New regulations for cross-border conversions – Is there a need for action?

With the 2019 Transformation Directive, the European Member States have been obliged to implement standardised rules for cross-border transformation transactions in their respective national laws. At the beginning of July this year, the German government presented a draft law to implement the Transformation Directive. This is because the new regulations are to be implemented into German law by 31.01.2023. Therefore, the government draft is expected to be passed by the Bundestag and the Bundesrat before the end of this year.

The proposed regulations under the government draft contain a number of innovations. Until now, only mergers were regulated in German transformation law in the cross-border area. The new regulations will also regulate the cross-border demerger and the cross-border change of legal form, so that in future these three forms of transformation can be implemented with greater legal certainty under national law.

However, new regulations on co-determination law are to be implemented, which provide for a stronger involvement of employees or employee representatives. It has now been determined which works councils are to be involved, which leads to more legal certainty. This is due to the clarification that, contrary to the previously prevailing opinion, group works councils may also have to be involved. On the other hand, it remains to be seen whether, for example, the likewise expanded creditor protection rights and the accompanying possibility of a three-month block on the register will be abused so as to take advantage from the pressure of a possible delay in the overall process.

However, the new regulations also raise new questions. This is because, as a matter of principle, the new regulations prohibit the misuse of cross-border projects to restrict workers’ co-determination rights. If this is the case, a so-called negotiated procedure must be carried out. The issue of when such an abuse can be assumed, however, does not appear to be sufficiently clarified. According to the government draft, this is already the case if structural changes are made within four years that have the effect of impairing employees’ co-determination rights. This can be any structural change that, for example, causes a threshold of co-determination rights to be exceeded. This rigid regulation has already been criticised in the literature.

It will be interesting to see whether the legislative process will relativise the possibilities of abuse or blocking by dishonest creditors and whether the blocking of certain structural changes will be facilitated. So it remains exciting. If necessary, it may be possible to make use of the transitional arrangements and promptly tackle cross-border conversions on the basis of the previous law.

  • Dr. Steffen Lorscheider, LL.M.

    • Lawyer and notary
    • Trade law and company law