EU Company Law – Mergers, Divisions and Cross-Border Mergers

1. EU Company Law – Mergers, Divisions and Cross-Border Mergers Doc dr Tatjana Jevremović Petrović

2. 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

3. 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 divisions, 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

4. 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)

5. 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.

6. 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

7. 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

8. 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

9. 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

10. 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

11. (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

12. (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

13. 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)

14. 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.

15. 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.

16. Company’s 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.

17. 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

18. Preparation of merger: Draft terms of merger • Draft terms of merger • Drawn by all companies involved in writing • Obligatory contents

19. 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 mergingcompanies; • (b) the share exchange ratio and the amount of any cash payment; • (c) the terms relating to the allotment of shares in the acquiringcompany; • (d) the date from which the holding of such shares entitles the holdersto participate in profits and any special conditions affecting thatentitlement; • (e) the date from which the transactions of the company being acquiredshall be treated for accounting purposes as being those of theacquiring company; • (f) the rights conferred by the acquiring company on the holders ofshares to which special rights are attached and the holders of securitiesother 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

20. 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.

21. 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

22. 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...

23. 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 ⅔ votes attached to shares or subscribed capital (or simple majority if half of the subscribed capital is represented)

24. 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)

25. Shareholder protection • Other shareholders rights (application of national law provisions): • Court’s control of the merger procedure • Court’s 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

26. Shareholder protection: Cross-border mergers • AMember State mayadopt provisionsdesigned to ensure appropriate protection for minoritymembers 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)

27. 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

28. 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 don’t prevent merger procedure to take place, except in some national laws (Italy)

29. Creditor protection – cross-border 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 cross-border nature of the merger” – light provisions of creditor protection.

30. 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 ¾ votes) • Maximum creditors protection by joint and several responsibility of all recipient companies

31. 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

32. 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).

33. Control of the cross-border merger procedure • Substantial rules introduced in Cross-b.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

34. 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

35. Date on which merger takes effect • Regulated by national law • When merger is registered – Germany • With last general meeting approval (France, Belgium) • Court’s 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

36. 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

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

38. Nullity of mergers/divisions • Maximum protection by the 3rd Company Law Dir. • Ordered by court’s judgment • Only if there was no control • Only 6 months after merger becomes effective • Only if it’s 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)

39. 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 don’t apply • Rules concerning exchange of shares don’t apply (no real merger)

40. 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

41. Employee protection • Most problematic Germany: • More than 500 employees: ⅓of the supervisory body • More than 2000 employees: ½ 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

42. 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

43. 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 Review6/05. • 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 cross-border mergers Directive”, Company lawyer, 2007.