EUROPEAN COMMISSION Brussels,25.4.2018 SWD(2018) 141 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law



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Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions

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Table of contents Glossary 1Introduction 1.1Context 1.2Calls for an initiative 1.3Scope of the impact assessment 2The problem definition 2.1Use of digital tools and processes throughout a company's lifecycle 2.2Cross-border mergers 2.3Cross-border divisions 2.4Cross-border conversions 2.5Conflict of laws rules 2.6How would the problem evolve – what is the baseline scenario? 3Need for action at EU level 3.1Legal basis for the EU to act 3.2Added value of EU action 4Objectives: What is to be achieved? 4.1Policy objectives 4.2Consistency with other EU policies and the Charter of Fundamental Rights

5Policy options and analysis of their impacts 5.1Use of digital tools and processes throughout a company's lifecycle 5.2Cross-border operations (mergers, divisions and conversions) 5.3Conflict of laws rules 6Package of preferred policy options and overall impacts 6.1Summary of preferred policy options 6.2Analysis of the overall impacts of the package 6.3Subsidiarity and proportionality of options 6.4Choice of legal instrument 7Monitoring and evaluation 7.1Monitoring 7.2Evaluation Annex 1: Procedural information Annex 2: Stakeholder consultation Annex 3: Who is affected and how? Annex 4: Problem definition – Additional evidence Annex 5: Evaluation of the functioning of rules on cross-border mergers Annex 6: Overview of ECJ case-law on cross-border mobility of companies Annex 7: Overview of Member States' positions on the questions of seat and connecting factors Annex 8: Methodology of key assumptions for cross-border divisions and cross-border conversions

Annex 9: Calculation method for potential savings for companies brought about by the use of digital tools and processes throughout a company's lifecycle Annex 10: Employee participation at board level Annex 11: The SME Test – Summary of resultS…………………………………192 Glossary Acquiring company The company that receives the assets and liabilities from the acquired company in a merger or division by acquisition. Business register The database maintained by each Member State to keep record of registration of companies in the given Member State and subsequent changes in the information on companies. Conflict of law In situations with cross-border elements, conflict of laws rules determine which of possibly two or more national laws apply to the internal functioning of a company. Connecting factor The relevant link between a subject (in this context a company) and a legal order which determines the applicable law in a conflict of law situation. Cross-border conversion An operation whereby a company formed and registered in accordance with the law of a Member State converts into another company formed and registered in accordance with the law of the another Member State retaining its legal personality and without being wound up or going into liquidation. Cross-border division An operation whereby a company splits and transfers all or some of its assets and liabilities to existing or new company/companies in another Member State. Cross-border merger An operation whereby two or more companies from two or more Member States transfer their assets and liabilities to an existing (acquiring) or a new company. Cross-Border Merger Directive (CBMD) Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies. Now it is part of the Codification Directive (see below). Codification Directive Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (codification). This Directive codified in 2017 several Directives covering different aspects of company law. Dividing company The company that is being split up in the framework of a company division. Freedom of establishment of companies The freedom of establishment applicable to legal entities pursuant to Articles 49 and 54 TFEU. Group reorganisation The restructuring of legal and/or operation structure within a corporate group. Inbound conversion The process of conversion from the perspective of the country of destination, i.e. whereto the company will be registered as the result of the process. Limited liability company A company with share capital and with legal personality possessing separate assets which alone serve to cover its debts. It is defined in Annex II of Directive (EU) 2017/1132 relating to certain aspects of company law (codification). Member State(s) (MS) In the context of this Impact assessment, this covers Member States of the EU and of the EEA (i.e. Iceland, Liechtenstein and Norway in addition to the EU). National Gazette A periodical publication authorised to publish public or legal notices. In the context of this Impact Assessment it refers to the national gazettes in the MS that publish company information. Outbound conversion The process of conversion from the perspective of the country of departure, i.e. where the company originally was registered. Recipient company The company that receives certain assets and liabilities from the dividing company in the framework of company division. Registered office The office and the address under which the company is registered in the business register. Registration of companies The process through which the competent authorities or organisations create and keep records of the creation of companies, changes in companies' registered information (filing) and the linked documentation. The business register is the database where these data are recorder. SE Societas Europea (European Company), a limited liability company formed according to the Regulation (EC) No 2157/2001 on the Statute for a European company (SE). Introduction 1.1Context Companies play a crucial role in promoting economic growth, creating jobs and attracting investment in the European Union. They help deliver greater economic as well as social value for society at large. To achieve this, companies need to operate in an environment which is conducive to growth and adapted to face the new economic and social challenges of an increasingly globalised and digital world. There are around 24 million companies in the EU, out of which approximately 80% are limited liability companies. Around 98-99% of limited liability companies are SMEs. Every year around 2,5 million new companies are created and a slightly smaller number of companies cease to exist. High growth enterprises play an important role in contributing to the economic growth and the creation of jobs. In 2014, around 145 000 companies, or almost a tenth (9.2 %) of all enterprises with at least ten employees in the EU-28 ’s business economy were recognized as high-growth enterprises, providing work for over 12 million employees . The possibility to operate beyond national borders is a part of the natural life-cycle of the company. This includes the option to carry out a cross-border merger, division or conversion, offers them an important chance to survive and grow e.g. by having new business opportunities in other EU countries, by reorganizing, cutting organisational cost or adapting to changing market conditions. For example, a survey carried out in 2016 found out that 22% of the business executives had immediate plans for expansion in the internal market. However, cross-border company operations can have significant impacts for relevant stakeholders as well as society at large. Therefore, it is essential that the protection of those involved in and affected by the company affairs, namely employees, creditors and minority shareholders, keep pace with the growing trans-nationalization of companies and that Member State authorities are able to act against abuse. The current situation concerning cross-border corporate mobility provides a very fragmented picture across the EU. The existing EU legal framework provides rules only for cross-border mergers of companies, while cross-border divisions and conversions are subject to national rules, if such rules exist at all. In addition, it is not always certain which law applies to the internal functioning of companies with operations in more than one MS. Since there are no harmonised rules at EU level, the case law of the Court of Justice has developed the principles, based on freedom of establishment, especially related to cross-border conversions, but also to the recognition of companies incorporated in another MS. In its judgements, the court has always stated that it is for the legislator to establish a detailed procedure/rules. Furthermore, in today's world, the use of digital tools and processes, in particular in order to initiate economic activity by setting up a company or continuing it in another MS easily, rapidly and cost-effectively is one of the prerequisites for a competitive market and for competitive companies. However the current EU law provides only for very limited use of such tools and in particular there are no provisions on the online registration of companies. While the Commission proposal on the establishment of a Single Digital Gateway covers the general registration of business activity via online means, the constitution of limited liability companies is carved out from the proposal because it necessitates a comprehensive approach to be addressed in the company law acquis. The Commission committed to propose specific rules for this area without delay. Overall, today's Single Market does not offer companies and their stakeholders optimal conditions in terms of clear, predictable and balanced legal framework. This is especially important for SMEs which are the backbone of EU economy. For them any improvement in the possible use of digital tools and any possiblity of performing cross-border operations less costly and burdensome is very important. While the role of companies is to create wealth, it should not only concern the well-being of the company itself, but also of the stakeholders associated with it. In case of cross-border mobility of companies, in particular the interests of employees, creditors and minority shareholders play an important role. However, today the legal uncertainty and lack or complexity of rules for cross-border mobility of companies also means that there is no clear framework to ensure effective protection of these stakeholders. This may even lead to a situation whereby the freedom of establishment could be abused by some companies. In the situation of a lack of legal certainty the protection offered to stakeholders is therefore often ineffective. Therefore, it is important to unleash the potential of the Single Market by breaking down barriers to cross-border trade, facilitating access to markets, increasing confidence and stimulating competition while offering effective protection to stakeholders. 1.2Calls for an initiative The Investment Plan for Europe stressed that determined efforts are needed to make the most of the Single Market and make it an effective launch pad for companies. The 2015 Single Market Strategy mentioned uncertainties over company law as one of the obstacles that SMEs complain about in the Single Market and announced that the Commission would consider "further ways of achieving simpler and less burdensome rules for companies — while continuing to act against letterbox companies — including making digital solutions available throughout a company’s lifecycle, in particular in relation to their registration and to the filing of company documents and information" and would also "examine the need to update the existing rules on cross-border mergers and the possibility to complement them with rules as regards cross-border divisions". The 2016 Communication on the Start-up and Scale-up Initiative stressed the need to remove barriers for start-ups to develop in the Single Market and reiterated the call for measures in the area of company law. Furthermore, both the 2015 Digital Single Market Strategy and the 2016 e-Government Action Plan stressed the role of public administrations in helping businesses to easily start business, operate online and expand across borders. The e-Government Action Plan specifically recognised the importance of improving the use of digital tools when complying with company law related requirements. In addition, the Single Digital Gateway included a political commitment to come forward with online registration of limited liability companies in the context of the digitalisation of company law.

In addition, the Stockholm programme of 2009 called for an initiative on uniform conflict of laws rules in the area of company law. Against this background, the Commission 2017 Work Programme included a company law initiative to facilitate the use of digital technologies throughout a company's lifecycle (equally confirmed in the Digital Single Market Mid-term Review) and cross-border mergers and divisions. The need to complement and improve the legal framework as regards the use of digital tools and on cross-border company mobility was also recognised by the European Parliament. In its 2017 resolution on the e-Government Action Plan, it called on the Commission to consider further ways to promote digital solutions for formalities throughout a company's lifecycle and underlined the importance of work on the interconnection of business registers. Furthermore, in its recent resolution of 13 June 2017, the European Parliament called for a comprehensive EU framework in order to simplify the procedures and requirements applicable to transfers, divisions and mergers, and to remove obstacles arising from conflicts of laws, with a view to facilitating companies' mobility in line with their business needs, while preventing abuses and fictitious transfers for the purposes of social or fiscal dumping and duly respecting employees’ representation rights. In its 2009 and 2012 resolutions the European Parliament also specifically asked the Commission to come forward with a proposal on cross-border conversions. The Council also encouraged the Commission in its 2015 Conclusions on the Single Market Policy to address the online registration of companies through the use of the Digital Single Market Package. Furthermore, most recently in the Tallinn declaration on eGovernment the Member States make a strong call to step up efforts for provision of efficient, user-centric electronic procedures in the EU. The Commission has actively engaged with stakeholders and conducted comprehensive consultations throughout the impact assessment process, in view of collecting the evidence needed to come to a political decision on the scope of this company law package. Stakeholder views are indicated throughout the impact assessment where relevant and summarised in Annex 2. 1.3Scope of the impact assessment The purpose of this impact assessment is to assess whether and to what extent the existing company law legal framework both at EU and national level a) hampers the exercise of the freedom of establishment by companies and the possibility to use digital tools throughout companies' lifecycle as well as b) provides the effective protection for stakeholders, such as creditors, minority shareholders, employees but also other third parties which are affected by companies' activities. In addition, the impact of the existing national conflict of laws rules is assessed in this respect. The areas covered are: - Use of digital tools and processes throughout a company's lifecycle: Companies use a number of digital tools and processes in order to comply with requirements stemming from company law, such as registering a company as legal entity, filing documents to the business register or applying for publication in the national gazette. This also encompasses digital access to company related information by third parties. The use of digital tools in interactions between companies and their shareholders is not part of this impact assessment. - Cross-border mergers: A cross-border merger takes place when two or more companies from different MS join into one surviving entity by transferring to it all their assets and liabilities. - Cross-border divisions: A division involves a transfer of all or some assets and liabilities from a dividing company to existing or new company/companies in another MS. - Cross-border conversions: A conversion means an operation whereby a company formed and registered in accordance with the law of a Member State converts into a company formed and registered in accordance with the law of another Member State while retaining its legal personality and without being wound up or going into liquidation. Unlike cross-border mergers and divisions, which involve more entities across MS, a cross-border conversion concerns just one company. - Conflict of laws rules: In situations with cross-border elements, conflict of laws rules determine which of possibly two or more national laws apply to the internal functioning of a company. This impact assessment addresses those five areas which are interrelated and contribute directly to a company's ability to expand their business and reap the full benefits offered by the Single Market. Digitalisation serves as the starting point as the pragmatic use of the opportunities offered by digital tools would help entrepreneurs to create their business and communicate to the relevant competent authorities with greater ease and less cost. Moreover, the effective use of digital safeguards would ensure the integrity of the information that is provided to business registers in a cross-border setting and provide greater transparency and security to society at large. Should entrepreneurs then wish to expand their business cross-border, the enhancement of the Cross-border Merger rules and the introduction of procedural rules for cross-border divisions and cross-border conversions would not only offer them greater ability to grow their business and explore new markets but would also offer robust protection to employees, minority shareholders and creditors. Digitalisation strongly interacts with these procedures as effective digital communication between the business registers through the EU system (called BRIS) would enable them to establish a clear point in time to which a company merges, divides and converts cross-border and changes its legal form. This would in turn provide greater legal certainty for business registers, entrepreneurs and stakeholders. Finally, certainty on the applicable law is relevant if a company finds itself in a situation with cross-border elements. The present impact assessment addresses all the above-mentioned areas as the impact assessment aims at informing the political decision whether action needs to be taken in all of these areas or only in selected ones. Where possible, the interactions between different areas and between any preferred options are spelled out. In addition, the assessment refers to the relevant stakeholder feedback which has been obtained in various consultations confirming the assessment of relevance (see for details on stakeholder consultation Annex 2). Decisions to set up a company, expand, restructure or move the company cross-border depend on many factors such as business opportunities, productivity gains and business environment as well as the legal, tax and regulatory regime of a given MS. However, companies cannot even envisage exercising the freedom of establishment in practice, if the underlying legal framework does not allow them to carry out such operations or make them very costly or complicated. Against this background, this impact assessment will only analyse the prerequisite condition for mobility, namely the enabling rules and procedures in the area of company law. It will not address the EU and national legal frameworks in other related policy areas such as labour law, insolvency, taxation or other aspects of digitalisation not associated with company law such as cloud computing or e-residency. The proposed policy options will not touch the existing acquis in these other areas which will remain fully applicable. In many cases, the proposed policy options would build on or complement the existing acquis such as use of BRIS, the e-card, once-only principle or make them applicable for companies (e.g. eIDAS). Moreover, the proposed policy options will have due regard for the European Pillar of Social Rights, in particular the 8th principle that seeks to safeguard the social dialogue and involvement of workers. As such, employee participation in cross-border operations should be seen as part of the wider social acquis aimed to protect employees in case of cross-border operations. The diagram below presents the different areas subject to this impact assessment as well as their interrelations. In addition, the graph shows links with other EU policies or initiatives. Relationship between the issues covered by this impact assessment and links with other EU initiatives

The problem definition The well-functioning Single Market is important for increasing EU’s competitiveness and its functioning is key to the European Union remaining an attractive location for businesses, both domestic and foreign. Together with the free movement of capital and the freedom of establishment, company law directives and regulations provide a legal framework which has an impact on investments. The more uncertainty there is in company law the less attractive the EU is for investors. This results in untapped potential. The problem is that in the absence of a reliable legal framework for cross-border divisions and conversions, and inefficiencies in the current EU rules for cross-border mergers, companies have difficulties to access markets in other MS and often need to find costly alternatives to direct procedures which can deter them, in particular SMEs, from doing cross-border business. In addition, the lack of possibility to use relevant digital tools is also a barrier to the exercise of the freedom of establishment by companies. These lead to unnecessary costs for companies and hinder or prevent them from using the opportunities offered by the Single Market. This also means that relevant stakeholders (employees, creditors, minority shareholders and other third parties) are faced with uncertainty as to their rights and protection in cross-border situations. The problem tree below illustrates the main drivers, problems and consequences relevant for this initiative. The following sub-chapters describe the drivers and problems in more detail for each subject area. Concrete examples of difficulties faced by companies and stakeholders can be found in Annex 4. The number of companies currently engaged in cross-border activity can best illustrate the overall scale of the problem. According to data from a 2011 study on the Opportunities for the Internationalisation of European SMEs there are only 2% of SMEs that have investment abroad (500,000 companies). Furthermore, according to Eurostat data from 2014 only 0.7% of companies are intra-EU foreign affiliated (i.e. they are controlled or owned by multinational enterprises that are resident in another EU MS). All of these companies are likely to benefit from the package. However, due to the outdated modalities for which companies have to use when communicating with business registers (particularly in a cross-border setting) and the inefficient procedures companies have to use when operating cross-border, a significant population of EU companies are never even given the opportunity to make effective use of their freedom of establishment. Therefore, the number of companies concerned with the package is likely to be significantly higher. 1.4Use of digital tools and processes throughout a company's lifecycle 1.4.1Driver: What causes the problem? In a world where technology is part of everyone's daily life, companies increasingly use digital tools in their business. Companies also need to interact with public authorities, but this is not always possible through electronic means. The EU offers a very inconsistent landscape when it comes to the availability of online tools for companies in their contact with public authorities in the area of company law. MS provide e-government services at variable degrees: some are very advanced and provide easy-to-use, fully online solutions, while others are more timid in their efforts and do not offer at all online solutions for critical steps in a company's lifecycle such as the registration of the company as a legal entity. Currently the EU company law includes certain elements of digitalisation such as the obligation for MS to make available online information about limited liability companies registered in central, commercial or companies registers (herein business registers). However these requirements are limited and lack precision, leading to a very diverse implementation at national level. In addition, certain digital processes are not covered at all by EU law and only a number of MS address them at national level. For example, today only 17 MS provide a procedure for the fully online registration of companies; in the other MS the only way to register a company is by going in person to the registration authority or another body which then submits the application for registration. This creates inefficiencies and an uneven playing field for companies as some MS only allow for face-to-face procedure for company registration while others allow both face-to-face and online procedure – or only online (as is the case in Estonia and Denmark). More detailed information about the situation in different MS can be found in Annex 4. The situation is similar for the online registration of branches. While data on all branches of EU companies is not yet available today, according to available BRIS statistics, there are 6,000 branches alone in 10 MS. Although branches do not have a legal personality, they still need to be registered in the business register. The registration of a branch largely follows the same requirements as company registration. Although the recent Commission proposal for a Single Digital Gateway sets out the requirement for MS to digitalise the registration of business activity in general, limited liability companies are not in the scope of this proposal as it was deemed more appropriate to address this in the context of company law. The lack of an EU legal framework for limited liability companies and their branches would only perpetuate a situation where unequal opportunities are offered to companies across the single market. Once they have been registered, companies and branches have an obligation to file certain information with the business registers during their life time (for example, amendments to their articles of constitution, changes in the names of company legal representatives or their annual accounts). Although the current EU law stipulates that companies should be able to submit the documents and particulars that are part of the mandatory disclosure requirements "by electronic means", the current definition of "electronic means" is not specific enough and leads to a diverse implementation in the MS (see also overview in Annex 4). Most significantly, in several MS (e.g. Belgium, Germany, Hungary, and Spain) company representatives cannot file documents fully online; instead they need to go in person in front of a notary or legal professional who certifies the documents and then submits them online to the business registers, while some MS (e.g. Estonia, Poland) require only facultative involvement of notaries. Once companies and branches have filed the necessary information with the business registers, current EU rules provide for the publication of all or part of that information in the national gazette. It is only by publication in the national gazette (or equally effective means) that the disclosed information becomes legally effective. Such requirement dates back to the early days of EU company law when the publication in the official gazette was the only way of ensuring certainty and transparency of business information. A revision of the EU rules in 2003 introduced the option for MS to keep the national gazette in electronic form, without specifying how the information should be submitted by the company and in particular it did not do away with possible multiple submission requirements in MS (i.e. both to the business register and the national gazette). Today at least 14 MS make their national gazettes available in electronic form; in one of those (France) an additional publication in print remains mandatory. Overall, the situation remains divergent in different MS. Whether online or on paper, companies continue to submit the same information to two different places (business register and national gazette). This is not the only example of multiple submissions by companies of the same information. For example, companies that have a branch in another EU country need to file their annual accounts both to the business register where the company is registered and to the business register in the MS where the branch is registered. Concerning access by third parties to company information in business registers, the directive on the interconnection of business registers (BRIS) sets a minimum set of data which must always be provided for free. However for the other company information available in the business registers most MS charge fees for all or some of that information. Although this is in line with the existing EU rules which state that MS can charge fees which cannot exceed the administrative cost of storing and maintaining that data, this means that access to information varies across the EU, with more information being available free of charge in some MS than in others. 1.4.2What is the problem for companies? The lack of rules for online registration, filing and publication or the divergence of such rules in the MS create unnecessary costs and burdens to entrepreneurs who wish to set up a new business or to expand their business by registering subsidiaries or branches or fulfil specific requirements online. This in turn may lead to missed business opportunities due to delay in registering the business or in a worst case to the decision not to set up a business at all. The replies to the 2017 public consultation on company law confirmed the fact that the differences between MS laws or the overall lack of a legal framework as regards interactions with business registers via digital tools is seen by most stakeholders, in particular business organisations and public authorities, as an obstacle to the functioning of the single market. This problem needs to be addressed urgently as businesses are increasingly going digital and more public services are available online. They consider that the registration of companies should be also available online. Concerning the online registration, evidence from those MS that have put in place solutions for online registration shows that electronic applications for company registration are generally cheaper and quicker to process than applications made in person and on paper. This means that companies that do not have the option to register online incur higher costs than those that can complete the procedure fully online. The time needed to complete the procedure also adds up to the costs incurred by companies and when procedures require the physical presence in front of a competent authority the time for completing the registration is longer than when procedures are done fully online. In addition to the direct costs for registration or filing, company founders also incur indirect costs such as travel costs (in particular when travelling abroad).

MS Application for company registration Time to process the application Paper-based Online Paper-based Online Ireland EUR 100 EUR 50 10 to 15 days Within 5 days Finland EUR 380 EUR 350 Up to 17 working days Within 5 working days UK £40 £12 8 to 10 days Within 24 hours For the filing of documents, the submission of documents on paper is also generally more costly than the submission of documents online. For example, in Belgium to file on paper an abbreviated model of annual accounts costs EUR 226,34, as opposed to EUR 155,67 for online filing; in the UK, the submission of annual accounts by post costs £40, while the electronic submission of the same documents costs £13. Costs for registration and filing are even higher in those MS (e.g. Belgium, Germany, Hungary, Poland, and Spain) where company founders or representatives need to come in person in front of a notary or legal professional. For instance, the fees for notarial services are EUR 145 in Belgium or EUR 220 in Cyprus and can vary from EUR 150 to EUR 4,000 in Spain. These fees are typically added to the registration or filing fees. Concerning the issue of limited access to free of charge information available in the business registers, companies themselves can be affected in cases where they are looking up information on potential business partners. This can be particularly relevant for SMEs for which the costly access to information on businesses from other MS can hamper their business opportunities and cross-border trade in the Single Market. 1.4.3What is the problem for other stakeholders? Other stakeholders, such as creditors, investors, employees or their representatives or consumers who rely on company information from the business registers can also be affected by the above-mentioned drivers. For them the problem is twofold: reliability of data and the access to it. These stakeholders mainly face problem of limited access to free of charge information filed by companies in the business register as most registers charge fees for that information. Prices per document may not be considered high (average range from 2 to 15 Euros per document), but if more documents about the same company or about many companies are needed, then the costs add up and can become prohibitive for certain stakeholders. The issue of the limited access to free of charge information has become even more prominent with the launch of the business registers interconnection system (BRIS). BRIS facilitates access to company data from the EU business registers via a single European access point, but the easiness to search for this information only highlights how little information is in fact available for free in the registers. In addition, the fact that the information needs to be filed in two places (e.g. business register and national gazette) may still create uncertainty as to how stakeholders can rely on that information. For example, third parties may rely on information from the business registers not knowing that this information is only legally effective after publication in the national gazette. In turn, this creates mistrust in the EU business environment and affects the transparency and proper enforcement of rules. The relevant competent authorities in the MS – namely the business registers – are also affected by their own slow take-up of digital solutions. This is mainly proven by counter-examples from those that have already made progress in digitalising their processes over the past few years. For example, after the introduction of online filing and registration in 2008, the Slovenian business register noted a significant reduction in the time needed to process an application (in the first year the average time for registration was reduced from 60 days in 2007 to 4.3 days in 2008). Similarly, the Danish business register reported that, following the introduction of the online registration and filing system, in just four years the average time for case handling decreased by 69% and the average ramp-up time for a new employee decreased by 90%. This means that registers that are not yet offering streamlined online procedures for companies are missing out on the efficiencies that these solutions could bring to their own organisations. Notaries have signalled that for them a problem is legal certainty and the trustworthiness of registers. As they are part of the registration processes in a number of MS they are afraid that the digitalisation would question the need of their services, as in many MS in which fully online registration is functioning well, the involvement of a notary is not necessary. Notaries, therefore, as having a direct stake in the registration processes in many countries, have in reality different concerns than other stakeholders which are not part of the process. 1.5Cross-border mergers 1.5.1Driver: What causes the problem? Mergers are used by companies for different purposes such as group reorganisations, cutting organisational costs as well as business-oriented considerations in order to enjoy greater returns to scale, consolidated branding, or other synergies between different business activities. The introduction of the Cross-Border Merger Directive (CBMD) led to a substantial increase in cross-border merger activity in the EU and EEA. The number of cross-border mergers rose by 173% between 2008 and 2012 as a total of 1,227 cross-border mergers were carried out during this period, which indicates that the procedure set up by the Directive substantially enhanced cross-border activity. Indeed, recent further research demonstrates the striking impact that the introduction of the CBMD on cross-border merger activity as between 2013 and 2017 there were 1,163 cross-border mergers that took place in 9 EU Member States alone, almost the same as the EU-wide figure for the preceding 4 years. Stakeholders (such as law firms, business registers and trade unions) interviewed for the 2013 study on the application of the Directive welcomed the new procedures, the procedural simplification and reported lower costs and shorter timeframes due to the harmonised framework. Despite these positive developments, the evaluation of the functioning of the CBMD (Annex 5) which draws from the research and consultations demonstrates persisting issues that are frustrating the full effectiveness and efficiency of the Directive. Concerning protection of creditors and minority shareholders, the Directive lays down minimum, mainly procedural rules and leaves the substantive rules subject to national laws. Therefore, the differences between MS laws persist. For example, the Directive only says that creditors shall be protected subject to national rules, without further specifications. Similarly, the Directive lays down some rules concerning shareholders in general (e.g. information via the draft merger terms, merger and expert reports, voting during the general meetings) but leaves it to MS to decide whether to introduce further protection for minority shareholders. In the 2015 public consultation, the under-harmonisation of such rules was noted as a key point of concern for stakeholders. Approximately 80% of respondents were in favour of harmonisation of creditor rights and 65% in favour of harmonisation of minority shareholder protection. This view was further reflected in the 2017 public consultation where 80% of the MS that responded called for the substantive and procedural aspects of creditor protection to be harmonised. Similar views were echoed in a recent European Parliament Resolution. As to employee participation on board level, the Directive sets out a comprehensive framework. It provides that the rules on employee participation shall follow the laws of the MS where the registered office of the successor company is situated. Since this could invite for forum shopping, the Directive includes three exceptions to this general rule in order to guarantee the status quo in terms of employee participation. If any of these exceptions apply (basically there must be some form of employee participation before the merger), the management can either negotiate with employees a bespoke solution on the participation or apply standard rules (on the composition of the body representative to employees, its competence and powers, and the functioning of employee participation) provided by SE Directive 2001/86/EC. The percentage of employees required to have been previously covered by an employee participation system is one third (compared to one quarter in the SE directive rules). The current employee participation rules have been criticised both by companies and trade unions In addition, the Directive offers limited possibilities to simplify the merger procedure. For example, it allows waiving an independent expert report if all shareholders agree and does not require an expert report or the approval by the general meeting in case of a merger between a parent company and its wholly-owned subsidiary. Research and stakeholder consultationhave underlined the need for further simplifications in case of costly procedures which do not confer benefits on the stakeholders concerned. In addition, it has been argued that the procedure does not sufficiently integrate digital tools in the procedure itself (e.g. as regards submitting the documents to public authorities or sharing those between the authorities).

1.5.2What is the problem for companies? Companies often face costly legal advice and a very long delay to complete a merger due to the divergent national rules. For instance, while a simple cross-border merger takes between 2 and 4 months, some mergers can take up to 7 months depending on the MS involved. This can be due to different delays for authorities to issue a pre-merger certificate or due to different protection periods for stakeholders in different MS. The divergence between national rules can also make it difficult or impossible to meet certain steps of the procedure. It might be impossible for the merging companies to meet the 6-month deadline for submission of pre-merger certificates if due to different creditor protection periods such a certificate has not been yet issued in one of the MS concerned. The more complex the procedure and less possibilities for a simplified procedure, the higher will be the costs for the merging companies. For instance, stakeholders have taken the view that drawing up a management report on the impacts of the merger involves substantial time and costs and is an unnecessary burden in cases where the merging companies have no employees or the shareholders agree not to require such a report. It is estimated that drawing up such a report can amount to up to between €5,000 and 8,000 in Italy and that that legal advice for drawing up the necessary reports for a cross-border operation can sum up to € 8.000-12.000 in Belgium. Between 2008 and 2013, most merging companies and most companies resulting from a cross-border merger were private limited liability companies. Given that such private companies are mainly small or medium-size companies and they, in general, have to carry out the whole merger procedure which is primarily foreseen for big public limited liability companies, the costs arising for small and medium sized companies can be bigger than benefits, having a negative impact on economic growth. Companies also consider the employee participation procedure too complex and leading to unnecessary costs and delays within the merger. The evaluation of the functioning of the existing rules on cross-border mergers (Annex 5) found that the provisions of the CMBD have been less effective and efficient as regards creditors and minority shareholder protection; it further found deficiencies as regards the efficiency of the rules concerning the possibilities for a simplified procedure. It could not be conclusive on the efficiency of the employee participation procedure. 1.5.3What is the problem for other stakeholders? A cross-border merger may impact the rights of creditors who may, for example, need to sue the company in a different MS or may be in a worse financial situation if the liabilities of the acquiring company exceed its assets. Shareholders, in particular minority shareholders, may become shareholders of a company they do not wish to be part of or be affected by an inadequate exchange ratio. The current minimum standards and reference to national rules on protection of creditors and minority shareholders in the Directive create complexity and legal uncertainty. This triggers the need of stakeholders to ask for legal advice. In case they cannot afford it, their rights might become unenforceable. Due to the lack of specific safeguards and harmonised rules, creditors and minority shareholders benefit from more rights in some MS than in the others or they suffer from the lack of protection in some MS. The CBMD does not provide substantive protection rights for minority shareholders, but it allows MS to adopt provisions designed to ensure appropriate protection for minority shareholders. The duration of the period when minority shareholders can request protection varies between MS (from 10 days to 3 months). The content of the protection rights provided by national law also differ. In most MS minority shareholders have a right to sell their shares against adequate cash compensation (so-called "exit rights"), while some MS offer also a right to additional cash compensation if the share exchange ratio is not adequate or a right of investigation, and/or additional procedural safeguards such as majority of 75% is required in the general meeting to approve a cross-border merger). Some MS have not introduced specific minority shareholders' protection in national law. These divergences in MS laws lead to unequal treatment of stakeholders within the same cross-border merger operation and to legal uncertainty. They create costs for shareholders, as they do not know their rights and remedies in all MS. There is not even a minimum standard to which they could refer to. Concerning the protection of creditors, the general rule of the CBMD provides that a company taking part in a cross-border merger shall comply with the provisions and formalities of the national law to which it is subject. In accordance with the Directive on domestic mergers national laws have to provide "adequate protection" for the interests of creditors. MS' rules diverge on the time limit for the protection of creditors' claims and on the period of time during which creditors can exercise their rights. The rules also vary on the nature of protection, e.g. in all MS with rules creditors can demand a guarantee/security to guarantee that the company resulting from a merger will meet their claims but in many MS creditors even have a veto right over the merger. Similarly as for shareholders, these divergences lead to additional costs for creditors as they do not know their rights and remedies in all MS. There is not even a minimum standard to which they could refer to. Cross-border mergers may impact the position of employees in two ways. Firstly, generally, employees require comprehensive information about a cross-border merger. Currently, the situation of employees is only considered generally in the management report addressed predominantly to shareholders. It has been criticised that employees are not sufficiently informed about the details and implications of a cross-border merger. Secondly, there is an impact on employees' rights in those cases where there are representatives of employees in boards of the merging companies (or at least in one of them). The CBMD provides for rules dealing with the question of the transfer of acquired rights, focusing on the employee participation in the company resulting from the merger (as described in detail in section 2.2.1). These rules are considered problematic by trade unions as not giving enough protection for employees. 1.6Cross-border divisions 1.6.1Driver: What causes the problem? In a similar way as in mergers, divisions offer a way for companies to change or simplify their organisational structure, adapt to changing market conditions and realise new business opportunities in another MS, as confirmed by respondents to the 2015 consultation on cross-border mergers and divisions. For instance, divisions may be used to sell part of the business, to transfer it to other companies belonging to the same group or to distribute different parts of a company between different heirs or shareholders in conflict. Companies might be interested in separating their business to concentrate on part of it, to better allow specific parts – which operate in different business sectors – to meet their long-term objectives or due to different regulatory requirements. It appears that divisions are more often used by bigger companies than by SMEs, which rather search for cross-border partnerships than divide. Despite relatively numerous divisions at national level – thousands or hundreds in Denmark, France, Italy, Sweden, Romania, Estonia, Croatia, Poland or Finland, cross-border divisions are rarely carried out. Recent studies estimate that the range of cross-border division activity in the EU was between 50 – 200 operations in 2016. The high number of national divisions confirms that such operations are very useful as corporate restructuring tools. The main reason behind a small number of cross-border divisions is the divergence or non-existence of national rules and the absence of EU rules. The existing EU company law, Directive 82/891/EEC, sets out rules for national divisions of public limited liability companies only. As regards national rules, only less than half of the MS (e.g. Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Spain, Finland, France, Italy, Lithuania, Luxembourg, Romania, the Netherlands, Portugal, Sweden, Spain and the UK) provide for specific rules on cross-border divisions or allow them by relying on other legislation or case law. For instance, Czech Republic, Denmark and Finland have specific rules based on the national rules transposing the EU provisions on cross-border mergers. In France, Romania, Italy, Luxembourg, Spain and the UK cross-border divisions are allowed without specific rules, often following the case law of the Court of Justice (e.g. SEVIC case C-411/03) or by applying national provisions on cross-border mergers or domestic divisions by analogy. For example, in France a national court has confirmed that corporate restructuring between French and Dutch companies is possible if the Dutch law recognizes the validity of the operation and if the restructuring complies with the relevant national legislation in the MS concerned. In Italy, in the absence of legal rules, academics take the view that cross-border divisions, being similar to cross-border mergers, can be carried out. Even when MS allow companies to divide cross-border, the relevant national provisions are often divergent or even incompatible. In a number of MS carrying out a direct cross-border division is not possible. Therefore, there have been a number of calls for the Commission to propose a new procedure for cross-border divisions to sit alongside the CBMD. This was the case in the 2017 public consultation and recent European Parliament Resolution that called on the Commission to propose a procedure and noted that "introducing harmonised standards at EU level in the field of cross-border divisions would lead to a simplification of operations and a reduction of costs and duration of the procedures". 1.6.2What is the problem for companies?

The current legal situation means that carrying out a direct cross-border division is usually very difficult, costly or sometimes even impossible. With diverging national rules and in particular in the absence of specific national procedures, companies often face legal uncertainty and need to seek legal advice. 68% of the respondents to the 2015 consultation mentioned the legal uncertainty due to the lack of EU rules as the main obstacle to completing a cross-border division and 51% of the respondents the duration and complexity of the current procedures. For instance, if the dividing company and the recipient company are situated in different MS, the companies may need to meet different requirements (e.g. type and content of documents they need to draw up, involvement of independent experts or deadlines). Such different requirements make it difficult to structure the cross-border operation and render it more complex and costly. In some cases, costs involved or incompatibility of national rules could lead companies to decide not to divide at all and therefore result in missed business opportunities. This means that companies face unnecessary costs when they want to sell a part of business or transfer it to other companies belonging the same group, but cross-border. On average the costs of a cross-border division at EU level are estimated to be between €55,000 and €70,000. The same costs are faced when, for instance, the two main shareholders, or their heirs situated in two different MS, do not agree any longer about the strategy of a company, and the easiest solution to save business would be then to divide a company cross-border. Impact on companies can be seen by comparing the costs between cross-border and domestic divisions. The costs of a national division are estimated to be overall low. However, with regard to cross-border divisions, the costs can vary depending on whether a MS has specific procedure in place or whether the division is carried out indirectly. For instance, in Finland, where there is a set procedure for a direct division, the costs are estimated to be below €30,000. This differs significantly from the UK, where there are no procedural rules and the company has to effect a cross-border division through a merger, where the costs of a cross-border division can rise over €100,000. Member State Cost of domestic division Cost of cross-border division Austria € 10,000 - 60,000 € 30,000 - 60,000 Belgium €10,000 – 30,000 € 30,000 – 60,000 United Kingdom €30,000 - 60,000 €60,000 – 100,000+ Bulgaria Below €10,000 Below €10,000 – 30,000 Denmark Below €10,000 €10,000 – 30,000 Finland Below €10,000 €10,000 – 30,000 Italy € 10,000 - 60,000 € 30,000 – 100,000 Lithuania €10,000 – 30,000 € 30,000 – 60,000 Sweden Below €10,000 – 30,000 €10,000 – 60,000 Spain €10,000 – 30,000 €10,000 – 30,000 Source: EY study on cross-border operations of companies When companies cannot carry out a direct cross-border division or this would be too complicated or expensive, they tend to use alternative indirect procedures. For instance, they might divide at national level and merge cross-border with another company or create a new company abroad and transfer part of their assets and liabilities to it. As indicated by stakeholders, such indirect ways involve additional procedures, legal uncertainty and need of legal advice which lead to even higher costs. For instance, when carrying out a national division and a cross-border merger, a company would in most cases need to prepare all the documents twice (i.e. draft terms of each operation, management reports, independent expert reports), organise two general meetings of shareholders and receive all the necessary certificates from the public authorities separately for each operation, leading to unnecessary costs. For around half of the respondents to the 2015 consultation, the costs of such an indirect procedure were the main obstacle to carrying out a cross-border operation as compared to a domestic one. 1.6.3What is the problem for other stakeholders? As in case of cross-border mergers, the rights of stakeholders such as employees, creditors or minority shareholders are likely to be impacted by a cross-border division, as they would be subject to divergent national rules. While there is no clarity whether national rules apply to the stakeholders concerned in all cases and in all MS, the following descriptions explain the complexity of the current situation. The national rules on creditors' protection differ significantly. In case of domestic divisions, in the Czech Republic creditors have a right to petition the court for protection, while in Denmark, an independent expert evaluates if creditors' claims would be endangered. In Italy, this can be assessed either in an expert report or by a court. For cross-border divisions, in the Czech Republic creditors are entitled to seek a guarantee provided that it will be more difficult to recover their claims after division while in Denmark creditors can claim protection if the valuation expert concludes that the creditors would not be sufficiently protected after the division. The timing to provide creditor protection also varies: e.g. creditors can claim protection for example 1) up to four weeks after the general meeting, 2) within three months from the issuance of the public notice by the registration authority or 3) within six months after the cross-border divisions becomes effective. In Italy and Sweden, cross-border merger rules are usually applied by analogy, while in Belgium and France domestic division ones are used. The national rules also differ on minority shareholder protection. Through the cross-border division, shareholders may become shareholders of a company in a jurisdiction (another MS) where they did not wish to. Some MS (e.g. Denmark, Ireland, Italy, Poland) allow shareholders to sell their shares for adequate compensation, some require high majorities when voting in the shareholders' meeting (e.g. 90% in Austria as compared to 75% in case of proportionate divisions, 75% in Denmark as compared to 66% for the proportionate ones), some others provide for an ex-ante court scrutiny of the fairness of the terms of division (UK) or the possibility to set aside a resolution tainted by abuse of majority power (France). Such divergence can result in varying treatment of stakeholders of a dividing company across MS. In some cases, stakeholders might not receive any protection at all. For instance, in real life cases involving Italian and UK companies, creditors had the right to oppose the division according to Italian law but not according to the UK rules. In a hypothetical case of a division involving Danish and French companies, minority shareholders in a Danish dividing company would have a possibility to sell their shares for adequate compensation if they voted against the division at the general meeting whereas the shareholders of a French company would not have such a right. In case of domestic divisions, some MS provide for protection, e.g. in Belgium, where in principle, the employment contracts of the employees are transferred automatically to the receiving company while maintaining acquired rights, or Denmark (considerable protection where a business changes ownership) or the Netherlands (a works council – if at least 50 employees – has the right to provide formal advice on all reorganisations of a company and could bring a dispute before a court if the company board goes against their advice), whereas in a number of others (e.g. in France, Ireland, Italy, Lithuania, Spain or the United Kingdom) there are no specific provisions in place. But these domestic protections are not easily transferrable to the cross-border context. As regards employees' rights in case of cross-border divisions, the provisions differ between protection based on information and procedure in Denmark and based on information rights in Czech Republic and no specific rights in Finland; in MS where other national rules are applied by analogy, those rules also differ, e.g. in Belgium safeguards from domestic divisions would apply whereas in Sweden – the ones from cross-border merger rules. Moreover, more generally, there is no specific requirement to inform companies about the cross-border division and its implications – which appears particularly problematic given that divisions are considered as risky in terms of safeguarding employment rights. Due to the lack of rules, in case of a cross-border division, the employees' rights can diminish since the division can lead to lower number of employees. In case of a lower number of employees, the national law might not require the same level of employee's rights as before the division. Companies might use cross-border divisions and the legal uncertainty around it to avoid the need to apply potential domestic rules for employees' participation. The problem of "avoiding" national participation rules, by performing a cross-border division below the threshold, may be much more significant for cross-border divisions than for cross-border mergers (where the overall number of employees grows) In cases where companies carry out cross-border divisions indirectly, (e.g. through a division at national level and then through a cross-border merger), the situation is even more complicated for stakeholders. They would need to understand how they would be protected (if at all) under each separate procedure and under diverging national rules on creditors and minority shareholders in domestic divisions and cross-border mergers. This would result in legal uncertainty and need of legal advice. 1.7Cross-border conversions 1.7.1Driver: What causes the problem? Cross-border conversions are important for those companies that would like to continue operating in another MS without losing their business contracts. Conversion is a direct process whereby the company's legal personality is preserved as it converts its legal form to a legal form in the new MS (without needing to wind up or to liquidate its assets and liabilities in the initial MS). A conversion is particularly attractive for a small company that does not have enough financial resources to search for expensive legal advice and conduct a cross-border merger. A move by a small company to another MS is often done for the same reasons which are behind free movement of persons, i.e. personal or language reasons, search for better business opportunities and better financing, closeness to the clients or finding a more business friendly legal environment. For bigger companies, or groups of companies, the tax consideration is important, but often companies move to adjust their corporate governance or capital structure, or financial disclosure requirements. In its jurisprudence, the Court of Justice has firmly established the right of legal entities, within the meaning of Article 54 TFEU, to carry out a cross-border conversion. This right is protected as an inherent aspect of the freedom of establishment pursuant to Articles 49 and 54 TFEU. The case-law (see Annex 6) can be summarised as follows: MS should allow cross-border conversions if national conversions are allowed. However, the more detailed conditions for conversions are left to national laws, but they should not, in principle, impede the freedom of establishment. Such conditions may be justified as overriding reasons of general interest, in a non-discriminatory and proportionate manner (assessed on a case-by-case basis by European and national courts).

The recent Polbud judgment made it clear that a general requirement of winding-up of companies before carrying out a cross-border conversion is an unjustified restriction to the freedom of establishment. In this case, the Court also held that companies may rely directly on Article 49 TFEU to transfer their registered office to another Member State, even where they do not transfer their real head office. The Court recalled its earlier jurisprudence that the fact that either the registered office or real head office of a company was established in accordance with the legislation of a Member State for the purpose of enjoying the benefit of more favourable legislation does not, in itself, constitute abuse. However, despite being judicially recognised, the right to exercise a cross-border conversion remains largely unrealised for a number of companies. Recent studies have estimated that the range of volume of cross-border transfers of a registered office for 2016 to be between 350 – 900 operations. Therefore, they constitute less than 1% of domestic transfers. This is largely due to the lack of common procedures in EU law and the divergent approaches at national level. There are a number of MS that allow cross-border conversions according to their national legislation (i.e. Belgium, Cyprus, Czech Republic, Denmark, France, Greece, Italy, Luxembourg, Malta, Portugal, Slovakia, and Spain). A certain number of these MS enable and regulate conversions through law and procedure (e.g. Cyprus, Czech Republic, Denmark, Malta and Spain); in some others, discussion about a national law is currently ongoing (e.g. the Netherlands) and the others provide more limited rules, e.g. France where a cross-border conversion requires a unanimous agreement of shareholders. As the cross-border conversion means that the company leaves one MS and incorporates in another MS, the divergences of the national rules on cross-border conversions, if they exist, make cross-border conversions very difficult. In practise, a cross-border conversion can only happen in cases where both MS have compatible rules – the MS which a company leaves and the MS to which a company moves to. Even between those MS which have enacted legislation on conversions, the procedures put in place are inconsistent. For instance, MS have adopted divergent approaches to: information and disclosure requirements prior to a cross-border conversion; dates and deadlines to be met; publication requirements; steps required for the execution of a conversion; safeguards afforded to stakeholders (employees, creditors and minority shareholders). Furthermore, these rules may differ depending on whether it is an outbound or inbound conversion, which adds to the complexity. For instance, Hungary does not allow Hungarian companies to convert into companies in another MS (outbound), whereas conversions of foreign companies into Hungary are allowed subject to specific conditions set by the Hungarian Supreme Court following the Court of Justice judgment in the VALE case (C-378/10) (inbound). In addition, more than half of the MS do not provide any specific rules allowing for cross-border conversions (Austria, Bulgaria, Croatia, Estonia, Finland, Germany, Hungary, Ireland, Lithuania, Latvia, Poland, Romania, Slovenia, Sweden and the UK). It is to be noted that the Commission has pointed out this problem in the framework of country reports under the European Semester. In some of those MS, it might be still possible to convert on a cross-border basis of analogous interpretation of CJEU case-law e.g. Germany. Some other MS might permit inbound transfers on the basis of CJEU jurisprudence but have incorporated rules into their national law which require that a company winds up and therefore make outbound transfers of registered office impossible (Croatia, Hungary, Ireland, Lithuania, Poland, Romania and the UK). In 2008, the CJEU stressed that it is the EU legislator who is solely competent to resolve the issue regarding the coupling of the head office with the registered office. However, this has yet to happen and as such there are cases on conversions currently pending before the CJEU. In 2017, the Commission received a letter from 6 MS specifically calling for an EU instrument on conversions. This view was further reflected in the 2017 public consultation which showed broad support from MS/stakeholders alike as approximately 85% of all respondents were of the opinion that there should be an EU instrument on this matter. 1.7.2What is the problem for companies? In the absence of clear rules at EU level, companies that wish to undergo a cross-border conversion can try to carry out direct conversions by relying on the national rules for cross-border conversions (in case those are in place) and CJEU jurisprudence or carry out indirect conversions through other existing EU procedures (e.g. on cross-border mergers or SEs). They can also wind-up a company and create a new one in another MS transferring them all assets and liabilities. This creates unnecessary costs and burdens for companies. In a number of cases conversions, or operations leading to an equivalent result, are simply impossible for smaller companies. First, relying on a case-law often means long "legal battles" with registration authorities who do not have the habit to apply directly the case-law, but rather base their decisions on national procedures. This is too costly for small companies. It is not expected that the situation will fundamentally change in this regard after the Polbud judgment as the CJEU recognised that companies can rely on the freedom of establishment to convert across borders. However, absent EU harmonisation, the situation remains that it is highly possible that each case would be treated differently by the individual Member States' authorities without EU harmonised procedure. Secondly, if two national procedures which relate to cross-border conversions, do not match, a cross-border conversion is simply impossible or too costly (judicial path). Even if the procedures match, a cross-border conversion itself is estimated to cost, on average, at the present state of law, between €20,000 to €40,000 depending on the MS involved and the size of a company. This is prohibitive for small companies. Costs and administrative burdens result from the potentially different requirements in the departure and destination MS as regards the type and content of documents to be prepared (e.g. draft terms of conversions, pre-conversion certificate), different procedures and the related deadlines or other additional requirements. For instance, in the Czech Republic's conversion procedure the seat transfer proposal contains much more information than its Italian counterpart. In respect of publication, in Spain the transfer is to be published in the Official Gazette (accompanied by a call for a general meeting) and in the main newspapers in the province where the company is domiciled, whereas in Cyprus it must only be published in two daily newspapers. Thirdly, due to difficulties or impossibility to carry-out a direct conversion procedure, a company may choose to do this in indirect way by first creating a subsidiary abroad and then merging with it. So there is at least one step (the creation of a new company) that is not necessary in comparison with the direct conversion. Moreover, in cross-border mergers, there are at least two companies at stake, therefore there is a need for having for example expert reports for each company, whereas in a cross-border conversion there is one company and therefore one report. The cost of at least one extra report is unnecessary for the conversion. Due to this and other complexities of dealing with at least two companies, instead of one, the costs of carrying out a conversion on foot of a cross-border mergers are estimated to be between €80,000 to €100,000 depending on the MS and types of companies involved. This can often be prohibitive for SMEs. Another "alternative path", i.e. converting/transforming a company into an SE is also complex and normally only accessible for bigger companies. In such a case, there need to be either two companies or one public limited liability company with a subsidiary in another MS for at least 2 years. These requirements could be much easier met by groups of companies or bigger companies. Most small companies would not be public limited liability companies and would not be able to have a subscribed capital of not less than €120,000 which is required by SE Regulation. Also, the purpose of cross-border conversions is different from the aim behind creating SEs. In case of conversions the aim is to move from one MS to another, whereas the purpose of SE is to have a company that operates in the whole EU without having to move anywhere, since precisely the Statute allows it to operate easily in all MS (with common rules). The sole procedure of transfer, without counting the creation of SE, is estimated to cost around €30,000. Finally, if a company chooses to wind-up a company and transfer assets and liabilities to a newly created one in another MS, it may cost around €24,000 for SMEs and more than €100,000 for a bigger company. Similar to cross-border divisions, the impact which the lack of procedural rules has for companies can be best demonstrated by comparing the costs of a cross-border conversion to the costs of a national conversion. A study found a significant divergence between the costs of a national conversion, that require costs inferior to €10,000 in all the MS for which data was collected and the estimated costs for cross-border conversion which require higher costs than undertaking a domestic transfer in the majority of the MS. For instance, for Cyprus, where there is a set procedure in place, the cost difference is not significant, with costs estimated to be below €10,000 for both procedures. Conversely, for Austria, where cross-border conversions are authorised by applying the SE Regulation by analogy, the costs differ between less than €10,000 for a national transfer and €30,000-60,000 for a cross-border transfer. The most distinguishable difference in costs can be identified in the United Kingdom where cross-border conversions are not authorised and an indirect procedure has to be used. Here the costs are estimated to be €10,000 for a national conversion but can rise to over €100,000 for an indirect procedure to achieve the same result as a cross-border transfer. All of this shows that there are real difficulties faced by companies, especially by SMEs. As E&Y study provides that: Through interviews with legal practitioners in the MS and the Expert Panel with experience advising companies on (cross-border conversions), it was indicated that the tendency to abandon the transfer of a registered office will mainly apply to smaller companies such as SMEs who do not have the means nor the time to either (1) appeal the refusal to transfer the registered office through the use of the CJEU jurisprudence or (2) use finances for alternative solutions to undertake the transfer. At the same time, it has been found that a very large percentage of domestic transfers concerns SMEs (99,3% in Italy, 99,9% in Estonia). It is likely that the same would be true for cross border conversions. Therefore, given that 99% of all limited liability companies in the EU are SMEs and that a cross-border conversion procedure might be of particular interest for them, the above-mentioned problems can lead to considerable lost opportunities for the internal market. 1.7.3What is the problem for other stakeholders?

Similar to other cross-border operations, the rights of stakeholders such as employees, creditors or minority shareholders might be affected: when a company converts from one MS to another, in principle, the rights of such stakeholders may also change because they become stakeholders of the transferred company in the receiving MS. The protection of stakeholders would very much depend on the approach used by a company in the absence of EU rules. If companies choose to carry out direct conversions by relying on the national rules for cross-border conversions (in case those are in place) and CJEU jurisprudence, this means application of divergent and often incompatible rules and procedures. In addition, the protection offered by case-law is insufficient, since the case-law so far has dealt only with limited aspects of protection and its guidance is by its nature offered on case by case basis. As regards employee protection, some MS have specific rules on it; some do not have rules at all. For example, in the Czech Republic employees involved in the outbound conversion have the right to be acquainted with the transfer report and to express their opinion on the transfer, while in Cyprus and in Malta there is no such protection. The problem for employees might be the same as under cross-border divisions: there is a risk that companies use cross-border conversion and the lack of relevant rules to avoid the provision of employees' rights by moving to another MS with more favourable rules for companies in this respect. The problem of "avoiding" national participation rules, by performing a cross-border conversion below the national threshold, may be much more significant for cross-border conversions than for cross-border mergers (where the overall number of employees grows). Moreover, more generally, employees are not sufficiently informed about a cross-border conversion – this appears particularly problematic as the cross-border conversion is considered risky for employment rights. Furthermore, a possibility offered by a combination of MS laws which would allow the creation of letter-box companies in the destination MS is not welcome by many stakeholders, including employees. Concerns are raised that companies having a registered office, but not a head office in the destination MS after conversion may be used to avoid many obligations of the MS where they have a real head office. This problem has become more prominent following the Polbud judgement which stipulates that the freedom of establishment is applicable when only the registered office is transferred. As far as creditor protection is concerned, some MS (usually those with specific rules on cross-border conversions) provide the creditors with a right to request a security or to object the reincorporation (e.g. Cyprus, Czech Republic, Denmark, Malta, Spain and draft bill under discussion in the Netherlands). In Spain creditors are allowed to object the reincorporation, in Cyprus a creditor may object to the reincorporation but the court may intervene; while in the Czech Republic a creditor may demand security for unpaid debts. Some other MS (e.g. France, Greece, Luxembourg and Portugal) do not regulate this issue at all. As far as minority shareholders protection is concerned, the existing rules in MS range from no special rules (e.g. the UK) to rather elaborate protection regimes (e.g. in Germany where minority shareholder have an exit right against cash compensation and a right to additional cash compensation if the share exchange ratio is not adequate). There are also in some cases different majorities required to approve a conversion by shareholders; often supermajority is required (e.g. Belgium, Czech Republic, Malta, Spain, Portugal) but in some cases even unanimity (e.g. in Luxembourg, France, Greece for some companies), which is more protective of minority shareholders but might make such conversions close to impossible in practice. In the absence of a direct conversion procedure, as explained above, companies may choose to carry out indirect conversions through other existing EU procedures. In respect of indirect conversions, the SE Regulation and cross-border merger rules (see point 2.2) contain specific provisions on protection of stakeholders. As to the SE Regulation, it provides for a number of safeguards, but the SE does not offer a real conversion procedure and for the reasons explained in point 2.4.2 it contains complex rules which are not suited for smaller companies. As to the cross-border merges, the weaknesses of protection offered by cross-border merger directive are described in point 2.2. Naturally, when a company winds-up and reincorporates the acquired rights are extinguished and the new rights depend entirely on the national regime of the new MS. This plethora of unsatisfactory options and lack of efficient solutions leads to legal uncertainty or clearly incompatible rules. The protection of stakeholders in such cross-border transactions, in contrast to national conversions, is therefore often ineffective. 1.8Conflict of laws rules 1.8.1Driver: what causes the problem? Legislation regulating companies has only been partially harmonised at the EU level and the national company rules vary. Therefore, companies operating across borders or considering such cross-border activities face the risk of being governed by different or contradictory laws depending on where they are formed or active. They are also confronted with a lack of legal certainty as to which law applies, including in situations where the applicable law changes as in a cross-border conversion but also in static situations where a company engages in significant cross-border operations. As a consequence, the effect of the freedom of establishment on the mobility of companies across MS is still rather limited and foreign incorporations take place in other MS only to a small extent . In the UK there are between 227,000 and 270,000 foreign incorporated companies, in Estonia, Romania, France, Germany and Slovakia around 30,000, and in all other MS even less than that. An empirical survey of lawyers from all MS found that the divergence of national private international law regarding companies causes legal uncertainty for economic actors and their owners (shareholders), directors and managers operating within the internal market and for MS as to the question which rules of national law applies to foreign companies operating on their territory. Such legal uncertainty has an adverse effect on the cross-border mobility of companies, on foreign incorporations as well as on cross-border conversions. It is argued that this is also due to the absence of uniform conflict-of-law rules. At present, conflict of laws rules in the area of company law are regulated by MS and the content of these rules differs substantially. In particular, the connecting factor determining the applicable law, i.e. the criterion that is decisive on which law applies to companies with cross-border activities, varies among MS. Traditionally, some MS follow the real seat theory, i.e. the law governing a company is determined by the place where the central administration of that company is located. Other MS follow the incorporation theory, i.e. the law governing a company is determined by the place of its incorporation (the place of its registered seat). It is important to distinguish the connecting factor determining the applicable law from effective residence requirements under substantive company law which exist in several MS and which make the incorporation of a company subject to such requirements, with the consequence that companies are only registered if they have effective residence in the MS concerned. Connecting factors for conflict of law rules based on the incorporation theory are independent from and have no link to effective residence requirements under substantive company law. In other words, where a MS follows the incorporation theory for the determination of the applicable law, it applies the substantive law of the MS where a company is incorporated but that law may require a real seat on its territory for the incorporation of a company. Under this point, the terms 'incorporation theory' and 'real seat theory' as well as the term 'connecting factor' are used exclusively in the context of determining the law applicable to a company. The difference between the two theories concerning conflict of laws rules could lead to situations where a company incorporated in MS A, but with its central administration in MS B, would be recognised as a company of MS A by MS that followed the incorporation theory, but in MS that followed the real seat theory that same company would be governed by the law of MS B. Potentially, a company could therefore be subject to different and possibly contradictory laws at the same time. The Court of Justice of the EU has addressed some, but not all, of these uncertainties faced by companies in the internal market in the context of the relationship between national company laws and the freedom of establishment. The case-law of the Court of Justice has considered that certain practices in MS imposing their company law rules on companies incorporated in other MS (hereinafter also 'foreign companies') on the basis of the real seat approach are unjustified restrictions of the freedom of establishment where they lead to the non-recognition of foreign companies not having their real seat in the MS of incorporation. In its present state, EU law guarantees that a company incorporated in a MS must be recognised throughout the EU provided that it has any of its registered office, central administration or principal place of business in a MS. Besides formal recognition of companies as legal persons, MS cannot impose additional obligations unless such obligations are justified by overriding mandatory requirements. The same principles apply in that MS may not prevent a seat transfer accompanied by a change of a company´s governing law, provided that this is possible under the law of the MS which the company wishes to adopt. The above-mentioned case-law of the Court has, however, addressed existing obstacles only partially and only on a case-by-case basis. As a consequence, there is significant variation in how the relevant connecting factor determining the applicable law is formulated and whether the conflict rules contain exceptions to this connecting factor where the foreign company has substantial links to the new state. In several MS, conflict of laws rules applicable to companies are unclear, uncertain, underdeveloped or even non-existing or do not fully comply with the case law of the Court of Justice on freedom of establishment. Some MS still formally adhere to the real seat doctrine, but effectively disapply it in practice because of the use of presumptions. Some apply their domestic law to foreign companies at the choice of third parties if the company’s real seat is located within the new state. Other MS apply specific provisions of their domestic company law to foreign companies if idiosyncratic links of differing intensity with the new state are present, for example the location of assets in the new state or the carrying out of business activity. MS seem therefore to be split into four categories: those which apply a pure incorporation theory (BG, CY, CZ, FI, HU, IE, LT, MT, NL, SK, SE, UK); those where the incorporation theory is applied but this is unclear to non-experts or those where the incorporation is subject to exceptions but there is clarity in the legal framework (AT, BE, HR, EE, FR, DE, IT, RO, SI, ES); those where the incorporation is subject to exceptions and there is no clarity in the legal framework for no-experts (DK, EL, LV, LU) and those where even legal experts cannot identify whether the country follows a connecting factor based upon the incorporation theory or not (PL, PT). This situation, combined with insufficient awareness of the case-law in MS authorities and even lower courts, results in an enhanced risk of having to go through protracted litigation to benefit from the freedom of establishment. The recent Polbud judgment does not help to resolve the existing legal uncertainty in this respect, since the Court does not address the issue. It is important to distinguish between the connecting factor determining the applicable law from effective residence requirements under substantive company law. Finally, the boundaries between the law applicable to the internal functioning of companies (not yet regulated at EU level) and other areas of conflict of laws (already regulated at EU level, such as contract, tort and insolvency law) can raise legal uncertainties. For instance, there is significant variation in how the MS define the liability of directors in insolvency towards shareholders, creditors, or other third parties. The laws and practices of MS with regard to the law applicable to companies reveal therefore lack of uniformity and legal certainty as to several important aspects. All these elements may constitute obstacles to cross-border activities and corporate mobility in the EU and limit the possibility of companies to make effective use of the freedom of establishment. A number of the national public authorities and business organisations that replied to the 2017 public consultation considered that the differences between the MS laws or the overall lack of legal framework in respect to conflict-of law rules for companies to a certain extent constitute obstacles to the proper functioning of the internal market - with 28% considering it as an obstacle to a large or very large extent. The picture is different among trade unions (which predominantly see it only as a problem to some extent), and notaries (who predominantly do not see it as a problem at all). 1.8.2What is the problem for companies?

As a result of the lack of uniform conflict of laws rules, companies present or aiming to be present in more than one MS may incur additional costs and even refrain from exercising their freedom of establishment: The lost opportunities resulting from this latter aspect cannot be quantified but there is evidence that the extent to which private international laws differ between a given country pair is significantly and negatively related to the foreign incorporations. Countries that have a clear-cut version of the incorporation theory seem to benefit in the market for incorporations, as compared to countries that have retained elements of the 'real seat' theory: high numbers of foreign incorporations can be found in the UK (with ca 60% of all foreign incorporated companies in the EU), SK and FR. Differences between the national conflict of laws rules create additional costs in both so-called 'static' situations (where there is no change of applicable law) and in dynamic situations (where a company wishes to change the law applicable to its internal functioning, and therefore to convert into a company subject to a different national law). Illustrations of a static situation which may lead to a conflict of laws A Finnish businesswoman wants to set up a business which has a registered office in Finland but with all its economic operations in Estonia. She is uncertain whether she can safely rely on the applicability of Finnish law to that business. Illustration of dynamic situations which may lead to a conflict of laws A company registered in Slovakia with operations in Germany wishes to change its applicable law, without affecting its operations. Legal uncertainty as to the applicable law has been most often quoted as a practical problem (together with costs of translations) . In static situations, legal costs may be incurred ex ante, when a company establishes itself in more than one MS. The need to determine which rules it will be subject to may require specialised legal advice. Even where companies are not taking such advice ex ante, costs may need to be incurred ex post, for example when the company needs to determine the shareholders' rights or the duties of directors to or when it needs to defend itself against potential lawsuits. The legal uncertainty regarding which rules apply and the risk that more than one law may be applicable to a company or that a company may be found to fall foul of company law obligations (e.g. minimum capital requirements) in a given country are an obstacle to the exercise of the freedom of establishment and therefore an element which undermines growth, innovation and job creation. In dynamic situations, when a company wishes to perform a cross-border conversion, the lack of uniform conflict of laws rules will lead to additional legal costs which come on top of those incurred as a result of differences in the substantive laws of the MS. These may also be incurred ex ante or ex post (as in static situations) and a company may need to employ legal experts from at least two jurisdictions (more if the company is comparing the legal regimes in several potential new states). In addition, in both static and dynamic situations, there are different costs associated with the two main approaches to determining the law applicable to companies. All limited liability companies (representing some 80% of all companies in the EU) have currently a place of registration/incorporation. However, several MS retain elements of the 'real seat' as additional connecting factors. Companies with establishments in these countries may experience additional costs and obstacles to corporate mobility when compared with those established exclusively in countries applying the incorporation theory. For example, companies established in 'real seat' MS will have to ascertain the fact-based links which are relevant for the purposes of determining the applicable law and which differ considerably between MS: place of central administration, head office, main operations, economic link or a combination of these as factors determining the applicable law. Such remnants of the real seat theory are consistently statistically significant for companies' decision to perform a cross-border conversion. Lawyers and practitioners from 'real seat' jurisdictions also indicated practical problems such as objections by the commercial register to register a company whose headquarters were situated in another MS, legal uncertainty and lack of support from local lawyers and notaries. Where the place of incorporation cannot be determined, e.g. for unincorporated entities, another connecting factor would have to apply, which could point to the law of the 'real seat' or another law with which a company is more closely connected. However, such cases are likely to represent a small proportion in practice and will therefore not lead to substantial costs. 1.8.3What is the problem for other stakeholders? The lack of harmonised conflict of laws rules may also mean uncertainty as to the protection afforded to stakeholders, in both static and dynamic situations. In static situations, stakeholders (creditors, shareholders, employees) may not be clear about which rules apply to their protection and may as a consequence incur additional costs to ensure against such risks or refrain from acting in the most economically beneficial way. As long as the law applicable to a company is not easily ascertainable, stakeholders will need to incur additional legal costs, either ex ante (before entering a legal relationship with the company) or ex post (after entering such a legal relationship, e.g. when there is a breach of a duty on the part of a director), as well as opportunity costs (when refraining from entering a legal relationship with a company whose legal status is unclear because the law applicable to it is unclear). For example, creditors in particular need to be able to determine which law applies to the capacity of a company to enter legal relations, and what the consequences are when directors act ultra vires. Employees may need to know what their rights to participate in decision making are. In dynamic situations, minority creditors and shareholders as well as employees may find themselves in a situation where they need to incur additional costs to be able to determine which law protects their rights in the event of a cross-border conversion. National conflict of laws rules may differ in respect of (1) determining the law applicable to the protection of pre-existing stakeholders, and (2) determining the law applicable to the condition for re-incorporation of the company in the new MS. The new law will affect the protection of stakeholders entering a legal relationship with the company after the conversion took place, so clarity about which law applies after the change is of importance to stakeholders. The situation of employees Employees are a special category of stakeholders: for them, legal certainty about the applicable law may not be sufficient protection and they would require in fact protection under the law of the country where they are performing their activity in performance of an employment contract. 1.9How would the problem evolve – what is the baseline scenario? As regards the use of digital tools and process during the company’s lifecycle, with no initiative at the EU level, national company law procedures would continue to integrate digital solutions at different pace, further increasing inconsistencies between the levels of digitalisation in the MS. In addition, the Commission proposal for a European services e-card does not cover procedures and requirements under company law. The Commission proposal for a Single Digital Gateway covers the general registration of business activity and excludes the constitution of limited liability companies as this necessitates a comprehensive approach which would be more appropriately included in the company law acquis. Concerning cross-border mobility of companies, with no initiative at EU level, companies and stakeholders would continue to rely on the existing rules for Cross-Border Mergers enshrined in the Codified Directive, on the national legislation if in place for cross-border divisions and conversions, on the Court's case law and on indirect ways of carrying out cross-border divisions and conversions. For cross-border mergers, no substantial changes could be expected without a proposal at EU level. Some MS could change their national rules which are not harmonised in the Directive, e.g. on protection of creditors or minority shareholders. However, such changes are likely to be limited and importantly unlikely to be compatible with changes introduced by other MS. For cross-border divisions and conversions, some MS who do not have specific national rules yet, may unilaterally introduce such provisions following the case-law of the Court. For instance, rules on cross-border conversions were introduced in Denmark soon after the Court's decision in the VALE case. In the Netherlands, the discussions on a national draft law on cross-border conversions are currently ongoing. The examples of recent cases, such as the judgement by the German High Court of Frankfurt (see section on problems in cross-border conversions), and the currently ongoing case (C-106/16) in front of the Court, legal practitioners in an increasing number of MS might acknowledge that cross-border conversions should be permitted, which could in turn lead to more MS considering rules. This might be less likely in the case of cross-border divisions where there are less ongoing cases and less discussion in the legal literature.

At the same time, any such developments towards more recognition and legislation at national level might be slow and incomplete. For instance, the Romanian Brasov Court of Appeal rejected a request of a Romanian company to convert to the UK in 2014, arguing, among others, that the Court's judgment in the Cartesio case does not clarify the reincorporation proceeding and no specific rules have been implemented in Romania. In Hungary, the developments following the VALE case opened up a possibility of carrying out cross-border conversions into Hungary, without, however, changing the situation as regards converting out of the country. Although the Court of Justice may further clarify some principles, in particular as regards cross-border conversions (including in the currently ongoing case C-106/16), it would likely provide only partial answers, on a case by case basis, and would not set out a uniform procedure. As regards conflict of laws, continued reliance on the jurisprudence of the Court of Justice of the EU in the area of freedom of establishment will not by itself remove legal differences between MS' conflict of laws rules, nor will it eliminate the associated legal uncertainty and costs for mark