Keys to the law on domestic and cross-border reorganizations of companies

What are the keys to understanding the new law on domestic and cross-border reorganizations of companies? What are the main new features regarding structural modifications in commercial companies? At Gentile Law, expert lawyers in commercial law, we explain everything you need to know about the new regulation on domestic and cross-border reorganizations of companies.

Law on domestic and cross-border reorganizations of companies

What does the new lawon domestic and cross-border reorganizations of companies? In order to include a harmonized legal framework with the members of the European Union (“EU”), the Real decreto Ley 5/2023, de 28 de junio (the “Decree”) transposed the EU’s directives regarding conversions, mergers, divisions of companies, and global transfers of assets and liabilities (jointly referred as “reorganizations”), introducing relevant changes to carry out such operations.

When do the new domestic and cross-border reorganizations of companies come into effect? The Decree will enter into force on July 29 and will apply to projects that have not been approved as of such date. From Gentile Law, expert lawyers in advising companies both in Spain and abroad, we will tell you the most important features of this new lawon domestic and cross-border reorganizations of companies.

What is the scope of application on domestic and cross-border reorganizations of companies?

The Decree-Law derogated Law 3/2009 to regulate both domestic and cross-border (intra and extra-European) reorganizations of commercial companies. As mentioned, it will apply to projects that have not been approved as of such date. By means of the Decree, the Government complies with the transposition of the Mobility Directive (2019/2121) of the European Parliament that regulates numerous aspects of reorganizations.

Regarding credit institutions and insurance companies, the Decree shall apply without prejudice to the provisions of the specific laws applicable to each type of entity.

Therefore, from Gentile Law, expert lawyers in commercial law and company advice, we summarise the main modifications and novelties on domestic and cross-border reorganizations of companies.

What are the main changes in the new law on domestic and cross-border reorganizations of companies?

What are the main changes in the new law on domestic and cross-border reorganizations of companies? What are the keys to understanding the new law on domestic and cross-border reorganizations of companies? We explain:

1- The reorganization project:

What does the new law on domestic and cross-border reorganizations of companies? The Decree will regulate reorganization projects with common and specific provisions for domestic reorganizations and general rules for cross-border (intra-European and extra-European) reorganizations. It is noteworthy that, with these new regulations, the reorganization procedure becomes more relevant.

At the preparatory stage of the procedure for any type of reorganization, the common provisions state that two new additional reports must be included alongside the main project.

The first report, issued by the company’s directors, must include information on the effects and rights of the shareholders, creditors, and employees regarding the reorganization. For example, cash compensation when a shareholder exercises their right of disposal of shares, the impact on management bodies, or rights and remedies held by employees.

The second one, the “expert report”, will relate to the compulsory resolution of the Commercial Registrar, as an independent authority, on two issues: the valuation on cash compensation of shareholders and the suitability of the guarantees offered to shareholders, creditors, and employees.

The directors must take these reports into account when they approve the final project.

2- Protection of shareholders, creditors, and employees:

What else does the new law on on domestic and cross-border reorganizations of companies regulate? Under the Decree, shareholders, creditors, and employees will be subject to a protection regime against the effects of the reorganization.

Protection of shareholders

• Shareholders will have the right of disposal of shares when they vote against the project, or they are holders of non-voting shares.
• In mergers and divisions, shareholders who vote against such reorganizations, or are holders of non-voting shares, will have the right to sue for cash compensation. In relation to mergers, such a claim may be made on the grounds of an inadequate exchange ratio.

Protection of creditors

Creditors are granted the option to claim for appropriate protection measures within the term of one month for domestic transactions and within three months for cross-border transactions. To exercise this right, the creditor must prove that their credit will be affected because of the reorganization.

Protection of employees

Employees shall have the right to submit comments on the draft reorganization. The company must publish a notice informing the employees of this right.

3- Cross-border reorganizations: intra-european and extra-european:

What are cross-border structural modifications under the new law? The Decree distinguishes between intra-European and extra-European cross-border reorganizations. The intra-European regulation applies when the companies involved in the transaction are incorporated under the law of a Member State of the European Economic Area (“EEA”). The extra-European rules will apply where the companies involved are incorporated under the law of a non-EEA State.

Intra-European reorganizations

• The Commercial Registry must issue a “pre-transaction certificate” to certify the legality of the transaction within a period of 3 months.
• The Commercial Registry may deny the transaction if there is abuse, fraud, or a criminal purpose.
• Upon a shareholder’s exercise of their right of disposal, the acquirer of such shares will be the company, a shareholder or a third party proposed by the former.
• In relation to conversions, creditors with claims prior to the publication of the draft terms of conversion may commence a claim in the country of origin within a period of two years.

Extra-European structural changes

The Decree regulates extra-European conversions, mergers, divisions, and global transfers of assets and liabilities. The regulation on intra-European reorganizations applies directly to these operations, however, the following items should be noted:

• The application of foreign law and the participation of foreign authorities is recognized when verifying the legality of the operations.
• A Spanish company can only be converted into an extra-European company if it retains its legal personality in the country of destination.

The introduction of cross-border reorganizations allows companies that are not part of the EEA to participate in the execution of all the types of reorganizations recognized in the Spanish legal system, in accordance with the same rules applicable to intra-Community operations, including some specific provisions.

What are the conclusions on the law on domestic and cross-border reorganizations of companies?

The new legal framework harmonized with the EU member states will improve transparency in this type of transaction and will provide more certainty to shareholders, creditors, and employees in the performance of domestic and cross-border reorganizations. The new regulation will take effect on 29 July 2023 and will change important issues in this area of commercial law. As of now, there is no regulation that will further develop specific provisions of the Decree.

Do you want to know more about the keys to understanding the new law on the law on domestic and cross-border reorganizations of companies? At Gentile Law, expert lawyers in commercial law, we advise both Spanish and foreign companies from their creation, planning, consolidation and growth so that nothing goes wrong.