|“The cross-border mergers legislation will be the first Directive to be adopted under the 2003 Internal Market Action Plan”
The first of the proposed Directives outlined in the Commission’s 2003 Action Plan on company law and corporate governance could soon be on its way to the statute books. The Competitiveness Council at its meeting on 25 November agreed on an exchange of views on the Commission proposal for a 10th Company Law Directive on cross-border mergers1. This is a good indication that there could be a swift completion of the negotiations allowing adoption of the Directive in a single reading
The Directive on Cross-border Mergers, which could be introduced into national law within two to three years, proposes a legal framework which could help thousands of expanding SME’s by simplifying the process for undertaking mergers with companies in other Member States.
Differences in national legislation currently make cross-border mergers between EU companies either very complex and costly, or impossible.
The new measures will make them permissible in all EU countries and will introduce appropriate safeguards for the shareholders and employees involved in such cross-border merger operations.
The first attempt at legislation to facilitate cross-border mergers in Europe was made by the Commission in 1984, but it failed over disagreement on the issue of employee participation in companies’ decision-making bodies.
In 2001, however, the agreements reached in finalising the European Company Statute (ECS) resolved the key blocking points, and the Commission was able to re-launch the discussions. Agreement on a general approach was reached on the new Commission proposal at the November 2004 ‘Competitiveness Council’, setting it on course for rapid adoption.
This progress has been welcomed by politicians and industry groups alike. Laurens Jan Brinkhorst, Dutch Minister for Economic Affairs, who chaired the Council meeting, stressed the importance of the legislative breakthrough for SMEs: “After 20 years, we have finally concluded the political agreement on cross-border mergers. This is very important for the tens of thousands of small and medium-sized businesses in Europe that want to increase profitability and increase knowledge.”
Philippe Lambrecht, Secretary General of the industry umbrella group, Federation of Enterprises in Belgium (FEB), emphasises that industry had been waiting many years for these measures and is pleased to see the progress made in developing a legal framework which permits companies to operate across the EU as they do domestically.
Private and public companies
The new measures are designed to make mergers simpler for all companies with share capital and the new Commission proposal covers both public and private companies who want to merge their operations across EU borders.
The current options for doing this are complex and costly. Mergers often in effect take place via the winding-up of the companies concerned and the creation of a new company, which is time-consuming and very expensive. Another option is to reorganise totally and seek incorporation under the European Company Statute. Under the new Commission proposal, cross-border mergers would be carried out under the law of the Member State in which the merged entity is to be registered.
The proposal applies to any merger (whether done by the acquisition of one company by another or by the creation of a new company) between two or more EU companies, provided at least two of them are governed by the laws of different Member States.
The basic principle is that, subject to certain exceptions, each company taking part in a merger will do so in accordance with its own national laws which are applicable.
The proposed Directive sets down common draft merger terms which afford the minimum provisions for the protection of employees and shareholders alike.
Protection for other parties (creditors, debenture holders, etc.) would be maintained as it is under the applicable national law.
Regarding the issue of employees’ participation rights, a special negotiation procedure would apply.
EU Member States have widely differing worker participation (co-determination) systems. Some have compulsory schemes granting representation on the management board (DE, AT,SE, LU, SK, CZ).
Co-determination is more frequent in countries with two-tier board structures (supervisory and management boards). Mergers involving companies operating under both one-tier or two-tier systems are covered under the Commission’s proposals.
The basic principle established is that the scheme where the new company is registered is the one that is applied (i.e. the host Member State). Where the merger implies a loss or reduction of employee participation, the mechanism set up under the European Company Statute (Regulation and Directive) should be applied. In such cases a special negotiating body is established to agree on participation arrangements. If negotiations fail, the standard rules laid down under the European Company Statute would apply.
Under the terms of the new Directive, companies and workers representatives are free to negotiate arrangements for employee participation different from those existing in either company. Only if no agreement could be reached would the “default” arrangements be invoked which apply the provisions of the most stringent Member State.
Cross-border merging in practice
Each merging company will be required to draw up draft terms of the cross-border merger. These terms must include:
the form, name and registered office of the merging companies and those proposed for the company created by the merger;
the ratio applicable to the exchange of securities or shares representing the companies’ capital and the amount of any compensation;
the terms for the allotment of securities or shares representing the capital of the companies created by the merger;
the date from which shareholders will be able to share in the profits, and any special conditions affecting that entitlement;
the date from which transactions of the merging companies will be treated for accounting purposes as being those of the company created by the merger;
the rights conferred by the company created by the merger on members enjoying special rights;
any special advantages granted to the expert (see below);
the statutes of the company created by the merger;
information on how the employees’ participation in the company created by the merger is to be determined.
An expert report intended for the members of each of the merging companies shall be made available at least one month before the general meeting. Alternatively, one expert can be appointed to draw up a single report for all companies involved in the cross-border merger. Member States must designate the competent authority which will consider the legality of any merger under its national law and which will issue a certificate confirming proper completion of the pre-merger acts and formalities. Member States must also designate a competent authority to check the proper completion of the merger, in particular, that the terms of cross-border merger were approved and that the arrangements for employee participation were determined properly.
|Philippe Lambrecht, Secretary General of the FEB: "...industry had been waiting many years for these measures."
Through agreements with national governments, a five year opt-out has been agreed for cooperative societies. Member States will have the power to decide whether or not cooperative companies which fall within their jurisdiction are covered by the provisions of the Directive. UCITS (collective investment funds such as unit trusts, SICAVs etc.) are also excluded, for consumer protection reasons.
Each company taking part in a cross-border merger would be governed, as far as the merger formalities are concerned, by the provisions of national law which would apply if it were merging with a company from the same Member State. This would include those provisions governing the decision-making process relating to the merger and the protection of creditors, debenture holders and the holders of securities other than shares to which special rights are attached.
The only exceptions to the principle that national law would apply to all merging companies, are those provided in the Directive for reasons to do with the cross-border nature of the operation. For example, the name and registered office proposed for the new company - an important piece of information as far as all interested parties, including creditors, are concerned - are points that have to be included in the draft terms of cross-border merger.
European Company Statute alternative
The new Directive will provide an interesting alternative for companies which are not interested in forming a European Company or cannot incorporate under the European Company Statute - for the most part small and medium-sized enterprises.
Indeed, due to the current complexity of the merger process, an alternative route is to operate under the European Company Statute. The ECS, however, is aimed at companies which need to reorganise their business on a Europe-wide scale. There are many companies, predominantly SMEs, who may wish to undertake a cross-border merger without creating a European company, particularly if they do not intend to operate in many Member States. The Directive would allow them to do so.
|“The new measures are designed to make mergers simpler for all companies with share capital and the new proposal covers both public and private companies.”
The need for EU company law provisions to facilitate cross-frontier restructuring figured as a high priority in the November 2002 report of the High Level Group of Company Law Experts chaired by Jaap Winter, which was based on extensive consultation.
Industry has been asking for years for better rules on cross-border mergers which are viewed as a basic essential for an integrated European market. “We are naturally delighted that something has finally happened though the time it has taken - nearly twenty years - is naturally disappointing,” says Philippe Lambrecht, Secretary General of the Belgium’s industry federation, FEB (Federation of Enterprises in Belgium).
“It is indeed difficult for anyone to gauge at this stage the potential impact of the legislation. The 'proof of the pudding' will be in the eating, by which I mean that once it is implemented, we will see how valuable it is through the number of companies which choose this route for cross-border mergers.”
There are indeed various ways to coordinate businesses internationally and work-arounds are possible, Lambrecht explains. Companies can be wound up and new ones incorporated. The European Company Statute is another route. "Many companies would like a simple, straightforward facility to merge in the same way they do at the national level. The solution proposed will hopefully be a cost-efficient solution.”
In addition to cost, there may be other factors that come into play, Lambrecht points out: “In opting for a merger approach, companies may also take into consideration other commercial aspects such as image and market positioning, where their legal status as a European company or a national operator, could play a role.”
"Some areas of industry are indeed concerned by the employee participation issues. The current agreement is an acceptable compromise and once we can all see it working in practice, we will all be able to see if adjustments are necessary. On matters of company law, at the end of the day we need to be working towards a total solution which incorporates the issues of company law, taxation and social provisions.”
The Commission has called for a swift adoption of the Directive.
Following the agreement on an exchange of view adopted in the Council, the proposed Directive is currently being examined in Parliament, where Mr Klaus-Heiner Lehne has been appointed Rapporteur by the competent committee, the Legal Affairs Committee.
His report to the Parliament is expected to follow the line agreed in Council.
The vote in the Parliament's Plenary is expected to take place in the Spring. The Directive is on the agenda of the Luxembourg Presidency with the aim of reaching adoption at first reading in the first half on 2005.
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