Manuel Santos Vitor
Abreu Advogados, Lisbon
manuel.s.vitor@abreuadvogados.com

Introduction

Directive (EU) 2019/2121^[1] was adopted on 27 November 2019, amending Directive (EU) 2017/1132.^[2] It intends to introduce a comprehensive set of rules for cross-border transformations, mergers and divisions of limited liability entities. Once the directive is transposed into the legal system of all EU Member States there will be a harmonised regime across the EU for cross-border mergers, demergers and transformations of limited liability companies.^[3]

Building on the preceding rules, the directive seeks to align the different legal regimes in the EU, protecting the principle of the freedom of establishment and at the same time safeguarding the rights of employees, creditors and minority shareholders within the European market.

The same rules were transposed into the Portuguese legal system by means of the enactment of Decree Law 114-D/2023 of 5 December 2023^[4] which, inter alia, amended the Portuguese Commercial Companies Code of 1986.  

From a Portuguese law perspective, a cross-border merger or demerger requires that one of the intervening companies is a Portuguese based company, thus governed by Portuguese law, and a cross-border transformation requires that the company to be transformed is based in Portugal and governed by Portuguese law and that as a result of the transformation it becomes a company based within and governed by the law of another EU Member State. In this case, the legal personality is maintained.

In the transposition of Directive (EU) 2019/2121 the Portuguese legislator sought to streamline cross-border mobility for corporate entities. As we will detail later in this article, these legislative changes raise questions regarding the equilibrium between promoting corporate mobility and safeguarding the interests of the other intervening or concerned parties. The consequence may be that more stringent regulations and impositions are placed on the different players that will dissuade corporations from engaging in cross-border ventures.

The cross-border element in transformations, mergers and demergers

As mentioned already, this legislative change brought about the inclusion of definitions for ‘cross-border transformation’, ‘cross-border merger’ and ‘cross-border demerger’.

Decree Law 114-D/2023, in general terms, transposes the mandatory rules set out in the directive into the Commercial Companies Code, but the Portuguese legislator decided not to include some provisions left to the discretion of the EU Member States, mostly addressing specific situations involving companies in distress.

As in most countries, a merger/demerger process in Portugal before December 2023 required the intervention, at different moments, of the boards and shareholders of the companies involved, as well as the necessary involvement of supervisory bodies and chartered accountants responsible for the verification of all of the economic and financial requirements.

Formalities have to be observed pursuant to Portuguese law concerning: (1) the adoption of the relevant corporate consent, starting with the approval of the merger/demerger project at board level, (2) its registration at the commercial registry and inherent publicity, allowing creditors the possibility to challenge the envisaged operations, and at the end of the process, (3) the approval of the merger/demerger by the relevant shareholders, and the registration thereof in the relevant commercial registries, which may result in one or more companies, either already existing or freshly incepted (as a result of a demerger), receiving assets and liabilities and, possibly, employees from the initial existing companies. These principles and steps are now more complex.

The same entities remain involved after the transposition of the directive. At first glance, there are no material changes, although the whole process has become more formal and demanding.

However, a substantial difference is that the boards and shareholders of the companies involved are required to interact anew or more – particularly boards and shareholders – with creditors, employees and minority shareholders, who are now granted rights that they did not have before.

The protection of creditors

In line with the directive, the changes introduced into the Portuguese Commercial Companies Code lay down specific requirements for the protection of creditors in cross-border mergers, demergers and transformations, either prior to or following completion of the cross-border operation.

Firstly, creditors of the companies participating in a cross-border merger may lodge a judicial opposition to it, within three months^[5] of the publication of the registration of the merger/demerger project, on the grounds that it may affect their credit rights, provided they have asked the debtor company to satisfy their claim or to provide adequate security for the settlement thereof (no clear definition being provided in this regard), without their request having been complied with after a minimum period of 15 days has elapsed. It seems obvious to comment that this appears to be a costly and burdensome exercise for bona fide and reliable debtors and that the period of 15 days to issue guarantees is simply too short. In this new situation, there is a real risk that companies will be unnecessarily exposed to creditors.

In what concerns cross-border demergers, the law establishes the right of creditors of the participating companies to apply to the court to obtain adequate guarantees within three months of the publication of the cross-border demerger project, provided that they can demonstrate, on reasonable grounds, that the demerger will affect or affects the satisfaction of their claims and that the company has not offered them adequate guarantees. Unlike what is established regarding mergers, in the case of demergers, it is not required that creditors have requested the debtor company to satisfy their claim or to provide adequate security without their request having been granted within 15 days from such request, but the issue remains concerning the possible excessive exposure to nervous creditors.

In regard to cross-border transformations, creditors of the company to be transformed may, within three months of the publication of the cross-border transformation project, apply before a court for the issue of appropriate guarantees, on the grounds that the cross-border transformation will affect the satisfaction of their rights. Again, no definition of such a guarantee is given and it will most likely be a costly exercise.

It should also be noted that creditors of the Portuguese company to be transformed, the rights of which date back to the date of publication of the cross-border transformation project, regardless of whether or not their credits are overdue, may, within two years (!!) of the transformation taking effect, file lawsuits before the Portuguese courts against the transformed company (which at the time will be based within and governed by the law of another jurisdiction!), without prejudice to other rules on jurisdiction arising from EU law, national law or a jurisdiction-based pact.

In the case of cross-border demergers, there is an additional layer of protection for creditors: the joint and several liability of the new company/companies resulting from the demerger and, if not dissolved following a full demerger, of the demerged company. The main debtor will of course be the new company to which the debt is assigned.

In other words, each new company is obliged to pay the debts assigned to it after the demerger. Nevertheless, if any of these companies fail to do so, the other companies, as well as the demerged entity if it is not dissolved, involved in the demerger may be held responsible for the unpaid debts.

This subsidiary liability ensures another layer of protection for creditors, who can enforce their rights and request payment of the debt of all companies involved at a certain point. On the one hand, this represents an additional layer of protection for creditors. However, this possible liability may also represent a considerable exposure for the companies involved in the demerger until the debts are paid or the rights of enforcement by the creditors elapse, when the relevant statute of limitations applies. This statute could be as long as 20 years in the case of Portuguese law.

In short, there was a clear intention to protect creditors in the latest rules, the new liability of all the companies involved may prove to be excessive and the regime for the issuance of guarantees is not a clear path and may be costly. Moreover, creditors hold such rights for a long period of time, bringing uncertainty for the shareholders and companies involved.

Lastly, the judicial remedies available and the relative slowness of judicial systems may introduce another layer of time constraints and uncertainty.

The protection of minority shareholders

As per the provisions set forth in the directive, the Portuguese legislation that was implemented to ensure its transposition sets forth a mechanism for the protection of minority shareholders in cross-border operations like mergers, demergers or transformations.

Minority shareholders who voted against the approval of a cross-border M&A project are entitled to dispose of their shares if the resulting companies are governed by the laws of another EU Member State.

They must exercise such exit right within one month of the resolution approving the project and the resulting company is obliged to allow their exit and must pay them in cash the consideration corresponding to the valuation of the relevant shareholding, as foreseen in the merger/demerger project, within two months of the project’s registration.

Should minority shareholders opt for such exit, they can also request a judicial evaluation of their shareholdings within six months of the resolution’s approval if they deem the cash consideration to be inadequate. This judicial remedy is available even after the operation is registered with the competent commercial registrars in the relevant Member States.^[6] Shareholders who do not hold such exoneration right or those who have not exercised it can also request a judicial evaluation of their shareholdings within six months of the resolution’s approval. This judicial process does not prevent the commercial registration and completion of the cross-border project.

This issue may be complex at the shareholder level, again bringing uncertainty since it may delay the procedure, while not preventing its completion. These are certainly scenarios to be considered, raised and discussed in advance, for instance, at the level of shareholder agreements where these matters may be addressed.

The protection of employees

Employees are entitled to provide their input on planned mergers, demergers or transformations and to have their queries and concerns addressed by the companies involved. This is a novelty in Portuguese law.

The boards of directors of the companies involved must provide a comprehensive report to both shareholders and employees, outlining the legal and economic justifications behind the proposed actions and any potential ramifications for the workforce.

Employees, or their representatives, have the right to submit their reasoned opinion on the cross-border project and the boards of directors of the participating companies are obliged to inform shareholders accordingly and attach the feedback from the employees to the report. Furthermore, the board of directors must consider the employees’ reasoned opinion and reply to the same, addressing any concerns or issues raised.

In essence, increased involvement from employees is a fact and it may introduce additional complexities, especially in organisations with large workforces and strong union representation.

Conclusion

In conclusion, Directive (EU) 2019/2121, adopted on 27 November 2019, introduced a unified set of regulations governing cross-border transformations, mergers and demergers of limited liability entities, amending previous directives with a view to establishing a harmonised regime within the EU. These changes aim to provide legal clarity, uphold the principles of the freedom of establishment and, at the same time, safeguarding the rights of employees, creditors and minority shareholders.

The transposition of the directive into Portuguese law via Decree Law 114-D/2023 sought to facilitate cross-border mobility for corporate entities. However, questions remain regarding the balance between encouraging cross-border corporate mobility and maintaining adequate stakeholder protection, as more stringent regulations may deter corporations from engaging in cross-border ventures.

Key aspects of the legislative changes include defining cross-border operations and transposing mandatory rules into the Austrian Commercial Companies Code.

The protection of creditors and employees is bolstered by specific requirements outlined in the Commercial Companies Code, ensuring adequate safeguards in cross-border mergers, demergers and transformations. Similarly, minority shareholders are afforded substantial protection, with provisions for exoneration and judicial evaluation of shareholdings in cases of inadequate compensation or exchange ratios.

Despite these protective measures, challenges remain, particularly concerning the new requirements on the interaction with such stakeholders and new matters such as the issuance of guarantees and the new judicial remedies made available, which may add layers of complexity and uncertainty, aggravated by the delays in the judicial system. In particular, uncertainties at the shareholding level may arise, necessitating proactive discussions and agreements among shareholders to address potential scenarios in advance.