Company Reorganizations: Cross-border conversion approved by German court

n a recently published decision of July 2013, the Higher Regional Court of Nuremberg approved the cross-border conversion of a Luxembourg société à responsabilité limitée (S.à r.l.) into a German limited liability company (GmbH), which involved the transfer of both the statutory and the administrative seat of the company from Luxembourg to Nuremberg. The decision of the Higher Regional Court of Nuremberg is the first follow-up decision of a German court since the VALE judgement of the European Court of Justice (ECJ) of 12 July 2012 (C-378/10), in which the ECJ stipulated that a cross-border conversion of a company must be possible under the conditions provided by the national jurisdiction applicable in the respective case, even if such jurisdiction in principle only applies to companies that have been founded and validly exist in accordance with the rules of the respective jurisdiction.

Principles of the VALE Decision

In VALE, the ECJ had to decide on the transfer of both the statutory and the administrative seat of VALE Costruzioni Srl, a limited liability company under Italian law, to Hungary. The Hungarian courts had rejected the transfer of the statutory seat to Hungary as being incompatible with Hungarian law. The ECJ held that the decisions of the Hungarian courts violated EU law. According to the ECJ, the host member state may determine the national law applicable to such operations and apply the provisions of its national law on the conversion of national companies that govern the incorporation and functioning of companies. However, as a cross-border conversion of a company falls within the scope of the freedom of establishment (Art. 49 and 54 TFEU), the cross-border conversion has to be possible under the conditions set out by the respective national jurisdiction even if this jurisdiction in principle only applies to companies that have been founded and validly exist in accordance with the respective jurisdiction. In this context, the court noted that cross-border conversions may be not treated less favourably than purely domestic conversions (principle of equivalence) and, further, that the exercise of the rights conferred by EU law must not be rendered practically impossible or excessively difficult (principle of effectiveness).

Different Types of Cross-border Mobility

The VALE judgement was the first decision of the ECJ on the scope of the freedom of establishment in cases of a simultaneous transfer of both the statutory and the administrative seat from the perspective of the host member state. It provides for a new type of cross-border mobility of companies within in the EU and thus further continues the respective developments on EU level in the last years. More than ten years ago, the ECJ in his decisions Überseering (5 November 2002, C-208/00) and Inspire Art (30 September 2003, C-167/01) had already promoted the cross-border mobility of companies within the EU by allowing the cross-border transfer of the administrative seat of a company that maintained its statutory seat in the member state where it was founded. This jurisprudence of the ECJ triggered a wave of foreign companies in Germany, in particular limited liability companies under English law which, from a German perspective, were attractive in particular due to their lack of minimum share capital. Cross-border conversions should also be distinguished from cross-border mergers based on the EU Merger Directive of 26 October 2005, which was implemented in German national law in secs. 122a et seq. of the German Act on the Reorganization of Companies (Umwandlungsgesetz). While a cross-border conversion does not change the identity of the company, a merger means that the assets of the transferring company are transferred to the receiving company by way of universal succession and under dissolution of the transferring company without liquidation onto the receiving company. In practice, the preservation of the identity of a company can be helpful in particular with regard to change of control-clauses, data protection rules or, as the case may be, for the avoidance of real estate transfer taxes.

Summary

From a practical point of view, the decision of the Higher Regional Court of Nuremberg is a positive signal as it paves the way for cross-border conversions in Germany after the VALE decision of the ECJ. It should be noted that other German courts may decide differently with respect to specific issues, e.g. in order to apply certain protective provisions in favour of creditors or employees of companies, in particular with respect to the German co-determination of employees (Mitbestimmung). Legal certainty in this regard will most likely require a common approach at the EU level. Until then, cross-border conversions should only be implemented in close co-ordination with the registry courts of the involved member states.