestimmung) of German business by its employees and to prevent international reorganizations which are designed to abusively circumvent a co-determination (German co-determination rules only apply to German corporations and only subject to certain headcount thresholds). German commercial partnerships will be allowed to assume other entities as a surviving entity if they have not more than 500 employees. Cross-border divisions will be available for EU companies. If made for transfer to existing companies, divisions can also be executed by a German company dividing its assets, if less than 400 staff are employed by all participating companies, and, if a German company assumes assets, less than 80% of the staff are employed by all participating companies under the relevant co-determination regime of the transferring company.
With the new law, the often long and painful appraisal procedures to review and amend shareholders’ compensation (Spruchverfahren) will see certain improvements. Court competencies will be determined in a clear procedure and – rather than the catch all settlement required today – the court will be allowed to assess relevant business values based on an evaluation agreed by a majority of applicants. The conflicting procedures for shareholders of the company absorbed by the surviving entity and the shareholders of the surviving entity will be combined.
All applicants in an appraisal process will now require representation by a German Rechtsanwalt for applications and statements to the competent court.