Cross-Border mergers directive

The Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies (hereinafter the “Directive”) lays down the framework for cross-border merger procedures of limited liability companies (as defined in Article 1 of Directive 68/151/EEC dated 9 March 1968, on co-ordination of safeguards which, for the protection of the interests of members and others are required by Member States of companies within the meaning of the second paragraph of Article 58 of the EC Treaty, with a view to making such safeguards equivalent throughout the Community - OJ [1968] L 065) or other companies with share capital having legal personality possessing separate assets which serve to cover its debts) from different Member States. Under the Directive, a merger is deemed to be a process of dissolution of one or more companies without going into liquidation and transfer of their assets and liabilities to another existing company (the acquiring company), or to a company they form (the new company), in exchange for issuing securities or shares representing the capital of that other company to their members. The conditions for cross-border mergers do not apply to companies whose business is the collective investment of capital provided by the public. Member States may decide not to apply the provisions of the Directive to cooperative societies.

Save for the conditions of cross-border mergers stipulated by the Directive, the company taking part in a cross-border merger is required to comply with the provisions of the national law to which it is subject. The Directive requires that certain formalities be fulfilled before the cross-border merger is completed. Firstly, the management or administrative body of each merging company is required to produce common draft terms of cross-border merger containing inter alia the form, name and registered office of the merging companies and those proposed for the company resulting from the merger, the ratio applicable to the exchange of securities or shares representing the company capital and the amount of any cash payment, and the likely repercussions of the cross-border merger on employment. These draft terms of the cross-border merger must be published in accordance with the laws of the Member State for each of merging companies.

Further, the management or administrative body of each of the merging companies must prepare a report for members of the respective merging company explaining the economic and legal aspects as well as the effects of the cross-border merger on the members, creditors and employees of the company. The members of each merging company shall receive an independent expert cross-border merger report no later than one month before the general meeting deciding on approval of the draft terms of the merger.

As mentioned above, the general meeting of each of merging companies shall decide on the approval of the common draft terms of the cross-border merger.

Prior to the merger, the competent public authority (e.g. court or notary) of the relevant Member States shall certify that each merging company have duly fulfilled pre-merger formalities. The merger may become effective only after the competent public authorities of each relevant Member State scrutinises legality of the cross-border merger as regards the completion procedure of the cross- border merger. The Member States shall further ensure that the notification on completion of cross-border merger is published under the respective rules of their national law.

As a result of the cross-border merger, (i) all the assets and liabilities of the dissolved companies shall be transferred to the acquiring company (in case of merger by acquisition) or to the new company (if a new company is created by merger), (ii) the members of the dissolved companies shall become members of the acquiring or new company, and (iii) the dissolved companies shall cease to exist.

The Directive also contains simplified procedures for cross-border mergers by acquisition when they are carried out by (i) a company that holds all the shares conferring the right to vote at general meetings of the company or companies acquired (e.g. certain exemptions as to the particulars of the draft terms of the cross-border merger, no need for approval by the general meeting, etc.) and (ii) a company that holds 90% or more but not all of the shares or other securities conferring the right to vote at general meetings of the company or companies being acquired.

Without prejudice to certain exemptions contained in the Directive, the company formed as a result of the merger shall be subject to the national rules in force concerning employees’ participation in the Member State where that company has its registered office.

The Member States are required to bring laws into force to comply with the Directive no later than 15 December 2007.