Do you run a UK-registered company that operates in another EU Member State?

In our recent Brexit checklist, we highlighted potential issues for UK-registered companies that primarily carry on their business elsewhere in the EU.

Such companies may have difficulty continuing to operate in the relevant Member State, depending on the local rules.

Recent changes to German corporate law provide a perfect example of this. The changes will apply to relevant UK companies from 29 March 2019 in the event of a no-deal Brexit.

Freedom of establishment after Brexit

The EU principle of freedom of establishment obliges Member States to recognise a company validly formed under another Member State’s law, regardless of where in the EU that company’s “real seat” (e.g. its principal place of business) is located.

After Brexit, or after any post-Brexit transition period if a Withdrawal Agreement is concluded, UK companies will no longer have a right to freedom of establishment.

Instead, each Member State will apply its own rules on whether and how it will recognise companies incorporated in the UK.

This issue will be most acute for UK-registered companies that have their central administration or principal place of business in another EU Member State.

Affected UK companies need to check whether, post-Brexit, the Member State in which they are operating will continue to recognise their company as being incorporated, having separate legal personality and having limited liability status.

UK companies under new German law

Germany is a prime example.  Following the loss of freedom of establishment a UK-incorporated limited company (private or public) that has its administrative headquarters in Germany would (under German law) lose its legal capacity as a limited liability company and automatically be treated as a partnership.

As a consequence, shareholders would lose the benefit of limited liability and become personally liable, without limit, for their company’s debts and obligations.

It is estimated that 8,000 to 10,000 UK companies are affected by this issue.

In December 2018, the German Parliament passed an act to amend key legislation in order to prepare UK companies and the German corporate landscape for a no-deal Brexit. The act entered into force on 31 December.

The new rules will enable UK companies (with their “real seat” in Germany) to remain in operation in Germany by performing a cross-border merger into a German limited liability company (e.g. into a GmbH & Co. KG or UG & Co. KG).

Transitional provisions in the act provide that, if the merger plan is notarised by 29 March 2019, companies will then have 2 years to take the necessary steps and apply for entry into the German commercial register. If there is a transition period, the timetable for notarisation of the merger plan will be extended until the end of the transition.

Next steps

This kind of restructuring would require planning and taking legal advice in both Germany and the UK.

UK companies with significant business in other EU Member States should also be taking advice on how local law will treat the company after Brexit.

Given the current possibility of a no-deal Brexit, affected companies should not delay.

For further information and legal advice on your merger plan, please contact Will McIntosh or another member of Brodies’ corporate team.

Visit our Brexit Hub for regular updates on Brexit developments.

Fiona Beal

Practice Development Lawyer at Brodies LLP
Fiona is a practice development lawyer in Brodies' corporate team. She provides support and knowledge management services in the field of company and corporate law including management of the department styles and know-how bank
Fiona Beal