Decree-Law no. 114-D/2023, of 5 December, transposing Directive (EU) 2019/2121, as regards cross-border conversions, mergers, and divisions

On 5 December 2023, Decree-Law no. 114-D/2023 was published in the Official Gazette, transposing into Portuguese law the Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019, insofar as it relates to cross-border transformations, mergers, and divisions.

The Decree-Law came into force on 5 January 2024 and led to the amendment of several pieces of legislation, specifically the Companies Code, the Commercial Registry Code, Decree-Law no. 24/2019 of 1 February and the Emoluments Regulation for Registries and Notaries.

Context – European Union

On 27 November 2019, the European Parliament and the Council adopted Directive (EU) 2019/2121, which amended Directive (EU) 2017/1132 as regards cross-border conversions, mergers, and divisions.

Despite establishing a unified and harmonized framework for these matters, the Directive grants member states considerable discretion in adapting its provisions to their local legal frameworks. This flexibility is particularly evident in decisions such as whether the prescribed regimes are applicable to companies undergoing insolvency or liquidation proceedings and the specific determination of majorities required at a General Meeting for the approval of a cross-border transformation.

The adoption of Directive (EU) 2019/2121 was a result of extensive deliberations within the European Union, reflecting the commitment to fostering a common legal ground while accommodating the diverse needs and preferences of Member States.

Mergers, Divisions and Transformations – the new set of rules

Since 2009, national legislation has allowed companies with registered offices in different European Union countries – one of which has its registered office in Portugal – to carry out cross-border mergers (under the terms of Directive 2005/56/EC of the European Parliament and of the Council of 26 October, which was transposed into national law by Law 19/2009 of 12 May). With the adoption of Directive (EU) 2019/2121, it became necessary to transpose the broader and more concrete rules on mergers and also to specifically regulate the legal figures of demergers and cross-border transformations.

• Mergers

The legislative changes to the legal framework for mergers laid down in the Commercial Companies Code occurred both regarding the rules on internal (or national) mergers and with regard to the rules on cross-border mergers.

The following changes have been made to domestic mergers (already regulated in articles 97 to 117 of the Portuguese Commercial Companies Code):

• The introduction of new elements that will necessarily have to be included in the merger project, namely the mention of the identifying elements (type, company name and registered office) of the company resulting from the merger, the guarantees offered (if any) to the creditors of the companies participating in the merger and information on the consideration for the acquisition of the shareholdings from the shareholders of the company being merged;
• The introduction of new elements that will necessarily have to be included in the examination of the merger project to be carried out by a statutory auditor, namely the need to take into account, for the exchange ratio, the market value of the shareholdings of the companies participating in the merger prior to the announcement of the project, as well as the need to concretely indicate the methods used to determine the consideration for the acquisition of the shareholdings from the shareholders of the company being acquired or to be merged and justify their application;
• The introduction of additional information to be included in the notice convening the General Meeting, including the need to mention that shareholders (from now on, the term shareholder will cover both realities), company creditors and employee representatives (or, failing that, employees of the participating companies) may submit comments to the company on the merger project up to 5 working days before the date set for the General Meeting;
• The extension of the period in which the creditors of the participating companies can lodge a judicial opposition to the merger, from one to three months after the publication of the registration of the project, while maintaining the requirement that they have requested the company to honour their claim for at least 15 days without the request having been granted.

The legal framework for cross-border mergers (regulated in articles 117-A to 117-L of the Portuguese Commercial Companies Code) has been profoundly altered, with the following changes standing out:

• The introduction of a compulsory reference in the common merger project to the proposed amendments to the articles of association of the acquiring company or to the draft articles of association of the new company, where appropriate;
• The need for a report of the administrative or management body of the participating companies for shareholders and employees, to be made available electronically together with the draft terms of merger at least 6 weeks before the date of the general meeting approving the merger, setting out the legal and economic grounds for the merger and the implications for employees and the future business of each of the companies; this report will have a special section for shareholders and another for employees, in which information relevant to each group of recipients will be explained, and these sections may constitute a single report or two autonomous reports depending on the recipients;
• The receipt by the company of an opinion from the employees (or their representatives, if any) obliges the company’s management to inform the shareholders of this fact, to attach the opinion to the report it has drawn up and also to present a reasoned response to the employees that addresses the issues, positions and concerns raised by them;
• An analysis of the common cross-border merger project by an independent statutory auditor (or firm of statutory auditors) under an independent expert report is now required even if the participating companies have a supervisory body (and not just in place of it);
• The company resulting from the merger must now pay all the consideration for the acquisition of the shareholdings provided for in the merger project to the shareholders of the participating companies within 2 months of the final registration of the merger in the commercial register;
• When the shareholder believes that the compensation for the acquisition of their shares is inadequate, he may ask the court to set an adequate consideration within 6 months of the date of the merger resolution;
• The right of shareholders to dispose of their shares who vote against the merger is now broader, allowing them to demand that the company acquire their shareholding for an adequate consideration within the month following the date of approval of the merger;
• In cases where the merger by incorporation of a company wholly owned by another is to take place, and even if the approval of the common draft terms of merger is waived, the following documents must be made available to the shareholders (one month before the date on which the merger is decided): (i) the common merger plan; (ii) a notice to shareholders, creditors and employees enabling them to submit comments on the merger plan; (iii) the aforementioned management report to shareholders and employees; and (iv) the report by the statutory auditor or audit firm.

These changes have two main objectives: on the one hand, the simplification and harmonisation of merger rules and procedures and, on the other hand, the creation of additional mechanisms to protect the rights of shareholders (especially those who vote against the merger and those who wish to sell their shares, strengthening the right to resignation and the right to adequate compensation), creditors (who will now be able to comment on the impact of the merger project on their claims) and employees (giving them the opportunity to comment on the merger project and the right to receive a response to their comments).

Divisions

The changes made to divisions also occur on two levels: domestically (by changing the legal regime for domestic divisions) and cross-border (by establishing a specific legal regime for cross-border divisions).

Domestic divisions are regulated in articles 118 to 129 of the Commercial Companies Code; with this law, Section II of Chapter X (on divisions) is created to specifically regulate cross-border divisions.

In domestic divisions, the major change is the clarification that the members of the management body of each of the participating companies are jointly and severally liable for the damage caused by the division to shareholders and creditors, when they have not observed the diligence of a judicious and orderly manager.

Cross-border divisions, like mergers, will now have their own legal regime, with the following aspects standing out:

• The introduction of the concept of cross-border division, as a process of “splitting up one or more companies, provided that one of the companies participating in the demerger has its registered office in Portugal and another of the companies participating in the demerger has been incorporated in accordance with the law of a Member State […] and has its registered office, central administration or principal place of business in the territory of the European Union“;
• The definition of three types of divisions: partial division, total division and division by separation;
• The definition of the elements that must necessarily be included in the cross-border division project, including a proposal for an indicative timetable for the division;
• The establishment of a set of specific rules for the division process (similar to those laid down for cross-border mergers), namely the obligation for the management of the company to be divided or of the participating companies to draw up a report for shareholders and employees, the need for expert supervision of the cross-border division project by the supervisory body or by a statutory auditor or firm of statutory auditors, the establishment of mechanisms to protect creditors and shareholders and rules to ensure adequate supervision of the legality of the process.

Transformations

Company transformations are regulated in articles 130 to 140 of the Commercial Companies Code. As with divisions, the new decree-law has also divided Chapter XI into two sections: the first to regulate internal transformations (which includes the articles mentioned above) and the second for cross-border transformations, comprising articles 140-B to 140-M.

In the context of internal transformations, it is now stipulated (in the same way as for demergers) that the members of the management body of the transformed company are jointly and severally liable for the damage caused by the transformation to shareholders and creditors, when they have not observed the diligence of a careful and orderly division.

For cross-border transformations, the general features of the new regime now established are as follows:

• The introduction of the concept of cross-border transformation as a process through which “[…] a company, without being dissolved or liquidated or going into liquidation, while maintaining its legal personality, converts: a) The legal form under which it is registered in Portugal to a legal form provided for in the Member State to which it transfers its registered office; or b) The legal form under which it is registered in another Member State to a form provided for by national law, transferring its registered office to Portugal.”
• Establishing the elements that must necessarily be included in the transformation project;
• The establishment of specific prescriptions similar to those established in the cross-border division regime, namely as regards the obligation for the management body to issue a report to shareholders and employees, the expert supervision of the cross-border transformation project by the supervisory body or by a statutory auditor or firm of statutory auditors, the mechanisms for protecting creditors and shareholders and the rules that ensure adequate supervision of the legality of the transformation process.

Legality check of cross-border operations

The commercial registry offices are the entity responsible for checking the legality of cross-border operations, firstly by issuing a prior certificate proving that the acts and formalities prior to the merger, division, or transformation, as the case may be, have been completed, and secondly by virtue of its powers to monitor the legality of the operation.

The commercial registry offices, as the entity responsible for conducting cross-border merger, division and transformation registrations, are also responsible for notifying the competent authorities of the Member States involved in the process in question, via the European Union’s system of interconnection of registries, of the registration, issue of the prior certificate and the start of the corporate restructuring operation’s effects for each of the companies involved.

 Conclusion

This legislative amendment of EU origin makes an important contribution towards harmonising the rules applicable to cross-border mergers, divisions, and transformations.

On the other hand, the law seeks, in line with the Directive, to reconcile the objective of establishing an internal market without borders with the necessary social protection and the promotion of social dialogue, as objectives of European integration, by establishing rules aimed at strengthening the protection of workers, creditors and shareholders.