In our previous article on cross-border transformations, we mentioned that the EU has taken a number of steps to put companies that plan to carry out a transformation, merger or division within the Community in a similar situation. As part of this, Directive (EU) 2019/2121, adopted on 27 November 2019, amended the provisions of Directive (EU) 2017/1132 on cross-border mergers, thus creating the legal basis for harmonised rules to apply to cross-border transformations and divisions. The amendment sought to achieve the objective of an internal market without internal borders for companies, which it sought to reconcile with the objective of social protection, including the right of employees to information and participation and additional rules to ensure the protection of members and creditors. The directive had to be transposed by member states by 31 January 2023.
In Hungary, until 1 August 2022, cross-border mergers were governed by Act CXL of 2007 on cross-border mergers of capital companies (Old Transformation Act). The Old Transformation Actwas repealed with effect from 1 August 2022 by Act CXXIV of 2021 on cross-border transformations, mergers, divisions and other legislative amendments of capital companies (New Transformation Act), in view of the above-mentioned EU Directive.
In addition to the new rules on conversion, the New Transformation Act lays down rules for cross-border divisions, both partial and full divisions. A cross-border transformation is defined as an operation whereby a company registered in the company register, while retaining its legal personality, converts its legal form into a capital company under the law of the host Member State without going into liquidation or dissolution, and transfers at least its registered office to the host Member State. In practice, this means that a private limited company registered in Hungary can convert into a German GmbH while retaining its legal personality, maintaining its previous legal relationships, such as contracts with its customers, employment relationships with its employees or other contracts. It should be stressed that the New Transformation Act only allows for the two forms of company described above: limited liability company or public limited company.
Under the New Transformation Act, a Hungarian resident company may not decide on or participate in a cross-border operation if
– the company is subject to bankruptcy or liquidation proceedings;
– is subject to compulsory liquidation proceedings;
– is undergoing restructuring proceedings;
– is the subject of a civil non-litigious procedure aimed at enabling the company to reorganise or restructure its financial or property situation or its operations by reaching an agreement with its creditors.
In the following paragraph, we briefly summarise the most important provisions of the New Transformation Act in the context of a cross-border transformation of a Hungarian company:
– As a general rule, the supreme body of the company decides on the cross-border transformation twice. The Hungarian company’s chief executive officer prepares a draft terms of conversion, a draft balance sheet and a conversion report. The draft terms of conversion must be audited by an independent auditor.
– The company must file the draft terms of conversion, certain declarations, notifications and the auditor’s report with the court at least 30 days before the date of the general meeting of the company’s governing body at which the final decision on the cross-border conversion is taken.
– The Hungarian court will be notified of the conversion by the filing of the above documents and will publish twice the most important information about the conversion in order to allow the creditors of the Hungarian company to claim security if the cross-border conversion threatens the satisfaction of their claims.
– The company will apply to the court for a certificate at least 30 but not more than 90 days after the date of the final decision on the cross-border transformation.
– The court shall issue a certificate, which shall be sent to the company and, via the system for the interconnection of company registers, to the authority responsible for keeping the companyregister in the Member State of the successor company.
– The application for registration of a successor company established in Hungary must be lodged with the (Hungarian) court having jurisdiction in the Member State of the registered office of the successor company within 30 days of the issue of the certificate issued in the Member State of origin. In the other case, upon notification of the date of the cross-border transformation received from the host Member State, the court will remove the predecessor Hungarian company from the register and at the same time enter the data on the cross-border transformation as defined in the Ctv. in the register and make them publicly available and accessible through the system for interconnecting the company registers of the Member States.
– The company resulting from the cross-border transformation shall, within 90 days of the date on which the cross-border transformation takes effect, draw up a final balance sheet of assets and liabilities of the successor company as of the date on which the cross-border transformation takes effect.
As can be seen from the above, the cross-border transformation is a complex and time-consuming process, which requires a number of other considerations, in particular company law and tax law, on the part of the companies. If you have any questions on the above, please do not hesitate to contact us.
