Government Draft on the German Transformation Act: Will the Quick Cross-Border Company Conversion Come to an End?

In July 2019 we have informed you here in this blog on which the EU decided regarding cross-border conversions, mergers and divisions. In order to cast these changes into German law, the German government has planned respective amendments to the German Transformation Act (Umwandlungsgesetz).

These amendments will, in particular, reform the current procedure for the transfer of a German limited liability company, a GmbH, to another EU member state. At first glance, this cross-border company conversion will become more complex and difficult. It might therefore be a lucrative option for shareholders of German GmbHs to initiate a cross-border conversion this year, i.e. before the amendments will come into force.

I. Overview of the Essential Amendments

On 6 July 2022, the Federal Cabinet adopted the draft of an Act to Implement the Conversion Directive (UmRUG-RegE). This government draft continues the implementation of the Directive on Cross-Border Conversions, Mergers and Divisions (Company Conversion Directive, UmwRL) as a part of the so-called Company Law Package of the EU. The objective of the Company Conversion Directive is to create uniform regulations for cross-border transformation activities for corporations (limited liability company (GmbH), public limited company (AG), partnership limited by shares (KGaA)) within the EU.

This standardisation of legal requirements is complemented by a comprehensive EU effort to digitally interconnect national commercial registers and enable companies to transfer to other EU countries with legal certainty.

II. Company Conversion of a German Limited Liability Company

The cross-border company conversion means the transfer of a corporation founded under the laws of one EU member state to a legal form under the laws of another EU member state. Figuratively speaking, the corporation takes off its German legal dress and exchanges it for that of another EU member state.

One form of cross-border conversion that we frequently assist with is the transformation of a German GmbH into a Dutch B.V. (Besloten vennootschap met beperkte aansprakelijkheid) or into a Luxembourg S.à r.l. (Société à responsabilité limitée).

The adaptation of the regulations in the EU is accompanied by a number of innovations for this cross-border conversion, involving more steps and a more complex procedure. Due to the additional submission and waiting periods we expect that the cross-border conversion of a German GmbH to another European country will take longer in the future.

The now codified procedure consists of two steps. Once the prerequisites for the conversion in Germany have been met, the company must be registered in its new legal form in the register of the destination state in compliance with the relevant foundation regulations.

1. Conversion Report

Once the shareholders have decided on a cross-border company conversion, the management must first prepare a Conversion Report. This Conversion Report must illustrate the economic and legal effects of the cross-border company conversion for the GmbH, the shareholders and the employees. In particular, the management must describe the effects of the cross-border conversion on the future business activities of the company and its subsidiaries, if any. In case the GmbH has multiple shareholders, the report further must explain how the company conversion affects the shareholders' legal positions.

The Conversion Report must be made available to the shareholders electronically six weeks prior to the resolution on the conversion.

2. Conversion Plan

In the future, the management will additionally have to draw up a Conversion Plan. The Conversion Plan constitutes the core of the cross-border conversion and contains its key points. These are, in addition to the company name and the registered office of the new legal form, an indicative timetable for the cross-border conversion.

The Conversion Plan must be notarially recorded one month prior to the resolution of consent by the shareholders and subsequently be submitted to the registration court with a request for publication. Only in a second step, upon expiry of the month, shareholders may approve the Conversion Plan in a shareholders' meeting.

3. Examination Report

If the GmbH has more than one shareholder, in the future also a Conversion Examination must be performed. Previously, such an examination was only required in the case of mergers. The examination must be carried out by one or more experts, checking the information in the Conversion Plan for completeness and correctness.

After the examination, the conversion examiners will prepare an Examination Report. Also, the Examination Report must be made available to the shareholders one month before the shareholders' meeting.

If the GmbH has multiple shareholders and these do not waive the Conversion Examination in a notarially recorded form, this requirement may delay the cross-border conversion consid-erably.

4. Conversion Resolution

Once the Conversion Plan, the Conversion Report and, if necessary, the Examination Report have been made available to the shareholders meeting the respective deadlines the shareholders vote in a notarially recorded shareholders' meeting on the cross-border conversion. A qualified majority of 75% of the votes cast must be in favour of the cross-border company conversion.

Then the management of the company must register the resolved conversion with the commercial register and apply for the issuance of a so-called Conversion Certificate.

5. Examination by the Registration Court

Another important change regarding the cross-border company conversion is the now required verification of lawfulness by the registration court. In the future, the registration court will examine all the procedural steps and formalities described above. Only after completion of the examination will the registration court issue the Conversion Certificate. It certifies that all relevant requirements have been met in Germany. The Conversion Certificate is required for the registration of the company in the destination state. The German registration court transmits the Conversion Certificate electronically to the competent register in the destination state.

In the future, in addition to checking the documents, the registration court will also carry out a check for abusive practices. If there are any indications, the court will examine whether the cross-border conversion is planned for abusive or fraudulent purposes.
The examination by the registration court can lead to considerable delays in the conversion. Although the Act provides for an examination period of three months, it remains to be seen whether the registration courts will reach the limits of their capacity in view of the newly introduced procedures for cross-border conversions, mergers and divisions.

6. Blockade by Creditors

The reform of the German Transformation Act also legally regulates that, in the future, creditors of the GmbH can interrupt the registration of the cross-border conversion by filing an action for a security provision. Thus, creditors who can credibly demonstrate that they are entitled to a claim against the GmbH which arose prior to the publication of the conversion, and which has become due after the publication, can prevent the cross-border conversion, if the conversion endangers the settlement of the outstanding claim. Creditors must assert their claim for security in court within three months of the publication of the conversion by the registration court.

7. Relocation to the Member State

The new registration of the company can then be filed with the competent register of the destination state. In addition to observing the formation provisions of the respective destination state, the company will have to submit the Conversion Certificate issued by the German registration court to the register of the destination state. In this respect, the register of the destination state is bound by the findings of the Conversion Certificate. This will simplify and accelerate the entry of the company in the register of the destination state in the future. The cross-border conversion becomes effective upon entry in the register of the destination state.

Once the company is registered in the destination state, the register of the destination state will notify the German commercial register of the entry so that the German register can delete the company from the German commercial register with reference to the conversion.

8. Transitional Arrangements

The government draft of the Act to Implement the Conversion Directive (UmRUG-RegE) provides for a transitional period for cross-border conversions that were resolved by the company before 31 January 2023 and filed with the registration court before 31 December 2023. During this transitional period, the cross-border conversion is still possible in accordance with the former legal provisions.

9. Conclusion

Thus, in the future there will be legal certainty for the shareholders and the registration courts for cross-border conversions. This is welcome, as the procedure for cross-border conversions currently depends to a large extent on how the respective registration courts apply the rules in practice.

The downside of the ensuing legal certainty in the European Economic Area is the expected prolongation of the procedure. This can be combined with higher costs for the company due to growing expenses.

III. Outlook

The Conversion Directive is to be transposed into national law by 31 January 2023.

IV. Last Chance for a quick Cross-border Company Conversion?

The welcome harmonisation of European conversion law reforms the current legal situation in Germany. However, due to the increased complexity and the newly introduced procedural steps, cross-border conversions will take longer once the amendments come into force, especially in the first period after the amendment.

To avoid application of the amendments to the Act regarding a cross-border conversions, it may be advisable to initiate the cross-border conversion this year so that the conversion can be completed in accordance with the current legal situation.

We will be pleased to advise you on whether it is reasonable for your GmbH to convert to another European country before the end of the year.

Felix Busold and Volker Szpak