Germany: Cross-Border Mergers Of Corporations - A Summary

Last Updated: 24 June 2008
Article by Benjamin Wille

European corporate law has undergone significant changes in the last several years that have provided European companies with a greater degree of flexibility to pursue cross-border mergers within the European Union ("EU"). In a series of decisions by the European Court of Justice, the limits on foreign companies moving into Germany were abolished. In addition, in connection with creating a European company (Societas Europaea , or "SE"), for the first time a legal framework for cross-border mergers of corporations in Europe was created.

The solution that was found in connection with the introduction of the SE regarding the rights of employees in its incorporation paved the way for agreement on a European Directive regarding cross-border mergers. This Cross- Border Merger Directive had to be implemented into the national law of the EU member states by December 15, 2007. Parallel to the enactment and implementation of the Cross-Border Merger Directive, the European Court of Justice declared cross-border mergers to be permissible and determined that contrary national laws were discriminatory and therefore violated European law.

The German legislature implemented the Cross-Border Merger Directive into national law in April 2007 by integrating its provisions into a new section of the German Reorganization Act. Cross-border mergers are now addressed in Sections 122a et seq. of the Reorganization Act and represent an important new structuring instrument, primarily for changes in corporate groups but also in the context of M&A transactions.

Procedural Steps

As modified, the Reorganization Act generally treats crossborder mergers in the same manner as domestic mergers. Only where the cross-border character of the transaction itself makes it necessary were provisions added or the existing ones modified. These differences primarily serve the purpose of protecting the creditors and employees of the merging entities. The main differences and similarities in the procedural steps are the following:

Applicability. Pursuant to Section 122a of the Reorganization Act, a cross-border merger is one in which at least one of the participating companies is incorporated under the laws of an EU member state other than Germany or a contracting state in the European Economic Area ("EEA"). This means that at least one of the participating companies must be subject to German law.

Merger Plan. The core piece of the merger is the "merger plan." The merger plan serves the same purpose as the merger agreement in a German domestic merger; i.e., the basic provisions of the merger are set forth therein. However, the merger plan requires additional information, such as statements concerning the valuation of the assets and liabilities of the transferor(s), the procedure for determining the employees' rights in the acquiring company, and the articles of association of the acquiring company.

Merger Report. As in domestic-merger settings, a merger report must be prepared. Unlike in domestic mergers, there are no exceptions to this requirement. In particular, the report has to be prepared even if the transferee is the sole shareholder of the transferor. Additionally, statements have to be made regarding the impact that the merger will have on the creditors and employees of the merging entities.

Merger Audit. Generally, in both a cross-border merger and a domestic merger, a merger audit must be performed. Also, in both cases the audit may be avoided under certain circumstances (i.e. , in the case of a merger of a wholly owned subsidiary with its parent and where the audit requirement is waived by all shareholders). However, the exemption from the merger-audit requirement that is available in the case of a domestic merger of a limited liability company ("GmbH"), provided that no shareholder requests such an audit, is not applicable to a cross-border merger.

Protection of Creditors and Minority Shareholders. The law contains special features regarding the protection of the interests of creditors and minority shareholders of the merging entities. In a purely domestic transaction, German statutory law provides that the shareholders' resolution approving the merger may not be challenged on the basis of the insufficiency of the consideration received. In a cross-border merger, however, the restriction of the right to challenge applies only to the extent that (i) the national law governing the shareholders has available a special proceeding to review the consideration (comparable to the German shareholders' compensation claim proceeding, "Spruchverfahren" ), or (ii) the affected shareholders expressly agree to the restriction of their right to challenge the transaction.

Under certain circumstances, the minority shareholder of the transferring company has a right of withdrawal for cash compensation in the event that the acquiring company is not subject to German law. In addition, creditors may (unlike in a German domestic merger) assert potential claims even before the merger is actually completed. This distinction is based on the fact that asserting claims against a foreign company will most likely be more difficult for a creditor than asserting claims against a German entity.

Employee Participation Rights. Employee participation is the practice of mandatory representation of employees on the board of EEA companies. In general, the national rules of employee participation of the country in which the transferee is domiciled apply in cross-border mergers. However, special rules apply if (i) one of the participating companies has more than 500 employees, or (ii) the protection level of the national law applicable to the transferee falls below the standard in place for the participating companies prior to the merger. In these cases, procedures are applicable that are based on the employee participation rights in the SE. Due to the complexity of these procedures, it may be expected that the question of employee participation rights will represent a significant challenge.

Audit by the Commercial Register. As a last step, the merger has to be registered with the competent commercial registers. The commercial register of the transferring entity evaluates whether the conditions for the merger to be fulfilled by the transferring company have been satisfied. If this is the case, a "merger certificate" is issued. Based on this certificate, the commercial register of the acquiring entity also evaluates whether all requirements for the merger to be fulfilled by the acquiring company have been satisfied. If this is also the case, the merger is registered. As a result, all rights and obligations of the transferring entity are transferred to the acquiring entity, and the transferring entity is dissolved without going into liquidation.

Assessment and Result

The newly added provisions bring long-awaited clarity and should be easily implemented because of their similarities to most of the existing provisions. Once they are implemented, complex and expensive structuring to work around the previous rules will no longer be necessary. However, the new provisions are limited to mergers as such. Other forms of corporate reorganization, such as changes of corporate form and spinoffs, are not addressed. Furthermore, the new provisions deal with mergers of limited liability companies only, not with partnerships. Therefore, partnerships still may not participate in cross-border merger transactions.

In the near future, help could come in the form of an act to reform international corporate law. Such an act would not only codify which national law is applicable to companies that operate across borders but also establish the application of that law over participating companies in the context of cross-border corporate restructurings. In contrast to the transnational merger situation on the basis of the Cross- Border Merger Directive (or its implementation into national law), a conceptional basis for the implementation of restructuring measures will be created in the future. The deficits of the Cross-Border Merger Directive could then swiftly become moot.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.