Towards a European pre-pack
In 2022 the European Commission presented a Proposal for the harmonisation of rules on pre-packs.[1] There were two central elements to the Commission’s proposal. First, all Member States should allow for pre-packs also with related parties. Second, existing EU protection of employees in case of pre-packs from the Transfer of Undertakings and Protection of Employees (TUPE) Directive[2] as developed by the CJEU would be abolished. The protection afforded under TUPE, as interpreted and developed by the CJEU, provides that employees transfer where the prepack is not aimed at the liquidation of the enterprise. As a consequence, employees will transfer most notably where a former shareholder or another related party acquires the business out of insolvency. In its unexplained attempts to give pre-packs a maximal boost, the Commission’s Proposal simply provided that all pre-packs would be deemed to be aimed at liquidation, which would mean that employees would never transfer on the basis of European law.
Under the European legislative process, the Commission has the right to initiate a directive, but it is up to the Council and the European Parliament to adopt a directive. The Council’s position has been somewhat unclear. The European Parliament pushed back against the Commission’s proposal for the harmonisation of rules on pre-packs with an amendment aimed at safeguarding employees’ protection. With these different positions, the Pre-pack Proposal entered the Trilogue phase, a process often referred to as the “back room of the back room.”[3] Since the Trilogue is not a transparent procedure, outsiders could not know in which direction the negotiations were heading. Like Schrödinger’s cat, we did not know whether employees’ protection was dead or alive while the Trilogue was ongoing.
The outcome of the Trilogue remains somewhat messy.[4] However, we conclude that, based on the text of the Pre-pack Directive, it is sufficiently clear that employees’ protection under TUPE is still intact and that employees will continue to transfer in the case of related-party pre-packs. The rather aggressive attempt to abolish employee protection in such cases has been unsuccessful.
Corporate Finance Lab 