From the 15th March 2024, a new set of legal provisions started to apply whenever a Cyprus Company is converted from a Cyprus company to one of the companies of the Member States of the European Union or when a company from a Member State of the European Union is converted to a Cyprus company. This is due to the amendment of the Companies Law (No.3) of 2024 (Law 26(I)/2024) (the "Amendment Law") that transposed into domestic law the provisions of Directive (EU) 2019/2121 (the "Mobility Directive") that amended Directive (EU) 2017/1132 as regards cross-border conversions.
According to the Mobility Directive and the Amendment Law, a "cross-border conversion" means an operation whereby a Limited Liability Company, without being dissolved or wound up or going into liquidation, converts the legal form under which the company is registered in a departure Member State into a legal form of the destination Member State and transfers at least its registered office to the destination Member State, while retaining its legal personality. The law of the departure Member State shall govern those parts of the procedures and formalities to be complied with in connection with the cross‐border conversion in order to obtain the pre-conversion certificate, and the law of the destination Member State shall govern those parts of the procedures and formalities to be complied with following receipt of the pre-conversion certificate. It must be highlighted that a cross-border conversion cannot be applied to companies that are in liquidation or are subject to resolution tools, powers and mechanisms, insolvency proceedings, liquidation proceedings or crisis prevention measures (Section 201ΗΑ of the Amendment Law).
The Amendment Law now requires both the involvement of the Cyprus Department of Registrar of Companies and Intellectual Property (the "RoC") and the Cyprus Court and ensures that employees and members' interests are protected during the conversion process. According to Section 201ΗΔ of the Amendment Law, the Directors of a Cyprus company that intends to be converted are responsible for drawing up the draft terms of the cross-border conversion. These terms include among others the legal form, name and location of its registered office, the instrument of constitution of the company in the destination Member State as well as the proposed indicative timetable for the cross-border conversion. The draft terms also focus on the rights conferred by the converted company on members enjoying special rights or on holders of securities or the measures proposed concerning them, any safeguards offered to creditors, any special advantages granted to members of the administrative, management, supervisory or controlling bodies of the company, whether any incentives or subsidies were received by the company in Cyprus in the preceding five years and details of the offer of cash compensation for members and the likely repercussions of the cross-border conversion on employment.
Further to this, a report must be prepared by the directors of the Cyprus company explaining to the employees, if there are any, and members, the legal and financial aspects and implications of the cross-border conversion on the employees and future business activity of the company. The part of the report that is especially addressed to the members focuses on their compensation and rights. An interesting aspect of the Amendment Law is that companies must additionally ensure that an independent expert that is either a natural or legal person examines the said draft terms of cross-border conversion and then draws up a report for members that examines whether the cash compensation to the members is adequate (Section 201ΗΣΤ of the Amendment Law).
Once the above are finalised, the company submits with the RoC at least one month before the date of the general meeting that will approve the draft terms of the cross-border conversion by special resolution (Section 201ΗΗ of the Amendment Law),
(a) the draft terms of the cross-border conversion,
(b) a notice informing the members, creditors and representatives of the employees of the company, or, where there are no such representatives, the employees themselves, that they may submit to the company, at the latest five working days before the date of the general meeting, comments concerning the draft terms of the cross-border conversion and
(c) the independent expert's report if needed. The documents disclosed in accordance with this paragraph are made publicly accessible by the RoC and they can also be accessed through the system of interconnection of registers of member states.
The interests of creditors can also be protected since if they are dissatisfied with the safeguards offered in the draft terms of the cross-border conversion that were published, they may apply, within three months of the disclosure of the draft terms of the cross-border conversion referred above to the appropriate Court for adequate safeguards, provided that such creditors can credibly demonstrate that, due to the cross-border conversion, the satisfaction of their claims is at stake and that they have not obtained adequate safeguards from the company (Section 201H1 of the Amendment Law).
The Cyprus Company that wants to be converted has to proceed then with filing an application with the Court in Cyprus in order to obtain the pre-conversion certificate (Section 201ΗΙΓ of the Amendment Law). The application mainly includes:
(a) the draft terms of the cross-border conversion,
(b) the report and the appended opinion in relation to employees and members, if any, as well as the report of the independent expert, and
(c) any information in relation to the general meeting's approval and (d) an affidavit confirming the truth of the statements mentioned in the application.
The Court can request if it wishes additional information in relation to the application and if it is determined that the cross-border conversion complies with all the relevant conditions and that all necessary procedures and formalities have been completed, the court issues the pre-conversion certificate or gives the opportunity to the Cyprus company to fulfil or complete any requirements within a reasonable time. The pre-conversion certificate can then be transmitted to the Member State through the system of interconnection of registers.
The Amendment Law further explains that the Court in Cyprus is responsible to scrutinise the legality of the cross-border conversion as regards the part of the procedure which is governed by Cyprus law when the destination Member State is Cyprus and to approve or not the cross-border conversion. The company from a Member State that wishes to be converted, can submit electronically the application to the Cyprus Court for approval. The Court examines in particular that the converted company complies with the provisions of national law on the incorporation and registration of companies and, where appropriate, that the arrangements for employee participation have been determined and accepts as undisputed evidence of the completion of the process in the Member State the pre-conversion certificate that was issued by the said Member State (Section 201HIE of the Amendment Law). Once the company obtains the approval of the Cyprus Court, it can submit the approval with the RoC that is responsible for the registration and publication of approval that marks the completion of the cross-border conversion. According to the Amendment Law, the laws of the destination Member State shall determine, with regard to their respective territories the date of completion of the cross-border conversion in their registers.
As a result of the completion of the cross-border conversion, all the assets and liabilities of the company, including all contracts, credits, rights and obligations, shall be those of the converted company, the members of the company shall continue to be members of the converted company, unless they have disposed of their shares, the rights and obligations of the company arising from contracts of employment or from employment relationships and existing at the date on which the cross-border conversion takes effect shall be those of the converted company.
In conclusion, it is expected that the new procedures for cross-border conversions will improve the functioning of the internal market for companies and firms and their exercise of the freedom of establishment in a harmonised legal framework in which there will be better cooperation between the Member States as regards the cross-border conversions of companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.