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.
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.