New rules for cross-border company divisions

On 15 September this year, an amendment to the Commercial Companies Code and certain other acts will come into force. The amendment primarily aims to implement into the Polish legal system the Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 concerning cross-border conversions, mergers and divisions of companies. The new regulations will introduce revised rules concerning cross-border transformations of business entities. In addition to changes regarding cross-border operations, the amendment also introduces new rules concerning domestic transformations. This solution is primarily intended to prevent discrimination against Polish entities participating in these processes compared to entities in the cross-border context. Besides changes to the Commercial Companies Code, the amendment also brings novelties in ten other acts, including the Act on the National Court Register, the Tax Ordinance Act, and the Act on Supervision over the Financial Market. In this article, we will focus mainly on the new solutions concerning cross-border and domestic transformations, mergers, or divisions of companies, which will be included in the Commercial Companies Code, as well as on the rights and obligations of the bodies and employees of companies resulting from cross-border transformation, merger, or division.

Key changes in the Commercial Companies Code

The amendment will introduce new solutions especially regarding the capacity of companies to merge, divide, or transform. Among these, the following should be highlighted:

• equalising, with regard to reorganisation, both domestic and cross-border status of the limited joint-stock partnership and capital companies;
• granting the limited joint-stock partnership full capacity to merge and divide;
• extending the possibility of mergers for partnerships;
• allowing cross-border division and cross-border transformation of capital companies and limited joint-stock partnerships;
• new types of cross-border operations, including, among others, a new type of domestic partial division of a company (division by separation) and a previously unknown simplified type of domestic and cross-border merger (merger by acquisition);
• introduction of conflict-of-law rules in the case of cross-border operations;
• clarification of the content of the transformation plan resulting from cross-border operations and the management board’s report containing the justification of the operation, especially the necessity to include in the plan information regarding the principles of dividing the assets of the divided company, which were not included in the cross-border division plan, and consequently the principles of liability for the obligations of the divided company;
• introduction of a two-tier system of legality control of transformations, including the involvement of the Head of the National Revenue Administration in issuing certificates of compliance with the law for cross-border operations. Additionally, the control will also be conducted by authorities of the Member State competent for the company resulting from the cross-border transformation, merger, or division;
• determination of the expert’s liability rules in the case of cross-border transformation and prohibition of annulment of cross-border operations.

What benefits do employees of a company resulting from a cross-border transformation gain?

On 26 May this year, an act was signed that determines forms of employee participation in a company resulting from cross-border transformation, merger, or division. Additionally, the new regulation specifies the rights and duties of employees and company bodies subject to cross-border transformation, merger, or division. The act will come into force on 15 September. Like the amendment to the Commercial Companies Code, it primarily implements Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 into the domestic legal order. The provisions foresee three types of rights as possible forms of employee participation in a company arising from cross-border processes:

1. Firstly, employees will gain the right to appoint or elect a specific number of members of the supervisory board or the board of directors.
2. The second form of participation provided by the act is the right to recommend members of the supervisory board or the board of directors.
3. Employees will also have the possibility to object to the election of certain members of the supervisory board or the board of directors.

Moreover, the act assumes that exercising participation rights will be possible through two different models. The first one provides for the creation of a so-called negotiation team, which will become the representation of the employee side. Within this model, negotiations will be held before cross-border processes take place. The act provides that the outcome of the talks should be an agreement between the negotiation team and the company’s relevant bodies. The agreed consensus will determine the form of the chosen participation. The second model assumes the application of so-called standard rules. In this scenario, the form of participation will be implemented only after the cross-border transformations. This means that no negotiation team will be appointed, since in this case, the company’s relevant bodies will adopt a resolution on applying the standard rules. This model assumes the whole process will be conducted with the participation of a representative team and on terms directly resulting from the act.

Summary

The described changes will come into effect on 15 September. The novelties will have significant impact on business entities planning or considering cross-border or domestic transformations, as well as on the employees of companies involved in these processes. The amendment to the Commercial Companies Code will expand the possibilities to carry out particular transformations by introducing new types of operations and broadening the merger and division capacities for certain companies. Besides new opportunities, the regulation will also introduce some additional obligations for company bodies and a two-tier system of legality and correctness control of individual transformations. The second discussed act regarding forms of employee participation in companies resulting from cross-border transformation, merger, or division also holds key importance for entities in commercial turnover and their employees. Companies should carefully familiarise themselves with the regulation to understand how employees are entitled to participate in these processes and what procedures must be carried out in this respect. Furthermore, employees should also acquaint themselves with the upcoming changes to be fully aware of their rights and duties.