Mergers with foreign companies
If you are looking for new business opportunities, you can also consider merging with another existing company or taking one over. The following rules concern ‘limited liability companies' governed by the laws of at least two different EU countries.
What forms of mergers are covered by the rules?
The EU rules must be applied in the following 3 situations:
- one or more companies are being bought by a third company - in this case all the assets and liabilities of the bought companies are transferred to the buying company. This effectively means the dissolution of the bought companies, but officially this does not count as liquidation. The buying company has to issue securities (such as shares) representing the capital of the company, in exchange for the assets that it received through the transfer. Cash payments might also be needed, up to a maximum 10% of the nominal or accounting value of the buying company's securities.
- two or more companies transfer all their assets and liabilities to a totally new company that they are going to form. In this case the asset-transferring companies will also be dissolved at the end of the process without undergoing an official liquidation procedure. The newly formed company will have to issue securities (such as shares) representing its capital to the owners of the asset-transferring companies. Cash payment of maximum 10% of the nominal or accounting value of these securities might also be needed.
- a company transfers all its assets and liabilities to another company which already holds all of its securities. Following the transfer, the asset-transferring company is dissolved without undergoing an official liquidation procedure.
EU-countries have the right not to apply these rules to cross-border mergers involving cooperative societies, even if they fall within the definition of a limited liability company.
Cross-border mergers involving companies investing capital provided by private or public investors are exempt from the EU-merger rules below.
Common draft terms
In a first step the management of each company involved in the merger must draw up a document - the common draft terms of the merger - addressing the following points as a minimum:
- name and registered office of the companies involved, and of the company resulting from the merger
- the ratio and terms of allotment that will be applied to the exchange of securities (e.g. how many of the acquiring company's shares will be offered to the shareholders of the companies acquired) and possible amounts of cash payment
- the likely effects on employment
- the date from which the new holders of the securities of the company resulting from the merger will have the right to dividends
- the statutes of the company resulting from the merger
- information on the evaluation of the assets and liabilities transferred to the company resulting from the merger.
The common draft terms must be published at least 1 month before the general assembly meetings of the companies that will decide on the merger. Publication could be on the companies' websites or on a dedicated website for mergers in the EU countries concerned.
Reports to prepare before the general meetings
Two reports must be prepared before the general meetings:
- a report by the management or administrative bodies to explain the legal and economic aspects and implications of the merger for owners, creditors and employees. This report should be ready at least 1 month before the general meeting and should be given to the owners of the company and to the staff representatives
- an independent expert report only for the owners of the companies involved. This report must be ready at least 1 month before the general meeting and should comment on the exchange ratio laid down in the common draft terms that will be used when offering securities for the acquired assets.
The independent expert report can be dispensed with if agreed by all owners of each company involved.
The general meetings of the companies involved have to finally approve the draft terms of the merger. Any company involved has the right to make the implementation of the merger conditional on the existence of rules for staff participation in the company resulting from the merger.
EU-countries can rule that no general meeting is necessary for the acquiring company to approve the merger on certain conditions, for example that the acquiring company publishes the common draft terms at least 1 month before the general meetings of all the companies it is going to acquire. At the same time it should also make available all other documents relevant to the merger - such as the annual accounts and annual reports of the companies to be acquired - for inspection by their own shareholders.
Checking the legality of the merger
In each EU country concerned, a designated authority - for example a court or notary - has to check the legality of the merger with regard to their national law. If everything is in order, the authority issues a pre-merger certificate about the proper completion of the pre-merger formalities.
One final check should concentrate on the completion of the merger - for example that all the companies involved approved the same terms of the common draft terms of the merger - and the relevant authority in the country where the new company will be created and registered must check the legality of the formation of the new company.
Entry into force
The date when the merger takes effect - in any event after the legality check - will be determined by the law of the country where the acquiring or newly-formed company is registered. Each company should publicise the merger in its own national public register. The old registrations can then be deleted.
As a general rule, staff participation is determined by the laws of the EU country in which the acquiring company or the newly formed company is registered.
The rules of the country of registration cannot apply to staff participation in the company resulting from the merger if:
- they do not allow for the same level of staff participation as there was in the acquired companies
- at least one of the companies involved in the merger had more than 500 employees on average in the 6 months before the publication of the common draft terms.
Mergers of European dimension
Companies with turnover above certain thresholds (starting at EUR 2.5 billion of combined aggregate worldwide turnover) which do business in the EU and wish to merge must ask the European Commission for approval - irrespective of where their headquarters are. The specific conditions and thresholds are listed in Article 1(2) and 1(3) of the EC Merger Regulation. The Commission examines the proposed merger's impact on the competition in the EU. The mergers which would significantly restrict competition in the EU are rejected. Sometimes mergers are approved with certain conditions attached.