EU Company Law

Mergers, Divisions
and Cross-Border
Mergers
Doc dr
Tatjana Jevremovi
Petrovi

Introduction

Directives

3rd Company Law Directive on national mergers

6th Company Law Directive on national divisions
Cross-border Mergers Directive

Similar legal problems and provisions in all

documents
Procedure of Mergers/Divisions:

Preparatory acts
Adoption of decision on merger/division
Effects, Nullity and other issues
European rules and national regulation

Introduction

History of adoption of Directives

First ideas: Statute for a SE (1970) and Proposal

for a Convention on cross-border mergers (1973)
Third Company Law Directive on national mergers
of public limited liability companies (1978)
First Draft included mergers and division s,
separate document for divisions: Sixth Company
Law Directive on divisions of public limited liability
companies (1982)
Both amended 2007 and 2009
Directive 2011/35/EU of the European Parliament
and of the Council of 5 April 2011 concerning
mergers of public limited liability companies

Introduction

Unsuccessful regulation of cross-border mergers for

years.
Harmonization of mergers on national level to make
harmonization on international level easier.
After the adoption of 3rd and 6th Directives in many
national laws mergers were common in practice,
unlike other laws (UK) other instruments with
similar purposes
Adoption of the Cross-border Mergers Directive of
limited liability companies (2005) (not 10th Dir any
more) after the adoption of the Statute of the SE and
Directive on the employee participation in the SE
(2001)

Introduction

Cross-border Mergers for years

symbolized non-efficiency of EU
Company Law, together with SE and
other company mobility issues.
Reason for the regulation of
mergers: economic benefits
efficiency, competitiveness.

Provisions of the
Directives

Mergers harmonization in all MS

Divisions only when MS already
has provisions on this issue (does
recognize divisions)
Terms mergers and divisions defined
and harmonized by Directive
provisions

Provisions of the
Directives

Merger is the operation where one or more

companies are

wound up without going into liquidation and

transfer to another/new company all their assets
and liabilities
in exchange for the issue to the shareholders of the
company/companies being acquired/cease to exist
of shares in the acquiring company and cash
payment, if any, not exceeding 10% of the nominal
value of the shares, or where they have no nominal,
their accounting par value.

Merger by acquisition/formation of a new

company

Provisions of the
Directives

Division is the operation,

whereby after being wound up without going into

liquidation
a company transfers to more than one company all
its assets and liabilities
in exchange for the allocation to the shareholders
of the company being divided of shares in the
company receiving contributions as a result of the
division and possibly a cash payment not exceeding
10% of the nominal value of the shares, or where
they have no nominal, their accounting par value.

Division by acquisition/formation of a new

company/combined these two options

Provisions of the Directives

(terminology merger
division)

Merging companies companies

involved in a division
Company being acquired company
being divided
Acquiring company each of the
recepient companies

Mergers

Definition of merger
One or more companies cease to exist
Universal transfer of all assets and
liabilities (ipso jure) universal
succession
Exchange of shares - shareholders of
company being acquired become
shareholders of the acquiring/new
company

(Dis)advantages of
mergers

Advantages:
One administrative body, one centre of
management
Competitiveness
Universal succession
No continuous minority shareholders
No double taxation
Profit/loss spreading in the unique structure
Access on a big markets

(Dis)advantages of
mergers

Disadvantages:

One or more companies cease to exist

Members of management lose their positions or
employment
Bigness is badness
Business secrets are being revealed
Hard to determine exchange ratio of the shares
Irreversible operation
Change of applicable law (cross-border mergers)
Competition linked problems
Tax consequences

Cross-border mergers

Merger where companies involved are

regulated by at least two different
legal systems (two applicable laws).
Stricto sensu no change of applicable
law but consequences are the same.
Before Directive: in national laws same
position as if it was change of
applicable law (where company is
being acquired not permitted in
Germany, France, Belgium)

Cross-border mergers

Problems in PIL cumulative application of all

national laws concerned (sometimes opposite
provisions)

PIL issues:

Change of applicable law

Application of national law: cumulative or distributive

For cross-border mergers all interested national laws

must:

Allow cross-border merger

Have common system for this operation legal nature,
conditions.
Other issues protection of certain rights, procedure
distributive application of national rules.

Cross-border mergers

3rd and Cross-border mergers

Directives created common system for
mergers in all national laws, or adopted
some special rules where distributive
national law application is problematic
Cross-border mergers Directive also
made this operation possible, although
same resulted from the ECJ Sevic Case.

Companys nationality
cross-border mergers

Companies formed in accordance with the

law of the MS and having its registered
office, central administration or principal
place of business (Art. 54 (ex. 48)) within the
Community, provided at least two of them
are governed by the laws of different MS.
This criteria may lead to circumvention of
laws, therefore rights for MS to oppose the
mergers of its own nationals on the ground
of public interest.

Forms of companies

National mergers and divisions only public

limited liability companies, cross-border
mergers for all limited liability companies
(provided it is allowed under national law).
Problems with different national law
treatment of different company forms:

merger is possible when all relevant laws allow

merger for all company types concerned.

Reason for wider application of Cross-border

mergers Directive non-existence of SPE, as
well as interpretation of the right of
establishment by the ECJ

Preparation of merger:
Draft terms of merger

Draft terms of merger

Drawn by all companies involved in
writing
Obligatory contents

Preparation of merger:
Draft terms of merger

Draft terms of merger shall include at least:

(a) the type, name and registered office of each of the merging companies;
(b) the share exchange ratio and the amount of any cash payment;
(c) the terms relating to the allotment of shares in the acquiring company;
(d) the date from which the holding of such shares entitles the holders to
participate in profits and any special conditions affecting that entitlement;
(e) the date from which the transactions of the company being acquired
shall be treated for accounting purposes as being those of the acquiring
company;
(f) the rights conferred by the acquiring company on the holders of shares
to which special rights are attached and the holders of securities other
than shares, or the measures proposed concerning them;
(g) any special advantage granted to the experts and members of the
merging companies' administrative, management, supervisory or
controlling bodies.
For divisions: allocation of the assets and liabilities but for non allocated
assets: proportionality, non allocated debts: joint and several liability of all
companies

Preparation of merger:
Draft terms of merger
For Cross-border mergers cumulative
application of all national laws concerned
(both content and legal form of draft terms
of merger).
Legal form in writing plus national law
provisions (certification if this is the case in
cross-border merger, than it must be done
for all cumulative application of laws
stricter law applies)
Publication for every company according to
its own national law.

Preparation of merger:
Written reports

Written report by administration or

management of each company explanation
of legal and economic details of merger
(aimed to protect shareholders)
Written report by independent expert, acting
in the interest of shareholders

Appointed or approved by judicial or

administrative authority
One for all companies single report possible
New amendments allow companies not to have
this report

Shareholder protection

Most important part of the 3rd, 6th and

Cross-border Mergers Directive
provisions
All preparatory phase documents serve
for their protection.
Right to be informed on a planned merger
Information and documents available
Information during general meeting
Right to obtain free copies...

Shareholder protection: GM
approval

General meeting approval of the draft terms of

merger
Necessary for the merger to be valid

by general meeting of each of the participating

companies.

Voting on draft terms of merger and alteration of

the articles of association.
Majority determined by national law, but no less
than votes attached to shares or subscribed
capital (or simple majority if half of the
subscribed capital is represented)

Shareholder protection: GM
approval

Decision by each class of shareholders.

In the case of division if shares of the allocated

companies are allocated otherwise than in
proportion to their right in the capital, possibility
for minority shareholders to have their shares
being purchased.

Possibility not to hold general meeting in the

acquiring company (provided some conditions
are met)

Shareholder protection

Other shareholders rights (application

of national law provisions):
Courts control of the merger procedure
Courts control of the exchange ratio
Shareholders rights: payment in cash (they
remain shareholders but receive also some
cash payment)
Shareholders rights: their shares are
bought by company (they cease to be
shareholders) droit de retrait

Shareholder protection:
Cross-border mergers

A Member State may adopt provisions

designed to ensure appropriate protection
for minority members who have opposed the
cross-border merger.

Determination by court of the exchange ratio

after adoption of the merger by general meeting
(German and Austrian law)
Shareholders right of their shares being
purchased (right of retreat/sell out right) for
dissenting shareholders not regulated by
Directive provisions (questionable whether is
allowed under special protection of
shareholders rule)

Creditor protection

Weakest (un)regulated issue in Merger/Cross-border Merger

Directive
Transfer of debts without creditors consent
3rd Directive application of national law rules with
adequate system of their protection (especially claims that
antedate publication of the draft terms which are not fallen
due)

Pledge, mortgage, personal guarantees

Where financial situation of the merging companies makes
protection necessary, and there is no any other safeguards
In any event, Member States shall ensure that the creditors are
authorized to apply to the appropriate administrative or judicial
authority for adequate safeguards provided that they can credibly
demonstrate that due to the merger the satisfaction of their claims
is at stake and that no adequate safeguards have been obtained
from the company.

Coordinated with 2nd Company Law Directive

Minimal creditor protection

Different protection for creditors of the acquiring/company being
acquired possible

Creditor protection
national provisions

A priori protection (France) before merger is

completed

Usually after publication of the draft terms of

merger within 30 days
Right to demand claims, although not due

A posteriori (Germany) right to demand

safeguards after merger becomes effective (6
months)
Both systems dont prevent merger procedure
to take place, except in some national laws
(Italy)

Creditor protection crossborder mergers

Cross-border merger might result in

absence of creditors protection
therefore usually protection a priori
is introduced (discrimination issues)
Based on Cross-border Merger
Directive provision of protection of
creditors, taking into account crossborder nature of the merger light
provisions of creditor protection.

Creditor protection in the

case of division

Special rule for creditor protection in the

case of division joint and several
responsibility of all recipient companies
(may be limited to net assets allocated to
that company), unless otherwise agreed
by creditors (judicial supervision of the
division procedure and creditors meeting
with votes)

Maximum creditors protection by joint and

several responsibility of all recipient
companies

Protection of other
persons involved

Same protection for debenture

holders, holders of other securities
than shares
For convertible securities maximum
protection same rights in acquiring
company

Control of the merger

procedure

First Directive: legality and form of certain

acts

Preventive supervision (usually by court)

Later intervention by notary who certifies legality
of the procedure/act

Control of the merger duality:

Preventive: judicial or administrative authority

(France, Germany (with certification as well)
Certification by notary in due legal form (if there
was no preventive control or not for all merger
acts) Italy, UK (special rules court decides not
only on the legality, but fairness of merger as well).

Control of the cross-border

merger procedure

Substantial rules introduce d in Crossb.m. Dir.

Preventive and post merger control for
each company by its national rules
Pre merger control competent authority
issues a certificate of the completion of
acts and procedures.
Control of the competent authority in the
MS of the acquiring company after
merger is completed

Control of division
procedure

Special rule on division under the

supervision of a judicial authority

Non-application of certain rules, aimed

at creditor and shareholder protection

Date on which merger takes

effect

Regulated by national law

When merger is registered Germany

With last general meeting approval (France,
Belgium)
Courts decision (UK)
Certification by notary (Holland)

In cross-border merger introduction of

conflict-of-law rule: national law of the
acquiring company determines this moment,
but not before control of the legality of the
merger was completed

Publication and effects of

the merger

Publication in accordance with the 1st Company

Law Directive
Effects harmonized by 3rd Company Law Dir.
by introduction of the universal succession
regime (transfer of all assets and liabilities)

Transfer of all assets and liabilities (including intuitu

personae contracts) from company being acquired to
acquiring company
Shareholders of the company being acquired become
shareholders of the acquiring company
Company being acquired cease to exist

Civil liability

Civil liability of
administrative/management
members and experts to
shareholders
introduced for the protection of
shareholders
tort liability

Nullity of
mergers/divisions

Maximum protection by the 3rd Company

Law Dir.

Ordered by courts judgment

Only if there was no control
Only 6 months after merger becomes effective
Only if its impossible to remedy

Decision on nullity must be published

according to 1st Company Law Directive
For cross-border merger nullity is not
possible after merger takes effect (double
control no need for nullity)

Simplified merger cases

Acquiring company holds 90% or more of

the shares of company being acquired

Reports need not to be written

General meeting decision not necessary in
acquiring company

Acquiring company holds 100% of the

shares of company being acquired

Some rules dont apply

Rules concerning exchange of shares dont
apply (no real merger)

Employee protection

Political issue, resolved in 2000 on the Nice Summit

of the European Council
Not individual protection or work contracts but
their right to be voted in management or control
organs, or right to vote for persons in these organs.
Obligatory participation: Germany, Denmark,
Sweden, Finland, Holland, Luxemburg, Austria,
Czech Republic, Hungary, Slovakia and Slovenia
Participation in public companies only in France,
Spain, Portugal, Greece, Malta, Ireland, Poland
Non-participation in UK, Belgium, Italy, Cyprus,
Lithuania, Latvia, Estonia

Employee protection

Most problematic Germany:

More than 500 employees: of the supervisory

body
More than 2000 employees: of the supervisory
body (still minority)

Directive on employee participation in SE

based on before and after principle
Formation of special negotiating body
Adoption of standard rules by MS, which can
be applied if negotiating body so decides.
In Cross-bor mer. Dir. application of SE
employee participation rules with
special/modified provisions

Comparison with Serbian

law on companies

Compare whether Serbian law on

companies is harmonized with 3rd
Company Law Directive on national
mergers on the issues of:
Shareholders protection
Creditors protection
Nullity of mergers

Reading materials

V. Edwards European Company Law

Dorresteijn/Monteiro/Teichmann/Werlauff European Corporate
Law

Further reading:

S. Grundmann European Company Law

Jensen, A.F. Cross Border Mergers in the EU before and After the
SE, ELSA Selected Papers on European Law 2002 (2),
http://www.elsa.org/publications/spel_02_2.html
Manchin, M. Determinants of European cross-border mergers and
acquisitions, Eur. Commission, DG for Economic and Financial
Affairs, 2004.
Pannier, M. The EU Cross Border Merger Directive A New
Dimension for Employee Participation and Company Restructuring,
European Business Law Review 6/05.
Rickford The Proposed Tenth Company Law Directive on Cross
Border Mergers and its Impact in the UK, European Business Law
Review 6/05.
Wooldridge, F. The employee participation provisions of the crossborder mergers Directive, Company lawyer, 2007.