Guide on how to successfully carry out multi-jurisdictional mergers and acquisitions in Central, Southern and Eastern Europe, kindly provided to us by Wolf Theiss, the leading law firm in Central and Eastern and Southeastern Europe.
After advising a client on merging a group of companies across a number of countries, we realised there was a need for a firm-wide effort to research and compile a guide on how to successfully carry out multi-jurisdictional mergers. The project focused on the 12 countries in central, eastern and south-eastern Europe where Wolf Theiss has offices. The effort resulted in the publication last autumn of Cross- Border Mergers in CEE/SEE – Practioner’s Guide (LexisNexis 2009).
For EU member states, the guide covered the national laws implementing Directive 2005/56/EC on cross-border mergers of limited liability companies (the Directive). For the countries that are not yet EU member states, we have focused on the alternative structures available.
In this article, we will cover some of the highlights of our research, principally an overview of the steps involved in an EU cross-border merger, and differences between the various national laws in CEE/SEE that companies carrying out a cross-border in the region cannot afford to overlook.
European Court of Justice
In the much-anticipated decision of the European Court of Justice in SEVIC Systems AG , the German rules governing (national) mergers were held incompatible with the EU’s fundamental freedoms. SEVIC, however, only dealt with the inbound aspects of a cross-border merger, and it was still unclear whether companies could undertake an outbound merger. The decision three years later in Cartesio Oktató és Szolgáltató bt , which dealt with the transfer of a company’s place of incorporation from one EU member state to another, shed some light on this question. In Cartesio, the ECJ ruled that if, upon the transfer of its seat, the relocating company is converted into a form of company that is governed by the law of the EU member state to which it has moved, such outbound reorganisation is safeguarded by the freedom of establishment. Leading legal scholars argue that, following Cartesio, both the transferring company (ie the company merging outbound) and the absorbing company (ie the company into which the outbound company is merged) can base their right to implement a cross-border merger directly on the freedom of establishment.
Despite Cartesio, in practice it is preferable to implement a cross-border merger on the basis of the national laws implementing the Directive, rather than relying directly on the freedom of establishment.
The EU’s Cross-Border Merger Directive
Prior to the adoption of Regulation 2001/2157 on the Statute for a European Company (SE) and the Directive, cross- border mergers in the EU were not regulated on an EU-wide basis and their implementation was therefore hardly feasible in practice. Cross-border mergers required that the national laws of both jurisdictions (ie the jurisdiction of the transferring company and the jurisdiction of the absorbing company) recognised the procedure for mergers of companies through universal succession. Many EU jurisdictions did not specifically recognise this procedure.
The changes brought about by the Directive have given much greater flexibility to companies operating on an EU-wide basis. Cross-border mergers are expected to provide an essential tool for intra-group reorganisations, as well as a mechanism for cross-border acquisitions and takeovers.
Overview of Steps in an EU Cross-Border Merger
The procedure of a cross-border merger, based on the Directive, can be divided into the following steps:
Common draft terms
The management board of each of the merging companies is required to draw up the common draft terms of a cross-border merger in the form of a notarial deed.
The common draft terms must define the terms and the details of the cross- border merger (eg company details of the companies involved, the ratio applicable to the exchange of securities or shares representing the company capital and the amount of any cash payment, the terms for the allotment of securities or shares representing the capital of the company resulting from the cross-border merger, the likely repercussions of the cross-border merger on employment etc). Depending on the structure of the cross-border merger (eg 100 % upstream cross-border merger) certain information may not be necessary.
In order to safeguard shareholders and creditors interests, the common draft terms must be published at least one month before the date of the shareholders’ meeting. In general the publication comprises two steps:
- filing with the competent registration authority; and
- publishing of the common draft terms in the national gazette.
Report of the management
The management board of the merging companies must prepare a report on the proposed cross-border merger explaining and justifying the legal and economic aspects of the cross-border merger and its implications for shareholders, creditors and employees. This report must be made available to both the shareholders and the employees’ representatives, if any, or the employees themselves, at least one month prior to the date of the shareholders’ meeting.
Independent expert’s report
An independent expert’s report intended for shareholders and made available no less than one month before the date of the shareholders’ meeting must be drawn up for each merging company. The independent expert has to examine the share-exchange ratio proposed for the cash compensation and the method(s) used to arrive at the proposed cash compensation. The shareholders of each company can waive such independent expert’s report.
Report of the supervisory board
In some jurisdictions a report of the supervisory board, if any, scrutinising the merger may be necessary.
In order to secure any rights or interests shareholders, employees or creditors may have, the Directive imposed various information duties.
- Vis-à-vis shareholders: the common draft terms, the reports of the management, report(s) of the independent expert(s) and the report of the supervisory board (if any) must be sent to the shareholders one month prior to the shareholders’ meeting. Some jurisdictions (eg Austria, Czech Republic, Hungary, Slovenia) may provide for additional documents to be sent to the shareholders, such as the annual financial statements and financial reports for the last three years of all companies involved, the final balance sheet of the transferring company, as well as interim financial statements (if any).
- Vis-à-vis employees: at least one month prior to the date of the shareholders’ meeting, the report of the management must be made available to the employees’ representatives, if any, or to the employees. The employees (or the works council, if any) must be informed about the merger in writing regarding the (proposed) date of transfer, the reason for the transfer, the legal, economic and social implications for the employees and any measures envisaged in relation to the employees.
- Vis-à-vis creditors: by publication of the common draft terms creditors are usually informed about the cross-border mergers. In most jurisdictions the common draft terms must include the arrangements made for the exercise of rights by creditors of the merging companies.
Approval by the shareholders’ meeting
On the basis of the common draft terms, the management report, the independent expert’s report and the supervisory board report, if any, the shareholders have to decide upon the cross-border merger. The Directive implements some minimum standards to be observed (eg information duties prior to the shareholders’ meeting). The formalities for convening the shareholders’ meeting and the quorum necessary are subject to national law. Further the Directive offers the opportunity to a simplified merger (without the approval of the merger by the general meeting of the absorbing company) in case of a 100% upstream merger.
- The registration of the cross-border merger is divided into the following steps:
- Publication of the common draft terms;
- issuance of a pre-merger certificate;
- Registration of the merger; and
- De-registration of the transferring company from the respective registry.
Depending on national law a public notary, the competent court or any other public authority is responsible for the different steps.
The pre-merger certificate is issued after scrutiny of the legality of the cross-border merger as regards to that part of the procedure which concerns the transferring company. The issuance of the pre-merger certificate may be dependent upon, eg, the observance of any rules regarding creditor protection or whether any shareholder has challenged the shareholder’s resolution. Any registration of the merger is subject to the prior issuance of the pre-merger certificate.
Registration of the merger
The registration of the merger takes place in the register of the absorbing company. Prior to the registration the competent national authority has to scrutinise the legality of the cross-border merger as regards to the part of the procedure
which concerns the completion of the cross-border merger. The legal effectiveness of the merger is dependent on the law of the absorbing company. Generally speaking, the various jurisdictions determined the date or registration of the merger in the registry of the absorbing company as the date of the legal effectiveness of the merger. In some jurisdictions (eg Hungary or Romania) the determination of a different date may be possible.
Registration of deletion of transferring entity
After registration of the merger in the foreign register, the transferring company has to be deleted from the respective national register. However, the deletion of the transferring company has a declaratory effect only.
Consequences of the Cross-Border Merger
Upon legal effectiveness of the cross-border merger, all assets and liabilities of the transferring company are ex lege and uno actu transferred to the absorbing company, the members of the transferring company become members of the absorbing company and the transferring company ceases to exist. With respect to the legal effectiveness attention has to be given to the possibility to agree upon a different date for the economic effectiveness of the merger. The latter means the date from which the transferring company is deemed to make transactions for the account of the absorbing company. This date may be agreed upon between the parties in the common draft terms. National restrictions have to be considered when determining this date (eg Austrian law restricts the possibility to agree upon a retroactive economic effective date up to nine months prior to the registration of the merger).
The principles described above may be amended by national law. For example the following national ‘specialities’ have to be considered while planning a cross-border merger.
- In Austria and Slovenia, creditors of the transferring company must be personally informed about the cross-border merger in case of a merger into a foreign entity if the sum of the registered capital and the capital reserves of the absorbing company is lower than the sum of the registered capital and the capital reserves of the transferring company.
- Austrian, Hungarian, Slovak and Slovenian law provides the obligation to involve the supervisory board of a company in the cross-border merger process. In these jurisdictions the supervisory board is obliged to evaluate the cross-border merger on basis of common draft terms, the report of the management and/or the independent expert's report. Any further approval requirements related to a supervisory board are not implemented into national law. However, the articles of association can provide a necessary consent of the supervisory board to the cross-border merger. In case of such mandatory approval requirement have to be fulfilled except national law provided any possibility to replace or substitute such mandatory approval. For example, Hungarian law provides that the management of the company may replace or substitute the resolution of the supervisory board in a shareholder's meeting.
- In some jurisdictions, eg Bulgaria and Romania, national law does restrict the possibility of outbound mergers (the merger of a Bulgarian or Romanian company into a foreign company) with respect to a transferring (Bulgarian or Romanian) company having a valid ownership title over real estate located in the respective country. In Romania, this restriction is limited to the transfer of Romanian companies participating in a cross-border merger prior to 2012 (five years after Romania joined the EU) or 2014 (seven years after Romania joined the EU) if the real estate is zoned for agricultural purposes.
- In Hungary, the publication duties with respect of the common draft terms involve a more complex procedure than in other jurisdictions. First, the common draft terms have to be published in the Official Journal at least 30 days prior to the general meeting approving the merger. The publication has to be effected via the Ministry of Justice. A second publication is mandatory after the approval of the common draft terms by all participating companies. The merging company must publish certain information regarding the approved cross-border merger (eg company details of the transferring and the absorbing companies, details regarding the merger or key components of the draft balance sheet of the legal successor) in two consecutive notices in the Official Journal within eight days after the approval of the cross-border merger.
- In addition to the publication duties, Hungarian law provides for severe formalities with respect to the shareholder's meeting. Under Hungarian law, two shareholders' meetings must be held by a Hungarian company to consider the merger unless otherwise provided by the articles of association or in case of a 100% upstream merger (acquisition by the sole shareholder). In the first shareholders' meeting the shareholders decide on the intention to implement the merger. On the basis of the common draft terms the approval of the cross-border merger takes place in the second shareholders' meeting.
- With respect to the effectiveness of the cross-border merger, Slovak law distinguishs not only between the date of legal effectiveness (date of registration of the merger in the commercial register of the absorbing company) and date of economic effectiveness (the date from which the transferring company is deemed to make transactions for the account of the absorbing company), but also the date of dissolution of the transferring company (which triggers accounting obligations and the obligation to file a tax return for the full or partial financial year preceding the date of dissolution).
- In Albania, Bosnia and Herzegovina and Serbia, where the Directive is not implemented, the alternatives to a cross-border merger are rather limited. In general the assets and/or shares are transferred by asset deal or share deal. Both strategies do not offer the advantages of a universal succession (ie the transfer of assets, rights, obligations, liabilities or relationships ex lege and uno actu without any further act of assignment). In contrast thereto Croatia has already implemented the Directive into the Croatian Companies Act. However, the coming into force of the provisions on cross-border mergers has been postponed until the date Croatia joins the EU. Hence, the rather restricted legal possibilities for a cross-border merger the Croatian law provided before this implementation are still in force.
This article is by Clemens Philipp Schindler, partner, and Harald Stingl, partner, Wolf Theiss.