7.5 Cross-border conversion and cross-border demerger

On the 16^th of December 2008, the ECJ delivered its long-expected judgment in the case of Cartesio.1 This case was about a Hungarian limited partnership (betéti társaság) that wished to transfer its de facto head office to Italy, but at the same time wished that Hungarian law continued to govern the partnership. However, according to Hungarian law, it was not possible to transfer the de facto head office of the limited partnership outside of Hungary with continuing applicability of Hungarian law. Therefore, the Hungarian Court of Registration refused the application for registration of the aforementioned migration. The Hungarian Court of Registration was of the opinion that the partnership needed to be wound up and reincorporated in order to cross the Hungarian border and move to Italy. The question put before the ECJ was whether the Hungarian Court of Registration was allowed to refuse registration of the migration, in view of Art. 43 and 48 of the TEC (nowadays: Art. 49 and Art. 54 TFEU).

In short, the ECJ held that invoking Art. 43 TEC (Art. 49 TFEU) is only possible if the company meets the requirements of Art. 48 TEC (Art. 54 TFEU). The ECJ held that up to now there is no single connecting factor determining the national law applicable to a company throughout the Member States. Some Member States adhere the real seat doctrine; some others to the incorporation doctrine. Therefore, it is still up to each Member State to determine the applicable law at the incorporation of a company, but also to determine how to maintain a company governed by the laws of the Member State. If, by application of the real seat doctrine, the company no longer complies with the applicable law, the requirements of Art. 48 TEC (Art. 54 TFEU) are no longer met. In consequence, an appeal to Art. 43 TEC (Art. 49 TFEU) is not possible.2

Especially of relevance to this study are the remarks of the ECJ in the Cartesio case with respect to cross-border conversion. For this study, the option of an outbound cross-border merger, by means of which a BV is converted into a joint-stock company of another Member State, is of relevance. According to the ECJ, one has to distinguish the situation that the company migrates and wishes to maintain its applicable law from the situation that the company migrates and wishes to change the applicable law. The ECJ held that the power to determine the connecting factor with respect to the applicable law does not imply immunity from the rules of the TFEU on freedom of establishment and does not justify prescribing winding-up and liquidation of the company if it wishes to cross the border and change the applicable law. I cite the ECJ:

This view of the ECJ opens the door to the cross-border conversion of companies throughout the EU and EEA. A Member State cannot prohibit an outbound cross-border conversion, on the condition that the company is converted into a company governed by the laws of another Member State that allows an inbound cross-border conversion. A prohibition by prescribing winding-up or liquidation is not allowed. Nonetheless, the initial Member State is entitled to introduce restrictions on such conversion, but only in so far as these can be justified by requirements of the public interest. In accordance with standing case law, these restrictions both have to be essential to and proportionate to the attainment of such overriding requirements.

It is worth mentioning that in order to effectuate a cross-border conversion, the receiving Member State must allow an inbound cross-border conversion. As has been pointed out by Schutte-Veenstra, Luxembourg is familiar with such rules.4 In addition, Storm has put forward that Switzerland allows a cross-border conversion under certain conditions.5 The phrase "(...) converting itself into a company governed by the law of the other Member State, to the extent that it is permitted under that law to do so" seems to imply that Member States are not obliged to accept inbound cross-border conversions.

Further to the Cartesio judgment, the Dutch legislator cannot prohibit a BV to engage in an outbound cross-border conversion. The Cartesio judgment, however, does not explain what rules have to apply to such cross-border conversion. In this respect, harmonization of the roles is highly desirable, more particular by revival of the project on a Fourteenth EC Directive on the cross-border transfer of the registered office of companies. Unfortunately, the European legislator terminated this project.6

Regardless of how this matter is resolved, I point out that the option of an outbound cross-border conversion raises issues similar to the issues raised in the situation of a cross-border merger. The minority shareholder of a BV involved in an outbound cross-border conversion will be confronted with a fundamentally different law system, perhaps even without his consent. In my view, there are sound reasons to protect the minority shareholder of such a converting BV in a similar way as the minority shareholder of a disappearing company involved in a cross-border merger. The level of protection of the shareholder may differ from the level of protection provided by Dutch law, and it is pos sible that the shareholder is not familiar with the law that governs the foreign company. This minority shareholder has to be able to exit the company if he does not consent to the cross-border conversion, by means of an appraisal right.

Timmerman points to the urgent need for introduction of rules protecting minority shareholders, creditors and employees in the situation of an outbound cross-border conversion.7 Moreover, he indicates that the rules of protection have to be in line with the national rules on conversion in order to prevent possible discrimination further to Art. 49 and Art. 54 TFEU. Although I agree with Timmerman that rules of protection are urgently needed, in my view, the Cartesio judgment leaves scope for introduction of restrictions based on public interest, quite similar to the limited scope given by the Tenth EC Directive in the situation of a cross-border merger, especially as considered in Recital 3. Similar arguments can be derived from the Sevic Systems and Überseering judgments as referred to in § 7.4.2. Whereas the situation of a national conversion is not wholly comparable to the situation of a cross-border conversion, to a certain extent differences in restrictions may be justified by the rule of reason. Therefore, in contrast with Timmerman's view, I assume that differences in treatment are allowed.

The view that a Member State is allowed to introduce rules on the protection of minority shareholders, creditors, and employees is also of relevance in the situation of a cross-border demerger. Currently, Dutch law only includes rules on national legai demergers and does not facilitate a cross-border demerger. One may assume that the question whether effectuating a cross-border demerger is possible, could be answered positively by drawing a parallel with cross-border mergers. In short, in the Sevic Systems judgment, the ECJ held that a cross-border merger is just one of the means of a transformation operation a company could be involved in. About these types of transformation operations, the ECJ held that:

Further to the Sevic Systems judgment, it is possible that only facilitating national mergers, but denying the possibility of a cross-border merger categorically creates a conflict with Art. 49 TFEU. A parallel can be drawn with demergers. A demerger could be seen as one of the means of a transformation operation, and, therefore, is a matter that falls within the scope of Art. 49 TFEU. Further to the Sevic Systems judgment, it can be assumed that facilitating national demergers, but categorically precluding the possibility of cross-border demergers likely conflicts with Art. 49 TFEU.9 If a cross-border demerger can be based on the freedom of establishment (which is uncertain), this immediately raises the question of whether minority shareholders, creditors, and employees have to be protected in a way comparable to the protection they are offered in the situation of a cross-border merger. I think there is no overriding argument to treat the minority shareholder involved in a cross-border merger differently from the minority shareholder involved in a cross-border demerger.10 In this situation, an appraisal right could be introduced in the same way and justified in a comparable manner as in the situation of a cross-border merger.