Impact on cross-border mobility: UK companies relocating to Germany have approved and reliable concepts until Brexit takes effect
By Dr. Dirk Jannott, Petra Stoeckle and Peter Hocke

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Background

The British vote to leave the EU is a source of great uncertainty for UK corporates doing business within the EU. Such multinational companies domiciled in the UK as Vodafone have started to think publicly about “relocating” their domicile to other EU Member States. A key driver for this consideration is uncertainty about the legal framework that will govern UK companies after the UK leaves the EU. In particular, this concerns the fundamental freedoms currently secured under EU treaties, including the freedom of establishment and to provide services and the free movement of capital. The agreements to be entered into between the EU and the UK in connection with Brexit will determine whether and to what extent equivalent freedoms and the legal frameworks supporting them (such as passport provisions in the financial services sector that foresee a “one-stop shop” with one regulator for the entire EU) will be available to UK companies after the exit.

The need to consider relocating the company’s domicile could also arise for smaller companies incorporated under UK law but that have their place of effective management in Germany. In particular prior to liberalization of minimum capital requirements for German limited liability companies in 2008, a large number of German entrepreneurs had established companies under UK law as companies limited by shares in order to benefit from the less strict capitalization requirements in the UK at that time. This development was facilitated by judgements from the European Court of Justice stating that the freedom of establishment requires German courts to recognize the legal capacity of a company incorporated in another Member State irrespective of the company’s place of effective management. It is possible that – subject to deviating agreements – German courts may revert to requiring companies incorporated in the UK to have their place of effective management in the UK in order to be recognized as such. In a worst-case scenario, such a lack of recognition of a UK company by the German courts could even result in unlimited liability of the UK company’s shareholders.

Methods to relocate a company’s domicile to another EU or EEA Member State and timing

What methods are available for relocating a UK company to another EU or EEA Member State? The current legal framework provides, in principle, for four methods:

  • Outbound cross-border merger
  • Cross-border relocation of a European Company (Societas Europaea – SE)
  • Cross-border transformation of an UK company into a company incorporated in another EU or EEA Member State
  • Asset deal

With the exception of the asset deal, each of these methods is governed by European law and will (subject to potential deviating agreements or national legislation enabling companies to engage in cross-border relocations irrespective of their membership in the EU or EEA) therefore only be available as long as the UK effectively remains a member of the EU or, at least, the EEA.

In terms of timing, one may say that the UK has not yet even officially informed the European Council on its intent to leave the EU and that the actual exit is not likely to take effect prior to the end of 2018. Nevertheless, planning a relocation should not be set aside until the actual exit appears on the horizon as each of the methods available for relocation requires extensive preparation from an operational, tax and legal perspective.

Cross-border merger

Since the adoption of the Cross-Border Merger Directive in 2005 as legal basis for cross-border mergers of corporations within the EU, several mergers have taken place between UK corporations and companies located in different states of the European Union. As a reliable method for relocating, such cross-border mergers could be suitable for transferring all the assets and liabilities of a UK company to another Member State without the need for a liquidation process in the UK. If no existing entity is available or appropriate to serve as a transferee company, the shareholders of the transferor company would, in a first step, establish a new company in the chosen host Member State.

A period of at least eight to 12 months should be scheduled for such a cross-border merger. It is important to be aware that the merger not only has to be approved by a 75% majority of shareholders, but also, under certain conditions (and different from other Member States), by a majority in number, representing 75% in value, of the creditors present and voting at a UK creditors’ meeting.

Cross-border relocation of a European Company (SE)

The UK company could, in a first step, be transformed into an SE in accordance with the SE Regulation, however such a transformation requires the UK company be a public limited company (PLC) and have had a subsidiary in another EU or EEA Member State for more than two years. If the UK company is a limited company (Ltd.) with a subsidiary in another EU or EEA Member State for more than two years, it has to be transformed into a PLC first, before the transformation into an SE is possible. If the UK company has not had a subsidiary in another EU or EEA Member State for more than two years, the transformation can be achieved by way of a merger with an (acquired) shelf SE.

Once the transformation into an SE is completed, the SE can, in a second step, initiate a cross-border relocation into another EU or EEA Member State by transferring its domicile. The SE Regulation explicitly provides for such an option. The relocation requires a transfer proposal and a respective report, each to be drawn up by the management, as well as an approving shareholders’ resolution with a qualified majority. A period of at least 12 to 18 months should be scheduled for the transformation of a UK company into an SE and its subsequent relocation to another EU or EEA Member State.

Cross-border transformation

On the basis of judgements from the European Court of Justice, there is a strong argument that, from the perspective of European law, a cross-border transformation of a company incorporated in the UK into a company incorporated in another EU or EEA Member State is possible. In practice, this would be executed by way of transferring the UK company’s domicile to another Member State and incorporating the company in accordance with the laws of the transferee Member State. As a consequence, the company would not be dissolved and reestablished, but rather it would continue its existence. After the transformation, this would be in the legal form of the transferee Member State with the regulations of the transferee Member State now applying. This concept should be applicable for the UK until Brexit takes effect.

Due to a lack of practical precedents in the UK it is, however, doubtful whether a cross-border transformation will immediately be approved by UK authorities. Having to enter into disputes with the UK authorities would certainly create a more cumbersome process for cross-border transformations of UK companies than cross-border mergers, although continuation of existence may be more favorable for the company involved in terms of some aspects.

With respect to Germany, inbound cross-border transformations from other EU or EEA Member States are recognized and have been implemented in practice. As these transformations are carried out on the basis of judgements from the European Court of Justice, registration of these transformations should be aligned with the relevant German Commercial Register. Subject to potential delays in obtaining required approvals by UK authorities, a cross-border transformation can, from a German perspective, usually be implemented within a period of less than one year.

Asset deal

On the basis of an asset deal, a UK company could transfer all of its assets and liabilities to an entity incorporated in another Member State. Although the asset deal is a well-established method for relocation, its most material disadvantage is that the individual transfer of agreements requires in principle the consent of the relevant contractual partners. This can make the asset deal a rather complex process, and it carries the risk that negotiations could result in less favorable contractual terms. The extent of required approvals by contractual partners is therefore one of the key considerations when establishing a timeline for the implementation of an asset deal.

Conclusion

Until Brexit takes effect, there are approved and reliable concepts for relocation. There is, however, currently no visibility in terms of the post-Brexit legal environment governing cross-border relocations of UK companies to other Member States and vice versa. If the UK were to join the EEA, all of the aforementioned relocation methods would, in principle, still be available after Brexit takes effect. Nevertheless, companies considering a relocation to another EU or EEA Member State on the basis of the methods governed by EU law should closely monitor political developments and take into account the timing required for such a measure in order to not be faced with a different legal environment as a consequence of Brexit prior to completion of the relocation.

Dirk.Jannott@cms-hs.com

Petra.Stoeckle@cms-hs.com

Peter.Hocke@cms-hs.com

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