CROSS-BORDER MERGERS OF LIMITED LIABILITY COMPANIES

This Directive aims to facilitate cross-border mergers between limited liability companies
in the European Union. The measures envisaged by the EU are designed to reduce the
cost of such operations, to guarantee their legal certainty and to offer this option to the
maximum number of companies, particularly those not wishing to set up a European
Company, (SE).

ACT

Directive 2005/56/EC of the European Parliament and of the Council of 26 October

2005 on cross-border mergers of limited liability companies [Official Journal L 310
of 25.11.2005, p. 1].

SUMMARY

The Directive sets out to facilitate cross-border mergers of limited liability companies by
proposing a simplified legislative framework.

It is an important stage in the EU efforts to implement the Lisbon Strategy and is

designed to identify the legislation applicable in the event of a merger to each of the
merging companies. Once the new entity emanating from the merger has been set up, a
single body of national legislation applies: that of the Member State in which the entity
has established its registered office.

Scope

The Directive applies to mergers of limited liability companies:

• formed in accordance with the law of a Member State;

• with their registered office, central administration or principal place of business within
the Community;
• if at least two of them are governed by the law of different Member States.

Member States may decide not to apply the Directive to cross-border mergers involving a
cooperative society even in the cases where the latter would fall within the definition of
"limited liability company". Lastly, companies the object of which is the collective
investment of capital provided by the public (UCITS) are excluded from the scope of the
Directive.

Procedures governing cross-border mergers

The management or administrative organ of each of the merging companies is required to

draw up the common draft terms of cross-border merger. The Directive contains a list
of the twelve compulsory particulars that constitute the minimum content of the common
draft terms, which must be published in the manner prescribed by the law of each
Member State in accordance with the Directive on disclosure by limited liability
companies at least one month before the date of the general meeting which is to decide on
them.

The management or administrative organ of the merging companies must prepare a report
on the proposed cross-border merger for the members and employees that explains the
legal and economic aspects of the cross-border merger and its implications.

An independent expert report on the merger must be drawn up. It will not be required if
all the members of each of the companies involved in the merger have so agreed. The
expert report and the proposed cross-border merger report must be made available at least
one month before the date of the general meeting.

On the basis of the documents referred to above, the general meeting of each of the
merging companies must decide on the approval of the common draft terms of cross-
border merger.

Scrutiny of legality

Each Member State must designate the authority competent for scrutinising the legality of
the cross-border merger as regards that part of the procedure that concerns each merging
company subject to its national law. That authority must issue a pre-merger certificate
attesting to the proper completion of the pre-merger acts and formalities.

Each Member State must designate the authority competent for scrutinising the legality of
the cross-border merger as regards that part of the procedure that concerns the completion
of the cross-border merger and, where appropriate, the formation of a new company
resulting from the cross-border merger where the company created by the cross-border
 merger is subject to its national law. That authority must ensure that the merging
companies have approved the common draft terms of cross-border merger in the same
terms.

Legal effects

Following scrutiny of legality, the law of the Member State to whose jurisdiction the
company resulting from the cross-border merger is subject must determine the date on
which the cross-border merger takes effect and the arrangements for publicising
completion of the merger in the public register. The old registration must not be deleted
until that notification has been received.

Cross-border mergers have the following effects:

• the companies being acquired or the merging companies cease to exist;

• all the assets and liabilities of the companies concerned by the merger are transferred to
the new entity (either the acquiring company or the new company);
• the members of the companies being acquired become members of the new entity.

Where the laws of the Member States require the completion of special formalities before
the transfer of certain assets, rights and obligations by the merging companies becomes
effective against third parties, the company resulting from the cross-border merger is
responsible for carrying out those formalities.

Worker participation

The general principle as regards the employees' rights of participation is that national
laws governing the company resulting from the cross-border merger apply.

By way of exception, the principles and arrangements relating to worker participation

laid down by the relevant regulation and the Directive on the European Company (SE)
apply as follows:

• where at least one of the merging companies has, in the six months before publication of
the draft terms of the cross-border merger, an average number of employees that exceeds
500 and is operating under an employment participation system;
• where the national legislation applicable to the company resulting from the cross-border
merger does not provide for at least the same level of employee participation as operated
 in the relevant merging companies, measured by reference to the proportion of employee
representatives amongst the members of the administrative or supervisory organ which
covers the profit units of the company, subject to employee representation;
• where the national legislation applicable to the company resulting from the cross-border
merger does not provide for employees of establishments of that company that are
situated in other Member States, the same entitlement to exercise participation rights as is
enjoyed by those employees employed in the Member State where the company resulting
from the cross-border merger has its registered office.

Under the Directive supplementing the Statute for a European Company with regard to
the involvement of employees, the threshold for applying the benchmark provisions laid
down for the European Company is increased to 331/3% of the total number of workers
in the merging companies that have had to operate under any form of worker
participation system. For a period of three years after the cross-border merger has taken
effect, the rights of the workers are protected in the event of any subsequent domestic
mergers.

The provisions on worker participation apply to any domestic merger subsequent to a

cross-border merger for a period of three years after the cross-border merger has taken
effect.

Context

Back in 1984 the Commission presented a draft Directive on cross-border mergers of

companies [COM(1984) 727]. The proposal was the subject of lengthy and abortive
negotiations. The new proposal for a Directive is based on the provisions of the Statute of
the SE. This Directive forms part of the Financial Services Action Plan (FSAP) and is a
key measure in the action plan on modernising company law and enhancing cooperate
governance.