Cross-border conversions, mergers and divisions explained

In May 2023, Ireland transposed the EU Mobility Directive, under the European Union (Cross-Border Conversions, Mergers and Divisions) Regulations 2023 into national law (the “Mobility Directive”). The Mobility Directive is part of an initiative by the European Union to enhance cross-border mobility and freedom of establishment within the single market, through the introduction of a more harmonised legal framework for cross-border conversions and divisions of limited liability companies in the EEA.

The Mobility Directive, which repeals and replaces all prior legislation on cross-border mergers, provides greater flexibility in the cross-border restructuring options available to European limited liability companies by allowing cross-border conversions and divisions for the first time. The legislation also introduces enhanced and simplified procedures to enable companies to more easily relocate from one EEA member state to another, by means of conversion, division or merger.

Under the new framework, European companies will benefit from increased flexibility in the cross-border restructuring options available. The legislation provides specific steps for each of these processes which aim to ensure that the transaction is not artificial and that the interests of the employees, members and creditors are protected.

Scope

The Mobility Directive does not apply to any regulated financial services entity that falls within the remit of the EU Bank Recovery and Resolution Directive, including banks, significant investment firms, and certain collective undertakings. Where any other type of Irish-regulated financial company seeks to convert, divide, or merge, the Central Bank must be notified, and its response must be notified to the High Court. It is unclear what rights the Central Bank would have to block or amend a restructuring proposal and whether it could or would in practice continue to supervise any such entity post-relocation. Likewise, the role of the Central Bank where a regulated entity in another EEA member state seeks to convert, merge or divide into Ireland is even less clear.

Cross-Border Mergers

There are three forms of cross-border mergers:

1. Merger by Acquisition: Whereby a company acquires all the assets and liabilities of one or more companies that is/are dissolved without going into liquidation. Members of the acquired companies are issued with shares in the acquiring company.

2. Merger by Absorption: Whereby a company that is to be dissolved without going into liquidation transfers all of its assets and liabilities to a company that holds all the shares in the dissolved company.

3. Merger by Formation of a New Company: Whereby two or more companies on being dissolved without going into liquidation transfer their assets and liabilities to a newly formed company. Members of the dissolved companies are issued with shares in the new company.

Cross-Border Divisions

There are also three forms of cross-border divisions:

1. Full Division: Whereby a dividing company transfers its assets and liabilities to two or more recipient companies. In exchange, the members of the dividing company are issued with shares in the recipient companies.

2. Partial Division: Whereby a dividing company transfers part of its assets and liabilities to one or more recipient companies. In exchange, the members of the dividing company are issued with shares in the recipient company/companies.

3. Division by Separation: Whereby the dividing company transfers part of its assets and liabilities to one or more recipient companies in exchange for the issue of shares in the recipient company/companies.

Conclusion

The introduction of a harmonised framework is a welcome development addressing several difficulties relating to private limited company cross-border operations which have been highlighted as barriers to freedom of establishment by the Court of Justice of the European Union in recent years. It will provide greater mobility for companies along with more certainty on the formalities and procedures to be followed to successfully conclude cross-border operations. The Mobility Directive will provide new opportunities for non-Irish EEA registered companies to relocate to Ireland in a more streamlined and efficient manner than is currently available.

For further information please contact Ronan Donohoe, Head of Company Secretarial.