UmRUG Update: Implementation of the Reorganization Directive (“UmRUG”)

1. BACKGROUND

The UmRUG serves to implement the Transformation Directive (EU) 2019/2121 (“UmwRL”), which was adopted by the EU on November 27, 2019, as part of one of the largest reform packages of European company law, the so-called “Company Law Package“ and represents an important normative consolidation and continuation of the case law of the ECJ on the European freedom of establishment. The long-awaited harmonization by regulating cross-border division into several enterprises and cross-border changes of legal form of corporations in EU and EEA countries creates legal certainty and opens up new structuring possibilities. The UmRUG is completed by the Measures Act Preparatory Act (Maßnahmengesetzvorbereitungsgesetz, “MgVG”) concerning cross-border mergers and by the Act Implementing the Co-determination Regulation of the Transformation Directive (Gesetz zur Umsetzung der mitbestimmungsrechtlichen Regelung der Umwandlungsrichtlinie, “MgFSG“) for cross-border division into several enterprises and changes of legal form.

2. ESSENTIAL INNOVATIONS IN A NEW SIXTH BOOK IN THE GERMAN TRANSFORMATION ACT

The provisions on cross-border transformations are summarized in a new sixth book of the German Transformation Act (“UmwG”). The proven principles and the reference-rich system of the German Transformation Act are retained. As a result of the UmRUG, cross-border mergers in which the entire assets of a company are transferred to another existing company or to a new company established as a result are amended in Secs. 305-319 of the amended version of the German Transformation Act (“UmwG n.F.”). In addition, for the first time, provisions on cross-border division into several enterprises are created in Secs. 320-332 UmwG n.F. on new formations and on cross-border changes of legal form in Secs. 333-345 UmwG n.F. Whereas in the case of a merger of two legal entities, their assets are combined, in the case of a division into several enterprises, the assets of an entity are either

• divided as a whole between at least two existing or newly established companies (split-up);
• only part of the assets are transferred to one or more existing or newly established companies, whereby the shareholders of the company being spun off receive shares in the acquiring company (spin-off);
• or part of the assets are transferred to one or more existing or newly established companies, with the new shares being transferred to the transferring company (hive-down).

The cross-border change of legal form is primarily accomplished by transferring the registered office of a company to another state while retaining its identity. A transfer of assets does not take place.

In order to meet the increased need for protection of the parties involved as a result of the increase of the possibilities, new and, in part, more specific provisions have been included for the protection of creditors, employees, and minority shareholders. The procedure for cross-border restructuring measures involving a German corporation and their (legality) review basically follows the familiar procedure for cross-border mergers.

a) Protection of creditors

The new possibilities are not intended to allow companies to use clever structural measures to evade claims or make it more difficult to enforce them. Therefore, creditors of the transferring company or the company changing its legal form may, in accordance with Secs. 314, 328, 341 UmwG n.F., demand security in court insofar as the fulfillment of claims which are not yet due, but which already arose prior to the publication of the merger plan, division plan, or change of legal form plan (or its draft) are endangered by the transformation process. If the creditor has made this credible before the competent court, Secs. 316 para. 2 sent. 3, 329, 343 para. 2 sent. 3 UmwG n.F. provide in particular for a block on the register as long as the proceedings have not yet been fully completed. Pursuant to Secs. 314 para. 5, 328, 341 para. 1 UmwG n.F., the court having jurisdiction in this respect shall be the court in the district in which the competent registry court is also located. Upon request, this competent court shall inform the registry court whether such proceedings have been asserted in court (Secs. 315 para. 5, 329, 342 para. 5 UmwG n.F.).

b) Extension of the Examination Duties of the Registry Court – Abuse Control

The UmRUG extends the powers of the Registry Court. In addition to the existing examination duties, the register court must carry out an abuse control insofar as there are indications that a transformation is to be carried out for abusive purposes, in particular with the aim of evading or circumventing Union law or national law (Secs. 316 para. 3, 329, 343 para. 3 UmwG n.F.). According to the new act, indications exist in particular if:

• aa) a negotiation procedure to be conducted pursuant to Article 133 (2) to (4) of Directive (EU) 2017/1132 (to ensure co-determination) has only been initiated at the request of the court;
• bb) the number of employees is at least four-fifths of the threshold relevant for corporate co-determination, no value is added in the target country and the administrative seat remains in Germany;
• cc) a foreign company becomes the debtor of company pensions or entitlements as a result of the cross-border transformation and this company has no other operating business.

If the existence of the indications triggers a duty to examine on the part of the register court, the latter has the option of hearing the trade unions represented in the transferring legal entity pursuant to Secs. 317 No. 5, 329, 344 No. 5 of the Transformation Act (UmwG), as amended, insofar as this is necessary for the examination of the unfairness.