Global Insight | June 2023

New financial and legal perspectives for restructuring in the EU

Through the eyes of the auditor

Companies often face events that require its business operations to restructure. When opportunities arise to improve business or financial synergies, to acquire know-how or resources, to make gains in market position, or to streamline a business in the context of a portfolio clean-up, business transformation becomes essential. As always, considerations, such as business strategy, asset valuation, transfer pricing or tax issues, come into play in relation to these planned transactions. In such instances, it pays dividends to engage external expert auditors and advisors, and in certain cases legal experts, to ensure a comprehensive and well-informed approach.

While it is widely known that EU citizens have the right to free movement within the EU, it is not as widely known that this freedom also extends to EU businesses. This means that EU businesses are granted the freedom to relocate to another Member State, a concept referred to as the freedom of establishment.

What is new in the EU Merger Directive?

The biggest novelty is that, except for a few cases, all transactions that are part of a domestic merger or division can be carried out cross-border. These new rules in the EU Mergers Directive allow not only mergers but also demergers and spin-offs. As a result, companies with an international network that previously had only a branch in another EU member state, can now maintain legal continuity by functioning as a separate entity in that state.

To be clear, the option for cross-border transformations is exclusively available to capital companies, i.e., limited liability companies or joint stock companies. The new rules will only cover cross-border transformations where all the companies involved are or can be considered resident in an EU Member State.

Why are summer and winter the best times to decide?

It is recommended to align the timing of any transformations with the recently published statutory financial statements for the 31 December reporting date. These statements can serve as valuable support for transactions.

The company owners may decide to merge or spin-off, or to change the legal form of the company, or in many cases a combination of these.

The assets and liabilities balance sheet will be established by the auditor valuing them at either book value or market value. However, the most important aspect of the process is ensuring that, as of the effective date, the successor company is the legal successor to all the company’s assets and liabilities, in particular its contracts, debts, rights, and obligations.

Why could a cross-border transformation be a smart solution for companies?

The opening of new perspectives and significant business potential for companies operating in European markets, ensures legal continuity (creditors, long-term contracts, tenders from government and multinational companies, employees), and allows branches to be transformed into legal entities.
To acquire know-how resources or market position in different EU States, or in cases where the owners have different views on the prospects of the company, they could split up across borders. In such case, the parties could consider a full division or a partial division.

VGD Hungary’s audit and advisory teams have the expertise and know-how to advise you on M&A transactions in the domestic and European markets and will be happy to help you navigate the financial, tax, legal and accounting issues involved in M&A transactions.

For more information, please contact:

Gyöngyi FERENCZ
Audit Partner
VGD Hungary Audit Kft.

E: gyongyi.ferencz@vgd.hu
T: +36 (1) 226 7575
E: vgd.budapest@vgd.hu
W: www.vgd.hu