Cross-border mergers and EU Directive 2019/2121: the protection of creditors and noteholders

Monday 11 April 2022

Teresa Madeira Afonso
PLMJ, Lisbon
teresa.madeiraafonso@plmj.pt

Directive (EU) 2019/2121 of 27 November 2019 (known as the Mobility Directive) was published on 12 December 2019 and came into force on 1 January 2020. Among other things, it amends the parts of Directive (EU) 2017/1132 of 14 June 2017 (known as the Codification Directive) relating to cross-border conversions, mergers and demergers.[1] According to Article 3 of the Mobility Directive, Member States must bring into force the laws, regulations and administrative provisions that are required to comply with the Directive by 31 January 2023.

Until the entry into force of the Mobility Directive, the Codification Directive only contained rules on cross-border mergers. Other cross-border operations, such as cross-border demergers and conversions, were excluded from its scope of application; the Mobility Directive has now set forth rules on these transactions and amended the rules on cross-border mergers.

One of the main objectives of the changes introduced by the Mobility Directive was to ensure that the rights and interests of all stakeholders concerned in a cross-border merger process – in particular shareholders, creditors and employees – are protected and duly taken into account.

In Portugal, the rules on cross-border mergers are currently set out in the Portuguese Commercial Companies Code (Código das Sociedades Comerciais or CSC). These are scarce and, as such, cause harmonisation difficulties.

For mergers between Portuguese companies in the context of a cross-border merger, there are concerns around protecting the interests and rights of creditors of the companies involved; the financial guarantees for claims may be affected by the outcome of the merger process.

In the case of a cross-border merger, this concern is all the greater because the debtor may come to be governed by the law of another Member State. The lack of harmonisation of each Member State’s creditor protection rules was creating instability and uncertainty as to whether creditors would be able to recover the amounts owed to them. The changes arising from the Mobility Directive attempt to correct this situation.

Protection of creditors within the Portuguese jurisdiction

The CSC currently comprises a set of rules specifically aimed at ensuring the protection of creditors of companies involved in a cross-border merger.

Firstly, the creditors have a recognised right of information. From the publication of the registration of the draft terms of merger, creditors, employees or representatives of the employees of the merging companies have the right to access all documentation prepared and used for the drafting of the terms of merger (at the registered office of each company). This includes:

  • reports and opinions drawn up by company bodies and experts;
  • accounts, reports of the management bodies, reports and opinions of the supervisory bodies; and
  • all accounts approval resolutions of the shareholders’ general meetings from the preceding three financial years (this requirement is in addition to the European rules).

Within one month of publication of the registration of the draft terms, any creditors of the merging companies with credits pre-dating that publication can lodge an opposition to the merger in court. The opposition must be filed in court, provided that the creditors have demanded (up to 15 days before the filing of the opposition) the immediate payment of their credits or the provision of adequate guarantees by the debtor merging company.

The merger process may proceed (including the shareholders’ general meeting) while any judicial opposition is decided, and the merger documents may be signed by the management bodies of the companies, but the final registration of the merger will remain pending until the creditor’s dispute is resolved or a cash deposit is made by the debtor merging company in guarantee of the claims.

Noteholders, as a specific type of creditors, can oppose the merger before the courts. They have to do this through a common representative appointed for this purpose, if decided by an absolute majority of the noteholders present or represented in a general meeting convened for the purpose. The noteholders meeting must be convened in accordance with the rules that apply to the shareholders’ meetings. The period for convening the shareholders' meeting is one month for public limited liability companies (Article 377(4) of the CSC) and 15 days for private limited liability companies (Article 248(3) of the CSC), except when the company's articles of association provide otherwise. This is apparently inconsistent with the time limit of one month from the publication of the project granted to creditors to oppose the merger; legal scholars have made this point, indicating that the term for convening of the meeting should be taken into account before the definitive registration of the merger.

Finally, it should also be noted that, in contrast with the rules on internal mergers, ‘a cross-border merger that has already started to take effect may not be declared null and void’. This means that a cross-border merger that has been effectively registered is no longer challengeable under the applicable law. This is a limitation to creditors’ rights: it is of the essence that opposing terms and mechanics are duly followed for their protection.

Protection of creditors under the Mobility Directive (Article 126-B)

Under the Mobility Directive, creditors who are dissatisfied with the safeguards offered in the common draft terms of cross-border mergers will be able to apply to the appropriate administrative or judicial authority within three months of the publication of those terms for adequate safeguards, which should be subject to the condition that the cross-border merger becomes effective. In Portugal, the competent administrative authority is the Commercial Registry Office.

In these instances, creditors must be able to credibly demonstrate that:

  • the cross-border merger compromises the satisfaction of their credits; and
  • that they have not obtained adequate safeguards from the merging companies.

Member States can also rule that the management body of each merging company must submit a statement accurately reflecting its current financial position. This statement must be made by reference to a date less than one month from the date of its publication. Moreover, it must state that it is not aware of any reason why the company or companies resulting from the cross-border merger will not be able to meet its or their obligations as at the date on which they fall due (Article 128b(2), added by Directive (EU) 2019/2121). The statement must be published together with the common draft terms of the cross-border merger under the terms of Article 123 of Directive (EU) 2019/2121.

Conclusions

Under the Mobility Directive, the position of creditors of companies merging across borders will be strengthened, firstly because the term to challenge a transaction will be extended from one to three months.

Considering the complexity of these transactions, it is critical that creditors have enough time to assess the documents made available at the company’s premises, as well as their credit satisfaction probability, by comparing the financial position of its merging debtor before and after the transaction.

However, in the near future, the Portuguese legislature will have to decide between granting more rights to creditors within a cross-border merger process or facilitate the cross-border merger process, especially if the management bodies of the participating companies must prepare a statement accurately reflecting the merging companies’ current financial position.

Although this statement will constitute a useful tool for creditors to assess the benefits and drawbacks of the cross-border operation and its impact on satisfaction of their credits, it will also require a more personal approach to the merger from the management bodies of the merging companies. After all, the membership of management bodies can be personally liable for not complying with their duties with the diligence of a careful and orderly manager – and therefore for inaccurate information provided (with wilful misconduct and negligence) to shareholders, employees and creditors during the merger.

 

[1] The Codifying Directive brings together the provisions of several directives and repeals them in the interests of organisation and clarity:

  • Council Directive 82/891/EEC of 17 December 1982, concerning the division of public limited liability companies (Sixth Directive);
  • Council Directive 89/666/EC of 21 December 1989, concerning disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State (11th Directive);
  • Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies;
  • Directive 2009/101/EC of the European Parliament and of the Council of 16 September 2009 on coordination of safeguards which, for the protection of the interests of shareholders and third parties, are required by Member States of companies within the meaning of the second paragraph of Article 48 of the Treaty, with a view to making such safeguards equivalent throughput the EU (13th Directive);
  • Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 on mergers of public limited liability companies; and
  • Directive 2012/30/EU of the Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of shareholders and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent throughout the EU.