Corina Roman, Managing Associate in SIMION & BACIU’s Corporate, M&A practice group, authored an extensive overview on the core aspects to be considered in the context of a cross-border division, taking into account the recent amendments brought to the relevant legislation.
5 key aspects to be considered with respect to cross-border divisions:
- In a cross-border division, recipient companies must be always incorporated as an effect of the cross-border division.
- The cross-border division may lead to the deregistration of the company being divided (full division) or may entail the transfer only of part of its patrimony (partial division).
- If the legal requirements are met, such operation may be more beneficial from a tax perspective than a sale of business or of assets.
- The transferred patrimony must be precisely identified, which may require in certain cases the use of allocation keys and/or the creation of certain categories of inventory items.
- By contrast to the division implemented at domestic level, the partial cross-border division brings an element of novelty, namely, in exchange for the transferred patrimony, the shareholders of the company being divided may receive shares not only in the recipient companies, but also in the company being divided or in both categories of companies.
Until recently, the reorganization options in Romania did not include cross-border divisions.
Companies had to undergo transactions either in the form of a sale of part of their business (“business transfers”) or in the form of a sale of assets (“asset transfers”), which used to add extra pressure on the cashflow, the existence of a price being essential in both cases. Moreover, the involved companies also incurred a potential tax impact deriving from such operations, which in certain cases was not a light one. The fact that, in most cases, such operations were conducted between same group companies also required an increased attention from the perspective of transfer prices.
The status quo was changed once Law 222/2023 on the amendment and supplementation of Companies Law no. 31/1990, as well as Law no. 265/2022 on the commercial register and amending and supplementing other normative acts applicable to registrations in the commercial register entered into force, when cross-border divisions became an option for the reorganization of a company.
Together with the introduction of cross-border divisions in the Romanian legal and economic life, the grounds for a deeply sought flexibilization were laid. Therefore, we now have in Romania a perfectible legal framework allowing companies envisaging a cross-border presence to transfer their entire patrimony or to make a carve-out of a certain business branch to the benefit of newly incorporated companies.
Who may benefit from a cross-border division?
The cross-border division is a reorganization option for joint stock companies, partnerships limited by shares, limited liability companies, Romanian legal persons, and for European Companies (Societas Europaea) with registered office in Romania, if at least two of the companies involved in the division are from different Member States and operate in one of the legal forms provided in Annex II to the Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to Certain Aspects of Company Law (Codification).
However, in general, entities such as listed companies, collective investment entities, investment management companies, alternative investment fund managers, companies subject to resolution tools, powers and mechanisms, companies undergoing recovery or crisis prevention proceedings, companies pending liquidation and which started the distribution of assets to shareholders, companies under insolvency proceedings or companies undergoing insolvency prevention proceedings, cannot benefit from such option.
What shapes can a cross-border division take?
Irrespective of the form chosen, recipient companies must be incorporated as an effect of the division. The reason for which preexisting companies have been excluded from the possibility to undergo a cross-border division is the higher degree of complexity triggered by the circumstances associated with preexisting companies, being necessary in such latter cases to involve more competent authorities from several Member States in order to avoid the circumvention of EU regulations.
As such, the cross-border division may be performed as:
- a full division – the company being divided ceases to exist without entering liquidation and it transfers its entire patrimony to one or more newly incorporated recipient companies. In exchange for the transferred patrimony, the shareholders of the company being divided may receive shares in the recipient companies and, if the case, a cash payment of up to 10% of the nominal or accounting value of the shares;
- a partial division in the interest of shareholders – the divided company does not cease to exist, as it transfers only a part of its patrimony to the newly incorporated recipient companies. By contrast to the domestic division, the partial cross-border division brings an element of novelty, namely, in exchange for the transferred patrimony, the shareholders of the company being divided may receive shares not only in the recipient companies, but also in the company being divided or in both categories of companies, as well as a cash payment of up to 10% of the nominal or accounting value of the shares;
- partial division in the interest of the company being divided – in this scenario we are also in the presence of a partial cross-border division, with the mention that, in this case, the shares allocated in exchange for the patrimony transferred to the recipient companies will be allocated to the company being divided. Hence, subsidiaries of the company being divided will be incorporated.
- What are the aspects of the cross-border division regulated by the Romanian law?
Such as also mentioned in the article dedicated to cross-border mergers, the cross-border division is a process involving different legal frameworks on different procedural segments. Similarly, the Romanian law will be applicable to aspects pertaining to:
- preliminary check in view of obtaining the pre-division certificate by the company being divided whenever the company being divided is a Romanian legal person,
- check of the aspects related to the incorporation of the new recipient company/companies in Romania. The Romanian law will also apply to the effective date of the division if the company being divided is a Romanian legal entity.
What aspects should the cross-border division plan take into consideration?
Aside from the complete identification details of the companies involved in the cross-border division and other division-related details, the plan must detail the manner in which the shares are allocated to the share capital of the recipient companies, the estimated timing of the division, the requirements and criteria used for the allocation of shares in the share capital of the recipient companies or of the company being divided or both, as the case may be, the exchange ration used for shares and the value of the cash payments, guarantees provided to creditors, implications on the workforce, procedures whereby employees are involved in the recipient companies’ activity.
However, by far one of the key aspects is the accurate description of the assets and liabilities of the company being divided and the manner in which such assets are allocated to recipient companies or are preserved by the company being divided in case of a partial division. Even more difficult is to identify those assets and liabilities which are not known on the date the cross-border plan is drafted. Also, in the case of companies being divided, which have a wide variety of different inventory items categories, such as components, subcomponents, raw materials and other similar, in practice, it is often hard to ensure a proper level of details in the division plan, while also preserving the confidentiality over the production processes or the manner in which the activity of the company being divided is carried out.
Although not the easiest method, the solution seems to include in the cross-border division plan, an algorithm for the allocation of such items at the level of the companies involved in the division based on objective criteria, in line with the specifics of the division, and to set identifiable categories of inventory items so as to reunite those inventory items that have an heterogeneous nature, but preserve common features (such as functions, destinations, etc.).
In addition to the need to keep confidential certain aspects related to the activity, assets and liabilities of the companies involved in the division, another matter to be considered is the protection of personal data. In this case, the companies involved in this type of operations should first consult an expert on data protection matters to make sure that they are not breaching any specific requirements by disclosing sensitive data in the annexes to the division plan (such as, for example, aspects related to employees or their personal data).
What are the key aspects to be considered throughout the entire cross-border division?
Except for those specific cases provided by the law, the companies involved in the division must pay special attention to the correct information of employees, the regulations applicable in Romania imposing companies undergoing a cross-border division to make available the division plan and its annexes to the employees, at least in electronic format, either by having it displayed on the company webpage or by having it communicated by other electronic means that allow for a confirmation of receipt. Such information must be performed with at least 6 weeks prior to approval of the cross-border division in the general meeting of shareholders. One month before the general meeting of shareholders is held to approve the division, the employees must also receive a notice informing them that they can submit comments on the proposed cross-border division no later than 5 days before the general meeting of shareholders. The information is ensured also by means of the report drafted by the directors or members of the management committee of the company being divided.
Of a similar level of information will also benefit the shareholders and creditors of the company being divided, the law also putting in place similar procedures for such stakeholders. Also, if no waiver to the independent expert assessment report is made, the shareholders and creditor may benefit from a reconfirmation of the accuracy of the division plan based on such report. The report shall analyze at least the accuracy of the exchange ratio used for the shares for the shareholders who exercise their withdrawal right, while also mentioning, among other things, the methods used for determining the price of shares.
Providing creditors with proper guarantees and obtaining the acceptance of such creditors of the guarantees offered or, otherwise, obtaining a favorable court order become, in the light of the new regulations, mandatory requirements for the issuance of the pre-division certificate to the extent that the company being divided is a Romanian legal entity. As such, communicating in advance and reaching an agreement with the creditors become prerequisites for the implementation of a cross-border division.
Last, but not least, on the procedural side, it is worth mentioning that, if the company being divided is a Romanian legal person, the lawfulness of the procedure undergone by the latter will be verified by the Commercial Register representative with jurisdiction over the registered office of such company. This Commercial Register office will be the one authorized to issue the preliminary certificate required for the implementation of the cross-border division, irrespective of the form chosen for implementation, after first having secured, via inter-institutional means, all the information required in this respect.
The Romanian Commercial Register will also be the one competent to decide on the incorporation of the Romanian recipient companies. For the recipient companies resulting from the division, with a registered office in other Member States, the jurisdiction will rest however with the Commercial Register from the state/states where the registered offices are located.
The entire division process is based on the interconnection of the Commercial Registers located in the Member States and we hope that this process, especially the de-registration of a company subject to a full division, will function properly so that fully divided companies may have the time required to fulfil all reporting obligations until their tax code is invalidated.
We are also looking forward to the publication of the instructions and/or norms required for the implementation of this type of procedures which offer a greater flexibility to companies intending to transfer in another Member State part of their patrimony, without however having to perform a sale or incur an unjustified tax burden.
The above article was prepared for and first published by avocatnet.ro platform.
Details about SIMION & BACIU’s Corporate, Mergers & Acquisitions practice are available HERE.