CROSS-BORDER CONVERSION OF CURACAO LEGAL ENTITIES
Inbound and outbound
Since 10-10-10 Curacao has its own Book 2 of the Civil Code. This applies equally to Sint Maarten. The BES Islands (Bonaire, Saba and St. Eustatius) also have their own Book 2 Civil Code, that (also) differs from Book 2 of the Civil Code in the Netherlands. As from the said date, seen from the perspective of Book 2 of the Curacao Civil Code, St. Maarten and Bonaire – just as had already applied to Aruba for quite some time – are to a certain extent to be considered as ‘a foreign country’. I say here ‘to a certain extent’ due to Article 38 paragraph 4 of the Charter of the Kingdom of the Netherlands. I will say more about this later.
Why as a legal entity would you want to move abroad? Some legal entities are established in Curacao for tax reasons and are for instance a member of an international group. When the tax base is no longer interesting or desirable for any reason whatsoever, it is possible to opt for a winding-up or conversion into a foreign entity. The latter will be preferable if the respective company is for instance bound to all kinds of contracts and its conversion into another entity is impossible or too complicated. It may also be the case that a winding up might indeed lead to disadvantageous tax consequences whereas a conversion would not. It is obviously also possible that foreign legal entities might also want to move to Curacao for the same reasons.
Cross-border conversion within the Kingdom
Under the Transfer of Seat Ordinance it is for instance impossible to transfer to Aruba or St. Maarten. Article 38 paragraph 4 of the Charter of the Kingdom of the Netherlands provides that the subject of transfer of seat of legal entities must be regulated in a Kingdom Act. Agreement between the governments of the countries is required for this provision. For as long as that subject has not been regulated in a Kingdom Act, a transfer of seat within the Kingdom is not possible; because cross-border conversion can be materially equated with it, it is assumed that that should also first be regulated in a Kingdom Act before it can take place within the Kingdom.
The question is how a cross-border merger between the countries in the Caribbean part of the Kingdom must be considered; the Netherlands has not yet any legal provisions for this in place. Curacao, Sint Maarten and Aruba (VBA) have the outbound as well as the inbound merger; at the moment Bonaire, Sint Eustatius and Saba only have the inbound merger. For instance can a Curacao public limited company as a disappearing company merge with a public limited company in Sint Maarten as the acquiring company? This merger differs materially from the doctrine of transfer of seat and conversion so that it is defensible that Article 38 paragraph 4 of the Charter does not interfere with such a merger.
Within the Kingdom a transfer of seat can only take place pursuant to the Act of the Kingdom on the Voluntary Transfer of Seat (Rijkswet vrijwillige zetelverplaatsing van rechtspersonen) and moreover only in the event of (the threat of) war or extraordinary (political) circumstances (revolution). In order to make use of this possibility it is not required that a provision in this respect is included in the articles of association of the legal entity. I will not discuss the contents of this Kingdom Act any further.
Until 10-10-10 you could transfer the registered seat of an Antillean public limited company (NV) or a private company limited by shares (BV) from for instance Curacao to Sint Maarten by means of a simple amendment to the articles of association: you just filled in another island as the registered place of business according to the articles of association (a domestic transfer of seat). Since 10-10-10 this is no longer possible. You may even wonder whether it was indeed possible before that date since Article 38 paragraph 4 of the Charter, but it was done in just the same way as a transfer of seat within the Netherlands (for instance from Amsterdam to Rotterdam), and nobody worried about it.
The conversion under the law of Curacao
Back to Curacao and the doctrine of conversion. I only intend to discuss several aspects of this. The conversion has been provided for in Sections 2:300 et seq. of the Civil Code. The conversion of a foreign legal entity into a Curacao entity has been provided for in Section 2:303 of the Civil Code (immigration).
The cross-border conversion of the NV and the BV into a foreign legal entity has been provided for in Sections 2:304 and 2:305 of the Civil Code, and the provisions for a foundation which wants to be converted into a foreign legal entity can be found in Section 2:306 of the Civil Code (emigration).
Here the term ‘foreign legal entity’ means a legal entity controlled by the law of a country not belonging to the Kingdom of the Netherlands.
With regard to a conversion let’s start with the foreign legal entity, in particular the company with share capital which wants to be converted into a Curacao equivalent (Section 2:303 of the Civil Code). Insofar as I was able to gather, it seldom or never happens that a foreign company with share capital is converted into a Curacao foundation or the other way around. But it is allowed by law.
The law requires that provisions with regard to domestic conversion (thus from the one Curacao legal entity into the other) are applicable as much as possible. In this connection the provisions of Sections 2:301 and 2:302 of the Civil Code apply. Obviously Section 2:300 of the Civil Code also applies as much as possible: after all, Section 2:303 of the Civil Code mentions the application of Section 2:300 of the Civil Code in the event of immigration.
This means for instance that a (Curacao) notarial deed of conversion is required. A conversion also requires a resolution for the conversion and amendment of the articles of association, adopted with due observance of at least the requirements for a resolution to amend the articles of association. If the foreign legal entity is converted into a Curacao NV or BV a conversion balance sheet will be attached to the deed and in addition, the equity capital shown should not be negative; if the NV or the BV into which the foreign legal entity is converted has a nominal capital then the equity capital should not be less than this nominal capital.
In the event of immigration on the application of Section 2:300 subsection 2 of the Civil Code (the requirements for passing resolutions) and before the moment the conversion is effected the respective relevant foreign rules must also be taken into account. Requiring a condition that the foreign rules must also be taken into account, is an attempt to minimize the chances of defects in the process of passing resolutions on which the conversion is based. In addition the country of emigration could for instance prescribe as a condition for (effecting) the conversion the de-registration from a register so that this de-registration is a determining factor for the moment in time at which the conversion is effected. That a legal entity is floating (is in a legal vacuum) must be avoided as much as possible but also that it exists in two jurisdictions at the same time.
Moreover, the law provides that the law governing the foreign legal entity should not be incompatible with the conversion and its modalities. A statement of that purport issued by an expert in this area of law, must be attached to the deed of conversion. The law requires an expert but does not give any details of this concept. It is left to the civil-law notary in Curacao who has to execute the deed to assess whether the respective person can be considered as having sufficient expertise. If this is an advocate in that other country or a lawyer who can be compared with our civil-law notary or a corporate law professor, that expertise could soon be established. It is obviously recommended to ask the person whose statement is requested, also to indicate in that statement the grounds on which the respective person is an expert (or considers himself to be an expert). A substantive examination into the accuracy of such a statement cannot be required of the civil-law notary.
The most important amendment in the Curacao provision with regard to the conversion of an NV or BV into a foreign legal entity (outbound) is that the requirement of the personal notice of liability by managing directors and shareholders has been removed as from 1 January 2012 onwards, except for the case mentioned below. This provision has been replaced by the possibility for creditors or contractual counterparties of the company wishing to convert into a foreign legal entity to lodge an objection on the grounds that they will be prejudiced in their position as creditor or contractual counterparty (Section 2:305 of the Civil Code). This provision is in line with what we already know about the doctrine of merger.
The application must state what security, guarantee, contract change, dissolution or compensation is demanded. If the court awards the objection it will determine the security or guarantee to be furnished by the NV or the BV or a third party or the compensation to be paid, or the contract change or contract dissolution which will apply when the conversion is effected. The court may attach an obligation on the NV or the BV to pay compensation with regard to a contract change or contract dissolution to become effective from the date of the conversion onwards.
The deed of conversion cannot be executed before the objection has been withdrawn, the decision in which the objection has been declared unfounded or, upon the objection being upheld, the security or guarantee determined has been furnished. If the deed of conversion has nevertheless already been executed, the court can, whether or not upon a legal remedy being instituted, order a security it has described to be furnished and to attach a penalty to this.
The intended conversion will be announced in a newspaper issued here in this country by the care of the civil-law notary no sooner than three months and not later than five weeks before the date of executing the deed of conversion and insofar as this is possible simultaneously in the journal in which official notices are placed by the authorities. This can be deviated from in cases where this is specifically required in the interest of the company (Section 2:304 subsection 5 of the Civil Code).
Therefore the announcement requirement can be omitted in cases when this is specifically required by the interest of the NV. As appears from the Explanatory Memorandum in particular the case came to mind where a conversion into a foreign legal entity has been fully prepared up to and including the execution of the notarial deed, however, on the understanding that it only becomes effective when a certain condition has been fulfilled. Such a provision might be needed in times of war or a threat of war.
For that matter the legislator does not set further requirements on this criterion (if this is ‘specifically required in the interest of the company’). Therefore this is regularly used in practice in order to avoid the waiting period associated with the objection process. In those cases the declaration of joint and several liability will be accepted without any problems.
If the announcement is not made the objection process will be prejudiced and there will be a chance that creditors and contractual counterparties will become the victim of this. The joint and several liability provision has been included for that case.
You see, if deviation takes place (so that no announcement has been made), the deed of conversion must include a statement by all the managing directors who were in office at the time of the resolution concerning the conversion and, unless a listed company is involved, of all the shareholders entitled to vote who did not cast their vote against the proposal for the conversion, in which they hold themselves jointly and severally liable for all debts of the company existing at the time the deed of conversion was executed; this liability will lapse except in the case of bad faith three months after that moment in time and in any case one year after the commencement of the continued existence of the company in the new legal form (Section 2:304 subsection 5 of the Civil Code).
Before 1 January 2012 the more general rule applied that all shareholders entitled to vote who had not voted against the conversion, had to hold themselves jointly and severally liable for all the debts of the company. There were many objections to this system, which objections also apply with regard to the more restricted system of joint and several liability. I will not discuss these any further at this time.
It was noted in the Explanatory Memorandum that a declaration of liability of managing directors or shareholders does not have to be problematic in practice. The simplest way to escape the consequences of this is by paying the debts when due. The management board must be considered to be able to have sufficient insight into this. Insofar as this is not so in a certain case or if payment is not possible and the parties involved nevertheless continue the conversion without compliance with the announcement requirements, the parties can stipulate guarantees and securities.
I also want to point out that Section 5 subsection 3 of the Civil Code has been declared applicable. In complying with the announcement requirements and realizing the consequences of non-compliance, the civil-law notary has a heavy responsibility. In the event of a failure to comply with the obligations arising from the law, the civil-law notary becomes personally liable to the parties who have suffered losses because of this.
Karel Frielink
(Attorney/Lawyer, Partner)
(21 September 2017)
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