October 18th, 2019 / Insight posted in Articles

Brexit insight – implications of Brexit on legal status of operations in Germany

The EU principle of freedom of establishment obliges member states to recognise a company validly formed under another member state’s law, regardless of where in the EU that company’s real seat is located. The seat is defined as the place where the management takes place and where its decisions are transformed into the day-to-day activities of the company.

After Brexit or any post-Brexit transition period, if a withdrawal agreement is concluded, UK companies will no longer have the right to freedom of establishment.

Instead, each Member State will apply its own rules on whether and how it will recognise UK-registered companies.

In Germany, a UK limited company that has its administrative headquarters in Germany would, under German law, lose its legal capacity as a limited company and would automatically be treated as a partnership. Shareholders will lose the benefit of limited liability and become personally liable, without limit, for the company’s debts and obligations.

Last December, the German Parliament passed new legislation to enable UK companies with their real seat in Germany to remain in operation in Germany by performing a cross-border merger into a German limited liability company (eg GmbH & Co. KG or UG & Co. KG).

Transitional provisions in the Act provide that, if the merger plan was notarised by 29 March 2019 (the original Brexit date), companies would have two years to take the necessary steps and apply for entry into the German commercial register. Assuming there is a transitional period (and no-deal is thereby avoided by 31 October), the timetable for notarising the merger plan will be extended until the end of the transition period.

There are different possibilities covered by the cross-border merger regulations.  We understand that a stream of UK companies are merging with other EEA companies by way of cross-border mergers.

The recent determination by the Court of Appeal in Easynet Global Services Limited (Appellant) vs Secretary of State for Business, Energy & Industrial Strategy (Intervener) [2018] (EWCA Civ 10) rejected the proposition that a company might need to be sufficiently capitalised or trading at a significant level to be able to participate in a cross-border merger. It said that a merger (in this case involving a dormant Dutch company) was not an abuse of process and more groups should be encouraged to consider cross-border mergers.

The Court of Appeal decision may also allow UK groups to engineer a cross-border merger by setting up an EEA company before any proposed merger. This may be more attractive than other alternatives such as the liquidation route under section 110 Insolvency Act 1986.

The UK implemented the Directive on Cross-Border Mergers of Limited Liability Companies (2005/56/EC) by enacting the Companies (Cross-Border Mergers) Regulations 2007 (SI 2007/2974).

The Regulations allow three different types of cross-border mergers:

  • a merger by absorption (an existing company absorbs one or more other merging companies);
  • a merger by absorption of a wholly-owned subsidiary (an upstream merger); or
  • a merger by formation of a new company (two or more transferor companies, at least two of which are governed by the laws of a different EEA state, merge to form a new company).

The cross-border merger procedure cannot be used where:

(a.) one or more of the merging companies is to be wound up;

(b.) the consideration for the merger does not take the form of shares or securities in the transferee (and, if agreed, cash) or if the consideration is not waived;

(c.) one or more of the merging companies does not fall within the prescribed type of companies.